40FR12G

(s) (signed) Ken Amann

April 28, 2020

Name: Ken Amann

Title: Chief Financial Officer

0001193125-21-008131.txt : 20210113 0001193125-21-008131.hdr.sgml : 20210113 20210113160604 ACCESSION NUMBER: 0001193125-21-008131 CONFORMED SUBMISSION TYPE: 40FR12G PUBLIC DOCUMENT COUNT: 100 FILED AS OF DATE: 20210113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Cresco Labs Inc. CENTRAL INDEX KEY: 0001832928 IRS NUMBER: 981505364 STATE OF INCORPORATION: A1 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 40FR12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-56241 FILM NUMBER: 21526151 BUSINESS ADDRESS: STREET 1: 400 W ERIE ST SUITE 110 CITY: CHICAGO STATE: IL ZIP: 60654 BUSINESS PHONE: (312) 929-0993 MAIL ADDRESS: STREET 1: 400 W ERIE ST SUITE 110 CITY: CHICAGO STATE: IL ZIP: 60654 40FR12G 1 d945319d40fr12g.htm 40FR12G 40FR12G

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

☒	Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934

☐	Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934


For the fiscal year ended		Commission File Number

Cresco Labs Inc.

(Exact name of Registrant as specified in its charter)

British Columbia, Canada

2833

98-1505364

(Province or other jurisdiction of incorporation

or organization)

(Primary Standard Industrial Classification

Code Number)

(I.R.S. Employer

Identification Number)

400 W Erie St Suite 110

Chicago, IL 60654

United States

(312) 929-0993

(Address and telephone number of Registrant’s principal executive offices)

Cresco Labs Inc.

400 W Erie St Suite 110

Chicago, IL 60654

United States

(312) 929-0993

(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None


Title of each class		Name of each exchange on which registered
N/A		N/A

Securities registered pursuant to Section 12(g) of the Act: Subordinate Voting Shares, no par value

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

For annual reports, indicate by check mark the information filed with this Form:


☐ Annual information form		☐ Audited annual financial statements

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: N/A

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☐ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

Yes ☐ No ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.

Emerging growth company ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

†	The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

EXPLANATORY NOTE

Cresco Labs Inc. (the “Company”, the “Registrant”) is a Canadian issuer eligible to file its registration statement pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on Form 40-F pursuant to the multi-jurisdictional disclosure system of the Exchange Act. The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act. Equity securities of the Company are accordingly exempt from Sections 14(a), 14(b), 14(c), 14(f) and 16 of the Exchange Act pursuant to Rule 3a12-3.

FORWARD LOOKING STATEMENTS

The Exhibits incorporated by reference into this Registration Statement of the Registrant contain forward-looking statements. All statements, other than statements of historical fact, incorporated by reference are forward-looking information. Generally, forward-looking information may be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “proposed”, “is expected”, “budgets”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or by the use of words or phrases which state that certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking information will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking information. The Registrant’s forward-looking statements contained in the Exhibits incorporated by reference into this Registration Statement are made as of the respective dates set forth in such Exhibits and on assumptions the Registrant believed are reasonable as of such date. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the Registrant to be materially different from those expressed or implied by such forward-looking information. Such risks and other factors may include, but are not limited to: general business, economic, competitive, political and social uncertainties; general capital market conditions and market prices for securities; delay or failure to receive board or regulatory approvals; the actual results of future operations; competition; changes in legislation affecting the Registrant; the timing and availability of external financing on acceptable terms; and lack of qualified, skilled labor or loss of key individuals. A description of assumptions used to develop such forward-looking information and a description of additional risk factors that may cause actual results to differ materially from forward-looking information can be found in the Registrant’s disclosure documents, such as the Registrant’s Annual Information Form for the year ended December 31, 2019, dated April 28, 2020 (the “AIF”), on the SEDAR website at www.sedar.com, attached hereto as Exhibit 99.18. Although the Registrant has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking information as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking information contained in the Exhibits incorporated by reference are expressly qualified by this cautionary statement. The forward-looking information contained in the Exhibits incorporated by reference represents the expectations of the Registrant as of the date of such Exhibit and, accordingly, is subject to change after such date. However, the Registrant expressly disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.

DIFFERENCES IN UNITED STATES AND CANADIAN REPORTING PRACTICES

The Registrant is permitted, under a multijurisdictional disclosure system adopted by the United States, to prepare this report in accordance with Canadian disclosure requirements, which are different from those of the United States. The Registrant prepares its financial statements, which are filed with this report on Form 40-F, in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board, and the audit is subject to Canadian auditing standards. IFRS differs in certain respects from United States generally accepted accounting principles (“US GAAP”) and from practices prescribed by the SEC. Therefore, the Registrant’s financial statements filed with this registration statement may not be comparable to financial statements prepared in accordance with U.S. GAAP.

PRINCIPAL DOCUMENTS

In accordance with General Instruction B.(1) of Form 40-F, the Registrant hereby incorporates by reference Exhibits 99.1 through 99.49, inclusive, as set forth in the Exhibit Index attached hereto.

In accordance with General Instruction D.(9) of Form 40-F, the Registrant has filed the written consents of the independent accountants named in the foregoing Exhibits as Exhibit 99.50, as set forth in the Exhibit Index attached hereto.

TAX MATTERS

Purchasing, holding, or disposing of securities of the Registrant may have tax consequences under the laws of the United States and Canada that are not described in this registration statement on Form 40-F.

DESCRIPTION OF SUBORDINATE VOTING SHARES

The required disclosure is included under the heading “Description of Capital Structure” in the Registrant’s AIF, attached hereto as Exhibit 99.18.

OFF-BALANCE SHEET ARRANGEMENTS

The Registrant has no off-balance sheet arrangements.

CURRENCY

Unless otherwise indicated, all dollar amounts in this Registration Statement on Form 40-F are in United States dollars.

CONTRACTUAL OBLIGATIONS

The following table lists information with respect to the Registrant’s known contractual obligations as of December 31, 2019.


	Payments due by period ($ in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Note Reference
Long-Term Debt Obligations	$	550		—	$	550		—		—		(a), (b), (c)
Lease Obligations	$	317,230	$	15,304	$	31,192	$	34,440	$	236,294		(d), (e)
Purchase Obligations	$	62,834	$	62,834		—		—		—
Other Long-Term Liabilities	$	81,841	$	59,940	$	21,901		—		—

Total	$	462,455	$	138,078	$	53,643	$	34,440	$	236,294

Notes:

(a)	As part of the Origin House acquisition in the first quarter of 2020, long-term debt was assumed for approximately $22 million to mature June 30, 2021, which was subsequently refinanced in the fourth quarter of 2020.

(b)	Long-term debt was issued in the first quarter of 2020 resulting in an obligation of $100 million to be paid in two tranches, $92 million in the third quarter of 2021 and $8 million in the first quarter of 2022, which was subsequently refinanced in the fourth quarter of 2020.

(c)	Outstanding long-term debt was refinanced in the fourth quarter of 2020 resulting in an obligation of $200 million to be paid in two tranches, $12 million in the third quarter of 2021 and $188 million in the first quarter of 2023.

(d)	In conjunction with the Origin House acquisition in the first quarter of 2020, additional lease obligations of approximately $27 million were assumed, to be paid over the next 10 years.

(e)	Sale-leaseback transactions in the first and second quarters of 2020 resulted in additional lease obligations of $217 million, to be paid over the next 20 years.

UNDERTAKING

The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to the securities registered pursuant to Form 40-F or transactions in said securities.

CONSENT TO SERVICE OF PROCESS

The Registrant has concurrently filed a Form F-X in connection with the class of securities to which this Registration Statement relates.

•

Any change to the name or address of the Registrant’s agent for service shall be communicated promptly to the Commission by amendment to the Form F-X referencing the file number of the Registrant.

EXHIBIT INDEX

The following documents are being filed with the Commission as Exhibits to this Registration Statement:


Exhibit		Description

99.1		News Release dated January 8, 2020

99.2		Material Change Report dated January 13, 2020

99.3		News Release dated January 23, 2020

99.4		News Release dated February 3, 2020

99.5		Senior Secured Term Loan Agreement dated January 22, 2020

99.6		Material Change Report dated February 3, 2020

99.7		News Release dated February 7, 2020

99.8		News Release dated March 3, 2020

99.9		Material Change Report dated March 12, 2020

99.10		Notice of Meeting and Record Date dated April 27, 2020

99.11		News Release dated April 27, 2020

99.12		ON Class 1 Reporting Issuers and Class 3B Reporting Issuers—Participation Fee Management Certification of CFO dated April 28, 2020

99.13		Consolidated Financial Statements as of and for the years ended December 31, 2019 and 2018, dated April 28, 2020

99.14		AB Class 1 Reporting Issuers and Class 3B Reporting Issuers—Participation Fee Management Certification of CFO dated April 28, 2020

99.15		Management Discussion and Analysis of Financial Condition and Results of Operations for the three months and years ended December 31, 2019 and 2018

99.16		Certification of Annual Filings by CFO Venture Issuer Basic Certificate dated April 28, 2020

99.17		Certification of Annual Filings by CEO Venture Issuer Basic Certificate dated April 28, 2020

99.18		Annual Information Form for the year ended December 31, 2019, dated April 28, 2020

99.19		Certification of Annual Filings by CFO Venture Issuer Basic Certificate dated April 28, 2020

99.20		Certification of Annual Filings by CEO Venture Issuer Basic Certificate dated April 28, 2020

99.21		News Release dated May 28, 2020

99.22		Condensed Interim Consolidated Financial Statements (Unaudited) for the three months ended March 31, 2020 and 2019

99.23		Management Discussion and Analysis of Financial Condition and Results of Operations for the three months ended March 31, 2020 and 2019

99.24		Certification of Interim Filings by CEO Venture Issuer Basic Certificate dated May 28, 2020

99.25		Certification of Interim Filings by CFO Venture Issuer Basic Certificate dated May 28, 2020

99.26		Notice of Meeting and Record Date dated May 29, 2020

99.27		Notice of Annual and Special Meeting of Shareholders to be held on June 29, 2020


Exhibit		Description

99.28		Notice of Annual and Special Meeting and Management Information Circular with respect to the Annual and Special Meeting of Shareholders of the Issuer to be held on June 29, 2020

99.29		Form of Proxy—Annual and Special Meeting to be held on June 29, 2020

99.30		Auditor’s Consent Letter to the Incorporation of the Auditor’s Report into the Prospectus Supplement dated December 3, 2019

99.31		News Release dated June 10, 2020

99.32		News Release dated June 16, 2020

99.33		News Release dated July 30, 2020

99.34		News Release dated August 20, 2020

99.35		Condensed Interim Consolidated Financial Statements (Unaudited) for the three and six months ended June 30, 2020 and 2019

99.36		Management Discussion and Analysis of Financial Condition and Results of Operations for the three and six months ended June 30, 2020 and 2019

99.37		Certification of Interim Filings by CEO Venture Issuer Basic Certificate dated August 20, 2020

99.38		Certification of Interim Filings by CFO Venture Issuer Basic Certificate dated August 20, 2020

99.39		News Release dated November 18, 2020

99.40		Condensed Interim Consolidated Financial Statements (Unaudited) for the three and nine months ended September 30, 2020 and 2019

99.41		Management’s Discussion and Analysis of Financial Condition and Result of Operations for the three and nine months ended September 30, 2020 and 2019

99.42		Certification of Interim Filings by CFO Venture Issuer Basic Certificate dated November 18, 2020

99.43		Certification of Interim Filings by CEO Venture Issuer Basic Certificate dated November 18, 2020

99.44		News Release dated December 14, 2020

99.45		Support Agreement entered into by and among the Cresco Labs Inc., Cresco U.S. Corp and Cresco Labs, LLC (“Cresco”) dated November 30, 2018

99.46		Tax Receivable Agreement entered into by and among Cresco U.S. Corp, Cresco, the holders of units in the capital of Cresco existing prior to the recapitalization of Cresco in connection with the completion of the business combination among Randsburg International Gold Corp. (“Randsburg”) and Cresco pursuant to which Cresco completed a reverse take-over of Randsburg, and the holders of Cresco LTIP units dated November 30, 2018

99.47		Amended and Restated Limited Liability Company Agreement of Cresco, entered into by Cresco and each of the members of Cresco on November 30, 2018

99.48		Arrangement Agreement entered into by and between Cresco Labs Inc. and Origin House dated April 1, 2019

99.49		Amended and Restated Underwriting Agreement entered into by and among Cresco Labs Inc. and Canaccord Genuity Corp., Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P., dated September 16, 2019

99.50		Consent of Marcum LLP dated January 12, 2021

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized.


CRESCO LABS INC.

By:		/s/ Charles Bachtell
		Name: Charles Bachtell
		Title: Chief Executive Officer

Date: January 13, 2021

EX-99.1 2 d945319dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

Cresco Closes Acquisition of Origin House, Adding Leading California

Wholesale Distribution and Cultivation Operations to Its Strategic National

Footprint

•

Establishes Cresco as one of the largest wholesale distributors in California.

•

Expected to enable Cresco to continue developing its house of brands in one of the largest and most influential legal cannabis markets in the world.

•

Combines two industry-leading cultivation, branding and distribution teams.

CHICAGO—(BUSINESS WIRE)—January 8, 2020—Cresco Labs Inc. (CSE: CL, OTCQX: CRLBF) (“Cresco” or the “Company”), one of the largest vertically integrated multistate cannabis operators in the United States, announced today that it has closed the previously announced acquisition of CannaRoyalty Corp. d/b/a Origin House (“Origin House”) (CSE: OH, OTCQX: ORHOF) by way of a plan of arrangement (the “Arrangement”). With the closing of the Arrangement, Cresco has significantly increased its footprint and accelerated its entry into the California market.

“This is a transformational deal for Cresco and represents the culmination of the better part of a year’s work for both the Cresco and Origin House teams,” said Charlie Bachtell, Cresco’s CEO and Co-founder. “With the closing of this transaction, Cresco is in a position to accelerate its entry into one of the largest legal cannabis markets in the world, while adding valuable expertise in wholesale distribution and brand development, which we expect will drive significant value for all of our shareholders as we scale across the country in the coming years. We also see meaningful synergies across our national footprint through the addition of Origin House’s ultra-premium indoor cultivation team, which we expect will assist us in our goal to consistently outperform the market on yield and quality metrics.”

Mr. Bachtell continued, “In an industry that is in flux, Cresco is one of the most fundamentally sound and best-positioned multi-state cannabis operators in the U.S. The Company has built an engine that is designed to execute operationally, develop leading brands and get them into the hands of consumers to drive growth and value across all three horizons – short, medium and long term.”

Marc Lustig, Chairman and CEO of Origin House commented, “Cresco’s focus on the middle two verticals of the value chain – brands and wholesale distribution – as the key to creating long-term shareholder value, is aligned with the philosophy we had at Origin House. Speaking as one of the largest former shareholders of Origin House and now an enthusiastic and significant Cresco shareholder, I am looking forward to the opportunity for this combined team to create value for all of our shareholders.”

Pursuant to the Arrangement, Cresco will appoint Marc Lustig, Chairman and CEO of Origin House, to the Cresco board of directors, following receipt of certain U.S. regulatory approvals.

Origin House’s 92,000 square feet of ultra-premium indoor cultivation and production facilities is expected to allow Cresco to expand its offering of Cresco branded products across California rapidly; growing market share, generating brand equity, and driving shareholder value.

Transaction Details

Pursuant to the terms of the Arrangement, holders of common shares of Origin House (“Origin House Common Shares”) received 0.7031 (the “Exchange Ratio”) subordinate voting shares of Cresco (“Cresco Shares”) for each Origin House Common Share held, holders of class A compressed shares of Origin House (“Origin House Compressed Shares”) ultimately received 70.31 Cresco Shares for each Origin House Compressed Share held (the “Consideration”). In total, Cresco acquired 94,558,120 Origin House Common Shares (on an as converted basis) in exchange for 66,483,798 Cresco Shares.

In connection with the closing of the Arrangement, the remaining portion of the approximately CAD$39.7 million of subscription proceeds raised in connection with the financing announced on November 26, 2019 have now been released from escrow, resulting in the issuance of 9,713,839 Origin House Common Shares under the financing. A further 3,692,639 Origin House Common Shares were issued to certain service providers, vendors and contracting parties of Origin House. All such Origin House Common Shares were exchanged, pursuant to the Arrangement, at the Exchange Ratio, for 0.7031 Cresco Shares and are not subject to any statutory hold period.

It is anticipated that the Origin House Common Shares will be delisted from the Canadian Securities Exchange (“CSE”) as of the close of trading on January 9, 2020, and Origin House intends to submit an application to the applicable securities regulators to cease to be a reporting issuer and to terminate its public reporting obligations.

Pursuant to the letter of transmittal mailed to shareholders of Origin House as part of the materials in connection with the special meeting of shareholders of Origin House held on December 31, 2019 (the “Meeting”), in order to receive the portion of the Consideration to which they are entitled, registered holders of Origin House Shares are required to deposit their share certificate(s) representing Origin House Shares, together with a duly completed letter of transmittal, with Odyssey Trust Company, the depositary under the Arrangement. Shareholders whose Origin House Shares are registered in the name of a broker, dealer, bank, trust company or other nominee must contact their nominee to deposit their Origin House Shares.

Further information about the Arrangement is set forth in the materials prepared by Origin House in respect of the Meeting which were mailed to Origin House shareholders and filed under Origin House’s profile on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

ABOUT CRESCO LABS:

Cresco is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco is built to become the most important company in the cannabis industry by combining highly strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) approach to cannabis, Cresco’s 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, Remedi and Mindy’s, a line of edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside*, Cresco’s national dispensary brand, is a wellness focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco at www.crescolabs.com.

ABOUT ORIGIN HOUSE:

Origin House is a growing cannabis brands and distribution company operating across key markets in the U.S. and Canada, with a strategic focus on becoming a preeminent global house of cannabis brands. Origin House’s brand development platform is operated out of six licensed facilities located across California, and provides distribution, manufacturing, cultivation and marketing services for its brand partners. Origin House is actively developing infrastructure to support the proliferation of its brands internationally, initially through its acquisition of Canadian retailer 180 Smoke. Origin House’s shares trade on the CSE under the symbol “OH” and on the OTCQX under the symbol “ORHOF”. Origin House is the registered business name of CannaRoyalty Corp. For more information, visit www.originhouse.com.

FORWARD LOOKING STATEMENTS

Forward looking statements are based on certain assumptions regarding the Company and Origin House, including but not limited to expected growth, results of operations, performance, industry trends and growth opportunities. While the Company and Origin House consider these assumptions to be reasonable based on currently available information, they may prove to be incorrect. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to: (i) risks associated with general economic conditions; (ii) adverse industry events; (iii) future legislative and regulatory developments; (iv) inability to access sufficient capital and/or inability to access sufficient capital on favourable terms; (v) the evolving cannabis industry in North America generally; (vi) the ability of the Company to implement its business strategies: (vii) the ability of the Company to create shareholder value and to maintain, in California and in general, its market share in wholesale distribution, craft cultivation, cannabis branding and M&A; (viii) the Company’s development and growth of its brands, its influence in the cannabis market and its future plans, including expansion in the United States; (ix) risks associated with currency and interest rate fluctuations; (x) risks discussed in public filings relating to the Arrangement, including those risk factors referred to in the management information circular of Origin House prepared in connection with the Meeting, as well as those risks discussed under “Risk Factors” in the Company’s CSE Listing Statement filed with SEDAR, or Origin House’s management’s discussion and analysis filed with SEDAR; (xi) the statements of the CEO and Co-founder of Cresco; (xii) the statements of the Chairman and CEO of Origin House; (xiii) the appointment of the Chairman and CEO of Origin House to the board of directors of Cresco; (xiv) the anticipated revenue and performance of the Company as a result of operations in California and its indoor cultivation and production capacity; and (xv) other factors, many of which are beyond the control of Cresco and/or Origin House.

Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, readers should not place undue reliance on the forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco Shares, nor as to Cresco’s and/or Origin House’s financial performance in future financial periods. Except to the extent required by applicable laws, Cresco and/or Origin House do not intend to update any of these factors or any of the forward-looking statements contained herein, whether as a result of new information, future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media:

Jason Erkes, Cresco Labs Inc.

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles, Cresco Labs Inc.

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco inquiries:

312-929-0993

info@crescolabs.com

EX-99.2 3 d945319dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

FORM 51-102F3

MATERIAL CHANGE REPORT

Item 1.

Name and Address of Company

Cresco Labs Inc. (the “Company”)

1055 West Hastings Street, Suite 2200

Vancouver, British Columbia

V6E 2E9, Canada

Item 2.

Date of Material Change

January 8, 2020

Item 3.

News Release

A news release with respect to the material change, a copy of which is attached hereto as Appendix “A”, was disseminated by the Company on January 8, 2020 through Business Wire and subsequently filed under the Company’s profile on SEDAR at www.sedar.com.

Item 4.

Summary of Material Change

On January 8, 2020, the Company and CannaRoyalty Corp. d/b/a Origin House (“Origin House”) completed their previously announced plan of arrangement (as amended, the “Arrangement”) under the provisions of the Business Corporations Act (Ontario), pursuant to which the Company acquired all of the issued and outstanding shares of Origin House.

Pursuant to the terms of the Arrangement, holders of common shares of Origin House (“Origin House Common Shares”) received 0.7031 subordinate voting shares of the Company (“Cresco Labs Shares”) for each Origin House Common Share held and holders of class A compressed shares of Origin House (“Origin House Compressed Shares”) received 70.31 Cresco Labs Shares for each Origin House Compressed Share held.

The Origin House Common Shares were delisted from the Canadian Securities Exchange as of the close of trading on January 9, 2020 and the OTCQX on January 10, 2020. Origin House has applied to the applicable securities regulators to cease to be a reporting issuer and to terminate its public reporting obligations.

Item 5.1

Full Description of Material Change

Please see the press release attached hereto as Appendix “A”.

Item 5.2.

Disclosure of Restructuring Arrangements

Not applicable.

Item 6.

Reliance on Subsection 7.1(2) of National Instrument 51-102

Not applicable.

Item 7.

Omitted Information

Not applicable.

Item 8.

Executive Officer

For further information, please contact:

John Schetz, General Counsel

Phone: (312) 929-0993

Email: john.schetz@crescolabs.com

Item 9.

Date of Report

January 13, 2020.

Appendix “A”

Cresco Closes Acquisition of Origin House, Adding Leading California Wholesale

Distribution and Cultivation Operations to its Strategic National Footprint

•

Establishes Cresco as one of the largest wholesale distributors in California.

•

Expected to enable Cresco to continue developing its house of brands in one of the largest and most influential legal cannabis markets in the world.

•

Combines two industry-leading cultivation, branding and distribution teams.

January 8, 2020 – CHICAGO, ILLINOIS – Cresco Labs Inc. (CSE: CL, OTCQX: CRLBF) (“Cresco” or the “Company”), one of the largest vertically integrated multistate cannabis operators in the United States, announced today that it has closed the previously announced acquisition of CannaRoyalty Corp. d/b/a Origin House (“Origin House”) (CSE: OH, OTCQX: ORHOF) by way of a plan of arrangement (the “Arrangement”). With the closing of the Arrangement, Cresco has significantly increased its footprint and accelerated its entry into the California market.

Pursuant to the Arrangement, Cresco will appoint Marc Lustig, Chairman and CEO of Origin House, to the Cresco board of directors, following receipt of certain U.S. regulatory approvals.

The acquisition of Origin House makes Cresco a leading wholesale distributor in California, selling into over 575 dispensaries, representing approximately 65% of California’s storefront dispensaries. Origin House’s Continuum distribution platform distributes 13 third party brands, including Kings Garden. In the most recent quarter, Origin House generated CAD$22.8 million in revenue driven primarily by its California distribution business.

Transaction Details

Pursuant to the terms of the Arrangement, holders of common shares of Origin House (“Origin House Common Shares”) received 0.7031 (the “Exchange Ratio”) subordinate voting shares of Cresco (“Cresco Shares”) for each Origin House Common Share held, holders of class A compressed shares of Origin House (“Origin House Compressed Shares”) ultimately received 70.31 Cresco Shares for each Origin House Compressed Share held (the “Consideration”). In total, Cresco acquired 94,558,120 Origin House Common Shares (on an as converted basis) in exchange for 66,483,798 Cresco Shares.

ABOUT CRESCO LABS:

ABOUT ORIGIN HOUSE:

FORWARD LOOKING STATEMENTS

CEO of Origin House; (xiii) the appointment of the Chairman and CEO of Origin House to the board of directors of Cresco; (xiv) the anticipated revenue and performance of the Company as a result of operations in California and its indoor cultivation and production capacity; and (xv) other factors, many of which are beyond the control of Cresco and/or Origin House.

CONTACTS:

Media:

Jason Erkes, Cresco Labs Inc.

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles, Cresco Labs Inc.

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco inquiries:

312-929-0993

info@crescolabs.com

EX-99.3 4 d945319dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

Cresco Labs Announces Signing of Senior Secured Credit Agreement

Initial Drawdown of up to US$100 million expected end of January; Agreement Includes

Mutual Option to Increase to up to US$200 million

CHICAGO—(BUSINESS WIRE)—Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco” or the “Company”), one of the largest vertically integrated multistate cannabis operators in the United States, announced today that it has entered into a non-brokered credit agreement (the “Credit Agreement”) for a senior secured term loan (the “Senior Loan”) in an initial aggregate principal amount of up to US$100 million, with a mutual option to increase the size of the facility to a maximum of US$200 million. The Company expects to complete an initial drawdown of up to US$100 million on or about January 30, 2020, subject to the satisfaction of customary funding conditions.

The proceeds from the Senior Loan will be used to fund the expansion of operations in Illinois, closing and integration costs associated with pending acquisitions, and other strategic growth initiatives in key markets.

“This agreement reflects the strength and growth potential of the national platform Cresco has built as well as our ongoing commitment to execute a superior capital agenda for the benefit of shareholders,” said Charlie Bachtell, CEO and Co-founder of Cresco Labs. “Through this deal, we have diversified the Company’s funding sources, improved our cost of capital in a non-dilutive manner and given ourselves flexibility in a dynamic capital environment. As we enter 2020 and our business continues to increase its positive free cash flow, Cresco is well-positioned to continue growing its foothold in the most strategic cannabis markets in the U.S., while building the most important company in the industry.”

Terms

Commitments under the Senior Loan are provided by a broad syndicate of lenders, including U.S. based institutional investors, demonstrating confidence in Cresco’s strategic position and reflecting the strong growth outlook for the US cannabis industry. Members of the Company’s management and board of directors will also be participating as investors in the Senior Loan. Each commitment under the Senior Loan may be for an 18-month or 24-month term, at the lender’s option. Loans made on the initial closing date will bear interest at a rate of approximately 12.7% per annum for 18-month loans and approximately 13.2% for 24-month loans, payable quarterly in arrears. The terms of the Senior Loan were negotiated at arm’s length with the agent and lead investor and include customary restrictive covenants.

About Cresco Labs

national dispensary brand, is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. These risks and uncertainties include, among other things, the Company’s ability to satisfy pre-funding conditions, timing of initial funding, availability of additional funding under the Senior Loan if required by the Company, and the Company’s ability to comply with the restrictive covenants and other terms of the Senior Loan. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media:

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles

Vice President, Investor Relations

Investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.4 5 d945319dex994.htm EX-99.4 EX-99.4

Exhibit 99.4

Cresco Labs Closes $100 Million Senior Secured Credit Facility

CHICAGO—February 3, 2020—Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco Labs” or the “Company”), one of the largest vertically integrated multistate cannabis operators in the United States, today announced that it has closed the recently announced non-brokered credit agreement (the “Credit Agreement”) for a senior secured term loan (the “Senior Loan”) in an initial aggregate principal amount of US$100 million, with a mutual option to increase the size of the facility to a maximum of US$200 million. The proceeds from the Senior Loan will be used to fund the expansion of operations in Illinois, closing and integration costs associated with pending acquisitions, and other strategic growth initiatives in key markets. A broad syndicate of lenders participated in the Senior Loan, including U.S. based institutional investors together with members of the Company’s management and board of directors.

Charlie Bachtell, CEO and Co-founder of Cresco Labs, commented, “The closing of this financing is an important event and was driven by the incredible opportunities we at Cresco have before us. We have worked to create a credit facility that strengthens our balance sheet in a non-dilutive manner – with no warrants nor convertibility to equity. This transaction demonstrates that capital is available to the top operators in this industry who demonstrate a disciplined strategic focus, a responsible allocation of capital, and a track record of operational execution. We are especially pleased to have closed the transaction with such a high-quality group of investors who have displayed a dedicated commitment to the long-term success of Cresco as we continue to execute our vision – to build the most important company in cannabis.”

Terms

The Senior Loan is for either an 18-month or 24-month term, at the lender’s option. The Loans bear interest at a rate of approximately 12.7% per annum for 18-month loans and approximately 13.2% for 24-month loans, payable quarterly in arrears. The terms of the Senior Loan were negotiated at arm’s length with the agent and lead investor and include customary restrictive covenants.

About Cresco Labs

Cresco Labs is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco is built to become the most important company in the cannabis industry by combining the most strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) approach to cannabis, Cresco’s 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, Remedi and Mindy’s, a line of edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside*, Cresco’s national dispensary brand, is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.

Forward Looking Statements

outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media:

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles, Cresco Labs

VP, Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.5 6 d945319dex995.htm EX-99.5 EX-99.5

Exhibit 99.5

Execution Version

SENIOR SECURED TERM LOAN AGREEMENT

Dated as of January 22, 2020

among

CRESCO LABS INC., as Borrower,

THE LENDERS FROM TIME TO TIME PARTY HERETO

and

[Redacted - Confidential], as Administrative Agent

and

[Redacted - Confidential], as Collateral Agent

TABLE OF CONTENTS


		Page
ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS			1
Section 1.1	Defined Terms		1
Section 1.2	Uniform Commercial Code		31
Section 1.3	Construction		31
Section 1.4	Time Periods		32
Section 1.5	Changes in IFRS		32
Section 1.6	Delaware Divisions		32

ARTICLE 2 THE LOAN			32

Section 2.1	Loan		32
Section 2.2	Advances		33
Section 2.3	Increase of Loan Amount		34
Section 2.4	Use of Proceeds		34

ARTICLE 3 REPAYMENTS, PREPAYMENTS, INTEREST AND FEES			35

Section 3.1	Repayments and Prepayments; Application		35
Section 3.2	Repayment of Loan; Applicable Maturity Date		35
Section 3.3	Prepayments; Repayments		35
Section 3.4	Interest		36
Section 3.5	Application of Payments		36
Section 3.6	Fees		37
Section 3.7	Evidence of Debt		37
Section 3.8	Payments Generally; Administrative Agent’s Claw Back		37
Section 3.9	Sharing of Payments		38
Section 3.10	Apportionment of Payments		38

ARTICLE 4 CHANGED CIRCUMSTANCES, TAXES AND CERTAIN OTHER PROVISIONS			39

Section 4.1	Increased Costs		39
Section 4.2	Taxes		40

ARTICLE 5 CONDITIONS PRECEDENT TO CLOSING AND FUNDING			43

Section 5.1	Reserved		43
Section 5.2	Conditions to Closing Date under this Agreement		43
Section 5.3	Each Advance		45

ARTICLE 6 REPRESENTATIONS AND WARRANTIES			47

Section 6.1	Existence, Qualification and Power; Compliance with Laws		47
Section 6.2	Authorization; No Contravention		47
Section 6.3	Governmental Authorization; Other Consents		47
Section 6.4	Binding Effect		47
Section 6.5	Litigation		48
Section 6.6	No Default		48


Section 6.7	Indebtedness	48
Section 6.8	Insurance	48
Section 6.9	Taxes	48
Section 6.10	ERISA Compliance	48
Section 6.11	Margin Regulations; Investment Company Act; Public Utility Holding Company Act	48
Section 6.12	Disclosure	49
Section 6.13	Reserved	49
Section 6.14	Material Agreements; No Defaults; Customers and Suppliers	49
Section 6.15	Oral Agreements; Matters Not of Record	50
Section 6.16	Creation, Perfection and Priority of Liens	50
Section 6.17	Equity Interests	50
Section 6.18	No Agreements to Merge	51
Section 6.19	Labor Matters	51
Section 6.20	Brokerage Commissions	51
Section 6.21	Agreements with Affiliates	51
Section 6.22	Anti-Money Laundering and Anti-Terrorism Laws	51
Section 6.23	Anti-Bribery and Anti-Corruption Laws	52
Section 6.24	Representations and Warranties as to Financial Statements, Documents, Projections, Solvency and Other Information	53
Section 6.25	Cannabis Licenses and Core Business	54
Section 6.26	Compliance with Laws, Etc.	54
Section 6.27	Environmental Matters	54
Section 6.28	Title to Properties	55
Section 6.29	Intellectual Property	55
Section 6.30	No Proposed Legislation	56
Section 6.31	Representation regarding Super Voting Shares	56

ARTICLE 7 AFFIRMATIVE COVENANTS		56

Section 7.1	Financial Statements and Other Reports	56
Section 7.2	Minimum Cash Balance	58
Section 7.3	Furnishing of Information and Inspection of Collateral	58
Section 7.4	Notices	59
Section 7.5	Payment of Obligations	61
Section 7.6	Preservation of Existence, Etc.	61
Section 7.7	Maintenance of Insurance	61
Section 7.8	Compliance	62
Section 7.9	Books and Records	62
Section 7.10	Intangible, Recording and Stamp Tax	62
Section 7.11	Further Assurances	62
Section 7.12	Special Covenants Relating to Collateral	63
Section 7.13	Performance under Contractual Obligations	63
Section 7.14	Reserved	63
Section 7.15	Material Subsidiaries	64
Section 7.16	Cannabis Licenses	65
Section 7.17	Acquisition Documents	66
Section 7.18	Labor Matters	66


Section 7.19	Employee Benefit Plans	66
Section 7.20	Maintenance of Properties	66
Section 7.21	Environmental Matters	66
Section 7.22	Post-Closing Obligations	67

ARTICLE 8 NEGATIVE COVENANTS		68

Section 8.1	Other Indebtedness	68
Section 8.2	Liens	70
Section 8.3	Dispositions or Transfers	73
Section 8.4	Investments	75
Section 8.5	Fundamental Changes	78
Section 8.6	Transactions with Affiliates	78
Section 8.7	Restricted Payments	78
Section 8.8	Margin Regulations	80
Section 8.9	No Other Negative Pledge	80
Section 8.10	No Change in Fiscal Year	80
Section 8.11	Stay, Extension and Usury Laws	80
Section 8.12	Agreements to Restrict Dividends	81
Section 8.13	Litigation	81
Section 8.14	Use of Proceeds	81
Section 8.15	Governing Documents	81
Section 8.16	Principal Place of Business	81
Section 8.17	Sale and Leaseback Transactions	81
Section 8.18	Key Service Providers	81
Section 8.19	Conduct of Business	81
Section 8.20	Reserved	82
Section 8.21	Anti-Money Laundering and Anti-Terrorism Laws	82
Section 8.22	Anti-Bribery and Anti-Corruption Laws	82
Section 8.23	Investment Company Act of 1940	82

ARTICLE 9 RESERVE ACCOUNT AND DEPOSIT ACCOUNTS		82

Section 9.1	Establishment of and Deposit into Reserve Account	82
Section 9.2	Reserve Account	83
Section 9.3	Acknowledgement of Security Interests	83
Section 9.4	The Loan Parties Rights	83
Section 9.5	Reserve Amount	84
Section 9.6	Operating Accounts	84

ARTICLE 10 EVENTS OF DEFAULT AND REMEDIES		84

Section 10.1	Event of Default	84
Section 10.2	Remedies Upon Event of Default	86
Section 10.3	Application of Funds	87
Section 10.4	Protective Advances/Cure Rights	87

ARTICLE 11 ADMINISTRATIVE AGENT AND COLLATERAL AGENT		88

Section 11.1	Appointment and Authority	88
Section 11.2	Rights as a Lender	88

iii


Section 11.3	Exculpatory Provisions	88
Section 11.4	Reliance by Agent	89
Section 11.5	Delegation of Duties	89
Section 11.6	Resignation or Removal of the Administrative Agent or Collateral Agent	89
Section 11.7	Non-Reliance on Agent and Other Lenders	90
Section 11.8	Administrative Agent May File Proofs of Claim	90
Section 11.9	Collateral and Subsidiary Guarantor Releases	91

ARTICLE 12 MISCELLANEOUS		92

Section 12.1	Amendments, Actions Under this Agreement, Etc.	92
Section 12.2	Notices; Effectiveness; Electronic Communication	93
Section 12.3	No Waiver; Cumulative Remedies	94
Section 12.4	Expenses; Indemnity; Damage Waiver	94
Section 12.5	Payments Set Aside	96
Section 12.6	Successors And Assigns	96
Section 12.7	Right of Setoff	99
Section 12.8	Interest Rate Limitation	99
Section 12.9	Counterparts; Integration; Effectiveness	99
Section 12.10	Survival of Representations and Warranties	100
Section 12.11	Severability	100
Section 12.12	Governing Law; Jurisdiction; Etc.	100
Section 12.13	WAIVER OF JURY TRIAL	102
Section 12.14	Relationship of Parties	102
Section 12.15	USA Patriot Act Notice	102
Section 12.16	Time of the Essence	102
Section 12.17	Telephone and Electronic Authorization	103
Section 12.18	Confidentiality as to Loan Documents, Etc.	103
Section 12.19	Confidentiality	104
Section 12.20	Judgment Currency	104
Section 12.21	Electronic Documentation	104

EXHIBITS

Exhibit A – Form of Note

Exhibit B – Form of Assignment and Assumption

Exhibit C – Form of Lender Supplement

Exhibit D – Form of Compliance Certificate

SCHEDULES

Schedule 1.1 – Cannabis Licenses

Schedule 1.2 – Initial Lenders’ Commitments

Schedule 6.14 – Material Agreements

Schedule 6.17 – Equity Interests

Schedule 6.19 – Labor Matters

Schedule 6.28 – Real Property Interests

Schedule 7.12 – Material Real Property

Schedule 7.18 – Labor Agreements

Schedule 8.1 – Permitted Indebtedness

Schedule 8.2 – Permitted Liens

Schedule 8.3 – Dispositions and Transfers

Schedule 8.4 – Permitted Investments

Schedule 8.6 – Transactions with Affiliates

Schedule 8.7 – Restricted Payments

Schedule 8.13 – Litigation

Schedule 12.17 – Borrower’s Authorized Signatories

[Remainder of page intentionally blank.]

SENIOR SECURED TERM LOAN AGREEMENT

THIS SENIOR SECURED TERM LOAN AGREEMENT, dated as of January 22, 2020, (as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time, this “Agreement”), among Cresco Labs Inc., a British Columbia company (together with its successors and permitted assigns, the “Borrower”), and the lenders from time to time party hereto (each a “Lender” and collectively the “Lenders”), [Redacted - Confidential], a Delaware limited liability company as administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, the “Administrative Agent”) and [Redacted—Confidential], a Delaware limited liability company, as collateral agent for the benefit of the Secured Parties (in such capacity, together with its successors and assigns in such capacity, the “Collateral Agent”).

WHEREAS, subject to the terms and conditions of this Agreement and the other Loan Documents, the Borrower has requested that the Lenders extend, and the Lenders have agreed to extend, a senior secured loan to the Borrower in an aggregate principal amount of up to Seventy Five Million and 00/100 Dollars ($75,000,000) (which may be increased pursuant to Section 2.3 below) for the uses provided for herein, and the Borrower is willing to grant security interests in the Collateral to the Collateral Agent for the benefit of the Secured Parties in order to secure Borrower’s obligations hereunder.

NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter contained, the parties hereto hereby agree as follows:

ARTICLE 1

DEFINITIONS AND ACCOUNTING TERMS

Section 1.1 Defined Terms.

As used in this Agreement, the following terms shall have the meanings set forth below:

“Accounts” means any checking, savings or other deposit account maintained by the Loan Parties (including the Reserve Account). All funds in each Account shall be conclusively presumed to be Collateral or the proceeds of Collateral and neither the Collateral Agent nor any Lender shall have any duty to inquire as to the source of the amounts on deposit in any Account.

“Administrative Agent” has the meaning assigned to such term in the preamble hereto.

“Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on the signature page, or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.

“Administrative Questionnaire” means an administrative questionnaire in a form supplied by the Administrative Agent.

“Advance” means an advance of any portion of the Loan Amount pursuant to the provisions of this Agreement.

“Affiliate” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. Notwithstanding the foregoing, under no circumstance shall any Agent, any Lender or any of their respective Affiliates be deemed to be an Affiliate of any of the Loan Parties or any Subsidiary thereof for purposes of this Agreement or any other Loan Document.

“Agent” means the Administrative Agent or the Collateral Agent, as applicable.

“Agreement” has the meaning assigned to such term in the preamble hereto.

“All-in Yield” means, as to any Loan, the yield thereof, including in the form of interest payments and Facility Fees.

“Anti-Corruption Laws” has the meaning specified in Section 6.23.

“Anti-Money Laundering and Anti-Terrorism Laws” means any requirement of Law relating to terrorism, economic sanctions or money laundering, including, without limitation, (a) the Money Laundering Control Act of 1986 (i.e., 18 U.S.C. §§ 1956 and 1957), (b) the Bank Secrecy Act of 1970 (31 U.S.C. §§ 5311-5330 and 12 U.S.C. §§ 1818(s), 1820(b) and 1951-1959), and the implementing regulations promulgated thereunder, (c) the USA PATRIOT Act and the implementing regulations promulgated thereunder, (d) the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), (e) laws, regulations and Executive Orders administered under any Sanctions Programs, (f) any law prohibiting or directed against terrorist activities or the financing or support of terrorist activities (e.g., 18 U.S.C. §§ 2339A and 2339B) and (g) any similar laws enacted in the United States, Canada or any other jurisdictions in which the parties to this Agreement operate, as any of the foregoing laws have been, or shall hereafter be, amended, renewed, extended, or replaced and all other present and future legal requirements of any Governmental Authority governing, addressing, relating to, or attempting to eliminate, terrorist acts and acts of war and any regulations promulgated pursuant thereto.

“Applicable Maturity Date” means the earlier of (a) the Applicable Scheduled Maturity Date and (b) the date on which the Principal Amount of the Loan becomes due and payable as herein provided, whether at declaration of acceleration, call for redemption or otherwise.

“Applicable Percentage” means with respect to any Lender as of any date, the percentage (carried out to the ninth decimal place) of the Principal Amount of the Loan owed to such Lender at such time.

“Applicable Rate” has the meaning specified in Section 3.4(a).

“Applicable Rate Adjustment” means, with respect to any Loan, the percentage (as the same may be amended on each Funding Date) that would result in the All-in Yield on such Loan being equivalent to an interest rate per annum of [Redacted – Commercially Sensitive Information].

“Applicable Scheduled Maturity Date” means, subject to Section 3.8, (i) the date which is eighteen (18) months after the Closing Date with respect to Tranche A Loans, and (ii) the date which is twenty-four (24) months after the Closing Date with respect to Tranche B Loans, in each case, unless such date is extended by the prior written agreement of the Administrative Agent and the Lenders.

“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 12.6(b)), and accepted by the Administrative Agent, in substantially the form of Exhibit B attached hereto and made a part hereof or any other form approved by the Administrative Agent.

“Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy”, as now and hereinafter in effect, or any successor statute.

“Bankruptcy Event” means any of the following: (a) a receiver, liquidator or trustee shall be appointed for any Subsidiary; (b) any Subsidiary shall be adjudicated as bankrupt or insolvent; (c) any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal, state or provincial law, shall be filed by or against, consented to, or acquiesced in by, any Subsidiary, or (d) any proceeding for the dissolution, liquidation, insolvency, bankruptcy or wind-up (voluntary or involuntary) of any Subsidiary shall be instituted.

“BIA” means the Bankruptcy and Insolvency Act (Canada) as now and hereinafter in effect, or any successor statute.

“Blocked Person” means any Person:

(a) that (i) is identified on the list of “Specially Designated Nationals and Blocked Persons” published by OFAC and/or any other similar lists maintained by OFAC pursuant to authorizing statute, executive order or regulation; (ii) (A) is an agency of the government of a country, (B) an organization controlled by a country, or (C) resides, is organized or chartered in a country, region or territory that is the target of comprehensive sanctions under any Sanctions Program (a “Sanctioned Country”); (iii) a Person listed in any economic or financial sanctions-related or trade embargoes-related list of designated Persons maintained under any of the Anti-Money Laundering and Anti-Terrorism Laws; or (iv) (A) is a Person whose property or interest in property is blocked or subject to blocking pursuant to Section 1 of the Executive Order or any related legislation or any other similar executive order(s) or (B) engages in any dealings or transactions prohibited by Section 2 of the Executive Order or is otherwise associated with any such Person in any manner violative of Section 2 of the Executive Order; and

(b) that is owned or controlled by or that is acting for or on behalf of, any Person described in clause (a) above.

“Borrower” has the meaning assigned to such term in the preamble hereto.

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the State of New York.

“Canadian Pledge and Security Agreement” means that certain Pledge and Security Agreement of even date herewith by and among the Borrower and the Collateral Agent for the benefit of the Secured Parties, in substantially the form acceptable to the Collateral Agent, as the same may be amended, restated, amended and restated, replaced, supplemented or otherwise modified from time to time.

“Cannabis License” means (a) each license specified on Schedule 1.1, (b) any license acquired after the Closing Date by any Loan Party or Subsidiary thereof permitting such Loan Party or such Subsidiary to cultivate, produce, warehouse, store, transport, modify, distribute or sell cannabis or THC-infused products to medical or recreational purchasers in any jurisdiction, including in Canada, the United States or any province or state thereof, or (c) any authorization, permit or licence otherwise required by any Loan Party or any Subsidiary thereof to operate the Core Business.

“Capital Lease Obligations” means, with respect to any Person for any period, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as liabilities on a balance sheet of such Person under IFRS and the amount of which obligations shall be the capitalized amount thereof determined in accordance with IFRS. Notwithstanding the foregoing, for purposes of this Agreement, any lease (whether entered into before or after December 31, 2018) that, in the good faith determination of such Person, would have been classified as an operating lease pursuant to IFRS as in effect on December 31, 2018, shall be deemed to be an operating lease and shall not be included in the definition of “Capital Lease Obligations.”

“Cash Equivalents” means (a) any readily-marketable securities (i) issued by, or directly, unconditionally and fully guaranteed or insured by the United States or Canadian federal government or (ii) issued by any agency of the United States or Canadian federal government the obligations of which are fully backed by the full faith and credit of the United States or Canadian federal government, (b) any readily-marketable direct obligations issued by any other agency of the United States or Canadian federal government, any state of the United States or any Canadian province or any political subdivision of any such state or province or any public instrumentality thereof, in each case having a rating of at least “A-1” from S&P or at least “P-1” from Moody’s, (c) any commercial paper rated at least “A-1” by S&P or “P-1” by Moody’s and issued by any Person organized under the laws of any state of the United States, (d) any Dollar-denominated time deposit, insured certificate of deposit, overnight bank deposit or bankers’ acceptance issued or accepted by (i) any Lender or (ii) any commercial bank that is (A) organized under the laws of the United States or Canada, any state thereof or the District of Columbia, (B) “adequately capitalized” (as defined in the regulations of its primary federal banking regulators) and (C) has Tier 1 capital (as defined in such regulations) in excess of Two Hundred Fifty Million and 00/100 Dollars ($250,000,000), (e) shares of any United States or Canadian money market fund that (i) has substantially all of its assets invested continuously in the types of investments referred to in clause (a), (b), (c) or (d) above with maturities as set forth in the proviso below, (ii) has net assets in excess of Five Hundred Million and 00/100 Dollars ($500,000,000) and (iii) has obtained from either S&P or Moody’s the highest rating obtainable for money market funds in the United States or Canada; provided, however, that the maturities of all obligations specified in any of clauses (a), (b), (c) and (d) above shall not exceed three hundred sixty-five (365) days, and (f) instruments

equivalent to those referred to in clauses (a) through (e) above denominated in other currencies and comparable in credit quality and tenor to those referred to above and customarily used for short and medium term investment purposes in jurisdictions outside the United States or Canada to the extent reasonably required in connection with any business conducted by such Person in such jurisdictions.

“CCAA” means the Companies’ Creditors Arrangement Act (Canada) as now and hereinafter in effect, or any successor statute.

“Change in Law” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority, (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any applicable Governmental Authority or (d) the Loan being classified as an HVCRE; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.

“Change of Control” means an event or series of events by which, without the consent of the Required Lenders:

(a) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of shares representing more than fifty percent (50.00%) of the voting power of the outstanding shares of voting stock of the Borrower on a fully diluted basis;

(b) the Holders of Super Voting Shares on any date cease to hold at least fifty percent (50.00%) of the Super Voting Shares issued and outstanding as of such date; or

(c) the majority of the seats (other than vacant seats) on the board of directors or similar governing body of the Borrower shall cease to be occupied by Persons (i) who were members of the board of directors or similar governing body of the Borrower on the Closing Date or (ii) who were nominated, appointed or approved by the Borrower’s board of directors or similar governing body of the Borrower.

For purposes of this definition, a Person shall not be deemed to have beneficial ownership of securities subject to a stock or share purchase agreement, merger or amalgamation agreement or similar agreement until the consummation of the transactions contemplated by such agreement.

Notwithstanding the foregoing, a transaction will not be deemed to involve a Change of Control under clause (a) or (b) above if (i) the Borrower becomes a direct or indirect wholly owned Subsidiary of a holding company and (ii)(A) the direct or indirect holders of the voting stock of such holding company immediately following that transaction are the same as the holders of the Borrower’s voting shares immediately prior to that transaction, including with respect to the Holders of Super Voting Shares, or (B) immediately following that transaction, the holders of the Borrower’s voting stock immediately prior to that transaction (or another holding company satisfying the requirements of this sentence) are the beneficial owners, directly or indirectly, of more than fifty percent (50.00%) of the voting stock of such holding company, including with respect to the Holders of Super Voting Shares.

“Claims” has the meaning set forth in Section 12.4(b).

“Closing Date” means a date selected by the Administrative Agent occurring within three (3) Business Days following such date as all of the conditions precedent in Section 5.2 are satisfied or waived by the Administrative Agent.

“Code” means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, as amended and in effect.

“Collateral” means all real property and personal property assets securing or intending to secure the Obligations, except for the “Excluded Property” (as defined in the Security Documents).

“Collateral Agent” is defined in the preamble to this Agreement.

“Commitment” means, for each Lender, the obligation of such Lender to make Loans to the Borrower, as it may be modified or established (i) pursuant to Section 2.3, (ii) as a result of any assignment that has become effective pursuant to Section 12.6(b) or (iii) otherwise from time to time pursuant to the terms hereof. The initial amount of each Initial Lender’s Commitment as of the Closing Date is set out on Schedule 1.2, as the same shall be deemed to be supplemented in connection with the effectiveness of each Lender Supplement.

“Commitment Period” means the period commencing on the Closing Date and expiring on the earliest of (a) the date which is six (6) months from the Closing Date, provided that the Administrative Agent may in its discretion and with the consent of the Required Lenders extend such date to not later than October 22, 2020, by providing written notice to the Borrower at least twenty (20) Business Days prior to the expiration of the Commitment Period to be so extended, (b) the date on which the Administrative Agent notifies the Borrower that the Commitment Period has been terminated following the occurrence and during the continuance of an Event of Default as provided for in Section 10.2(i), and (c) such date that the Loan Amount (as increased to the maximum amount set forth herein) has been fully funded to the Borrower; provided that, the Commitment Period may be suspended by the Administrative Agent by written notice to the Borrower upon the occurrence and during the continuance of a Default.

“Competitor” means the Persons listed on the “Competitor List” delivered by the Borrower to the Administrative Agent in writing prior to or on the Closing Date, and the Affiliates of such Persons.

“Compliance Certificate” means a compliance certificate delivered in accordance with Section 7.1(d).

“Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

“Consolidated EBITDA” means, with respect to the Borrower, on a consolidated basis determined in accordance with IFRS, for any period, the amount equal to the Consolidated Net Income of the Borrower plus, without duplication: (i) interest charges, (ii) federal, state, provincial, local and foreign income taxes expense, (iii) depreciation, depletion and amortization expense, (iv) payments of any premiums and any other costs, fees and expenses required to be paid by the terms thereof in connection with the repayment or redemption of Indebtedness existing as of the date of this Agreement, (v) severance costs, restructuring costs, asset impairment charges and acquisition transition services costs, provided in each case such costs or charges were deducted in calculating Consolidated Net Income for such period, (vi) all unusual, nonrecurring or extraordinary non-cash losses, charges or expenses (including to the extent related to impairment of goodwill), (vii) interest income, to the extent such interest income was deducted in computing such Consolidated Net Income, (viii) any expenses or charges related to any issuance of capital stock, any Investment, acquisition, disposition, recapitalization or the incurrence, modification or repayment of Indebtedness permitted to be incurred by this Agreement, in each case whether or not successful, (ix) the settlement amounts relating to the settlement of any claims against the Loan Parties, in an amount not to exceed [Redacted – Commercially Sensitive Information] for any four Fiscal Quarter period, (x) all expenses related to restricted stock and redeemable stock interests granted to officers, directors and employees, to the extent such expenses were deducted in computing such Consolidated Net Income and minus (xi) all unusual, nonrecurring or extraordinary non-cash gains and income.

“Consolidated Net Income” means the Net Income of each Loan Party and each of their respective Subsidiaries on a consolidated basis, provided that:

(a) the cumulative effect of a change in accounting principles will be excluded;

(b) to the extent deducted in the calculation of Net Income, any non-recurring charges associated with any premium or penalty paid, write-offs of deferred financing costs (including unamortized original issue discount) or other financial recapitalization changes in connection with redeeming or retiring any Indebtedness prior to its maturity will be added back to the calculation of Consolidated Net Income;

(d) unrealized gains and losses due solely to fluctuations in currency values and the related tax effects according to IFRS will be excluded; and

(e) unrealized losses and gains under Hedging Obligations included in the determination of Net Income, will be excluded.

“Consolidated Total Assets” means, as of the last day of any period, the total assets of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with IFRS, as of the most recent date for which internal financial statements have been provided pursuant to Section 7.1, or if such financial statements have not been delivered at the time of determination, the most recent date for which consolidated financial statements of the Borrower are publicly available on SEDAR or EDGAR.

“Consolidated Total Revenue” means, for any period, the revenue of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with IFRS.

“Contractual Obligation” means, as to any Person, any provision of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

“Control” (including the correlative meanings, the terms, “controlling”, “controlled by” and “under common control with”) of any specified Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.

“Controlled Substances Act” means the Controlled Substances Act (21 U.S.C. § 801 et seq.), and any rules or regulations promulgated thereunder as in effect from time to time.

“Core Business” means the cultivation, production, warehousing, storage, transportation, modification, distribution or sale of cannabis or THC-infused products to medical or recreational purchasers in any jurisdiction, including in Canada, the United States or any province or state thereof.

“Current Value” has the meaning specified therefor in Section 7.12(c).

“DACA Agreement” means, with respect to any Account established by the Borrower, an agreement in form and substance satisfactory to the Collateral Agent establishing “control” (as defined in the UCC) of such Account by the Collateral Agent and whereby the bank maintaining such account agrees, upon the occurrence and during the continuance of an Event of Default, to comply only with the instructions originated by the Collateral Agent, without the further consent of any Loan Party or any Subsidiary thereof all as set forth in such DACA Agreement, as the same may be amended, restated, amended and restated, replaced, supplemented or otherwise modified from time to time.

“Debtor Relief Laws” means each of the (a) the Bankruptcy Code, (b) the BIA, (c) the CCAA, and (d) all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States, the Laws of Canada or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.

“Default” means any event, act or condition described in Section 10.1 that is, with the giving of notice, lapse of time, or both, and would constitute, unless cured or waived, an Event of Default.

“Default Rate” means an interest rate equal to (a) the Applicable Rate plus (b) [Redacted – Commercially Sensitive Information] per annum.

“Defaulting Lender” means any Lender that (a) has failed to fund any portion of an Advance when required hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one (1) Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy, insolvency, receivership or other similar proceeding.

“Depository Institution” means a bank, credit union or other financial institution that regularly takes deposits and is duly chartered under federal or state Law and the deposits of which are insured by the Federal Deposit Insurance Corporation or equivalent governmental agency.

“Disposition” or “Dispose” means, with respect to any Person, the sale, lease, sale and leaseback, assignment, conveyance, transfer or other voluntary disposition (whether in one transaction or series of transactions) of any property (including, without limitation, any Equity Interests) by such Person (or the granting of any option or other right to do any of the foregoing), including any sale, assignment, transfer, division or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith, and including any expropriation of any property of such Person.

“Dollar” and “$” mean dollars in lawful currency of the United States.

“EDGAR” means the United States Securities and Exchange Commission’s Electronic Data Gathering, Analysis, and Retrieval system.

“Eligible Assignee” means any Person (other than a natural person); provided that notwithstanding the foregoing, “Eligible Assignee” shall not include the Borrower or any of the Borrower’s Affiliates or any Competitor.

“Eligible Institution” means a Depository Institution or trust company the short term unsecured debt obligations or commercial paper of which are rated at least A-1+ by S&P, P-1 by Moody’s, and F-1+ by Fitch in the case of accounts in which funds are held for thirty (30) days or less, or, in the case of letters of credit or accounts in which funds are held for more than thirty (30) days, the long term unsecured debt obligations of which are rated at least “AA” by Fitch or S&P or “Aa2” by Moody’s.

“Eligible Participant” means any Person (other than a natural person); provided that notwithstanding the foregoing, “Eligible Participant” shall not include the Borrower or any of the Borrower’s Affiliates or any Competitor.

“Employee Benefit Plan” means any employee benefit plan that is described in Section 3(3) of ERISA and which is maintained for employees of any Loan Party or their respective Subsidiaries or any ERISA Affiliate thereof.

“Environment” means the natural environment (including soil, land, surface or subsurface strata), surface waters, groundwater, sediment, ambient air (including all layers of the atmosphere), indoor air, organic and inorganic matter and living organisms, and any other environmental medium or natural resource.

“Environmental Actions” means any summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding or judgment from any Person or Governmental Authority involving violations or alleged violations of Environmental Laws or Releases, exposure to or cleanup of any Hazardous Materials (a) from any assets, properties or businesses owned or operated by any Loan Party or any of their respective Subsidiaries or any predecessor in interest; (b) onto any facilities which received Hazardous Materials generated by any Loan Party or any of their Subsidiaries or any predecessor in interest, or (c) with respect to any Environmental Liabilities and Costs.

“Environmental Law” means any and all current or future foreign, federal, state, provincial or local statutes, laws, common-law doctrine, ordinances, orders, rules, regulations, judgments, governmental authorizations, or any other requirements of Governmental Authorities relating to (a) the Environment, including those Laws relating to Releases of Hazardous Materials, (b)protection of the public health and welfare with respect to the exposure to or the Release of any Hazardous Materials or (c) occupational safety and health, industrial hygiene or the protection of human, plant or animal health or welfare (to the extent related to exposure to or management of Hazardous Materials), in any manner applicable to any Loan Party or any Material Subsidiary.

“Environmental Liabilities and Costs” means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts and consultants and costs of investigations and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any actual or alleged noncompliance with or liability pursuant to any Environmental Law or Environmental Action, including any condition of the Environment or a Release of Hazardous Materials from or onto (a) any property presently or formerly owned by any Loan Party or any Subsidiary thereof or (b) any facility which received Hazardous Materials generated by any Loan Party or any Subsidiary thereof.

“Environmental Lien” means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs.

“Environmental Permit” means any permit, approval, identification number, license or other authorization pursuant to or required under any Environmental Law.

“Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants or options for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, membership or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate”: As applied to any Person, any trade or business (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b), (c), (m) or (o) of the Code.

“Event of Default” has the meaning assigned to such term in Section 10.1.

“Excluded Taxes” means, with respect to any Agent or any Lender or any other recipient of any payment to be made by or on account of any obligation of any Loan Party hereunder, (a) taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it (in lieu of net income taxes) imposed as a result of such recipient being organized under the laws of, or having its principal office or, in the case of any Lender that is a bank, its applicable lending office, located in the jurisdiction (or any political subdivision thereof) imposing such tax, (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction imposed as a result of such recipient being organized under the laws of, or having its principal office or, in the case of any Lender that is a bank, its applicable lending office, located in the jurisdiction (or any political subdivision thereof) imposing such tax, (c) Connection Income Taxes not otherwise described in (a) or (b) above, (d) in the case of a Lender, any U.S. or Canadian federal withholding tax that is imposed on amounts payable to such Lender at the time such Lender becomes a party to this Agreement (or, if it is a bank, designates a new lending office) or is attributable to such Lender’s failure or inability (other than as a result of a Change in Law after such Lender becomes a party hereto) to comply with Section 4.2, except to the extent that such Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (if it is a bank) or assignment, to receive additional amounts from the Loan Parties with respect to such withholding tax pursuant to Section 4.2(a) and (e) any U.S. federal withholding taxes imposed on amounts payable by the Borrower pursuant to FATCA.

“Executive Order” means Executive Order No. 13224 on Terrorist Financings: - Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten To Commit, or Support Terrorism issued on 23rd September, 2001, as amended by Order No. 132684, as so amended.

“Facility Fee” means, with respect to each Commitment made on the Closing Date, [Redacted – Commercially Sensitive Information] of the principal amount of such Commitment. For greater certainty, the Facility Fee shall not be payable with respect to any Commitment made after the Closing Date without the written agreement of the Borrower.

“Fiscal Quarter” means each of the calendar quarters during any Fiscal Year.

“Fiscal Year” means any period of twelve (12) consecutive months ending on December 31 of any calendar year.

“Fitch” means Fitch Ratings Inc.

“Foreign Official” has the meaning specified in Section 6.23.

“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

“Funding Date” means the Initial Funding Date and each other date on which any Advance is made thereafter.

“Funding Request” has the meaning specified in Section 2.2.

“Governing Documents” means (a) (i) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction), (ii) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement, and (iii) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity, (b) any certificate of designation or instrument relating to the rights of holders (including preferred shareholders) of Equity Interests in such entity, and (c) any shareholder rights agreement, voting trusts or other similar agreement to which such entity is a party.

“Governmental Authority” means the government of the United States or Canada or any other nation, or of any political subdivision thereof, whether state, provincial or local, and any agency, authority, instrumentality, regulatory body, court, tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

“Guarantee” or “Guaranty” means, as to any Person, (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien); provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term “Guarantee” as a verb has a corresponding meaning.

“Hazardous Materials” means all chemicals, materials, substances, solid and hazardous wastes, toxic substances, flammable materials, solvents, radioactive materials, carcinogens, pesticides, pollutants, contaminants, compounds, in any form, including petroleum or petroleum distillates and any petroleum by-products, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas or mold, subject to regulation under, or which may give rise to liability pursuant to, any Environmental Law.

“Hedging Obligations” means, with respect to any specified Person, the obligations of such Person under:

(a)

interest rate swap agreements, interest rate cap agreements, interest rate collar agreements and other agreements or arrangements with respect to interest rates;

(b)

commodity swap agreements, commodity option agreements, forward contracts and other agreements or arrangements with respect to commodity prices;

(c)

foreign exchange contracts, currency swap agreements and other agreements or arrangements with respect to foreign currency exchange rates; and

(d)

other agreements or arrangements designed to protect such Person against fluctuations in interest rates, commodity prices or currency exchange rates.

“Holders of Super Voting Shares” means [Redacted - Confidential].

“Hope Heal Health” means Hope Heal Health, Inc., a Massachusetts corporation.

“Hope Heal Health Acquisition” means the transactions contemplated pursuant to that certain Agreement and Plan of Merger, dated November 19, 2018, by and among Hope Heal Health, Inc., 1880 West, LLC, Cresco HHH, LLC, Cresco 1880 West, LLC, the individuals party thereto and John Rogue as the representative, as amended by that certain letter agreement, dated December 2018, and as further amended, restated, amended and restated, supplemented or otherwise modified from time to time with the prior written consent of the Administrative Agent and Required Lenders.

“HVCRE” means a loan that is categorized as a high volatility commercial real estate loan exposure pursuant to Part 217 of Chapter II of title 12 of the Code of Federal Regulations.

“IFRS” means International Financial Reporting Standards, as adopted by the International Accounting Standards Board, as in effect in Canada from time to time.

“Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with IFRS:

(a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;

(b) all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;

(d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business as described below);

(e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;

(f) the aggregate amount of all Capital Lease Obligations of such Person which, in accordance with IFRS, is required to be shown on the balance sheet of such Person;

(g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and

(h) all Guarantees of such Person in respect of any of the foregoing.

For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any Hedging Obligation on any date shall be the Mark-to-Market Exposure thereof as of such date. Indebtedness shall not include any trade account payables arising from the acquisition of goods, supplies or merchandise, paid within sixty (60) days of the incurrence of such trade account payables, each in the ordinary course of such Person’s business.

Notwithstanding the foregoing, the following shall not constitute Indebtedness:

(1)

any obligation arising from any agreement providing for indemnities, Guarantees, purchase price adjustments, holdbacks, contingency payment or earnout obligations based on the performance of the acquired or disposed assets, subordinated vendor takeback loan or similar obligations (other than Guarantees of Indebtedness) customarily incurred by any Person in connection with the acquisition or disposition of any assets, including capital stock, in an aggregate amount not to exceed [Redacted – Commercially Sensitive Information] at any one time outstanding;

(2)

any indebtedness that has been defeased in accordance with IFRS or defeased pursuant to the irrevocable deposit of cash or Cash Equivalents (in an amount sufficient to satisfy all obligations relating thereto at maturity or redemption, as applicable, including all payments of interest and premium, if any) in a trust or account created or pledged for the sole benefit of the holders of such indebtedness, and subject to no other Liens, and in accordance with the other applicable terms of the instrument governing such indebtedness; provided, however, if any such defeasance shall be terminated prior to the full discharge of the indebtedness for which it was incurred, then such indebtedness shall constitute Indebtedness for all relevant purposes of this Agreement;

(3)

any item that would not appear as a liability upon a balance sheet of the specified Person in accordance with IFRS; and

(4)

for greater certainty, Operating Leases.

“Independent Accountant” means any firm of nationally recognized, certified public accountants which is independent and which is selected by the Borrower and reasonably acceptable to the Administrative Agent.

“Indemnified Taxes” means (a) Taxes other than Excluded Taxes and (b) to the extent not otherwise described in (a), Other Taxes.

“Indemnitee” has the meaning specified in Section 12.4(b).

“Initial Funding Date” means, subject to the satisfaction of Section 5.3, January 30, 2020 or such other date as the Borrower and the Administrative Agent may agree in writing.

“Initial Lender” means a Lender (i) party to this Agreement as of the Closing Date or (ii) that becomes a party to this Agreement on or before the Initial Funding Date and funds its Commitment on the Initial Funding Date.

“ Insolvency Proceeding” means a bankruptcy, insolvency, receivership, liquidation, winding up, reorganization or similar proceeding.

“Inspection” has the meaning specified in Section 7.3(a).

“Intellectual Property” has the meaning specified therefor in the Security Agreement.

“Interest Payment Date” means (a) the first Business Day of each Fiscal Quarter and (b) the Applicable Maturity Date.

“Interest Period” means, with respect to any Interest Payment Date, (a) initially, the period commencing on the Initial Funding Date of the initial Advance and ending on March 31, 2020, (b) thereafter until the Applicable Maturity Date, each period commencing on (and including) the first (1st) day of the preceding Fiscal Quarter and terminating on (and including) the last day of the preceding Fiscal Quarter and (c) the period that ends on the Applicable Maturity Date, commencing the first (1st) day of the Fiscal Quarter in which the Applicable Maturity Date occurs and terminating on the Applicable Maturity Date.

“Investment” means, with respect to any Person, all direct or indirect investments by that Person in other Persons (including Affiliates) in the forms of loans (including guarantees or other obligations), advances, extensions of credit or capital contributions, purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with IFRS. The acquisition by a Loan Party or any Subsidiary thereof of a Person that holds an Investment in any third Person shall be deemed to be an Investment by such Loan Party in that third Person in an amount equal to the fair market value of the Investment held by the acquired Person in that third Person.

“IRS” means the United States Internal Revenue Service.

“Key Person” means [Redacted – Commercially Sensitive Information].

“Laws” means, collectively, each international, foreign, Federal, state, provincial, territorial, municipal and local statute, treaty, rule, regulation, ordinance, code and administrative or judicial precedent or authority, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and each applicable administrative order, directive, decree, policy, directed duty, license, authorization and permit of, and agreement with, any Governmental Authority.

“Lender” has the meaning assigned to it in the preamble to this Agreement.

“Lender Supplement” means a Lender Supplement substantially in the form of attached Exhibit C.

“Lien” means any recorded or unrecorded, express or implied, written or oral, mortgage, pledge, deed of trust, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale, Capital Lease Obligation, or other title retention agreement, any covenant, condition, restriction, lease, easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing).

“Loan” means any extension of credit by a Lender to the Borrower under this Agreement or any other Loan Document.

“Loan Amount” means the aggregate principal amount of the loan to be advanced pursuant to this Agreement, which shall be Seventy-Five Million and 00/100 Dollars ($75,000,000) as of the Closing Date and may be increased in accordance with Section 2.3.

“Loan Documents” means, collectively, this Agreement, the Notes, the Security Documents, the Subsidiary Guaranty, the Perfection Certificate and all other documents, instruments, letters and agreements executed or delivered in connection with the Loan or this Agreement.

“Loan Parties” means the Borrower and any Subsidiary Guarantor.

“Loan Proceeds” means the aggregate Advances made by the Lenders to the Borrower pursuant to the Loan Documents.

“Mandatory Prepayment Event” means the occurrence of any of the following at any time during the effectiveness of this Agreement or while any Obligations remain outstanding hereunder: (a) the sum of the aggregate principal amount of outstanding Loans exceeds the Loan Amount; (b) any Governmental Authority enforces a prohibition or ban on the Core Business or processes or methods related to the Core Business (e.g., cultivation, production, warehousing, storage, transportation, modification, distribution or sale), whether under the Controlled Substances Act or otherwise, (c) any Cannabis License is revoked, suspended, cancelled without replacement on or before the date of such revocation, suspension or cancellation, or any illegality of such Cannabis License under applicable Law, including the Controlled Substances Act, is actively enforced by a Governmental Authority having jurisdiction, (d) the making or payment of any Loan or other Obligations by any Lender or any Loan Party is made illegal or unenforceable by action of any applicable Governmental Authority, (e) a Material Adverse Effect, (f) a Change in Law which has a material adverse impact on the Core Business or (g) [Redacted – Commercially Sensitive Information] fails to be actively involved in the management and operations of the Core Business on behalf of the Loan Parties, except by reason of death or disability; provided that in the case of clauses (b), (c), (e) and (f) such event has an adverse impact of greater than (i) at any time when the aggregate principal amount of the Loans outstanding is One Hundred Million and 00/100 Dollars ($100,000,000) or less, [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recent period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b) (or [Redacted – Commercially Sensitive Information] of Consolidated EBITDA, if Consolidated EBITDA for such period is at least Sixty Million and 00/100 Dollars ($60,000,000)) and (ii) at any time when the aggregate principal amount of the Loans outstanding is more than One Hundred Million and 00/100 Dollars ($100,000,000), [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recent period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b); provided, in each case, that if such financial statements have not been delivered pursuant to Section 7.1(a) or Section 7.1(b) at the time of determination then such four consecutive Fiscal Quarter period shall end as of the last day of the most recent Fiscal Quarter for which consolidated financial statements of the Borrower are publicly available on SEDAR or EDGAR.

“Margin Regulations” has the meaning specified in Section 6.11(a).

“Mark-to-Market Exposure” means all obligations of a Person under any Hedging Obligation that such Person would be required to pay if the agreements governing such Hedging Obligation were terminated.

“Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect on, the operations, business, assets or financial condition of the Loan Parties taken as a whole; (b) a material impairment of the legality, validity or binding effect against the Loan Parties, taken as a whole, of any Loan Document to which they are a party or (c) a material impairment of the validity, perfection or priority of the security interest created pursuant to the Security Documents.

“Material Agreements” has the meaning specified in Section 6.14.

“Material Real Property” means (a) on the Closing Date, each fee-owned real property listed on Schedule 7.12 and (b) any fee-owned real property acquired by any Loan Party after the Closing Date with a Current Value in excess of [Redacted – Commercially Sensitive Information].

“Material Subsidiary” means any direct or indirect Subsidiary of the Borrower or any Loan Party that (a) owns or holds a Cannabis License or (b) as of the last day of the Fiscal Quarter for which financial statements have been delivered hereunder (or if such financial statements have not been delivered at the time of determination, the most recent date for which consolidated financial statements of the Borrower are publicly available on SEDAR or EDGAR) had (i) revenues representing in excess of five percent (5.00%) of Consolidated Total Revenue for the period of four consecutive Fiscal Quarters ending as of such date or (ii) assets representing in excess of five percent (5.00%) of Consolidated Total Assets as of such date; provided that, if at any time (A) the aggregate amount contributed to Consolidated Total Revenue by all Subsidiaries that are not Material Subsidiaries exceeds ten percent (10.00%) of Consolidated Total Revenue for the period of four consecutive Fiscal Quarters ending as of such date or (B) the Consolidated Total Assets of all Subsidiaries that are not Material Subsidiaries exceeds ten percent (10.00%) of Consolidated Total Assets as of such date, then the Borrower (or, in the event the Borrower has failed to do so within ten (10) days, the Administrative Agent) shall designate sufficient Subsidiaries as “Material Subsidiaries” to eliminate such excess, and such designated Subsidiaries shall for all purposes of this Agreement constitute Material Subsidiaries. Any determination as to whether a Subsidiary shall be a Material Subsidiary shall be made on the Closing Date and thereafter on the date that financial statements are delivered or should have been delivered pursuant to Section 7.1. To the extent a Subsidiary becomes a Material Subsidiary in connection with such determination, the Borrower shall cause such Subsidiary to comply with the requirements of Section 7.15 in accordance with the provisions thereof and otherwise in the Loan Documents upon the Administrative Agent’s request. Notwithstanding any other term of this Agreement, (i) each of [Redacted—Confidential] shall be deemed not to be a Material Subsidiary unless designated as such by the Borrower in writing; provided that if a [Redacted—Confidential] would be a Material Subsidiary if not for this clause (i) and is not designated as a Material Subsidiary in accordance with this clause (i), then the Restricted Party that is the direct parent of such [Redacted - Confidential] shall be deemed to be a Material Subsidiary, (ii) each of (A) [Redacted – Confidential], (B) [Redacted—Confidential], or (C) [Redacted—Confidential], shall be deemed not to be a Subsidiary or an Affiliate of a Loan Party until such time that a Loan Party beneficially owns more than fifty percent (50.00%) of the securities having the total voting power of its Equity Interests entitled to vote for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) and (iii) until the date that is 30 days after the Closing Date, Origin House and its Subsidiaries shall be deemed not to be Subsidiaries or Affiliates of a Loan Party; provided that the 30-day period set forth in Section 7.15 shall nonetheless commence on the Closing Date with respect to Origin House as though it were a Subsidiary of a Loan Party on the Closing Date.

“Maximum Commitments” means (a) as to any Lender, the aggregate commitment of such Lender to make its ratable portion of the Loan and (b) as to all Lenders, the aggregate commitment of all Lenders to make the Loan which aggregate commitment shall be the Loan Amount.

“Maximum Loan Amount” has the meaning set forth in Section 2.3.

“Maximum Rate” has the meaning set forth in Section 12.8.

[Redacted - Confidential] has the meaning set forth in the definition of “Material Subsidiary”.

“Minimum Cash Balance” means [Redacted – Commercially Sensitive Information].

“Moody’s” means Moody’s Investors Service, Inc.

“Mortgage” means a mortgage, charge, deed of trust or deed to secure debt, in form and substance reasonably satisfactory to the Administrative Agent and the Required Lenders, made by a Loan Party in favor of the Collateral Agent for the benefit of the Secured Parties, securing the Obligations and delivered to the Administrative Agent.

“Multiemployer Plan” means any multiemployer plan that is described in Section 3(37) of ERISA and which is maintained for employees of any Loan Party or their respective Subsidiaries or any ERISA Affiliate thereof.

“Net Income” means, at any date of determination, in respect of a Person the net income and earnings (or loss) of such Person, determined in accordance with IFRS, excluding, however:

(a)

any gain or loss, together with any related provision for taxes on such gain or loss, realized in connection with: (a) any disposition of assets; or (b) the disposition of any securities by such Person or the extinguishment of any Indebtedness of such Person; and

(b)

any extraordinary gain or loss, together with any related provision for taxes on such extraordinary gain or loss.

“Non-Recourse Debt” means Indebtedness incurred or assumed by a Loan Party in respect of which a Lien is granted or intended to be granted by such Loan Party and which Indebtedness is incurred or assumed solely to finance the construction, development or acquisition of an asset or property (the “Non-Recourse Asset”) from a Person at arm’s length to the Loan Parties; provided that:

(a)

such Indebtedness is incurred at the time of construction, development or acquisition of the Non-Recourse Asset (or within one hundred twenty (120) days thereafter); and

(b)

the grantees of the Liens have no recourse whatsoever (other than recourse on an unsecured basis in respect of false or misleading representations or warranties and customary indemnities provided with respect to such financings) against any other assets, properties or undertakings of the Loan Parties; and

(c)

no Guarantee of such Indebtedness is provided by the Loan Parties.

“Note” means a promissory note made by the Borrower in favor of a Lender evidencing such Lender’s Loan, substantially in the form of Exhibit A attached hereto and made a part hereof, as the same may be amended, restated, amended and restated, replaced, supplemented or otherwise modified from time to time.

“Obligations” means any and all present and future Indebtedness (principal, interest, fees, costs and expenses, indemnities, attorneys’ fees and other amounts), liabilities and obligations (including, without limitation, guaranty obligations, indemnity obligations, Prepayment Premium and reimbursement obligations) of the Loan Parties to any Agent or any Lender and/or any indemnified person evidenced by or arising under or in respect of this Agreement, any Note and/or any of the other Loan Documents, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest, fees, costs, expenses and indemnities that accrue after the commencement by or against any Loan Party or any Subsidiary thereof of any proceeding under Debtor Relief Laws naming such Person as the debtor in such proceeding regardless of whether any such amounts are allowed or allowable claims in such proceeding.

“OCN First Loan” means the First Loan (as defined on Schedule 8.1) as in effect on the Closing Date (as may be amended, restated or modified in a manner that is not materially adverse to the Secured Parties), in an aggregate principal amount not to exceed [Redacted – Commercially Sensitive Information].

“OCN Second Loan” means the Second Loan (as defined on Schedule 8.1) as in effect on the Closing Date (as may be amended, restated or modified in a manner that is not materially adverse to the Secured Parties), in an aggregate principal amount not to exceed [Redacted – Commercially Sensitive Information].

“OCN Subordination Agreement” means a subordination agreement by and between the Administrative Agent (on behalf of the Lenders) and the Opaskwayak Cree Nation (and any other lender in connection with the OCN First Loan or the OCN Second Loan) on terms and conditions satisfactory to the Administrative Agent, acting reasonably, including without limitation, (i) subordination of all Liens granted in connection with the Indebtedness under the OCN First Loan and the OCN Second Loan to all Liens granted to the Secured Parties in connection with the Security Documents, (ii) not less than 180-day enforcement standstill, and (iii) not less than 180-day principal, interest and fee payment blockage during the continuance of any Event of Default (subject to customary blockage limitations), which, for greater certainty, will permit such payments in accordance with the terms of the Credit Agreement while such payment blockage is not in effect.

“OFAC” means the United States Department of the Treasury’s Office of Foreign Assets Control.

“Operating Lease” means any lease (whether entered into before or after December 31, 2018) that would have been classified as an operating lease pursuant to IFRS as in effect on December 31, 2018.

“Origin House” means each of CannaRoyalty Corp., an Ontario corporation, d/b/a Origin House and its Subsidiaries.

“Origin House Acquisition” means the transactions contemplated pursuant to that certain Arrangement Agreement, dated April 1, 2019, by and between Cresco Labs Inc. and CannaRoyalty Corp. d/b/a Origin House, as amended by that certain Agreement to Amend the Plan of Arrangement, dated May 12, 2019, that certain Second Agreement to Amend the Plan of Arrangement, dated June 5, 2019 and that certain Amending Agreement, dated November 12, 2019 and as further amended, restated, amended and restated, supplemented or otherwise modified from time to time with the prior written consent of the Administrative Agent and Required Lenders.

“Other Connection Taxes” means, with respect to the Administrative Agent or any Lender, Taxes imposed as a result of a present or former connection between such Person and the jurisdiction imposing such Tax (other than connections arising from such Person having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

“Other Taxes” means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

“Participant” has the meaning specified in Section 12.6(d).

“Patent” has the meaning specified therefor in the Security Agreement.

“Patriot Act” means the USA PATRIOT Improvement and Reauthorization Act of 2005, Pub. L. 109-77, signed into law March 9, 2006, as amended.

“Percentage Ownership” means, with respect to a Restricted Party, the percentage of such Restricted Party’s issued and outstanding Equity Interests (excluding directors’ qualifying shares or other securities required by applicable Law to be owned by a Person other than a Restricted Party) that are beneficially owned by Restricted Parties.

“Perfection Certificate” means a certificate in form and substance reasonably satisfactory to the Administrative Agent and the Required Lenders providing information with respect to the property of each Loan Party and each Material Subsidiary thereof.

“Permitted Acquisition” means the acquisitions permitted under Sections 8.4(c) through 8.4(e).

“Permitted Acquisition Indebtedness” means Indebtedness of a Restricted Party to the extent such Indebtedness was Indebtedness of any other Person existing at the time (a) such Person became a Restricted Party or (b) such Person was merged or consolidated with or into a Restricted Party; provided that on the date such Person became a Subsidiary of the Borrower or the date such Person was merged or consolidated with or into a Restricted Party, as applicable, either:

(a)

immediately after giving effect to such transaction on a pro forma basis as if the same had occurred at the beginning of the applicable four Fiscal Quarter period, the Restricted Parties would be permitted to incur at least One and 00/100 Dollar ($1) of additional Indebtedness pursuant to the Total Fixed Charge Coverage Ratio test set forth in Section 8.1(e); or

(b)

immediately after giving effect to such transaction on a pro forma basis as if the same had occurred at the beginning of the applicable four Fiscal Quarter period, the Total Fixed Charge Coverage Ratio of the Borrower would be equal to or greater than the Total Fixed Charge Coverage Ratio of the Borrower immediately prior to such transaction.

“Permitted Changes” means:

(a)

with the prior written consent of the Administrative Agent and the Required Lenders, (i) any merger, amalgamation or consolidation with or into the Borrower in a transaction in which the Borrower is the surviving entity or (ii) if the Person formed by or surviving any such merger or consolidation is not the Borrower (any such Person, the “Successor Borrower”), (A) no Event of Default shall exist or result therefrom, (B) the Successor Borrower shall deliver to the Administrative Agent all information as may be reasonably requested by the Administrative Agent to satisfy any applicable “know your customer” requirements, (C) the Successor Borrower shall be an entity organized or existing under the laws of Canada or a province thereof and (D) the Successor Borrower shall expressly assume the Obligations of such Borrower in a manner reasonably satisfactory to the Administrative Agent; it being understood and agreed that if the foregoing conditions under clauses (A) through (D) are satisfied, the Successor Borrower will succeed to, and be substituted for, such Borrower under this Agreement and the other Loan Documents, provided that the prior written consent of the Administrative Agent and the Required Lenders shall not be required if the Person that is a party to a merger, amalgamation or consolidation described in clause (i) above and surviving such a transaction is formed by the Borrower solely for facilitating such transaction;

(b)

any merger, amalgamation, dissolution, winding up, liquidation, or consolidation of a Subsidiary of a Loan Party into any Person in order to consummate an Investment or asset Disposition permitted by Section 8.3 or Section 8.4, or if all of the property of such Subsidiary passes to another Restricted Party (provided that if such Subsidiary is a Loan Party, then the Restricted Party to which its property passes is also a Loan Party) or is disposed of as permitted under Section 8.3 or Section 8.4, and not otherwise causing a Default under this Agreement, respectively; provided that when

any Subsidiary that is a Loan Party is merging with a Person that is not a Loan Party, to the extent such other Person is required to become a Subsidiary Guarantor, it shall deliver all information as may be reasonably requested by the Administrative Agent to satisfy any applicable “know your customer” requirements and, if necessary, shall comply with Section 7.15;

(c)

any Subsidiary of a Loan Party may merge, amalgamate or consolidate with or into a Loan Party or any other Subsidiary of a Loan Party; provided that when any Subsidiary that is a Loan Party is merging with another Subsidiary that is not a Loan Party, a Loan Party shall be the continuing and surviving Person;

(d)

a change in the legal form of a Subsidiary of a Loan Party, if the Borrower determines in good faith that such action is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; provided that any requirements under any Loan Document with respect to such change shall be promptly satisfied; provided further that, if such Subsidiary is a Loan Party, ten (10) days’ prior written notice of such change in legal form shall be provided to the Administrative Agent; and

(e)

a Disposition by a Subsidiary of all or substantially all of its assets (upon voluntary liquidation or otherwise) to another Subsidiary; provided that if the transferor in such a transaction is a Loan Party, then either (i) the transferee must be a Loan Party or (ii) to the extent constituting an Investment, such Investment must be a Permitted Investment in, or Permitted Indebtedness of, a Subsidiary that is not a Loan Party; and provided further, if necessary, such transferee shall comply with Section 7.15.

“Permitted Equity Refinancing” means cash proceeds of an equity offering of the Borrower consisting of (a) a sale of subordinate voting shares or other treasury stock of the Borrower through an at the market offering or other similar offering for a fixed price or (b) a sale of shares, or units consisting of shares and warrants, of the Borrower in a public offering or private placement at a price and on a closing date specified in an agency agreement, underwriting agreement or other similar agreement, in each case, to the extent such equity offering is otherwise not prohibited by this Agreement and does not result in a Change of Control.

“Permitted Indebtedness” has the meaning specified in Section 8.1.

“Permitted Investments” has the meaning specified in Section 8.4.

“Permitted Liens” has the meaning specified in Section 8.2.

“Permitted Refinancing Indebtedness” means any Indebtedness of the Borrower or any of its Subsidiaries issued (a) in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund for value, in whole or in part, or (b) constituting an amendment, modification or supplement to or deferral or renewal of ((a) and (b) collectively, a “Refinancing”) any other Indebtedness of the Borrower or any of its Subsidiaries; provided that:

(a)

the principal amount of such Permitted Refinancing Indebtedness does not exceed the amount of the Indebtedness so refinanced (plus all accrued and unpaid interest thereon and the amount of any premium paid on the Indebtedness being refinanced necessary to accomplish such Refinancing and reasonable fees and expenses incurred in connection therewith);

(b)

such Permitted Refinancing Indebtedness has a final maturity date either (a) no earlier than the final maturity date of Indebtedness being refinanced or

(b)

no earlier than 91 days after the latest Applicable Scheduled Maturity Date;

(c)

the Refinancing Indebtedness has a Weighted Average Life to Maturity at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being refinanced;

(d)

if the Indebtedness being Refinanced is subordinated in right of payment to the Obligations, such Permitted Refinancing Indebtedness is subordinated in right of payment to the Obligations on terms at least as favorable, taken as a whole, to the Secured Parties as those contained in the documentation governing the Indebtedness being Refinanced;

(e)

if the Indebtedness being Refinanced is unsecured, such Permitted Refinancing Indebtedness is unsecured; and

(f)

if the Indebtedness being Refinanced is pari passu in right of payment with the Obligations, such Permitted Refinancing Indebtedness is pari passu with, or subordinated in right of payment to, the Obligations.

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Phase I ESA” means an ASTM E1527-13 Phase I Environmental Site Assessment.

“Phase II ESA” means an ASTM E1903-11 Phase II Environmental Site Assessment.

“Pledge and Security Agreement” means that certain Pledge and Security Agreement of even date herewith by and among each Loan Party and the Collateral Agent for the benefit of the Secured Parties, in substantially the form acceptable to the Collateral Agent, as the same may be amended, restated, amended and restated, replaced, supplemented or otherwise modified from time to time.

“Post-Closing Obligations” has the meaning specified in Section 7.22.

“PPSA” means the Personal Property Security Act (British Columbia) and the regulations thereunder or any successor statute; provided, however, if validity, perfection and effect of perfection and non-perfection of the Collateral Agent’s Liens on any applicable Collateral are governed by the personal property security laws or other applicable laws of any jurisdiction in

Canada other than British Columbia, PPSA shall mean those personal property security laws or such other applicable laws (including the Civil Code of Quebec) in effect from time to time in such other jurisdiction for the purposes of the provisions hereof relating to such validity, perfection and effect of perfection and non-perfection and for the definitions related to such provisions, as from time to time in effect.

“Prepayment Premium” means the make-whole premium equal to the present value of all principal and interest payments of the Loan remaining until the Applicable Scheduled Maturity Date.

“Principal Amount” means, (i) when used with respect to the Loan, at any time, the then-outstanding principal amount of the Loan, and (ii) when used with respect to any other Indebtedness, the then-outstanding principal amount or accreted value of such Indebtedness, as the same may be increased or decreased, as a result of prepayment or otherwise, from time to time, including interest that accrues and remains unpaid in accordance with this Agreement or any agreement governing such other Indebtedness.

“Real Property Deliverables” means each of the following agreements, instruments and other documents in respect of each parcel of Material Real Property:

(a) a Mortgage duly executed by the applicable Loan Party;

(b) evidence of the recording of each Mortgage in such office or offices as may be necessary or, in the opinion of the Administrative Agent or the Required Lenders, desirable to perfect the Lien purported to be created thereby or to otherwise protect the rights of the Administrative Agent and the Lenders thereunder;

(d) a current ALTA survey and a surveyor’s certificate, in form and substance reasonably satisfactory to the Required Lenders, certified to the Administrative Agent and to the issuer of the Title Insurance Policy with respect thereto by a professional surveyor licensed in the state in which such Material Real Property is located and reasonably satisfactory to the Required Lenders;

(e) an opinion of counsel, reasonably satisfactory to the Administrative Agent and the Required Lenders, in the state or province where such Material Real Property is located with respect to the enforceability of the Mortgage to be recorded and such other matters as the Administrative Agent or the Required Lenders may reasonably request;

(f) an environmental indemnity agreement reasonably satisfactory to the Administrative Agent and the Required Lenders;

(g) a Phase I ESA (and, if reasonably requested by the Required Lenders based upon the results of such Phase I ESA, a Phase II ESA) of each Material Real Property completed by an independent environmental consulting firm reasonably acceptable to the Required Lenders, and in each case with results of the Phase I ESA and/or Phase II ESA, as applicable, which are reasonably satisfactory to the Required Lenders; and

(h) such other agreements, instruments and other documents (including guarantees and opinions of counsel) as the Administrative Agent or the Required Lenders may reasonably require.

“Registered Intellectual Property” means Intellectual Property that is issued, registered, renewed or the subject of a pending application.

“Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees and administrators, managers, advisors and representatives of such Person and of such Person’s Affiliates.

“Release” means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, seeping, migrating, dumping or disposing of any Hazardous Material (including the abandonment or discarding of barrels, containers and other closed receptacles containing any Hazardous Material) into the Environment, including, without limitation, the movement of Hazardous Materials through or in the ambient air, soil, surface or ground water, or property.

“Remedial Action” means all actions taken to (a) investigate, clean up, remove, remediate, contain, treat, monitor, assess, evaluate or in any other way address Hazardous Materials in the Environment, (b) respond to any Environmental Actions, (c) prevent or mitigate any Release, or (d) perform pre-remedial studies and investigations and post-remedial operation and maintenance activities.

“Reportable Event” means a “reportable event” as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to an Employee Benefit Plan (other than an event for which the thirty (30) day notice period is waived pursuant to applicable regulations).

“Required Lenders” means Lenders holding at least a majority of the aggregate Principal Amount of the Loan, from time to time; provided, however, that any such amounts held by any of the Loan Parties or any of their respective Affiliates or by any Defaulting Lender shall be excluded for all purposes under this definition for determining “Required Lenders” for any purpose. Notwithstanding the foregoing, in no event shall Required Lenders consist of fewer than two non-Defaulting Lenders at any time at which there shall be at least two non-Defaulting Lenders party to this Agreement, and for purposes of the foregoing, Lenders that are Affiliates (and Approved Funds of such Lender or an Affiliate thereof) of one another shall be treated as a single Lender.

“Reserve Account” means, subject to Section 9.2, an identifiable account separate from all other funds held by the Reserve Account Bank that is either (i) an account or accounts (or subaccounts thereof) maintained with a federal or state-chartered Depository Institution or trust company which complies with the definition of Eligible Institution, or (ii) a segregated trust account or accounts (or subaccounts thereof) maintained with a federal or state chartered Depository Institution or trust company acting in its fiduciary capacity which, in the case of a state chartered Depository Institution or trust company is subject to regulations substantially similar to 12 C.F.R. § 9.10(b), having in any case a combined capital and surplus of at least the Reserve Amount and subject to supervision or examination by federal and state authorities. A Reserve Account will not be evidenced by a certificate of deposit, passbook or other instrument.

“Reserve Account Bank” means Century Bank or such other bank or banks selected by the Administrative Agent to maintain the Reserve Account. The Administrative Agent may, in its reasonable discretion, request that the Borrower change the Reserve Account Bank up to one (1) time per year; provided that at any time during the continuance of an Event of Default there shall be no restriction on the Administrative Agent’s ability to request that the Borrower change the Reserve Account Bank.

“Reserve Amount” means [Redacted – Commercially Sensitive Information].

“Responsible Officer” means the chief executive officer, president, chief financial officer, treasurer or the general counsel of the Borrower or any Person designated by a Responsible Officer to act on behalf of a Responsible Officer, or other duly authorized Person acceptable to the Administrative Agent; provided that such designated Person may not designate any other Person to be a Responsible Officer. Any document delivered hereunder that is signed by a Responsible Officer of the Borrower shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of the Borrower and such Responsible Officer shall be conclusively presumed to have acted on behalf of the Borrower.

“Restricted Party” has the meaning specified in the introductory paragraph of Article 8.

“Restricted Payment” means (a) any dividend or other distribution (whether in cash, securities or other property) with respect to any capital stock or other Equity Interest of any Loan Party or any of their Subsidiaries, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such capital stock or other Equity Interest, or on account of any return of capital to such Person’s stockholders, partners or members (or the equivalent of any thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment and (b) any payment of principal or interest with respect to the OCN First Loan or the OCN Second Loan. Without limiting the foregoing, “Restricted Payments” with respect to any Person shall also include all payments made by such Person with any proceeds of a dissolution or liquidation of such Person.

“S&P” means Standard & Poor’s Financial Services LLC, a division of McGraw-Hill Financial Inc., and any successor thereto.

“Sanctions Program” means any of the sanctions programs and related requirements of Law administered by (a) the U.S. government, including those administered by the Treasury Department’s Office of Foreign Assets Control or the U.S. Department of State, or (b) the Government of Canada, the United Nations Security Council, the European Union or Her Majesty’s Treasury of the United Kingdom, in each case, as renewed, extended, amended, or replaced.

“Secured Parties” means, collectively, the Agents and the Lenders.

“Security Documents” means the Pledge and Security Agreement, the Canadian Pledge and Security Agreement any DACA Agreement, any Mortgage and all other security agreements or other instruments, agreements, and documents (including UCC and PPSA financing statements) executed and delivered by or on behalf of a Loan Party to the Collateral Agent or the Administrative Agent granting a Lien to secure any of the Obligations.

“SEDAR” means the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval.

“Solvent” and “Solvency” means, with respect to any Person on a particular date, that on such date (a) at fair valuation, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair saleable value of the properties and assets of such Person is not less than the amount that would be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person’s ability to pay as such debts mature, (e) such Person is not engaged in a business or a transaction, and is not about to engage in a business or transaction, for which such Person’s properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged, (f) such Person is not “insolvent” within the meaning of Section 101(32) of the Bankruptcy Code and (g) such person is not “insolvent” under the BIA or CCAA. The amount of all guarantees or other contingent liabilities at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, can reasonably be expected to become an actual or matured liability.

“Specified Currency” has the meaning specified in Section 12.20.

“Subsidiary” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which more than fifty percent (50.00%) of securities having the total voting power of the Equity Interests entitled to vote for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise Controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Borrower.

“Subsidiary Guarantor” means each Material Subsidiary of the Borrower or of any Loan Party.

“Subsidiary Guaranty” means the Guaranty dated as of the date hereof and executed by each Subsidiary Guarantor in favor of the Administrative Agent for the benefit of the Lenders, in substantially the form acceptable to the Administrative Agent, as the same may be amended, restated, amended and restated, replaced, supplemented or otherwise modified.

“Super Voting Shares” means the Super Voting Shares of the Borrower, without par value, the terms of which are set forth in the articles of incorporation of the Borrower under the heading “Share Provisions to the Articles Effective Novemb[e]r 30, 2018” and “Appendix 2 to Amendment Resolution,” as such provisions may be replaced by those set forth in Section 28 of the proposed articles of incorporation of the Borrower attached to the Borrower’s management information circular, dated December 23, 2019.

“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

“Termination Event” means (i) the filing of a notice of intent to terminate an Employee Benefit Plan or the treatment of an Employee Benefit Plan amendment as a termination under Section 4041 of ERISA or (ii) the institution of proceedings by the PBGC to terminate an Employee Benefit Plan.

“Title Insurance Policy” means an ALTA form loan title insurance policy, dated the date on which a subject Mortgage is filed, in form and substance, and from a title insurance company, reasonably acceptable to the Collateral Agent, insuring the Lien of such Mortgage and covering all interests mortgaged to the Collateral Agent under the Mortgage, including comprehensive, access and zoning endorsements, among others as required by the Collateral Agent, to the extent available in the applicable jurisdiction, and deleting all standard exceptions, including but not limited to the survey exception (if a survey is required by the Collateral Agent or the title company providing such Title Insurance Policy).

“Total Fixed Charge Coverage Ratio” means, at any date, for the period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b) (or if no such financial statements have been delivered, the end of the most recent Fiscal Quarter for which consolidated financial statements of the Borrower are publicly available on SEDAR or EDGAR), the ratio of (a) Consolidated EBITDA minus (i) unfinanced capital expenditures of the Borrower and its Subsidiaries and classified as such on a balance sheet in conformity with IFRS, (ii) Restricted Payments paid by a Loan Party in cash to a Person that is not a Restricted Party, and (iii) federal, state, provincial, local and foreign income taxes of the Borrower and its Subsidiaries paid in cash and classified as such on a balance sheet in conformity with IFRS to (b) Total Fixed Charges of the Borrower and its Subsidiaries on a consolidated basis.

“Total Fixed Charges” means, with respect to any Person, for any period, the amount equal to the aggregate consolidated cash interest expense as determined in accordance with IFRS, including to the extent applicable and without duplication, the portion of any Capital Lease Obligations allocable to interest expense, all commissions, discounts and other fees charged with respect to letters of credit and bankers’ acceptance financing, the amortization of debt discounts and the net costs under a swap agreement in respect of interest rates, and the interest portion of any deferred payment obligations, in each case paid, payable or allocable in cash during such period.

“Trademark” has the meaning specified therefor in the Security Agreement.

“Tranche A Loan” means a Loan designated as a Tranche A Loan in a writing delivered by the Lender of such Loan to the Borrower and the Administrative Agent at least one (1) Business Day prior to the Funding Date for such Loan; provided that any Loan that is not designated as a Tranche B Loan in accordance with this Agreement shall be deemed to be a Tranche A Loan.

“Tranche B Loan” means any Loan designated as a Tranche B Loan in a writing delivered by the Lender of such Loan to the Borrower and the Administrative Agent at least one (1) Business Day prior to the Funding Date for such Loan.

“Transactions” means the transactions provided for in, or contemplated by, the Loan Documents.

“Transfer” means any direct or indirect sale, transfer, conveyance, division, installment sale, master lease, grant of Lien or other interest, license, lease, alienation or assignment, whether voluntary or involuntary, of all or any portion of the direct or indirect legal or beneficial ownership of, or any interest in (a) the Collateral or any part thereof, or (b) any Loan Party or any Subsidiary thereof, including any agreement to transfer or cede to another Person any voting, management or approval rights, or any other rights, appurtenant to any such legal or beneficial ownership or other interest.

“Tryke” means each of (i) Tryke Companies, LLC, an Arizona limited liability company (“Tryke Companies”), (ii) Tryke Companies SO NV, LLC, a Nevada limited liability company, (iii) Tryke Companies Reno, LLC, a Nevada limited liability company, and (iv) Tryke Companies Utah, LLC, a Utah limited liability company.

“Tryke Acquisition” means the transactions contemplated pursuant to that certain Membership Interest Purchase Agreement, dated September 15, 2019, by and among Seacoast Investments Fund I, LLC, Seacoast Investments Fund II, LLC, Seacoast Investments Fund IV, LLC, TH Realty I, LLC, TH Realty II, LLC, TH Realty II-B LLC, Cresco Labs, LLC, Cresco Labs Inc. and Tryke Sellers’ Representative, as amended, restated, amended and restated, supplemented or otherwise modified from time to time with the prior written consent of the Administrative Agent and Required Lenders.

“UCC” or “Uniform Commercial Code” means the Uniform Commercial Code as in effect from time to time in the State of Illinois; provided further that, if by reason of mandatory provisions of law, perfection, or the effect of perfection, priority or non-perfection, of a security interest in any of the Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Illinois, “Uniform Commercial Code” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection, priority, or effect of perfection or non-perfection or availability of such remedy, as the case may be.

“UETA” has the meaning specified in Section 12.21.

“United States” and “U.S.” mean the United States of America.

“Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years obtained by dividing:

(a) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by

(b) the then outstanding principal amount of such Indebtedness.

“Wholly-Owned Subsidiary” means, a Subsidiary, for which all of the Equity Interests of such Subsidiary are, directly or indirectly, owned or controlled by the Borrower and/or one or more of its Wholly-Owned Subsidiaries (except for directors’ qualifying shares or other shares required by applicable Law to be owned by a Person other than a Borrower and/or one or more of its Wholly-Owned Subsidiaries).

Section 1.2 Uniform Commercial Code. Any terms used in this Agreement that are defined in the UCC shall be construed and defined as set forth in the UCC unless otherwise defined herein, provided, however, that to the extent that the UCC is used to define any term herein and such term is defined differently in different Divisions of the UCC, unless expressly stated otherwise the definition of such term contained in Article 8 of the UCC shall govern.

Section 1.3 Construction. All references to sections and schedules are to sections and schedules in or to this Agreement unless otherwise specified. All accounting terms not specifically defined herein shall be construed in accordance with IFRS. When used herein, the term “financial statements” shall include the notes and schedules thereto. Unless otherwise specified herein or therein, all terms defined in this Agreement shall have the definitions given them in this Agreement when used in any other Loan Document or in any certificate or other document made or delivered pursuant thereto. All uses of the word “including” shall mean “including, without limitation” unless the context shall indicate otherwise. Unless otherwise specified, the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined. With respect to terms defined by cross-reference to another agreement, such defined terms shall have the definitions set forth in such other agreement as of the Closing Date, and no modifications to such agreement shall have the effect of changing such definitions for the purposes of this Agreement unless the Administrative Agent expressly agrees that such definitions as used in this Agreement have been revised. The parties hereby acknowledge and agree that, as to any clauses or provisions contained in this Agreement or any of the other Loan Documents to the effect that the Borrower (a) represents or warrants on behalf of, or covenants on behalf of, any other Loan Party or an Affiliate thereof, (b) shall cause any other Loan Party or an Affiliate thereof to act or refrain from acting, to comply with, to permit, to perform, to pay, to furnish, to cure, to remove, to observe, to deliver, to suffer, to initiate, to provide, to make available, to furnish in any manner, or (c) shall cause to occur or not to occur, or otherwise be obligated in any manner with respect to, any matters pertaining to any other Loan Party or an Affiliate thereof, such clause or provision is intended to mean, and shall be construed as meaning, that the Borrower shall cause such other Loan Party or such Affiliate to take such action (and in all cases throughout the Loan Documents the words “Borrower shall” or “Borrower shall not” (or words of similar meaning) means “Borrower shall cause the applicable Loan Party or the applicable Affiliate” or “Borrower shall not permit such applicable Loan Party or the applicable Affiliate” to so act or not to so act, as applicable, as the context may require (and any instance in the Loan Documents where such words already appear shall not be deemed or construed to mean that any other instance where

such words do not appear were not intended to be interpreted as provided above)). Unless otherwise expressly provided for herein or in any other Loan Documents, any approval or consent required or permitted to be taken by any Lender, the Required Lenders or any Agent pursuant to this Agreement and any other Loan Documents may be exercised, made or withheld in the sole discretion of such Lender, Required Lenders or such Agent, as applicable, acting reasonably.

Section 1.4 Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”. Periods of days referred to in this Agreement shall be counted in calendar days unless Business Days are expressly prescribed. Any period determined hereunder by reference to a month or months or year or years shall end on the day in the relevant calendar month in the relevant year, if applicable, immediately preceding the date numerically corresponding to the first day of the next such period, provided, that if such period commences on the last day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month during which such period is to end), such period shall, unless otherwise expressly required by the other provisions of this Agreement, end on the last day of the calendar month. Unless otherwise specified, all references to specific times shall mean and be a reference to such time in New York, New York.

Section 1.5 Changes in IFRS. As used herein and in any certificate or other document made or delivered pursuant hereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1 to the extent not defined, shall have the respective meanings given to them under IFRS. If at any time any change in IFRS would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Administrative Agent (in consultation with the Required Lenders) shall so request, the Borrower and the Administrative Agent shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in IFRS, provided that until so amended, (a) such ratio or requirement shall continue to be computed in accordance with IFRS prior to such change therein and (b) the Borrower shall provide the Administrative Agent financial statements and other documents required under this Agreement or as reasonably requested herein setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in IFRS.

Section 1.6 Delaware Divisions. For all purposes under the Loan Documents, in connection with any division or plan of division under Delaware law (or any comparable event under a different jurisdiction’s laws): (a) if any asset, right, obligation or liability of any Person becomes the asset, right, obligation or liability of a different Person, then it shall be deemed to have been transferred from the original Person to the subsequent Person, and (b) if any new Person comes into existence, such new Person shall be deemed to have been organized on the first date of its existence by the holders of its Equity Interests at such time.

ARTICLE 2

THE LOAN

Section 2.1 Loan. On the terms and subject to the conditions of this Agreement, from and after the Closing Date to and including the last day of the Commitment Period, (a) the Lenders agree to provide Advances to the Borrower, and the Borrower agrees to borrow and accept proceeds of such Advances, up to Seventy-Five Million and 00/100 Dollars ($75,000,000), provided that the maximum aggregate principal amount of the Loans shall be equal to the lesser of (i) the Loan Amount and (ii) the aggregate

principal amount of the Commitments, and (b) upon the Borrower’s request, the Lenders agree to provide additional Advances to the Borrower, and the Borrower agrees to borrow and accept proceeds of such requested Advances, for amounts in excess of Seventy-Five Million and 00/100 Dollars ($75,000,000), up to the Maximum Loan Amount, provided that the maximum aggregate principal amount of the Loans shall be equal to the lesser of (i) the Loan Amount and (ii) the aggregate principal amount of the Commitments. Any amounts borrowed and repaid under this Agreement may not be reborrowed.

Section 2.2 Advances.

(a) Subject to Section 2.3, the Advances to be made on the Initial Funding Date shall be made by the Lenders in an amount to be specified in a written funding request delivered by the Borrower to the Administrative Agent at least two (2) Business Days before the Initial Funding Date. Advances made after the Initial Funding Date that are described in Section 2.1(a) shall be made contemporaneously with increases in the Loan Amount and the aggregate principal amount of the Commitments. The Advances made pursuant to Section 2.1(b) shall be made upon the Borrower’s delivery to the Administrative Agent of a written funding request (a “Funding Request”) for any such Advance, which Funding Request shall be delivered not later than 12:00 noon (New York City time) at least ten (10) Business Days prior to the requested Funding Date, and subject to satisfaction or waiver of each of the conditions precedent set forth in Section 5.3. The proceeds of the Advance made on the Initial Funding Date shall be utilized as follows: (i) first, the Facility Fee will be withheld on behalf of and paid pro rata to the Lenders, (ii) second, the Reserve Amount will be deposited into the Reserve Account to the extent of the remaining proceeds of such Advances and (iii) third, the remaining proceeds of such Advances shall be deposited into such Accounts as the Borrower directs. The proceeds of Advances made after the Initial Funding Date shall be utilized as follows: (i) first, any fees agreed to in writing by the Borrower with respect to any applicable Lender will be withheld on behalf of and paid to such Lender, (ii) second, to the extent any additional Reserve Amount is required to be deposited in the Reserve Account pursuant to this Agreement, the Reserve Amount will be deposited into the Reserve Account to the extent of the remaining proceeds of such Advances and (iii) third, the remaining proceeds of such Advances shall be deposited into such Accounts as the Borrower directs for proceeds of Advances on the Initial Funding Date, unless a Funding Request directs otherwise. Each Funding Request shall be irrevocable and shall specify (i) the principal amount of the proposed Loan, (ii) wire instructions for the deposit account of the Borrower into which such funds should be deposited, and (iii) the proposed borrowing date, which must be a Business Day. The Administrative Agent and the Lenders may act without liability upon the basis of written, emailed or telecopied notice believed by the Administrative Agent in good faith to be from the Borrower (or from any Responsible Officer thereof designated in writing purportedly from the Borrower to the Administrative Agent). The Administrative Agent and each Lender shall be entitled to rely conclusively on any Responsible Officer’s authority to request a Loan on behalf of the Borrower until the Administrative Agent receives written notice to the contrary. The Administrative Agent and the Lenders shall have no duty to verify the authenticity of the signature appearing on any written Funding Request.

(b) Each Funding Request pursuant to this Section 2.2 shall be irrevocable and the Borrower shall be bound to make a borrowing in accordance therewith.

(c) All Loans under this Agreement shall be made by the Lenders simultaneously and proportionately to their pro rata shares of the Commitments, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender’s obligations to make a Loan requested hereunder, nor shall the Commitment of any Lender be increased or decreased as a result of the default by any other Lender in that other Lender’s obligation to make a Loan requested hereunder, and each Lender shall be obligated to make the Loans required to be made by it by the terms of this Agreement regardless of the failure by any other Lender. Not later than 10:00 am New York City time, on the requested Funding Date, each Lender shall make available to the Administrative Agent an amount in immediately available funds equal to the Advance to be made by such Lender.

(d) On the requested Funding Date, the Administrative Agent shall deliver the aggregate of the amounts made available to the Administrative Agent by the Lenders in immediately available funds, as specified in Section 2.1(a).

Section 2.3 Increase of Loan Amount. At any time from and including the Closing Date to and including the last day of the Commitment Period, provided that there does not exist any Default or Event of Default that is continuing, the Loan Amount may be increased, subject to Section 2.1, upon the Borrower’s request, up to an aggregate principal amount at any time outstanding not to exceed Two Hundred Million and 00/100 Dollars ($200,000,000) (the “Maximum Loan Amount”), provided that if Commitments are unavailable for the full amount of the Maximum Loan Amount, the Loan Amount and the principal amount of the Loan shall increase to the lesser amount for which Commitments are available. Any increase contemplated under this Section 2.3 shall be effective only upon the Administrative Agent’s receipt of a fully-executed Lender Supplement in substantially the form of Exhibit C attached hereto. If the Loan Amount (a) is equal to or less than One Hundred Million and 00/100 Dollars ($100,000,000), such Lender Supplement shall be executed by at least the Administrative Agent (and the Administrative Agent’s execution of such Lender Supplement shall not be unreasonably withheld, conditioned or delayed), the Borrower and the Lenders providing additional Commitments pursuant thereto (including each new Lender) and (b) exceeds One Hundred Million and 00/100 Dollars ($100,000,000), executed by the Administrative Agent, the Borrower, Required Lenders and to the extent not included in Required Lenders and still a Lender at such time, each Initial Lender; provided that, in case of either clause (a) or (b) above, the Administrative Agent consents (such consent not to be unreasonably withheld, conditioned or delayed) to any proposed new Lender providing additional Commitments pursuant to such increase. No Lender is required to provide any such increase.

Each such increase and other Loan provided hereunder shall be either a Tranche A Loan or a Tranche B Loan with an All-in Yield not exceeding the All-in Yield for the Tranche A Loans; provided that if the All-in Yield for the Tranche A Loans is increased then the All-in Yield for the Tranche B Loans may be increased to an amount not exceeding the All-in Yield for the Tranche A Loans. For the avoidance of doubt, the Applicable Maturity Date for the Tranche A Loans may not be extended without the prior written consent of all Lenders holding Tranche A Loans. This paragraph may not be amended without the prior written consent of all Lenders holding Tranche A Loans.

Section 2.4 Use of Proceeds. The Loan shall be used to fund the entire Reserve Amount to be deposited into the Reserve Account, and thereafter to fund Permitted Acquisitions and Permitted Investments pursuant to Section 8.4(f) and (g); provided that the proceeds of each Advance may be invested in Cash Equivalents pending regulatory approval of any Permitted Acquisition.

ARTICLE 3

REPAYMENTS, PREPAYMENTS, INTEREST AND FEES

Section 3.1 Repayments and Prepayments; Application. The Borrower agrees that the Loan shall be repaid and prepaid pursuant to the provisions of this Article 3.

Section 3.2 Repayment of Loan; Applicable Maturity Date. The Borrower shall repay to the Lenders holding Tranche A Loans on the Applicable Maturity Date for Tranche A Loans the aggregate Principal Amount of the Tranche A Loans on such date in full, together with all accrued and unpaid interest, fees, costs and other Obligations and amounts owed to any Agent or any Lender, in each case, on the Tranche A Loans. The Borrower shall repay to the Lenders holding Tranche B Loans on the Applicable Maturity Date for Tranche B Loans the aggregate Principal Amount of the Tranche B Loans on such date in full, together with all accrued and unpaid interest, fees, costs and other Obligations and amounts owed to any Agent or any Lender, in each case, on the Tranche B Loans. Prior thereto repayments of the Loan shall be made as set forth below in Section 3.3. Notwithstanding the provisions of this Section 3.2 to the contrary, the Borrower may not repay any Tranche B Loans at any time before the repayment in full of all Tranche A Loans (except as permitted by Section 3.3).

Section 3.3 Prepayments; Repayments.

(a) Voluntary Prepayment. The Borrower may voluntarily prepay (i) the Tranche A Loans (and not the Tranche B Loans) and (ii) both the Tranche A Loans and Tranche B Loans on a pro rata basis (and the Tranche B Loans alone if no Tranche A Loans remain outstanding), in each case, at any time prior to the Applicable Scheduled Maturity Date upon ten (10) Business Days’ notice to the Administrative Agent. Any such voluntary prepayment shall be in the amount of all outstanding Obligations plus the Prepayment Premium and shall be tendered to the Administrative Agent at a time and in such manner as determined by the Administrative Agent in its reasonable discretion.

(b) Mandatory Prepayments. The Borrower will promptly notify the Administrative Agent of a Mandatory Prepayment Event as required under Section 7.4(a), and the applicable prepayment will be made no later than thirty (30) days from the date such notice is given. On the prepayment date, the Borrower shall prepay the principal amount of the Loans (pro rata between the Tranche A Loans and Tranche B Loans), together with all unpaid interest, fees and costs payable hereunder to (but excluding) the date of such prepayment, and all other outstanding Obligations with respect thereto, provided that the principal amount of the Loans payable with respect to clause (a) of the definition of “Mandatory Prepayment Event” shall be the amount by which the outstanding principal amount of the Loan exceeds the Loan Amount and with respect to clause (d) of the definition of a “Mandatory Prepayment Event,” if the making of any Loan by a Lender is made illegal by any applicable Governmental Authority, the Borrower shall be obligated to repay the Obligations only to such Lenders (and not to others). In addition, the Borrower shall prepay the outstanding principal amount of the Loan utilizing the insurance proceeds received by any Loan Party or any Subsidiary in excess of [Redacted – Commercially Sensitive Information] arising from casualty or the loss of property if such insurance proceeds are not used to purchase replacement assets within one (1) year of receipt of such insurance proceeds.

(c) Provisions Applicable to All Prepayments or Repayments. Notwithstanding anything to the contrary in this Agreement or any other Loan Document or otherwise, upon the prepayment or repayment of the Loan in whole or in part (whether such prepayment is a mandatory prepayment, or a repayment upon acceleration pursuant to Section 10.2, whether by notice or automatically (on account of a Bankruptcy Event or otherwise)), the Borrower shall pay to the Administrative Agent for the ratable benefit of the Lenders in accordance with each Lender’s Applicable Percentage of the paid or prepaid Loans all accrued but unpaid interest, fees and costs payable hereunder to (but excluding) the date of such prepayment on the amount prepaid and any and all other outstanding Obligations which may be payable hereunder and under the other Loan Documents.

Section 3.4 Interest.

(a) Subject to the provisions of Section 3.4(b), the outstanding Principal Amount of the Loan will bear interest at a rate per annum equal to [Redacted – Commercially Sensitive Information], less the Applicable Rate Adjustment (the “Applicable Rate”), payable in cash. All accrued and unpaid interest on the Loan shall be paid for the applicable Interest Period on each Interest Payment Date, commencing with the first Interest Payment Date immediately following the applicable Funding Date.

(b) After an Event of Default has occurred and is continuing, at the election of the Administrative Agent and the Required Lenders and upon notice to the Borrower, the entire Principal Amount of each Loan shall bear interest at a rate per annum equal to the Default Rate, accruing from the date on which such Event of Default occurred and all interest thereafter accrued on the Loan during the continuance of an Event of Default (including following the exercise of remedies pursuant to Section 10.2) shall be payable on demand.

(c) Interest shall accrue from and including the applicable Funding Date through payment in full of the Obligations. All interest shall be calculated by multiplying (i) the actual number of days elapsed in the Interest Period for which the calculation is being made, based on thirty (30) day months, by (ii) a daily rate based on a three hundred sixty (360) day year (that is, the Applicable Rate or the Default Rate, as then applicable, expressed as an annual rate divided by 360) by (iii) the Principal Amount; provided, however, that if any payment made under the Loan is ever rescinded, voided, or must otherwise be returned by the Lenders to the Borrower in connection with any bankruptcy, reorganization, receivership, insolvency, or otherwise, the amount returned shall bear interest from the date returned to the Borrower until the date such amount is paid to the Lenders.

Section 3.5 Application of Payments. So long as no Event of Default has occurred and is continuing, all payments, repayments and prepayments shall be applied: first, to the Agents’ and the Lenders’ charges, fees, expenses, indemnities and other obligations (other than the interest and principal) as provided in the Loan Documents; second, to accrued and unpaid interest then owing; and third, to all other Obligations, and in each case with respect to the Lenders, as applicable to each Lender, pro rata.

Section 3.6 Fees. All charges, fees, expenses, indemnities and other obligations (other than the interest and principal) owing under any of the Loan Documents shall be paid by the Loan Parties (who shall be jointly and severally liable therefor) in immediately available funds, at the times and in the amounts set forth in such Loan Documents.

Section 3.7 Evidence of Debt. The Loan made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive, absent manifest error, of the amount of the Loan made by the Lenders to the Borrower and the interest, costs and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through Administrative Agent) a Note, which shall evidence such Lender’s Loan in addition to such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, amount and maturity of its Loan and payments with respect thereto which shall be conclusive, absent manifest error.

Section 3.8 Payments Generally; Administrative Agent’s Claw Back. All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to (a) the Administrative Agent, for the account of the respective Lenders to which such payments are owed, at the Administrative Agent’s Office, or (b) at the direction of the Administrative Agent, directly to the respective Lenders to which such payment are owed, at the applicable Lender’s lending office, in each case, in Dollars and in immediately available funds not later than 1:00 p.m. New York City time on the date(s) specified herein; provided that thirty (30) days prior to the Applicable Scheduled Maturity Date of a Tranche A Loan, the Borrower shall deliver to the Administrative Agent a notice describing the sources of funds to be used to make such payment which sources of funds shall be one or more of the following: (i) cash generated in the ordinary course of business, (ii) proceeds of issuance of Equity Interests or (iii) proceeds of Indebtedness with a maturity date that occurs on or after the latest Applicable Scheduled Maturity Date with respect to the Tranche B Loans; and provided further that such funds payable by the Borrower upon the Applicable Scheduled Maturity Date of a Tranche A Loan shall be deposited with the Administrative Agent not later than 1:00 p.m. New York City time on the date prior to the Applicable Scheduled Maturity Date of such Tranche A Loan, and the Administrative Agent shall (i) hold such funds in escrow pending their distribution to the Lenders and (ii) issue a notice on such Applicable Scheduled Maturity Date to the Lenders of Tranche B Loans stating whether all funds required to discharge the Tranche A Loans have been delivered by the Borrower in accordance with this Agreement, and the deposit of such funds by the Borrower shall conclusively satisfy the Borrower’s obligation to pay such funds to the Agent and the applicable Lenders. The Administrative Agent will (or will direct the Borrower to) promptly distribute to each Lender its Applicable Percentage (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s lending office. All payments received by the Administrative Agent after 1:00 p.m. New York City time shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next succeeding Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.

Section 3.9 Sharing of Payments. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of any Obligation in excess of its ratable share of payments on account of similar obligations obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in such similar obligations held by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that (a) if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and each Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender’s ratable share (according to the proportion of (i) the amount of such Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid by the purchasing Lender in respect of the total amount so recovered and (b) the provisions of this Section 3.9 shall not be construed to apply to (i) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement, or (ii) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to any Loan Party or any Subsidiary thereof (as to which the provisions of this Section 3.9 shall apply). The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 3.9 may, to the fullest extent permitted by law, exercise all of its rights (including the Lender’s right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.

Section 3.10 Apportionment of Payments.

(a) All payments of principal and interest in respect of outstanding Loans, all payments of fees (other than the fees set forth in Section 3.6, the Facility Fee and the fees in any fee letter with any Agent) and all other payments in respect of any other Obligations, shall be allocated by the Administrative Agent among such of the Lenders as are entitled thereto, in proportion to their respective pro rata share of the outstanding Loan or otherwise as provided herein or, in respect of payments not made on account of Loans, as designated by the Person making payment when the payment is made.

(b) (i)(A) After the occurrence and during the continuance of an Event of Default described in Section 10.1(a), (e) or (f), (B) after the acceleration of the Loans pursuant to Section 10.2, (C) after the exercise of enforcement remedies by the Administrative Agent (acting at the written direction of Required Lenders) pursuant to the Loan Documents or (D) otherwise upon the direction of the Required Lenders, after the occurrence and during the continuance of an Event of Default, then (ii) in each case, the Administrative Agent shall apply all payments in respect of any Obligations, including, without limitation, proceeds of the Collateral and any amounts received on account of the Obligations (whether received as a consequence of the exercise of any remedies under Section 10.2 hereof or any Loan Document or as a distribution out of any proceeding in respect of or commenced under any Insolvency Proceeding including payments in respect of “adequate protection” for the use of Collateral during such proceeding) or under any plan of reorganization or on account of any liquidation of any Loan Party or any Subsidiary thereof, subject to the provisions of this Agreement, (A) first, ratably to pay the Obligations in respect of any fees, expense reimbursements, indemnities and other amounts then due and payable to the Administrative Agent and its agents and attorneys until paid in full; (B) second, ratably to pay the Obligations in respect of any fees, expense reimbursements, indemnities, premiums (including the Prepayment Premium, if applicable) and other amounts then due and payable to the Lenders until

paid in full; (C) third, ratably to pay interest then due and payable in respect of the Loan until paid in full; (D) fourth, ratably to pay principal of the Loan until paid in full; (E) fifth, to the ratable payment of all other Obligations then due and payable until all such Obligations are paid in full; and (F) sixth, to the extent of any remaining amount, to an Account or Accounts as directed by the Borrower.

(c) For purposes of Section 3.10(b), “paid in full” means payment in cash of all amounts owing under the Loan Documents (other than contingent indemnification obligations for which no claim has been asserted) according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest, fees and expenses accrued after the commencement of any Insolvency Proceeding, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding.

(d) In the event of a conflict between the priority provisions of this Section 3.10 and other provisions contained in any other Loan Document, the terms and provisions of this Section 3.10 shall control and govern.

ARTICLE 4

CHANGED CIRCUMSTANCES, TAXES AND CERTAIN OTHER PROVISIONS

Section 4.1 Increased Costs.

(a) If any Change in Law shall:

(A) impose, modify or deem applicable any reserve, special deposit, liquidity or similar requirement (including any compulsory loan requirement, insurance charge or other assessment) against assets of, deposits with or for the account of, or credit extended by, any Lender;

(B) impose on any Lender any other condition, cost or expense (other than Taxes) affecting this Agreement or Loan made by such Lender; or

(C) subject any Lender or any Agent, as applicable, to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (d) and (e) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto;

and the result of any of the foregoing shall be to increase the cost to such Lender or such Agent of making, continuing, converting into or maintaining any Loan or of maintaining its obligation to make any such Loan or to reduce the amount of any sum received or receivable by such Lender or such Agent hereunder, whether of principal, interest or otherwise, then the Loan Parties shall pay to such Lender or such Agent such additional amount or amounts as will compensate such Lender or such Agent for such additional costs incurred or reduction suffered.

(b) If any Lender determines that any Change in Law regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loan made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy and liquidity), then from time to time the Loan Parties shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c) A certificate of the applicable Lender or Agent setting forth the amount or amounts necessary to compensate such Lender or such Agent or its holding company as specified in paragraph (a) or (b) of this Section 4.1 shall be delivered to the Borrower and shall be conclusive absent manifest error. The Loan Parties shall pay such Agent or such Lender the amount shown as due on any such certificate within ten (10) days after receipt thereof.

Failure or delay on the part of any Agent or any Lender to demand compensation pursuant to this Section 4.1 shall not constitute a waiver of such Agent’s or such Lender’s right to demand such compensation.

Section 4.2 Taxes.

(a) Payments Free of Taxes. Any and all payments by or on account of any of the Obligations hereunder or under any other Loan Document shall be made free and clear of and without deduction or withholding for any Taxes, provided that if a Loan Party or any Subsidiary thereof shall be required by applicable Law to deduct or withhold, or a Lender or an Agent, as applicable, shall be required to remit, any Taxes from such payments, then (i) such Loan Parties or such Subsidiary shall make any such deductions or withholdings and (ii) such Loan Parties or such Subsidiary shall timely pay the full amount deducted or withheld to the relevant and applicable Governmental Authority in accordance with applicable Law and (iii) if such Taxes are Indemnified Taxes, the sum payable shall be increased as necessary so that after making all required deductions, withholdings or remittances (including deductions, withholdings or remittances applicable to additional sums payable under this Section 4.2), such Lender or such Agent receives an amount equal to the sum it would have received had no such deductions, withholdings or remittances been made.

(b) Payment of Other Taxes. Without limiting or duplicating the provisions of Section 4.2(a), the Loan Parties or any Subsidiary thereof shall timely pay (or, at the option of the Administrative Agent, timely reimburse it for the payment of) any Other Taxes to the relevant and applicable Governmental Authority in accordance with applicable Law.

(c) Indemnification by the Loan Parties. The Loan Parties shall indemnify each Agent and each Lender within five (5) days after written demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 4.2) paid by such Agent or such Lender, as the case may be, and any penalties, interest and expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant and applicable Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by an Agent on its own behalf, as applicable, shall be conclusive absent manifest error.

(d) Evidence of Payments. As soon as practicable after any payment of Taxes (imposed with respect to this Agreement or any other Loan Document) by a Loan Party to an applicable Governmental Authority, the Borrower shall deliver to the applicable Lender or Agent, as the case may be, the original or a certified copy of a receipt issued by such applicable Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment satisfactory to such Lenders or such Agent, as applicable.

(e) Status of Lenders. (i) Any Lender that is entitled to an exemption from, or reduction in the rate of, withholding tax under the Law of the jurisdiction in which any Loan Party or any Subsidiary thereof is resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any other Loan Document shall deliver to the Borrower, at the time or times prescribed by applicable Law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable Law as will permit such payments to be made without withholding or at a reduced rate of withholding. Such delivery shall be required on the Closing Date (or, in the case of an assignee, on the date of assignment) and on or before the date such documentation expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent documentation so delivered or as may reasonably be requested by the Borrower. In addition, any Lender, if requested by the Borrower, shall deliver such other documentation prescribed by applicable Law or reasonably requested by the Borrower as will enable the Borrower to determine whether or not such Lender is subject to backup withholding requirements.

(ii) Without limiting the generality of the foregoing, in the event that any Loan Party or any Subsidiary thereof is resident for tax purposes in the United States, any Lender that is entitled to an exemption from, or reduction in the rate of, United States withholding tax shall deliver to the Borrower (in such number of copies as shall be reasonably requested by the Borrower) on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower), whichever of the following is applicable:

(A) duly completed copies of IRS Form W-8BEN or W-8BEN-E claiming eligibility for benefits of an income tax treaty to which the United States is a party;

(B) duly completed copies of IRS Form W-8ECI;

(D) in the case of a Lender that is entitled to claim the benefits of the exemption for portfolio interest under section 881(c) of the Code, (x) a certificate to the effect that such Lender is not (A) a “bank” within the meaning of section 881(c)(3)(A) of the Code, (B) a “10 percent shareholder” of the Borrower within the meaning of section 881(c)(3)(B) of the Code, or (C) a “controlled foreign corporation” related to the Borrower, as described in section 881(c)(3)(C) of the Code and (y) duly completed copies of IRS Form W-8BEN or W-8BEN-E; or

(E) any other form prescribed by applicable Law as a basis for claiming exemption from or a reduction in United States federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable Law to permit the Borrower to determine the withholding or deduction required to be made.

(iii) If a payment made to a Lender under any Loan Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower at the time or times prescribed by Law and at such time or times reasonably requested by the Borrower such documentation prescribed by applicable Law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower as may be necessary for the Borrower to comply with its obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this paragraph, “FATCA” shall include any amendments made to FATCA after the date of this Agreement.

(iv) Without limiting the generality of the foregoing, in the event that any Loan Party or any Subsidiary thereof is resident for tax purposes in Canada, any Lender that is entitled to an exemption from, or reduction in the rate of, Canadian withholding tax shall, to the extent it is legally entitled to do so, if reasonably requested by the Borrower, deliver to the Borrower (in such number of copies as shall be reasonably requested by the Borrower) executed copies of Canada Revenue Agency Form NR301, NR302 or NR303, as applicable, together with such supplementary documentation as may be prescribed by applicable Law, certifying such Lender’s eligibility to receive a reduced rate of withholding tax or exemption provided by any tax treaty between Canada and another jurisdiction in respect of payments made to it under any Loan Document.

(v) Notwithstanding the foregoing, no Lender shall be required to provide any documentation pursuant to this Section 4.2(e) that it is not legally permitted to provide.

(f) Treatment of Certain Refunds. If any Lender or any Agent determines, in its sole discretion, that it has received a refund of any Indemnified Taxes as to which it has been indemnified by any Loan Party or with respect to which any Loan Party has paid additional amounts pursuant to this Section 4.2, it shall pay to the applicable Loan Party an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by such Loan Party under this Section 4.2 with respect to the Indemnified Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender or such Agent, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Loan Parties, upon the request of such Lender or such Agent, as applicable, agree to repay the amount paid over to such Loan Party (plus any penalties, interest or other charges imposed by the relevant and applicable Governmental Authority) to such Lender or such Agent, as applicable, in the event such Lender or such Agent is required to repay such refund to such applicable Governmental Authority. This Section 4.2(f) shall not be construed to require any Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to any Loan Party or any other Person.

(g) Mitigation Obligations; Designation of a Different Lending Office. If the Loan Parties are required to pay any additional amount to any Agent or any Lender that is a bank or any Governmental Authority for the account of any Agent or any Lender that is a bank pursuant to this Section 4.2, then such Agent or such Lender, as applicable, shall use reasonable efforts to designate a different lending office for funding or booking its Loan hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Agent or such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to this Section 4.2 in the future, and (ii) would not subject such Agent or such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Agent or such Lender. The Loan Parties hereby agree to pay all costs and expenses incurred by such Agent or such Lender in connection with any such designation or assignment.

ARTICLE 5

CONDITIONS PRECEDENT TO CLOSING AND FUNDING

Section 5.1 Reserved.

Section 5.2 Conditions to Closing Date under this Agreement. The occurrence of the Closing Date is subject to the satisfaction or waiver by the Administrative Agent and each Lender of each of the conditions precedent set forth below:

(a) Loan Documents. The Loan Documents shall have been duly authorized, executed and delivered by each of the parties thereto (including the Initial Lenders party to this Agreement on the Closing Date) and shall be in full force and effect, and each Agent shall have received copies of the fully executed originals of each Loan Document, including without limitation any amendments thereto, along with a completed Perfection Certificate satisfactory in form and substance to the Administrative Agent and the Lenders.

(b) Certificates. The Administrative Agent shall have received certificate(s), addressed to the Administrative Agent and each Lender, dated as of the Closing Date, from each Loan Party as to the following, and such certificate(s) shall be accurate in all respects:

(A) the certification of the resolutions, in full force and effect, authorizing, to the extent relevant, the execution, delivery and performance of this Agreement and each other Loan Document to be executed by it and the performance of its obligations contemplated hereby and thereby;

(B) the incumbency and signatures of those Responsible Officers who have signed or will sign each Loan Document to which the Borrower is or will be a party, or who is, until replaced by another such Responsible Officer duly authorized for such purpose, authorized to act with respect to each Loan Document;

(D) a recent certificate of good standing or equivalent for each Loan Party from the applicable office of such Loan Party’s jurisdiction of organization;

(E) certification that (i) each of the conditions precedent to the Closing Date has been satisfied in form and substance acceptable to, or waived by, the Administrative Agent and (ii) the representations and warranties contained in this Agreement and each of the other Loan Documents are true and correct in all material respects (or if made as of a specific date, such representations and warranties were true and correct in all material respects as of such date), except to the extent qualified by materiality, “Material Adverse Effect” or like qualification, in which case such representations and warranties are (or were) true and correct in all respects;

(F) certification that each Loan Party immediately before and after giving effect to the transactions contemplated by this Agreement and the other Loan Documents is, and will be, Solvent;

such certificate(s) to be executed by a Responsible Officer and addressed to the Administrative Agent and each Lender and accompanied by copies of all documents referred to in clauses (i) through (vi) immediately above, in each case as then in effect, certified to be true, complete and correct and, that each such document has not been amended, supplemented or modified (other than in connection with any amendment, supplement or modification so delivered) and is in full force and effect.

(c) Payment of Fees and Expenses. All charges, fees, expenses, indemnities and other obligations (other than the interest and principal) due to be paid under the Loan Documents on the Closing Date and invoiced in writing to the Borrower at least one (1) Business Days prior to the Closing Date have been paid (or will be paid with Loan Proceeds on the applicable Funding Date).

(d) Establishment of the Reserve Account. The Reserve Account shall have been established and be subject to an effective DACA Agreement in form and substance reasonably satisfactory to both Agents; provided that, with respect to the Advance made on the Initial Funding Date, the amounts required to be deposited in the Reserve Account pursuant to the Loan Documents shall be so deposited from the proceeds of the Advance made on the Initial Funding Date.

(e) Litigation. To the knowledge of the Borrower, no pending or threatened (in writing) litigation or proceeding against the Loan Parties exists that could reasonably be expected to have a Material Adverse Effect on any Loan Party.

(f) Illegality, Etc. There shall be no preliminary or permanent injunction or temporary restraining order or other order issued by a Governmental Authority or other legal restraint or prohibition (other than the Controlled Substances Act) enjoining or preventing, in whole or in part, the making of the Loan or the transactions contemplated by the Loan Documents, or which, in the judgment of the Administrative Agent, would make it illegal for any Agent or any Lender to perform its obligations under the Loan Documents.

(g) Collateral Searches. The Administrative Agent shall have received the results of searches for any effective UCC or PPSA financing statements, tax Liens, judgment Liens or Liens against Intellectual Property filed against any Loan Party or its property, which results shall not show any such Liens (other than Permitted Liens acceptable to the Agents and the Lenders).

(h) Collateral Creation and Perfection Matters. The deliveries, filings, recordings and other actions necessary, in the reasonable opinion of the Collateral Agent, in order to establish and to perfect the security interests in the Collateral to be granted to the Collateral Agent for the benefit of the Secured Parties have been made or taken or shall be made concurrently.

(i) No Material Adverse Effect. There has not been a Material Adverse Effect since December 31, 2018.

(j) Additional Documents. The Administrative Agent shall have received such other documents from the Borrower and each other Loan Party as it may reasonably request at least one (1) Business Day prior to the Closing Date.

(k) Initial DACA Agreements for Accounts other than the Reserve Account. Prior to the Closing Date, the Borrower shall have made commercially reasonable efforts to deliver to the Administrative Agent DACA Agreements covering the Accounts specified in Section 9.6 other than the Reserve Account and otherwise in form and substance approved by the Administrative Agent.

(l) Opinion of Counsel. Each Agent and each Lender shall have received a legal opinion from the Borrower’s counsel in form and substance reasonably acceptable to the Administrative Agent.

(m) Fee Letter. Each Agent shall have received a fully-executed fee letter in form and substance acceptable to each Agent.

(n) Financial Statements. The Administrative Agent shall have received: (i) unaudited consolidated financial statements of the Borrower and its Subsidiaries for the Fiscal Quarter ended September 30, 2019, and (ii) audited consolidated financial statements of the Borrower and its Subsidiaries for the Fiscal Years ended December 31, 2018, December 31, 2017, and December 31, 2016.

Section 5.3 Each Advance. The Administrative Agent and the Lenders shall not be required to make any Advance unless on Initial Funding Date and each other applicable Funding Date thereafter:

(a) Funding Request. The Administrative Agent has received a Funding Request as required under Section 2.2 at least ten (10) Business Days (or two (2) Business Days in the case of the initial Advance) before such Advance, unless such period or Funding Request is waived in writing by the Administrative Agent and each Lender providing such Advance.

(b) Event of Default. There exists no Default or Event of Default that has occurred and is continuing, nor would a Default or Event of Default result from such Advance.

(c) Representations and Warranties. Each of the representations and warranties made by the Loan Parties contained in the Loan Documents is (x) with respect to any representations or warranties that contain a materiality qualifier, true and correct in all respects as of such Funding Date, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct in all respects on and as of such earlier date and (y) with respect to any representations or warranties that do not contain a materiality qualifier, true and correct in all material respects as of such Funding Date, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct in all material respects on and as of such earlier date.

(d) Payment of Fees and Expenses. All charges, fees, expenses, indemnities and other obligations (other than the interest and principal) due to be paid under the Loan Documents on the applicable Funding Date and invoiced in writing to the Borrower at least one (1) Business Day prior to the applicable Funding Date have been paid (or will be paid with Loan Proceeds on the applicable Funding Date).

(e) Establishment of the Reserve Account. The Reserve Account shall have been established and be subject to an effective DACA Agreement in form and substance reasonably satisfactory to both Agents; provided that, with respect to an Advance made after the Closing Date, any amounts required to be deposited in the Reserve Account pursuant to the Loan Documents shall be so deposited from the proceeds of such Advance.

(f) Lender Commitments. The Administrative Agent shall have received proceeds of the Commitments of the Lenders for such Advance (it being understood that this condition is for the sole benefit of the Administrative Agent and may not be relied upon by any Lender as a condition to such Lender’s obligation to fund its pro rata share of the Advance).

(g) Lender Administrative Questionnaires. The Administrative Agent shall have received an Administrative Questionnaire from each Lender having a Commitment as of the applicable Funding Date which has not previously provided an Administrative Questionnaire.

(h) Insurance. With respect to (a) the Advance made on the Initial Funding Date the Administrative Agent shall have received copies of certificates of insurance evidencing the existence of all insurance required to be maintained by each of the Loan Parties under the Loan Documents, including such insurance required under Section 7.7(a) and (b) any Advance after the Initial Funding Date, only to the extent the policies of insurance evidenced in any such certificates delivered pursuant to subsection (a) above have expired or lapsed, new or renewed certificates of insurance evidencing the existence of all insurance required to be maintained by each of the Loan Parties under the Loan Documents, including such insurance required under Section 7.7(a).

(i) Use of Proceeds. The Advance is reasonably expected to be utilized in accordance with Section 2.4 (including the proviso thereof) within thirty (30) days following the funding of such Advance.

Each Funding Request with respect to each such Advance shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 5.3(b) and 5.3(c) have been satisfied.

ARTICLE 6

REPRESENTATIONS AND WARRANTIES

In order to induce the Agents and the Lenders to enter into this Agreement, each Loan Party represents and warrants to the Lenders, for itself and each of its Subsidiaries, as of the Closing Date, the Initial Funding Date and each other Funding Date thereafter, and each other date on which the representations and warranties set forth in this Article 6 are reasserted:

Section 6.1 Existence, Qualification and Power; Compliance with Laws. Each Loan Party (a) is duly organized or formed, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own its assets and carry on its business, and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and in good standing under the Laws of each jurisdiction where its ownership of assets or the conduct of its business requires such qualification or license, unless the failure to be so qualified or licensed in such foreign jurisdiction would not reasonably be expected to result in a Material Adverse Effect; provided that this Section 6.1 shall not be deemed to expand, limit or otherwise modify the representations set forth in Section 6.25 in respect of Cannabis Licenses.

Section 6.2 Authorization; No Contravention. The execution, delivery and performance by each Loan Party of each Loan Document to which such Loan Party is a party, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Loan Party Governing Documents, (b) conflict with or result in any material breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any Contractual Obligation of such Loan Party or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Loan Party or its assets is subject, or (c) violate any applicable Law (excluding the Controlled Substances Act).

Section 6.3 Governmental Authorization; Other Consents. Other than as required in the ordinary course of business and in connection with the filing or recording of the Security Documents, no approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against any Loan Party of any Loan Document to which it is a party.

Section 6.4 Binding Effect. This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Loan Party that is party thereto. This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally.

Section 6.5 Litigation. There are no actions, inquiries, suits, proceedings, claims or disputes pending or, to the knowledge of the Loan Parties, threatened in writing, at law, in equity, in arbitration or before any Governmental Authority, by or against any Loan Party or any Subsidiary thereof or against any of its properties or revenues that (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or, (b) purport to affect or pertain to the Core Business in each case in a manner that could reasonably be expected to have a Material Adverse Effect.

Section 6.6 No Default. No Loan Party or any Subsidiary thereof is in default under or with respect to any Contractual Obligation that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.

Section 6.7 Indebtedness. No Loan Party has any outstanding Indebtedness, other than Permitted Indebtedness.

Section 6.8 Insurance. The Loan Parties and each Subsidiary thereof maintain insurance in compliance with Section 7.7.

Section 6.9 Taxes.

(a) Each Loan Party and each Subsidiary thereof has filed all Federal, state, provincial and other tax returns and reports required to be filed, and have paid all Federal, state, provincial and other taxes, assessments, fees and other governmental charges levied or imposed upon it or its properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been provided in accordance with IFRS. No Loan Party or any Subsidiary thereof is party to any tax sharing agreement.

(b) There is no proposed tax assessment against the Loan Parties or any Subsidiary thereof.

Section 6.10 ERISA Compliance. No Loan Party or any Subsidiary thereof is obligated to contribute to, and is not itself an “employee benefit plan,” as defined in Section 3(3) of ERISA, which “employee benefit plan” is subject to Title I of ERISA or Section 4975 of the Code, and none of the assets of such Loan Party or such Subsidiary constitute or will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101. In addition, (a) no Loan Party or any Subsidiary thereof is a “governmental plan” within the meaning of Section 3(32) of ERISA and (b) transactions by or with a Loan Party or any Subsidiary thereof are not subject to any state or other statute, regulation or other restriction regulating investments of, or fiduciary obligations with respect to, governmental plans within the meaning of Section 3(32) of ERISA which is similar to the provisions of Section 406 of ERISA or Section 4975 of the Code and which prohibit or otherwise restrict the transactions contemplated by this Agreement or any other Loan Document.

Section 6.11 Margin Regulations; Investment Company Act; Public Utility Holding Company Act.

(a) None of the Loan Proceeds will be used in violation of Regulations U or X of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221 and 207) (the “Margin Regulations”), for the purpose of purchasing or carrying any “margin stock” as defined in the Margin Regulations or reducing or retiring any Indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might make this transaction a “purpose credit” within the meaning of the Margin Regulations. Neither any of the Loan Parties, nor any of their Subsidiaries nor any Person acting on behalf of such Loan Parties or such Subsidiaries has taken or will take any action which might cause any Loan Document to violate the Margin Regulations or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934, or any rule or regulation promulgated thereunder, in each case as now in effect or as the same may hereafter be in effect.

(b) None of the Loan Parties or any Subsidiary thereof is (i) an “investment company” or an “affiliated person” or “promoter” of, or “principal underwriter” of or for, an “investment company”, as such terms are defined in the Investment Company Act of 1940, as amended, or (ii) other than the Controlled Substances Act, subject to regulation under any requirement of Law that limits in any respect its ability to incur Indebtedness or which may otherwise render all or a portion of the Obligations unenforceable.

(c) No Loan Party or any Subsidiary thereof is subject to regulation under the Public Utility Holding Company Act of 2005, the Federal Power Act, the Interstate Commerce Act (as any of the preceding have been amended), or any other Law which regulates the incurring by the Borrower of Indebtedness, including laws relating to common or contract carriers or the sale of electricity, gas, steam, water or other public utility services.

Section 6.12 Disclosure. No financial statement delivered to the Administrative Agent pursuant to Section 7.1(a) or (b) (in each case, as modified or supplemented by other information so furnished, and in the case of financial statements delivered to the Administrative Agent pursuant to Section 7.1(b), subject to the absence of footnote disclosure and normal year-end audit adjustments) contains any material misstatement of fact or, when taken as a whole, omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading in any material respect.

Section 6.13 Reserved.

Section 6.14 Material Agreements; No Defaults; Customers and Suppliers.

(a) As of the Closing Date, no Loan Party or any Subsidiary thereof is party to any contracts, instruments or other agreements under which such Loan Party or such Subsidiary has a potential outstanding liability in excess of [Redacted – Commercially Sensitive Information] (collectively, together with similar agreements entered into after the Closing Date, the “Material Agreements”) other than this Agreement (with respect to the Borrower) or such Material Agreements set forth on Schedule 6.14 (with respect to any Loan Party or any Subsidiary thereof).

(b) No Loan Party or any of its Subsidiaries is a party to any Material Agreement or subject to any restriction or limitation in any Governing Document or any judgment, order, regulation, ruling or other requirement of a court or other Governmental Authority, which (either individually or in the aggregate) has, or in the future could reasonably be expected (either individually or in the aggregate) to have, a Material Adverse Effect.

(c) Each such Material Agreement (i) is in full force and effect and is binding upon and enforceable against each Loan Party or its Subsidiaries that is a party thereto and, to the best knowledge of such Loan Party, all other parties thereto in accordance with its terms, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors’ rights generally and by general equitable principles and (ii) is not in default due to the action or inaction of any Loan Party or its Subsidiaries or, to the best knowledge of any Loan Party, any other party thereto unless the failure of such Material Agreement to be in full force and effect or being subject to such default, individually or in the aggregate for all Material Agreements not in full force or effect or subject to such default, could not reasonably be expected to have a Material Adverse Effect.

(d) No event has occurred which, immediately or upon the expiration of applicable cure or grace periods, would constitute a default under any Material Agreement unless the failure of such Material Agreement to be in full force and effect or being subject to such default, individually or in the aggregate for all Material Agreements not in full force or effect or subject to such default, could not reasonably be expected to have a Material Adverse Effect.

(e) Except as could not reasonably be expected to have a Material Adverse Effect, there exists no actual or threatened termination, cancellation or limitation of, or modification to or change in, the business relationship between (i) any Loan Party or its Subsidiaries, on the one hand, and any customer or any group thereof, on the other hand, whose agreements with any Loan Party or its Subsidiaries are individually or in the aggregate material to the business or operations of such Loan Party or Subsidiary, or (ii) any Loan Party or its Subsidiaries, on the one hand, and any supplier or any group thereof, on the other hand, whose agreements with any Loan Party or Subsidiaries are individually or in the aggregate material to the business or operations of such Loan Party or Subsidiary.

Section 6.15 Oral Agreements; Matters Not of Record. No Loan Party is a party to any oral agreement or matters that are not of record that are or would otherwise be Liens on any of the Collateral (other than Permitted Liens).

Section 6.16 Creation, Perfection and Priority of Liens. The execution and delivery of the Security Documents by each Loan Party to which it is a party to, together with the filing of any UCC or PPSA financing statements delivered to the Administrative Agent, are effective to create in favor of the Collateral Agent for the benefit of the Secured Parties, as security for the Obligations, a valid and perfected first priority Lien (subject to Permitted Liens) on all of the Collateral then in existence that may be perfected by filing or recording, and all filings and other actions required pursuant to the Loan Documents to perfect such Lien will have been duly taken on or prior to (or to the extent permitted by the Loan Documents, following) the Closing Date with respect to the Loan Parties as of the Closing Date.

Section 6.17 Equity Interests. All outstanding Equity Interests of the Loan Parties and each Subsidiary thereof are duly authorized, validly issued, fully paid and (to the extent applicable) non-assessable. Except as set forth on Schedule 6.17, on the Closing Date, there are no outstanding subscriptions, options, conversion rights, warrants or other agreements or commitments of any nature whatsoever (firm or conditional) obligating a Loan Party to issue, deliver or sell, or cause to be issued, delivered or sold, any additional Equity Interests of a Loan Party or obligating a Loan Party to grant, extend or enter into any such agreement or commitment. All Equity Interests of the Loan Parties have been offered and sold in material compliance with all federal and state securities laws and all other applicable Law. None of the Equity Interests of the Loan Parties are subject to any Lien except those in favor of the Collateral Agent and Permitted Liens.

Section 6.18 No Agreements to Merge. No Loan Party or any Subsidiary thereof has as any legal obligation, absolute or contingent, to any Person to effect any merger, consolidation, division or other reorganization or to enter into any agreement with respect thereto, except to the extent permitted under Section 8.4 or Section 8.5.

Section 6.19 Labor Matters. There are no disputes presently subject to grievance procedure, arbitration or litigation under any of the collective bargaining agreements, employment contracts or employee welfare or incentive plans to which any Loan Party or any Subsidiary thereof is a party, which could reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 6.19, as of the Closing Date, no Loan Party or any Subsidiary thereof is a party to or bound by any collective bargaining agreement or other contract with a labor union or labor organization and there are no strikes, lockouts, work stoppages or slowdowns, or jurisdictional disputes or organizing activities occurring or threatened. No Loan Party or any of its Subsidiaries or ERISA Affiliates has incurred any liability or obligation under the Worker Adjustment and Retraining Notification Act (“WARN”) or similar state law, which remains unpaid or unsatisfied. The hours worked and payments made to employees of any Loan Party or its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable legal requirements, except to the extent such violations could not, individually or in the aggregate, reasonably be expected to be material. All payments due from any Loan Party or its Subsidiaries on account of wages and employee health and welfare insurance and other benefits have been paid or accrued as a liability on the books of such Loan Party or Subsidiary, except where the failure to do so could not, individually or in the aggregate, reasonably be expected to be material.

Section 6.20 Brokerage Commissions. No Person is entitled to receive any broker’s commissions in connection the transactions contemplated by this Agreement.

Section 6.21 Agreements with Affiliates. No Loan Party is a party to any Contractual Obligations with any of their Affiliates or any of their Related Parties except as permitted under Section 8.6.

Section 6.22 Anti-Money Laundering and Anti-Terrorism Laws.

(a) None of the Loan Parties, any of their respective Subsidiaries or Affiliates, their respective directors, officers or employees nor to the knowledge of the Borrower, their respective agents, has violated or is in violation of any of the Anti-Money Laundering and Anti-Terrorism Laws in any material respect or has engaged in or conspired to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the Anti-Money Laundering and Anti-Terrorism Laws.

(b) None of the Loan Parties, nor any Subsidiary of any of the Loan Parties or their Affiliates, nor any officer, director, employees or principal shareholder or owner of any of the Loan Parties or any of their Subsidiaries, nor any of the Loan Parties’ or any of their Subsidiaries’ respective agents acting or benefiting in any capacity in connection with the Loans or other transactions hereunder, is a Blocked Person.

(c) None of the Loan Parties, nor any Subsidiary or Affiliate of any of the Loan Parties, nor any of their respective agents acting in any capacity in connection with the Loans or other transactions hereunder, (i) conducts any business with or for the benefit of any Blocked Person or engages in making or receiving any contribution of funds, goods or services to, from or for the benefit of any Blocked Person, or (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked or subject to blocking pursuant to any Sanctions Programs.

(d) The Borrower will not request any Loan hereunder, and the Borrower shall not use, and shall procure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Loan hereunder (i) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Blocked Person, or in any Sanctioned Country, or (ii) in any manner that would result in the violation of Anti-Money Laundering and Anti-Terrorism Laws applicable to the Borrower, any of its Subsidiaries, either Agent or any Lender.

(e) The Loan Parties have adopted, implemented and maintain policies and procedures that are reasonably designed to ensure compliance with the Anti-Money Laundering and Anti-Terrorism Laws by the Loan Parties, their respective Subsidiaries and their respective directors, officers, employees and agents.

Section 6.23 Anti-Bribery and Anti-Corruption Laws.

(a) The Loan Parties, their respective Subsidiaries and Affiliates, their respective directors, officers and employees and to the knowledge of the Borrower, their respective agents, are in compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, the Corruption of Foreign Public Officials Act (Canada) and the anti-bribery and anti-corruption laws, rules and regulations of any jurisdictions applicable to the Loan Parties or their Subsidiaries (collectively, the “Anti-Corruption Laws”).

(b) None of the Loan Parties nor any of their Subsidiaries or Affiliates has at any time:

(i) offered, promised, paid, given, or authorized the payment or giving of any money, gift or other thing of value, directly or indirectly, to or for the benefit of any employee, official, or other person acting on behalf of any foreign (i.e., non-U.S.) Governmental Authority, or of any public international organization, or any foreign political party or official thereof, or candidate for foreign political office (collectively, “Foreign Official”), for the purpose of: (A) improperly influencing any act or decision of such Foreign Official in his, her, or its official capacity; or

(ii) inducing such Foreign Official to do, or omit to do, an act in violation of the lawful duty of such Foreign Official, or (C) securing any improper advantage, in order to obtain or retain business for, or with, or to direct business to, any Person; or

acted or attempted to act in any manner which would subject any of the Loan Parties to liability under any Anti-Corruption Law.

(c) The Borrower has not received notice that there are or have been any allegations, investigations or inquiries with regard to a potential violation of any Anti-Corruption Law by any of the Loan Parties or any of their respective current or former directors, officers, employees, stockholders or agents, or other persons acting on their behalf.

(d) The Loan Parties have adopted, implemented and maintain anti-bribery and anti-corruption policies and procedures that are reasonably designed to ensure compliance with the Anti-Corruption Laws by the Loan Parties, their respective Subsidiaries and their respective directors, officers, employees and agents.

(e) The Borrower will not request any Loan hereunder, and the Borrower shall not use, and shall procure that its Subsidiaries, Affiliates and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Loan hereunder in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws.

Section 6.24 Representations and Warranties as to Financial Statements, Documents, Projections, Solvency and Other Information.

(a) Each delivery by a Loan Party to any Agent or any Lender of any schedules (including the schedules attached to this Agreement), or financial statements, whether before or after the Closing Date, shall be a representation and warranty that such schedules, financial statements and other reports are true, correct and complete (in accordance with IFRS if applicable) in all material respects, that there are no omissions therefrom that would result in such financial statements and other reports being incomplete, incorrect or misleading in any material respect as of the date thereof, and that such financial statements accurately present in all material respects the financial condition and results of operations of the Loan Parties as at the dates thereof and for the periods covered thereby.

(b) All material indebtedness and other liabilities (including, without limitation, Indebtedness, liabilities for taxes, long-term leases and other unusual forward or long-term commitments), direct or contingent, of the Borrower and its Subsidiaries are set forth in the financial statements that have been delivered to the Administrative Agent and the Lenders by the Borrower.

(c) Since December 31, 2018, no event or development has occurred that (either individually or in the aggregate) has had or could reasonably be expected to have a Material Adverse Effect.

(d) The Borrower’s projected consolidated statements of income and cash flows and balance sheets after giving effect to the making of the Loan and the application of the proceeds thereof and the other transactions contemplated hereby to occur on the Closing Date, for Borrower’s fiscal year ending December 31 2019, have been prepared in good faith based upon assumptions believed by the Borrower to be reasonable as of the time prepared, it being understood that (i) the projections are only forecasts and no warranty is made as to their accuracy and (ii) actual results of operations may materially differ.

(e) After giving effect to the transactions contemplated by this Agreement and before and after giving effect to each Loan, each Loan Party is, and the Loan Parties and its Subsidiaries on a consolidated basis are, Solvent. No transfer of property is being made by any Loan Party or any Subsidiary and no obligation is being incurred by any Loan Party or any of its Subsidiaries in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of such Loan Party or any of its Subsidiaries.

Section 6.25 Cannabis Licenses and Core Business. Each Loan Party and all of their respective Subsidiaries have, where necessary for the operation of the Core Business in compliance with applicable Law (excluding the Controlled Substances Act), obtained all required permits, licenses, registrations, qualifications or approvals, including the Cannabis Licenses, in all jurisdictions in which it conducts or proposes to conduct its Core Business for such operations unless the failure to obtain such permit, lease, regulation, qualification, approval or Cannabis License could not reasonably be expected to have a Material Adverse Effect. Each Cannabis License or other such permit, license, registration, qualification or approval is valid and fully-effective, except as could not reasonably be expected to have a Material Adverse Effect. Each Loan Party and each Subsidiary thereof has taken all actions necessary for the validity and effectiveness for each Cannabis License or other such permit, license registration, qualification or approval and does not anticipate any variations or difficulties in renewing such licenses, permits, registrations, or qualifications, or any other required license, permit, registration, or qualification, except in each case as could not reasonably be expected to have a Material Adverse Effect. No Loan Party or any of their respective Subsidiaries are engaged in any business other than the Core Business and business activities incidental or related thereto. With respect to the Cannabis Licenses listed on Schedule 1.1 (other than any Cannabis License owned or held by Origin House), as of the Closing Date the grant of a security interest (i) in each such Cannabis Licenses or (ii) in the Equity Interests of any Person that owns or holds each such Cannabis Licenses, in each case, pursuant to the Security Documents (without giving effect to clauses (iii), (vii) and (xi) of the definition of Excluded Property as set forth in the Pledge and Security Agreement) does not violate or require any consent under the terms of each such Cannabis Licenses or applicable state Law under which each such Cannabis License has been issued in any material respect.

Section 6.26 Compliance with Laws, Etc.. Except with respect to the Controlled Substances Act, each Loan Party and Material Subsidiary is: (i) in material compliance with the requirements of all applicable Laws, rules, regulations and orders of any Governmental Authority, and (ii) with regard to the conduct of the Core Business, is in material compliance with all licensing, legislation, regulations, by-laws or other lawful requirements of any Governmental Authority in each jurisdiction where it carries on its business.

Section 6.27 Environmental Matters. With respect to each Loan Party and its Subsidiaries, (a) the business, operations, assets and property of such Loan Party and its Subsidiaries are in compliance with all Environmental Laws except as could not reasonably be expected (either individually or in the aggregate) to result in material Environmental Liabilities and Costs to a Loan Party or its Subsidiaries; (b) there has been no Release by a Loan Party, its Subsidiaries or their respective Agents or contractors or, to the knowledge of each Loan Party, any other Person at any of the properties owned or operated, or, to the knowledge of each Loan Party, formerly owned and operated, by any Loan Party or its Subsidiaries or a predecessor in interest, or, to the knowledge of each Loan Party, at any disposal or treatment facility which received Hazardous Materials generated by any Loan Party, its Subsidiaries or any predecessor in

interest in either case except as would not reasonably be expected (either individually or in the aggregate) to result in material Environmental Liabilities and Costs to a Loan Party or its Subsidiaries; (c) no Environmental Action that is pending or unresolved has been asserted against any Loan Party or any of its Subsidiaries or any predecessor in interest nor does any Loan Party have knowledge or notice of any threatened or pending Environmental Action against any Loan Party or any of its Subsidiaries or any predecessor in interest; (d) to the knowledge of each Loan Party, no Environmental Actions have been asserted against any facilities that may have received Hazardous Materials generated by any Loan Party or its Subsidiaries or any predecessor in interest in either case except as would not reasonably be expected (either individually or in the aggregate) to result in material Environmental Liabilities and Costs; (e) no property now owned, or to the knowledge of each Loan Party, now leased or formerly owned or leased by a Loan Party or any of its Subsidiaries has been used for the generation, treatment, storage, transportation, handling or disposal site for any Hazardous Material in a manner which violates the Environmental Laws in any material respect or has resulted in or would reasonably be expected to result in a material Environmental Action, material Environmental Liabilities and Costs, or a material obligation to conduct a Remedial Action, in each case, asserted against a Loan Party or its Subsidiary; (f) no Loan Party or any of its Subsidiaries has failed to report to the proper Governmental Authority any Release which is required to be so reported by any Environmental Laws except as would not reasonably be expected (either individually or in the aggregate) to result in material Environmental Liabilities and Costs; (g) each Loan Party and its Subsidiaries holds all Environmental Permits in connection with the operation of the business carried on by it, except for such Environmental Permits as to which a Loan Party’s failure to maintain or comply with would not reasonably be expected (either individually or in the aggregate) to result in material Environmental Liabilities and Costs; (h) no Loan Party nor any of its Subsidiaries has received any notification pursuant to any Environmental Laws that (i) any work, repairs, construction or capital expenditures are required to be made in respect as a condition of continued compliance with any Environmental Laws, or any Environmental Permit or (ii) any Environmental Permit referred to above is about to be reviewed, made subject to limitations or conditions, revoked, withdrawn or terminated, in each case, except as would not reasonably (either individually or in the aggregate) be expected to result in material Environmental Liabilities and Costs, (i) there are no Environmental Liens asserted against any property owned or, to the knowledge of such Loan Party, operated by any Loan Party or any Subsidiaries, and (j) to the knowledge of any Loan Party, there are no facts or circumstances that would reasonably be expected to result in Environmental Liabilities and Cost or require a material capital expenditure to comply with Environmental Laws.

Section 6.28 Title to Properties. As of the Closing Date, all real property interests owned or leased by any Loan Party or any of its Subsidiaries is set forth on Schedule 6.28. Each Loan Party and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests) the real property owned by it, (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property) real property leased by it or (iii) good title to all of their respective material personal property. Except as permitted by Section 8.2, all such properties are free and clear of Liens.

Section 6.29 Intellectual Property. Each Loan Party and its Subsidiaries owns or licenses or otherwise has the right to use all Intellectual Property rights that are material to the operation of its business, except where the failure to own, license or use Intellectual Property could not reasonably be expected to have a Material Adverse Effect. To the knowledge of each Loan Party, the use of such Intellectual Property does not infringe upon, dilute, misappropriate or conflict with the rights of any other Person with respect thereto, except where such infringement, dilution, misappropriation or conflict could not reasonably be expected to have a Material Adverse Effect. Set forth on Schedule V to the Pledge and

Security Agreement and the Canadian Pledge and Security Agreement is a complete and accurate list, as of the Closing Date and as of each date that such schedule is required to be updated pursuant to the Pledge and Security Agreement and the Canadian Pledge and Security Agreement, of each item of Registered Intellectual Property owned by each Loan Party and its Subsidiaries. No claim or litigation regarding any U.S. federally registered Trademark is pending or threatened in writing, which could reasonably be expected to have a Material Adverse Effect. To the knowledge of each Loan Party, no Patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code pertaining to Intellectual Property (other than the Controlled Substances Act or the Lanham Act (to the extent that the use of any Trademark of a Loan Party or any of its Subsidiaries is found to not be a “lawful” use of such Trademark in commerce within the meaning of 15 U.S.C. §§ 1051, 1127; 37 C.F.R. § 2.69 (Use of a mark in commerce must be lawful use to be the basis for federal registration of the mark)) is pending or proposed, which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

Section 6.30 No Proposed Legislation. The Loan Party is not aware of any legislation (other than the Controlled Substances Act), or proposed legislation published by a legislative body, which could reasonably be expected to have a Material Adverse Effect.

Section 6.31 Representation regarding Super Voting Shares. As of the Closing Date, the provisions of the articles of incorporation of the Borrower described in the “Super Voting Shares” definition are the only provisions of any Governing Document of the Borrower that set forth and govern the terms of the Super Voting Shares. As of the Closing Date, the Holders of Super Voting Shares hold at least fifty percent (50.00%) of the Super Voting Shares issued and outstanding as of the Closing Date.

ARTICLE 7

AFFIRMATIVE COVENANTS

Commencing on the Closing Date, and so long thereafter as any Loan or other Obligation (other than contingent indemnification obligations for which no claim has been asserted) hereunder shall remain unpaid or unsatisfied, each Loan Party shall, and shall cause each of its Subsidiaries, as applicable below, to:

Section 7.1 Financial Statements and Other Reports. Provide to the Administrative Agent the following financial information and statements in form reasonably acceptable to the Administrative Agent:

(a) Annual Reports. As soon as available, but not later than one hundred and twenty (120) days after the end of each Fiscal Year commencing with the Fiscal Year ending December 31, 2019, provide to the Administrative Agent the audited consolidated balance sheets of the Borrower as at the end of, and the related consolidated statements of income, retained earnings and cash flows for, such Fiscal Year, and the corresponding figures as at the end of, and for, the preceding Fiscal Year, accompanied by a report and opinion of an Independent Accountant, which report and opinion shall be prepared in accordance with generally accepted auditing standards relating to reporting and which report shall contain no qualified or adverse opinion or disclaimer of opinion (provided, that a going concern or similar qualification shall not be considered a “qualified or adverse opinion or disclaimer of opinion” if the sole reason for such qualification is that the Loan becomes classified as a current obligation within one (1) year of the Applicable Scheduled Maturity Date), together with a certificate signed by an Responsible Officer of the Borrower, to the effect that such financial statements fairly present in all material respects the consolidated financial position of each Loan Party, as at the dates indicated and the results of its operations for the periods indicated in conformity with IFRS.

(b) Quarterly Reports. As soon as available, and in any event within sixty (60) days after the end of each of the first three Fiscal Quarters of each Fiscal Year commencing with the first such Fiscal Quarter ending immediately after the Closing Date, the consolidated unaudited balance sheet of the Borrower as of the close of such Fiscal Quarter and related consolidated statements of income, retained earnings and cash flow for such Fiscal Quarter and that portion of the Fiscal Year ending as of the close of such Fiscal Quarter, including comparisons of (i) the current period to the corresponding period in the prior year, and (ii) the year-to-date to the corresponding period in the prior year, in each case certified by a Responsible Officer of the Borrower as fairly presenting in all material respects the consolidated financial position, results of operations and cash flow of each Loan Party as at the dates indicated and for the periods indicated in accordance with IFRS (subject to the absence of footnote disclosure and normal year-end audit adjustments).

(c) Monthly Reports. Within thirty (30) days of the end of each calendar month, commencing with the month beginning December 1, 2019, the Borrower shall deliver to the Administrative Agent (i) a statement of consolidated cash and cash equivalents for the Borrower as of the last day of such month (ii) a statement of consolidated revenue for such month and (iii) such additional information as may be reasonably requested by the Administrative Agent or agreed to by the parties hereto. For the avoidance of doubt, the monthly reports required to be delivered pursuant to this Section 7.1(c), shall be delivered for all twelve (12) calendar months, including for months in which annual reports and quarterly reports are delivered.

(d) Compliance Certificate. Concurrently with delivery of the financial statements required under clause (a) or (b) above, a Compliance Certificate substantially in the form of attached Exhibit D duly executed by a Responsible Officer of the Borrower that, among other things, (i) certifies that no Default or Event of Default is continuing as of the date of delivery of such Compliance Certificate or, if a Default or Event of Default is continuing, states the nature thereof and the action that the Borrower proposes to take to cure such Default or Event of Default, (ii) certifies that all filings required under the Security Documents have been made and listing each such filing that has been made since the date of the last certificate delivered in accordance with this Section 7.1(d), (iii) certifies that the Loan Parties have delivered all documents and information they are required to deliver pursuant to any Loan Document on or prior to the date of delivery of such Compliance Certificate, or have attached such documents and information to such Compliance Certificate, (iv) confirms that there have been no changes to the information contained in each of the Perfection Certificates delivered on the Closing Date or the date of the most recently updated Perfection Certificate delivered pursuant to this clause (d) and/or attaching an updated Perfection Certificate identifying any such changes to the information contained therein and (v) certifies that the minimum cash balance requirement under Section 7.2 is satisfied.

(e) Dispositions. Promptly and in any event within five (5) days after execution, receipt or delivery thereof, copies of any material notices that any Loan Party executes or receives in connection with the sale or other Disposition of the Equity Interests of, or all or substantially all of the assets of, any Loan Party or any Subsidiary that holds a Cannabis License.

(f) Public Company Filings and Other Reports. Promptly and in any event within five (5) days after (i) the sending or filing thereof, copies of all statements, reports and other material information any Loan Party sends to any holders of its Indebtedness in excess of [Redacted – Commercially Sensitive Information] or to holders of the Borrower’s Equity Interests or that it files on SEDAR or EDGAR or any national (domestic or foreign) securities exchange, (ii) the board of directors’ approval thereof, minutes of the meetings of the Borrower’s board of directors, subject to redaction for matters reasonably subject to a claim of attorney-client privilege, and (iii) the receipt thereof, a copy of any material notice received from any holder of its Indebtedness having a principal amount equal to or greater than [Redacted – Commercially Sensitive Information].

(g) Bank Account Information. At the request of the Administrative Agent, the Borrower will provide the Administrative Agent with read only access to the Borrower’s and each other Loan Party’s bank accounts.

(h) No Change to Accounting and Reporting Practices. No Loan Party shall make any material change in its accounting policies or financial reporting practices without the prior written consent of the Administrative Agent and the Required Lenders, which consent shall not be unreasonably withheld, conditioned or delayed, except as required by Law or applicable accounting rules.

(i) Additional Reporting Deliverables. Promptly upon request, such other information concerning the assets, condition or operations, financial or otherwise, of any Loan Party or any of its Subsidiaries as the Administrative Agent or the Required Lenders may from time to time may reasonably request.

Section 7.2 Minimum Cash Balance. The cash and Cash Equivalents held on a consolidated basis by all Loan Parties (but not their Subsidiaries which are not Loan Parties) shown on each monthly balance sheet delivered in accordance with Section 7.1(c) shall be equal to or greater than the Minimum Cash Balance.

Section 7.3 Furnishing of Information and Inspection of Collateral.

(a) Inspection. The Borrower will furnish or cause to be furnished to the Administrative Agent from time to time such information with respect to the financial affairs of any Loan Party or any of their Subsidiaries and the Collateral as the Administrative Agent may reasonably request. The Borrower will, during regular business hours and with reasonable prior written notice, permit the Administrative Agent or its respective agents or representatives and/or certified public accountants or other auditors acceptable to the Administrative Agent, to: (i) examine and make copies of and abstracts from all books and records relating to the financial affairs of any Loan Party or any of their Subsidiaries or any Collateral, (ii)(A) visit the offices and properties of the Borrower for the purpose of examining such books and records and to verify materials, leases, notes, inventory, accounts receivable, deposit accounts and its other assets, to conduct audits, physical counts, valuations and appraisals and (B) after the occurrence and during the continuance of an Event of Default, assertion of any Environmental Actions, or violation of Environmental Laws, with respect to any Material Real Property, conduct Phase I ESAs (and, if reasonably requested by the Administrative Agent or the Required Lenders based upon the results

of any such Phase I ESA, a Phase II ESA) or examinations, provided that Phase I ESAs shall be delivered in connection with any Mortgage on any Material Real Property as required under this Agreement, (iii) discuss matters relating to the Core Business or any Collateral or such Loan Party’s performance hereunder or under the other Loan Documents to which it is a party with any of the officers, directors, employees or independent public accountants of the Borrower, to the extent reasonably available, having knowledge of such matters and (iv) conduct a review of its books and records with respect to the financial affairs of any Loan Party or any of their Subsidiaries or any Collateral (each inspection and audit described in clauses (i) though (iv) above, an “Inspection”).

(b) Reimbursement. The Borrower shall reimburse the Administrative Agent for its reasonable and invoiced (and showing in reasonable detail) out-of-pocket costs and expenses incurred in connection with one such Inspection per twelve-month period, and the Administrative Agent will each bear its own costs and expenses for any additional Inspections during such twelve-month period; provided that the Borrower shall also reimburse the Administrative Agent for their reasonable out-of-pocket costs and expenses incurred in connection with any additional Inspections that the Administrative Agent deem desirable to conduct while any Event of Default has occurred and is continuing or is reasonably necessary while any other Default has occurred and is continuing.

(c) Confidentiality. In connection with any such Inspection, to the extent no applicable confidentiality agreement is already in place with respect to such Person, each Person conducting such Inspection (including any third party certified public accounting firms or auditing firms) shall have agreed in writing to maintain the confidentiality of the Borrower’s and its Affiliates’ confidential non-public information on terms reasonably acceptable to the parties thereto.

(d) No Disruption of Business. The Administrative Agent shall conduct, and shall cause its respective agents, representatives, accountants and auditors to conduct, such Inspection in a commercially reasonable manner so as to minimize any burden (financial or otherwise) on the Borrower and its Affiliates and any disruption to the business and operations of the Borrower and its Affiliates (it being understood and agreed that an Inspection conducted in a substantially similar manner and scope as that conducted by the Administrative Agent prior to the Closing Date shall be deemed commercially reasonable).

Section 7.4 Notices. Promptly notify the Administrative Agent of:

(a) the occurrence of any Default, Event of Default or Mandatory Prepayment Event;

(b) any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of any Loan Party (including failure to pay any amount due in respect of any Permitted Indebtedness on the date scheduled for payment therefor, without giving effect to any grace period); (ii) any dispute, litigation, investigation, proceeding or suspension between any Loan Party and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting any Loan Party;

(d) (i) as soon as possible and in any event within 10 days after any Loan Party or any ERISA Affiliate thereof knows or has reason to know that (1) any Reportable Event with respect to any Employee Benefit Plan has occurred, (2) any other Termination Event with respect to any Employee Benefit Plan subject to Title IV of ERISA has occurred, or (3) an accumulated funding deficiency has been incurred or an application has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including installment payments) or an extension of any amortization period under Section 412 of the Internal Revenue Code with respect to an Employee Benefit Plan, a statement of an Authorized Officer of the Borrower setting forth the details of such occurrence and the action, if any, which such Loan Party or such ERISA Affiliate proposes to take with respect thereto, (ii) promptly and in any event within 3 days after receipt thereof by any Loan Party or any ERISA Affiliate thereof from the PBGC, copies of each notice received by any Loan Party or any ERISA Affiliate thereof of the PBGC’s intention to terminate any Employee Benefit Plan or to have a trustee appointed to administer any Employee Benefit Plan, (iii) promptly and in any event within 10 days after the filing thereof with the IRS if requested by the Required Lenders, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Employee Benefit Plan and Multiemployer Plan, (iv) promptly and in any event within 10 days after any Loan Party or any ERISA Affiliate thereof knows or has reason to know that a required installment within the meaning of Section 412 of the Internal Revenue Code has not been made when due with respect to an Employee Benefit Plan, (v) promptly and in any event within 3 days after receipt thereof by any Loan Party or any ERISA Affiliate thereof from a sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice received by any Loan Party or any ERISA Affiliate thereof concerning the imposition or amount of withdrawal liability under Section 4202 of ERISA or indicating that such Multiemployer Plan may enter reorganization status under Section 4241 of ERISA, and (vi) promptly and in any event within 10 days after any Loan Party or any ERISA Affiliate thereof sends notice of a plant closing or mass layoff (as defined in WARN) to employees, copies of each such notice sent by such Loan Party or such ERISA Affiliate thereof;

(e) the occurrence of a default or event of default under any Indebtedness of any Loan Party in a principal amount equal to or greater than [Redacted – Commercially Sensitive Information];

(f) the declaration or distribution of any Restricted Payment not permitted hereunder;

(g) any casualty or other insured damage to any material portion of any Collateral or the commencement of any action or proceeding for the taking of any material portion of any Collateral or any part thereof or interest therein under power of eminent domain or by condemnation or similar proceeding; and

(h) any rescission, revocation, termination, suspension or other adverse development concerning any Cannabis License.

Each notice pursuant to this Section 7.4 shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what actions the Borrower has taken and proposes to take, or what actions the Borrower has caused and proposes to cause any Material Subsidiary to take, with respect thereto. Each notice pursuant to Section 7.4(a) shall describe with particularity any and all provisions of this Agreement and any other Loan Document that have been breached.

Section 7.5 Payment of Obligations. Each Loan Party and each Subsidiary thereof shall pay and discharge, prior to delinquency, all its obligations and liabilities, including (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with IFRS are being maintained by such Loan Party or such Subsidiary; (b) all lawful claims which, if unpaid, would by law become a Lien (other than a Permitted Lien) upon any Loan Party’s property; and (c) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with IFRS are being maintained by such Loan Party or such Subsidiary.

Section 7.6 Preservation of Existence, Etc. . Except as provided in Section 8.3 or as would constitute a Permitted Change, (a) preserve, renew and maintain in full force and effect the legal existence of each Loan Party under the Laws of the jurisdiction of its organization; and (b) take all action reasonably necessary to maintain all assets, rights, privileges, permits, licenses and franchises that are material to and necessary for the operation of the Core Business; provided that this Section 7.6 shall not be deemed to expand, limit or otherwise modify the covenants set forth in Section 7.16 with respect to Cannabis Licenses.

Section 7.7 Maintenance of Insurance.

(a) Liability. Maintain with financially sound and reputable insurers having an A.M. Best rating of A- or better and not Affiliates of any Loan Party protecting the Loan Parties against loss from liability imposed by law or assumed in any agreement, document, or instrument and arising from bodily injury, death or property damage, as shall be in accordance with the general practices of businesses engaged in similar activities in similar geographic areas on the Closing Date, and in amounts, containing such terms, in such forms and for such periods as may be reasonable and prudent in accordance with sound business practices.

(b) Additional Insurance. Such other policies of insurance as the Administrative Agent may reasonably request in writing to the extent available on commercially reasonable terms.

(c) General. All policies for required insurance will be in form and substance satisfactory to the Administrative Agent acting reasonably. All liability policies evidencing required insurance will name the Collateral Agent, on behalf of the Secured Parties (as defined under the applicable Security Documents), as additional insured pursuant to endorsements and certificates acceptable to the Agents, acting reasonably. All property casualty policies evidencing required insurance will name the Collateral Agent, on behalf of the Secured Parties (as defined under the applicable Security Documents), as loss payee pursuant to endorsements and certificates acceptable to the Agents, acting reasonably. The policies will provide for at least thirty (30) days prior written notice of the cancellation or modification thereof to be given to the Collateral Agent. Certificates of insurance evidencing that such insurance is in full force and effect, will be delivered

to the Administrative Agent, together with proof of the payment of the premiums thereof. Prior to the expiration of each such policy, the Borrower shall furnish the Administrative Agent with evidence that such policy has been renewed or replaced in the form of the original or a certified copy of the renewal or replacement policy or, if acceptable to the Administrative Agent, a certificate reciting that there is in full force and effect, with a term covering at least the next succeeding calendar year, insurance of the types and in the amounts required in this Section 7.7.

(d) Settlement of Claims. No Loan Party or any Subsidiary thereof shall settle any claim under any casualty insurance policies, if such claim involves any loss in equal to or greater than [Redacted – Commercially Sensitive Information], without the prior written approval of the Administrative Agent, not to be unreasonably withheld, conditioned or delayed and the Borrower shall use commercially reasonable efforts to cause each such policy that is renewed or entered into after the Closing Date to contain a provision to such effect.

Section 7.8 Compliance. Comply in all respects with all Laws applicable to it except for the Controlled Substances Act and any rules or regulations promulgated thereunder and except to the extent non-compliance could not reasonably be expected to have a Material Adverse Effect, provided that, in the event the Controlled Substances Act and any rules or regulations promulgated thereunder are modified such that the Core Business is no longer in violation of the Controlled Substances Act following such modification, the Loan Parties shall comply in all respects with the Controlled Substances Act as so modified except to the extent non-compliance could not reasonably be expected to have a Material Adverse Effect.

Section 7.9 Books and Records. Maintain and implement administrative and operating procedures, and keep and maintain all documents, books, records, computer tapes and disks and other information reasonably necessary for the operation of the Core Business.

Section 7.10 Intangible, Recording and Stamp Tax. Promptly pay all intangible taxes or documentary stamp taxes assessed against any Loan Parties, any Agent or any Lender as a result of this Agreement or any document related hereto, if any.

Section 7.11 Further Assurances. At any time and from time to time, execute, acknowledge and deliver such further documents, agreements and instruments and take such further action as may reasonably be requested by the Administrative Agent, in each case further and more perfectly to effect the purposes of this Agreement and the other Loan Documents, including, from time to time to better assure, preserve, protect and perfect the interest of the Collateral Agent in the Collateral and the rights and remedies of the Secured Parties under the Loan Documents. Without limiting the foregoing, to the extent that the Collateral Agent determines from time to time that additional pledge agreements, financing statements, recognition agreements and other documents are required in order to perfect all Liens and encumbrances in favor of the Collateral Agent, the Borrower shall execute and deliver such documents, instruments and other agreements as the Collateral Agent may reasonably request.

Section 7.12 Special Covenants Relating to Collateral.

(a) Defense of Title. Defend the Collateral, the title and interest therein represented and warranted in the Security Documents and the legality, validity, binding nature and enforceability of each Lien and encumbrance contained in the Security Documents and the first priority of the Liens created pursuant to the Security Documents against all matters (other than claims by holders of Permitted Liens), including: (a) any attachment, levy, or other seizure by legal process or otherwise of any or all Collateral; (b) any Lien or encumbrance or claim thereof on any or all Collateral; (c) any attempt to foreclose, conduct a trustee’s sale, or otherwise realize upon any or all Collateral; and (d) any claim questioning the legality, validity, binding nature, enforceability or priority of the Security Documents, in each case, at the Loan Parties’ sole cost and expense. Each Loan Party shall notify the Administrative Agent and each Lender promptly in writing of any of the foregoing and will provide such information with respect thereto as the Administrative Agent may from time to time request.

(b) Landlord Waivers; Collateral Access Agreements. (i) Use commercially reasonable efforts to deliver to the Administrative Agent a landlord waiver, in form and substance reasonably satisfactory to the Administrative Agent and the Required Lenders and which may be included as a provision contained in the relevant lease, executed by each landlord with respect to each of the Loan Parties’ leases for real property where the Loan Parties’ books and records are located and where Collateral with a book value in excess of [Redacted – Commercially Sensitive Information] (when aggregated with all other Collateral at the same location) is located and (ii) if at any time any Collateral with a book value in excess of [Redacted – Commercially Sensitive Information] (when aggregated with all other Collateral at the same location) is or the Loan Parties’ books and records are stored on the premises of a bailee, warehouseman, or similar party, use commercially reasonable efforts to obtain written subordinations or waivers or collateral access agreements, as the case may be, in form and substance reasonably satisfactory to the Administrative Agent and the Required Lenders.

(c) Material Real Property. Within 10 Business Days of the acquisition by any Loan Party after the date hereof of any Material Real Property, the Borrower shall notify the Administrative Agent in writing thereof, setting forth with specificity a description of the interest acquired, the location of the real property, any structures or improvements thereon and either an appraisal or such Loan Party’s good-faith estimate of the current value of such real property (for purposes of this Section 7.12, the “Current Value”). The Administrative Agent (acting at the written direction of the Required Lenders) shall notify such Loan Party whether it intends to require a Mortgage (and any other Real Property Deliverables) with respect to such Material Real Property. Upon receipt of such notice requesting a Mortgage (and any other Real Property Deliverables), the Person that has acquired such Material Real Property shall promptly furnish the same to the Administrative Agent.

Section 7.13 Performance under Contractual Obligations . Timely observe and perform all of the covenants and agreements required to be performed and/or observed by the Loan Parties or any Subsidiary thereof under any Contractual Obligations, and shall enforce the performance and observance by any counterparty to any Material Agreement of all of the covenants and agreements required to be performed and/or observed by such counterparty under any Material Agreements except, in each case, to the extent that a failure to so observe, perform and enforce could not reasonably be expected to have a Material Adverse Effect.

Section 7.14 Reserved.

Section 7.15 Material Subsidiaries. In the event any Person is or becomes a direct or indirect Material Subsidiary of any Loan Party, the Borrower shall notify each Agent of each such event or transaction concurrently with the delivery of the deliverables for the Closing Date and with each Compliance Certificate, provided that upon the completion of the corresponding acquisitions, any direct or indirect Subsidiary that is acquired or that results from the consummation of the Origin House Acquisition, the Hope Heal Health Acquisition or the Tryke Acquisition and that is a Material Subsidiary of any Loan Party after the consummation of such acquisition shall all be Material Subsidiaries for purposes of this Agreement. Each Material Subsidiary of a Loan Party shall within thirty (30) days after becoming a Material Subsidiary (or such later date as may be agreed by the Administrative Agent in its sole and absolute discretion):

(a) become (if not already a party thereto) a party to the Subsidiary Guaranty, the Security Agreement and any other Security Document requested by the Collateral Agent, in a manner reasonably satisfactory to the Collateral Agent;

(b) pursuant to, and to the extent required by, the Security Agreement (taking into account any thresholds, carve-outs or other limitations set forth therein), pledge to the Collateral Agent for the benefit of the Lenders (i) all of the outstanding Equity Interests owned directly by such Material Subsidiary, along with undated stock or other powers for such certificates, executed in blank (or, if any such Equity Interests are uncertificated, or if any such certificates cannot be located after reasonable efforts exercised by such Material Subsidiary, confirmation and evidence satisfactory to the Collateral Agent that the security interest in such uncertificated securities has been pledged to and perfected by the Lender in accordance with the UCC, PPSA or any similar law which may be applicable), and (ii) all notes evidencing intercompany Indebtedness in favor of such Material Subsidiary, as the case may be, in accordance with the terms of the Security Documents;

(c) deliver to the Collateral Agent copies of (i) UCC, PPSA or similar search reports for the applicable jurisdiction, federal, provincial, state or other tax Liens, judgment, litigation and bankruptcy reports dated a date reasonably near (but prior to) the date such Person becomes a Subsidiary Guarantor and a party to the Security Agreement, listing all effective UCC, PPSA or similar financing statements, federal, provincial, state or other tax Liens, and judgment Liens which name such Person, as the debtor, and pending litigation and bankruptcies against such Person, and which are filed or pending, as applicable, in each jurisdiction in which UCC, PPSA or similar filings are to be made pursuant to this Agreement or the other Loan Documents and any other appropriate jurisdictions, together with copies of such financing statements (none of which (other than Permitted Liens) shall cover any of the Collateral), and (ii) search results from the United States Patent and Trademark Office, United States Copyright Office and Canadian Intellectual Property Office to the extent any patents, trademarks or copyrights form a part of the Collateral being granted by such Person;

(d) deliver to the Collateral Agent (i) acknowledgment copies or confirmation statements of properly filed UCC or PPSA financing statements or such other in form and substance satisfactory to the Collateral Agent, such UCC or PPSA financing statements naming such Person as the debtor and the Collateral Agent as the secured party, and filed under the UCC or PPSA as adopted in all applicable jurisdictions as may be necessary or appropriate to perfect the first priority security interest of the Collateral Agent pursuant to the Security Agreement, and (ii) appropriate trademark, copyright and patent security agreements or supplements to be filed with the United States Patent and Trademark Office, United States Copyright Office and Canadian Intellectual Property Office to the extent relevant; and

(e) deliver to the Collateral Agent (i) a pledge from any Loan Party that is the direct parent of such Material Subsidiary of its Equity Interests in such Material Subsidiary in favor of the Lender pursuant to the Security Agreement (or a reaffirmation of such pledge if such direct parent is already a party to the Security Agreement), together with updated schedules to the Security Agreement setting forth such Loan Party’s Equity Interests in such Material Subsidiary, and (ii) any other Security Documents reasonably requested by the Collateral Agent in respect of such Loan Party’s pledge of its Equity Interests in such Material Subsidiary in favor of the Collateral Agent, in each case, in form and substance reasonably satisfactory to the Collateral Agent.

In the event that the Borrower or any of its Subsidiaries completes an acquisition or a disposition subsequent to the commencement of the four consecutive Fiscal Quarter period specified in the definition of “Material Subsidiary” and on or prior to the date on which the transaction occurred that led to a determination of whether a Person became a Material Subsidiary, then the determination of whether such Person is a Material Subsidiary will be made giving pro forma effect to such acquisitions and dispositions (i) as if the same had occurred at the beginning of such period for the purpose of calculating Consolidated Total Revenue and (ii) on the last date of such period for the purpose of calculating Consolidated Total Assets.

The foregoing shall be accompanied with other documentary evidence, reasonably requested by the Administrative Agent, in a form reasonably satisfactory to the Administrative Agent, that evidences the foregoing, including copies of the resolutions of the board of directors (or equivalent body) of such Material Subsidiary authorizing the relevant transactions, copies of such Material Subsidiary’s organizational documents, incumbency certificates of such Material Subsidiary, opinions of legal counsel and evidence of the insurance required to be maintained pursuant to Section 7.7.

The Borrower may cause Subsidiaries that are not Material Subsidiaries to be Loan Parties for the purposes of this Agreement by causing such Subsidiary to execute and deliver each of the documents and instruments set forth in this Section 7.15 applicable to a Material Subsidiary, and such Subsidiary shall become a Loan Party effective upon the completion of such documents and instruments.

Section 7.16 Cannabis Licenses. At all times:

(a) maintain in good standing and keep effective all Cannabis Licenses necessary for the operation of the Core Business to the extent that the failure to maintain in good standing and keep effective such Cannabis Licenses could reasonably be expected to have an adverse impact of (i) at any time when the principal amount of the Loans is One Hundred Million and 00/100 Dollars ($100,000,000) or less, [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recent period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b) (or

[Redacted – Commercially Sensitive Information] of Consolidated EBITDA, if Consolidated EBITDA for such period is at least Sixty Million and 00/100 Dollars ($60,000,000)) and (ii) at any time when the principal amount of the Loans is more than One Hundred Million and 00/100 Dollars ($100,000,000), [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recent period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b); provided, in each case, that if such financial statements have not been delivered pursuant to Section 7.1(a) or Section 7.1(b) at the time of determination then such four consecutive Fiscal Quarter period shall end as of the last day of the most recent Fiscal Quarter for which consolidated financial statements of the Borrower are publicly available on SEDAR or EDGAR; and

(b) notify the Administrative Agent in writing of the cancellation, suspension, lapse, termination, postponement, invalidity or replacement of any Cannabis License.

Section 7.17 Acquisition Documents. During the negotiation of any Permitted Acquisition, and in any case before closing on such Permitted Acquisition, circulate for the Administrative Agent’s reasonable review all material documentation related to such Permitted Acquisition or such further documentation as either Agent shall reasonably request.

Section 7.18 Labor Matters. At all times during the period the Obligations are outstanding not become a party to or bound by any collective bargaining agreement, employment contract, employee welfare or incentive plan or other contract with a labor union or labor organization, except as set forth on Schedule 7.18 or as could not reasonably be expected to have a Material Adverse Effect.

Section 7.19 Employee Benefit Plans. At all times during the period the Obligations are outstanding cause itself and each ERISA Affiliate to: (a) keep in full force and effect any and all Employee Benefit Plans which are presently in existence or may, from time to time, come into existence under ERISA, unless such Employee Benefit Plans can be terminated without material liability to such Loan Party or any of its Subsidiaries in connection with such termination (as distinguished from any continuing funding obligation), (b) make contributions to all Employee Benefit Plans in a timely manner and in an amount sufficient to comply with the requirements of ERISA, (c) comply in all material respects with the requirements of ERISA which relate to such Employee Benefit Plans, and (d) notify the Lender immediately upon receipt by such Loan Party or any of its Subsidiaries of any written notice of the institution of any proceeding or other action relating to any Employee Benefit Plans, in the case of each of Section 7.19(a) through 7.19(d) that could reasonably be expected to have a Material Adverse Effect.

Section 7.20 Maintenance of Properties. The Borrower shall, and shall cause each other Loan Party and their respective Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition (other than wear and tear occurring in the ordinary course of business) all properties used in the business of such Loan Party and its Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof which in the exercise of its reasonable business judgment are required for the continuation of its business.

Section 7.21 Environmental Matters. The Borrower shall, and shall cause each other Loan Party and their respective Subsidiaries to, (a) comply, and cause all lessees and other Persons operating or occupying properties owned or leased by it to comply in all material respects, with all Environmental

Laws and material Environmental Permits, (b) obtain and renew all Environmental Permits required by Environmental Laws for its operations and properties, (c) conduct any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action required by Environmental Laws or any Governmental Authority to address Hazardous Materials at, on, under or emanating from any properties owned or leased by it in accordance with the requirements of all Environmental Laws, (d) keep any property owned by it or any of its Subsidiaries free of Environmental Liens or leased by it or any of its Subsidiaries free of any Environmental Liens resulting from the activities of any Loan Party, its Subsidiaries or their respective agents or contractors, (e) provide the Administrative Agent written notice within five (5) days of becoming aware of any Release of a Hazardous Material in excess of any reportable quantity pursuant to any Environmental Law from or onto property owned or leased by it or any of its Subsidiaries and take any Remedial Actions required under Environmental Law to abate said Release; and (f) provide the Administrative Agent with written notice within ten (10) days of receipt by or knowledge of a Loan Party or any Subsidiary thereof of any of the following: (A) notice that an Environmental Lien has been filed, in each case, against any property of any Loan Party or any of its Subsidiaries; (B) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Loan Party or any of its Subsidiaries; and (C) notice of a violation, citation or other administrative order which, in the case of each of the foregoing (A) through (C), would reasonably be expected to result in material Environmental Liabilities and Costs to a Loan Party or its Subsidiaries.

Section 7.22 Post-Closing Obligations. Notwithstanding the conditions precedent set forth in Article 5 or any other provision of this Agreement, the Borrower has informed the Administrative Agent and the Lenders that certain of such items required to be delivered to the Administrative Agent or otherwise satisfied as conditions precedent to the effectiveness of this Agreement will not be delivered to Administrative Agent as of the Closing Date. Therefore, as an accommodation to Borrower (but subject to the other conditions set forth herein), the Administrative Agent and the Lenders have agreed to allow the Borrower to complete such conditions on a post-closing basis. In consideration of such accommodation, Borrower hereby agrees to take, and cause each other Loan Party to take, each of the actions described with respect to the following items (collectively, the “Post-Closing Obligations”), the Borrower shall deliver (or otherwise satisfy) each Post-Closing Obligation to the reasonable satisfaction of the Administrative Agent in the form, manner and time set forth hereunder for such Post-Closing Obligation or within such longer time or different form or manner as the Administrative Agent may reasonably agree.

(a) Within thirty (30) days of the Closing Date, notwithstanding any contrary requirement for timing of such compliance under the terms of Section 7.15, the Borrower shall cause any entity becoming a Subsidiary of any Loan Party pursuant to the consummation of the Origin House Acquisition that would constitute a Material Subsidiary under Section 7.15 to comply with all requirements of Section 7.15 (including execution of any joinders, grants or pledges or provision of any documentation required thereunder).

(b) Within sixty (60) days of the Closing Date, and subject to the terms of Section 9.6, the Borrower shall use commercially reasonable efforts to establish DACA Agreements in form and substance acceptable to the Administrative Agent over operating Accounts existing as of the Closing Date.

(c) Within sixty (60) days of the Closing Date, the Borrower shall deliver to the Administrative Agent an executed OCN Subordination Agreement; provided that if the Administrative Agent does not deliver to the Borrower an initial draft of such OCN Subordination Agreement within five (5) Business Days of the Closing Date, such period shall be extended by the number of days from the Closing Date to the date such initial draft is delivered to the Borrower.

(d) Within sixty (60) days of the Closing Date (or such later date as the Administrative Agent may agree), the Borrower shall provide deliver to the Administrative Agent the insurance endorsements required by Section 7.7.

ARTICLE 8

NEGATIVE COVENANTS

Commencing on the Closing Date, and so long thereafter as any Loan or other Obligation (other than contingent indemnification obligations for which no claim has been asserted) hereunder shall remain unpaid or unsatisfied, no Loan Party shall, nor shall it permit any of its Subsidiaries (each such Loan Party and Subsidiary, a “Restricted Party”) to, directly or indirectly:

Section 8.1 Other Indebtedness. Incur or permit to exist or remain outstanding any Indebtedness; provided, however, that the Loan Parties and their Subsidiaries may incur or permit to exist or remain outstanding the following Indebtedness (“Permitted Indebtedness”):

(a) Indebtedness in favor of the Lenders or the Administrative Agent under the Loan Documents;

(b) Indebtedness listed on Schedule 8.1 (other than the OCN First Loan and the OCN Second Loan) and any Permitted Refinancing Indebtedness in respect of such Indebtedness; provided, however, that with respect to any earn-out payments payable in cash, such earn-out payments shall not be paid if any Event of Default has occurred and is continuing;

(c) Indebtedness of the Restricted Parties in respect of guarantees and/or obligations as an account party in respect of the face amount of letters of credit in respect thereof, in each case securing obligations not constituting Indebtedness for borrowed money (including worker’s compensation claims and security to a landlord for any lease obligation of a Restricted Party and obligations incurred in connection with insurance or similar requirements) provided in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(d) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument drawn against insufficient funds in the ordinary course of business and (to the extent such practice has been established) consistent with past practice; provided, however, that such Indebtedness is extinguished within ten (10) Business Days of incurrence;

(e) Indebtedness incurred if the Total Fixed Charge Coverage Ratio determined on a pro forma basis after giving effect to the incurrence of such Indebtedness (including the pro forma application of the net proceeds therefrom) would not be less than [Redacted – Commercially Sensitive Information], provided that, such Indebtedness shall be subordinated to the Obligations on terms acceptable to the Administrative Agent;

(f) Non-Recourse Debt not to exceed [Redacted – Commercially Sensitive Information] at any time outstanding;

(g) intercompany Indebtedness owing to and held by any Restricted Party, provided that: (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than a Loan Party and (ii) any sale or other transfer of any such Indebtedness to a Person that is not a Loan Party, will be deemed, in each case, to constitute an incurrence of such Indebtedness by the Restricted Party, as the case may be, that was not permitted by this clause (g);

(h) Indebtedness of a Restricted Party that is not a Loan Party owed to another Restricted Party;

(i) the Guarantee by any Restricted Party of Indebtedness of a Restricted Party that was permitted to be incurred by another provision of this Section 8.1;

(j) the incurrence by a Loan Party of Hedging Obligations for the purpose of managing risks in the ordinary course of business and (to the extent such practice has been established) consistent with past practice and not for speculative purposes, provided that the net Mark-to-Market Exposure of all Hedging Obligations shall not exceed [Redacted – Commercially Sensitive Information] in the aggregate at any time;

(k) Indebtedness in respect of workers’ compensation claims, warehouse receipt or similar facilities, casualty or liability insurance, take-or-pay obligations in supply arrangements, self-insurance obligations, bankers’ acceptances, performance bonds, completion bonds, bid bonds, appeal bonds and surety bonds or other similar bonds or obligations, and any Guarantees or letters of credit functioning as or supporting any of the foregoing, in each case provided by such Restricted Party in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(l) Indebtedness constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business and (to the extent such practice has been established) consistent with past practice, provided that such Indebtedness shall not exceed [Redacted – Commercially Sensitive Information] in the aggregate at any time;

(m) Permitted Acquisition Indebtedness and any Permitted Refinancing Indebtedness in respect of such Permitted Acquisition Indebtedness;

(n) Indebtedness under cash management agreements or incurred in respect of netting services, overdraft protections and similar protections, in each case, in connection with cash management or deposit accounts in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(o) Indebtedness representing deferred compensation to directors, officers, members of management or employees (in their capacities as such) of a Restricted Party incurred in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(p) such other Indebtedness consented to by the Administrative Agent and the Required Lenders from time to time in writing; and

(q) Indebtedness outstanding on the Closing Date in an aggregate principal amount not exceeding [Redacted – Commercially Sensitive Information] in connection with the OCN First Loan and the OCN Second Loan (plus any interest that is capitalized or paid in kind thereon), and any Permitted Refinancing Indebtedness in respect thereof; provided that such Indebtedness and any Permitted Refinancing Indebtedness in respect thereof is subject to the OCN Subordination Agreement (or any subordination agreement delivered in replacement thereof), from and after the date the OCN Subordination Agreement is required to be delivered in accordance with Section 7.22 and no payments are made thereunder prior to the delivery of the OCN Subordination Agreement other than as permitted under Section 8.7.

For the avoidance of doubt, for purposes of determining compliance with this Section 8.1, in the event that any proposed Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (a) through (q) above, the Restricted Parties will be permitted to divide and classify such item of Indebtedness at the time of its incurrence in any manner that meets the criteria of one or more of such clauses, does not cause the Restricted Parties to exceed the limits of such clauses and otherwise complies with this Section 8.1. In addition, any Indebtedness originally divided or classified as incurred pursuant to clauses (a) through (q) above may later be re-divided or reclassified by the Restricted Parties in any manner that meets the criteria of one or more of such clauses and will be deemed as having been incurred pursuant to another of such clauses; provided that such re-divided or reclassified Indebtedness could be incurred pursuant to such new clause at the time of such re-division or reclassification, shall not cause the Restricted Parties to exceed the limits of such clause and otherwise complies with this Section 8.1.

Notwithstanding any other provision of this Section 8.1 and for the avoidance of doubt, the maximum amount of Indebtedness that may be incurred pursuant to this Section 8.1 will not be deemed to be exceeded with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies or increases in the value of property securing Indebtedness which occur subsequent to the date that such Indebtedness was incurred as permitted by this Section 8.1.

Section 8.2 Liens. Create or permit to exist any Lien on any of its assets (including Collateral), except for the following (the “Permitted Liens”):

(a) Liens in favor of the Agents or the Lenders under the Loan Documents;

(b) Liens junior to the Liens in favor of the Agents and the Lenders, subject to intercreditor agreements subordinating such Liens to the Agents’ Liens in the Collateral on terms acceptable to the Agents;

(c) Liens listed on Schedule 8.2 (other than any Liens granted in connection with the OCN First Loan or the OCN Second Loan);

(d) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, provided that any reserve or other appropriate provision as shall be required in conformity with IFRS shall have been made therefor;

(e) Liens incurred or deposits made in the ordinary course of business and (to the extent such practice has been established) consistent with past practice in connection with workers’ compensation, unemployment insurance and other social security legislation;

(f) Liens created by or resulting from any legal proceeding with respect to which a Restricted Party is prosecuting an appeal or other proceeding for review and the Restricted Party is maintaining adequate reserves in accordance with IFRS;

(g) Liens in favor of a Restricted Party given by a Person other than a Restricted Party and Liens in favor of a Loan Party given by another Restricted Party;

(h) Liens on property of a Person (i) existing at the time of acquisition thereof or (ii) existing at the time such Person is merged with or into or consolidated with a Restricted Party; provided that such Liens were in existence prior to, and not in contemplation of, such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with the Restricted Party, provided that the Indebtedness secured by such Liens shall not exceed [Redacted – Commercially Sensitive Information] in the aggregate at any time;

(i) Liens securing Non-Recourse Debt permitted by Section 8.1(f);

(j) Liens securing Hedging Obligations permitted by Section 8.1(j);

(k) Liens incurred or deposits made in the ordinary course of business and (to the extent such practice has been established) consistent with past practice in connection with worker’s compensation, unemployment insurance or other social security or similar obligations;

(l) Liens, deposits or pledges to secure public or statutory obligations, or the performance of bids, tenders, contracts (other than contracts for the payment of Indebtedness), stay and customs bonds, leases, statutory obligations, statutory bonds, return of money bonds or other similar obligations arising in the ordinary course of business and (to the extent such practice has been established) consistent with past practice, provided that the Indebtedness arising under performance bonds for bids, tenders and contracts secured by such Liens shall not secure Indebtedness exceeding [Redacted – Commercially Sensitive Information] in the aggregate at any time;

(m) Liens given to a public utility of any municipality or governmental or other public authority when required by such utility or authority in connection with the ownership of assets, provided that such Liens do not materially interfere with the use of such assets in the operation of the business;

(n) reservations, limitations, provisos and conditions, if any, expressed in any original grant from the government of Canada of any real property or any interest therein or in any comparable grant in jurisdictions other than Canada, provided they do not materially interfere with the use of such assets;

(o) survey exceptions, encumbrances, easements or reservations of, or rights of others for, rights of way, zoning or other restrictions as to the use of properties, and defects in title which, in the case of any of the foregoing, were not incurred or created to secure the payment of Indebtedness, and which in the aggregate do not materially adversely affect the value of such properties or materially impair the use for the purposes of which such properties are held by the Restricted Parties;

(p) servicing agreements, development agreements, site plan agreements, and other agreements with Governmental Authorities pertaining to the use or development of assets, provided each is complied with in all material respects and does not materially interfere with the use of such assets in the operation of the business;

(q) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other assets relating to such letters of credit and products and proceeds thereof to the extent the obligations so secured are permitted by Section 8.1;

(r) bankers’ Liens and Liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Borrower or any Subsidiary thereof on deposit with or in possession of such bank;

(s) Liens arising by reason of a judgment, decree or court order, to the extent not otherwise resulting in an Event of Default;

(t) extensions or renewals of any Liens referred to in clauses (a) through (s) above, provided that the renewal or extension is limited to all or part of the assets or property securing the original Lien; and

(u) Liens securing Indebtedness permitted under Section 8.1(q); provided that such Liens are subject to the OCN Subordination Agreement (or any subordination agreement delivered in replacement thereof), from and after the date the OCN Subordination Agreement is required to be delivered in accordance with Section 7.22 and no payments are made thereunder prior to the delivery of the OCN Subordination Agreement other than as permitted under Section 8.7.

For the avoidance of doubt, for purposes of determining compliance with this Section 8.2, (i) a Lien securing an item of Indebtedness need not be permitted solely by reference to one category (or portion thereof) of Permitted Liens described in clauses (a) through (u) above but may be permitted in part under any combination thereof that meets the criteria of one or more of such clauses, does not cause the Restricted Parties to exceed the limits of such clauses and otherwise complies with this Section 8.2, and (ii) in the event that a Lien securing an item of Indebtedness (or any portion thereof) meets the criteria of one or more of the categories (or portions thereof) of Permitted Liens described in clauses (a) through (u) above, the Restricted Parties shall be entitled to divide, classify or reclassify, or later divide, classify, or reclassify, such Lien securing such item of Indebtedness (or any portion thereof) in any manner that complies (based on circumstances existing at the time of such division, classification or reclassification) with the criteria of one or more of such clauses, does not cause the Restricted Parties to exceed the limits of such clauses, and otherwise complies with this Section 8.2.

In addition, with respect to any Lien securing Indebtedness that was permitted to secure such Indebtedness at the time of the incurrence of such Indebtedness, such Lien shall also be permitted to secure any increase in the amount of such Indebtedness in connection with any accrual of interest, the accretion of accreted value, the amortization of original issue discount, the payment of interest in the form of additional Indebtedness with the same terms or in the form of common equity of a Loan Party, the payment of dividends on preferred stock in the form of additional shares of preferred stock of the same class, accretion of original issue discount or liquidation preference, and increases in the amount of Indebtedness outstanding solely as a result of fluctuations in the exchange rate of currencies or increases in the value of property securing Indebtedness described in the definition of “Indebtedness.”

For the avoidance of doubt, in no circumstance may the obligations of any Loan Party or its Subsidiaries under any Material Agreement be secured by any Lien, except as otherwise permitted by this Section 8.2.

Section 8.3 Dispositions or Transfers. Make any Disposition or Transfer, except for the following:

(a) any single transaction or series of related transactions that involves assets or other Equity Interests having a fair market value of less than [Redacted – Commercially Sensitive Information]; provided that the aggregate amount of any such transactions shall not have a fair market value exceeding a maximum of [Redacted – Commercially Sensitive Information] during the term of this Agreement;

(b) sales of real estate owned by any Loan Party or any Subsidiary thereof; provided that, with respect to real estate sale-and-leaseback transactions, at least [Redacted – Commercially Sensitive Information] of the net cash proceeds of such sale-and-leaseback transaction will be (i) reinvested into real estate owned by a Loan Party or a Subsidiary thereof, which real estate shall not be subject to any Lien, (ii) used to make a capital expenditure or otherwise invest in property owned by a Loan Party in furtherance of the Core Business, or (iii) repay Indebtedness outstanding under this Agreement in accordance with its terms, it being understood that the net proceeds of a sale-and-leaseback transaction shall be net of any amount received in expectation that it will later be applied to the property subject to the sale-and-leaseback transaction;

(c) sales of inventory in the ordinary course of business and in compliance with all applicable Laws (including with reference to the enforcement policies of the applicable Governmental Authority) and industry standards;

(d) any Disposition or Transfer of cash or Cash Equivalents in a manner not otherwise prohibited by this Agreement;

(e) Dispositions or Transfers (including without limitation surrenders and waivers) of accounts or notes receivable or other contract rights in connection with the compromise, settlement or collection thereof in the ordinary course of business or in bankruptcy or similar proceedings;

(f) the trade or exchange by a Restricted Party of any asset for any other asset or assets that is used or useable in the Core Business, including any cash or Cash Equivalents necessary in order to achieve an exchange of equivalent value; provided, however, that the fair market value of the asset or assets received by the Restricted Party in such trade or exchange (including any such cash or Cash Equivalents) is at least equal to the fair market value (as determined in good faith by the Borrower) of the asset or assets disposed of by the Restricted Party pursuant to such trade or exchange;

(g) any sale, lease, conveyance or other disposition of (i) inventory, products or services in the ordinary course of business and (to the extent such practice has been established) consistent with past practice, and (ii) any property or equipment that has become damaged, worn out or obsolete or pursuant to a program for the maintenance or upgrading of such property or equipment;

(h) a Restricted Payment or Permitted Investment that is otherwise permitted by this Agreement;

(i) a surrender or waiver of contract rights or a settlement, release or surrender of contract, tort or other claims in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(j) sales, transfers and other dispositions of Investments in joint ventures to the extent required by, or made pursuant to, customary buy/sell arrangements between the joint venture parties set forth in joint venture arrangements and similar binding arrangements and the transfer of assets as part of the consideration for Investment in a joint venture permitted under Section 8.4;

(k) sales or dispositions in respect of which a Restricted Party is required to pay the proceeds thereof to a third party pursuant to the terms of agreements or arrangements in existence as at the Closing Date, as set forth on Schedule 8.3;

(l) the unwinding of any Hedging Obligations;

(m) the abandonment of intellectual property rights in the ordinary course of business and (to the extent such practice has been established) consistent with past practice or in the reasonable business judgment of the Borrower to the extent not necessary in connection with the Core Business;

(n) the issuance of directors’ qualifying shares and shares issued to foreign nationals as required by applicable law;

(o) Liens permitted by Section 8.2;

(p) any Disposition or Transfer by any Loan Party to any other Loan Party to the extent any resulting Investment constitutes a Permitted Investment;

(q) any Disposition or Transfer by any Restricted Party that is not a Loan Party to any other Restricted Party to the extent any resulting Investment constitutes a Permitted Investment;

(r) any sale-and-leaseback transaction of non-real estate property; provided that the proceeds of such transaction are not used to repay Indebtedness other than amounts outstanding under the Loan or other Obligations; and

(s) any Disposition or Transfer of assets or property subject to a Permitted Lien resulting from foreclosure on such assets or property.

provided that the Loan Parties shall not dispose of Material Subsidiaries in a single transaction or a series of related transactions if the portion of Consolidated EBITDA reasonably attributable to such Material Subsidiaries represented more than (i) at any time when the principal amount of the Loans is One Hundred Million and 00/100 Dollars ($100,000,000) or less, [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recent period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b) (or [Redacted – Commercially Sensitive Information] of Consolidated EBITDA, if Consolidated EBITDA for such period is at least [Redacted – Commercially Sensitive Information]) and (ii) at any time when the principal amount of the Loans is more than One Hundred Million and 00/100 Dollars ($100,000,000), [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recent period of four consecutive Fiscal Quarters ended as of the end of the most recent Fiscal Quarter for which audited financial statements have been delivered pursuant to Section 7.1(a) or internal financial statements have been delivered pursuant to Section 7.1(b); provided further, in each case, that if such financial statements have not been delivered pursuant to Section 7.1(a) or Section 7.1(b) at the time of determination then such four consecutive Fiscal Quarter period shall end as of the last day of the most recent Fiscal Quarter for which consolidated financial statements of the Borrower are publicly available on SEDAR or EDGAR.

Section 8.4 Investments. Make any Investments except the following (“Permitted Investments”):

(a) Investments listed on Schedule 8.4;

(b) the Origin House Acquisition;

(d) the Tryke Acquisition;

(e) acquisitions approved with the prior written consent of the Administrative Agent and the Required Lenders; provided that (i) for acquisitions that are consummated for total cash consideration (including cash contributions or other financing provided to the acquired entity to enable it to reach positive cash flow based on then current projections) aggregating up to [Redacted – Commercially Sensitive Information] in the aggregate at any time during the term of this Agreement, such consent shall not be unreasonably withheld, delayed or conditioned, and (ii) for all other such acquisitions, such prior written consent shall be in the sole discretion of the Administrative Agent and the Required Lenders;

(f) Investments made in furtherance of the acquisitions specified Sections 8.4(b) through 8.4(e), including, without limitation, advances, deposits and prepayments for purchases of any assets used in the Core Business;

(g) Investments in the real estate, construction and buildout costs, property, plant and equipment including land, buildings, machinery, production equipment, computers, furniture, fixtures and vehicles belonging to any Restricted Party and in which such Restricted Party, if it is a Loan Party, will provide a security interest, mortgage or fixture filing, as applicable, to the Collateral Agent for the benefit of the Lenders, provided that such Investments shall not exceed [Redacted – Commercially Sensitive Information] in the aggregate for any consecutive twelve (12) month period;

(h) any Investment in Cash Equivalents;

(i) any Investment made as a result of the receipt of non-cash consideration from a Disposition or Transfer that was made pursuant to and in compliance with Section 8.3(a);

(j) Hedging Obligations permitted by Section 8.1(j);

(k) stock, obligations or securities received as a result of the bankruptcy or reorganization of a Person or taken in settlement or other resolutions of claims or disputes or in satisfaction of judgments, and extensions, modifications and renewals thereof in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(l) advances to customers or suppliers in the ordinary course of business and (to the extent such practice has been established) consistent with past practice that are, in conformity with IFRS, recorded as accounts receivable, prepaid expenses or deposits on the statement of financial position of the Restricted Parties and endorsements for collection or deposit arising in the ordinary course of business and (to the extent such practice has been established) consistent with past practice, in an amount not to exceed [Redacted – Commercially Sensitive Information] at any time during which the Obligations are outstanding;

(m) loans or advances to officers and employees of a Restricted Party any of its Subsidiaries made in the ordinary course of business and (to the extent such practice has been established) consistent with past practice, which, in the aggregate outstanding amount, do not at any time exceed [Redacted – Commercially Sensitive Information];

(n) Guarantees issued in accordance with Section 8.1(c);

(o) guarantees supporting the performance of bids, tenders, contracts (other than contracts for the payment of Indebtedness), stay and customs bonds, leases, statutory obligations, statutory bonds, return of money bonds or other similar obligations arising in the ordinary course of business and (to the extent such practice has been established) consistent with past practice;

(p) any Investment by a Loan Party in another Loan Party (including any Investment by a Loan Party in a Restricted Party that is not a Loan Party for the ultimate purpose of making such Investment in a Loan Party, so long as such Investments are part of one substantially contemporaneous transaction) or by a Restricted Party that is not a Loan Party in another Restricted Party; provided that, if the recipient of such Investment is not a Loan Party, the Percentage Ownership of the Restricted Party making such Investment is not greater than the Percentage Ownership of the Restricted Party receiving such Restricted Payment;

(q) Investments in the ordinary course of business and (to the extent such practice has been established) consistent with past practice consisting of the contribution of assets in whatever manner pursuant to joint marketing or other business arrangements with other Persons in an aggregate amount not to exceed [Redacted – Commercially Sensitive Information] at any time;

(r) any Investments received in compromise or resolution of obligations of trade creditors or customers, including accounts receivable, that were incurred in the ordinary course of business of a Restricted Party, including pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of any trade creditor or customer;

(s) other Investments having an aggregate fair market value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this clause (s) since the Closing Date, not to exceed the amount equal to [Redacted – Commercially Sensitive Information] of Consolidated EBITDA for the most recently completed twelve fiscal months for which the internal financial statements are available immediately preceding the date on which such Investment is made;

(t) any Investment in respect of share price guarantees for share consideration given by a Restricted Party with respect to acquisitions prior to the Closing Date in an aggregate amount not to exceed [Redacted – Commercially Sensitive Information] as scheduled and identified on Schedule 8.4;

(u) any Investment in any Person solely in exchange for the issuance of Equity Interests of the Borrower, including the portion of any Investment for which the consideration is solely Equity Interests of the Borrower;

(v) Investments in the ordinary course of business and (to the extent such practice has been established) consistent with past practice consisting of loans or advances from any Loan Party or any Subsidiary thereof to any non-Loan Party Subsidiary in an aggregate amount not to exceed [Redacted – Commercially Sensitive Information] at any time; and

(w) Any Investment that constitutes a Restricted Payment permitted by Section 8.7.

For the avoidance of doubt, for purposes of determining compliance with this Section 8.4, (i) an Investment need not be permitted solely by reference to one category (or portion thereof) of Permitted Investments described in clauses (a) through (w) above but may be permitted in part under any combination thereof that meets the criteria of one or more of such clauses, does not

cause the Restricted Parties to exceed the limits of such clauses and otherwise complies with this Section 8.4, and (ii) in the event that an Investment (or any portion thereof) meets the criteria of one or more of the categories (or portions thereof) of Permitted Investments described in clauses (a) through (w) above, the Restricted Parties shall be entitled to divide, classify or reclassify, or later divide, classify, or reclassify, such Investment (or any portion thereof) in any manner that complies (based on circumstances existing at the time of such division, classification or reclassification) with the criteria of one or more of such clauses, does not cause the Restricted Parties to exceed the limits of such clauses, and otherwise complies with this Section 8.4.

Section 8.5 Fundamental Changes. Without the written consent of the Required Lenders, other than with respect to clause (a) of the definition of “Permitted Changes”: (a) wind-up, liquidate or dissolve, or enter into any consolidation, merger or amalgamation, except for Permitted Changes or (b) change the terms of any Material Agreement in such a way that could reasonably be expected to be materially adverse to the Lenders.

Section 8.6 Transactions with Affiliates. Enter into any material transaction of any kind with any Affiliate of a Loan Party or a Subsidiary, whether or not in the ordinary course of business, other than on fair and reasonable terms substantially as favorable to the Loan Party or such Subsidiary as would be obtainable by the Loan Party or such Subsidiary at the time in a comparable arm’s length transaction with a Person other than an Affiliate, provided that the foregoing restriction shall not apply to:

(a) transactions scheduled and identified on Schedule 8.6;

(b) transactions between or among Loan Parties and any of their Wholly-Owned Subsidiaries or between and among Restricted Parties; provided that if one such Restricted Party is not a Loan Party then the Percentage Ownership of each such Restricted Party must be equal;

(c) any transaction with an Affiliate or Subsidiary that constitutes a Permitted Change or is not prohibited by Section 8.4 or Section 8.7;

(d) employment, indemnification, and compensation arrangements (including arrangements made with respect to benefits, bonuses and equity-based awards) entered into in the ordinary course of business and (to the extent such practice has been established) consistent with past practice with members of the board of directors, officers, employees or consultants of a Loan Party or a Subsidiary of a Loan Party; and

(e) payments by Loan Party and its Subsidiaries pursuant to tax sharing agreements among such Loan Party and its Subsidiaries on customary terms that require each party to make payments when such taxes are due or refunds received of amounts equal to the income tax liabilities and refunds generated by each such party calculated on a separate return basis and payments to the party generating tax benefits and credits of amounts equal to the value of such tax benefits and credits made available to the group by such party.

Section 8.7 Restricted Payments. Make any Restricted Payment except the following:

(a) Restricted Payments listed on Schedule 8.7(A); 78

(b) Restricted Payments listed on Schedule 8.7(B) pertaining to obligations under definitive agreements for a Permitted Acquisition;

(c) Restricted Payments made solely from cash proceeds of an equity offering of any Loan Party or of any equity investment by third parties in any Loan Party (including cash proceeds received from an exercise of warrants or options or from the issue or sale of convertible or exchangeable securities of a Loan Party that have been converted into or exchanged for Equity Interests), in each case only if such cash proceeds were obtained after the Closing Date and to the extent such equity offering or equity investment is otherwise permitted by this Agreement and does not result in a Change of Control;

(d) any Restricted Payment consented to in writing by the Administrative Agent with the consent of the Required Lenders;

(e) Restricted Payments made to Loan Parties (including Restricted Payments paid by a Loan Party to a Restricted Party that is not a Loan Party for the ultimate purpose of distributing such Restricted Payment to a Loan Party, so long as such Restricted Payments are part of one substantially contemporaneous transaction) or by Restricted Parties that are not Loan Parties to any other Restricted Party; provided that, if the recipient of such Restricted Payment is not a Loan Party, the Percentage Ownership of the Restricted Party making such Restricted Payment is not greater than the Percentage Ownership of the Restricted Party receiving such Restricted Payment;

(f) the distribution, as a dividend or otherwise, of shares of capital stock of, or Indebtedness owed to a Loan Party by a Subsidiary of a Loan Party that is not a Loan Party;

(g) Restricted Payments by a Restricted Party to allow the payment of cash in lieu of the issuance of fractional shares upon the exercise of options or warrants or upon the conversion or exchange of Equity Interests of any such Restricted Party; provided that the aggregate amount of all Restricted Payments paid under this clause (g) shall not exceed [Redacted – Commercially Sensitive Information];

(h) Acquisitions by a Restricted Party of Equity Interests of a non-wholly-owned Subsidiary of such Restricted Party in exchange for Equity Interests of the Borrower, consistent with past practice;

(i) Restricted Payments (i) consisting of regularly scheduled payments of interest and fees to Opaskwayak Cree Nation on the OCN First Loan and the OCN Second Loan (x) prior to the delivery of the OCN Subordination Agreement, as required pursuant to the terms thereof on the Closing Date so long as no Event of Default has occurred and is continuing at the time of such payment or would result therefrom, and (y) following delivery of the OCN Subordination Agreement, made in strict accordance with the OCN Subordination Agreement, and (ii) consisting of payments of principal to Opaskwayak Cree Nation on the OCN First Loan and the OCN Second Loan made solely with one or more of (x) the proceeds of a Permitted Refinancing Indebtedness of such OCN First Loan and OCN Second Loan, and (y) the proceeds of a Permitted Equity Refinancing; provided that such Permitted Refinancing Indebtedness is subject to a subordination agreement on terms and conditions satisfactory to the Administrative Agent in its reasonable discretion.

(j) Restricted Payments made in furtherance of the acquisitions specified in Sections 8.4(c) through 8.4(d) as set forth on Schedule 8.7(B) and made in furtherance of the acquisitions consented to pursuant to Section 8.4(e), and as specified in such consent.

For the avoidance of doubt, in determining whether any Restricted Payment is permitted by this Section 8.7, in the event that a proposed Restricted Payment (or portion thereof) meets the criteria of one or more of the categories of Restricted Payments described in clauses (a) through (j) above, the Restricted Parties will be entitled to classify and later reclassify (based on circumstance existing at the time of such reclassification) such Restricted Payment or portions thereof in any manner that meets the criteria of one or more of such clauses, does not cause the Restricted Parties to exceed the limits of such clauses and otherwise complies with this Section 8.7, and such Restricted Payment or portion thereof will be treated as having made pursuant to only such clause or clauses (or portions thereof).

Section 8.8 Margin Regulations. Use the proceeds of the Loan in violation of the Margin Regulations, or for the purpose of purchasing or carrying any “margin stock” as defined in the Margin Regulations or reducing or retiring any Indebtedness which was originally incurred to purchase or carry “margin stock” or for any other purpose which might make this transaction a “purpose credit” within the meaning of the Margin Regulations.

Section 8.9 No Other Negative Pledge. Other than (a) the Loan Documents, (b) applicable Laws, (c) any agreement or instrument creating a Permitted Lien (but only to the extent such agreement or restriction applies to the assets subject to such Permitted Lien), (d) customary provisions in leases and licenses of real or personal property entered into by any Loan Party or any Subsidiary as lessee or licensee in the ordinary course of business, restricting the granting of Liens therein or in property that is the subject thereof, and (e) customary restrictions and conditions contained in any agreement relating to the sale of assets pending such sale, provided that such restrictions and conditions apply only to the assets being sold and such sale is permitted under this Agreement, enter into, incur or permit to exist, directly or indirectly, any agreement, instrument, deed, lease or other arrangement that prohibits, restricts or imposes any condition upon the ability of any Loan Party or any Subsidiary thereof to create, incur or permit to exist any Lien (other than Permitted Liens) upon any of its property or revenues in favor of the Secured Parties to secure the Obligations under the Loan Documents, whether now owned or hereafter acquired.

Section 8.10 No Change in Fiscal Year. Change the Fiscal Year or Fiscal Quarter of any Loan Party without the prior written consent of the Administrative Agent, except, in each case, as required by IFRS.

Section 8.11 Stay, Extension and Usury Laws. At any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of its obligations under this Agreement or the other Loan Documents and the Borrower (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Lenders, but shall suffer and permit the execution of every such power as though no such law has been enacted.

Section 8.12 Agreements to Restrict Dividends. Enter into any arrangement or agreement the operative effect of which is to restrict the payment of dividends or distributions by any Subsidiary of a Loan Party except for agreements or arrangements, which (a) exist on the Closing Date, (b) are binding on a Subsidiary at the time such Subsidiary first becomes a Subsidiary, so long as such agreement or arrangement was not entered into solely in contemplation of such Person becoming a Subsidiary, (c) are customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business, (d) are customary restrictions in leases, subleases, licenses or asset sale agreements otherwise permitted under this Agreement so long as such restrictions may relate to the assets subject thereto, (e) are on cash, other deposits or net worth or similar restrictions imposed by Persons under contracts entered into in the ordinary course of business, or (f) are contained in any employment, compensation or separation agreement or arrangement entered into by a Loan Party or a Subsidiary thereof in the ordinary course of business.

Section 8.13 Litigation. Except as set forth in Schedule 8.13, (a) commence any litigation other than in the ordinary course of business or (b) settle any litigation or dispute for an amount in excess of [Redacted – Commercially Sensitive Information] (net of amounts covered by insurance or indemnity) without the prior written consent of the Administrative Agent not to be unreasonably withheld, conditioned or delayed.

Section 8.14 Use of Proceeds. Use any Loan Proceeds for any purpose other than as set forth in Section 2.4.

Section 8.15 Governing Documents. Amend or modify any of its Governing Documents without the Required Lenders’ written consent in a manner that adds a requirement for additional Restricted Payments, that modifies any provisions concerning Super Voting Shares or that could reasonably be expected to be materially adverse to the Lenders. For the avoidance of doubt, the amendments and modifications to the Loan Parties’ Governing Documents contemplated by the Borrower’s management information circular, dated December 23, 2019, shall be permitted hereunder and shall not be deemed to violate this Section 8.15.

Section 8.16 Principal Place of Business. Change a Loan Party’s principal place of business or chief executive office or reorganize a Loan Party in a different jurisdiction without providing ten (10) days’ prior written notice to the Administrative Agent.

Section 8.17 Sale and Leaseback Transactions. Enter into any sale and leaseback transaction, other than as permitted under Section 8.3.

Section 8.18 Key Service Providers. Appoint, retain or terminate any auditor without the Administrative Agent’s prior written consent not to be unreasonably withheld, conditioned or delayed.

Section 8.19 Conduct of Business. (a) Engage or plan to engage in any business, conduct or agreement other than the Core Business and any other business reasonably related, complementary or ancillary thereto or (b) sell any inventory outside the normal course of business except as otherwise permitted under Section 8.3.

Section 8.20 Reserved.

Section 8.21 Anti-Money Laundering and Anti-Terrorism Laws. (a)(i) conduct any business or engage in any transaction or dealing with or for the benefit of any Blocked Person, including the making or receiving of any contribution of funds, goods or services to, from or for the benefit of any Blocked Person; (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked or subject to blocking pursuant to the Sanctions Programs; (iii) use any of the proceeds of the Advances or the transactions contemplated by this Agreement to finance, promote or otherwise support in any manner any illegal activity, including, without limitation, any violation of the Anti-Money Laundering and Anti-Terrorism Laws or any specified unlawful activity as that term is defined in the Money Laundering Control Act of 1986, 18 U.S.C. §§ 1956 and 1957; or (iv) violate, attempt to violate, or engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, any of the Anti-Money Laundering and Anti-Terrorism Laws in any material respects; or (b) with respect to any Loan Party, any Subsidiary or Affiliate of any Loan Party, any officer, director or principal shareholder or owner of any Loan Party, any of the Loan Parties’ respective agents acting or benefiting in any capacity in connection with the Loans or other transactions hereunder, shall be or shall become a Blocked Person.

Section 8.22 Anti-Bribery and Anti-Corruption Laws. (a) offer, promise, pay, give, or authorize the payment or giving of any money, gift or other thing of value, directly or indirectly, to or for the benefit of any Foreign Official for the purpose of: (i) influencing any act or decision of such Foreign Official in his, her, or its official capacity; or (ii) inducing such Foreign Official to do, or omit to do, an act in violation of the lawful duty of such Foreign Official, or (iii) securing any improper advantage, in order to obtain or retain business for, or with, or to direct business to, any Person; or (b) act or attempt to act in any manner which would subject any of the Loan Parties or their Subsidiaries to liability under any Anti-Corruption Law.

Section 8.23 Investment Company Act of 1940. Engage in any business, enter into any transaction, use any securities or take any other action or permit any of its Subsidiaries to do any of the foregoing, that would cause it or any of its Subsidiaries to be required to register under the registration requirements of the Investment Company Act of 1940, as amended, by virtue of being an “investment company” or a company “controlled” by an “investment company” not entitled to an exemption within the meaning of such Act.

ARTICLE 9

RESERVE ACCOUNT AND DEPOSIT ACCOUNTS

Section 9.1 Establishment of and Deposit into Reserve Account. The Loan Parties shall at their sole expense establish and maintain until all of the Obligations have been paid in full (other than contingent indemnification obligations for which no claim has been asserted) the Reserve Account as a special, segregated, irrevocable account in the name of a Loan Party, for and on behalf of the Collateral Agent for the benefit of the Lenders, at the Reserve Account Bank, named the “Reserve Account”, which shall be under the dominion and control of the Collateral Agent pursuant to an executed DACA Agreement, subject to the terms and conditions of the Security Documents and to the terms hereof. Subject to Section 9.5, the Loan Parties shall maintain a balance of not less than the Reserve Amount in the Reserve Account from the Closing Date and at all times thereafter, except with the written consent of the Administrative Agent and the Required Lenders.

Section 9.2 Reserve Account. Except with the written consent of the Administrative Agent and the Required Lenders, at all times before the consummation of the Hope Heal Health Acquisition, (i) maintain the Reserve Account at the Reserve Account Bank, (ii) not establish any other depositary account for purposes of holding the Reserve Amount other than the Reserve Account, (iii) enter into and maintain a DACA Agreement with respect to the Reserve Account by and among the holder of the Reserve Account, the Reserve Account Bank and the Collateral Agent in form and substance agreeable to the Collateral Agent, and (iv) deposit and maintain the full Reserve Amount in the Reserve Account; provided that in the event the DACA Agreement with respect to the Reserve Account is terminated by the Reserve Account Bank (for any reason other than a default or breach of such DACA Agreement by the holder of the Reserve Account), the Borrower shall use its commercially reasonable efforts, prior the effective date of such termination, to (A) establish a replacement Reserve Account with a replacement Reserve Account Bank and (B) enter into replacement DACA Agreement with respect to such replacement Reserve Account with such replacement Reserve Account Bank and the Collateral Agent, and the failure of such DACA Agreement to be in effect during the period in which the Borrower is using its commercially reasonable efforts as aforesaid, and thereafter if such commercially reasonable efforts are not successful, shall not be a breach of this Agreement, provided further that in the event that a replacement Reserve Account with a replacement Reserve Account Bank is not established prior to the effective date of such termination, the Administrative Agent or the Collateral Agent may, and are authorized by the Borrower to, direct the existing Reserve Account Bank to transfer all funds in the Reserve Account to a deposit account designated by the Administrative Agent or the Collateral Agent and thereafter such Account shall be treated as the Reserve Account for the purpose of this Agreement, and the funds therein shall be dealt with in accordance with this Agreement.

Section 9.3 Acknowledgement of Security Interests. Pursuant to the Security Documents, in order to secure the payment and performance of the Obligations, the Loan Parties have pledged to and created in favor of the Collateral Agent a security interest in and to the Reserve Account, and all cash, Cash Equivalents, instruments, investments, securities entitlements and other securities at any time on deposit in the Reserve Account, and all proceeds of any of the foregoing. The Reserve Account shall constitute collateral security for the payment and performance by the Borrower of the Obligations hereunder and shall at all times (subject to the proviso in Section 9.2) be subject to the control of the Collateral Agent and shall be held in the custody of the depository under the DACA Agreement(s) in trust for the purposes of, and on the terms set forth in, such DACA Agreement(s). Such DACA Agreement(s) provided with respect to the Reserve Account shall be in form and substance to the sole satisfaction of the Collateral Agent. Upon the reasonable request of the Collateral Agent, the Loan Parties shall immediately move the Reserve Account and all funds contained therein to a Depository Institution chosen by the Collateral Agent.

Section 9.4 The Loan Parties Rights. The Loan Parties shall not have any rights or powers with respect to any amount in the Reserve Account or any part thereof except (a) as provided for in the DACA Agreement(s), (b) the right to have such amounts applied in accordance with the provisions hereof and (c) subject to the written consent of the Administrative Agent and the Required Lenders, which shall not be unreasonably withheld, conditioned or delayed, to remove any amount in the Reserve Account in excess of the Reserve Amount. No Loan Party may make any disbursements from the Reserve Account except in accordance with this Agreement.

Section 9.5 Reserve Amount. The Reserve Amount shall be held in the Reserve Account at all times from the Closing Date until the earliest of (i) the consummation of the Hope Heal Health Acquisition, (ii) such other time as consented to by the Administrative Agent and the Required Lenders in writing, provided that, in the case of request by the Borrower for use of the Reserve Amount for acquisitions described in Sections 8.4(d) through 8.4(f), such consent shall not be unreasonably withheld, delayed or conditioned, and (iii) irrevocable payment in full of all Obligations hereunder, to be confirmed by the Administrative Agent in writing (the earliest of such dates, the “Reserve Amount Release Date”). Upon the Reserve Amount Release Date, the Agents shall take all necessary actions, if any, to permit the Loan Parties to exercise control over the Reserve Account, including to withdraw the Reserve Amount therefrom, provided that, in the event of a Reserve Amount Release Date under clause (i) of the preceding sentence, the Administrative Agent and the Lender have been provided assurances reasonably acceptable to them that the Hope Heal Health Acquisition has occurred or will occur upon the disbursement of Reserve Amount to the Borrower.

Section 9.6 Operating Accounts. After the Closing Date, the Loan Parties and their Subsidiaries may from time to time in their reasonable discretion open and maintain operating Accounts for purposes of operating the Core Business of the Loan Parties or their respective Subsidiaries with a Depository Institution as the Loan Parties and their Subsidiaries may from time to time reasonably determine. Each applicable Loan Party shall use commercially reasonable efforts to enter into a DACA Agreement with respect to each such operating Account of each applicable Loan Party by and among such depository institution, the applicable Loan Party and the Collateral Agent (A) if such Account contains funds exceeding [Redacted – Commercially Sensitive Information] at any time or (B) if funds in the amount of [Redacted – Commercially Sensitive Information] are deposited into such Account during any month.

ARTICLE 10

EVENTS OF DEFAULT AND REMEDIES

Section 10.1 Event of Default. An Event of Default shall exist upon the occurrence of any of the following specified events (each, an “Event of Default”):

(a) Non-Payment. (i) The Borrower shall fail to pay (A) any Principal Amount of any Loan when the same becomes due or, (B) any interest, fees or other amounts payable under the terms of this Agreement or any of the other Loan Documents within three (3) days of the date when the same becomes due, or (ii) any Loan Party fails to pay when due any amount payable under the Subsidiary Guaranty.

(b) Specific Covenants. (i) the Borrower fails to perform or observe, or fails to cause any Subsidiary to perform or observe, any covenant or agreement contained in any of Section 7.4, Section 7.6(a), Section 7.15 (to the extent a specific time frame for completion is set forth in Section 7.15), Section 7.16, Article 8 and Article 9.

(c) Other Defaults. Any Loan Party or any Subsidiary thereof fails to perform or observe (i) any other covenant or agreement contained in Section 7.6(b) and Section 7.7(a) and such failure continues for ten (10) days after the earlier of the date a Responsible Officer of the Borrower has actual knowledge of such failure or written notice thereof to the Borrower from the Administrative Agent or any Lender, or (ii) any other covenants or agreement (not specified in Section 10.1(a)-(b) or the preceding clause (i) of this Section 10.1(c)) contained in any Loan Document on its part to be performed or observed and such failure continues for thirty (30) days after the earlier of the date a Responsible Officer of the Borrower has actual knowledge of such failure or written notice thereof to the Borrower from the Administrative Agent or any Lender.

(d) Representations and Warranties. Any representation, warranty, certification or written statement of fact made or deemed made by or on behalf of any Loan Party in any other Loan Document, or in any document delivered in connection herewith or therewith shall be incorrect in any material respect when made or deemed made.

(e) Insolvency Proceedings, Etc. (i) Any Loan Party, institutes or consents to the institution of any proceeding, or makes any filing, under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, interim receiver, trustee, monitor, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or (ii) a proceeding shall be commenced or a petition filed, without the application or consent of any Loan Party, as applicable, seeking or requesting the appointment of any receiver, interim receiver, trustee, monitor, custodian, conservator, liquidator, rehabilitator or similar officer is appointed and the appointment continues undischarged, undismissed or unstayed for sixty (60) calendar days or an order or decree approving or ordering any of the foregoing shall be entered; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property is instituted without the consent of such Person and continues undismissed or unstayed for sixty (60) calendar days, or an order for relief is entered in any such proceeding.

(f) Inability to Pay Debts; Attachment. (i) Any Loan Party becomes unable or admits in writing its inability or fails generally to pay its debts as they become due in the ordinary course of business, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within sixty (60) days after its issuance or levy.

(g) Cross Default. Failure by a Loan Party to pay any Indebtedness (other than Indebtedness owing to another Loan Party) within any applicable grace period after final maturity or the acceleration of any such Indebtedness by holders thereof because of a default, in each case if the total amount of such Indebtedness unpaid or accelerated exceeds [Redacted – Commercially Sensitive Information].

(h) Judgments. There is entered against any Loan Party (i) one or more final judgments for the payment of money in the aggregate amount exceeding [Redacted – Commercially Sensitive Information] (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any one or more non-monetary judgments the financial impact of which exceeds the aggregate amount of [Redacted – Commercially Sensitive Information] and, in either case under clause (i) or (ii) of this provision, such judgment is not, within sixty (60) days after the entry thereof, satisfied, vacated, discharged or execution thereof stayed or bonded pending appeal, or such final judgment is not satisfied, vacated, discharged prior to the expiration of any such stay.

(i) Invalidity of Loan Documents. Any material provision of any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Loan Party contests in any manner the validity or enforceability of any provision of any Loan Document; or any Governmental Authority with jurisdiction commences a proceeding seeking to invalidate the Loan Documents; or any Loan Party denies that it has any or further liability or obligation under any Loan Document or purports to revoke, terminate or rescind any provision of any Loan Document (other than in accordance with the Loan Documents).

(j) Security Documents. Except as resulting from the actions or omissions of the Administrative Agent or the Lenders, any Lien intended to be created by any Security Document shall at any time be invalidated, subordinated or otherwise cease to be in full force and effect, or any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by any Loan Party in writing not to be, a valid, first priority (except as expressly otherwise provided in this Agreement or such Security Document) perfected Lien in the Collateral covered thereby (except for immaterial items of Collateral).

(k) Criminal Act. Any Loan Party or any officer of any Loan Party or Subsidiary thereof authorized to act on behalf of it and in such capacity is criminally indicted or convicted (a) under any Law constituting embezzlement, theft, fraud or intentional misconduct, the adverse effect to any Loan Party or Loan Parties in the aggregate is in excess of [Redacted – Commercially Sensitive Information] or (b) under any Law, that may reasonably be expected to lead to a forfeiture of any property of such Loan Party having a fair market value in excess of [Redacted – Commercially Sensitive Information].

(l) Subsidiary Guaranty. Any Loan Party shall repudiate or purport to revoke the Subsidiary Guaranty, provided that no Event of Default under this clause (l) shall occur with respect to any Loan Party that has been released from the Subsidiary Guaranty in accordance with this Agreement.

(m) Blocked Person. Any Loan Party or any Subsidiary thereof shall become a Blocked Person.

(n) Change of Control. There occurs any Change of Control.

(o) Fraud. Fraud or intentional misrepresentation by any Loan Party or any Subsidiary thereof in connection with the Loan.

Section 10.2 Remedies Upon Event of Default. In the case of an Event of Default, at any time thereafter during the continuance of such Event of Default, the Administrative Agent may, and at the request of the Required Lenders, shall, by written notice to the Borrower, take any one or more of the following actions, at the same or different times: (i) terminate this Agreement and any Commitments made hereunder, (ii) exercise any all remedies available to the Administrative Agent and the Lenders under the Security Documents or otherwise available at law or in equity, including the Uniform Commercial Code, by suit in equity by action at law, judicial or no judicial foreclosure, or otherwise, (iii) set off any amounts held in the Reserve Account or any other Account under the Administrative Agent’s control, (iv) instruct any Loan Party to carry on and conduct such Loan Party’s business in substantially the same manner in the Core Business and to do all things necessary to maintain any Cannabis Licenses in continued effect and (v) declare any Note and any Loan then outstanding to be due and payable in whole (or in part, in which case any portion of the Principal Amount not so declared to be due and payable may thereafter be

declared to be due and payable), and thereupon the Principal Amount so declared to be due and payable, together with accrued interest thereon and all charges, fees, expenses, indemnities and other Obligations owing or payable hereunder or under any other Loan Document, shall become due and payable immediately, without presentment, demand, protest, notice of intent to accelerate, notice of acceleration or other notice of any kind, all of which are hereby waived by the Borrower. The Loan Parties must cooperate with the Administrative Agent and continue to operate the business as required by the Administrative Agent.

Section 10.3 Application of Funds. After the occurrence and during the continuance of an Event of Default, any amounts received on account of the Obligations shall be applied by the Administrative Agent in accordance with Section 3.10(b)-(c).

Section 10.4 Protective Advances/Cure Rights. If the Borrower fails to do so, at any time prior to payment in full of the Obligations under the Loan, the Administrative Agent, on behalf of the Lenders, without waiving or releasing any of the Obligations, upon prior written notice to the Borrower, may (but shall not be required to) make any payments as the Administrative Agent may deem necessary to protect and/or maintain the Collateral. In addition, if the Borrower fails to do so, if at any time a breach, Default or Event of Default, occurs or any Loan Party otherwise fails to perform or comply with any of the terms, covenants, and conditions to be performed and/or complied with, any other Indebtedness, then the Administrative Agent, on behalf of the Lenders, without waiving or releasing any of the Obligations, may (but shall not be required to):

(a) make advances to the Loan Parties and/or directly make any payments as the Administrative Agent may deem necessary to cure or remedy such event or failure, including, without limitation, to cure or prevent a Default or Event of Default or an exercise of any rights or remedies or options against the Loan Parties or Lenders; and/or

(b) perform any other acts on their part to be performed for such purposes.

The making by the Administrative Agent of any such advances, payments or performances will not, however, be deemed to cure any Default or Event of Default under the Loan Documents arising from the predicated Events of Default. All sums so advanced or paid and all costs and expenses incurred by the Administrative Agent in connection with the performance of any such act shall be subject to the same terms and shall be deemed to be part of the Loan (including that such advances shall bear interest at the Applicable Rate or, if an Event of Default shall have occurred and be continuing and the Administrative Agent has so elected, the Default Rate, and be due on the Applicable Maturity Date, will be added to the Principal Amounts of the Loan and the Note and if repaid prior to the Applicable Maturity Date will be secured by the Security Documents). All such payments and advances so actually made shall conclusively be deemed to be protective advances which are required and mandatory to preserve and protect the Collateral Agent’s security for the performance of the Obligations under the Loan Documents, and shall be secured by the Security Documents to the same extent and with the same priority as the other principal, interest and other amounts payable under the Loan Documents.

ARTICLE 11

ADMINISTRATIVE AGENT AND COLLATERAL AGENT

Section 11.1 Appointment and Authority.

(a) Each of the Lenders hereby irrevocably appoints [Redacted – Confidential] to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorize the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.

(b) Each of the Lenders hereby irrevocably appoints [Redacted – Confidential] to act on its behalf as the Collateral Agent hereunder and under the other Loan Documents and authorize the Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Collateral Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.

(c) The provisions of this Article (except Section 11.9) are solely for the benefit of the Agents and the Lenders, and no Loan Party nor any of their Related Parties shall have rights as a third party beneficiary of any of such provisions.

Section 11.2 Rights as a Lender. The Person serving as an Agent hereunder, to the extent a Lender, shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent, and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as an Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with any Loan Party or any Subsidiary or other Affiliate thereof as if such Person were not an Agent hereunder and without any duty to account therefor to the Lenders.

Section 11.3 Exculpatory Provisions. No Agent shall have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, each Agent:

(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that such Agent is required to exercise as directed in writing by the Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that such Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose such Agent to liability or that is contrary to any Loan Document or applicable Law; and

(c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as such Agent or any of its Affiliates in any capacity. Such Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Lenders (or such other number or percentage of the Lenders as shall be necessary, or such Agent shall

believe in good faith to be necessary, under the circumstances as provided in Section 12.1 and Section 10.2) or (ii) in the absence of its own gross negligence or willful misconduct. Such Agent shall not be deemed to have knowledge of any Default unless and until written notice describing such Default is given to any Agent by the Borrower or any Lender. Such Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article 5 or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to Agent.

Section 11.4 Reliance by Agent. Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any writing sent through electronic mail) sent by a Loan Party believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. In determining compliance with any condition hereunder to the making of a Loan, that by its terms must be fulfilled to the satisfaction of a Lender, each Agent may presume that such condition is satisfactory to such Lender unless such Agent shall have received written notice to the contrary from such Lender prior to the making of such Loan. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

Section 11.5 Delegation of Duties. Each Agent may perform any and all of their duties and exercise their rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by such Agent. Each Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of any Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as such an Agent.

Section 11.6 Resignation or Removal of the Administrative Agent or Collateral Agent.

(a) The Administrative Agent may at any time give written notice of its resignation to the Lenders and the Borrower to be effective not earlier than thirty (30) days from the date of such notice.

(b) The Collateral Agent may at any time give written notice of its resignation to the Lenders and the Borrower to be effective not earlier than thirty (30) days from the date of such notice.

(c) The Required Lenders may remove either Agent from their capacity as such Agent under this Article 11, upon 10 Business Days’ written notice to such Agent. Upon receipt of such notice, such Agent shall cease all further activities and duties in the capacity in for which it was removed and provide such assistance as the Required Lenders may reasonably request to effect an orderly transition to a new Agent.

(d) Upon receipt of any written notice of resignation by either Agent, or upon the removal of such Agent by the Required Lenders, or if there exists a vacancy in any such capacity for whatever reason, the Required Lenders shall have the right to appoint with the consent of the Borrower which shall not be unreasonably withheld, delayed or conditioned (except that such consent shall not be required at any time that an Event of Default is continuing), an Eligible Assignee as a successor. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring or removed Agent gives written notice of its resignation, then such retiring or removed Agent may, on behalf of the Secured Parties, appoint a successor Agent meeting the qualifications set forth above; provided that if the retiring or removed Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation or removal shall nonetheless become effective in accordance with such written notice, and (1) the retiring or removed Agent, as applicable, shall be discharged from its duties and obligations hereunder and under the other Loan Documents, and (2) all payments, communications and determinations provided to be made by, to or through such retiring or removed Agent shall instead be made by or to each Lender, until such time as the Required Lenders appoint a successor Agent as provided for above in this Section 11.6. Upon the acceptance of a successor’s appointment as an Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) or removed Agent, and the retiring or removed Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section 11.6). After the retiring or removed Agent’s resignation or removal hereunder and under the other Loan Documents, the provisions of this Article and Section 12.4 shall continue in effect for the benefit of such retiring or removed Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed Agent was acting as the Administrative Agent or the Collateral Agent, as applicable.

Section 11.7 Non-Reliance on Agent and Other Lenders. Each Lender acknowledges that it has, independently and without reliance upon any Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.

Section 11.8 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to any Subsidiary, Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loan, and all other obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Section 3.6 and Section 12.4) allowed in such judicial proceeding; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders to pay to the Administrative Agent any amount due for the compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Section 3.6 and Section 12.4. Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

Section 11.9 Collateral and Subsidiary Guarantor Releases. The Lenders hereby empower and authorize the Administrative Agent to execute and deliver to the Borrower on the Lenders’ behalf any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of Collateral which shall be permitted by the terms hereof or of any other Loan Document (including, without limitation, in connection with any asset sale permitted hereunder or in connection with any release of a Subsidiary Guarantor made in accordance with the Loan Documents) or which shall otherwise have been approved by the Required Lenders (or, if required by the terms of Section 12.1, all of the Lenders) in writing. In addition, the Lenders authorize the Administrative Agent to release any Subsidiary Guarantor from its obligations under the Loan Documents if such Person is no longer required to be a Subsidiary Guarantor hereunder or if such Person is sold, transferred or assigned in accordance with and to the extent permitted by the terms of this Agreement. Upon the request of the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s authority to release or subordinate its interest in particular types or items of Collateral, or to release any Subsidiary Guarantor from its obligations under the Loan Documents pursuant to the foregoing. In each case as specified hereto, the Administrative Agent shall (and each Lender hereby authorizes the Administrative Agent to), at the Borrower’s expense, execute and deliver to the applicable Loan Party such documents as such Loan Party may reasonably request to evidence the release of such item of Collateral from the security interest granted under the Loan Documents or to subordinate its interest therein, or to release a Subsidiary Guarantor from its obligations under the Guaranty, in each case in accordance with the terms of the Loan Documents.

ARTICLE 12

MISCELLANEOUS

Section 12.1 Amendments, Actions Under this Agreement, Etc.

(a) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and either Agent with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Maximum Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender directly affected thereby (except the waiver of the obligation to pay Default Rate of interest (both prior to its accrual and retroactively) shall not constitute a reduction in the rate of interest or fees for purposes of this clause (ii)), (iii) postpone the scheduled date of payment of the principal amount of any Loan (other than any reduction of the amount of, or any extension of the payment date for, the mandatory prepayments required under Section 3.3 in each case which shall only require the approval of the Required Lenders), or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Maximum Commitment, without the written consent of each Lender directly affected thereby, (iv) change any of the provisions of Section 3.5, Section 3.9, Section 3.10 and this Section 12.1, the definition of “Required Lenders,” or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender, (v) except as permitted by the terms of a Loan Document, release any Loan Party from its obligations under the Loan Documents without the written consent of each Lender, (vi) increase the Loan Amount or the aggregate Commitments (A) up to and including Two Hundred Million and 00/100 Dollars ($200,000,000), other than in accordance with Section 2.3, or (B) in excess of Two Hundred Million and 00/100 Dollars ($200,000,000), without the prior written consent of each Lender or (vii) except as provided in clause (b) of this Section 12.1 or in any Security Document, release all or substantially all of the Collateral, without the written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the either Agent without the prior written consent of such Agent. Notwithstanding the foregoing, no consent with respect to any amendment, waiver or other modification of this Agreement shall be required of any Defaulting Lender, except with respect to any amendment, waiver or other modification referred to in clause (i), (ii) or (iii) of the first proviso of this paragraph and then only in the event such Defaulting Lender shall be directly affected by such amendment, waiver or other modification;

(b) The Lenders hereby irrevocably authorize the Collateral Agent, at its option, to release any Liens granted to the Collateral Agent by the Loan Parties on any Collateral (i) upon the occurrence of the payment in full of all Obligations, (ii) constituting property being sold or disposed of if the Borrower certifies to the Administrative Agent that the sale or disposition is made in compliance with the terms of this Agreement (and the Administrative Agent may rely conclusively on any such certificate, without further inquiry) or (iii) as required to effect any sale or other disposition of such Collateral in connection with any exercise of remedies of the Administrative Agent and the Lenders pursuant to Article 10. Any such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of the Loan Parties in respect of) all interests retained by the Loan Parties, including the proceeds of any sale, all of which shall continue to constitute part of the Collateral;

(c) If, in connection with any proposed amendment, waiver or consent requiring the consent of “each Lender” or “each Lender directly affected thereby,” the consent of the Required Lenders is obtained, but the consent of other necessary Lenders is not obtained (any such Lender whose consent is necessary but not obtained being referred to herein as a “Non-Consenting Lender”), then the Borrower or the Administrative Agent may elect to replace a Non-Consenting Lender as a Lender party to this Agreement, provided that, concurrently with such replacement, (i) another bank or other Person which is reasonably satisfactory to the Borrower and the Administrative Agent shall agree, as of such date, to purchase for cash the Loan and other Obligations due to the Non-Consenting Lender pursuant to an Assignment and Assumption and to become a Lender for all purposes under this Agreement and to assume all obligations of the Non-Consenting Lender to be terminated as of such date, and (ii) the Borrower shall pay to such Non-Consenting Lender in same day funds on the day of such replacement all interest, fees and other amounts then accrued but unpaid to such Non-Consenting Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Non-Consenting Lender under Section 4.1 and Section 4.2; or

(d) Notwithstanding anything to the contrary herein, the Administrative Agent may, with the consent of the Borrower only, amend, modify or supplement this Agreement or any of the other Loan Documents to cure any ambiguity, omission, mistake, defect or inconsistency.

(e) Notwithstanding anything to the contrary herein, the Borrower may amend the schedules hereto (except for Schedule 1.2) within 30 days after the Closing Date solely to the extent necessary to reflect the Origin House Acquisition; provided that any material amendment to the schedules is subject to the consent of the Administrative Agent (such consent not to be unreasonably withheld, conditioned or delayed).

Section 12.2 Notices; Effectiveness; Electronic Communication.

(a) Notices Generally. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be either (i) in writing and delivered by nationally recognized courier service or mailed by certified or registered mail or (ii) by electronic mail, (A) as to the Borrower, each Lender, each Agent, at its address specified on its signature page hereto (or, in the case of a Lender that becomes party to this Agreement by assignment, at its address specified in the Assignment and Assumption pursuant to which it became a Lender hereunder) and (B) any other Person, at such other Person’s address as shall be designated by such Person in a written notice to the Administrative Agent. All notices, elections, requests and demands under this Agreement shall be effective and deemed received upon the earliest of (i) the actual receipt of the same by personal delivery, (ii) one (1) Business Day after being deposited with a nationally recognized overnight courier service, or (iii) three (3) Business Days after being deposited in the United States mail. Any notice so given by electronic mail shall be deemed to have been given as of the date on which the sender of such communication shall confirm receipt thereof by the appropriate parties. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given as herein required shall be deemed to be receipt of the notice, election, request, or demand sent.

(b) Change of Address, Etc. The Borrower or any Agent may change its address, electronic mail address or telephone number for notices and other communications hereunder by written notice to the other parties hereto. Each other Lender may change its address, electronic mail address or telephone number for notices and other communications hereunder by written notice to the Borrower and each Agent.

(c) Reliance by Agents and Lenders. The Agents and the Lenders shall be entitled to rely and act upon any notices purportedly given by or on behalf of the Borrower even if such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein. The Borrower shall indemnify each Agent and each Lender, and the Related Parties of each of them, from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower.

Section 12.3 No Waiver; Cumulative Remedies. No failure by any Lender or any Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges of the Lenders and the Agents herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

Section 12.4 Expenses; Indemnity; Damage Waiver.

(a) Costs and Expenses.

(A) The Borrower shall pay on the Closing Date all reasonable and invoiced (and showing in reasonable detail) out-of-pocket expenses incurred by the Agents (including the reasonable and invoiced (and showing in reasonable detail) fees, charges and disbursements of counsel for the Agents), that have been invoiced to the Borrower at least one (1) Business Day prior to the Closing Date, in connection with the preparation, negotiation, due diligence, execution, and delivery of this Agreement and the other Loan Documents.

(B) The Borrower shall pay (X) all reasonable and invoiced (and showing in reasonable detail) out-of-pocket expenses incurred by either Agent (including the reasonable and invoiced (and showing in reasonable detail) fees, charges and disbursements of counsel for such Agent), in connection with the administration of this Agreement and the other Loan Documents (including, without limitation, any such fees, charges and disbursements of counsel arising from either Agent’s actions under Section 7.12), (Y) all reasonable and invoiced (and showing in reasonable detail) out-of-pocket expenses incurred by either Agent (including the reasonable and invoiced (and showing in reasonable detail) fees, charges and disbursements of counsel for such Agent), in connection with any amendments, modifications or waivers of the provisions hereof or

thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), and (Z) all documented out-of-pocket expenses incurred by any Agent or any Lender (including the reasonable documented fees, charges and disbursements of counsel for the Administrative Agent and each Lender), in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section 12.4, and (B) in connection with the Loan hereunder, including all such reasonable and invoiced (and showing in reasonable detail) out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of the Loan.

(b) Indemnification by Borrower. The Borrower shall indemnify and defend each Agent (and any sub-agent thereof), each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the reasonable and documented fees, charges and disbursements of any counsel for any Indemnitee), incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrower or any other Loan Party (collectively, “Claims”) arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties to the Loan Documents of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any Loan or the use or proposed use of the proceeds therefrom or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party, and regardless of whether any Indemnitee is a party thereto, in all cases, whether or not caused by or arising, in whole or in part, out of the comparative or contributory negligence of any Indemnitee or its agents; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of any Indemnitee or its agents. This Section 12.4 shall not apply with respect to Taxes other than any Taxes that represent losses, claims and damages arising from any non-Tax claim.

(c) Reimbursement by Lenders. To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under Section 12.4(a)-(b) to be paid by it to any Agent (or any sub-agent thereof), or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), or such Related Party, as the case may be, such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against such Agent (or any such sub-agent) in its capacity as such, or against any Related Party of any of the foregoing acting for such Agent (or any such sub-agent) in connection with such capacity. The obligations of the Lenders hereunder to make payments pursuant to this Section 12.4(c) are several and not joint. The failure of any Lender to make any payment under this Section 12.4(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to make its payment under this Section 12.4(c).

(d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable Law, the Borrower, on behalf of itself and each other Loan Party and its Related Parties, shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof. No Indemnitee referred to in Section 12.4(b) shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby, unless such distribution is determined by a court of competent jurisdiction to be gross negligence or willful misconduct.

(e) Payments. All amounts due under this Section 12.4 shall be payable not later than five (5) Business Days after demand therefor.

(f) Survival. The agreements in this Section 12.4 shall survive the resignation or replacement of any Agent, the replacement of any Lender, the termination of the Loan and the repayment, satisfaction or discharge of all the other obligations.

Section 12.5 Payments Set Aside. To the extent that any payment by or on behalf of the Borrower is made to any Agent or any Lender, or any Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by such Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by either Agent. The obligations of the Lenders under clause (b) of the preceding sentence shall survive the payment in full of the obligations and the termination of this Agreement.

Section 12.6 Successors And Assigns.

(a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender, and any purported assignment or transfer by the Borrower in violation of the foregoing shall be null and void. Any Lender may at any time assign or otherwise transfer any of its rights or obligations hereunder without the consent of Borrower (i) to an Eligible Assignee in accordance with the provisions of Section 12.6(b), (ii) by way of participation to an Eligible Assignee in accordance with the provisions of Section 12.6(d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 12.6(f) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the

parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided for in Section 12.6(d) and, to the extent expressly contemplated hereby, the Related Parties of the Administrative Agent and each Lender) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b) Assignments by Lenders. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of the Loan at the time owing to it); provided that:

(A) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loan and commitments assigned;

(B) each partial assignment shall be in a minimum amount of Ten Million and 00/100 Dollars ($10,000,000) of the assigning Lender’s rights and obligations under this Agreement with respect to the Loan and commitments assigned or, if less, the total amount of such Lender’s rights and obligations under this Agreement;

(C) any Eligible Assignee that is not an existing Lender shall complete an Administrative Questionnaire in form and substance satisfactory to the Administrative Agent;

(D) any Eligible Assignee that is not a financial institution shall be an Approved Fund or a Fund that is acceptable to the Administrative Agent;

(E) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, and the Administrative Agent shall promptly provide a copy of the same to the Borrower; and

(F) the Administrative Agent or one or more of its Affiliates shall serve as administrative agent hereunder.

Subject to acceptance and recording thereof by the Administrative Agent pursuant to Section 12.6(c), from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Section 4.1 and Section 12.4 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 12.6(b) shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 12.6(d).

(c) Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders and Principal Amounts (and stated interest) of the Loan owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by Borrower at any reasonable time and from time to time upon reasonable prior written notice. In addition, at any time that a request for consent for a material or substantive change to the Loan Documents is pending, any Lender wishing to consult with other Lenders in connection therewith may request and receive from the Administrative Agent a copy of the Register.

(d) Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Eligible Participant (each, a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of the Loan owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in Section 12.1(a)(i)-(iv) that affects such Participant. Subject to Section 12.6(e), the Borrower agrees that each Participant shall be entitled to the benefits of Section 4.1 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 12.6(b). To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 12.7 as though it were a Lender.

(e) Limitations upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Section 4.1 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrower’s prior written consent.

(f) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to an Eligible Assignee to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledge or assignee for such Lender as a party hereto.

(g) Electronic Execution of Assignments. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act or any other similar state laws based on the Uniform Electronic Transactions Act.

Section 12.7 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent (but without the prior notice to or consent of the Borrower, any such notice and consent being expressly waived by the Borrower to the extent permitted by applicable Law), to the fullest extent permitted by applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender to or for the credit or the account of the Borrower or any other Loan Party against any and all of the obligations of Borrower or such Loan Party now or hereafter existing under this Agreement or any other Loan Document to such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations of Borrower or such Loan Party may be contingent or unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Lender under this Section 12.7 are in addition to other rights and remedies (including other rights of setoff) that such Lender may have. Each Lender agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.

Section 12.8 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the “Maximum Rate”). If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the Principal Amounts of the Loan or, if it exceeds such unpaid Principal Amounts, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.

Section 12.9 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. Delivery of any executed counterpart of this Agreement by facsimile or transmitted electronically in either a Tagged Image Format File (“TIFF”) or Portable Document Format (“PDF”) shall be equally effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart by facsimile TIFF, or PDF shall also deliver a manually executed counterpart of this Agreement, but failure to do so shall not affect the validity, enforceability or binding effect of this Agreement.

Section 12.10 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by each Agent and each Lender, regardless of any investigation made by such Agent or such Lender or on their behalf and notwithstanding that any Agent or any Lender may have had notice or knowledge of any Default at the time of any Advance, and shall continue in full force and effect as long as any Loan or any other Obligations (other than contingent indemnification obligations for which no claim has been asserted) remain unpaid or unsatisfied.

Section 12.11 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

Section 12.12 Governing Law; Jurisdiction; Etc.

(a) THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF ILLINOIS, AND THE LOAN MADE BY LENDERS AND ACCEPTED BY BORROWER IN THE STATE OF ILLINOIS, AND THE PROCEEDS OF THE LOAN DELIVERED PURSUANT HERETO WERE DISBURSED FROM THE STATE OF ILLINOIS, WHICH STATE THE PARTIES IRREVOCABLY AND UNCONDITIONALLY AGREE HAS A SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY, AND IN ALL RESPECTS, INCLUDING, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, EACH AND ALL OF THIS AGREEMENT, THE NOTE, THE OTHER LOAN DOCUMENTS, AND THE OBLIGATIONS ARISING HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE (WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANOTHER STATE) AND ANY APPLICABLE LAW OF THE UNITED STATES. TO THE FULLEST EXTENT PERMITTED BY LAW, THE BORROWER HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY OTHER JURISDICTION GOVERNS THIS AGREEMENT, THE NOTE, AND/OR THE LOAN.

(b) ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST ANY AGENT, ANY LENDER OR ANY LOAN PARTY ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY AT SUCH AGENT’S OR SUCH LENDER’S OPTION BE INSTITUTED IN ANY FEDERAL OR STATE COURT IN COOK COUNTY, ILLINOIS, AND

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BORROWER WAIVES ANY OBJECTIONS WHICH IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING. NOTHING HEREIN SHALL LIMIT THE RIGHT OF EITHER AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST ANY LOAN PARTY IN THE COURTS OF ANY OTHER JURISDICTION. BORROWER DOES HEREBY DESIGNATE AND APPOINT:

Cogency Global

1 W. Washington St., Suite 1447

Chicago, IL 60602

AS ITS AUTHORIZED AGENT TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT IN COOK COUNTY, ILLINOIS, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE MAILED OR DELIVERED TO THE BORROWER IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE BORROWER IN ANY SUCH SUIT, ACTION OR PROCEEDING IN THE STATE OF ILLINOIS. THE BORROWER (I) SHALL GIVE PROMPT WRITTEN NOTICE TO THE ADMINISTRATIVE AGENT OF ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (II) MAY AT ANY TIME AND FROM TIME TO TIME DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN OFFICE IN NEW YORK, NEW YORK OR COOK COUNTY, ILLINOIS (WHICH SUBSTITUTE AGENT AND OFFICE SHALL BE DESIGNATED AS THE PERSON AND ADDRESS FOR SERVICE OF PROCESS), AND (III) SHALL PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS AUTHORIZED AGENT CEASES TO HAVE AN OFFICE IN NEW YORK, NEW YORK OR COOK COUNTY, ILLINOIS, OR IS DISSOLVED WITHOUT LEAVING A SUCCESSOR.

(c) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY LENDER WITH RESPECT TO THIS AGREEMENT, ANY NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, WHETHER IN LAW OR EQUITY, WHETHER IN CONTRACT OR IN TORT OR OTHERWISE, SHALL BE BROUGHT EXCLUSIVELY IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF ILLINOIS, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH LENDER ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, ANY NOTE OR ANY OTHER LOAN DOCUMENT FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. EACH LENDER IRREVOCABLY AGREES THAT ALL SERVICE OF PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT ITS ADDRESS SET FORTH ON ITS SIGNATURE PAGE HERETO OR AT SUCH OTHER ADDRESS OF WHICH THE BORROWER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY EACH LENDER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT.

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Section 12.13 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY VOLUNTARILY, KNOWINGLY, UNCONDITIONALLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS Section 12.13.

Section 12.14 Relationship of Parties. The relationship between the Borrower, on the one hand, and the Lenders and Agents, on the other, is, and at all times shall remain, solely that of borrower and lenders. Neither the Lenders nor the Agents shall under any circumstances be construed to be partners or joint venturers of any Loan Party or any of their Affiliates or direct or indirect owners; nor shall the Lenders or Agents under any circumstances be deemed to be in a relationship of confidence or trust or a fiduciary relationship with any Loan Party or any of their Affiliates or direct or indirect owners, or to owe any fiduciary duty to any Loan Party or any of their Affiliates or direct or indirect owners. The Lenders and the Agents do not undertake or assume any responsibility or duty to any Loan Party or any of their Affiliates or direct or indirect owners to select, review, inspect, supervise, pass judgment upon or otherwise inform any Loan Party or any of their Affiliates or direct or indirect owners of any matter in connection with its or its property, any security held by the Collateral Agent or the operations of any Loan Party or any of their Affiliates or direct or indirect owners. Each Loan Party and each of their Affiliates or direct or indirect owners shall rely entirely on their own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by any Lender or any Agent in connection with such matters is solely for the protection of the Lenders and the Agents and neither any Loan Party or any of their Affiliates or direct or indirect owners is entitled to rely thereon.

Section 12.15 USA Patriot Act Notice. Each Lender that is subject to the Patriot Act and each Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the Patriot Act it is required to obtain, verify and record, and the Borrower hereby agrees to provide, information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or such Agent, as applicable, to identify the Borrower, and otherwise enable compliance, in accordance with the Patriot Act.

Section 12.16 Time of the Essence. Time is of the essence with respect to the Loan Documents.

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Section 12.17 Telephone and Electronic Authorization.

(a) Each Agent and the Lenders may honor telephone or email instructions for repayments, by any one of the individuals authorized to sign Loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. A list of authorized signers shall be named in Schedule 12.17. Schedule 12.17 may be modified from time-to-time by the Borrower; provided that at all times the individuals named as Chairperson, President, Chief Executive Officer, Secretary and Treasurer of the Borrower shall be deemed to be authorized signers.

(b) The Borrower shall indemnify and hold each Agent and each Lender harmless from all liability, loss, and costs in connection with any act resulting from telephone or email instructions such party believes are made by any individual authorized by the Borrower in Section 12.17(a) (or deemed authorized in accordance with Schedule 12.17) to give such instructions other than losses caused by such Agent’s or such Lender’s gross negligence or willful misconduct. This paragraph will survive this Agreement’s termination, and will benefit each Agent, each Lender and their respective officers, employees, and agents.

Section 12.18 Confidentiality as to Loan Documents, Etc.. This Agreement, the other Loan Documents and any written communications provided to the Loan Parties and their Subsidiaries by the Administrative Agent and the Lenders prior to or after the date hereof in connection with this Agreement and the other Loan Documents are exclusively for the information of the Loan Parties and their Subsidiaries and, along with the identity of Lenders or prospective Lenders may not be disclosed by the Loan Parties or their Subsidiaries to any third party or circulated or referred to publicly without the Administrative Agent’s prior written consent except that such information, including the existence and a copy of this Agreement (with the names of the Lenders redacted), may be disclosed, after providing written notice to the Administrative Agent (to the extent legally permissible), pursuant to a subpoena or order issued by a court of competent jurisdiction or by a judicial, administrative or legislative body or committee, or as required by applicable Law; provided that the applicable Loan Party shall have, to the extent legally permissible (i) promptly notified the Administrative Agent of the receipt of any such subpoena or order, (ii) consulted with the Administrative Agent as to the advisability of taking steps to resist or narrow the scope of the disclosure contemplated thereby and (iii) cooperated with the Administrative Agent in any reasonable efforts it may make to obtain an order or other reliable assurance that confidential treatment will be accorded to such information. The Loan Parties’ disclosure of the identity of Lenders or prospective Lenders (x) to its officers, directors, agents and advisors (including legal counsel, accountants, and other professional advisors) and employees (to the extent such information is reasonably necessary or beneficial for the performance of their duties) who have been instructed by one or more of the Loan Parties to keep such information confidential, in accordance with this Section 12.18, and (y) in connection with any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of the Loan Parties’ rights hereunder or thereunder, in each case, shall not be subject to the limitations set forth in this Section. Each of the Agents and each Lender agrees that the terms of this Section shall set forth the entire agreement between the Borrower, the Loan Parties and the Agents and each Lender with respect to any confidential information previously received by the Loan Parties and their Subsidiaries in connection with this Agreement, and this Section shall supersede any and all prior confidentiality agreements entered into by the Borrower, a Loan Party or any Subsidiary thereof with respect to such confidential information.

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Section 12.19 Confidentiality. Each of the Agents and each Lender agrees to hold any information relating to the Borrower, the Loan Parties and any of their Subsidiaries furnished to it by or on behalf of the Borrower, the Loan Parties or any of their Subsidiaries in confidence and shall not reveal the same, except for disclosure (i) to its Affiliates and to the Agents and any other Lender and their respective Affiliates, and, in each case, their respective employees, directors, and officers provided such parties have been instructed to keep such information confidential in accordance with this Section 12.19, (ii) to legal counsel, accountants, and other professional advisors to the Agents or such Lender provided such parties have been instructed to keep such information confidential in accordance with this Section 12.19, (iii) to the extent necessary to comply with law or any legal, judicial or administrative process or as otherwise required by law or the requests of any Governmental Authority (in which case such Person, (x) shall limit such disclosure only to the extent necessary to comply with such law, process or request and (y) to the extent permitted by law, agrees to inform the Borrower promptly thereof), (iv) to its direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties provided such parties have agreed to keep such information confidential in accordance with this Section 12.19, (v) to rating agencies if requested or required by such agencies in connection with a rating relating to the Loan hereunder, (vi) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, and (x) to the extent such information (1) becomes publicly available other than as a result of a breach of this Section or (2) becomes available to the Agents or any Lender on a non-confidential basis from a source other than a Loan Party or any Subsidiary thereof. The Borrower agrees that the terms of this Section shall set forth the entire agreement between the Borrower, the Loan Parties and the Agents and each Lender with respect to any confidential information previously or hereafter received by the Agents or such Lender in connection with this Agreement, and this Section shall supersede any and all prior confidentiality agreements entered into by an Agent or any Lender with respect to such confidential information.

Section 12.20 Judgment Currency. If for the purposes of obtaining judgment in any court it is necessary to convert a sum due from any Loan Party hereunder in the currency expressed to be payable herein (the “Specified Currency”) into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the Specified Currency with such other currency at the Administrative Agent’s main New York City office on the Business Day preceding that on which final, non-appealable judgment is given. The obligations of each Loan Party in respect of any sum due hereunder shall, notwithstanding any judgment in a currency other than the Specified Currency, be discharged only to the extent that on the Business Day following receipt by any Lender (including the Administrative Agent), as the case may be, of any sum adjudged to be so due in such other currency such Lender (including the Administrative Agent), as the case may be, may in accordance with normal, reasonable banking procedures purchase the Specified Currency with such other currency. If the amount of the Specified Currency so purchased is less than the sum originally due to such Lender (including the Administrative Agent), as the case may be, in the Specified Currency, each Guarantor agrees, to the fullest extent that it may effectively do so, as a separate obligation and notwithstanding any such judgment, to indemnify such Lender (including the Administrative Agent), as the case may be, against such loss.

Section 12.21 Electronic Documentation. Delivery of an executed counterpart of a signature page of any Loan Document by electronic format (e.g., “pdf”) is effective as delivery of a manually executed counterpart. The words “execution,” “signed,” “signature,” and words of like import shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which

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shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, or any applicable state laws based on the Uniform Electronic Transactions Act (“UETA”). The Administrative Agent may, on behalf of the Borrower, create a microfilm or optical disk or other electronic image of this Agreement and any or all of the Loan Documents. The Administrative Agent may store each such electronic image in its electronic form and then destroy any paper original as part of the Administrative Agent’s normal business practices, with the electronic image deemed to be an original and of the same legal effect, validity, and enforceability as such paper original. The Administrative Agent is authorized, when appropriate, to convert any instrument into a “transferable record” under UETA, with the image of such instrument in the Administrative Agent’s possession constituting an “authoritative copy” under UETA.

[Signature page follows.]

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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed and delivered under seal as of the date first set forth above.

BORROWER:

CRESCO LABS INC.,

a British Columbia company

By: (signed) Ken Amann

Name: Ken Amann

Title: Chief Financial Officer

Address for Notices:

400 W. Erie St. Suite 110

Chicago, IL 60654

Attention: John Schetz

Phone: (312) 410-8226

Email: john.schetz@crescolabs.com

With a copy to:

Bennett Jones LLP

One First Canadian Place

Toronto, ON M5X 1A4

Attention: Aaron Sonshine

Phone: (416) 777-6448

Email: sonshinea@bennettjones.com

[Signatures continue on following page(s).]

Senior Secured Term Loan Agreement

ADMINISTRATIVE AGENT:

[Redacted – Confidential]

By: (signed)

Name: [Redacted – Confidential]

Title: President

Address for Notices:

[Redacted – Confidential]

With a copy to:

[Redacted – Confidential]

[Signatures continue on following page(s).]

Senior Secured Term Loan Agreement

COLLATERAL AGENT:

[Redacted – Confidential]

By: (signed)

Name: [Redacted – Confidential]

Title: President

Address for Notices:

[Redacted – Confidential]

With a copy to:

[Redacted – Confidential]

[Signatures continue on following page(s).]

Senior Secured Term Loan Agreement

INITIAL LENDERS:

[Redacted – Confidential]

By: (signed)

Name: [Redacted – Confidential]

Title: Chief Financial Officer

Address for Notices:

[Redacted – Confidential]

Senior Secured Term Loan Agreement

EXHIBIT A

FORM OF PROMISSORY NOTE

[__________], 20[_]

FOR VALUE RECEIVED, CRESCO LABS INC., a British Columbia company (the “Obligor”), DOES HEREBY PROMISE TO PAY to the order of [LENDER] (the “Lender”) or its registered assigns at the office of [Redacted – Confidential], in its capacity as administrative agent (together with its successors and assigns, “Administrative Agent”), at [Redacted – Confidential], in lawful money of the United States of America in immediately available funds, on the Maturity Date, the aggregate Principal Amount of the Loan made by the Lender, together with all accrued and unpaid interest and other Obligations and amounts owed to the Lender on the Loan, in like money, at such interest rates as are set forth in the Loan Agreement.

The Obligor and any and all sureties, guarantors and endorsers of this Promissory Note and all other parties now or hereafter liable hereon severally waive grace, demand, presentment for payment, protest, notice of any kind (including, but not limited to, notice of dishonor, notice of protest, notice of intention to accelerate or notice of acceleration) and diligence in collecting and bringing suit against any party hereto and agree to the extent permitted by applicable law (i) to all extensions and partial payments, with or without notice, before or after maturity, (ii) to any substitution, exchange or release of any security now or hereafter given for this Note, (iii) to the release of any party primarily or secondarily liable hereon, and (iv) that it will not be necessary for any holder of this Note, in order to enforce payment of this Note, to first institute or exhaust such holder’s remedies against the Obligor or any other party liable hereon or against any security for this Note. The non-exercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance.

This Note is one of the Notes referred to in that certain Senior Secured Term Loan Agreement, dated as of January 22, 2020 (as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Loan Agreement”; capitalized terms used but not defined herein shall have the meanings given to them in the Loan Agreement) among the Obligor, as borrower, the Lenders referred to therein, the Administrative Agent and [Redacted – Confidential], in its capacity as collateral agent, and is entitled to the benefits of, and is secured by the security interests granted in, the Loan Agreement and the other Loan Documents, which Loan Agreement and other Loan Documents, among other things, contain provisions for voluntary prepayments, mandatory prepayment and for acceleration of the maturity hereof upon the occurrence of certain events, all as provided in the Loan Agreement. This Note is made pursuant and subject to the terms and conditions of the Loan Agreement.

THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS.

IN WITNESS WHEREOF, the undersigned has duly executed this Promissory Note as of the date first written above.

CRESCO LABS INC.,

a British Columbia company

By:

Name:

Title:

Promissory Note

EXHIBIT B

FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT

THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this “Agreement”), dated as of [_____________], 20[___], by and between [________], a [________] (the “Assignor”) and [________], a [________] (the “Assignee”).

Reference is made to that certain Senior Secured Term Loan Agreement, dated as of January 22, 2020 (as may be amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Loan Agreement”), among Cresco Labs Inc., a British Columbia company (the “Borrower”), and the lenders from time to time party thereto (each a “Lender” and collectively the “Lenders”), [Redacted – Confidential], a Delaware limited liability company as administrative agent for the Lenders (in such capacity, together with its successors and assigns, the “Administrative Agent”) and [Redacted – Confidential], a Delaware limited liability company, as collateral agent for the benefit of the Secured Parties (in such capacity, together with its successor and assigns, the “Collateral Agent”). Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Loan Agreement.

The Assignor and the Assignee hereby agree as follows:

As of the Assignment Effective Date (as defined below), the Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, all of the Assignor’s rights and obligations under the Loan Agreement to the extent related to the amounts and percentages specified in Section 1 of Schedule I hereto.

1. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim and (ii) it has full power and authority, and has taken all actions necessary, to execute and deliver this Agreement and to consummate the transactions contemplated hereby, (b) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto or the attachment, perfection or priority of any Lien granted by the Borrower to the Collateral Agent in the Collateral, and (c) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Loan Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto.

2. The Assignee (a) agrees that it will, independently and without reliance upon the Administrative Agent, the Collateral Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Agreement, (b) appoints and authorizes each of the Administrative Agent and

Collateral Agent to take such action as agent on its behalf and to exercise such powers under the Loan Agreement and the other Loan Documents as are delegated to each such agent by the terms thereof, together with such powers as are reasonably incidental thereto, (c) agrees that it will perform in accordance with their terms all of the obligations that, by the terms of the Loan Agreement, are required to be performed by it as a Lender, (d) represents and warrants that it has full power and authority, and has taken all actions necessary, to execute and deliver this Agreement and to consummate the transactions contemplated hereby, (e) confirms it has received such documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement, (f) sets forth beneath its name on the signature pages hereof its address for notices and (g) if applicable, attaches two properly completed Forms W-8BEN, W-8ECI, W-8IMY or successor or form prescribed by the IRS, certifying that such Assignee is entitled to receive all payments under the Loan Agreement payable to it without deduction or withholding of any United States federal income taxes, a U.S. Tax Compliance Certificate, and such other tax forms that may be required under the Loan Agreement.

3. Following the execution of this Agreement by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Agreement shall be the effective date specified in Section 2 of Schedule I hereto (the “Assignment Effective Date”).

4. As of the Assignment Effective Date, (a) the Assignee shall be a party to the Loan Agreement and have all of the rights and obligations under the Loan Agreement of a Lender and (b) the Assignor shall relinquish all of its rights and be released from its obligations under the Loan Documents in its capacity as a Lender, to the extent arising or accruing from and after the date hereof.

5. From and after the Assignment Effective Date, the Administrative Agent shall make all payments under the Loan Documents in respect of the interest assigned hereby to the Assignee.

6. This Agreement shall be governed by, and be construed and interpreted in accordance with, the law of the State of Illinois.

7. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement.

[Signature Pages Follow]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.

ASSIGNOR:

[ASSIGNOR NAME]

By:

Name:

Title:

ASSIGNEE:

[ASSIGNEE NAME]

By:

Name:

Title:

Address for notices:

[___________________]

Tel: [_______________]

Fax: [_______________]

Email: [_____________]

With a copy to:

[___________________]

Tel: [_______________]

Fax: [_______________]

Email: [_____________]

ACCEPTED AND AGREED

this [__] day of [______], 20[___]:

[Redacted – Confidential],

as Administrative Agent

By: ____________________________________

Name:

Title:

SCHEDULE I


SECTION 1.
Outstanding principal amount of Loans assigned to Assignee:		$[___]
Percentage of aggregate outstanding principal amount of Loans assigned to Assignee:		[___]%
SECTION 2.
Assignment Effective Date:		[________], 20[__]

EXHIBIT C

FORM OF LENDER SUPPLEMENT

LENDER SUPPLEMENT, dated [__________], 20[__] (this “Supplement”), to the Senior Secured Term Loan Agreement, dated as of January 22, 2020 (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”), among Cresco Labs Inc., a British Columbia corporation (the “Borrower”), the Lenders party thereto and [Redacted – Confidential], a Delaware limited liability company as administrative agent (in such capacity, the “Administrative Agent”) and as collateral agent (in such capacity, the “Collateral Agent”) for itself and the Lenders.

RECITALS

WHEREAS, the Loan Agreement provides in Section 2.3 thereof that any bank, financial institution or other entity may extend and/or increase Commitments under the Loan Agreement subject to the written request of the Borrower and the written approval of the Administrative Agent, the Required Lenders, if applicable, and the Lenders providing additional Commitments, by executing and delivering to the Borrower and the Administrative Agent a supplement to the Loan Agreement in substantially the form of this Supplement

WHEREAS, the undersigned [Augmenting Lender] [was not an original party to the Loan Agreement but now desires to become a party thereto/ is a Lender party to the Loan Agreement and now desires to increase its Commitment];

NOW, THEREFORE, each of the parties hereto hereby agrees as follows:

1. [The undersigned [Augmenting Lender] agrees to be bound by the provisions of the Loan Agreement and agrees that it shall, on the date of this Supplement, become a Lender for all purposes of the Loan Agreement to the same extent as if originally a party thereto, with a Commitment with respect to Loans of [__________] ($[__________])/ The undersigned Augmenting Lender agrees that on the date of this Supplement its Commitment shall be increased by [_________] ($[___________]), and such Augmenting Lender’s total Commitment shall be equal to [_________] ($[___________]).]

2. This Loans advanced pursuant to this Lender Supplement shall be designated as Tranche [_] Loans.

3. The undersigned Augmenting Lender (a) represents and warrants that it is legally authorized to enter into this Supplement; (b) confirms that it has received a copy of the Loan Agreement, together with copies of the most recent financial statements delivered pursuant to Section 7.1 thereof, as applicable, and has reviewed such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Supplement; (c) agrees that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Agreement or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise

such powers and discretion under the Loan Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Loan Agreement and will perform in accordance with its terms all the obligations which by the terms of the Loan Agreement are required to be performed by it as a Lender.

4. The undersigned’s address for notices for the purposes of the Loan Agreement is as follows:

[___________]

5. The Borrower hereby represents and warrants that no Default or Event of Default has occurred and is continuing on and as of the date hereof.

6. Capitalized terms used but not otherwise defined herein shall have the meanings given to such terms in the Loan Agreement.

7. This Supplement shall be governed by, and construed in accordance with, the laws of the State of Illinois.

8. This Supplement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same document.

[Signature pages follow.]

IN WITNESS WHEREOF, each of the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer on the date first above written.

[INSERT NAME OF ANY LENDER

INCREASING COMMITMENT OR

PROVIDING NEW COMMITMENT]

By:

Name:

Title:

Acknowledged as of the date first written above:

[Redacted – Confidential], as Administrative Agent

By:

Name:

Title:

[INSERT NAME OF ANY REQUIRED LENDER OR INITIAL LENDER NOT LISTED ABOVE, IF REQUIRED PURSUANT TO SECTION 2.3 OF THE LOAN AGREEMENT]

By:

Name:

Title:

Accepted and agreed to as of the date first written above:

[CRESCO LABS INC., as Borrower, if required under Section 2.3 of the Loan Agreement]

By:

Name:

Title:

EXHIBIT D

FORM OF COMPLIANCE CERTIFICATE

To: [Redacted – Confidential]:

THE UNDERSIGNED HEREBY CERTIFIES THAT:

(1) I am a Responsible Officer of CRESCO LABS INC. (the “Borrower”);

(2) I have reviewed the terms of the Senior Secured Term Loan Agreement dated as of January 22, 2020 (as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Loan Agreement”), by and among the Borrower, and the lenders from time to time party thereto (each a “Lender” and collectively the “Lenders”), [Redacted – Confidential], a Delaware limited liability company as administrative agent for the Lenders and [Redacted – Confidential], a Delaware limited liability company, as collateral agent for the benefit of the Secured Parties;

(3) no Default or Event of Default (as such terms are defined in the Loan Agreement) is continuing as of the date hereof, except as described below (or on a separate attachment to this Certificate). The exceptions listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking or proposes to take with respect to each such condition or event are as follows:

;

(4) all filings required under the Security Documents have been made, and since the date of the last Compliance Certificate delivered in connection with Section 7.1(d) of the Loan Agreement, the following filings under the Security Documents have been made:

;

(5) [the Loan Parties have delivered all documents and information they are required to deliver pursuant to any Loan Document on or prior to the date hereof] OR [I have attached hereto true, complete and correct copies of all documents and information each Loan Party is required to deliver pursuant to any Loan Document on or prior to the date hereof];

(6) [there have been no changes to the information contained in each of the Perfection Certificates delivered on the Closing Date or the date of the most recently updated Perfection Certificate delivered pursuant to Section 7.1(d) of the Loan Agreement] OR [I have attached a true, complete and correct copy of an updated Perfection Certificate identifying any such changes to the information contained therein since the date of the most recently delivered Perfection Certificate];

(7) the minimum cash balance requirement under Section 7.2 of the Loan Agreement is satisfied; and

(8) The representations and warranties contained in Article 6 of the Loan Agreement are (x) with respect to any representations or warranties that contain a materiality qualifier, true and correct in all respects as of the date hereof, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct in all respects on and as of such earlier date and (y) with respect to any representations or warranties that do not contain a materiality qualifier, true and correct in all material respects as of the date hereof, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct in all material respects on and as of such earlier date.

The foregoing certification, together with any attachments hereto delivered with this Certificate in support hereof, are made and delivered this ___ day of __________, _________ pursuant to Section 7.1(d) of the Loan Agreement.

CRESCO LABS INC.,

a British Columbia company

By: ______________________________

Name:

Title:

[Schedules Redacted – Confidential and/or Commercially Sensitive Information]

EX-99.6 7 d945319dex996.htm EX-99.6 EX-99.6

Exhibit 99.6

FORM 51-102F3

MATERIAL CHANGE REPORT

Item 1.

Name and Address of Company

Cresco Labs Inc. (the “Company”)

1055 West Hastings Street, Suite 2200

Vancouver, British Columbia

V6E 2E9 Canada

Item 2.

Date of Material Change

January 22, 2020

Item 3.

News Release

A news release with respect to the material change was disseminated by the Company on January 23, 2020 through Business Wire and subsequently filed under the Company’s profile on SEDAR at www.sedar.com.

Item 4.

Summary of Material Change

On January 22, 2020, the Company entered into a non-brokered credit agreement for a senior secured term loan in an initial aggregate principal amount of up to US$100 million, with a mutual option to increase the size of the facility to a maximum of US$200 million. The Company completed an initial drawdown of US$100 million on January 31, 2020.

Item 5.1

Full Description of Material Change

On January 22, 2020, the Company entered into a credit agreement for a senior secured term loan (the “Senior Loan”) in an initial aggregate principal amount of up to US$100 million, which may be increased up to a maximum of US$200 million subject to the approval of the agent and the required lenders. The Company completed an initial drawdown of US$100 million under the Senior Loan on January 31, 2020.

A broad syndicate of lenders provides commitments under the Senior Loan, including U.S. based institutional investors. Members of the Company’s management and board of directors will also be participating as investors in the Senior Loan. Each commitment under the Senior Loan may be for an 18-month or 24-month term, at the lender’s option. Loans made on the initial closing date will bear interest at a rate of approximately 12.7% per annum for 18-month loans and approximately 13.2% for 24-month loans, payable quarterly in arrears. The terms of the Senior Loan were negotiated at arm’s length with the agent and lead investor and include customary restrictive covenants.

The proceeds from the Senior Loan will be used to fund the expansion of the Company’s operations in Illinois, closing and integration costs associated with pending acquisitions, and other strategic growth initiatives in key markets.

The participation of the Company’s management and board in the Senior Loan may constitute a “related party transaction” as defined in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). The transaction is exempt from: (i) the valuation requirement of MI 61-101 by virtue of the exemption contained in Section 5.5(b), as no securities of the Company are listed or quoted on the specified markets and (ii) the minority shareholder approval requirement of MI 61-101 by virtue of the exemption contained in Section 5.7(1)(a) of MI 61-101, as the fair market value of the transaction does not exceed 25% of the Company’s market capitalization. The identity of the lenders and the extent of their participation were not finalized until shortly prior to the initial drawdown under the Senior Loan. Accordingly, it was not possible to publicly disclose details of the nature and extent of related party participation in the Senior Loan pursuant to a material change report filed at least 21 days prior to the execution of the credit agreement.

Item 5.2.

Disclosure of Restructuring Arrangements

Not applicable.

Item 6.

Reliance on Subsection 7.1(2) of National Instrument 51-102

Not applicable.

Item 7.

Omitted Information

Not applicable.

Item 8.

Executive Officer

For further information, please contact:

John Schetz, General Counsel

Phone: (312) 929-0993

Email: john.schetz@crescolabs.com

Item 9.

Date of Report

February 3, 2020

Cautionary Note Regarding Forward-Looking Information and Statements

This material change report contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. These risks and uncertainties include, among other things, the Company’s ability to satisfy pre-funding conditions, timing of initial funding, availability of additional funding under the Senior Loan if required by the Company, and the Company’s ability to comply with the restrictive covenants and other terms of the Senior Loan. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances

are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this material change report speaks as of the date hereof. The distribution of this material change report does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this material change report or otherwise.

EX-99.7 8 d945319dex997.htm EX-99.7 EX-99.7

Exhibit 99.7

Cresco Labs Closes Acquisition of Hope Heal Health, Inc., Launches First Day of Adult-

Use Cannabis Sales in Massachusetts

CHICAGO— February 07, 2020— Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco Labs” or “the Company”), one of the largest vertically integrated multistate cannabis operators in the United States, today announced that it has closed the previously announced acquisition of Hope Heal Health, Inc. (“HHH”) after receiving regulatory approval for change in ownership granted by the Massachusetts Cannabis Control Commission (“CCC”). HHH holds licenses for cultivation, product manufacturing, and retail operations in Massachusetts, with the ability to obtain up to two more retail licenses in the state. HHH currently operates a cultivation and manufacturing facility in Fall River, Massachusetts, adjacent to its Fall River Dispensary.

The close of Cresco’s acquisition coincides with the launch of recreational cannabis sales at the

HHH dispensary. The license enables the Company to continue serving its existing medical-use customer base and begin serving the fast-growing adult-use market through the retail and wholesale distribution of Cresco’s house of brands. Massachusetts recorded nearly $450 million in the first year of cannabis sales, according to the CCC.

Cresco Labs CEO and Co-founder Charlie Bachtell, commented, “In our pursuit of achieving the most strategic geographic footprint in the U.S., we are thrilled to begin serving adult-use customers and continue serving medical patients in Massachusetts. Since we originally entered an agreement to acquire HHH in late 2018, we’ve worked with HHH to build a reputation of quality and consistency in what is now the largest adult-use market in the Northeast. Now that we’ve officially closed the acquisition, we’re stepping into a fully operational, vertically integrated business that is immediately accretive with both positive EBITDA and cash flow. We look forward to building out our retail presence under the Sunnyside* brand (pending approval), as well as our wholesale channel and growing our market share as we’ve done successfully in other states.”

There are more than 40 adult-use dispensaries in the Massachusetts market that the Company may now begin distributing its full suite of products to, including Cresco, Remedi, and Mindy’s Edibles. The Fall River dispensary is located less than 20 miles from downtown Providence, RI directly off an Interstate exit and the Company expects adult-use sales to reflect a strong customer base both in the local community and with the Massachusetts tourism market.

About Cresco Labs

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Media:

Jason Erkes, Cresco Labs

Chief

Communications Officer

press@crescolabs.com

Investors:

Aaron

Miles, Cresco Labs

Vice	President of Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.8 9 d945319dex998.htm EX-99.8 EX-99.8

Exhibit 99.8

Cresco Labs Announces Resignation of Joe Caltabiano as President

March 03, 2020

CHICAGO—(BUSINESS WIRE)— Cresco Labs Inc. (CSE:CL)(OTC:CRLBF) (“Cresco Labs” or “the Company”), one of the largest vertically integrated multistate cannabis operators in the United States, today announced that Joe Caltabiano has advised the Company of his decision to resign from the position of President effective immediately.

Mr. Caltabiano’s management responsibilities will be taken up by CEO and Co-founder Charlie Bachtell as well as other members of the Company’s recently strengthened leadership team. The Company wishes Joe well on his future endeavors and looks forward to continuing its path to building the most important company in cannabis.

About Cresco Labs:

Cresco Labs is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco is built to become the most important company in the cannabis industry by combining the most strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) approach to cannabis, Cresco’s 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, Remedi and Mindy’s, a line of edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside*, Cresco’s national dispensary brand is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.

Forward Looking Statements

known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Media:

Jason

Erkes, Cresco Labs

Chief

Communications Officer

press@crescolabs.com

Investors:

Aaron

Miles, VP of Investor Relations

Investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.9 10 d945319dex999.htm EX-99.9 EX-99.9

Exhibit 99.9

Form 51-102F3

MATERIAL CHANGE REPORT


Item 1.		Name and Address of Reporting Issuer

		Cresco Labs Inc. (the “Company”) 2500 Park Place, 666 Burrard Street Vancouver, British Columbia V6C 2X8 Canada

Item 2.		Date of Material Change

		March 3, 2020

Item 3.		News Release

		A news release dated March 3, 2020 was disseminated through Business Wire and filed under the Company’s profile on SEDAR at www.sedar.com.

Item 4.		Summary of Material Changes

		On March 3, 2020, Joe Caltabiano advised the Company of his decision to resign from the position of President effective immediately.

Item 5.		Full Description of Material Change

		On March 3, 2020, Joe Caltabiano advised the Company of his decision to resign from the position of President effective immediately.

		Mr. Caltabiano’s management responsibilities will be taken up by CEO and Co-founder Charlie Bachtell as well as other members of the Company’s recently strengthened leadership team.

Item 6.		Reliance on subsection 7.1(2) of National Instrument 51-102

		Not applicable.

Item 7.		Omitted Information

		Not applicable.

Item 8.		Executive Officer

		For further information, please contact: John Schetz, General Counsel Telephone: (312) 929-0993 Email: john.schetz@crescolabs.com

Item 9.		Date of Report

		March 12, 2020.

EX-99.10 11 d945319dex9910.htm EX-99.10 EX-99.10

Exhibit 99.10

LOGO

April 27, 2020

Filed via SEDAR

To All Applicable Exchanges and Securities Administrators

Subject:

Cresco Labs Inc. (“Issuer”)

Notice of Meeting and Record Date

Dear Sir/Madam:

We are pleased to confirm the following information with respect to the Issuer’s upcoming meeting of securityholders:


Meeting Type:		Annual General
Meeting Date:		June 15, 2020
Record Date for Notice of Meeting:		May 11, 2020
Record Date for Voting:		May 11, 2020
Beneficial Ownership Determination Date:		May 11, 2020
Class of Securities Entitled to Vote:		Subordinate Voting/ Proportionate Voting/ Super Voting
ISIN:		CA22587M1068/ CA22587M2058
Meeting Location:		To be determined
Issuer sending proxy materials directly to NOBOs:		No
Issuer paying for delivery to OBOs:		No
Notice and Access for Beneficial Holders:		No
Notice and Access for Registered Holders:		No

In accordance with applicable securities regulations we are filing this information with you in our capacity as agent of the Issuer.

Yours truly,

ODYSSEY TRUST COMPANY

signed “Jacquie Fisher”

Jacquie Fisher

Director, Client Services

EX-99.11 12 d945319dex9911.htm EX-99.11 EX-99.11

Exhibit 99.11

Cresco Labs Announces Record Fourth Quarter & Full Year 2019 Results With Revenue Growth of 144% Year-over-Year and 14% Quarter-Over-Quarter and Pre-Announces First Quarter 2020 Revenue

Conference Call with Investors and Analysts to be Held at 5:00 p.m. Eastern Time Today

CHICAGO—(BUSINESS WIRE)—April 27, 2020—Cresco Labs Inc. (CSE: CL) (OTCQX:

CRLBF) (FSE: 6CQ) (“Cresco” or the “Company”) one of the largest vertically integrated multistate cannabis operators in the United States, today released its unaudited financial results for the fourth quarter ending December 31, 2019. All financial information presented in this release is in U.S. dollars, unless otherwise noted.

Management Commentary

Charlie Bachtell, Co-founder and CEO of Cresco Labs stated, “2019 was a pivotal year for Cresco, as we achieved several major milestones that will have a profound impact on the future success of both our organization and the industry. Throughout the year, we diligently executed the plan laid out for shareholders, delivering strong financial and operational performance and setting the foundation for profitable growth in 2020. We have continued to act as stewards of this industry, successfully leading efforts that resulted in the passage of adult-use legislation in Illinois, and worked side by side with our state administrations to help cannabis achieve ‘essential’ status amid the COVID-19 pandemic. Backed by a strong balance sheet and a world-class leadership team, I am confident in our ability to manage through the current COVID-19 crisis and know that we will emerge from it as a stronger, more profitable company.”

Mr. Bachtell continued, “Our vision is to be the most important company in this industry, while generating sustainable, industry-leading returns on invested capital. Based on evidence from other mature consumer product industries, the highest long-term returns will go to companies that: have a strategic geographic footprint; are dominant players in their chosen markets; own a durable and differentiated brand portfolio; and have the distribution expertise and infrastructure to get those brands onto third-party shelves efficiently. This is Cresco’s strategy. The success we have had in Illinois and Pennsylvania already has proven that we are following the right plan – going deep and focusing on getting our brand portfolio onto third-party shelves. Building on our success last year, in 2020 we are focused on: expanding our market-leading position in Illinois and Pennsylvania; integrating our newest assets and turning California into a center of profitable growth; and building a scalable foundation in other important states. By achieving success in these focus areas, we expect to transition the Company from Adjusted EBITDA positive to cashflow positive progressively through the year.”

Financial Highlights and Subsequent Events

Revenue

•

Fourth quarter 2019, revenue of $41.4 million, up 144% year-over-year and 14% quarter-over-quarter.

•

Total 2019, revenue of $128.5 million, up 197% year-over-year.

•

Fourth quarter 2019, pro forma revenue¹ of $56.0 million, which includes CannaRoyalty Corp. d.b.a. Origin House and minority investments.

•

First quarter 2020, estimated revenue of $66.5 million, up 216% year-over-year and 61% quarter-over-quarter.

Adjusted EBITDA

•

Fourth quarter 2019, Adjusted EBITDA², excluding the impact of biological assets, of $2.9 million compared to $(0.3) million in the prior-year period.

Net (Loss) Income

•

Fourth quarter net loss³ of $45.2 million compared to net loss of $4.4 million in the prior-year period.

•

Fourth quarter 2019 financial results included acquisition and other non-core costs of $7.2 million, $4.1 million related to share-based incentive compensation, $3.4 million in expansion, relaunch and rebranding costs and $1.3 million fair value mark-up on acquired inventory.

Balance Sheet

•

As of December 31, 2019, the Company had total assets of $616.6 million, including cash and cash equivalents of $49.1 million.

Capital Markets

•

On December 12, 2019, the Company announced the closing of a sale-and-leaseback agreement for its Lincoln, Illinois cultivation facility to GreenAcreage Real Estate Corp. for $50 million.

•

On January 8, 2020, the Company announced the closing of its acquisition of Origin House, which provides Cresco with substantial California wholesale distribution and a premium indoor cultivation footprint. Prior to the closing of the transaction, Origin House completed a non-brokered financing for aggregate gross proceeds of C$39.7 million (approximately US$30 million) to strengthen the balance sheet of the combined company.

•

On January 28, 2020, the Company announced the closing of a sale-and-leaseback agreement for its Yellow Springs, Ohio property for total non-dilutive funding of $12 million.

•

On February 2, 2020, the Company announced the closing of a non-brokered credit agreement for a senior secured term loan in an initial aggregate principal amount of $100 million, with a mutual option to increase the size of the facility to a maximum of $200 million.

•

On February 7, 2020, the Company announced the legal close and cash funding for its acquisition of Hope Heal Health, Inc. (“HHH”) after receiving regulatory approval for change in ownership. The legal close of Cresco’s acquisition coincided with the launch of recreational cannabis sales at the HHH dispensary.

•

On April 23, 2020, the Company announced the closing of a sale-and-leaseback agreement for its Marshall, Michigan property for total non-dilutive funding of $16 million.

•

On April 27, 2020, the Company announced the termination of the purchase agreement to purchase all outstanding equity of Tryke Companies, LLC as its capital allocation strategy has adapted given several recent changing dynamics.

Operations

•

On November 6, 2019, the Company announced the launch of its industry-defining Community Impact Incubator Program, part of its SEED initiative.

•

On December 17, 2019, the Company announced that it won the U.S. Cannabis Company Game Changer Award at the inaugural MJBizDaily Awards in Las Vegas, which recognized the organization that displayed excellence and the greatest impact in the U.S. cannabis industry.

•

On December 30, 2019, the Company announced the opening of its first five Sunnyside branded dispensaries in Lakeview, Elmwood Park, Champaign, Buffalo Grove and Rockford, IL.

•

On January 1, 2020, the Company announced the first sale under Illinois new adult-use cannabis legislation at its Sunnyside Lakeview dispensary. Among the first customers were two participants of Cresco’s SEED initiative and Illinois Lt. Gov. Juliana Stratton.

•

On February 27, 2020, the Company announced the conversion of four dispensaries to Cresco’s nationwide retail brand, Sunnyside, in the Williamsburg neighborhood in Brooklyn, Huntington Station, New Hartford and Bardonia, NY. In addition, it launched a home delivery service for medical cannabis patients in the New Hartford area of New York.

•

On April 6, 2020, the Company announced that it had been granted final approval to open the first adult-use dispensary in downtown Chicago.

•

On April 8, 2020, the Company announced additions to its senior leadership teams, Cresco continues to build on its industry-leading management team with additions that have deep financial industry roots from both top CPG companies and from traditional industries that have experienced rapid growth.

COVID – 19

•

On March 19, 2020, the Company provided an update on its response to COVID-19. The Company continues to operate all of its dispensaries with expanded hours using curbside pickup, online ordering, and delivery to ensure social distancing.

•

On April 13, 2020, the Company announced an initiative to expand local hiring of workers displaced by COVID-19. In addition, the Company announced it is providing free meals to employees to ensure employee wellness and safety, as well as to support local restaurants.

Financial Results for the Fourth Quarter Ended December 31, 2019 (Unaudited)

Revenue for the fourth quarter of 2019 was $41.4 million, an increase of 144% compared to revenue of $17.0 million for the fourth quarter of 2018. The increase in revenue was driven by expansion into new markets and continued growth in the states where the Company operates. Fourth quarter 2019 revenue increased 14% compared to $36.2 million for the third quarter of 2019, primarily driven by higher revenue generated in Pennsylvania, Illinois and Arizona as well as the additional revenue from its Valley Ag and HHH acquisitions which are included in the Company’s results starting in October 2019. On a pro forma basis, revenue for the fourth quarter of 2019 increased incrementally from the third quarter of 2019 to $56.0 million, which includes the impact of pending acquisitions and minority investments.

Operational gross profit⁴, before the impact of biological assets accounting was $21.2 million, or 51% of revenues, an increase of 176% compared to operational gross profit of $7.7 million, or 45% of revenues, for the fourth quarter of 2018. Fourth quarter 2019 operational gross profit increased 24% compared to $17.1 million, or 47% of revenues, for the third quarter of 2019. The change in operational gross profit margin was driven by increased sales and operational efficiencies in the Company’s established markets offset by the impact of emerging and recently acquired businesses where the Company is focused on footprint expansion and relaunching of Cresco-branded products. The Company expects to see higher margins in these developing markets as operations continue to scale.

Total expenses for the fourth quarter of 2019 were $33.5 million, compared to $18.6 million for the prior-year period. Total expenses in the fourth quarter of 2019 included $7.2 million in acquisition and other non-core costs, $4.2 million in expenses related to share-based incentive compensation and $1.4 million of depreciation and amortization. The balance of the increase represents investments made in talent and operational infrastructure to support the Company’s continued revenue growth.

Net loss for the fourth quarter for 2019 was $45.2 million, compared to net loss of $4.4 million for the prior-year period. Current period net loss included income tax expense of $4.3 million.

Adjusted EBITDA, excluding the net impact of the fair value of biological assets, for the fourth quarter of 2019 was $2.9 million compared with $(0.3) million for the prior-year period.

Balance Sheet and Liquidity

As of December 31, 2019, the Company had total assets of $616.6 million, including cash and cash equivalents of $49.1 million. Use of cash in the fourth quarter of 2019 included significant investments in the expansion of cultivation, processing and retail facilities in the Company’s existing markets as well as funding provided for our current and pending acquisitions.

Total shares on a fully converted and diluted basis⁵ were 307,729,000 as of December 31, 2019.

Conference Call and Webcast

The Company will hold a conference call and webcast to discuss its financial results and provide investors with key business highlights on Monday, April 27, 2020 at 5pm Eastern Time (4pm Central Time). The conference call may be accessed via webcast or by dialing 866-688-4235 (409-216-0711 for international callers) and entering conference ID 8155158. Archived access to the webcast will be available for one year on Cresco’s investor relations website.

Consolidated Financial Statements

The financial information reported in this news release is based on unaudited management prepared financial statements for the three months and year ended December 31, 2019. The Company will file its consolidated financial statements on SEDAR by April 29, 2020. Accordingly, such financial information may be subject to change. All financial information contained in this news release is qualified in its entirety with reference to such financial statements. While the Company does not expect there to be any material changes, to the extent that the financial information contained in this news release is inconsistent with the information contained in the Company’s financial statements, the financial information contained in this news release shall be deemed to be modified or superseded by the Company’s financial statements. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation for purposes of applicable securities laws. Further, the reader should refer to the additional disclosures in the Company’s audited financial statements for the year ended December 31, 2018, previously filed on SEDAR.

Cresco references certain non-IFRS financial measures throughout this press release, which may not be comparable to similar measures presented by other issuers. Please see the “Non-IFRS Financial Measures” section at the end of this press release for more detailed information.

About Cresco Labs Inc.

Cresco Labs is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco is built to become the most important company in the cannabis industry by combining the most strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) approach to cannabis, Cresco’s 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, Remedi and Mindy’s, a line of edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside, Cresco’s national dispensary brand, is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS. The Company has also provided unaudited pro forma financial information, which assumes that closed and pending mergers and acquisitions in 2019 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2019. This measure also includes revenue for certain pending or completed minority investments, for which revenue is not consolidated under IFRS rules. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein.

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

¹ Pro forma revenue and comparative period reflect the results of acquisitions and minority investments closed and with definitive agreements as of the beginning of the year in which the closing or definitive agreement occurred.

² See “Non-IFRS Financial Measures” at the end of this press release for more information regarding the Company’s use of non-IFRS financial measures.

³Net (loss) income includes amounts attributable to non-controlling interests.

⁴ See “Non-IFRS Financial Measures” at the end of this press release for more information regarding the Company’s use of non-IFRS financial measures.

⁵ Total diluted share count is calculated using total outstanding subordinate voting shares, proportionate voting shares, redeemable LLC units, options, restricted stock units, warrants and contingent shares as of December 31, 2019. This share count does not include shares issuable in pending or future acquisitions.

Cresco Labs Inc.

Unaudited Financial Information and Non-IFRS Reconciliations

(All amounts expressed in thousands of U.S. Dollars)

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income

For the Three Months and Years Ended December 31, 2019 and 2018


	For the Three Months Ended December 31						For the Years Ended December 31
($ in thousands)	2019 (Unaudited)			2018 (Unaudited)			2019 (Unaudited)			2018 (Audited)
Revenue	$	41,382		$	16,957		$	128,534		$	43,252
Cost of Sales – Production Costs		(27,676	)		(10,748	)		(82,904	)		(28,218	)

Gross Profit Before Fair Value Adjustments		13,706			6,209			45,630			15,034
Realized Changes in Fair Value of Inventory Sold		(34,657	)		(9,594	)		(91,080	)		(27,180	)
Unrealized Gain on Changes in Fair Value of Biological
Assets		28,601			19,607			109,531			52,563

Gross Profit		7,650			16,222			64,081			40,417
GP%		18.5	%		95.7	%		49.9	%		93.4	%
Expenses:
Selling, General and Administrative		32,166			18,205			94,118			34,780
Depreciation and Amortization		1,361			409			4,219			692

Total Expenses		33,527			18,614			98,337			35,472
(Loss) Gain from Operations		(25,877	)		(2,392	)		(34,256	)		4,945


Other (Expense) Income:
Interest (Expense) Income, Net		(4,275	)		110			(7,875	)		89
Other (Expense) Income, Net		(10,606	)		2,233			(8,647	)		2,781
(Loss) Income from Investment in Associate		(170	)		10			(63	)		(348	)

Total Other (Expense) Income, Net		(15,051	)		2,353			(16,585	)		2,522

(Loss) Income Before Income Taxes		(40,928	)		(39	)		(50,841	)		7,467
Income Tax Expense		(4,288	)		(4,374	)		(14,461	)		(4,374	)
Net (Loss) Income ¹
Net (Loss) Income ¹
	$	(45,216	)	$	(4,413	)	$	(65,302	)	$	3,093

¹	Net (loss) income includes amounts attributable to non-controlling interest.

Cresco Labs Inc.

Unaudited Summarized Consolidated Statements of Financial Position

As of December 31, 2019 and 2018


	12/31/2019		12/31/2018
($ in thousands)	(Unaudited)		(Audited)
Cash and Cash Equivalents	$	49,102	$	131,302
Other Current Assets		110,236		61,402
Property and Equipment, Net		155,839		39,721
Intangible Assets, Net		94,206		25,464
Goodwill		137,719		51,146
Other Long-Term Assets		69,452		9,076

Total Assets	$	616,554	$	318,111


Total Current Liabilities	$	150,169	$	25,230
Total Long-Term Liabilities		143,762		9,900
Total Shareholders’ Equity		322,623		282,981

Total Liabilities and Shareholders’ Equity	$	616,554	$	318,111

Cresco Labs Inc.

Unaudited Revenue and Gross Profit Metrics

For the Three and Twelve Months Ended December 31, 2019 and 2018


	For the Three Months Ended						For the Years Ended
	December 31,						December 31,
($ in thousands)	2019			2018			2019			2018
Revenue	$	41,382		$	16,957		$	128,534		$	43,252
Cost of Sales - Production Costs¹		(27,676	)		(10,748	)		(82,904	)		(28,218	)
Realized Changes in Fair Value of Inventory Sold		(34,657	)		(9,594	)		(91,080	)		(27,180	)
Unrealized Gain on Changes in Fair Value of Biological
Assets		28,601			19,607			109,531			52,563

Gross Profit	$	7,650		$	16,222		$	64,081		$	40,417

Cultivation Costs Expensed Under IAS 41²		2,807			1,465			8,837			3,858
Net Impact of Fair Value of Biological Assets		6,056			(10,013	)		(18,451	)		(25,383	)
Expansion, Relaunch and Rebranding Costs³		3,380			—			6,259			—
Fair Value Mark-up for Acquired Inventory		1,273			—			1,273			—

Operational Gross Profit (Non-IFRS)	$	21,166		$	7,674		$	61,999		$	18,892

Operational Gross Profit % (Non-IFRS)		51.1	%		45.3	%		48.2	%		43.7	%

¹	Production (manufacturing, processing and cultivation) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

³	Costs related to non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

Cresco Labs Inc.

Unaudited Reconciliation of Net Income to Adjusted EBITDA

For the Three and Twelve Months Ended December 31, 2019 and 2018


	For the Three Months Ended						For the Years Ended
	December 31,						December 31,
($ in thousands)	2019			2018			2019			2018
Net (Loss) Income¹
	$	(45,216	)	$	(4,413	)	$	(65,302	)	$	3,093
Depreciation and Amortization		3,925			381			11,911			1,552
Other Expense (Income), Net		10,606			(2,233	)		8,647			(2,781	)
Interest Expense (Income), Net		4,275			(110	)		7,875			(89	)
Loss (Income) from Investment in Associate		170			(10	)		63			348
Income Tax Expense		4,288			4,374			14,461			4,374

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (Non-IFRS)	$	(21,952	)	$	(2,011	)	$	(22,345	)	$	6,497

Expansion, Relaunch and Rebranding Costs²		3,380			—			6,259			—
Fair Value Mark-up for Acquired Inventory		1,273			—			1,273			—
Cultivation Costs Expensed Under IAS 41³		2,807			1,465			8,837			3,858
Acquisition and Other Non-Core Costs		7,179			7,056			17,549			7,525
Management Incentive Compensation (Share-Based)		4,122			3,227			14,867			10,464

Adjusted EBITDA (Non-IFRS)	$	(3,191	)	$	9,737		$	26,440		$	28,344

Net Impact of Fair Value of Biological Assets		6,056			(10,013	)		(18,451	)		(25,383	)

Adjusted EBITDA (non-IFRS), Net of Impact of Biological Assets	$	2,865		$	(276	)	$	7,989		$	2,961

¹	Net (loss) income includes amounts attributable to non-controlling interest.

²	Costs related to non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

Contacts

Media

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

312-953-2767

Investors

Aaron Miles, Cresco Labs

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries

312-929-0993

info@crescolabs.com

EX-99.12 13 d945319dex9912.htm EX-99.12 EX-99.12

Exhibit 99.12

FORM 13-502F1

CLASS 1 AND CLASS 3B REPORTING ISSUERS – PARTICIPATION FEE

MANAGEMENT CERTIFICATION

I, Ken Amann, an officer of the reporting issuer noted below have examined this Form 13-502F1 (the Form) being submitted hereunder to the Ontario Securities Commission and certify that to my knowledge, having exercised reasonable diligence, the information provided in the Form is complete and accurate.


Reporting Issuer Name:	Cresco Labs Inc.

End date of previous financial year:	December 31, 2019

Type of Reporting Issuer:	☒ Class 1 reporting issuer	☐ Class 3B reporting issuer

Highest Trading Marketplace:	CSE

(refer to the definition of “highest trading marketplace” under OSC Rule 13-502 Fees)

Market value of listed or quoted equity securities:

(in Canadian Dollars—refer to section 7.1 of OSC Rule 13-502 Fees)

Equity Symbol


		CL
1^st Specified Trading Period (dd/mm/yy) (refer to the definition of “specified trading period” under OSC Rule 13-502 Fees)		01/01/2019 to 31/03/2019

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$15.05 (i)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		33,431000 (ii)

Market value of class or series		(i) x (ii) $503,136,550 (A)

2^nd Specified Trading Period (dd/mm/yy) (refer to the definition of “specified trading period” under OSC Rule 13-502 Fees)		01/04/2019 to 30/06/2019


Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$13.54 (iii)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		46,720,000 (iv)

Market value of class or series		(iii) x (iv) $632,5888,800 (B)

3^rd Specified Trading Period (dd/mm/yy)
(refer to the definition of “specified trading period” under OSC Rule 13-502 Fees)		01/07/2019 to 30/09/2019

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$7.7700 (v)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		67,514,000 (vi)

Market value of class or series		(v) x (vi) $524,583,780 (C)

4^th Specified Trading Period (dd/mm/yy)
(refer to the definition of “specified trading period” under OSC Rule 13-502 Fees)		01/10/2019 to 31/12/2019

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		8.930 (vii)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		73,610,939 (viii)

Market value of class or series		(vii) x (viii) $657,345,685.27 (D)

5^th Specified Trading Period (dd/mm/yy)
(if applicable - refer to the definition of “specified trading period” under OSC Rule 13-502 Fees)		N/A to

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$N/A (ix)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		N/A (x)


Market value of class or series		(ix) x (x) $N/A (E)

Average Market Value of Class or Series
(Calculate the simple average of the market value of the class or series of security for each applicable specified trading period (i.e. A through E above))
		$579,413,703.82 (1)

(Repeat the above calculation for each other class or series of equity securities of the reporting issuer (and a subsidiary pursuant to paragraph 2.8(1)(c) of OSC Rule 13-502 Fees, if applicable) that was listed or quoted on a marketplace at the end of the previous financial year)


Fair value of outstanding debt securities: (See paragraph 2.8(1)(b), and if applicable, paragraph 2.8(1)(c) of OSC Rule 13-502 Fees)		$80,958,570 (2)

(Provide details of how value was determined)

Capitalization for the previous financial year		(1) + (2) $660,372,273.82

Participation Fee		$40,950.00
(For Class 1 reporting issuers, from Appendix A of OSC Rule 13-502 Fees, select the participation fee)

(For Class 3B reporting issuers, from Appendix A.1 of OSC Rule 13-502 Fees, select the participation fee)

Late Fee, if applicable
(As determined under section 2.7 of OSC Rule 13-502 Fees)		$N/A

Total Fee Payable		$40,950.00
(Participation Fee plus Late Fee)

EX-99.13 14 d945319dex9913.htm EX-99.13 EX-99.13

Exhibit 99.13

CRESCO LABS INC.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED

DECEMBER 31, 2019 AND 2018

(Expressed in United States Dollars)

Cresco Labs Inc.

MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING

To the Shareholders of Cresco Labs Inc.:

Management of Cresco Labs Inc. and its subsidiaries (combined the “Company”) is responsible for the preparation and presentation of the accompanying consolidated financial statements, including responsibility for significant accounting judgements and estimates in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and ensuring that all information in the annual report is consistent with the consolidated financial statements. This responsibility includes selecting appropriate accounting principles and methods, and making decisions affecting the measurement of transactions in which objective judgement is required.

In discharging its responsibilities for the integrity and fairness of the consolidated financial statements, management designs and maintains the necessary accounting systems and related internal controls to provide reasonable assurance that transactions are authorized, assets are safeguarded, and financial records are properly maintained to provide reliable information for the preparation of consolidated financial statements.

The Board of Directors (the “Board”) is responsible for overseeing management in the performance of its financial reporting responsibilities, and for approving the financial information included in the annual report. The Board fulfils these responsibilities by reviewing the financial information prepared by management and discussing relevant matters with management and external auditors. The Audit Committee is also responsible for recommending the appointment of the Company’s external auditors.

Marcum LLP, an independent firm, is appointed by the shareholders to audit the consolidated financial statements and report directly to them; their report follows. The external auditors have full and free access to, and meet periodically and separately with, both the Audit Committee and management to discuss their audit findings.

April 28, 2020


/s/ Charles Bachtell		/s/ Kenneth Amann
Chief Executive Officer		Chief Financial Officer

Cresco Labs Inc.

INDEX TO FINANCIAL STATEMENTS


INDEPENDENT AUDITORS’ REPORT			1

FINANCIAL STATEMENTS:

Consolidated Statements of Financial Position			3

Consolidated Statements of Operations and Comprehensive Loss			5

Consolidated Statements of Changes in Shareholders’ Equity			6

Consolidated Statements of Cash Flows			7

Notes to the Consolidated Financial Statements			8

LOGO

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Cresco Labs Inc.

Our Opinion

We have audited the consolidated financial statements of Cresco Labs Inc. and its subsidiaries (collectively the “Company”), which comprise the consolidated statement of financial position as at December 31, 2019, the consolidated statements of operations and comprehensive loss, changes in shareholders’ equity and cash flows for the year then ended, and the notes to the consolidated financial statements, which include a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board.

Basis For Our Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities For The Audit Of The Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis Of A Matter – Change In Accounting Principle

As disclosed in note 2 (q), the Company adopted IFRS 16, Leases, effective January 1, 2019 using the modified retrospective approach. Our report is not modified with respect to this matter.

Other Matter

The consolidated financial statements of the Company for the year ended December 31, 2018, were audited by another auditor who expressed an unmodified opinion on those consolidated financial statements on May 6, 2019.

Other Information

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis.

LOGO

Independent Auditors’ Report

Page 2

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities Of Management And Those Charged With Governance For The Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities For The Audit Of The Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

•

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

Independent Auditors’ Report

Page 3

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

•

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

•

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

•

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

•

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

•

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

LOGO

Marcum LLP

Certified Public Accountants

Chicago, IL

April 28, 2020

Cresco Labs Inc.

Consolidated Statements of Financial Position

As of December 31, 2019 and 2018

(In thousands of United States Dollars)


		December 31,			December 31,
		2019			2018
ASSETS
Current assets:
Cash and cash equivalents		$	49,102		$	131,302
Restricted cash			5,050			6,726
Accounts receivable, net	Note 4		16,455			3,658
Biological assets	Note 5		31,791			17,673
Inventory, net	Note 6		49,555			24,521
Loans receivable, short-term	Note 20		644			7,726
Other current assets			6,741			1,098

Total current assets			159,338			192,704
Non-current assets:
Property and equipment, net	Note 7		155,839			39,721
Right-of-use assets	Note 8		46,696			—
Intangible assets, net	Note 10		94,206			25,464
Loans receivable, long-term	Note 20		18,633			7,280
Investments	Note 9		1,278			433
Security deposits			1,084			1,363
Goodwill	Note 10		137,719			51,146
Deferred tax asset	Note 25		1,761			—

Total non-current assets			457,216			125,407

TOTAL ASSETS		$	616,554		$	318,111

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Current liabilities:
Accounts payable and other accrued expenses	Note 11	$	62,834		$	7,595
Income tax payable	Note 25		15,198			2,584
Current portion of lease liabilities	Note 8		12,019			—
Deferred consideration, contingent consideration and other payables	Note 14		59,940			14,873
Derivative liabilities, short-term	Note 20		178			178

Total current liabilities			150,169			25,230
Long-term liabilities:
Deferred rent			—			2,199
Derivative liabilities, long-term	Note 20		15,243			146
Lease liabilities	Note 8		82,856			—
Deferred tax liability	Note 25		23,212			4,459
Deferred consideration and contingent consideration	Note 14		21,901			3,096
Other long-term liabilities	Note 20		550			—

Total long-term liabilities			143,762			9,900

TOTAL LIABILITIES			293,931			35,130

SHAREHOLDERS’ EQUITY:
Share capital			275,851			162,182
Contributed surplus			25,863			11,594
Accumulated deficit			(114,632	)		(52,745	)

Equity of Cresco Labs Inc.			187,082			121,031
Non-controlling interests	Note 12		135,541			161,950

TOTAL SHAREHOLDERS’ EQUITY			322,623			282,981

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	616,554		$	318,111

See accompanying notes to consolidated financial statements.

Nature of Operations (Note 1)

Commitments and Contingencies (Note 18)

Subsequent Events (Note 26)

Approved and authorized for issue on behalf of the Shareholders on April 28, 2020:


/s/ Charles Bachtell		/s/ Kenneth Amann
Chief Executive Officer		Chief Financial Officer

Cresco Labs Inc.

Consolidated Statements of Operations and Comprehensive Loss

For the Years Ended December 31, 2019 and 2018

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


		Year ended December 31,
		2019			2018
Revenue, net	Note 15	$	128,534		$	43,252
Costs of sales - production costs	Note 6		(82,904	)		(28,218	)

Gross profit before fair value adjustments			45,630			15,034
Realized changes in fair value of inventory sold	Note 6		(91,080	)		(27,180	)
Unrealized gain on changes in fair value of biological assets	Note 5		109,531			52,563

Gross profit			64,081			40,417

Expenses:
Selling, general and administrative	Note 16		94,118			34,780
Depreciation and amortization	Note 7, 8, 10		4,219			692

Total expenses			98,337			35,472

(Loss) earnings before other (expense) income and income taxes			(34,256	)		4,945
Other (expense) income:
Interest (expense) income, net	Note 24		(7,875	)		89
Other (expense) income, net	Note 17		(8,647	)		2,781
Loss from investment in associate			(63	)		(348	)

Total other (expense) income, net			(16,585	)		2,522

(Loss) earnings before income taxes			(50,841	)		7,467
Income tax expense	Note 25		(14,461	)		(4,374	)

Net (loss) income and comprehensive (loss) income		$	(65,302	)	$	3,093
Net (loss) income and comprehensive (loss) income attributable to non-controlling interests, net of tax	Note 12		(22,101	)		5,008

Net loss and comprehensive loss attributable to Cresco Labs Inc.		$	(43,201	)	$	(1,915	)

Net loss per share - attributable to Cresco Labs Inc. shareholders
Loss per share - Basic	Note 23	$	(0.37	)	$	(0.03	)
Loss per share - Diluted	Note 23	$	(0.37	)	$	(0.03	)

See accompanying notes to consolidated financial statements.

Cresco Labs Inc.

Consolidated Statements of Changes in Shareholders’ Equity

For the Years Ended December 31, 2019 and 2018

(In thousands of United States Dollars)


										$ Amount
	Notes			Share capital			Shares to be issued			Contributed surplus			Accumulated deficit			Non-controlling interests			Total
Balance as of January 1, 2018					36,958			—			655			(15,935	)		14,258			35,936
Net income (loss)					—			—			—			(1,915	)		5,008			3,093
Share-based compensation expense		Note 13			—			—			10,464			—			—			10,464
Warrant expense		Note 13			—			—			1,095			—			—			1,095
Exercise of options and warrants		Note 12	(c), 13		257			—			(100	)		—			—			157
Stock dividend		Note 12	(e)		3,465			—			—			(3,465	)		—			—
Other unit issuances		Note 12			339			567			—			—			—			906
Non-controlling interest recognized in business combination		Note 12, 14			—			—			—			—			6,377			6,377
Non-controlling interest contribution		Note 12			—			—			—			—			5,280			5,280
Change in ownership interest		Note 12			56,150			—			—			(31,430	)		(24,720	)		—
May Class F equity financing		Note 12	(b)(i)		23,589			—			—			—			—			23,589
October Class F equity financing through September 30, 2018		Note 12	(b)(i)		99,207			—			—			—			—			99,207
Shares issued pursuant to reverse takeover		Note 3, 12			1,693			—			—			—			—			1,693
November Private Placement, net of share issuance costs		Note 12	(b)(i)		74,549			—			—			—			—			74,549
Formation of Cresco Labs, Inc and Cresco Labs, LLC NCI at RTO		Note 12	(b)(v)(c)		(155,747	)		—			—			—			155,747			—
Shares issued in business combinations		Note 14			1,398			19,497			—			—			—			20,895
Establishment of deferred tax liability due to RTO					—			—			(520	)		—			—			(520	)
Repayment of subscription receipt		Note 12			260			—			—			—			—			260

Ending Balance as of December 31, 2018					142,118			20,064			11,594			(52,745	)		161,950			282,981

Balance as of January 1, 2019					142,118			20,064			11,594			(52,745	)		161,950			282,981
Cumulative effect of adoption of IFRS 16 Leases		Note 2	(q)		—			—			—			(1,466	)		(1,526	)		(2,992	)
Net loss					—			—			—			(43,201	)		(22,101	)		(65,302	)
Share-based compensation expense		Note 13			—			—			15,393			—			—			15,393
Exercise of options		Note 13			1,775			—			(594	)		—			—			1,181
Exercise of warrants		Note 12	(c)		1,674			—			(429	)		—			—			1,245
Change in ownership interest		Note 12	(d)		—			—			—			(438	)		(396	)		(834	)
Income tax reserve		Note 25			—			—			(101	)		393			—			292
Issuance of shares related to MedMar		Note 12	(b)(iii)		19,497			(19,497	)		—			—			—			—
Equity issued related to Valley Ag acquisition		Note 12	(b)(i)		48,881			—			—			—			—			48,881
Distributions to limited liability company unit holders		Note 12	(b)(iv)		—			—			—			(2,942	)		(688	)		(3,630	)
Shares issued through equity raise, net of costs		Note 12	(b)(ii)		45,975			—			—			—			—			45,975
Cresco LLC shares redeemed		Note 12	(d)		15,931			—			—			(14,233	)		(1,698	)		—
Cancellation of shares		Note 20	(a)(i)		—			(567	)		—			—			—			(567	)

Ending Balance as of December 31, 2019					275,851			—			25,863			(114,632	)		135,541			322,623

See accompanying notes to consolidated financial statements.

Cresco Labs Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2019 and 2018

(In thousands of United States Dollars)


	Year ended December 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(65,302	)	$	3,093
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		11,910			2,172
Bad debt expense		436			—
Share-based compensation expense		14,867			10,464
Loss on investments, net of gains		878			(2,083	)
Loss, net of gains, on changes in fair value of deferred and contingent consideration		3,720			—
Loss (gain) on derivative instruments and warrants		3,190			(861	)
Loss, net of gains, on loans receivable		279			—
Non-cash listing expense and other financing fees		—			2,178
Loss recognized on sale-leaseback transactions		670			—
Realized changes in fair value of inventory sold		82,659			27,180
Loss on inventory write-offs		8,421			—
Unrealized gain, net of losses, on changes in fair value of biological assets		(109,531	)		(52,563	)
Change in deferred taxes		1,176			1,515
Foreign currency gain, net		(444	)		—
Changes in operating assets and liabilities:
Accounts receivable		(12,782	)		(2,588	)
Inventory		(109,601	)		(45,490	)
Biological assets		96,849			41,681
Other current assets		(4,645	)		(820	)
Security deposits		(102	)		57
Accounts payable and other accrued expenses		36,516			2,953
Other current liabilities		3,033			—
Deferred rent		—			612
Income tax payable		12,614			2,584

NET CASH USED IN OPERATING ACTIVITIES		(25,189	)		(9,916	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(91,673	)		(27,726	)
Purchases of property and equipment in an asset acquisition		—			(1,436	)
Purchases of intangibles		(4,453	)		(782	)
Proceeds from sale and leaseback transactions and lease tenant incentives		38,532			—
Payment of acquisition consideration, net of cash acquired		(30,207	)		(37,078	)
Payment of deferred consideration in an asset acquisition		(1,500	)
Purchase of investments		—			(901	)
Loans receivable for entities to be acquired		(19,894	)		(13,859	)
Distributions from associate		1,599			—

NET CASH USED IN INVESTING ACTIVITIES		(107,596	)		(81,782	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from September 2019 financing		55,476			—
Payment of issuance costs of financing		(3,196	)		(7,206	)
Proceeds from issuance of warrants for overallotment		909			—
Proceeds from private placement		—			205,646
Proceeds from exercise of stock options and warrants		2,268			157
Non-controlling interests contributions		—			5,279
Acquisition of non-controlling interests		(834	)		—
Distributions to Non-controlling interest redeemable unit holders		(688	)		—
Distributions to other members		(2,942	)		—
Repayment of related party payables and notes		—			(1,053	)
Principal payments of leases		(2,084	)		—
Cash received from subscription receivable		—			260
Subscription deposits refunded		—			(400	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		48,909			202,683

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH		(83,876	)		110,985
Cash and cash equivalents and restricted cash, beginning of period		138,028			27,043

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	54,152		$	138,028

CASH PAID DURING THE PERIOD FOR:
Income tax, net	$	247		$	—
Interest		5,350			24
NON-CASH TRANSACTIONS:
Equity issued for acquisitions and escrows	$	48,881		$	21,463
Non-controlling interests redeemed for equity		1,698			—
Non-controlling interests recognized in business combinations		—			6,378
Previously held interest in business combination		—			3,641
Net liability upon adoption of IFRS 16 Leases and subsequent additions		92,484			—
Derivative liability incurred for business combinations		5,437			459
Deferred and contingent consideration for acquisitions		52,596			17,875
Conversion of loan to investment in associate		6,783			—
Liability incurred to purchase property and equipment		15,798			—
Cashless exercise of stock options		113			—
See accompanying notes to consolidated financial statements

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

1.	NATURE OF OPERATIONS

Cresco Labs Inc. (“Cresco” 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. 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-old for one-new basis.

On November 30, 2018, in connection with the reverse takeover (the “Transaction”) (as described further in Note 3), 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 the Super Voting Shares (“MVS”).

Pursuant to the Transaction, among the Company (then Randsburg) and Cresco Labs, LLC (“Cresco Labs”), a series of transactions was completed on November 30, 2018 resulting in a reorganization of Cresco Labs and Randsburg and pursuant to which Randsburg became the indirect parent and sole voting unitholder of Cresco. The transaction constituted a reverse takeover of Randsburg by Cresco Labs under applicable securities laws. Cresco Labs 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.

The 2018 comparative amounts presented in the financial statements are those of Cresco Labs, LLC.

On December 3, 2018, the Company began trading on the Canadian Securities Exchange (“CSE”) under the ticker symbol “CL.” On March 6, 2019, Cresco shares were approved to be quoted on the Over-the-Counter Market (“OTC”) and is traded under the ticker symbol “CRLBF.” On August 13, 2019, the Company began trading its Euro-denominated shares on the Frankfort Stock Exchange (“FSE”) and are trading under the symbol “6CQ.”

The Company is licensed to cultivate, manufacture and sell wholesale and retail cannabis and wholesale and retail cannabis products. The Company operates in and/or has ownership interests in Illinois, Pennsylvania, Ohio, California, Maryland, Nevada, Arizona, New York and Massachusetts, pursuant to the Illinois Compassionate Use of Medical Cannabis Pilot Program 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 Nevada Revised Statutes section 453A, the Arizona Medical Marijuana Act, the New York Compassionate Care Act and the Massachusetts Cannabis Control Commission, respectively.

The Company’s head office is located at Suite 110, 400 W Erie St., Chicago, IL 60654 and the registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Basis of Preparation

The accompanying consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”) in effect for the years ended December 31, 2019 and 2018.

The consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on April 28, 2020.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(b)

Basis of Measurement

The accompanying consolidated financial statements have been prepared on a going concern basis, under the historical cost convention, except for biological assets, which are measured at fair value less costs to sell; certain investments in associates, which are accounted for under the equity method; loans receivable measured at fair value through profit or loss (“FVTPL”); and certain investments, derivative instruments, and deferred 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 and the contractual obligation for liabilities.

Management has applied judgements in concluding that there remain no material uncertainties related to events or conditions that may cast doubt upon the entity’s ability to continue as a going concern, which judgments include effect of subsequent events (see note 26); and the Company’s ability to realize its assets and settle its obligations in the normal course of operations for at least twelve months from the date of the financial statements.

(c)

Classification of Expenses

The expenses within the accompanying statements of operations are presented by function. See Note 16 for details of expenses by nature.

(d)

Functional and Presentation Currency

The Company’s functional currency and that of all its subsidiaries, as determined by management, is the United States (“U.S.”) dollar. The Company’s presentation currency is the U.S. dollar. As such, the accompanying consolidated financial statements are presented in U.S. dollars. 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 Consolidated Statements of Operations and Comprehensive Loss.

(e)

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries with intercompany balances and transactions eliminated on 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’s wholly-owned subsidiaries and entities over which the Company has control as of December 31, 2019:


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		43.8	%
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	Illinois	Dispensary		87.6	%
MedMar Rockford, LLC	Illinois	Dispensary		75	%

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018


Entity	Location	Purpose	Percentage Held
Cresco Labs Notes Issuer, LLC	Illinois	Holding Company
Cresco Labs Ohio, LLC	Ohio	Cultivation, Production, and Dispensary Facility		99	%
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	%
Cresco Labs Arizona, LLC	Arizona	Holding Company		100	%
Arizona Facilities Supply, LLC	Arizona/Maryland	Cultivation, Production, and Dispensary Facility		100	%
Cresco Labs Tinad, LLC	Illinois	Holding Company		100	%
PDI Medical III, LLC	Illinois	Dispensary		98	%
Cresco Labs Phoenix Farms, LLC	Illinois	Holding Company		100	%
Phoenix Farms of Illinois, LLC	Illinois	Dispensary		100	%
JDC Elmwood, LLC	Illinois	Holding Company		100	%
FloraMedex, LLC	Illinois	Dispensary		100	%
Cresco Edibles, LLC	Illinois	Holding Company		100	%
TSC Cresco, LLC	Illinois	Licensing		75	%
Cresco HHH, LLC	Massachusetts	Cultivation, Production, and Dispensary Facility		100	%

Cresco 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 Note Issuer, LLC. Therefore, the Company controls Cresco Labs Note Issuer, LLC and has consolidated its results into the 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 Consolidated Statements of Financial Position, and the share of income (loss) attributable to non-controlling interests is shown as a component of net loss in the Consolidated Statements of Operations and Comprehensive Loss. Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.

(f)

Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in financial institutions, other deposits that are readily convertible into cash and cash on hand. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

(g)

Restricted Cash

Restricted cash represents amounts held in escrow related to the Company’s pending acquisitions. The Company held $5,050 thousand and $6,726 thousand of restricted cash as of December 31, 2019 and 2018, respectively.

(h)

Accounts Receivable

Accounts receivables are classified as financial assets initially recognized at fair value and subsequently measured at amortized cost, less any provisions for impairment. When an account receivable is uncollectible, it is written off against the provision. Subsequent recoveries of amounts previously written off are credited to the Consolidated Statements of Operations and Comprehensive Loss.

(i)

Biological Assets

The Company’s biological assets consist of cannabis plants and are valued at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of internally produced Work-in-process and Finished Goods inventory after harvest. The net unrealized gains or losses arising from changes in fair value less costs to sell during the year are included in the Consolidated Statements of Operations and Comprehensive Loss.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

All production costs related to biological assets are expensed as incurred and are included as Cost of sales – production costs. They include the direct cost of seeds and growing materials as well as other indirect costs such as utilities and supplies used in the growing process. Indirect labor for individuals involved in the growing and quality control process is also included, as well as depreciation on production equipment and overhead costs such as rent to the extent it is associated with the growing space. Unrealized fair value gains/losses on growth of biological assets are recorded in a separate line on the face of the income statement.

The Company capitalizes cost incurred after harvest to bring the products to their present location and condition in accordance with International Accounting Standards (“IAS”) 2 Inventories.

(j)

Inventory

Inventories of purchased finished goods and packing materials are initially valued at cost and subsequently at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value less costs to sell at harvest which becomes the deemed cost. Any subsequent post-harvest costs are capitalized to inventory. Post-harvest costs include costs such as materials, labor and depreciation expense on equipment involved in manufacturing, packaging, labeling and inspection. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Products for resale and supplies and consumables are valued at lower of cost and net realizable value.

The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written-down to net realizable value.

(k)

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation. Land is recorded at cost. Depreciation is calculated using the straight-line method over the useful life of the asset. The assets’ residual values, useful lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively, if appropriate. Equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the accompanying Consolidated Statements of Operations and Comprehensive Loss in the year the asset is derecognized.


Category		Estimated Useful Life
Leasehold Improvements	Amortized over the lesser of the life of the lease or
	estimated useful life of the improvement	8 - 15 years
Machinery and Equipment	Over the estimated useful life of the asset	5 - 15 years
Furniture and Fixtures	Over the estimated useful life of the asset	3 - 7 years
Vehicles	Over the estimated useful life of the asset	5 years
Website and Software	Over the estimated useful life of the asset	3 years
Computer Equipment	Over the estimated useful life of the asset	3 - 5 years
Buildings	Over the estimated useful life of the asset	30 - 40 years
Building Improvements	Over the estimated useful life of the asset	8 - 15 years

Repairs and maintenance that do not improve efficiency or extend economic life are charged to expense as incurred.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(l)

Intangible Assets

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any.

Intangible assets acquired in a business combination are measured at fair value at the acquisition date or date of consolidation/control. Amortization of definite-lived intangible assets is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any, over the following terms:


Market Related Intangibles (Trade Names)			18 months
Customer Relationships			8 years
Non-Compete Agreements			4 - 5 years
Permit Application Fees			1 - 2 years

The estimated useful lives and residual values are reviewed at each year end, and any changes in estimates are accounted for prospectively. Intangible assets that have an indefinite useful life are not subject to amortization. The Company’s indefinite-lived intangible assets consist of licenses, which, for valuation purposes, represent the future benefits associated with the Company’s cultivation, processing, and dispensary licenses. Absent such license intangibles, the Company cannot continue as a going concern and as such, there is no foreseeable limit to the period over which these assets are expected to generate future cash inflows to the Company.

Definite-lived intangible assets are tested for impairment when there is an indication of impairment. Indefinite-lived intangible assets are tested for impairment annually or more frequently as warranted if events or changes in circumstances indicate impairment (refer to Note 10 for additional detail on impairment tests). For the years ended December 31, 2019 and 2018, the Company did not recognize any impairment losses.

(m)

Investments in Associates

The Company determines how to account for investments based on the level of control it has over the investment. If control is determined, then the investment should be consolidated. Investments in which the Company has significant influence, but no control, are considered investments in associates. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but without control or joint control over those policies. Investments in associates are accounted for using the equity method of accounting. Interests in associates accounted for using the equity method are initially recognized at cost. The carrying value is then adjusted for the Company’s share of comprehensive income (loss), additional contributions and distributions from the investee. The carrying value of associates is assessed for impairment at each balance sheet date. Investments that the Company does not have control or significant influence over are first recognized at cost. At each reporting period, changes from the initial cost and fair value are recognized through profit and loss. The Company’s investments in equity-accounted investees are classified within Investments in the Consolidated Statements of Financial Position.

(n)

Goodwill

Goodwill represents the excess of the purchase price paid for the acquisition of a business over the fair value of the net tangible and intangible assets acquired. Goodwill is allocated to the cash-generating unit (“CGU”) or CGUs which are expected to benefit from the synergies of the combination.

Goodwill is tested for impairment annually or more frequently as warranted if events or changes in circumstances indicate impairment. For the purpose of impairment testing, goodwill and indefinite-lived intangible assets have been allocated to CGUs or groups of CGUs representing the lowest level that the assets are monitored for internal reporting purposes. Goodwill and indefinite-lived intangible assets are tested for impairment by comparing the carrying value of each CGU containing the assets to its recoverable amount (the higher of the asset’s fair value less costs of disposal and value-in-use); an

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. Impairment losses recognized in respect of a CGU are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the CGU. Any goodwill impairment loss is recognized in the Consolidated Statements of Operations and Comprehensive Loss in the period in which the impairment is identified. Impairment losses on goodwill are not subsequently reversed. The Company’s most recent goodwill impairment test during the fourth quarter did not result in the recognition of any impairment losses. The Company has not recorded any goodwill impairment for the years ended December 31, 2019 and 2018.

(o)

Income Taxes

Tax expense recognized in profit or loss comprises the sum of current and deferred taxes not recognized in other comprehensive income (loss) or directly in equity.

Current Tax

Current tax assets and/or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting periods that are unpaid at the reporting date. Current tax is payable on taxable profit, which differs from profit or loss in the financial statements. Calculation of current tax is based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

Deferred Tax

Deferred taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realization, provided they are enacted or substantively enacted by the end of the reporting period. Deferred tax liabilities are always provided for in full. Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized against future taxable income. Deferred tax assets and liabilities are offset only when the Company has a right and intention to offset current tax assets and liabilities from the same taxation authority. Changes in deferred tax assets or liabilities are recognized as a component of tax income or expense in profit or loss, except where they relate to items that are recognized in other comprehensive income or directly in equity, in which case the related deferred tax is also recognized in other comprehensive income (loss) or equity, respectively.

(p)

Revenue Recognition

The Company’s primary source of revenue is from wholesale of cannabis products to dispensary locations and direct retail sales to eligible customers at the Company owned dispensaries.

The Company adopted IFRS 15 Revenue from Contracts with Customers using the modified retrospective approach as of the date of initial application on January 1, 2018, with no revision of comparative period amounts. As the effect of adopting IFRS 15 did not have a material impact on the financial statements, there was no adjustment made to the opening balance of equity at the date of initial application.

The standard includes a five-step model for contracts with customers as follows:

Identify the contract with a customer;

Identify the performance obligations in the contract;

Determine the transaction price, which is the total consideration provided by the customer;

Allocate the transaction price among the performance obligations in the contract based on their relative fair values; and

Recognize revenue when the relevant criteria are met for each unit (at a point in time or over time).

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The Company recognizes revenue upon satisfaction of the performance obligation, when control of the promised goods is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods, upon delivery and acceptance by wholesale and retail customers.

Contract Costs

In accordance with IFRS 15, incremental costs to obtain a contract are capitalized and amortized over the contract term if the cost are expected to be recoverable. The Company does not capitalize incremental costs to obtain a contract where the contract duration is expected to be one year or less. As of December 31, 2019 and 2018, the Company did not have any costs capitalized.

(q)

Change in Accounting Policy—Leases

In January 2016, the IASB published IFRS 16 Leases, replacing IAS 17 Leases IFRIC 4 Determining whether an Arrangement Contains a Lease. IFRS 16 introduced a single lessee accounting model, requiring lessees to recognize assets for the right to use as well as lease liabilities for the outstanding lease payments. The Company adopted IFRS 16 on January 1, 2019, using a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of initial application, without revising prior periods.

IFRS 16 permits entities to elect a number of practical expedients to simplify the adoption of IFRS 16 as well as the ongoing application of IFRS 16.

Upon adoption of IFRS 16, the Company elected to adopt the following practical expedients:

•

The existing leases were not reassessed at the initial application date to determine whether or not they are leases under the criteria of IFRS 16. Instead, contracts classified as leases under IAS 17 or IFRIC 4 will continue to be accounted for as leases;

•

Leases for which the lease term ends within 12 months of the date of initial application of the standard were treated as short-term leases and recognized as rent expense within Selling, general and administrative (“SG&A”) in the Statement of Operations and Comprehensive Loss on a straight-line basis over the lease term; and

•

A single discount rate was applied to a portfolio of leases with similar characteristics.

On an ongoing basis, the Company elected to adopt the following practical expedient:

•

The Company has elected not to recognize right-of-use (“ROU“) assets and lease liabilities where the total lease term is less than or equal to 12 months. The payments for such leases are recognized as rent expense within SG&A in the Consolidated Statement of Operations and Comprehensive Loss on a straight-line basis over the lease term.

The Company has real estate leases for retail stores, cultivation facilities, corporate offices, and equipment leases. At inception of a contract, the Company estimates whether the contract includes a lease. A contract contains a lease if it includes enforceable rights and obligations under which the right to control the use of an identified asset is conveyed for a period of time in exchange for consideration. The Company recognized a ROU asset and a lease liability at the commencement date – the date when the asset is available for use by the lessee.

The Company assesses at lease commencement whether it is reasonably certain to exercise extension or termination options. The Company reassesses its lease portfolio to determine whether it is reasonably certain to exercise the options if there is a significant event or significant change in circumstances within its control. The extension options which are considered reasonably certain to be exercised are mainly those for which operational decisions have been made which make the leased assets vital to the continued relevant business activities.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Liabilities arising from a lease are initially measured at the present value of the lease payments that are not paid at that date discounted using the Company’s incremental borrowing rate. Lease liabilities include the value of the following payments:

•

Fixed payments, including in-substance fixed payments, less any lease incentives receivable;

•

The exercise price of a purchase option if the Company is reasonably certain to exercise that option; and

•

Penalties for early termination of the lease, if the lease term reflects the Company exercising an option to terminate the lease.

The lease liability is subsequently measured at amortized cost using the effective interest method. The lease liability is decreased by cash paid less interest expense incurred. The lease liability is remeasured when there is a change in future lease payments, or if the Company changes its assessment of whether it will exercise an extension, purchase, or termination option.

ROU assets are measured at cost and are comprised of the following:

•

The amount of the initial measurement of lease liability;

•

Lease payments made at or before the commencement date less any lease incentives received;

•

Any initial direct costs; and

•

An estimate of costs of dismantling and removing the underlying asset, restoring the site on which it is located or the underlying asset, if applicable.

The ROU asset is depreciated on a straight-line basis from the commencement date to the end of the lease term. The depreciation expense on ROU assets replaces rent expense. The value of the ROU asset is periodically reduced by impairment losses, if any, and adjusted for certain revaluations of the lease liability.

On initial application, the Company elected to measure the ROU assets on a lease-by-lease basis at either 1) an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments or deferred rent payments or 2) at its carrying amount as if IFRS 16 had been applied since the commencement date but discounted using the Company’s incremental borrowing rate at January 1, 2019.

On initial application, the lease payments were discounted using the Company’s incremental borrowing rate at January 1, 2019. The weighted average incremental borrowing rate was 13%.

The Company recognized a ROU asset of $32,519 thousand, lease liability of $37,707 thousand, accumulated deficit of $1,466 thousand, a reduction of deferred rent of $2,196 thousand and a reduction of non-controlling interest of $1,526 thousand at January 1, 2019. The cumulative effect adjustment to accumulated deficit and NCI was a result of measuring the ROU asset for certain leases as if IFRS 16 had been applied since their respective commencement dates.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The following reconciliation to the opening balance for lease liabilities under IFRS 16 as of January 1, 2019 is based on leases at December 31, 2018:


($ in thousands)
Lease obligations in accordance with IAS 17 at December 31, 2018	$	60,451
Leases not commenced at January 1, 2019		(929	)
Exemption for short-term leases		(133	)
Lease extension options		34,841
Other		1,149

Obligations from lease arrangements (undiscounted)		95,379

Effect of discounting		(57,672	)

Lease liability recognized as of January 1, 2019	$	37,707

Refer to Note 8 for additional information on the impact of IFRS 16.

(r)

Share and Unit-Based Compensation

The Company measures equity settled share and unit-based payments based on their fair value at the grant date and recognizes compensation expense over the vesting period based on the Company’s estimate of equity instruments that will eventually vest. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates actual forfeitures may vary from the original estimate. The impact of the revision of the original estimate is recognized in profit or loss such that the cumulative expense reflects the revised estimate. For share and unit-based payments granted to non-employees, the compensation expense is measured at the fair value of the good and services received except where the fair value cannot be estimated in which case it is measured at the fair value of the equity instruments granted. The fair value of share and unit-based compensation to non-employees is periodically re-measured until counterparty performance is complete, and any change therein is recognized over the period and in the same manner as if the Company had paid cash instead of paying with or using equity instruments.

For awards where the holder has the election of settling their award in either cash or equity, the fair value of share-based compensation is remeasured at the end of each reporting period until the corresponding awards vest.

(s)

Financial Instruments

Effective January 1, 2018, the Company adopted IFRS 9 Financial Instruments. IFRS 9 introduces new requirements for the classification and measurement of financial assets. IFRS 9 requires all recognized financial assets to be measured at amortized cost or fair value in subsequent accounting periods following initial recognition. IFRS 9 also amends the requirements around hedge accounting, and introduces a single, forward looking expected loss impairment model. All financial assets and financial liabilities, in respect of financial instruments, are recognized on the Company’s Consolidated Statements of Financial Position when the Company becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are incremental and are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities measured at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expires, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The classification of financial instruments dictates how these assets and liabilities are measured subsequently in the Company’s consolidated financial statements.

(i)

Financial Instruments Measured at Fair Value Through Profit or Loss

Financial instruments are classified as FVTPL when they are held for trading. A financial instrument is held for trading if it was acquired for the purpose of sale in the near term. Derivative financial instruments that are not designated and effective as hedging instruments are also classified as FVTPL. Financial instruments classified as FVTPL are stated at fair value with any changes in fair value recognized in earnings for the period. Financial assets in this category include certain short-term investments, derivatives and contingent consideration.

(ii)

Financial Assets Measured at Amortized Cost

Financial assets measured at amortized cost are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial assets are measured at amortized cost using the effective interest method, less any impairment losses. Financial assets in this category include cash and cash equivalents, short-term investments, trade receivables, other receivables, and loans receivable.

Loans receivable primarily consist of loans to entities in which the Company has a potential future investment. These loans are measured at either FVTPL if they have derivative qualities or at amortized cost, less expected credit losses.

(iii)

Impairment of Financial Assets

The Company assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired.

The Company recognizes expected credit losses (“ECL”) for trade receivables based on the simplified approach under IFRS 9. The simplified approach to the recognition of expected losses does not require the Company to track the changes in credit risk; rather, the Company recognizes a loss allowance based on lifetime ECLs at each reporting date from the date of the trade receivable.

Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Trade receivables are reviewed qualitatively on a case-by-case basis to determine whether they need to be written off.

For financial assets carried at amortized cost, the Company recognizes loss allowances for ECLs on its financial assets measured at amortized cost. ECLs are a probability-weighted estimate of credit losses. The Company applies a three-stage approach to measure ECLs. The Company measures loss allowance at an amount equal to 12 months of expected losses for performing loans receivable if the credit risk at the reporting date has not increased significantly since initial recognition (Stage 1) and at an amount equal to lifetime expected losses on loans receivable that have experienced a significant increase in credit risk since origination (Stage 2) and at an amount equal to lifetime expected losses which are credit impaired (Stage 3).

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The Company considers a significant increase in credit risk to have occurred if contractual payments are more than 30 days past due and considers the loans receivable to be in default if they are 90 days past due. A significant increase in credit risk or default may have also occurred if there are other qualitative factors (including forward looking information) to consider; such as borrower specific information (i.e., change in credit assessment).

Objective evidence of impairment of financial assets carried at amortized cost exists if the counterparty is experiencing significant financial difficulty, there is a breach of contract, concessions are granted to the counterparty that would not normally be granted, or it is probable the counterparty will enter into bankruptcy or a financial reorganization.

(iv)

Financial Liabilities Measured at Amortized Cost

Financial liabilities measured at amortized cost are recognized initially at fair value net of any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Other financial liabilities are de-recognized when the obligations are discharged, cancelled or expired. Financial liabilities in this category include accounts payable and accrued liabilities and deferred consideration and other payables.

Summary of the Company’s Classification and Measurements of Financial Assets and Liabilities


	IFRS 9
	Classification	Measurement
Cash and cash equivalents	FVTPL	Fair value
Restricted cash	Amortized cost	Amortized cost
Accounts receivable	Amortized cost	Amortized cost
Loans receivable	Amortized cost or FVTPL	Amortized cost or fair value
Investments	FVTPL	Fair value
Accounts payable and accrued liabilities and Other long-
term liabilities	Amortized cost	Amortized cost
Deferred consideration and other payables	Amortized cost or FVTPL	Amortized cost or fair value
Derivative liabilities and contingent consideration	FVTPL	Fair value

(t)

Earnings (Loss) per Share

The Company presents basic and diluted earnings (loss) per share. Basic earnings per share is calculated by dividing the profit or loss attributable to shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share 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 LLC shares, warrants, restricted stock units (“RSUs”) and options issued. Items with an anti-dilutive impact are excluded from the calculation. The number of shares included with respect to options, warrants and RSUs is computed using the treasury stock method.

(u)

Significant Accounting Judgements, Estimates, and Assumptions

The preparation of the Company’s accompanying consolidated financial statements under IFRS requires management to make judgements, estimates, and assumptions about the carrying amounts of certain assets and liabilities. Estimates and related assumptions are based on historical experience and other relevant factors. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis for reasonableness and relevancy. Where revisions are required, they are recognized in the period in which the estimate is revised for the current as well as future periods that are affected.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Significant judgements, estimates, and assumptions that have the most significant effect on the amounts recognized in the accompanying consolidated financial statements are described below.

(i)

ECL on Loan Receivables and Trade Receivables

The Company calculates ECLs for trade receivables based on the historical default rates over the expected life of the trade receivable and adjusts for forward-looking estimates, which is determined through the exercise of judgement. The Company calculates ECLs for loan receivables by considering cash shortfalls on a discounted basis it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring, which is determined through the exercise of judgement. The Company’s ECL models rely on forward looking information and economic inputs, such as default rates, industry growth rate, licensing rules, etc. The inputs and models used for calculating expected credit losses may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays may be made as temporary adjustments using expert credit judgement. The allowance the Company records, if any, is the sum of these probability weighted outcomes.

(ii)

Biological assets and Inventory

The valuation of biological assets at the point of harvest is the cost basis for all cannabis-based inventory and thus any critical estimates and judgements related to the valuation of biological assets are also applicable for inventory. In calculating the value of the biological assets and inventory, the estimates management makes includes estimating the stage of growth of the cannabis up to the point of harvest, harvesting costs, selling costs, average or expected selling prices and expected yields for the cannabis plants. In calculating final inventory values, management compares the inventory cost to estimated net realizable value. The Company must also determine if the cost of any inventory exceeds its net realizable value, such as cases where prices have decreased, or inventory has spoiled or has otherwise been damaged. Further information on estimates used in determining the fair value of biological assets is contained in Note 5.

(iii)

Estimated Useful Lives, Depreciation of Property and Equipment, and Amortization of Intangible Assets

Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgement.

Amortization of intangible assets is dependent upon estimates of useful lives which are determined through the exercise of judgement.

(iv)

Property and Equipment Impairment

The Company evaluates the carrying value of long-lived assets at the end of each reporting period whenever there is any indication that a long-lived asset is impaired. Such indicators include evidence of physical damage, indicators that the economic performance of the asset is worse than expected, or that the decline in asset value is more than the passage of time or normal use, or significant changes occur with an adverse effect on the Company’s business. If any such indication exists, the Company estimates the recoverable amount of the asset. An asset is impaired when its carrying amount exceeds its recoverable amount. The Company measures impairment based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset. The fair value is determined primarily by using the projected future cash flows discounted at a rate commensurate with the risk involved as well as market valuations. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair values are reduced for an estimate of the cost to dispose or abandon.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(v)

Goodwill and Indefinite-Lived Intangible Asset Impairment

Goodwill and indefinite-lived intangible assets are tested for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of these assets has been impaired. In order to determine if the value of these assets has been impaired, the CGU to which the assets have been allocated must be valued using present value techniques. When applying this valuation technique, the Company relies on a number of factors, including historical results, business plans, forecasts, market data and discount rates. Changes in the conditions for these judgements and estimates can significantly affect the assessed value of goodwill and indefinite-lived intangibles. The Company has determined that the goodwill associated with all acquisitions belongs to each respective state as this is the lowest level at which management monitors goodwill and indefinite-lived intangibles. See Note 10 for additional detail.

(vi)

Business Combinations and Asset Acquisitions

Determination of an acquisition as a business combination or an asset acquisition depends on whether the assets acquired constitute a business. The classification can have a significant impact on the accounting on and subsequent to the acquisition date.

Business Combinations

A business combination is a transaction or event in which an acquirer obtains control of one or more businesses and is accounted for by applying the acquisition method. The total consideration transferred in a business combination is the sum of the fair values of assets transferred, liabilities incurred or assumed, and equity interests issued by the acquirer in exchange for control of the acquiree. The acquisition date is the date where the Company obtains control of the acquiree. The identifiable assets acquired and liabilities assumed are recognized at their acquisition date fair values, except for deferred taxes and share-based payment awards where IFRS 3 Business Combinations provides exceptions to recording the amounts at fair value. Acquisition costs are expensed to profit or loss.

In determining the fair value of all identifiable assets, liabilities and contingent liabilities acquired, the most significant estimates relate to contingent consideration and intangible assets. Management exercises judgement in estimating the probability and timing of when contingent payments are expected to be made and at what amounts, which is used as the basis for estimating fair value. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of these assets and any changes in the discount rate applied.

Non-controlling interest in the acquiree, if any, is recognized either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets, determined on an acquisition-by-acquisition basis. For each acquisition, the excess of total consideration over the fair value of previously held equity interest prior to obtaining control, and the non-controlling interest in the acquiree over the fair value of the identifiable net assets acquired, is recorded as goodwill.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Asset Acquisitions

Acquisitions that do not meet the definition of a business combination are accounted for as an asset acquisition. Consideration paid for an asset acquisition is allocated to the individual identifiable assets acquired and liabilities assumed based on their relative fair values. Goodwill is not recorded as a result of an asset acquisition.

(vii)

Control Over the Investee, Principles of Consolidation

The Company examines three elements to determine whether control exists. When all of these three elements of control are present, then an investor is considered to control an investee and consolidation is required. When one or more of the elements is not present, an investor will not consolidate but instead be required to determine the nature of its relationship with the investee. The three elements of control that serve as the basis of consolidation include: identify the investee, understand the purpose and design of the investee, and identify the relevant activities of the investee and how decisions about these relevant activities are made. The Company exercises its judgement when determining control over an investee in when it has all of the following attributes: power over the investee, such as the ability to direct relevant activities of the investee; exposure, or rights, to variable returns from its involvement with the investee, such as returns that are not fixed and have the potential to vary with performance of the investee; and the ability to use its power over the investee to affect the amount of the investor’s returns, such as identifying the link between power and returns.

Cresco Labs Inc. through Cresco U.S. Corp has control over Cresco Labs, LLC. Despite holding only a minority interest, the Company has the full decision-making power over Cresco Labs. According to IFRS 10 Consolidated Financial Statements, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company has the right to direct all the relevant activities of Cresco Labs and to affect its returns under the amended and restated LLC Agreement. The Company is also exposed to variable returns through its own shareholding in the Cresco Labs. The Company also exercises judgement in applying the provisions of IFRS 10 to determine when to consolidate its acquired entities, which may occur before the related transactions have been fully funded. See Note 14 for additional information.

(viii)

Share-Based Compensation

In calculating the share-based compensation expense, key estimates such as the rate of forfeiture of awards granted, the expected life of options, the volatility of the Company’s stock price and the risk-free interest rate are used.

(ix)

Income Tax

Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.

(x)

Implementation of IFRS 16

The adoption of IFRS 16 Leases required, as of January 1, 2019, the Company to assess its significant judgements and certain key estimates when applying the standard in Note 2(q) and Note 8.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Critical judgements required in the application of IFRS 16 include the following:

•

Identifying whether a contract or part of a contract includes a lease at inception of the contract. The Company’s assessment includes the exercise of judgement about whether the contract depends on a specific asset, whether the Company obtains substantially all the economic benefits from the use of the asset, and whether the Company has the right to direct the use of the asset and non-lease components;

•

Identifying lease components and allocating the consideration to each lease component on the basis of the relative stand-alone price of each lease component. The Company assesses each lease component for a right to use an underlying asset and, if necessary, determines the relative stand-alone price for each lease component based on current market prices;

•

Determining whether it is reasonably certain that an extension, purchase or termination option will be exercised, on a lease by lease basis. The Company considers all facts and circumstances and examines whether there is an economic incentive or penalty affecting the decision to exercise an option; and

•

Establishing whether there are multiple leases in an arrangement. The Company’s assessment includes the exercise of judgement whether it has the right to control multiple assets within a contract.

Key sources of estimation uncertainty in the application of IFRS 16 include the following:

•

Estimating the lease term. The Company determines the lease term as the non-cancellable period of the lease at the commencement date, adjusted for any purchase, renewal or termination options it deems reasonably certain to exercise;

•

Determining the appropriate incremental borrowing rate specific to each leased asset. The Company establishes incremental borrowing rates used as discount factors in discounting payments reflecting the Company’s borrowing rate, duration of lease term and credit spread; and

•

Assessing whether a ROU asset is impaired if indicators are present.

Unanticipated changes in these judgements or estimates could affect the identification and determination of the fair value of lease liabilities and ROU assets at initial recognition, as well as the subsequent measurement of lease liabilities and ROU assets. Changes in the economic environment or changes in the cannabis and retail industry may impact Management’s assessment of lease terms, and any changes in Management’s estimate of lease terms may have a material impact on the Company’s statement of financial position and Statement of Operations and Comprehensive Loss. In addition, the Company’s assessed incremental borrowing rates are subject to change mainly due to macroeconomic changes in the environment and cannabis industry and the Company’s creditworthiness.

These items could potentially result in changes to amounts reported in the Consolidated Statements of Operations and Comprehensive Loss and Financial Position of the Company.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(xi)

Sale and Leaseback Accounting

A sale and leaseback transaction involves the transfer of an asset to another entity and the leaseback of the same asset. The Company applies IFRS 15 and IFRS 16 when accounting for sale and leaseback transactions. A sale and leaseback is recognized as a sale when the control of the asset has been transferred to the purchaser. The Company recognizes any gain or loss related to the transfer of rights of the asset to the buyer-lessor and measures the ROU asset arising from the leaseback at the retained portion of the previous carrying amount.

(v)

Recent Accounting Pronouncements

The following IFRS standards have been recently issued by the IASB. Pronouncements that are not applicable to the Company have been excluded herein.

(i)

IAS 28 Long-term Interests (“IAS 28”)

In October 2017, the IASB amended IAS 28, Long-term Interests in Associates and Joint Ventures. The amendments were added to clarify that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. This standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted. The adoption of this standard on January 1, 2019 did not have any impact on the Company’s financial statements.

(ii)

IFRS 3 Business Combination (“IFRS 3”)

In October 2018, the IASB issued amendments to IFRS 3 Business Combinations, Definition of Business. The amendments clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. It also narrowed the definitions of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs and removed the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs. In addition, the amendments added an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.

The amendments must be applied to transactions that are either business combinations or asset acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. Consequently, entities do not have to revisit such transactions that occurred in prior periods. Earlier application is permitted and must be disclosed. The Company elected early application for interim and annual periods beginning July 1, 2019. There was no impact from the adoption of IFRS 3 amendments related to the year ended December 31, 2019.

3.	REVERSE TAKEOVER TRANSACTION

On October 10, 2018, Randsburg and the Company announced that they had entered into a binding letter agreement to affect a transaction that resulted in a reverse takeover of Randsburg by Cresco.

The Transaction was treated for accounting purposes as an asset acquisition of Randsburg by Cresco. In consideration for the acquisition of Randsburg, the Company issued SVS of Cresco for each outstanding common share of Randsburg totaling approximately 258,205 SVS to shareholders of Randsburg.

Additionally, each Randsburg share purchase warrant which gives the holder the right to acquire shares in the common stock of Randsburg when presented for execution will be exchanged for a warrant which will give the holder the right to acquire SVS of Cresco on the same basis as the exchange of Randsburg common shares for Cresco SVS. These warrants were classified as derivative liabilities and measured at FVTPL. They have been included in the purchase consideration at their fair value of approximately $146 thousand based on the Black-Scholes pricing model.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The Company accounted for the Transaction as a deemed issuance of shares for the purchase of the net nil net assets of Randsburg. A non-cash listing expense of $1,839 thousand is based on the following: 258,205 shares measured at a fair value of $6.54 per share ($1,693 thousand) and 53,325 purchase warrants measured at a fair value of $2.74 per share ($146 thousand). As a result of the reverse takeover, the Company recorded $1,654 thousand of transaction costs in the Consolidated Statements of Operations and Comprehensive Loss as a selling, general, and administrative expense during the period ended December 31, 2018. See Note 16 for further detail. 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). On close of the transaction, the former unit holders of Cresco Labs, LLC controlled approximately 59% of the continuing entity through the Redeemable units. 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. Therefore, in accordance with IFRS 3 Business Combinations, this is presented as a non-controlling interest in the reverse takeover, the value of which was recognized at its proportionate interest in the pre-combination carrying amounts of Cresco Labs, LLC. See Note 12 for further detail.

4.	ACCOUNTS RECEIVABLE

As of December 31, 2019 and 2018, Accounts receivable consisted of the following:


($ in thousands)	2019			2018
Accounts receivable, gross	$	16,726		$	3,678
Allowance for doubtful accounts		(271	)		(20	)

Total accounts receivable, net	$	16,455		$	3,658

See Note 20 for the analysis of accounts receivable aging and disclosure of bad debt expense.

5.	BIOLOGICAL ASSETS

The Company’s biological assets consist of cannabis plants. The changes in the carrying value of biological assets for the periods ending December 31, 2019 and 2018 consisted of the following:


($ in thousands)
Biological assets at January 1, 2018	$	2,637
Biological Assets Acquired (Note 14)		4,154
Transferred to inventory upon harvest		(41,681	)
Changes in fair value of biological assets		52,563

Biological assets at December 31, 2018		17,673

Biological Assets Acquired (Note 14)		1,436
Transferred to inventory upon harvest		(96,849	)
Changes in fair value of biological assets		109,531

Biological assets at December 31, 2019	$	31,791

Biological assets are measured at fair value less costs to sell until harvest. All production costs related to biological assets are expensed as incurred. The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. The fair value was determined using an expected cash flow model which assumes the biological assets at the balance sheet date will grow to maturity, be harvested and converted into finished goods inventory and sold in the retail and medical cannabis market.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

This model utilizes the following significant assumptions:


Inputs and assumptions	Calculation method	Effect changes of unobservable inputs has on fair value

Selling price per gram, less cost to sell	Based on observable market data or calculated wholesale prices with reasonable margins.	An increase in selling price per gram would increase the fair value of biological assets.

Attrition rate	Based on weighted average number of plants lost during each stage of production.	An increase in attrition rate would result in a decrease to the fair value of biological assets.

Average yield per plant	Based on the average number of grams of dried cannabis inventory expected to be harvested from each cannabis plant.	An increase to the average yield per plant would result in an increase to the fair value of biological assets.

Cumulative stage of completion in the production process	Based on an average number of days in production over a total average grow cycle of between 15 and 20 weeks.	An increase to the average stage of completion of the plants would result in an increase to the fair value of biological assets.

The Company’s estimates are, by their nature, subject to change and differences from the above assumptions will be reflected in the unrealized gain or loss on changes in fair value of biological assets in future periods.

The Company estimates the harvest yields for cannabis at various stages of growth. As of December 31, 2019 and 2018, it was expected that the Company’s biological assets would yield approximately 13,142 thousand and 6,506 thousand grams, respectively.

The Company has quantified the sensitivity of the inputs in relation to biological assets as of December 31, 2019 and 2018 and expects the following effect on fair value as shown in the table below:


			Effect on fair value ($ in thousands)
Significant inputs & assumptions	Range of inputs	Sensitivity	2019			2018
Selling price per gram, less cost to sell	$1.77 to $6.55	Increase 5%	$	6,360		$	2,759
		Decrease 5%		(6,360	)		(2,759	)
Average yield per plant	34 grams to 188 grams	Increase 5%		1,590			884
		Decrease 5%		(1,590	)		(884	)

6.	INVENTORY

As of December 31, 2019 and 2018, inventory was comprised primarily of cannabis and cannabis-related products. The Company wrote off $8,421 thousand and $nil of inventory during years ended December 31, 2019 and 2018, respectively, due to obsolescence primarily related to damaged work-in-process inventory in its Ohio operation. This write-off is included in the Realized changes in fair value of inventory sold presented on the Consolidated Statement of Operations and Comprehensive Loss. As of December 31, 2019 and 2018, the Company had inventory reserves of $173 thousand.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Inventory as of December 31, 2019 and 2018 consisted of the following:


($ in thousands)	December 31, 2019		December 31, 2018
Raw materials	$	16,521	$	8,570
Raw materials - non-cannabis		5,820		1,616
Work-in-process		14,100		10,801
Finished goods		13,114		3,534

Total Inventory	$	49,555	$	24,521

During the years ended December 31, 2019 and 2018, the Company recognized $173,984 thousand and $55,398 thousand, respectively, of inventory expensed to Cost of sales – production costs, which includes $82,904 thousand and $28,218 thousand, respectively, of Cost of sales – production costs of inventories and $91,080 thousand and $27,180 thousand, respectively, of non-cash expense relating to the changes in fair value of inventory sold.

7.	PROPERTY AND EQUIPMENT

As of December 31, 2019 and 2018, property and equipment consisted of the following:


($ in thousands)	Land and Buildings			Machinery and Equipment			Furniture and Fixtures			Leasehold Improvements			Computer Equipment and Software			Website and Software			Vehicles			Construction In Progress			Total
Cost
Balance at January 1, 2018	$	—		$	1,047		$	290		$	206		$	576		$	64		$	82		$	3,081		$	5,346
Additions		8,579			2,716			1,476			14,005			200			192			304			258			27,730
Transfers		391			—			—			6			—			—			—			(397	)		—
Asset acquisitions		—			—			—			—			—			—			—			1,436			1,436
Business acquisitions		2,155			686			322			3,611			58			6			—			—			6,838

As of December 31, 2018	$	11,125		$	4,449		$	2,088		$	17,828		$	834		$	262		$	386		$	4,378		$	41,350

Additions		3,683			9,473			7,635			36,793			1,308			138			295			46,103			105,428
Transfers		5,397			694			—			4,837			—			—			—			(10,928	)		—
Purchase related to sale- leaseback transactions		37,062			—			—			—			—			—			—			—			37,062
Sale related to sale-leaseback transactions		(37,062	)		—			—			—			—			—			—			—			(37,062	)
Business acquisitions		7,802			1,034			735			3,507			173			—			34			2,495			15,780

As of December 31, 2019	$	28,007		$	15,650		$	10,458		$	62,965		$	2,315		$	400		$	715		$	42,048		$	162,558

Accumulated depreciation
Balance at January 1, 2018	$	—		$	(110	)	$	(58	)	$	(25	)	$	(117	)	$	(43	)	$	(20	)	$	—		$	(373	)

Depreciation		(50	)		(225	)		(176	)		(608	)		(150	)		(17	)		(30	)		—			(1,256	)

As of December 31, 2018	$	(50	)	$	(335	)	$	(234	)	$	(633	)	$	(267	)	$	(60	)	$	(50	)	$	—		$	(1,629	)

Depreciation		(382	)		(913	)		(760	)		(2,509	)		(319	)		(97	)		(110	)		—			(5,090	)

As of December 31, 2019	$	(432	)	$	(1,248	)	$	(994	)	$	(3,142	)	$	(586	)	$	(157	)	$	(160	)	$	—		$	(6,719	)

Net book value
As of December 31, 2019	$	27,575		$	14,402		$	9,464		$	59,823		$	1,729		$	243		$	555		$	42,048		$	155,839

As of December 31, 2018	$	11,075		$	4,114		$	1,854		$	17,195		$	567		$	202		$	336		$	4,378		$	39,721

As of December 31, 2019 and 2018, costs related to the construction at the Company’s facilities were capitalized in construction in progress and not depreciated. Depreciation will commence when construction is completed and the facility is available for its intended use.

Depreciation of $5,090 and $1,256 thousand was incurred during the years ended December 31, 2019 and 2018, respectively, of which $1,240 and $234 thousand, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

As of December 31, 2019, ending inventory included $447 thousand of capitalized depreciation. For the years ended December 31, 2019 and 2018, $3,699 and $1,018 thousand of depreciation was recorded to Cost of sales – production costs, respectively, which includes $140 and $45 thousand, respectively, related to depreciation capitalized to inventory in prior periods.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

8.	LEASES

Effective January 1, 2019, the Company adopted IFRS 16 Leases, as indicated in Note 2(q). The Company is the lessee in all 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 15 years. Certain leases permit renewal options, including multiple successive renewal options ranging from 0.5 to 35 years.

ROU Assets—As of December 31, 2019, the Company’s single asset class of real estate leases consisted of the following:


($ in thousands)	As of December 31, 2019
Real estate	$	46,696

Included in the ROU asset balance is $39,770 thousand of additions for the year ended December 31, 2019, partially offset by $19,289 thousand of terminations for the year ended December 31, 2019.

Total interest expense of $7,078 thousand was recorded for the year ended December 31, 2019.

Total leasing depreciation of $4,054 thousand was recorded for the year ended December 31, 2019. For the year ended December 31, 2019, $1,614 thousand of leasing depreciation is included as Selling, general and administrative expense with the remainder in Cost of sales – production costs and ending inventory.

As of December 31, 2019, ending inventory includes $73 thousand of capitalized depreciation. For the years ended December 31, 2019, $2,622 thousand of depreciation was recorded to Cost of sales – production costs, which includes $255 thousand, related to amounts capitalized to inventory in prior periods.

For the year ended December 31, 2018, the Company recorded total rent expense of $5,068 thousand, of which $588 thousand was expensed to rent expense in Selling, general and administrative expenses, with the remainder in Cost of sales—production costs and ending inventory.

For the year ended December 31, 2018, $4,602 thousand of rent was recorded to Cost of sales – production costs, which includes $289 thousand related to amounts capitalized to inventory in prior periods.

For certain leases with durations of twelve months or less, the Company recorded $280 thousand in rent expense primarily within Selling, general and administrative expenses for the year ended December 31, 2019. The Company recognizes on this expense on a straight-line basis over the lease term.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

During the year ended December 31, 2019, the Company entered into certain sale and leaseback agreements whereby the Company sold properties with a total net book value of $37,062 thousand and recorded a gain on lease termination of $6,415 thousand and loss on asset disposal of $7,085 thousand that resulted in a $670 thousand loss included in Other (expense) income, net in the Consolidated Statement of Operations and Comprehensive Loss. The sale and leaseback transactions resulted in net proceeds of $36,373 thousand, a net increase to ROU asset of $69 thousand and a net increase to lease liability of $36,570 thousand, with the remaining impact related to settlement of security deposits and prepaid expenses. The properties, in which CHP Fresco, a related party, previously had an indirect ownership interest, are used in Illinois cultivation operations. As of December 31, 2019, the Company has received tenant improvement allowances of $2,658 thousand and expects to receive an additional $21,092 thousand for a total of $23,750 thousand in relation to these agreements.

As of December 31, 2019, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	15,304
2021		15,414
2022		15,778
2023		16,923
2024		17,517
Thereafter		236,294

Total lease payments	$	317,230

Less: interest		(198,605	)
Less: tenant improvement allowance		(23,750	)

Present value of lease liabilities		94,875

Less: short-term lease liabilities		(12,019	)

Present value of long-term lease liabilities	$	82,856

9.	INVESTMENTS

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

(a)

Investments at Fair Value

The Company has investments in three entities: MassRoots, Inc. (“MassRoots”), a publicly traded cannabis company; 420 Capital Management, LLC (“420 Capital”), a cannabis investment Company; and Lighthouse Strategies, LLC (“Lighthouse”), a diversified cannabis investment company. MassRoots, 420 Capital, and Lighthouse are accounted for at fair value. On August 12, 2019, the Company settled its outstanding loan receivable with Lighthouse of $3,264 thousand through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company with a fair value of $4,025 thousand. The Company recorded a $2,816 thousand loss on its investment in Lighthouse for the year ended December 31, 2019 in Other (expense) income of the Consolidated Statement of Operation and Comprehensive Loss. See Note 20 for additional details. The following is a summary of the investments held as of December 31, 2019 and 2018:

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018


($ in thousands)	2019		2018
MassRoots	$	1	$	12
420 Capital		68		68
Lighthouse		1,209		—

Total investments	$	1,278	$	80

The Company recorded a total mark-to-market loss for the above investments of $2,827 thousand and $109 thousand for the years ended December 31, 2019 and 2018, respectively.

(b)

Investment in Associates

The Company’s ownership stake in CHP Fresco, a real estate holding entity that owns indirect investments in entities that own properties used in the Company’s Illinois production facilities, was approximately 13%. However, based on various qualitative factors surrounding the investment, such as representation in management of the entity and its relationship as lessee with the investee entities, the Company has determined it confers significant influence. Certain members of the Company’s Board of Directors and management have an additional non-controlling interest in CHP Fresco. The following is a summary of the investment held as of December 31, 2019 and 2018:


($ in thousands)	2019		2018
CHP Fresco	$	—	$	353

Total investment	$	—	$	353

The Company recorded investment losses of $63 thousand and $348 thousand for the years ended December 31, 2019 and 2018, respectively, and distributions of $1,599 and $125 thousand for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019, CHP Fresco is now an inactive entity and the Company does not expect any future activity. The Company received a distribution of $1,477 thousand related to the dissolution of the CHP Fresco entity and its assets, resulting in a $1,309 thousand realized gain recorded in Other (expense) income in the Comprehensive Statement of Operations and Comprehensive Loss for the year ended December 31, 2019.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

10.

INTANGIBLE ASSETS AND GOODWILL

A reconciliation of the beginning and ending balances of intangible assets and goodwill as of December 31, 2019 and 2018 consisted of the following:


($ in thousands)	Customer Relationships			Permit Application Costs			Licenses		Other Intangibles (a)			Goodwill		Total
Cost
Balance at January 1, 2018	$	—		$	1,565		$	—	$	—		$	—	$	1,565

Additions		—			781			—		1,096			—		1,877

Additions from acquisitions		5,429			43			18,047		737			51,146		75,402

Balance at December 31, 2018	$	5,429		$	2,389		$	18,047	$	1,833		$	51,146	$	78,844

Additions		—			4,453			—		—			13		4,466

Additions from acquisitions		1,500			—			65,400		300			86,560		153,760

Balance at December 31, 2019	$	6,929		$	6,842		$	83,447	$	2,133		$	137,719	$	237,070

Accumulated amortization
Balance at January 1, 2018	$	—		$	(1,318	)	$	—	$	—		$	—	$	(1,318	)

Amortization		(130	)		(548	)		—		(238	)		—		(916	)

Balance at December 31, 2018	$	(130	)	$	(1,866	)	$	—	$	(238	)	$	—	$	(2,234	)

Amortization		(728	)		(1,399	)		—		(784	)		—		(2,911	)

Balance at December 31, 2019	$	(858	)	$	(3,265	)	$	—	$	(1,022	)	$	—	$	(5,145	)

Net book value
December 31, 2019	$	6,071		$	3,577		$	83,447	$	1,111		$	137,719	$	231,925

December 31, 2018	$	5,299		$	523		$	18,047	$	1,595		$	51,146	$	76,610

^(a)	Other Intangibles includes market related intangibles and non-compete agreements.

Amortization expense of $2,911 thousand and $916 thousand was recorded for the years ended December 31, 2019 and 2018, respectively, of which $1,364 thousand and $458 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

As of December 31, 2019, ending inventory includes $253 thousand of capitalized amortization. For the years ended December 31, 2019 and 2018, $1,371 and $534 thousand of amortization expense was recorded to Cost of sales – production costs, which includes $88 and $83 thousand, respectively, related to amortization capitalized in prior periods.

License intangible assets of $65,400 thousand were acquired from business combinations (Note 14) and are classified as indefinite-lived intangible assets as the Company cannot continue as a going concern without such licenses.

For the purpose of impairment testing, goodwill and indefinite-lived intangible assets have been allocated to CGUs representing the lowest level that the assets are monitored for internal reporting purposes. CGUs are determined based on the smallest identifiable group of assets that generate cash inflows that are largely independent of cash inflows from other assets or group of assets. Management has determined the Company’s CGUs that hold such goodwill and indefinite-lived intangible assets to be Illinois, Maryland, Arizona, New York and Massachusetts.

Annual impairment testing involves determining the recoverable amount of the CGU group to which goodwill is allocated and comparing this to the carrying value of the CGU groups. The measurement of the recoverable amount of the CGU groups was calculated based on the higher of the CGUs fair value less costs to sell or value in use, which are Level 3 measurements within the fair value hierarchy.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The calculation of the recoverable amount based on discounting the future cash flows (value in use) was based on the following key assumptions:

•

Cash flows were projected based on the Company’s long-term business plan for the periods 2020 through 2024.

•

Cash flows beyond 2024 were projected to grow at a perpetual growth rate, which was estimated to be 3%.

•

The business plan contains forecasts based on past experience of actual operating results in conjunction with anticipated future growth opportunities. While the forecast does assume some base business expansion, largely related to synergies gained through further incorporation of recent acquisitions into the Company’s infrastructure, the primary engine of growth is strategic in nature and is consistent with the projects and expectations as articulated in the Company’s strategic plan.

•

Discount rates applied in determining the recoverable amount of the CGU groups were 14.5% based on the pre-tax weighted average cost of capital of each CGU group and other competitors in the industry. The values assigned to the key assumptions represent Management’s assessment of future trends in the industries in which the CGU groups operate and are based on both external and internal sources and historical trend data.

The Company believes a reasonable increase or decrease in the discount rates or perpetual growth rates used in the analysis would not cause the recoverable amount to decrease below the carrying value.

11.

ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES

As of December 31, 2019 and 2018, Accounts payable and other accrued expenses were comprised of the following:


	December 31,		December 31,
($ in thousands)	2019		2018
Accounts payable	$	32,463	$	4,430
Accrued expenses		24,133		1,262
Payroll liabilities		5,195		795
Excise taxes payable		540		338
Property taxes payable		48		390
Tax penalty		455		275
Licensing fee payable		—		105

Total accounts payable and other accrued expenses	$	62,834	$	7,595

12.

SHARE CAPITAL

(a)

Authorized

The authorized share capital of the Company, which has no par value, is comprised of the following:

Unlimited Number of Subordinate Voting Shares

Holders of SVS will be entitled to notice of and to attend at 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.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

ii.

Unlimited Number of Proportionate Voting Shares

Holders of PVS will be entitled to notice of and to attend at 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 Super Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the PVS. The holder of PVS shall 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.

During the years ended December 31, 2019 and 2018, 186 thousand and 24 thousand PVS were exchanged for 37,122 thousand and 4,837 thousand 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 at 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.

Pre-RTO Capital Structure

Prior to the reverse takeover transaction, the Company was authorized to have six classes of units (the “Units”), designated as Founder’s Units (“Founder’s Units”), Class A Units (“A Units”), Class B Units (“B Units”), Class C Units (“C Units”), Class D Units (“D Units”), Class E Units (“E Units”), and Class F Units (“F Units”). Under the Company’s Operating Agreement (the “Agreement”), the Founder’s Units, A Units, B Units, C Units, E Units and F Units were identical in all respects except that C Units are non-voting. To the extent the Founder’s Units represented not less than fifteen percent of all outstanding Units, the Founder’s Units, as a class, had voting rights equal to the greater of the actual voting rights of the Founder’s Units and fifty percent plus one vote of the aggregate voting rights of the Company’s outstanding units. If the Founder’s Units represented less than fifteen percent of the outstanding Units, the Founder’s Units, A Units, B Units, E Units and F Units would vote as a single class, with each Unit representing one vote.

D Units are issued pursuant to a Profits Interest Plan, which is defined as any profits interest award plan of the Company, as amended, modified, supplemented, or replaced from time to time. D Units were awarded to individuals at fair value and had no voting rights.

(b)

Issued and Outstanding

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units by company is as follows:

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018


		Number of Shares/Units
(In thousands)		Class A Units			Class B Units			Class C Units			Class D			Class E Units			Class F Units			Founders Units			Redeemable Units			Subordinate Voting Shares (SVS)		Super Voting Shares (MVS)		Proportionate Voting Shares (PVS)¹			Shares to be issued
Balance as of January 1, 2018			93,000			14,056			16,770			3,999			14,007			—			33,000			—			—		—		—			—
Stock Dividend	Note 12(b)(v)(e)		1,400			140			—			—			—			—			—			—			—		—		—			—
Stock options exercised	Note 13		—			—			—			189			—			—			—			—			—		—		—			—
Shares issued as compensation	Note 12(b)(v)(f)		—			—			250			1,273			—			—			—			—			—		—		—			—
Shares issued (investment in associate)	Note 12(b)(v)(g)		—			—			—			—			114			—			—			—			—		—		—			—
Investment in Lighthouse, Nevada	Note 20		—			—			—			—			500			—			—			—			—		—		—			—
Purchase of NCI with no change in control	Note 12(f)		—			—			—			—			—			22,514			—			—			—		—		—			—
May Class F Equity Financing	Note 12(b)(v)(a)		—			—			—			—			—			11,851			—			—			—		—		—			—
October Class F Equity Financing	Note 12(b)(v)(b)		—			—			—			—			—			27,093			—			—			—		—		—			—
Converted to Pubco SVS, MVS and PVS	Note 12(b)(v)(c)		(2,709	)		(1,270	)		(16,520	)		(4,576	)		(11,480	)		(59,635	)		(122	)		—			—		—		—			—
Reorganization of equity into SVS, MVS, PVS, and Redeemable units	Note 12(b)(v)(c)		(91,691	)		(12,926	)		(500	)		(885	)		(3,141	)		(1,823	)		(32,878	)		143,844			8,991		500		87,168			—
Deemed issuance of shares to acquire Randsburg	Note 12(b)(v)(c)		—			—			—			—			—			—			—			—			259		—		—			—
Concurrent financing	Note 12(b)(v)(d)		—			—			—			—			—			—			—			—			12,624		—		—			—
PDI Acquisition	Note 14, 20(c)		—			—			—			—			—			—			—			—			—		—		258			—
Acquisition of NCI	Note 14, 20(c)		—			—			—			—			—			—			—			—			—		—		114			—
MedMar Acquisition	Note 14		—			—			—			—			—			—			—			—			—		—					3,020
PVS Converted to SVS	Note 12(a)(ii)		—			—			—			—			—			—			—			—			4,837		—		(4,837	)		—
Warrant Exercises	Note 12(c)		—			—			—			—			—			—			—			—			—		—		100			—

Balance as of December 31, 2018			—			—			—			—			—			—			—			143,844			26,711		500		82,803			3,020

Stock options exercised	Note 13		—			—			—			—			—			—			—			—			575		—		342			—
Warrants exercised	Note 12(c)		—			—			—			—			—			—			—			—			170		—		—			—
Issuance of MedMar Shares	Note 12(b)(iii)		—			—			—			—			—			—			—			—			—		—		3,020			(3,020	)
Issuance of Valley Ag Shares	Note 12(b)(i)		—			—			—			—			—			—			—			—			—		—		8,660			—
PVS conversions and adjustments	Note 12(a)(ii)		—			—			—			—			—			—			—			—			37,122		—		(36,888	)		—
Cresco LLC redemption	Note 12(d)		—			—			—			—			—			—			—			(1,672	)		1,672		—		—			—
Share issuance from equity raise	Note 12(b)(ii)		—			—			—			—			—			—			—			—			7,350		—		—			—

Ending Balance December 31, 2019			—			—			—			—			—			—			—			142,172			73,600		500		57,937			—

¹	PVS presented as 1 PVS for 200 SVS conversion ratio

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Issuance of Valley Ag Shares

In October 2019, the acquisition of Valley Ag was closed and 8,660 thousand PVS (as converted) of Cresco Labs Inc., valued at $48,881 thousand, were issued in conjunction with the consideration of the acquisition.

ii.

September 2019 Financing

In September 2019, the Company completed an underwritten unit offering to issue 7,350 thousand “Offered Units” at a price of $7.55 per unit. The Offered Units comprised of one share and one-half warrant for a total of $55,476 thousand. The Company received cash proceeds of $52,280 thousand, net of commission and other fees, with a corresponding increase to equity of $49,170 thousand, less equity issuance costs of $3,196 thousand. Refer to Note 20 for information regarding warrants recorded as part of this offering.

On October 24, 2019, the Company issued an additional 551 thousand share purchase warrants at a price of $1.64 per Additional Warrant for gross proceeds of $909 thousand, pursuant to the partial exercise of the Underwriter’s over-allotment option related to the September 2019 financing discussed above. See Note 20 for further details.

iii.

Issuance of MedMar Shares

In April 2019, the acquisition of MedMar Inc. was approved by regulators and 3,020 thousand shares of Cresco Labs Inc. were issued in conjunction with the consideration of the acquisition.

iv.

Distribution to LLC Unit Holders

During the second quarter of 2019, in accordance with the operating agreement of Cresco Labs, LLC, the Company declared a distribution of profits to 2018 unit holders of Cresco Labs, LLC. The total distribution was $3,630 thousand. The Company recorded a $688 thousand reduction to non-controlling interest of Cresco Labs, LLC for distributions to members who hold Redeemable Units. The remaining $2,942 thousand distribution was recorded as an increase to accumulated deficit.

2018 Issuances and Activity

May 2018 Private Placement Offering

During the second quarter of 2018, the Company completed a non-brokered private placement of approximately 11,851 thousand F Units at a price of $1.97 to $2.25 per unit, for aggregate gross proceeds of $23,589 thousand. Total fees recorded for the May 2018 placement offering was $888 thousand, comprised of $549 thousand cash and $339 thousand non-cash. The non-cash component was in the form of 339 thousand Class D Units issued at fair value.

October 2018 Private Placement Offering

In October 2018, the Company completed a brokered private placement of 27,093 thousand F Units at a price of $3.75 per unit, for aggregate gross proceeds of $101,415 thousand. Total fees recorded for the October 2018 placement offering was $4,602 thousand, comprised of $2,528 thousand cash and $2,074 thousand non-cash. Of the cash costs, $320 thousand was recorded in expense and $2,208 thousand was netted against proceeds in equity. The non-cash component was in the form of immediate grants of 553 thousand Class D Units; the fair value of which was the per-unit price of $3.75 of the October Private Placement Offering and is recorded as transaction costs in the Statement of Shareholder’s Equity.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Share Reorganization for RTO and Deemed Share Issuance

In conjunction with its RTO effected on November 30, 2018, the Company reorganized its existing classes of units (A Units, B Units, C Units, D Units, E Units, F Units, and Founders Units) and converted such units into either Redeemable LLC Units, SVS, PVS, or MVS. On an as-converted basis, previous holders of Cresco Labs, LLC units exchanged them for 96,659 thousand shares in Cresco. After share reorganization there remained a total of 143,844 thousand Redeemable LLC Units in Cresco Labs, LLC. Additionally, the Company granted 259 thousand SVS and 54 thousand warrants to previous holders of Randsburg warrants to effect the RTO with Randsburg.

In conjunction with the RTO, the Company converted 122,352 Founders Units and 30,588 Class A units into MVS. See Note 3 for additional information.

November 2018 Subscription Receipt Offering

Pursuant to an agency agreement dated as of November 26, 2018 (the “Agency Agreement”) between Cresco LLC and various pre-RTO related entities, Randsburg and their agents, Cresco Acquisition completed a private placement of 12,624,054 Subscription Receipts (the “SR Offering”) at a price of C$8.50 per Subscription Receipt for aggregate gross proceeds of approximately $80,642 thousand.

Each Subscription Receipt was automatically converted into one Cresco Acquisition Share immediately prior to and in connection with the completion of the Transaction, without payment of additional consideration or further action on the part of the holder. Upon completion of the business combination, each Cresco Acquisition Share was converted into one SVS, without payment of additional consideration or further action on the part of the holder.

Total fees recorded for the November 2018 placement offering were $6,093 thousand, comprised of $4,998 thousand in cash costs and broker warrants with a value of $1,095 thousand which were netted against proceeds in equity.

The Agents’ fee in connection with the SR Offering was (i) a cash commission equal to 6% of the gross proceeds from the SR Offering; (ii) a financial advisory fee for the non-brokered portion of the SR Offering equal to 1% of the gross proceeds from the sale of Subscription Receipts, up to a maximum of $7,500 thousand; and (iii) a financial advisory fee for the non-brokered portion of the SR Offering equal to 6% of the gross proceeds from the sale of the Subscription Receipts, above $7,500 thousand, for a total of C$5,932 thousand (the “Agent Fee”) plus reimbursements for the Agents’ expenses in connection with the SR Offering (including legal fees, disbursements and applicable taxes) in the amount of C$507 thousand. Fifty percent (50%) of the Agent Fee was paid on November 26, 2018 and the remaining in fifty percent (50%) was held in escrow by the Escrow Agent until the closing of the Transaction, upon which the funds were settled.

In addition, the Agents received 343,745 broker warrants which is equal to 3% of the number of Subscription Receipts sold pursuant to the SR Offering (the “Broker Warrants”), excluding the non-brokered portion. Each Broker Warrant will be exercisable at any time prior to November 30, 2020 which provides the ability to acquire one SVS of the Company at the issue price for the Subscription Receipts.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Stock Dividend

On July 13, 2018, the Company offered a dividend distribution of Class A and Class B Units in proportion to the total units outstanding of each individual class for a total of 1,540 thousand units at a fair value of $2.25/unit.

Shares Issued as Compensation

During the year ended December 31, 2018, the Company issued certain shares noted in the above table as compensation, pursuant to an equity allocation agreement, in exchange for services received and financing fees.

Investment in PDI

Via a purchase agreement signed in April 2018, Cresco Labs, LLC acquired a 35% stake in Tinad, LLC (“PDI”) in September 2018 in exchange for $901 thousand in cash consideration and 114,000 F Units to expand its retail footprint in the Illinois market. PDI operates a medical cannabis dispensary in the Chicago area suburb of Buffalo Grove, IL. This investment was initially accounted for using the equity method. Subsequently, the Company acquired the unowned portion of PDI and reclassified this investment to that of a fully consolidated entity. See Note 14 for additional details.

Repayment of subscription receipt

During the year ended December 31, 2018, the Company received $260 thousand in subscription receipt repayments.

Non-controlling interest contribution

During the year ended December 31, 2018, the Company received capital contributions of $3,609 thousand from Cresco Yeltrah, LLC members.

(c)

Share Purchase Warrants

Each whole warrant entitles the holder to purchase one SVS of the Company. A summary of the status of the warrants outstanding is as follows:


	Number of warrants			Weighted- average exercise price
Balance as of January 1, 2018		100,000		$	1.00
Issued		397,079			6.29
Exercised		(100,000	)		1.00

Balance as of December 31, 2018		397,079		$	5.35

Issued		6,226,250			7.78
Exercised		(169,545	)		6.16

Balance as of December 31, 2019		6,453,784		$	7.73

During the year ended December 31, 2019, the Company recorded $1,674 thousand of warrant exercises into share capital. Certain of these equity-classified warrants were exercised during the year ended December 31, 2019. Of the 6,453,784 warrants outstanding, 6,244,503 warrants issued to previous holders of Randsburg warrants, underwriters associated with September 2019 financing and sellers from the Valley Ag acquisition were classified as long-term derivative liabilities. See Note 20 for information about valuation of all such liability classified warrants.

No equity-classified warrants were issued in 2019.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(d)

Changes in Ownership and Non-controlling Interests

In February 2019, the Company acquired an additional 1% of Phoenix Farms of Illinois, LLC (“Phoenix”) decreasing non-controlling interest from 11% to 10%. The consideration paid was $184 thousand. This resulted in a $150 thousand increase in accumulated deficit and a $34 thousand decrease in non-controlling interest.

In May 2019, the Company acquired the remaining 10% of non-controlling interest from Phoenix. The consideration paid was $650 thousand, which resulted in a $288 thousand increase in accumulated deficit and a $362 thousand decrease in non-controlling interest.

In 2019, redemptions of 1,671,572 redeemable units occurred which were converted into an equivalent number of SVS. This redemption resulted in a decrease of 0.7% in non-controlling interest in Cresco Labs, LLC, an increase to accumulated deficit of $14,233 thousand, and a decrease of $1,698 thousand in non-controlling interest.

As of and for the year ended December 31, 2019, non-controlling interest included the following amounts before intercompany eliminations:


($ in thousands) January 1, 2019	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other entities including Cresco Labs, LLC¹			Total
Non-current assets		3,185			20,231			17,855			12,575			23,317			380,053			457,216
Current assets		3,075			1,037			1,356			5,186			15,579			133,105			159,338
Non-current liabilities		—			(1,803	)		(1,824	)		(95	)		(13,940	)		(126,100	)		(143,762	)
Current liabilities		(907	)		(718	)		(955	)		(1,061	)		(4,669	)		(141,859	)		(150,169	)

Net assets		5,353			18,747			16,432			16,605			20,287			245,199			322,623

Net assets attributable to NCI		1,567			2,658			2,330			150			(2,940	)		131,776			135,541

Revenue		5,593			4,088			5,310			2,212			12,042			99,289			128,534
Gross profit		6,303			1,999			2,564			(1,972	)		(6,749	)		61,936			64,081

Total comprehensive income (loss)		5,747			(981	)		(556	)		(6,278	)		(15,308	)		(47,926	)		(65,302	)

Comprehensive income (loss) allocated to NCI		1,437			(122	)		(139	)		(63	)		(3,062	)		(20,152	)		(22,101	)

NCI percentage at December 31, 2019		25	%¹		12.4	%¹		25	%¹		1.0	%¹		20.0	%¹		56.2	%¹

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 56.2% NCI related to NCI for Cresco Labs, Inc.

In 2018, the Company acquired the remaining 69% of Cresco Yeltrah, LLC interest. The consideration paid was 11,330 thousand F units which can be converted into publicly traded Cresco Labs Inc shares. This resulted in a $26,134 thousand increase to share capital, and a decrease to contributed surplus of $12,626 thousand after the reclassification of the non-controlling interest carrying balance.

In 2018, the Company acquired 67% of Cresco Labs Ohio, LLC decreasing non-controlling interest from 68% to 1%. The consideration paid was 7,791 thousand F Units which could be converted into publicly traded Cresco Labs Inc shares. This resulted in a $17,529 thousand increase to share capital, and a decrease to contributed surplus of $7,239 thousand after the reclassification of the non-controlling interest carrying balance. The balance remaining at December 31, 2019 and 2018 is $150 thousand and $212 thousand, respectively, and is recorded in non-controlling interest on the Consolidated Statement of Financial Position.

In September 2018, the Company acquired an additional 20% of SLO Cultivation, Inc. (“SLO”) decreasing non-controlling interest from 40% to 20%. The consideration paid was 2,267 thousand F Units which could be converted into publicly traded Cresco Labs Inc shares. This resulted in a $8,500 thousand increase to share capital, and a decrease to contributed surplus of $8,606 thousand after the reclassification of the non-controlling interest carrying balance. The balance remaining at December 31, 2019 and 2018 is ($2,940) thousand and $119 thousand, respectively, and is recorded in non-controlling interest on the Consolidated Statement of Financial Position.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

In June 2018, the Company acquired an additional 25% of Phoenix Farms of Illinois, LLC decreasing non-controlling interest from 36% to 11%. The consideration paid was 439 thousand F Units which could be converted into publicly traded Cresco Labs Inc shares. This resulted in a $987 thousand increase to share capital, and a decrease to contributed surplus of $194 thousand after the reclassification of the non-controlling interest carrying balance. The balance remaining at December 31, 2018 is $379 thousand and is recorded in non-controlling interest on the Consolidated Statement of Financial Position.

In October 2018, the Company acquired the remaining 6% of Cresco IL, LLC. The consideration paid 800 thousand Class F Units which could be converted into publicly traded Cresco Labs, Inc shares. This resulted in a $3,000 thousand increase to share capital, and a decrease to contributed surplus of $2,412 thousand after the reclassification of the non-controlling interest carrying balance.

In December 2018, the Company transferred 59% ownership of Cresco Labs, LLC to shareholders in relation to the reverse takeover acquisition of Randsburg (see Note 3). This resulted in a $155,746 thousand increase to non-controlling interest. The balance remaining at December 31, 2019 and 2018 is $131,776 thousand and $155,825 thousand and is recorded in non-controlling interest on the Consolidated Statements of Financial Position.

The total effect of the above transactions on contributed surplus was a reduction of $31,430 thousand, which has been presented as a reduction to accumulated deficit on the consolidated statement of Changes in Shareholders’ Equity.

As of and for the year ended December 31, 2018, non-controlling interest included the following amounts before intercompany eliminations:


($ in thousands) January 1, 2018	TSC Cresco, LLC			Cresco Labs Phoenix Farms, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other Entities including Cresco Labs, LLC¹			Total
Non-current assets		39			3,468			19,405			16,922			10,493			2,036			73,044			125,407
Current assets		599			631			280			358			2,728			5,355			182,753			192,704
Non-current liabilities		(11	)		—			(143	)		(202	)		(10	)		(653	)		(8,881	)		(9,900	)
Current liabilities		(105	)		—			(420	)		(525	)		(108	)		(977	)		(23,095	)		(25,230	)

Net assets		522			4,099			19,122			16,553			13,103			5,761			223,821			282,981

Net assets attributable to NCI		167			379			3,149			2,099			212			119			155,825			161,950

Revenue		2,439			1,733			273			397			—			690			37,720			43,252
Gross profit		669			307			(45	)		(74	)		278			444			38,838			40,417

Total comprehensive income (loss)		669			307			(45	)		(74	)		278			444			1,514			3,093

Comprehensive income (loss) allocated to NCI		167			307			(7	)		(14	)		(206	)		225			4,536			5,008

NCI percentage at December 31, 2018		25.0	%¹		10.5	%¹		12.4	%¹		25.0	%¹		1.0	%¹		20.0	%¹		56.9	%¹

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 56.9% NCI related to NCI for Cresco Labs, Inc

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

.During 2018, the Company acquired additional ownership interests in the above subsidiaries, without resulting in change of control, as indicated above. All ownership interests were acquired by the issuance of Class F units, which were valued between $2.25 and $3.75 per unit.

13.

SHARE-BASED COMPENSATION

The Company has a share-based compensation plan (the “Plan”) for key employees and service providers. Under the Plan, shares issued have no voting rights and vest proportionately over periods ranging from six months to four years from the issuance date.

Stock Options

A summary of the status of the options outstanding consisted of the following:


	Number of stock options outstanding			Weighted- average exercise price
Outstanding - January 1, 2018		3,450,000		$	0.98
Granted		16,540,000			2.32
Exercised		(189,247	)		0.83
Forfeited		(300,753	)		0.94

Outstanding - December 31, 2018		19,500,000		$	2.11
Granted		4,474,000			7.48
Exercised		(934,682	)		1.37
Forfeited		(669,150	)		2.88

Outstanding - December 31, 2019		22,370,168		$	3.19

Exercisable - December 31, 2019		5,707,643		$	1.87

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The following table summarizes the stock options outstanding as of December 31, 2019:


Expiration date	Stock options outstanding		Exercise price		Stock options exercisable
May 2025		100,000	$	1.00		100,000
June 2025		200,000		0.50		200,000
September 2025		10,000		1.00		10,000
January—March 2026		215,000		1.00		140,000
May—June 2026		800,000		1.00		675,000
November—December 2026		32,500		1.00		26,250
January—March 2027		35,000		1.00		22,500
August 2027—September		40,000		1.00		30,612
October—November 2027		475,000		1.00		232,600
December 2027		187,731		1.14		62,731
January—March 2028		11,613,750		1.14		3,098,594
April 2028		400,000		1.14		100,000
May—June 2028		950,000		2.25		237,500
July 2028		200,000		2.25		50,000
July—September 2028		767,187		3.75		184,356
October—November 2028		2,140,000		3.75		482,500
December 2028		220,000		6.50		55,000
February 2029		90,000		6.50		—
March 2029		372,000		11.25		—
June 2029		1,320,000		10.28		—
September 2029		1,360,000		5.90		—
December 2029		842,000		6.86		—

	22,370,168				5,707,643

Weighted average stock price of options on the dates which options were exercised during the twelve months ended December 31, 2019 was $7.12.

The Company recorded compensation expense in the amount of $14,512 thousand and $10,464 thousand for the years ended December 31, 2019 and 2018, respectively, of which $13,778 thousand and $10,132 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

Unrecognized compensation expense as of December 31, 2019 is $23,330 thousand and will be recognized over the course of the next four years.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The fair value of stock options granted was determined using the Black-Scholes option-pricing model with the following range of assumptions at the time of the grant:


	2019	2018
Risk-free annual interest rate	1.97% to 2.49%	2.53% to 2.77%
Expected annual dividend yield	0%	0%
Expected stock price volatility	77% to 88%	49% to 99%
Expected life of stock options	5.5 to 7 years	2.5 to 7 years
Forfeiture rate	0% to 3%	0%
Fair value at grant date	$3.88 to $8.26	$0.00 to $3.71
Stock price at grant date	$5.90 to $11.25	$1.14 to $6.75
Exercise price range	$5.90 to $11.25	$1.14 to $6.50

Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded companies. 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.

During the years ended December 31, 2019 and 2018, the weighted-average fair value of stock options granted was $5.52 and $1.39 per option, respectively. As of December 31, 2019, stock options outstanding have a weighted-average remaining contractual life of 8.7 years.

Restricted stock units

During the year ended December 31, 2019, the Company established 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 the date of grant. A number of RSUs granted have the ability to settle in cash. These awards have been determined to be liability-classified awards and are required to be marked-to-market as of the end of each reporting period. The Company recorded $339 thousand in Deferred consideration, contingent consideration and other payables on the Consolidated Statements of Financial Position related to these awards.

A summary of outstanding RSUs is provided below:


	Number of RSUs outstanding		Weighted average fair value
Outstanding—January 1, 2018		—		—
Granted		404,215	$	8.58

Outstanding—December 31, 2019		404,215	$	8.58

Liability classified as of December 31, 2019		63,554	$	6.86

The Company recorded compensation expense in the amount of $1,220 thousand for the year ended December 31, 2019, of which $268 thousand is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

Unrecognized compensation expense as of December 31, 2019 is $1,856 thousand and will be recognized over the course of the next four years.

As of December 31, 2019, ending inventory includes $944 thousand of capitalized compensation expense related to both options and RSUs. For the years ended December 31, 2019 and 2018, $821 and $302 thousand, respectively, of compensation expense was recorded to Cost of sales – production costs, which includes $39 thousand and $nil, respectively, related to compensation expense capitalized to inventory in prior periods.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

14.

ACQUISITIONS AND MERGERS

(a)

Business Combinations

The table below summarizes business combinations completed during the year ended December 31, 2019:


Completed during the year ended December 31, 2019	Valley Ag (i)			HHH (ii)			Total
($ in thousands)
Total consideration
Cash	$	18,774		$	—		$	18,774
Deferred cash consideration		25,990			26,606			52,596
Common shares issued		48,881			—			48,881
Derivative liability consideration		5,437			—			5,437
Contingent consideration		20,346			—			20,346
Loan settlement		10,146			4,807			14,953

	$129,574			$31,413			$160,987

Net identifiable assets (liabilities) acquired
Cash	$	1,199		$	313		$	1,512
Accounts receivable		145			306			451
Inventory		800			4,703			5,503
Biological assets		—			1,436			1,436
Other current assets		558			18			576
Property & equipment		7,256			8,524			15,780
Right-of-use asset		6,836			—			6,836
Other non-current assets		81			1			82
Customer relationships		1,200			300			1,500
Non-compete agreement		—			300			300
License		53,400			12,000			65,400

Total identifiable assets acquired	$	71,475		$	27,901		$	99,376

Short-term liabilities	$	(690	)	$	(621	)	$	(1,311	)
Lease liability		(6,980	)		—			(6,980	)
Long-term liability		—			(550	)		(550	)
Deferred tax liability		(16,108	)		—			(16,108	)

Net identifiable assets acquired	$	47,697		$	26,730		$	74,427

Purchase price allocation
Net identifiable assets acquired	$	47,697		$	26,730		$	74,427
Goodwill		81,877			4,683			86,560

Total consideration	$	129,574		$	31,413		$	160,987

Net cash outflows
Cash consideration paid	$	(18,774	)		(80	)		(18,854	)
Cash acquired		1,199			313			1,512

Total	$	(17,575	)		233			(17,342	)

No goodwill for any acquisition is expected to be deductible for tax purposes. Additionally, per IFRS 3, the Company will retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of the acquisition date. During the measurement period, the Company will also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date. The purchase price allocation for these transactions is substantially complete, with the exception of certain amounts related to valuation of certain fixed assets, intangible assets and income taxes. Purchase accounting is expected to be completed within twelve months from the acquisition dates.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(i)

Gloucester Street Capital, LLC (“Valley Agriceuticals, LLC” or “Valley Ag”)

On October 8, 2019, the Company announced that it had closed its acquisition of 100% of the membership interests of Gloucester Street Capital, LLC, the parent entity of Valley Agriceuticals, LLC via a merger between Gloucester and a subsidiary of Cresco Labs. As a result of this acquisition, Cresco Labs now holds one of 10 vertically integrated cannabis business licenses granted in the State of New York by the New York State Department of Health.

Total consideration for the acquisition was $129,574 thousand. Total consideration consisted of $18,774 thousand in cash consideration, equity consideration of $48,881 which consisted of 8,660 thousand PVS (as converted), warrants classified as long-term derivative liabilities convertible into 2,000 thousand PVS (as converted) valued at $5,437 thousand, $25,990 in deferred cash consideration, valued at present value, $20,346 thousand in contingent consideration and settlement of a loan receivable valued at $10,146 thousand. The maximum payment of contingent consideration is 4,800 thousand PVS (as converted) (includes potential fractional shares to be paid in cash) of which the ultimate value will fluctuate along with the movement of the Company’s stock price. See section (c) and (d) of this note for discussion of the methodology of the calculation of contingent consideration. See Note 20 for additional detail on liability-classified warrants.

The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the Valley Ag acquisition had occurred as of January 1, 2019. These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2019 or of the future consolidated operating results. For the Valley Ag acquisition, total unaudited pro forma revenue and net loss for the full year ended December 31, 2019 was $2,118 thousand and $4,115 thousand, respectively.

Contributed revenue and net loss from the Valley Ag acquisition was $840 thousand and $465 thousand, respectively, from the acquisition date through December 31, 2019.

The Company recorded transaction costs of $2,030 thousand in connection with the Valley Ag acquisition as Selling, general and administrative expenses in the Statements of Operations and Comprehensive Loss.

(ii)

Hope Heal Health, Inc. (“HHH”) and 1880 West, LLC, (“1880 W”), collectively referred to as (“HHH”)

On October 1, 2019, in order to enter the Massachusetts market, Cresco Labs, LLC acquired HHH via certain agreements giving it operational control before cash consideration was settled. HHH holds licenses to cultivate, process and dispense medical and adult-use marijuana in the State of Massachusetts, and operates a medical marijuana dispensary in Fall River, Massachusetts which was recently granted the right to dispense adult-use cannabis. The legal closing and cash funding for HHH occurred on February 7, 2020.

Total consideration for the acquisition was $31,414 thousand consisting of deferred cash consideration, valued at present value, of $26,606 thousand and settlement of a pre-existing loan receivable valued at $4,807 thousand.

The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the HHH acquisition had occurred as of January 1, 2019. These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2019 or of the future consolidated operating results. For the HHH acquisition, total unaudited pro forma revenue and net loss for the full year ended December 31, 2019 was $3,106 thousand and $38 thousand, respectively.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Contributed revenue and net income from the HHH acquisition was $1,984 thousand and $2,979 thousand, respectively, from the acquisition date through December 31, 2019.

The Company recorded transaction costs of $589 thousand in connection with the HHH acquisition in Selling, general and administrative expenses in the Statements of Operations and Comprehensive Loss.

The table below summarizes business combinations completed during the year ended December 31, 2018:


Completed during the year ended December 31, 2018	AFS (i)			FloraMedex (ii)			MedMar (iii)			PDI (iv)			Phoenix (v)			Total
($ in thousands)
Total consideration
Cash	$	—		$	10,000		$	—		$	—		$	2,641		$	12,641
Deferred cash consideration		23,600			—			7,244			—			—			30,844
Common shares issued		—			—			19,498			—			—			19,498
Derivative liability for deferred consideration		2,018			—			—			6,257			—			8,275
Contingent consideration		—			—			3,796			294			—			4,090

	$	25,618		$	10,000		$	30,538		$	6,551		$	2,641		$	75,348

Net identifiable assets (liabilities) acquired
Cash	$	146		$	60		$	192		$	315		$	244		$	957
Accounts receivable		135			6			—			—			18			159
Inventory		1,641			117			553			217			89			2,617
Biological assets		4,154			—			—			—			—			4,154
Other current assets		91			—			4			—			1			96
Property & equipment		3,388			1,495			1,208			475			272			6,838
Other non-current assets		42			—			46			32			—			120
Customer relationships		880			420			2,760			940			429			5,429
Market related intangible		270			70			250			110			37			737
License		5,897			2,103			6,518			2,503			1,026			18,047

Total identifiable assets acquired	$	16,644		$	4,271		$	11,531		$	4,592		$	2,116		$	39,154

Short-term liabilities	$	(744	)	$	(69	)	$	(996	)	$	(11	)	$	(180	)	$	(2,000	)
Notes payable		—			—			(345	)		—			—			(345	)
Derivative liability		—			—			—			(178	)		—			(178	)
Deferred tax liability		(2,424	)		—			—			—			—			(2,424	)
Net identifiable assets acquired	$	13,476		$	4,202		$	10,190		$	4,403		$	1,936		$	34,207
Purchase price allocation
Net identifiable assets acquired	$	13,476		$	4,202		$	10,190		$	4,403		$	1,936		$	34,207
Fair value of previously held interest		—			—			—			(3,641	)		—			(3,641	)
Non-controlling interest		—			—			(5,269	)		—			(1,108	)		(6,377	)
Goodwill		12,142			5,798			25,617			5,789			1,813			51,159

Total Consideration	$	25,618		$	10,000		$	30,538		$	6,551		$	2,641		$	75,348

Non-controlling interest at acquisition (%)		—	%		—	%		18	%		2	%		35	%
Net cash outflows																	—
Cash consideration paid	$	25,300		$	10,000		$	—		$	94		$	2,641		$	38,035
Cash acquired		(146	)		(60	)		(192	)		(315	)		(244	)		(957	)

Total	$	25,154		$	9,940		$	(192	)	$	(221	)	$	2,397		$	37,078

No goodwill for any acquisition is deductible for tax purposes. Additionally, per IFRS 3, the Company will retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of the acquisition date. During the measurement period, the Company recognized additional goodwill of $13 thousand related to final adjustments to deferred consideration. The above purchase price allocation schedule has been updated for this measurement period adjustment. The Company did not retrospectively restate prior year balances due to immateriality of the adjustments.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The following table summarizes, on a pro forma basis, the combined results of the acquired entities as though the following acquisition had occurred as of January 1, 2018. These pro forma results are not necessarily indicative of either the actual consolidated results had the acquisitions occurred as of January 1, 2018 or of the future consolidated operating results. Unaudited pro forma results are (in thousands):


($ in thousands)	AFS		FloraMedex			MedMar		PDI		Phoenix		Total
Revenue	$	11,402	$	1,468		$	6,282	$	2,931	$	1,853	$	23,936
Net Income (Loss)	$	918	$	(233	)	$	1,045	$	593	$	330	$	2,653

Total Company unaudited pro forma revenue and net income for the year ended December 31, 2018 would have been $62,504 thousand and $5,096 thousand, respectively.

(i)

Arizona Facilities Supply, LLC (“AFS”)

On October 24, 2018, Cresco Labs, LLC acquired AFS via certain agreements giving it de facto control before consideration was settled, to enter the Arizona and Maryland markets. AFS, through its subsidiaries (“AFS-AZ”), holds a vertical license to cultivate, process and dispense medical marijuana in the State of Arizona, operates a medical marijuana dispensary in Phoenix, Arizona and owns real property used for cultivation in Salome, Arizona. The legal closing and cash funding for AFS-AZ occurred on November 14, 2018. AFS Maryland (“AFS-MD”), a wholly owned subsidiary of AFS, operates with a license to process medical cannabis in Maryland. In December 2018, the cash was funded for the acquisition of AFS-MD.

Cresco Labs, LLC acquired all of the issued and outstanding shares of AFS-AZ and AFS-MD for $25,300 thousand in cash consideration. Of this amount, $22,300 thousand was allocated to AFS-AZ and $3,000 thousand was allocated to AFS-MD. Refer to the table above for detailed information about the purchase price allocation.

A consulting services agreement was signed which entitled the Company to 100% of profit and gives the Company control of AFS-MD and rights and exposure to variable returns. Due to provisions contained in certain agreements related to the acquisition, the Company has the full decision-making power over AFS-AZ and AFS-MD. According to IFRS 10.6, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company has the right to direct all the relevant activities of AFS-AZ and AFS-MD and is exposed to variable returns through the agreements effecting the acquisition before the funding of the acquisition.

For the year ended December 31, 2018, AFS accounted for approximately $1,315 thousand in contributed net income. This amount included revenues of approximately $1,226 thousand.

(ii)

FloraMedex, LLC (“FloraMedex”)

On November 21, 2018, Cresco Labs, LLC acquired FloraMedex to expand its retail footprint in the Illinois market. FloraMedex operates a medical cannabis dispensary in the Chicago area suburb of Elmwood Park, IL.

Cresco Labs, LLC acquired all of the issued and outstanding shares of FloraMedex for $10,000 thousand in cash consideration. Refer to the table above for detailed information about the purchase price allocation.

For the year ended December 31, 2018, FloraMedex accounted for approximately $22 thousand in contributed net income. This amount included revenues of approximately $152 thousand.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(iii)

MedMar Inc., MedMar Lakeview, LLC, and MedMar Rockford, LLC (collectively, “MedMar”)

On November 26, 2018, Cresco Labs, LLC acquired MedMar to expand its retail footprint in the Illinois market. MedMar operates two medical cannabis dispensaries in Chicago’s Wrigleyville neighborhood and the northern Illinois city of Rockford.

Cresco Labs, LLC acquired 87.6% and 75.0% of the issued and outstanding units of MedMar Lakeview and MedMar Rockford, respectively, for aggregate consideration of $30,538 thousand, comprised of $7,244 thousand cash, $19,498 thousand equity, and $3,796 thousand contingent consideration. Certain agreements were executed giving the Company de facto control before cash and share consideration was settled. The equity consideration is comprised of 3,020 thousand Cresco F Units convertible to publicly traded shares to be issued to the sellers, valued at the Company’s RTO price of $6.54. The contingent consideration consists of two components. The first provides for a $1,000 thousand cash payment to the sellers of MedMar for each additional dispensary license that MedMar obtains in the 30 months following the acquisition, not to exceed an aggregate $2,000 thousand. The fair value of this component was $1,096 thousand as of the acquisition date; without discounting, the amount is $1,434 thousand. The discount rate used in the valuation was 10.8%. The second component provides for the Company to reimburse the sellers for certain income tax payments. The first component relates to transfer tax, for maximum contingent consideration of $2,000 thousand, which was recorded by the Company in its entirety. The second component relates to certain tax distributions to owners of a maximum of $900 thousand, of which the Company has recorded $700 thousand. This amount has been recorded as contingent consideration of $2,000 thousand and deferred consideration and other payables of $700 thousand. Of the total purchase consideration, $17,143 thousand was allocated to MedMar Lakeview and $13,395 thousand was allocated to MedMar Rockford. Refer to the table above for detailed information about the purchase price allocation.

Although the MedMar cash and share consideration was not yet funded as of the acquisition date or as of December 31, 2018, due to provisions contained in certain agreements related to the acquisition, the Company has the full decision-making power over both MedMar Lakeview and MedMar Rockford. According to IFRS 10.6, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company has the right to direct all the relevant activities of MedMar Lakeview and MedMar Rockford and is exposed to variable returns through the agreements effecting the acquisition before the funding of the acquisition. Regulatory approval and funding have since occurred.

For the year ended December 31, 2018, MedMar accounted for approximately $119 thousand in contributed net loss. This amount included revenues of approximately $670 thousand.

Non-controlling interest of $5,269 thousand has been recognized at fair value. Fair value was determined based on the NCI’s share of the total enterprise value imputed based on the purchase consideration, minus a 21% discount for non-controlling interest.

(iv)

Tinad, LLC

Via a purchase agreement signed in April 2018, Cresco Labs, LLC acquired a 35% stake in PDI in September 2018 in exchange for $901 thousand in cash consideration and 114 thousand F Units to expand its retail footprint in the Illinois market. PDI operates a medical cannabis dispensary in the Chicago area suburb of Buffalo Grove, IL. This investment was accounted for using the equity method.

On October 1, 2018, Cresco Labs, LLC acquired an additional 63% investment and controlling interest in PDI via certain agreements giving it de facto control before cash and share consideration was settled. As of October 1, 2018, the investment had a carrying value of $1,001 thousand and a fair value of $3,641 thousand.

Accordingly, a gain of $2,640 thousand was recorded in Other (expense) income, net. The sellers could elect to receive their purchase consideration in either cash or shares as a later date. This share consideration was measured based on 80% of the expected RTO share price. Due to number of shares being variable at the

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

acquisition date, a derivative liability with a fair value of $6,257 thousand was recorded as the purchase consideration. During the fourth quarter of 2018, the amount of cash and shares for the acquisition of PDI became fixed. The Company issued 258 thousand shares in December 2018. Refer to Note 20 for more information on the fair value measurement. Refer to the table above for detailed information about the purchase price allocation.

Although the PDI cash and share consideration was not yet funded as of the acquisition date and cash consideration was not yet funded as of December 31, 2018, due to provisions contained in certain agreements related to the acquisition, the Company has the full decision-making power over PDI. According to IFRS 10.6, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Company has the right to direct all the relevant activities of PDI and is exposed to variable returns through the agreements effecting the acquisition before the funding of the acquisition. Regulatory approval and funding have since occurred.

For the year ended December 31, 2018, PDI accounted for approximately $56 thousand in contributed net loss. This amount included revenues of approximately $917 thousand.

(v)

Phoenix Farms Illinois, LLC (“Phoenix”)

On January 19, 2018, Cresco Labs, LLC acquired Phoenix to expand its retail footprint in the Illinois market. Phoenix operates a medical cannabis dispensary in the central Illinois city of Champaign, near the University of Illinois at Urbana-Champaign.

Cresco Labs, LLC acquired 65.2% of the issued and outstanding units of Phoenix for $2,641 thousand of cash consideration. Refer to the table above for detailed information about the purchase price allocation.

For the year ended December 31, 2018, Phoenix accounted for approximately $307 thousand in contributed net income. This amount included revenues of approximately $1,733 thousand.

Non-controlling interest of $1,108 thousand has been recognized at fair value. Fair value was determined based on the NCI’s share of the total enterprise value imputed based on the purchase consideration, minus a 21% discount for non-controlling interest.

(b)

Asset Acquisitions


Completed during the year ended December 31, 2018	SLO (i)		SPC (ii)		Total
($ in thousands)
Total consideration	$	1,500	$	1,436	$	2,936
Deferred cash consideration		1,500		—		1,500
Cash paid		—		1,436		1,436

Identifiable assets acquired
Inventory		$404		$—		$404
Property & Equipment		—		1,436		1,436
Intangible Assets		1,096		—		1,096

Total assets acquired	$	1,500	$	1,436	$	2,936

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(i)

SLO Cultivation Inc.

On June 7, 2018 Cresco Labs, LLC acquired 60% of the issued and outstanding units of SLO, a marijuana cultivation facility in operation in the cities of Carpinteria (Santa Barbara County) and San Luis Obispo (San Luis Obispo County) California, for consideration of $1,500 thousand. On September 27, 2018, Cresco acquired an additional 20% of the issued and outstanding units of SLO for an equity consideration of $8,500 thousand to bring the total ownership to 80% which is included in the Non-controlling Interests Adjustment for Change in Ownership line in the statement of change in equity. At the time of purchase, SLO had no operational business processes as the previous license was to be superseded under new state regulations. Therefore, the Company accounted for this transaction as an asset acquisition. Refer to the table above for detailed information about the purchase price allocation.

(ii)

Strategic Property Concepts, LLC (“SPC”)

On November 21, 2018, Cresco Labs, LLC acquired SPC to enter the Ohio market. SPC is a real estate holding entity that owns three properties being developed for retail cannabis operations. Cresco Labs, LLC acquired 100% of the issued and outstanding units of SPC for $1,436 thousand of cash consideration, allocated to a single asset class, real estate.

(c)

Deferred Consideration, Contingent Consideration and Other Payables

The table below summarizes the Company’s deferred consideration and other payables balance as of December 31, 2019 and 2018:


($ in thousands)	IFRS 9 Classification		2019		2018
MedMar deferred consideration		Amortized Cost	$	—	$	7,231
PDI deferred consideration		Amortized Cost		—		4,803
SLO deferred consideration		Amortized Cost		—		1,500
MedMar contingent tax consideration liability—current		FVTPL		—		700
MedMar contingent consideration liability for tax payments—current		FVTPL		2,000		—
MedMar contingent consideration liability—current		FVTPL		1,927		—
MedMar notes payable		Amortized Cost		—		345
PDI contingent tax consideration liability—current		FVTPL		—		294
Interest payable—short term		Amortized Cost		1,464		—
Valley Ag deferred consideration		Amortized Cost		18,750		—
HHH deferred consideration		FVPTL		27,237
Valley Ag operating cash flows consideration		FVTPL		7,423		—
Valley Ag make-whole liability		FVTPL		800		—
Liability-classified equity awards		FVTPL		339		—

Total			$	59,940	$	14,873

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Decreases in deferred consideration between December 31, 2019 and 2018 are due to payments of deferred consideration related to acquisitions of MedMar, PDI and SLO in the amounts of $7,244 thousand, $4,803 thousand, and $1,500 thousand, respectively.

In conjunction with the acquisitions of MedMar and PDI, the Company recorded a current liability of $994 thousand for contingent tax considerations, subsequently measured at FVTPL, within deferred consideration and other payables as of December 31, 2018. During the years ended December 31, 2019 and 2018, the Company made $818 thousand and $nil in payments, respectively. No other changes in assumptions or rates have occurred. As noted in section (d) – Contingent Consideration of this note, the MedMar contingent consideration liability for tax payments and MedMar contingent consideration of $2,000 thousand and $1,096 thousand, respectively, was reclassified from long-term to current in the second quarter of 2019.

In conjunction with its acquisition of Valley Ag, the Company recorded a current liability for the present value of deferred consideration of $18,750 thousand with accrued interest payable of $1,464 thousand held at amortized cost as of December 31, 2019.

The Company recorded deferred consideration of $7,240 thousand, measured at FVTPL, related to five-year operating cash flow projections in conjunction with its acquisition of Valley Ag. The Company subsequently recorded a loss of $183 thousand as of December 31, 2019.

The Company recorded a make-whole adjustment liability with a fair value of $2,300 thousand in conjunction with its acquisition of Valley Ag and held at FVTPL. The fair value decreased to $800 thousand due to changes in the Company’s stock price as of December 31, 2019 with a corresponding adjustment in Consolidated Statements of Operations and Comprehensive Loss.

In conjunction with its acquisition of HHH, the Company recorded a current liability for the present value of deferred consideration of $26,606 thousand with accrued interest payable of $632 thousand, measured at FVTPL as of December 31, 2019.

The company recorded a liability of $339 thousand related to liability-classified equity awards measured at FVTPL. See Note 13 for further details.

(d)

Contingent Consideration

The following is a summary of the current contingent consideration as of December 31, 2019 and 2018:


($ in thousands)	2019		2018
PDI contingent tax consideration liability—current	$	—	$	294
MedMar contingent tax consideration liability—current		—		700
MedMar contingent consideration liability for tax payments—current		2,000		—
MedMar contingent consideration liability—current		1,927		—

Total	$	3,927	$	994

In conjunction with its acquisition of MedMar, the Company recorded a non-current liability for contingent consideration with a fair value of $3,096 thousand as of December 31, 2018. At the acquisition date, the fair value was measured at FVTPL utilizing a discount rate of 10.8%, a period of 2.5 years, and weighted value based on probability of license outcomes due to law changes. In the second quarter of 2019, Illinois passed recreation use of cannabis into law effective January 1, 2020, resulting in a reclassification of the contingent consideration liability to a short-term liability in Deferred Consideration and Other Payables, see section (c) – Deferred Consideration and Other Payables of this note. In the year ended December 31, 2019, the fair value of the liability was increased by $831 thousand, utilizing a discount rate of 11.2% and an updated period of 0.3 years. Accordingly, the fair value of the contingent consideration liability increased to a total of $3,927 thousand.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The following is a summary of the long-term contingent consideration as of December 31, 2019 and 2018:


($ in thousands)	IFRS 9 classification		December 31, 2019		December 31, 2018
Non-current—MedMar contingent consideration liability for tax payments		FVTPL	$	—	$	2,000
Non-current—MedMar contingent consideration liability		FVTPL		—		1,096
Valley Ag contingent consideration		FVTPL		21,901		—

Total Long-term contingent consideration			$	21,901	$	3,096

In conjunction with its acquisition of Valley Ag, the Company recorded non-current liabilities for contingent consideration payable in equity with a total fair value of $21,901 thousand measured at FVTPL. The liability primarily comprised of $17,914 thousand of contingent equity consideration with a subsequent mark-to-market fair value loss of $3,908 thousand as of December 31, 2019 based on changes in the Company’s stock price.

15.

REVENUE

The following table represents the Company’s disaggregated revenue by source, primarily due to the Company’s contracts with its customers, for the years ended December 31, 2019 and 2018:


($in thousands)	2019		2018
Wholesale	$	79,927	$	30,723
Dispensary		48,607		12,529

Total Revenue	$	128,534	$	43,252

The Company generates revenue at the point in time the product is transferred to the customer, as the Company has a right to payment, and the customer has significant risks and rewards of such product. The Company does not engage in long-term sales contracts.

During the year ended December 31, 2019, the Company recorded $2,105 thousand of revenue under IFRS 15 related to a bill-and-hold arrangement for products not shipped as of December 31, 2019.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

16.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

For the year ended December 31, 2019 and 2018, Selling, general and administrative expenses consisted of the following:


($ in thousands)	2019		2018
Salaries and related	$	28,519	$	7,363
Consulting and professional fees		17,902		4,404
Share-based compensation		14,046		10,132
Advertising and marketing		12,630		2,048
Office		4,677		1,053
Travel and entertainment		4,361		1,390
Excise taxes		4,341		1,918
Technology		1,989		370
Insurance		1,911		215
Business expansion costs		1,524		521
Listing expense		—		1,839
Reverse takeover transaction costs		—		1,654
Other		2,218		1,873

Total Selling, general and administrative expenses	$	94,118	$	34,780

17.

OTHER (EXPENSE) INCOME, NET

For the years ended December 31, 2019 and 2018, Other (expense) income, net consisted of the following:


($ in thousands)	2019			2018
(Loss) gain on derivative instruments (Note 20)	$	(3,236	)	$	833
Gain on conversion of loan to investment		703
(Loss) gain on changes in fair value of contingent consideration (Note 20)		(3,186	)		28
Gain on changes in fair value of loans receivable		1,515			—
Impairment on loan receivable (Note 20)		(3,037	)		—
Loss on sale and leaseback transactions (Note 8)		(670	)		—
Dividend income		97			—
Unrealized loss on investments held at fair value (Note 9)		(2,827	)		(109	)
Gain (loss) on foreign currency		421			(763	)
Gain on revaluation of previously held equity investment		—			2,640
Gain on dissolution of previously held equity investment (Note 9)		1,309			—
Other income		264			152

Total other (expense) income, net	$	(8,647	)	$	2,781

18.

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 December 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(b)

Contingencies

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management believes that the Company is in substantial compliance with applicable local and state regulation as of December 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

19.

RELATED PARTY TRANSACTIONS

(a)

Compensation of key management personnel

The Company’s key management personnel have the authority and responsibility for planning, directing, and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Other than the lease arrangements described below for the year ended December 31, 2019, there were no material transactions with or changes to other related party balances as of December 31, 2019. Key management personnel compensation and other related party expenses for the years ended December 31, 2019 and 2018 are as follows:


	Year ended December 31,
($ in thousands)	2019		2018
Management compensation	$	3,139	$	2,289
Sponsor fees		—		2,769
Stock compensation expense		5,972		8,813

Total	$	9,111	$	13,871

As of December 31, 2019, the Company had receivables and payables of $712 thousand and $113 thousand, respectively, with key management personnel.

Key management personnel hold 86,550 thousand redeemable units of Cresco Labs, LLC, which is equal to $80,221 thousand of Non-controlling interests as of December 31, 2019.

(b)

Related parties—Leases

In addition to the above related party expenses, the Company has lease liabilities for real estate lease agreements in which the lessors have minority interest in SLO and MedMar, Inc. The lease liabilities were incurred in January 2019 and will expire in December 2023 through 2026.

Below is a summary of the expense resulting from the related party lease liabilities for the year ended December 31, 2019.


($ in thousands)	Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	382	$	1,650
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		63		89
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		92		88

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Additionally, below is the summary of the ROU assets and liabilities attributable to the related party lease liabilities. The ROU asset and liability for SLO’s lease assumes all lease extension options are exercised. For information on the implementation of IFRS 16, see Note 2(q).


	As of December 31, 2019
($ in thousands)	ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		649		694
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		643		686

20.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

Financial Instruments

The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses, as applicable) or FVTPL. The carrying values of financial instruments held at amortized cost approximate their fair values as of December 31, 2019 and 2018 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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

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

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

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

Unless otherwise noted, the Company considers all financial instruments classified as FVTPL to be Level 1 instruments.

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

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The following table summarizes the Company’s financial instruments as of December 31, 2019 and 2018:


($ in thousands)	December 31, 2019		December 31, 2018
Financial Assets:
Cash and cash equivalents	$	49,102	$	131,302
Restricted cash		5,050		6,726
Accounts receivable, net		16,455		3,658
Loans receivable, short-term		644		7,726
Loans receivable, long-term		18,633		7,280
Security deposits		1,084		1,363
Financial Liabilities:
Accounts payable and other accrued expenses	$	62,834	$	7,595
Current portion of lease liabilities		12,019		—
Deferred consideration, contingent consideration and other payables		59,940		14,873
Derivative liabilities		178		178
Derivative liabilities – long-term		15,243		146
Lease liabilities		82,856		—
Deferred and contingent consideration		21,901		3,096
Other long-term liabilities		550		—

(a)

Short-Term Loans Receivable

The following is a summary of short-term loans receivable balances and IFRS 9 classifications (discussed further below) as of December 31, 2019 and 2018:


($ in thousands)	IFRS 9 classification		2019		2018
Short-term loans receivable—Lighthouse		FVTPL	$	—	$	6,648
Short-term loans receivable—HHH		Amortized cost		—		314
Short-term loans receivable—Valley Ag		Amortized cost		—		678
Interest receivable		Amortized cost		644		86

Total short-term loans receivable			$	644	$	7,726

(i)

Short-Term Loans Receivable with Derivative Features

In conjunction with its agreement to purchase membership interest in Lighthouse equal to a 25% interest in Lighthouse’s subsidiary, Nevada Business Services Group, dated January 26, 2018, the Company entered into an escrow and loan arrangement, with certain embedded derivative. In the first quarter of 2018, the Company paid approximately $5,500 thousand in cash. The Company also transferred 500,000 Class E Units to be issued upon closing, valued at approximately $567 thousand, which are held in escrow until certain contingent events occur and recorded as shares to be issued. Portions of the Company’s escrow payments are drawn as a loan, with a stated interest rate of 6% measured at FVTPL.

On August 12, 2019, the Company settled its outstanding short-term loan receivable with Lighthouse through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company and the issuance of a new secured convertible promissory note that is convertible, at the Company’s discretion, into additional membership units approximating 1% ownership of the parent company. The new loan has a maturity of 18 months and an option for the Company to convert into additional membership units. This new loan had a fair value of $2,758 thousand in August 2019 and was held as a long-term loan receivable measured at FVTPL. The Company recognized an unrealized loss of $522 thousand as of December 31, 2019 due primarily to the change in fair value of the underlying investment. The settlement of the agreement dated January 26, 2018 resulted in cancellation of the 500,000 Cresco Class E Units previously held in escrow. See Note 9 for discussion of the Company’s investment in Lighthouse.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Other Short-Term Loans Receivable

In conjunction with its agreements to acquire HHH and Valley Ag, the Company entered into certain non-derivative loan arrangements, which are measured at amortized cost.

In connection with the HHH acquisition on October 1, 2019, the Company settled a loan receivable that was valued at $4,807 thousand, including accrued interest receivable, and was classified as consideration paid as part of the acquisition.

In connection with the Valley Ag acquisition on October 8, 2019, the Company settled the loan receivable that was valued at $10,146 thousand, including accrued interest receivable, and was classified as consideration paid as part of the acquisition.

On September 13, 2019, the Company entered into a loan agreement with VidaCann, LLC for the principal amount of $2,000 thousand and amended the agreement on October 10, 2019 to increase the principal amount to $3,000 thousand. On November 26, the Company announced the termination of the letter of agreement to purchase VidaCann, Ltd. As part of the termination agreement, the Company forgave the outstanding loan and interest receivable balance of $3,037 thousand and recorded an impairment loss in the Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2019.

Expected Credit Loss (ECL)

The Company calculates ECLs for loan receivables and restricted cash by considering cash shortfalls on a discounted basis it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring, which is determined through the exercise of judgement. No events or changes have occurred that would materially affect the expected credit loss over the life of these instruments and no impairment losses were recorded during the years ended December 31, 2019 or 2018.

(b)

Loans Receivable, Long-Term

The Company entered into certain loan arrangements that contained embedded derivatives comprising of a call and put option and a stated interest rate of 5.25%. Settlement of the instruments varies based on contingent events and returns are not fixed. As such, the Company records this loan receivable at FVTPL. Each period, the loan is measured using a probability-weighting analysis of expected outcomes, which utilize Level 3 inputs. The inputs included market rates ranging from 2.7% to 18.3%, a risk-free rate of 1.6% and expected settlement timing of 1.47 to 1.69 years. Changes in Level 3 inputs and assumptions utilized resulted in a fair value gain of $2,037 as of December 31, 2019. At December 31, 2019, of the $15,500 thousand maximum loan commitment, $10,471 thousand had been drawn on these loans.

The Company provided $390 thousand to Wellbeings LLC, a related party, during the year ended December 31, 2019 in the form of a member loan with the stated interest rate of 10.0%. The Company records this loan receivable at amortized cost.

On August 12, 2019, the Company entered into a secured convertible promissory note with Lighthouse measured at FVTPL and held as a long-term loan receivable in the amount of $2,236 thousand as of December 31, 2019. See Note 20 section (a)(i) for discussion.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

(c)

Derivative Liability

In conjunction with its acquisition of PDI, the Company recorded a derivative liability of $178 thousand at the acquisition date for an NCI put option, by which the remaining NCI could put their shares for a fixed amount of cash within one year of the acquisition legal close/funding date (April 2020). The derivative was valued using a discount rate of 9%. There was no change in fair value of this investment for the year ended December 31, 2019. In April 2020, the holders of the unowned interest in PDI exercised their put option which resulted in the Company paying $203 thousand to purchase this remaining NCI.

(d)

Other Long-Term Liabilities

In conjunction with its acquisition of HHH, the Company recorded a long-term liability for a loan payable of $550 thousand, as of both the acquisition date and December 31, 2019, subject to a 6.50% interest rate and a maturity date of June 26, 2021. Land and building with a December 31, 2019 carrying value of $7,452 thousand has been pledged as collateral. The Company believes fair value approximates carrying value.

(e)

Share Purchase Warrants

At December 31, 2019, of the 6,453,784 warrants outstanding, 18,253 warrants issued to previous holders of Randsburg warrants (measured at FVTPL) were classified as a long-term derivative liability with a fair value of $50 thousand at December 31, 2019. 35,071 warrants were exercised during the year ended December 31, 2019 for $204 thousand, resulting in a realized gain of $35 thousand and an increase to share capital of $368 thousand. The Company recorded a mark-to-market loss of $155 thousand due to changes in share price, partially offset by a $12 thousand unrealized foreign exchange gain on outstanding warrants at December 31, 2019. The fair value of non-brokered warrants issued was determined using the Black- Scholes option-pricing model utilizing the following assumptions:


	December 31, 2019	December 31, 2018
Risk-free annual interest rate	1.61%	1.25%
Expected annual dividend yield	0%	0%
Expected stock price volatility	81%	90%
Expected life of stock warrants	0.4 years	1 year
Forfeiture rate	0%	0%
Share price at period end	$6.86	$6.75

On September 24, 2019, the Company completed a financing which resulted in issuance of 3,675 thousand warrants measured at FVTPL. These warrants were classified as a long-term derivative liability with a fair value of $6,163 thousand at issuance. The Company recorded a mark-to-market loss of $835 thousand due to changes in share price, partially offset by a $135 thousand unrealized foreign exchange gain on outstanding warrants for the year ended December 31, 2019. See Note 12 for additional information.

On October 24, 2019, the Company issued an additional 551 thousand share purchase warrants (the “Additional Warrants”) at a price of $1.64 per Additional Warrant for gross proceeds of $909 thousand, pursuant to the partial exercise of the Underwriter’s over-allotment option related to the September 2019 financing. These warrants were classified as a long-term derivative liability with a fair value of $945 thousand. The Company recorded a mark-to-market loss of $118 thousand due to changes in share price partially offset by a $7 thousand unrealized foreign exchange gain on outstanding warrants for the year ended December 31, 2019.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Pursuant with the acquisition of Valley Ag, the Company issued 2,000 thousand share purchase warrants with a fair value of $5,437 thousand classified as a long-term derivative liability and measured at FVTPL. The Company recorded a mark-to-market loss of $2,127 thousand due to changes in share price, partially offset by a $290 thousand unrealized foreign exchange gain on outstanding warrants for the year ended December 31, 2019.

At both the issuance dates and as of December 31, 2019, the fair value of warrants issued through the September 2019 financing, corresponding overallotment and Valley Ag acquisition were determined using the Black-Scholes option-pricing model utilizing the following assumptions:


	Issuance date	December 31, 2019
Risk-free annual interest rate	1.73% to 1.77%	1.58%
Expected annual dividend yield	0%	0%
Expected stock price volatility	82%	81%
Expected life of warrants	1.5 years	1.4 years
Forfeiture rate	0%	0%
Share price on valuation date	$5.67—$6.32	$6.86

Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies.

Financial

Risk Management

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board mitigates 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 third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at December 31, 2019 and 2018 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 the continued economic strength of the U.S, strength in the U.S. capital 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 House of Representatives, but has not yet been voted on within the Senate. Given that 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.

The Company’s aging of accounts receivables as of December 31, 2019 and 2018 was as follows:


($ in thousands)	2019		2018
0 to 60 days	$	10,276	$	3,469
61 to 120 days		5,551		181
120 days +		899		28

Total accounts receivable, gross	$	16,726	$	3,678

The Company recorded bad debt expense of $251 thousand and $nil for the years ended December 31, 2019 and 2018, respectively, to account for expected credit loss and an additional $185 thousand in bad debt expense related to invoice write-offs for the year ended December 31, 2019.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Included in the Accounts receivable balance as of December 31, 2019 are amounts receivable from Origin House of $8,004 thousand. The outstanding receivables were subsequently collected in January of 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 were 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

In addition to the commitments outlined in Note 11 and Note 14, the Company has the following contractual obligations as of December 31, 2019:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable & other accrued expenses	$	62,834	$	—	$	—	$	62,834
Deferred consideration, contingent consideration and other payables		59,940		—		—		59,940
Deferred and contingent consideration		—		21,901		—		21,901
Other long-term liabilities		—		550		—		550

Total obligation as of December 31, 2019	$	122,774	$	22,451	$	—	$	145,225

In addition to the commitments outlined in Note 11 and Note 14, the Company has the following contractual obligations as of December 31, 2018:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable and other accrued expenses	$	7,595	$	—	$	—	$	7,595
Deferred consideration, contingent consideration and other payables		14,873		—		—		14,873
Deferred and contingent consideration		—		3,096		—		3,096

Total obligation as of December 31, 2018	$	22,468	$	3,096	$	—	$	25,564

(d)

Market Risk

(i)

Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of December 31, 2019 and 2018, the Company’s financial assets and liabilities are denominated solely 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 an immaterial amount of foreign exchange losses related to warrants during the year ended December 31, 2019. See Note 17 for additional detail.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

As of December 31, 2019 and 2018, 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

(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, contingent consideration and liability-classified RSUs that are valued based on the Company’s own stock price. An increase or decrease of stock price by 10% would result in an associated increase or decrease in fair value and Other (expense) income, net of $5,287 thousand.

(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 section 280E which bars businesses from deducting all expenses except their cost of sales 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 25 for the Company’s disclosure of uncertain tax positions.

(v)

Regulatory Risk

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 of unforeseen regulatory changes can have on the goals and operations of the business as a whole.

21.

CAPITAL MANAGEMENT

The Company’s objectives when managing capital are to ensure that there are adequate capital resources to safeguard the Company’s ability to continue as a going concern and maintain adequate levels of funding to support its ongoing operations and development such that it can continue to provide returns to shareholders and benefits for other stakeholders.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The capital structure of the Company consists of items included in shareholders’ equity. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the Company’s underlying assets. The Company plans to use existing funds, as well as funds from the future sale of products to fund operations and expansion activities and may from time to time seek out additional capital from borrowings or the sale of equity instruments. As of December 31, 2019, the Company is not subject to externally imposed capital requirements.

22.

SEGMENT INFORMATION

The Company operates in one segment, the production and sale of cannabis. All property and equipment and intangible assets are located in the United States.

All revenues were generated in the United States for the years ended December 31, 2019 and 2018.

23.

EARNINGS 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.

Potentially dilutive shares of 152,079 and 150,711 thousand were not included in the calculation of EPS for the years ended December 31, 2019 and 2018, respectively, as their impact would have been anti-dilutive due to net losses in these periods.

The following is a reconciliation for the calculation of basic and diluted loss per share (in thousands, except per share amounts) for the years ended December 31, 2019 and 2018:


	Year ended December 31,
(in thousands, except per share data)	2019			2018
Basic and diluted loss per share
Net loss income attributable to Cresco Labs Inc. shareholders	$	(43,201	)	$	(1,915	)
Weighted-average number of shares outstanding		118,318			59,343

Loss per share – basic and diluted	$	(0.37	)	$	(0.03	)

24.

INTEREST (EXPENSE) INCOME, NET

Interest (expense) income, net consisted of the following for the periods presented:


	Year ended December 31,
($ in thousands)	2019			2018
Interest expense – leases	$	(7,078	)	$	—
Interest expense		(2,380	)		(24	)
Interest income		1,583			113

Interest (expense) income, net	$	(7,875	)	$	89

See Note 8 for additional information regarding interest expense – leases related to the Company’s adoption of IFRS 16 Leases.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

25.

PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES

The Company accounts for income taxes in accordance with IAS 12 Income Taxes, under which deferred tax assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and the respective tax bases. As a result of the Transaction, the Company recognized a net deferred tax liability of $607 thousand with a corresponding decrease to Shareholders’ Equity.

As the Company operates in the legal cannabis industry, the Company is subject to the limits of IRC Section 280E for U.S. federal income tax purposes as well state income tax purposes for Illinois, Pennsylvania, Ohio, Maryland, Nevada, Arizona, New York, and Massachusetts. Under 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 does not conform to IRC Section 280E and, accordingly, the Company deducts all operating expenses on its California Franchise Tax Returns.

As of December 31, 2019, the Company has $1,677 thousand of non-capital Canadian losses which expire in 2038- 2039, $12,346 thousand of California net operating losses which expire in 2038-2039, and $922 thousand of U.S. federal net operating losses which have an indefinite carryforward period.

As of December 31, 2018, the Company has $37 thousand of non-capital Canadian losses which expire in 2038, $1,733 thousand of California net operating losses which expire in 2038, $21 thousand of U.S. federal net operating losses which expire in 2037 and $42 thousand of U.S. federal net operating losses which have an indefinite carryforward period.

The Company determined that the tax impact of certain arrangements between its management companies and operating companies are not probable that they would be sustained under IFRIC 23 due to the evolving interpretations of Section 280E. As a result, the Company recorded a reserve for an uncertain tax positions of $7,494 thousand and $2,619 thousand as of December 31, 2019 and 2018, respectively. Of this amount, $455 thousand relates to penalties and $246 thousand relates to interest as of December 31, 2019, and $275 thousand relates to penalties as of December 31, 2018. All interest and penalties are classified as Accounts payable and other accrued expenses within the Consolidated Statements of Financial Position. The Company early adopted IFRIC 23 as of December 31, 2018.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

Provision for income taxes consists of the following for the years ended December 31, 2019 and 2018:


($ in thousands)	2019		2018
Current
Federal	$	10,455	$	2,827
State		2,830		32

Total current	$	13,285		2,859
Deferred
Federal	$	1,124	$	1,230
State		52		285

Total deferred	$	1,176		1,515

Total	$	14,461	$	4,374

As of December 31, 2019 and 2018, the components of deferred tax assets and liabilities were as follows:


($ in thousands)	2019			2018
Deferred tax assets
Share-based compensation	$	1,177		$	925
Net operating losses		1,285			134
Lease liabilities		13,202			—
Inventory		188			—
Other		425			12

Total deferred tax assets	$	16,277		$	1,071
Deferred tax liabilities
ROU assets	$	(6,488	)	$	—
Biological assets		(4,213	)		(2,574	)
Inventory		—			(723	)
Property, plant and equipment		(7,923	)		(1,066	)
Intangible assets		(18,877	)		(1,101	)
Other		(227	)		(66	)

Total deferred tax liabilities	$	(37,728	)	$	(5,530	)

Net deferred tax liabilities	$	(21,451	)	$	(4,459	)

The amounts above may differ from the amounts recorded in Deferred tax asset and Deferred tax liability in the Consolidated Statements of Financial Position due to netting for tax filing groups for which the company has the legal right and intention to settle on a net basis as allowable under IAS 12.71.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

The reconciliation between the effective tax rate on income from continuing operations and the statutory tax rate is as follows:


($ in thousands)	2019			2018
Expected income tax (recovery) expense at statutory tax rate	$	(10,783	)	$	1,568
Tax rate differences		(5,383	)		(1,014	)
Pass through and non-controlling entities		186			(1,357	)
State tax expense, net		1,726			250
Permanently non-deductible items		16,382			1,697
Uncertain tax treatment		4,875			2,619
Share-based compensation		3,869			313
Change in tax status		3,102			—
Net changes in deferred tax assets not recognized		608			592
Other		(121	)		(294	)

Income tax expense	$	14,461		$	4,374

Effective tax rate		-28.4	%		58.6	%

Movement in net deferred tax liabilities:


($ in thousands)	2019			2018
Balance at the beginning of the year	$	(4,459	)	$	—
Recognized in profit/loss		(1,176	)		(1,515	)
Recognized in goodwill		(16,108	)		(2,424	)
Recognized in equity		292			(520	)

Balance at the end of the year	$	(21,451	)	$	(4,459	)

For the year ended December 31, 2019, the Company recognized in equity a deferred tax liability of $292 thousand comprised of $393 thousand related to the adoption of IFRS 16 partially offset by $101 thousand related to share-based compensation reserve and other transactions with shareholders.

For the years ended December 31, 2018, the Company recognized in equity is a deferred tax liability of $521 thousand comprised of $607 thousand related to the reverse takeover partially offset by $86 thousand related to share-based compensation reserve.

Deferred tax assets have not been recognized in respect of the following deductible temporary differences:


($ in thousands)	2019		2018
Unrecognized deductible temporary differences:
Canadian non-capital losses carried forward	$	1,677	$	37
Canadian capital losses carried forward		809		—
Capital raise expenses		2,332		2,157
Other		63		—

Total	$	4,881	$	2,194

26.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through April 28, 2020, which is the date on which these financial statements were issued.

Cresco Labs Inc.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2019 and 2018

On January 8, 2020, the Company closed its acquisition of CannaRoyalty Corp. (“Origin House”) in which the Company acquired 100% of all equity interests of Origin House for approximately 72,200 thousand Cresco shares, which includes shares to be issued, that were valued at approximately $430,000 thousand. As of the date of issuance of this report, the Company is still in the process of determining the fair value of acquired assets and liabilities and the calculation of the associated goodwill.

On January 28, 2020, the Company closed a sale-and-leaseback agreement for its Yellow Springs, Ohio property for total proceeds of $12 million.

On February 2, 2020, the Company entered into a non-brokered credit agreement for a senior secured term loan with an initial principal balance of $100,000 thousand and the mutual option to increase the facility to a maximum of $200,000 thousand. The lender has the option to select a term of either 18 or 24 months with interest rates varying between 12.7% and 13.2%. The Company incurred financing fees of $5,525 thousand in connection with this credit agreement. Under the agreement, the Company is subject to certain financial and non-financial covenants.

On February 7, 2020, the Company legally closed and paid cash of $27,500 thousand for its acquisition of HHH.

On April 23, 2020, the Company closed a sale-and-leaseback agreement for its Marshall, Michigan property for total proceeds of $16 million.

On April 27, 2020, the Company entered into a termination agreement which cancels its previously announced purchase agreement to acquire certain assets of and an interest in Tryke Companies, LLC, and certain subsidiaries and affiliates thereof, and includes certain termination charges.

Subsequent to December 31, 2019, the novel coronavirus or COVID-19, which was declared a pandemic by the World Health Organization on March 12, 2020, has caused significant economic uncertainty and consequently it is difficult to reliably measure the potential impact of this uncertainty on our future financial results.

EX-99.14 15 d945319dex9914.htm EX-99.14 EX-99.14

Exhibit 99.14

FORM 13-501F1

CLASS 1 REPORTING ISSUERS AND CLASS 3B REPORTING ISSUERS –

PARTICIPATION FEE

MANAGEMENT CERTIFICATION

I, Kenneth Amann, an officer of the reporting issuer noted below have examined this Form 13-501F1 (the Form) being submitted hereunder to the Alberta Securities Commission and certify that to my knowledge, having exercised reasonable diligence, the information provided in the Form is complete and accurate.


(signed) Kenneth Amann				April 28, 2020
Name: Kenneth Amann				Date:
Title: Chief Financial Officer


Reporting Issuer Name:	Cresco Labs Inc.

End date of previous financial year:	December 31, 2019

Type of Reporting Issuer:	[ ] Class 1 reporting	[ ] Class 3B reporting
	issuer	issuer

Highest Trading Marketplace:	CSE


Market value of listed or quoted equity securities:

Equity Symbol CL

1st Specified Trading Period (dd/mm/yy)		01/01/19 to 31/03/19

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$ 15.0500 (i)


Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		33,431,000 (ii)

	(i) x (ii)	$ 503,136,550
Market value of class or series		(A)

2nd Specified Trading Period (dd/mm/yy)	01/04/19 to 30/06/19

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$ 13.5400 (iii)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		46,720,000 (iv)

Market value of class or series	(iii) x (iv)	$ 632,588,800 (B)

3rd Specified Trading Period (dd/mm/yy)	01/07/19 to 30/09/19

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$ 7.7700 (v)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		67,514,000 (vi)

	(v) x (vi)	$ 524,583,780
Market value of class or series		(C)


4th Specified Trading Period (dd/mm/yy)	01/10/19 to 31/12/19

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$ 8.9300 (vii)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		73,610,939 (viii)

	(vii) x (viii)	$ 657,345,685.27
Market value of class or series		(D)

5th Specified Trading Period (dd/mm/yy)	N/A to

Closing price of the security in the class or series on the last trading day of the specified trading period in which such security was listed or quoted on the highest trading marketplace		$ (ix)

Number of securities in the class or series of such security outstanding at the end of the last trading day of the specified trading period		___________________________ (x)

	(ix) x (x)	$
Market value of class or series		(E)

Average Market Value of Class or Series (Calculate the simple average of the market value of the class or series of security for each applicable specified trading period (i.e. A through E above))		$________________579,413,703.82 (1)

(Repeat the above calculation for each other class or series of equity securities of the reporting issuer (and a subsidiary, if applicable) that was listed or quoted on a marketplace at the end of the previous financial year)


Fair value of outstanding debt securities:

(Provide details of how value was determined)		$ 80,958,570
		(2)

Capitalization for the previous financial year	(1) + (2)	$ 660,372,273.82

Participation Fee		$ 19,000.0000

Late Fee, if applicable		$

Total Fee Payable		$ 19,000.0000
(Participation Fee plus Late Fee)

EX-99.15 16 d945319dex9915.htm EX-99.15 EX-99.15

Exhibit 99.15

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

OPERATIONS FOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2019 AND 2018.

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Cresco Labs Inc. (the “Company” or “Cresco”) is for the three months and years ended December 31, 2019 and 2018. It is supplemental to, and should be read in conjunction with, the Company’s audited combined financial statements and accompanying notes for the year ended December 31, 2019. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial information presented in this MD&A is presented in United States dollars (“$” or “US$”), unless otherwise indicated.

This MD&A has been prepared by reference to the MD&A disclosure requirements established under National Instrument 51-102–Continuous Disclosure Obligations of the Canadian Securities Administrators.

The Company has provided certain supplemental non-IFRS financial measures in this MD&A. Where the Company has provided such non-IFRS financial measures, we have also provided a reconciliation to the most comparable IFRS financial measure. These supplemental non-IFRS 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 IFRS financial measures presented herein. Please see the information under the header “Non-IFRS Financial Measures” for additional information the Company’s use of non-IFRS financial measures and the reasons therefore.

This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable United States securities laws and Canadian securities laws. Please refer to the discussion of forward-looking statements and information set out under the heading “Cautionary Note Regarding Forward Looking Information”, located at the beginning of the Company’s Annual Information Form for the year ended December 31, 2019, filed on SEDAR. As a result of many factors, the Company’s actual results may differ materially from those anticipated in these forward-looking statements and information.

OVERVIEW OF THE COMPANY

Cresco Labs Inc. (the “Company” or “Cresco”) was incorporated in the Province of British Columbia and is licensed to cultivate, manufacture and sell cannabis and cannabis products. The Company operates in Illinois, Pennsylvania, Ohio, California, Nevada, Arizona, Massachusetts and New York.

Wholly-owned subsidiaries and entities of Cresco whose principal business is the cultivation, production, distribution, or sale of adult-use and medical cannabis and adult-use and medical cannabis products are listed below:

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Cresco Labs, LLC (“Cresco IL”), of which the Company owns 43.8%.

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Cresco Labs Notes Issuer, LLC (“Cresco Notes”), of which Cresco IL owns 100%.

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Cresco Labs PA, LLC (“Cresco PA”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Cresco Yeltrah, LLC (“Yeltrah”).

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Cresco Notes holds a 99% interest in an operating company, Cresco Labs Ohio, LLC (“Cresco Ohio”).

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Cresco Edibles, LLC, wholly-owned by Cresco Notes, which holds a 75% interest in an operating company, TSC Cresco, LLC (“TSC”).

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Cresco Labs SLO, LLC (“California”), wholly-owned by Cresco Notes, which holds an 80% interest in an operating company, SLO Cultivation, Inc. (“SLO”)

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Cresco Labs TINAD, LLC (“TINAD”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating entity, PDI Medical III, LLC (“PDI”).

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Cresco Labs Phoenix Farms, LLC, wholly-owned by Cresco Notes, which holds an 100% interest in an operating company, Phoenix Farms of Illinois, LLC (“Phoenix”).

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Cresco Labs Nevada, LLC, wholly-owned by Cresco Notes, which holds a 1.2% interest in an operating company, Lighthouse Strategies, LLC (“Lighthouse”) effective August 12, 2019, with an option to convert an issued loan into an additional approximate 1% of ownership.

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Cresco Labs Arizona, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Arizona Facilities Supply, LLC (“Arizona”).

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MedMar Inc., wholly-owned by Cresco, which holds an 87.6% interest in MedMar Lakeview, LLC (“Medmar Lakeview”) and a 75% interest in MedMar Rockford, LLC (“Medmar Rockford”).

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JDC Elmwood, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, FloraMedex, LLC (“FloraMedex”).

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Cresco HHH, LLC (“Cresco HHH”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Hope Heal Health, Inc. (“HHH”). Legal close of the HHH acquisition occurred on February 7, 2020.

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Gloucester Street Capital, LLC (“GSC”), wholly-owned by Cresco, which holds a 100% interest in an operating company, Valley Agriceuticals, LLC (“Valley Ag”).

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CannaRoyalty Corp., wholly-owned by Cresco, which holds a 100% interest in Cali-AntiFragile Corp., a California corporation, which holds a 100% interest in operating companies: Kaya Management Inc., Alta Supply Inc., FloraCal, and River Distribution, LLC, (collectively referred to as the operating company “Origin House”). The Origin House acquisition closed on January 8, 2020.

Cresco 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 exists to provide high-quality and consistent cannabis-based products to consumers. Cresco’s 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 medical cannabis cultivation and manufacturing centers in Illinois, five dispensary locations in Illinois, one medical cannabis cultivation and manufacturing center in Pennsylvania, three dispensary locations in Pennsylvania, two additional dispensary locations under construction in Pennsylvania, one medical cannabis cultivation center and one dispensary location in Ohio, one cultivation center and one processing facility in California, two cultivation centers in Arizona, one manufacturing and dispensary location in Arizona, one processing center in Maryland, one medical cannabis cultivation center license in New York, four dispensary locations in New York and one cultivation center and dispensary in Massachusetts. In Illinois, Cresco’s dispensary applications received the highest, second highest and third highest scores, respectively, of all applications reviewed by the State of Illinois. Subsequently, the Company was the first cultivator to receive approvals to grow adult-use cannabis; all three cultivation facilities were granted approvals in that state. Additionally, the Company’s five dispensary locations were approved for dispensing adult-use cannabis in that state upon legalization, effective January 1, 2020. Secondary sites corresponding to the five current dispensary licenses were also awarded, allowing for up to ten dispensary locations upon zoning approval by local jurisdictions. The zoning for the first such secondary site dispensary located in Chicago’s River North neighborhood was approved by the City of Chicago on March 6, 2020. In Pennsylvania, Cresco was awarded the highest score during the application process and had the second highest overall score, making it one of only five cultivators that was also awarded a dispensary license which allows for up to three dispensaries. The Company was subsequently awarded a second dispensary license allowing an additional three dispensaries for a total of six locations across the state. Cresco is currently located at Suite 110, 400 W. Erie St, Chicago, IL 60654 and employs over 1,400 people while being voted a finalist for “Best Places to Work” by Crain’s Chicago Business in 2019. During 2019, the Company announced a new dispensary brand, Sunnyside*, created to accelerate

industry growth and shift people’s expectations and perceptions around shopping for cannabis from intimidation and doubt to curiosity and acceptance through a new trail and marketing approach. Five Sunnyside* dispensaries opened on January 1, 2020 in the Illinois market. On April 6, 2020, the Company announced the final approval from the Illinois Department of Financial and Professional Regulation to open the first adult-use dispensary in downtown Chicago.

Issuing IPO, Reverse Takeover & Corporate Structure

The Company (then Randsburg Gold Corporation) was incorporated in the Province of British Columbia under the Company Act (British Columbia) on July 6, 1990. On December 30, 1997, the Company changed its name from Randsburg Gold Corporation to Randsburg International Gold Corp. (“Randsburg”) and consolidated its common shares on a five (5) old for one (1) new basis. On November 30, 2018, in connection with the Reverse Takeover, 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 class of common shares, redesignate such class as the class of Subordinate Voting Shares and create the Proportionate Voting Shares and the Super Voting Shares.

The Company’s registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9. Pursuant to the Reverse Takeover, among the Company (then Randsburg) and Cresco, a series of transactions was completed on November 30, 2018 resulting in a reorganization of Cresco and Randsburg and pursuant to which Randsburg became the indirect parent and sole voting unitholder of Cresco. The series of transactions constituted a Reverse Takeover of Randsburg by Cresco under applicable securities laws.

Set forth below is the organization chart of the Company. The material subsidiaries of Cresco did not change in connection with the Reverse Takeover.

LOGO

Recent Developments

On April 26, 2019, the Company announced that it filed and received a receipt for a preliminary short form base shelf prospectus (the “Shelf Prospectus”) with the securities commissions in each of the provinces of Canada, except Québec. The Shelf Prospectus, when made final, will allow the Company to offer up to C$500,000,000 of subordinate voting shares, debt securities, subscription receipts, warrants, and units, or any combination thereof, from time to time during the 25-month period that the final Shelf Prospectus is effective. The Company filed this Shelf Prospectus in order to maintain financial strength and flexibility going forward; the final version of the Shelf Prospectus was filed and accepted on July 26, 2019. The specific terms of any future offering of securities, including the use of proceeds from any offering, will be established in prospectus supplements to the Shelf Prospectus, which will be filed with the applicable Canadian securities regulatory authorities.

On May 28, 2019, the Company announced that shareholders representing 205,172,192 common shares (the “Shareholders”) have entered into voluntary lock-up agreements with the Company (the “Agreements”), representing 97% of the shares subject to an initial lock-up and 80% of total issued subordinate voting shares (on an as-if converted basis). Included among the Shareholders are all of the Company’s founders, its entire executive management team and board of directors, as well as several of the largest outside investors in Cresco. The voluntary lock-up Agreements stipulate that these shareholders will not, subject to limited exception, offer to sell, contract to sell, lend, pledge or otherwise dispose of any Cresco securities, or enter into any transaction to such effect, directly or indirectly, in addition to other restrictions until December 3, 2019, when a portion of the shares will be released followed by the remainder of the shares being released by June 3, 2020.

On September 18, 2019, the Company filed a prospectus supplement (the “Offering”), together with the short form base shelf prospectus described above, which qualified the distribution of 7,350,000 units (the “Offered Units”) of Cresco at a price of C$10.00 per Offered Unit (the “Offering Price”) pursuant to an amended and restated underwriting agreement (the “Underwriting Agreement”) dated as of September 16, 2019 between Cresco and Canaccord Genuity Corp., Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P. (collectively, the “Underwriters”). Each Offered Unit was comprised of one subordinate voting share (“SVS”) of Cresco (each, a “Unit Share”) and one-half of one SVS purchase warrant of Cresco (each whole SVS purchase warrant, a “Warrant”). Each Warrant is exercisable into one SVS of Cresco (each, a “Warrant Share”) at an exercise price of C$12.50 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on the date that is 36 months following the closing of the Offering. The Offered Units immediately separate into Unit Shares and Warrants upon issuance. Pursuant to the Underwriting Agreement, Cresco agreed to pay to the Underwriter a fee representing 5.0% of the aggregate gross proceeds of the Offering.

Cresco granted the Underwriter an option to purchase up to an additional 1,102,500 Offered Units (the “Additional Units”) at the Offering Price per Additional Unit on the same terms and conditions as the Offering for a period of 30 days from and including the closing date (September 24, 2019) to cover over allotments, if any, and for market stabilization purposes. On October 24, 2019, the Company issued an additional 551,250 share purchase warrants (the “Additional Warrants”) at a price of C$2.16 per Additional Warrant for gross proceeds of C$1,190,700, pursuant to the partial exercise of the Underwriter’s over-allotment option.

On December 3, 2019, the Company entered into an equity distribution agreement with Canaccord Genuity Corp. pursuant to which the Company may, from time to time, sell up to C$55,000 thousand of SVS. The Company intends to use the net proceeds of the at-the-market program, if any, principally for general corporate purposes, including funding ongoing discretionary capital programs and potential future acquisitions.

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 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 Cresco’s operations, it is subject to Staff Notice 51-352 and accordingly provides the following disclosure.

Cresco 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 December 31, 2019, the Company is directly involved (through licensed subsidiaries) in both the adult-use and medical cannabis industry in the states of Illinois, Pennsylvania, Ohio, Arizona, Maryland, California, Massachusetts and New York 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 (the “CSA”). Under the CSA, the policies and regulations of the United States 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 United States Constitution establishes that the United States 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.

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 California, Nevada, Massachusetts, Maine, Michigan, Illinois, Washington, Oregon, Colorado, Vermont and Alaska, and the District of Columbia, have legalized recreational use of cannabis. Maine and Illinois have not yet begun recreational cannabis commercial operations as of December 31, 2019. In early 2018, Vermont became the first state to legalize recreational cannabis by passage in a state legislature, but does not allow commercial sales of recreational cannabis. 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.

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 limits on the levels of THC. 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 United States. Accordingly, there are a number of significant risks associated with the business of the Company. 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 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 United States.

For these reasons, the Company’s investments in the United States cannabis market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian authorities. There are a number of risks associated with the business of the Company. See sections entitled “Regulatory Overview” and “Risk Factors” in the Prospectus Supplement dated September 18, 2019, “United States Regulatory Environment” and “Risk Factors” in the Prospectus dated July 26, 2019, and “General Development of the Business”, “Description of the Business” and “Risk Factors” in the Annual Information Form dated April 28, 2020.

On November 20, 2019, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (“MORE Act”) in a 24 to 10 vote. The MORE Act would decriminalize and remove Cannabis as a Schedule I substance. The MORE Act now will likely be brought up for a vote in the Democratic-controlled House of Representatives in the coming months.

The States In Which We Operate, Their Legal Framework and How It Affects Our Business

Illinois Operations

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 new 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 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 bowl syndrome to the list of qualifying medical conditions. This bill was signed into law in August by Governor JB Pritzker.

In January 2019, JB Pritzker was sworn into office as Governor of Illinois. Cresco’s CEO and co-founder, Charles Bachtell, has been appointed to the Cannabis Legalization Subcommittee of the governor’s transition team. Cannabis Legalization is one of four subcommittees under the Governor’s Restorative Justice and Safe Communities Transition Committee. The primary goals of the Cannabis Legalization Subcommittee are to evaluate and develop implementation recommendations for the Governor’s platform on legalizing cannabis. In June 2019, Governor Pritzker signed the Cannabis Regulation and Taxation Act (CRTA) into law, making Illinois the 11^th state to legalize recreational marijuana.

Illinois’ retail market for 2019 was over $250 million, representing a 90% + year-over-year increase.

Cresco currently operates three (3) medical/adult-use cannabis cultivation and manufacturing centers in Illinois and owns five (5) medical/adult-use dispensary locations in Illinois. Licenses were awarded based on merit in a highly competitive application process to applicants who demonstrated strong operational expertise and financial backing. To date, Cresco has established a 25% wholesale market share in Illinois.

Cresco is licensed to operate in the state of Illinois as a medical and adult-use cultivator and medical and adult-use product manufacturer. Phoenix, PDI, FloraMedex, MedMar Lakeview, and 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 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 Department of Agriculture and the Department of Financial and Professional Regulation under the provisions of the Illinois Revised Statutes 410 ILCS 130. All licenses are, as of the date hereof, active with the State of Illinois. There are two categories of licenses in Illinois: (i) cultivation/processing; and (ii) dispensary. The licenses are independently issued for each approved activity.

All cultivation/processing establishments must register with Illinois Department of Agriculture. All dispensaries must register with the Illinois Department of Financial and Professional Regulation. 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 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 Department of Agriculture or Illinois Department of Financial and Professional Regulation and include a renewal form.

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. The five dispensary locations were approved on October 16, 2019 to begin dispensing adult-use cannabis on January 1, 2020 and were also approved to open secondary site adult-use dispensaries by the Illinois Department of Financials and Professional Regulation. Two of the five additional dispensaries will be located within the City of Chicago. The zoning for the first such secondary site dispensary located in Chicago’s River North neighborhood was approved by the City of Chicago on March 6, 2020. On April 6, 2020, the Company announced the final approval from the Illinois Department of Financial and Professional Regulation for this secondary site to open and begin adult-use cannabis sales.

The three medical cultivation licenses held by Cresco 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 cultivation facilities were approved for growing adult-use cannabis by the Illinois Department of Agriculture, for a total cultivation capacity of 630 thousand square feet, the maximum allowed by law.

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, including epilepsy, cancer, chronic pain, and PTSD. 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 to up to three medical dispensary locations). Out of the hundreds of applicants in each license category, Yeltrah was awarded one (1) medical cannabis cultivation and manufacturing center in Pennsylvania, and three (3) dispensary locations in Pennsylvania. Yeltrah has established an estimated 20%+ market share in Pennsylvania.

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 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 will include 13 additional cultivation/processing licenses and 23 additional dispensary licenses. The application period ran from April 2018 through May 17, 2018. Yeltrah submitted additional dispensary applications and in December of 2018 an additional dispensary license was obtained to open three (3) additional dispensary locations, for a total of six (6) in the state of Pennsylvania.

In the introductory months of the program, Pennsylvania’s medical marijuana dispensaries experienced supply shortages and were unable to keep up with statewide demand. It was announced on April 17, 2018 that dry flower would be included in the regulations as an approved product form for sale and consumption (in addition to the already approved forms of concentrates, pills, and tinctures).

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 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.

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.

On September 25, 2019, Pennsylvania’s Governor held a press conference to announce 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 31, 2019, Senate Bill 350 (“SB 350”) was introduced to legalize cannabis for adult-use. SB 350, in due course, will be assigned to a Senate committee for consideration by the Pennsylvania State Senate.

Ohio Operations

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 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. Qualifying medical conditions for medical marijuana include: HIV/AIDS, Lou Gehrig’s disease, Alzheimer’s disease, cancer, chronic traumatic encephalopathy, Crohn’s disease, epilepsy or other seizure disorder, fibromyalgia, glaucoma, hepatitis C, inflammatory bowel disease, multiple sclerosis (MS), pain (either chronic, severe, or intractable), Parkinson’s disease, PTSD, sickle cell anemia, spinal cord disease or injury, Tourette’s syndrome, traumatic brain injury, and ulcerative colitis. In order for a patient to be eligible to obtain medical marijuana, a physician must make the diagnosis of one of these conditions.

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 State of Ohio Board of Pharmacy 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 State of Ohio Board of Pharmacy. Per state of Ohio regulations, all provisional license holders have a maximum of six 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 State of Ohio Board of Pharmacy is limited to issuing up to 60 dispensary licenses across the state but will have the authority to increase the number of licenses. To date, no announcement has been made if the number of licenses will be increased. Per the program rules, the 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 Ohio was awarded one provisional dispensary license which is located in Wintersville, Ohio. The dispensary license permits Cresco Ohio to purchase marijuana and marijuana products from cultivation/processing facilities and allows the sale of marijuana and marijuana products to registered patients.

Cresco Ohio applied for and, on November 30, 2017, received one provisional cultivation license. Cresco Ohio’s cultivation facility is a hybrid greenhouse structure located in Yellow Springs, Ohio. The medical cultivation licenses permit will permit Cresco Ohio to acquire, possess, cultivate, manufacture/process into medical marijuana products, deliver, transfer, have tested, transport, supply or sell marijuana and related supplies to medical marijuana dispensaries.

A holder of a provisional cultivation license is prohibited from operating as a licensed cultivator and performing any cultivation or production activities, including the procurement of seeds, seedlings, or other starting plant material until a Certificate of Operation is issued by the Ohio Department of Commerce. This provisional license serves as authorization from the Ohio Department of Commerce for Cresco Ohio to begin the construction or modification of the facility and to secure any other applicable permits needed from local jurisdictions in order to receive a Certificate of Operation. Pursuant to Ohio Administrative Code s. 3796:2-1-06(B), a provisional license holder has nine (9) months to obtain a Certificate of Operation. On September 14, 2018, Cresco Ohio received its Certificate of Operation for cultivation.

On December 12, 2018, Cresco 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.

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 for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which marijuana provides relief.

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

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. The four agencies that regulate marijuana at the state level are the BCC, the California Department of Food and Agriculture, the California Department of Public Health, and the California Department of Tax and Fee Administration.

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 requires license holders to operate in cities with marijuana licensing programs. Therefore, cities in California are allowed to determine the number of licenses they will issue to marijuana operators or can choose to outright ban marijuana.

On June 7, 2018, Cresco acquired a 60% ownership interest in SLO, a marijuana cultivation facility in operation in the cities of Carpinteria (Santa Barbara County) and San Luis Obispo (San Luis Obispo County), California. On September 27, 2018, Cresco acquired a further 20% ownership interest to bring the total ownership to 80%. The cultivation facility has a capacity of up to 650,000 square feet of greenhouse production space.

SLO through its wholly-owned subsidiaries (the “Cal Subsidiaries”), is licensed to operate as a medical and adult-use cultivator and processor under applicable California and local jurisdictional law (the “California License”). The California License permits the Cal Subsidiaries to cultivate and process medical and adult-use cannabis in the state of California pursuant to the terms of the California License issued by the BCC under the provision of the MAUCRSA and California Assembly Bill No. 133. In California, licenses are independently issued for each approved activity for use.

California state and local licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by BCC. 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 Resulting Issuer and have a material adverse effect on its business, financial condition, results of operations or prospects.

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

Mendota (Fresno County)

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

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

Carpinteria (SB County)

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SLO has been issued provisional licenses for Cultivation: Small Mixed-Light Tier 1. Additionally, SLO has been issued provisional licenses in:

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Nursery, allowing for the planting and cultivation of medical cannabis from seeds, clones, and immature plants.

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Processor Type, allowing for the harvesting, drying, curing, grading or tanning of cannabis as well as the packaging and labelling of certain non-manufactured cannabis.

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SLO submitted annual applications for the four listed license types to the state regulator awaiting approval of annual applications.

Origin House

On April 1, 2019, Cresco entered into a definitive agreement (“Origin House Agreement”) with CannaRoyalty Corp. d/b/a Origin House, pursuant to which Cresco will acquire all issued and outstanding shares of Origin House. Under the terms of the Origin House Agreement and subsequent amendments, holders of common shares of Origin House will receive 0.7031 subordinate voting shares of Cresco Labs for each Origin House share (the “Transaction”).

The Transaction represents a total consideration of approximately C$560 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 will be: 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 has become a leading distributor and provider of brand support services in California, the world’s largest regulated cannabis market. 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. Origin House delivers over 50+ cannabis brands to more than 500 dispensaries in California, representing approximately 60% market penetration. Following the closing of this acquisition, Cresco brands is expected to be in over 725 dispensaries and will have access to several additional licenses for cultivation, manufacturing and distribution of cannabis within the state of California.

During September 2019, Cresco Labs and Origin House submitted certifications of substantial compliance with the request for additional information (“Second Request”) from the United States Department of Justice Antitrust Division (“DOJ”) in connection with Origin House’s and Cresco Labs’ notification to U.S. antitrust authorities pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), as amended, in respect of Cresco Labs’ pending acquisition of Origin House.

On October 22, 2019, the Company announced the waiting period under the HSR Act for the pending acquisition of Origin House expired, satisfying one of the remaining conditions to completing the Transaction.

On January 8, 2020, the Company announced it had closed on its acquisition of Origin House in which the Company acquired 100% of all equity interests of Origin House for approximately 72,200 thousand Cresco shares that were valued at approximately $430,000 thousand.

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. (the “AMMA”). The AMMA is codified in Arizona Revised Statutes (“ARS”) § 36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (the “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 (“AAC”) Title 9 Chapter 17 (the “Rules”).

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 on-site cultivation facility, and one 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 an annual 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. In November 2020, the state of Arizona will include a ballot measure to be voted on for the legalization of adult-use cannabis.

In order to qualify to use medical marijuana under the AMMA, a patient is required to have a “debilitating medical condition.” Valid medical conditions include: HIV, cancer, glaucoma, immune deficiency syndrome, hepatitis C, Chron’s disease, agitation of Alzheimer’s disease, ALS, cachexia/wasting syndrome, muscle spasms, nausea, seizures, severe and chronic pain or another chronic or debilitating condition.

In order for an applicant to receive a Dispensary Registration Certificate (a ‘‘Certificate’’) they must: (i) fill out an application on the form proscribed by ADHS, (ii) submit the applying entity’s articles of incorporation and by-laws, (iii) submit fingerprints for each principal officer or board member of the applicant for a background check to exclude felonies, (iv) submit a business plan and policies and procedures for inventory control, security, patient education, and patient recordkeeping that are consistent with the AMMA and the Rules to ensure that the dispensary will operate in compliance and (v) designate an Arizona licensed physician as the Medical Director for the dispensary. Certificates are renewed annually so long as the dispensary is in good standing with ADHS and pays the renewal fee and submits an independent third-party financial audit.

Once an applicant has been issued a Certificate, they are allowed to establish one physical retail dispensary location, one cultivation location which is co-located at the dispensary’s retail site (if allowed by local zoning) and one 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. This approval to operate requires: (i) an application on the ADHS form, (ii) demonstration of compliance with local zoning regulations, (iii) a site plan and floor plan for the applicable property, and (iv) an in-person inspection by ADHS of the applicable location to ensure compliance with the Rules and consistency with the dispensary’s applicable policies and procedures.

On October 24, 2018, Cresco obtained a 100% 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 would expect to receive the applicable renewed license in the ordinary course of business. While Cresco’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 would have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

Nevada Operations

Medical marijuana use was legalized in Nevada by a ballot initiative in 2000. In November 2016, voters in Nevada passed an adult-use marijuana measure to allow for the sale of recreational marijuana in the state. The first dispensaries to sell adult-use marijuana began sales in July 2017. The Nevada Department of Taxation (“DOT”) is the regulatory agency overseeing the medical and adult-use cannabis programs. Similar to California, cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue.

On August 12, 2019, the Company settled its outstanding loan receivable with Lighthouse through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company. The remaining escrow balance was issued as a new secured convertible promissory note convertible, at the Company’s discretion, into additional membership units approximating 1% ownership of the parent company.

All marijuana establishments must register with DOT. If applications contain all required information and after vetting by officers, establishments are issued a medical marijuana establishment registration certificate. In a local governmental jurisdiction that issues business licenses, the issuance by DOT of a medical marijuana establishment registration certificate is considered provisional until the local government has issued a business license for operation and the establishment is in compliance with all applicable local governmental ordinances. Final 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. The renewal periods serve as an update for DOT on the licensee’s status toward active licensure. It is important to note provisional licenses do not permit the operation of any commercial or medical cannabis activity. Only after a provisional licensee has gone through necessary state and local inspections, if applicable, and has received a final registration certificate from DOT may an entity engage in cannabis business operation.

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 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 additional registered organizations.

In November 2017, Governor Cuomo signed a bill to add PTSD as a qualifying condition, and, 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. During Governor Cuomo’s January 2019 State of the State Address, he announced the proposal of the governmental agency, The Office of Cannabis Management. This agency would regulate and oversee the state’s medical marijuana program, adult-use program, and hemp program. The executive director of this agency would have the authority to grant ROs currently registered and in good standing with the NYSDOH, the ability to be licensed to cultivate, process, or sell adult-use cannabis and cannabis products.

Each RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH-designated regions throughout the state, and one 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.

On October 8, 2019, the Company closed the acquisition of GSC, the parent entity of Valley Ag, for consideration consistent of cash, deferred consideration, equity, and contingent consideration based upon the achievement or occurrence of certain milestones or events, all totaling $129,574 thousand. 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 medical cannabis dispensaries in the state of New York. To date, Valley Ag has four (4) dispensaries and a processing facility open and operational. Valley Ag has successfully renewed their initial licenses and all licenses are, as of the date hereof, active with the State of New York.

Through the aforementioned agreements and regulatory approval, Cresco now has a cultivation and manufacturing facility within the state of New York, as well as four (4) dispensary locations strategically located across the state.

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% 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% 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 the 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 had slowed the rollout, as sales for adult-use cannabis officially began in November 2018.

The Massachusetts Department of Health oversees the medical cannabis program. Each medical licensee must be vertically integrated and may have up to two locations. Licensed medical dispensaries are given priority in adult-use licensing and the Cannabis Control Commission oversees the adult-use cannabis program. 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 percent of what it produced. Medical dispensaries that wish to add the ability to sell cannabis products to nonpatients will be required to reserve 35 percent 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 or about November 19, 2018, Cresco entered into a definitive agreement to acquire 100% of the shares and membership interests, as applicable, of HHH and an affiliated real estate entity for consideration consisting of cash and the assumption of certain indebtedness. HHH holds a final certificate of registration from the State of Massachusetts Department of Health that allows for cultivation, manufacturing and processing, and the establishment and operation of a medical cannabis dispensary in Fall River, Massachusetts. The final certificate of registration allows HHH the ability to apply for up to two additional such licenses. HHH holds a final license from the Massachusetts Cannabis Control Commission that allows for cultivation, manufacturing and processing, and the establishment and operation of an adult-use cannabis dispensary in Fall River, Massachusetts. On October 1, 2019, Cresco Labs, LLC acquired HHH via certain agreements giving it operational control before cash consideration was settled. In January 2020, HHH entered into a host community agreement with the municipality of Fall River to allow for a siting of a medical/adult-use cannabis dispensary. On February 7, 2020, the Company announced the legal close of the acquisition and cash funding of $27,500 thousand. The closing coincided with state approval allowing recreational cannabis sales at the Company’s Fall River dispensary.

Michigan Operations

In November 2008, Michigan residents approved the Michigan Medical Marihuana Act (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide 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 types of “state operating licenses” for medical marijuana businesses: (a) a “grower” license, (b) a “processor” license, (c) a “secure transporter” license, (d) 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. According to Proposal 1, LARA is required to start accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.

On March 25, 2019, the Company announced that its affiliate 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.

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 year ended December 31, 2019, represents approximately 62.2% of our revenue. Revenue from company-owned retail dispensary locations, for the year ended December 31, 2019 represents the remaining 37.8%.

Gross Profit

Gross profit is calculated as revenue less cost of sales – production costs, which includes cultivation costs of biological assets, realized changes in fair value of inventory sold, and unrealized gain (loss) on changes in fair value of biological assets. Cost of sales – production costs includes the direct costs attributable to the production of the products sold and is comprised of the following:

•

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

•

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

•

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

•

Other operating expenses: These expenses include all costs associated with the facility itself including: insurance, community outreach programs, professional services, uniforms, employee training programs, tracking and inventory management systems, product testing, distribution, business development, back office expenses related to accounting, finance, human resources, and information technology and license renewal fees.

Cultivation costs of biological assets are comprised of cannabis plant costs and are immediately expensed in cost of sales – production costs in the period in which they are incurred.

In addition to market fluctuations, cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis products. The changes in regulatory environments may create fluctuations in gross profit over comparative periods.

Selling, General and Administrative Expenses (“SG&A”)

SG&A expenses consist mainly of salary and benefits costs of executive and back office staff, consulting and professional fees such as legal and accounting, share based compensation, advertising and marketing, office, travel and entertainment, and excise taxes.

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 months and years ended December 31, 2019 and 2018, selling, general and administrative expenses were comprised of the following:


	Three months ended December 31,				Year ended December 31,
($ in thousands)	2019		2018		2019		2018
Salaries and related	$	10,702	$	4,173	$	28,519	$	7,363
Consulting and professional fees		4,226		3,150		17,902		4,404
Share-based compensation		4,205		3,019		14,046		10,132
Advertising and marketing		5,279		983		12,630		2,048
Office		2,198		537		4,677		1,053
Travel and entertainment		1,244		659		4,361		1,390
Excise taxes		1,566		674		4,341		1,918
Technology		975		159		1,989		370
Insurance		526		99		1,911		215
Business expansion costs		96		473		1,524		521
Listing expense		—		1,839		—		1,839
Reverse takeover transaction cost		—		1,654		—		1,654
Other		1,149		786		2,218		1,873

Selling, general and administrative expenses	$	32,166	$	18,205	$	94,118	$	34,780

Income Taxes

The Company, which is and will continue to be a Canadian corporation, is also expected to be classified for U.S. federal income tax purposes as a United States corporation under Section 7874 of the Code. 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 legal cannabis industry, the Company is subject to the limits of the Internal Revenue Code (“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.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS and may not be comparable to similar measures presented by other issuers. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein.

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 or control through a management agreement. 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.

The following table sets forth selected combined financial information for the periods indicated that was derived from our consolidated financial statements and the respective accompanying notes prepared in accordance with IFRS.

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


	Three months ended December 31,
($ in thousands)	2019			2018			$ Change			% Change
Revenue	$	41,382		$	16,957		$	24,425			144	%
Cost of sales - production costs		(27,676	)		(10,748	)		(16,928	)		157	%
Realized changes in fair value of inventory sold		(34,657	)		(9,594	)		(25,063	)		261	%
Unrealized gain on changes in fair value of biological assets		28,601			19,607			8,994			46	%
Gross profit		7,650			16,222			(8,572	)		(53	)%
Total expenses		33,527			18,614			14,913			80	%
Total other (expense) income, net		(15,051	)		2,353			(17,404	)		(740	)%
Income tax expense		(4,288	)		(4,374	)		86			(2	)%
Net loss		(45,216	)		(4,413	)		(40,803	)		925	%
Net loss attributable to Cresco Labs Inc.		(27,988	)		(4,606	)		(23,382	)		508	%

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Three months ended December 31,
($ in thousands)	2019			2018			$ Change			% Change
Revenue	$	41,382		$	16,957		$	24,425			144	%
Cost of sales - production costs¹		(27,676	)		(10,748	)		(16,928	)		157	%
Realized changes in fair value of inventory sold		(34,657	)		(9,594	)		(25,063	)		261	%
Unrealized gain on changes in fair value of biological assets		28,601			19,607			8,994			46	%

Gross profit		7,650			16,222			(8,572	)		(53	)%

Cultivation costs expensed under IAS 41²		2,807			1,465			1,342			92	%
Net impact of fair value of biological assets		6,056			(10,013	)		16,069			(160	)%
Expansion, relaunch and rebranding costs³		3,380			—			3,380			100	%
Fair value mark-up for acquired inventory		1,273			—			1,273			100	%

Operational gross profit (Non-IFRS)	$	21,166		$	7,674		$	13,492			176	%

Operational gross profit % (Non-IFRS)		51.1	%		45.3	%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Impact of non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net loss to adjusted EBITDA (non-IFRS):


	Three months ended December 31,
($ in thousands)	2019			2018			$ Change			% Change
Net loss¹	$	(45,216	)	$	(4,413	)	$	(40,803	)		925	%
Depreciation and amortization		3,925			381			3,544			930	%
Other expense (income), net		10,606			(2,233	)		12,839			(575	)%
Interest expense (income), net		4,275			(110	)		4,385			(3,986	)%
Loss (income) from investment in associate		170			(10	)		180			(1,800	)%
Income tax expense		4,288			4,374			(86	)		(2	)%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	(21,952	)	$	(2,011	)	$	(19,941	)		992	%

Expansion, relaunch and rebranding costs²		3,380			—			3,380			100	%
Cultivation costs expensed under IAS 41³		2,807			1,465			1,342			92	%
Adjustments for acquisition, financing and other non-core costs		7,179			7,056			123			2	%
Management incentive compensation (share-based)		4,122			3,227			895			28	%
Fair value mark-up for acquired inventory		1,273			—			1,273			100	%

Adjusted EBITDA (Non-IFRS)	$	(3,191	)	$	9,737		$	(12,928	)		(133	)%

Net impact of fair value of biological assets		6,056			(10,013	)		16,069			(160	)%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	2,865		$	(276	)	$	3,141			(1,138	)%

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

²	Impact of non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Three Months Ended December 31, 2019 Compared to Three Months Ended December 31, 2018

Revenue

Revenue for the three months ended December 31, 2019 was $41,382 thousand, an increase of $24,425 thousand, or 144%, compared to revenue of $16,957 thousand for the three months ended December 31, 2018. The increase in revenue was driven by expansion into new markets and continued growth in the states where the Company operates.

Cost of sales – production costs, Gross profit, and Operational gross profit (non-IFRS)

Cost of sales – production costs for the three months ended December 31, 2019 was $27,676 thousand, an increase of $16,928 thousand compared to Cost of sales – production costs of $10,748 thousand for the three months ended December 31, 2018. The increase was primarily attributable to increased cultivation capacity in the Illinois and Pennsylvania markets and the full period impact in the Ohio, Maryland and Arizona markets during 2019. This also included net cultivation costs which were immediately expensed under the Company’s accounting policy for biological assets of $2,807 thousand and $1,465 in the three months ended December 31, 2019 and 2018, respectively.

Gross profit decreased primarily due to the adjustments to inventory value within biological asset accounting partially offset by the increase in revenue from the prior-year quarter.

Operational gross profit for the fourth quarter of 2019, a non-IFRS measure which excludes the impact of biological assets accounting and cultivation costs immediately expensed, as discussed above, was $21,166 thousand, compared to an operational gross profit of $7,674 thousand for the prior year. Operational gross profit reflects revenue less costs related to products sold in the period. The increase of $13,492 thousand from the prior year was primarily driven by the Company’s organic growth, greater scale and improved operational efficiencies in its established Illinois and Pennsylvania markets as

well as the Valley Ag and HHH acquisitions during 2019. Operational gross profit percentage of approximately 51.1% was higher when compared with the prior year, as the benefit of operational efficiencies in the Company’s more established markets outweighed the impact of emerging and recently acquired businesses where the Company is focused on footprint expansion and relaunching Cresco-branded products. The Company expects margin expansion as these operations scale.

Total expenses

Total expenses for the three months ended December 31, 2019 were $33,527 thousand, an increase of $14,913 thousand compared to total expenses of $18,614 thousand for the three months ended December 31, 2018. The increase in total expenses was attributable to acquisition and other non-core costs, share-based compensation, depreciation and amortization, as well as significant investments in our team and operational infrastructure to drive strategic initiatives that better position the Company for future growth.

Total other (expense) income

Total other (expense) income for the three months ended December 31, 2019 was an expense of $15,051 thousand, a change of $17,404 thousand compared to other income of $2,353 thousand for the three months ended December 31, 2018. The change in total other (expense) income was primarily due to increased interest expense as a result of IFRS 16 Leases adoption, losses on the change in fair value of contingent consideration and impairment of the VidaCann loan receivable. See Notes 17 and 20 in the consolidated financial statements for the years ended December 31, 2019 and 2018 for more information.

Income tax expense

Income tax expense for the three months ended December 31, 2019 was $4,288 thousand, a decrease of $86 thousand compared to income tax expense of $4,374 for the three months ended December 31, 2018. The decrease in the Income tax expense was driven by a higher net loss before income taxes partially offset by increased amounts of permanently non-deductible expenses under Section 280E.

Net (loss) income and Adjusted EBITDA (non-IFRS)

Net loss for the three months ended December 31, 2019 was $45,216 thousand, compared to net loss of $4,413 thousand for the three months ended December 31, 2018. Lower gross profit in the current period was paired with higher operating and other expenses.

Adjusted EBITDA, a non-IFRS measure which excludes non-cash items such as depreciation and amortization, net interest expense, income taxes, other income and expense, as well as share-based compensation and acquisition and other non-core costs, was $(3,191) thousand and $9,737 thousand for the three months ended December 31, 2019 and 2018, respectively. Excluding the impact of biological assets, adjusted EBITDA was $2,865 thousand and $(276) thousand for the three months ended December 31, 2019 and 2018, respectively.

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


	Year ended December 31,
($ in thousands)	2019			2018			$ Change			% Change
Revenue	$	128,534		$	43,252		$	85,282			197	%
Cost of sales - production costs		(82,904	)		(28,218	)		(54,686	)		194	%
Realized changes in fair value of inventory sold		(91,080	)		(27,180	)		(63,900	)		235	%
Unrealized gain on changes in fair value of biological assets		109,531			52,563			56,968			108	%
Gross profit		64,081			40,417			23,664			59	%
Total expenses		98,337			35,472			62,865			177	%
Total other (expense) income, net		(16,585	)		2,522			(19,107	)		(758	)%
Income tax expense		(14,461	)		(4,374	)		(10,087	)		231	%
Net (loss) income		(65,302	)		3,093			(68,395	)		(2,211	)%
Net loss attributable to Cresco Labs Inc.		(43,201	)		(1,915	)		(41,286	)		2,156	%

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Year ended December 31,
($ in thousands)	2019			2018			$ Change			% Change
Revenue	$	128,534		$	43,252		$	85,282			197	%
Cost of sales - production costs¹		(82,904	)		(28,218	)		(54,686	)		194	%
Realized changes in fair value of inventory sold		(91,080	)		(27,180	)		(63,900	)		235	%
Unrealized gain on changes in fair value of biological assets		109,531			52,563			56,968			108	%

Gross profit		64,081			40,417			23,664			59	%

Cultivation costs expensed under IAS 41²		8,837			3,858			4,979			129	%
Net impact of fair value of biological assets		(18,451	)		(25,383	)		6,932			(27	)%
Expansion, relaunch, and rebranding costs³		6,259			—			6,259			100	%
Fair value mark-up for acquired inventory		1,273			—			1,273			100	%

Operational gross profit (Non-IFRS)	$	61,999		$	18,892		$	43,107			228	%

Operational gross profit % (Non-IFRS)		48.2	%		43.7	%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Impact of non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net (loss) income to adjusted EBITDA (non-IFRS):


	Year ended December 31,
($ in thousands)	2019			2018			$ Change			% Change
Net (loss) income¹	$	(65,302	)	$	3,093		$	(68,395	)		(2,211	)%
Depreciation and amortization		11,911			1,552			10,359			667	%
Other expense (income), net		8,647			(2,781	)		11,428			(411	)%
Interest expense (income), net		7,875			(89	)		7,964			(8,948	)%
Loss from investment in associate		63			348			(285	)		(82	)%
Income tax expense		14,461			4,374			10,087			231	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	(22,345	)	$	6,497		$	(28,842	)		(444	)%

Expansion, relaunch and rebranding costs²		6,259			—			6,259			100	%
Cultivation costs expensed under IAS 41³		8,837			3,858			4,979			129	%
Adjustments for acquisition, financing and other non-core costs		17,549			7,525			10,024			133	%
Management incentive compensation (share-based)		14,867			10,464			4,403			42	%
Fair value mark-up for acquired inventory		1,273			—			1,273			100	%

Adjusted EBITDA (Non-IFRS)	$	26,440		$	28,344		$	(1,904	)		(7	)%

Net impact of fair value of biological assets		(18,451	)		(25,383	)		6,932			(27	)%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	7,989		$	2,961		$	5,028			170	%

¹	Net (loss) income includes amounts attributable to non-controlling interest.

²	Impact of non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenue

Revenue for the year ended December 31, 2019 was $128,534 thousand, an increase of $85,282 thousand, or 197%, compared to revenue of $43,252 thousand for the year ended December 31, 2018. The increase in revenue was driven by expansion into new markets and continued growth in the states where the Company operates.

Cost of sales – production costs, Gross profit, and Operational gross profit (non-IFRS)

Cost of sales – production costs for the year ended December 31, 2019 was $82,904 thousand, an increase of $54,686 thousand compared to Cost of sales – production costs of $28,218 thousand for the year ended December 31, 2018. The increase was primarily attributable to increased cultivation capacity in the Illinois and Pennsylvania markets and full period impact in the California, Ohio, Maryland and Arizona markets during 2019. Cost of sales – production costs also includes net cultivation costs which were immediately expensed under the Company’s accounting policy for biological assets of $8,837 thousand and $3,858 thousand in the years ended December 31, 2019 and 2018, respectively.

Gross profit increased primarily due to an increase in revenue exceeding the increase in Cost of sales – production costs, partially offset by a less favorable impact of biological asset accounting.

Operational gross profit for the year ended December 31, 2019, a non-IFRS measure which excludes the impact of biological assets accounting and cultivation costs immediately expensed, as discussed above, was $61,999 thousand, compared to an operational gross profit of $18,892 thousand for the prior year. Operational gross profit reflects revenue less costs related to products sold in the period. The increase of $43,107 thousand from the prior year was primarily driven by the Company’s organic growth in existing markets, the full year impact of all prior year acquisitions and the addition of the Valley Ag and HHH acquisitions during 2019. Operational gross profit percentage of approximately 48.2% was higher when compared with the prior year due to greater scale and operational efficiencies in the Company’s established markets, partially offset by the impact of emerging and recently acquired businesses where the Company expects margin expansion as these operations scale.

Total expenses

Total expenses for the year ended December 31, 2019 were $98,337 thousand, an increase of $62,865 thousand compared to total expenses of $35,472 thousand for the year ended December 31, 2018. The increase in total expenses was attributable to increases in depreciation and amortization, acquisition and other non-core costs, share-based incentive compensation, the full year impact of prior year acquisitions, as well as significant investments in the Company’s team and operational infrastructure to drive strategic initiatives that better position the Company for future growth.

Total other (expense) income

Total other expense for the year ended December 31, 2019 was $16,585 thousand, a change of $19,107 thousand compared to other income of $2,522 thousand for the year ended December 31, 2018. The change in total other (expense) income was primarily due to higher interest expense as a result of IFRS 16 adoption, losses on the change in fair value of contingent consideration and impairment of the VidaCann loan receivable. See Notes 17 and 20 in the consolidated financial statements for the years ended December 31, 2019 and 2018 for more information.

Income tax expense

Income tax expense for the year ended December 31, 2019 was $14,461 thousand, an increase of $10,087 thousand compared to income tax expense of $4,374 thousand for the year ended December 31, 2018. The increase in Income tax expense was due to an increase in operational activity and additional permanently non-deductible expenses under Section 280E.

Net (loss) income and Adjusted EBITDA (non-IFRS)

Net loss for the year ended December 31, 2019 was $65,302 thousand, compared to net income of $3,093 thousand for the year ended December 31, 2018. For the year ended December 31, 2019, higher gross profit was more than offset by higher operating expenses. The increase in operating expenses was driven by expansion into new markets and investments in the Company’s team and operational infrastructure to drive strategic initiatives that better position the Company for future growth.

Adjusted EBITDA, a non-IFRS measure which excludes non-cash items such as depreciation and amortization, net interest expense, income taxes, other income and expense, as well as share-based compensation and acquisition and other non-core costs, was $26,440 thousand and $28,344 thousand for the year ended December 31, 2019 and December 31, 2018, respectively. Excluding the impact of biological assets, adjusted EBITDA was $7,989 and $2,961 thousand for the year ended December 31, 2019 and 2018, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Overview

As of December 31, 2019, the Company held $49,102 thousand in cash and cash equivalents, $5,050 thousand in restricted cash, and $9,169 thousand of working capital compared to December 31, 2018, where we held $131,302 thousand in cash and cash equivalents, $6,726 thousand in restricted cash, and $167,474 thousand of working capital. The decrease of $158,305 thousand in working capital was primarily due to an increase in accounts payable and deferred consideration, contingent consideration and other payables and income tax payable between periods, as well as lease liabilities established after the adoption of IFRS 16 Leases.

We expect that our cash on hand and cash flows from operations, along with private and/or public financing, will be adequate to meet our capital requirements and operational needs for the next 12 months.

Cash Flows

Operating Activities

Net cash used in operating activities was $25,189 thousand for the year ended December 31, 2019, an increase in cash used of $15,273 thousand compared to net cash used in operating activities of $9,916 thousand for the year ended December 31, 2018. The increase in net cash used in operating activities was primarily due to the $65,302 net loss in 2019 driven by increased costs associated with our expansion in new and existing markets, partially offset by the timing of working capital requirements in the current period.

Investing Activities

Net cash used in investing activities was $107,596 thousand for the year ended December 31, 2019, an increase in cash used of $25,814 thousand compared to $81,782 thousand used in investing for the year ended December 31, 2018. The increase in net cash used in investing activities was primarily due to increases in purchases of property and equipment as the Company continues to expand its cultivation facilities and operations, partially offset by proceeds from sale-leaseback transactions.

Financing Activities

Net cash provided by financing activities was $48,909 thousand for year ended December 31, 2019, a decrease of $153,774 thousand compared to $202,683 thousand of cash provided by financing activities for the year ended December 31, 2018. The decrease in net cash provided by financing activities was primarily due to $205,646 thousand provided in total by the 2018 private placements compared with $52,280 thousand provided by the September 2019 equity raise.

CONTRACTUAL OBLIGATIONS

As of December 31, 2019, maturities of lease liabilities were as follows:


($ in thousands) 2020	$	15,304
2021		15,414
2022		15,778
2023		16,923
2024		17,517
Thereafter		236,294

Total Lease Payments	$	317,230

In addition to the future minimum rentals 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 will continue to invest in its facilities through construction and other capital expenditures as it expands its footprint in existing and new markets.

OFF-BALANCE SHEET ARRANGEMENTS AND PROPOSED TRANSACTIONS

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

RELATED PARTY TRANSACTIONS

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Aside from key management personnel compensation and the lease arrangements described below for the years ended December 31, 2019, there were no material transactions with or changes to other related party balances relative to the period ended December 31, 2018.

Key management personnel compensation for the three months and years ended December 31, 2019 and December 31, 2018 are as follows:


	Three months ended				Year ended
	December 31,				December 31,
($ in thousands)	2019		2018		2019		2018
Management compensation	$	969	$	1,436	$	3,139	$	2,289
Sponsor fees		—		2,769		—		2,769
Stock compensation expense		1,829		2,283		5,972		8,813

Total	$	2,798	$	6,488	$	9,111	$	13,871

As of December 31, 2019, the Company had receivables and payables of $712 thousand and $113 thousand, respectively, with key management personnel.

Key management personnel hold 86,550 thousand redeemable units of Cresco Labs, LLC, which is equal to $80,221 thousand of Non-controlling interests as of December 31, 2019.

Below is a summary of the expense resulting from the related party lease liabilities for the three months and year ended December 31, 2019.


	Three months ended				Year ended
	December 31, 2019				December 31, 2019
	Depreciation		Interest		Depreciation		Interest
($ in thousands)	expense		expense		expense		expense
Finance lease liability; lessor has minority interest in SLO	$	86	$	388	$	382	$	1,650
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		16		21		63		89
Finance lease liability; lessor has minority interest
MedMar Lakeview, LLC		23		21		92		88

Additionally, below is a summary of the ROU assets and lease liabilities attributable to related party lease liabilities. The ROU asset and lease liability for SLO’s lease assumes all lease extension options are exercised. For information on the implementation of IFRS 16, see Note 2(q) of the Company’s audited consolidated financial statements.


	As of
	December 31, 2019
($ in thousands)	ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		649		694
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		643		686

CHANGES IN OR ADOPTION OF ACCOUNTING POLICIES

In January 2016, the IASB published IFRS 16 Leases, replacing IAS 17 Leases and International Financial Reporting Interpretations Committee (“IFRIC”) 4 Determining whether an Arrangement Contains a Lease. IFRS 16 introduced a single lessee accounting model, requiring lessees to recognize assets for the right to use as well as lease liabilities for the outstanding lease payments. The Company adopted IFRS 16 on January 1, 2019, using a modified retrospective approach with the cumulative effect of initially applying the standard recognized at the date of initial application, without restating prior periods.

IFRS 16 permits entities to elect a number of practical expedients to simplify the adoption of IFRS 16 as well as the ongoing application of IFRS 16.

Upon adoption of IFRS 16, the Company elected to adopt the following practical expedients upon adoption of IFRS 16:

•

Leases for which the lease term ends within 12 months of the date of initial application of the standard were treated as short-term leases and recognized as rent expense within selling, general and administrative (“SG&A”) in the Consolidated Statement of Operations and Comprehensive Loss on a straight-line basis over the lease term;

•

A single discount rate was applied to a portfolio of leases with similar characteristics.

On an ongoing basis, the Company elected to adopt the following practical expedient on an ongoing basis:

•

The Company has elected not to recognize right-of-use (“ROU”) assets and lease liabilities where the total lease term is less than or equal to 12 months. The payments for such leases are recognized as rent expense within SG&A in the Consolidated Statement of Operations and Comprehensive Loss on a straight-line basis over the lease term.

On initial application, the Company elected to measure the ROU assets on a lease-by-lease basis at either 1) an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments or 2) at its carrying amount as if IFRS 16 had been applied since the commencement date but discounted using the Company’s incremental borrowing rate at January 1, 2019.

On initial application, the lease payments were discounted using the Company’s incremental borrowing rate at January 1, 2019. The weighted average incremental borrowing rate was 13%.

The Company recognized a ROU asset of $32,519 thousand, lease liability of $37,707 thousand, accumulated deficit of $1,466 thousand, and a reduction of non-controlling interest of $1,526 thousand at January 1, 2019. The cumulative effect adjustment to accumulated deficit was a result of measuring the ROU asset for certain leases as if IFRS 16 had been applied since their respective commencement dates.

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 through profit or loss (“FVTPL”). The carrying values of financial instruments held at amortized cost approximate their fair values as of December 31, 2019 and 2018 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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

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

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

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

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

Unless otherwise noted, the Company considers all financial instruments measured at FVTPL to be Level 1 instruments.

The following table summarizes the Company’s financial instruments as of December 31, 2019 and December 31, 2018:


	December 31,		December 31,
($ in thousands)	2019		2018
Financial Assets:
Cash and cash equivalents	$	49,102	$	131,302
Restricted cash		5,050		6,726
Accounts receivable, net		16,455		3,658
Loans receivable, short-term		644		7,726
Loans receivable, long-term		18,633		7,280
Security deposits		1,084		1,363
Financial Liabilities:
Accounts payable and other accrued expenses	$	62,834	$	7,595
Current portion of lease liabilities		12,019		—
Deferred consideration, contingent consideration and other payables		59,940		14,873
Derivative liabilities		178		178
Derivative liabilities - long-term		15,243		146
Lease liabilities		82,856		—
Deferred and contingent consideration		21,901		3,096
Long-term liabilities		550		—

Financial Risk Management

Credit and Banking Risk

not have significant credit risk with respect to its customers or loan counterparties, based on the continued economic strength of the U.S., including strength in the U.S. capital 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 in the U.S. federal banking laws related to the deposit and holding of funds derived from activities related to the cannabis industry have passed the House of Representatives, but has not yet been voted on in the Senate. Given that U.S. federal law provides that the production and possession of cannabis is illegal, there is a strong argument that banks cannot accept and deposit funds from businesses involved with the cannabis industry.

ii.

Asset Forfeiture Risk

iii.

Liquidity Risk

iv.

Market Risk

Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of December 31, 2019 and 2018, the Company’s financial assets and liabilities are denominated solely 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 an immaterial amount of foreign exchange losses related to warrants during the year ended December 31, 2019. See Note 20 of the Company’s audited consolidated financial statements.

Interest Rate Risk

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, contingent consideration and liability classified restricted stock units valued based on the Company’s own stock. An increase or decrease of stock price by 10% would result in an associated increase or decrease in fair value and Other (expense) income, net of $5,287 thousand.

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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 25 of the Company’s audited consolidated financial statements for the Company’s disclosure of uncertain tax positions.

Regulatory Risk

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 of unforeseen regulatory changes can have on the goals and operations of the business as a whole.

EX-99.16 17 d945319dex9916.htm EX-99.16 EX-99.16

Exhibit 99.16

FORM 52-109FV1

CERTIFICATION OF ANNUAL FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Kenneth Amann, Chief Financial Officer of Cresco Labs Inc., certify the following:

Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”) of Cresco Labs Inc. (the “issuer”) for the financial year ended December 31, 2019.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual filings.

Date: April 28, 2019

“Kenneth Amann”

Kenneth Amann

Chief Financial Officer

NOTE TO READER

In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of

controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

EX-99.17 18 d945319dex9917.htm EX-99.17 EX-99.17

Exhibit 99.17

FORM 52-109FV1

CERTIFICATION OF ANNUAL FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Charles Bachtell, Chief Executive Officer of Cresco Labs Inc., certify the following:

Date: April 28, 2019

“Charles Bachtell”

Charles Bachtell

Chief Executive Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.18 19 d945319dex9918.htm EX-99.18 EX-99.18

Exhibit 99.18

LOGO

Annual Information Form

For the year ended December 31, 2019

Dated April 28, 2020

TABLE OF CONTENTS


GENERAL			1

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			1

MARKET DATA AND INDUSTRY FORECASTS			2

CORPORATE STRUCTURE			3

GENERAL DEVELOPMENT OF THE BUSINESS			6

DESCRIPTION OF THE BUSINESS			11

RISK FACTORS			74

DIVIDENDS AND DISTRIBUTIONS			100

DESCRIPTION OF CAPITAL STRUCTURE			100

MARKET FOR SECURITIES			121

CONSOLIDATED CAPITALIZATION			121

DIRECTORS AND EXECUTIVE OFFICERS			122

PROMOTERS			128

LEGAL PROCEEDINGS AND REGULATORY ACTIONS			128

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS			129

AUDITOR, TRANSFER AGENT AND REGISTRAR			129

MATERIAL CONTRACTS			129

INTERESTS OF EXPERTS			129

ADDITIONAL INFORMATION			129

GLOSSARY			137

GENERAL

Reference is made to the audited consolidated financial statements (the “Financial Statements”), together with the auditors’ report thereon, and management’s discussion and analysis (the “MD&A”) for Cresco Labs Inc. (the “Company”) for the financial year ended December 31, 2019. Additional financial information is provided in the Financial Statements and MD&A, which are available for review under the Company’s profile on SEDAR at www.sedar.com.

Unless otherwise noted herein, information in this annual information form (the “AIF”) applies to the business activities and operations of the Company for the year ended December 31, 2019, as updated to April 28, 2020, unless otherwise indicated. Unless otherwise indicated, references to “$” are to U.S. dollars.

All references in this AIF to the Company also include references to all subsidiaries of the Company, as applicable, unless the context requires otherwise.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This AIF includes “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws. All information, other than statements of historical facts, included in this AIF that address activities, events or developments that the Company expects or anticipates will or may occur in the future is forward-looking information. Forward-looking information is often identified by the words “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or similar expressions and includes, among others, information regarding: expectations for the effects of the Business Combination, statements relating to the business and future activities of, and developments related to, the Company after the date of this AIF, including but not limited to, such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s business, operations and plans, including new revenue streams, the completion of contemplated acquisitions by the Company, the application for additional licenses and the grant of licenses that have been applied for, the expansion of existing cultivation and production facilities, the completion of cultivation and production facilities that are under construction, the construction of additional cultivation and production facilities, the expansion into additional states within the United States, international markets and Canada, any potential future legalization of adult-use and/or medical marijuana under U.S. federal law; expectations of market size and growth in the United States and the states in which the Company operates; expectations for other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally; and other events or conditions that may occur in the future.

The Company’s shareholders are cautioned that forward-looking information and statements are not based on historical facts but instead are based on reasonable assumptions and estimates of management of the Company at the time they were provided or made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements. Such factors include, among others, risks relating to the founder voting control; risks related to the unpredictability caused by the Company’s capital structure; risks related to additional financing, risks related to no guaranteed returns; risks related to the restrictions on immediate resale; risks related to sales by existing shareholders; risks related to the limited market for securities; expectations for the effects of the novel coronavirus (“COVID-19”) on the business’ operations and financial condition; risks relating to U.S. federal regulation, the variation in state regulation, risks relating to U.S. regulatory landscape and enforcement related to cannabis, including political risks; risks relating to anti-money laundering laws and regulation; risks relating to changes in cannabis laws and regulatory uncertainty; risks relating to legal, regulatory or political change; risks relating to Canadian investors in the U.S. cannabis sector; risks relating to the market price and volatility of the cannabis sector; risks relating to the internal controls of the Company and dilution; risks relating to the global economic condition; risks relating to the value of the Subordinate Voting Shares; tax and insurance related risks; risks relating to the limited operating history of the Company and the reliance on the expertise and judgment of senior management of the Company; risks relating to competition; risks relating to the difficulty in recruiting and retaining management and key personnel and managing growth; risks relating to the unreliability of forecasts; risks relating to the inability to innovate and find efficiencies; website and operational risks; risks relating to the reliance on third-party suppliers, manufacturers and contractors; risks relating to revenue shortfalls; risks relating to the failure to complete acquisitions; risks relating to the ability to obtain the necessary

permits and authorizations; risks relating to potential conflicts of interest; risks related to proprietary intellectual property and potential infringement by third parties; risks related to information technology and cyber-attacks; risks related to trade secrets; risks relating to the lack of U.S. bankruptcy protection, currency fluctuations and lack of earnings and dividend record; risks related to insurance coverage; risks relating to civil asset forfeiture; risks relating to the heightened scrutiny of investments in the U.S.; risks relating to the ability and constraints on marketing products; risks relating to the settlements of trades, access to banks and legality of contracts; risks related to the environment; risks related to the Company as a holding company; risks relating to the unfavorable tax treatment of cannabis businesses in the U.S. and the classification of the Company for U.S. tax purposes; risks relating to the public opinion, consumer acceptance and perception of the cannabis industry; security risks; risks relating to litigation; risks inherent in an agricultural business; risks related to rising energy costs; risks relating to the Company’s reliance on licenses; risks relating to product liability and product recall; risks relating to regulatory or agency proceedings, investigations and audits; risks relating to the newly established legal regimes; and general economic risks as well as those Risk Factors discussed below. Although the Company has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such forward-looking information and statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such information and statements. Accordingly, readers should not place undue reliance on forward-looking information and statements. Forward-looking information and statements are provided and made as of the date of this AIF and the Company does not undertake any obligation to revise or update any forward-looking information or statements other than as required by applicable law.

The discussion of risk factors in this AIF has been updated to include discussion of risks related to the current pandemic caused by the spread of COVID-19. The nature and scope of the pandemic and its impact are rapidly developing and it is difficult for management to identify at the current time all risks, or quantify those identified, or to assess their impact on particular financial measures and operating results. Nevertheless, discussion under “Risk Factors” identifies potential areas of negative potential impact that may be caused by the pandemic.

Non-IFRS Financial Information

In certain of its financial disclosures such as earnings releases and MD&A, the Company uses pro forma financial information as well as EBITDA, Adjusted EBITDA and Operational Gross Profit as measures of profitability, which are non-IFRS measures and do not have standardized definitions under IFRS. The Company provides the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS and may not be comparable to similar measures presented by other issuers, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. However, such 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 most comparable IFRS financial measures. As such, these supplemental non-IFRS financial measures shall always include reconciliations to the most directly comparable financial measures calculated and presented in accordance with IFRS.

Foreign Currency Information

The Company’s expenses are primarily denominated in U.S. dollars and its operations are in the U.S. The Company’s current exposure to exchange rate fluctuations relate primarily to it the Canadian activities of its subsidiary Origin House. The Company acquired Origin House on January 8, 2020. See “Tax Considerations for U.S. Holders” for additional information regarding foreign currency distributions or proceeds for holders of the Company’s subordinated voting shares.

MARKET DATA AND INDUSTRY FORECASTS

This AIF includes market and industry data that has been obtained from third-party sources, including industry publications. The Company believes that the industry data is accurate and that its estimates and assumptions are reasonable, but there is no assurance as to the accuracy or completeness of this data. Third party sources generally state that the information contained therein has been obtained from sources believed to be reliable, but there is no

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assurance as to the accuracy or completeness of included information. Although the data is believed to be reliable, the Company has not independently verified any of the data from third-party sources referred to in this AIF or ascertained the underlying economic assumptions relied upon by such sources and as such the Company does not make any representation as to the accuracy of such information. Further, market and industry data is subject to variations and cannot be verified due to limits on the availability and reliability of data inputs, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey. See also “Cautionary Statement Regarding Forward-Looking Information.”

CORPORATE STRUCTURE

The Company 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 old for one new basis. On November 30, 2018, in connection with the Business Combination, 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 class of common shares, redesignate such class as the class of Subordinate Voting Shares and create the Proportionate Voting Shares and the Super Voting Shares.

The Company’s head office is located at 400 W. Erie Street, #110, Chicago, IL 60654 and the registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

Pursuant to the Business Combination, among the Company (then Randsburg) and Cresco, a series of transactions was completed on November 30, 2018 resulting in a reorganization of Cresco and Randsburg and pursuant to which Randsburg became the indirect parent and sole voting unitholder of Cresco. The Business Combination constituted a reverse takeover of Randsburg by Cresco under applicable securities laws.

Cresco 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 Business Combination. Please see “Description of Unit Capital of Cresco – A&R LLC Agreement” for additional details as to the A&R LLC Agreement.

Set forth below is the organization chart of the Company.

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LOGO

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The current organization chart of Cresco, setting out active subsidiaries of Cresco, is set forth below.

LOGO

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GENERAL DEVELOPMENT OF THE BUSINESS

Cresco exists to provide high-quality and consistent cannabis-based products to consumers. Cresco blends regulatory compliance expertise with best practices from the agricultural, pharmaceutical and consumer packaged goods industries. Cresco (either directly or indirectly through subsidiaries) has been awarded three licenses to cultivate and manufacture medicinal cannabis in the State of Illinois. Cresco was awarded a cultivation license in Pennsylvania and was one of only five cultivators that was initially also awarded a dispensary license, which allows for up to three dispensaries, with a second license granted in December 2018 for up to three additional dispensaries. Cresco was awarded both a cultivation license and a dispensary license in Ohio and was the first approved dispensary to begin operations in Ohio in December 2018. Cresco received prequalification from the State of Michigan, which will allow Cresco, via an affiliated entity, to operate growing, processing and provisioning center facilities in Michigan. Cresco also has an interest in a cultivation, processing, and dispensary license in Nevada, an ownership interest in cultivation and processing licenses in California, owns and operates five dispensaries in Illinois and owns and operates two cultivation centers and one dispensary location in Arizona. Cresco acquired one medical cannabis cultivation center license and four dispensary locations in New York (refer to “Acquisitions and Dispositions” below for further information). Most recently, Cresco was the first cultivator in Illinois to receive approvals to grow adult-use cannabis; all three cultivation facilities were granted approvals in the state. Additionally, Cresco’s five Illinois dispensary locations were approved for dispensing adult-use cannabis in the state upon legalization, effective January 1, 2020. Cresco has completed an agreement to acquire assets in Massachusetts, including state registration and licensing that will allow for cultivation, manufacturing, processing, and the establishment and operation of a medical marijuana dispensary, with the ability to obtain up to three medical marijuana dispensary licenses and three adult-use dispensary licenses. Additionally, Cresco has completed its acquisition of operations in California, via the acquisition of CannaRoyalty Corp. d/b/a Origin House (“Origin House”) (refer to “Acquisitions and Dispositions” section below for further information).

Cresco plans to leverage the success in these markets to expand into legalized cannabis markets in other states, while focusing on compliance, control, efficiency, and product performance in the medicinal or adult-use cannabis industry.

Cresco owns and operates cultivation, manufacturing and retail dispensary businesses. The manufacturing and retail businesses are operational today and vertically integrated across eight highly regulated and/or limited licenses, and therefore limited legal supply markets: Illinois, Nevada, Ohio, Arizona, Pennsylvania, California, New York and Massachusetts, with processing operations in Maryland, and is expected to commence cultivation, manufacturing and retail dispensary operations in Michigan. These markets, where supply and demand can be reasonably predicted and forecasted, create the foundation upon which Cresco has created the opportunity for sustainable growth. Importantly, Cresco is not yet active in markets popularized by mainstream media like Washington, Oregon and Colorado where loose regulatory frameworks create unpredictable supply-demand market dynamics.

This ownership of wholesale and retail businesses supports Cresco’s strategy of distributing brands at scale by enabling Cresco to capture market share, generate brand awareness, and earn customer loyalty in its operating markets by guaranteeing share-of-shelf in its own retail stores and its ability to foster mutually beneficial relationships with its third-party dispensary customers as a large supplier of a portfolio of distinct and trusted cannabis brands.

Acquisitions and Dispositions

Valley AG

On October 8, 2019, the Company completed the acquisition of 100% of the membership interests of Gloucester Street Capital, LLC (“Gloucester”), the parent entity of Valley Agriceuticals, LLC (“Valley Ag”) via a merger between Gloucester and a subsidiary of Cresco. Valley Ag holds one of the ten vertically integrated cannabis business licenses granted in the State of New York by the New York State Department of Health. This license will allow the Company the right to operate one cultivation facility and four dispensaries in New York. Valley Ag’s assets include an operational processing facility and four licensed dispensaries.

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VidaCann

On March 18, 2019, the Company announced that it had entered into a letter agreement to acquire the ownership interests or assets of VidaCann Ltd. and/or affiliated entities (“VidaCann”). A definitive equity purchase agreement superseding the letter agreement was entered into on May 15, 2019. On November 26, 2019, the Company announced the mutual termination of the definitive equity purchase agreement.

Origin House

On April 1, 2019, the Company announced that it had entered into an arrangement agreement with Origin House, a publicly traded company, to acquire all of the issued and outstanding shares of Origin House (the “OH Arrangement”) on the original basis of 0.8428 of a Subordinate Voting Share for each common share of Origin House and 84.28 Subordinate Voting Shares for each class A compressed share of Origin House. On the date of announcement, total consideration for the OH Arrangement was equal to approximately $1.1 billion on a fully-diluted basis, or $12.68 per Origin House share, and after giving effect to the OH Arrangement, Origin House shareholders would have held approximately 20% ownership in the pro forma entity (on a pro forma fully-diluted and as converted basis). On October 22, 2019, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”), expired, which was the last significant regulatory approval required to complete the OH Arrangement. On November 13, 2019, the Company announced that the parties to the arrangement agreement entered into an amended arrangement agreement (the “OH Amended Arrangement Agreement”) to provide for certain changes to the covenants and agreements contained to the original arrangement agreement. Pursuant to the OH Amended Arrangement Agreement, the consideration payable under the OH Arrangement was reduced from 0.8428 of a Subordinate Voting Share for each common share of Origin House and 84.28 Subordinate Voting Shares for each class A compressed share of Origin House, to 0.7031 of a Subordinate Voting Share for each common share of Origin House and 70.31 Subordinate Voting Shares for each class A compressed share of Origin House. On November 26, 2019, Origin House announced that it had obtained an interim order from the Ontario Superior Court of Justice (Commercial List) in connection with the OH Amended Arrangement Agreement, authorizing Origin House to hold a second meeting of its shareholders on December 31, 2019 (the “Meeting”).

On January 8, 2020, Cresco announced the closing of the acquisition of Origin House. The OH Arrangement was effected by way of a plan of arrangement under Section 182 of the Business Corporations Act (Ontario).

Origin House is building a premium suite of branded cannabis consumer products in California, supported by its existing and growing portfolio of strategic manufacturing and distribution assets. Origin House’s current portfolio of products includes wholly-owned and licensed products and brands in large and high growth segments of the cannabis industry including vaping, pre-rolls, edibles, topicals, patches, creams, intimacy oils, concentrates, and animal health products. Origin House will also seek to create synergies and brand out-licensing opportunities among its portfolio companies and products in Canada, as well as Washington, Arizona, Oregon, Florida and Puerto Rico.

MedMar

On or about April 11, 2019, Cresco completed its acquisition of MedMar, Inc. (“MedMar”) and the membership interests of MedMar Lakeview, LLC (“MedMar Lakeview”) and MedMar Rockford, LLC (“MedMar Rockford”) for a combination of cash and equity consideration. Through the signing of certain operating agreements, Cresco assumed operational control in 2018. MedMar Lakeview and MedMar Rockford currently operate medical marijuana dispensaries in Chicago, Illinois and Rockford, Illinois, respectively.

PDI

In the fourth quarter of 2018, Cresco entered into a Unit Exchange Agreement with TINAD, LLC, an Illinois limited liability company to exchange a certain number of Class B membership units for the corresponding number of Class F membership units of Cresco, as well as other operating agreements by which Cresco assumes operational control of TINAD, LLC and its wholly-owned subsidiary, PDI Medical III, LLC, an Illinois limited liability company. The legal closing of the acquisition occurred in April 2019, giving the Company 98% ownership of all TINAD, LLC-related entities. The Company obtained the remaining 2% ownership of TINAD, LLC in April 2020.

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Tryke

On September 16, 2019, the Company announced that it entered into a purchase agreement (the “Tryke Agreement”) to acquire certain assets and an interest in (the “Tryke Acquisition”) Tryke Companies, LLC, and certain subsidiaries and affiliates thereof (collectively, “Tryke”).

On April 27, 2020, the Company entered into a termination agreement which cancels the Tryke Agreement and contemplates the Company’s payment of equity consideration for the termination of the Tryke Agreement.

Hope Heal Health

On February 7, 2020, Cresco announced the completion of its acquisition of 100% of the shares and membership interests, as applicable, of Hope Heal Health, Inc. (“HHH”) and an affiliated real estate entity for consideration consisting of cash and the assumption of certain indebtedness. HHH holds licenses for cultivation, product manufacturing, and retail operations from the State of Massachusetts Department of Health (the “Massachusetts Department”), with the ability to obtain up to two more retail licenses in the state. HHH currently operates a cultivation and manufacturing facility in Fall River, Massachusetts, adjacent to its Fall River Dispensary. The Company gained operational control of HHH on October 1, 2019, via certain operational agreements between the Company and HHH.

Pipeline Transactions

Cresco is actively pursuing growth opportunities to expand its asset portfolio in the medical and adult-use cannabis industry.

For additional information in respect of Cresco’s strategy for expansion, please see “Description of the Business” below.

Financing Activities

Base Shelf Prospectus

On April 26, 2019, the Company filed and received a receipt for a preliminary base shelf prospectus with the securities commissions in each of the provinces of Canada, except Quebec. The base shelf prospectus received final receipt on July 25, 2019 (the “Shelf Prospectus”). The Shelf Prospectus allows the Company to offer up to $500,000,000 of Subordinate Voting Shares, debt securities, subscription receipts, warrants and units, or any combination thereof, from time to time during the 25-month period that the final Shelf Prospectus is effective.

September Financing and October Over-Allotment Option

On September 24, 2019, the Company completed the issuance to a syndicate of underwriters, led by Canaccord Genuity Corp., of an aggregate of 7,350,000 units (the “Units”) of the Company at a price of C$10.00 per Unit for aggregate gross proceeds of C$73,500,000 (the “September Financing”). The Company also granted the underwriters an over-allotment option to purchase up to an additional 1,102,500 Units at a price of C$10.00, exercisable in whole or in part, at any time and from time to time on or prior to the date that is 30 days following the initial closing date. On October 24, 2019, the over-allotment option was partially exercised, and an additional C$1,190,000 in gross proceeds was raised, for aggregate gross proceeds pursuant to the September Financing of C$74,690,700.

Each Unit consists of one Subordinate Voting Shares and one half of one Subordinate Voting Share purchase warrant (each full warrant, a “Warrant”). Each Warrant entitles the holder to acquire one Subordinate Voting Share of the Company (the “Underlying Shares”) at a price of C$12.50 per Underlying Share, subject to adjustment in certain events, for a period of 3 years following the closing of the September 2019 Financing. The Company used the proceeds from the September 2019 Financing to fund business development and for working capital requirements and other general corporate purposes.

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At-the-Market Offering

On December 3, 2019, the Company announced that it had entered into an equity distribution agreement with Canaccord Genuity Corp. pursuant to which the Company may, from time to time, sell up to $55 million of Subordinate Voting Shares in the capital of the Company (the “ATM Program”). The ATM Program was made pursuant to the Shelf Prospectus dated July 25, 2019 (described below) and a prospectus supplement dated December 3, 2019.

Credit Facility

On February 2, 2020, Cresco entered into a senior secured credit agreement for $100 million (the “Credit Agreement”) which includes a mutual option to increase the size of the facility to up to $200 million (the “Senior Loan”). Commitments under the Senior Loan are provided by a broad syndicate of lenders including members of the Company’s management. Each commitment under the Senior Loan may be for an 18-month or 24-month term, at the lender’s option. Loans made on the initial closing date will bear interest at a rate of approximately 12.7% per annum for 18-month loans and approximately 13.2% for 24-month loans, payable quarterly in arrears. The Company completed the initial drawdown of $100 million under the Senior Loan on January 31, 2020.

United States Industry Background and Trends

The emergence of the legal cannabis sector in the United States, both for medical and adult-use, has been rapid as more states adopt regulations for its production and sale. Today 60% of Americans live in a state where cannabis is legal in some form and almost a quarter of the population lives in states where it is fully legalized for adult use.¹

The use of cannabis and cannabis derivatives to treat or alleviate the symptoms of a wide variety of chronic conditions has been generally accepted by a majority of citizens with a growing acceptance by the medical community as well. A review of the research, published in 2015 in the Journal of the American Medical Association, found strong evidence that cannabis can treat pain and muscle spasms.² The pain component is particularly important because other studies have suggested that cannabis can replace pain patients’ use of highly addictive, potentially deadly opiates — meaning marijuana legalization has the potential to save lives.³

Polls throughout the U.S. consistently show overwhelming support for the legalization of medical cannabis, together with strong majority support for the full legalization of recreational adult-use cannabis. It is estimated that 94% of the U.S. voters support legalizing cannabis for medical use.⁴ In addition, 64% of the U.S. public supports legalizing cannabis for adult recreational use.⁵ These represent large increases in public support over the past 40 years in favor of legal cannabis use.

Notwithstanding that more than half of the U.S. states have now legalized adult-use and/or medical marijuana, marijuana remains illegal under U.S. federal law with marijuana listed as a Schedule I drug under the United States Controlled Substances Act (the “CSA”). See “Description of the Business” and “Risk Factors” below. The United States Department of Justice (“DOJ”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The U.S. Food and Drug Administration (“FDA”) has not approved marijuana as a safe and effective drug for any indication.

¹	Ripley, Eve. (2016 November 30). Nearly 60 percent of U.S. population now lives in states with marijuana legalization. Retrieved from https://news.medicalmarijuanainc.com/nearly-60-percent-u-s-population-now-lives-states-marijuana-legalization/.

²	Grant, Igor MD (2015). Medical Use of Cannabinoids. Journal of American Medical Association, 314: 16, 1750-1751. doi: 10.1001/jama.2015.11429.

³	Bachhuber, MA, Saloner B, Cunningham CO, Barry CL. (2014). Medical Cannabis Laws and Opioid Analgesic Overdose Mortality in the United States, 1999-2010. JAMA Intern Med. 174(10):1668-1673. doi: 10.1001/jamainternmed.2014.4005.

⁴	Quinnipiac University. (2017 April 20). U.S. Voter Support For Marijuana Hits New High; Quinnipiac University National Poll Finds; 76 Percent Say Their Finances Are Excellent Or Good. Retrieved from https://poll.qu.edu/national/release-detail?ReleaseID=2453.

⁵	Gallup. (2017 October 25). Record-High Support for Legalizing Marijuana Use in U.S. Retrieved from http://news.gallup.com/poll/221018/record-high-support-legalizing-marijuana.aspx.

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Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical marijuana under the Cannabis Act (Canada), marijuana is largely regulated at the state level in the United States.

State laws regulating cannabis are in direct conflict with the CSA, which makes cannabis use and possession federally illegal in the United States. Although certain states and territories of the U.S. authorize medical or recreational cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal and any such acts are criminal acts under U.S. federal law under any and all circumstances under the CSA. Although Cresco’s and its subsidiaries activities are compliant with applicable United States state and local law, strict compliance with state and local laws with respect to cannabis may neither absolve Cresco and its subsidiaries of liability under United States federal law, nor provide a defense to any U.S. federal proceeding which may be brought against Cresco or its subsidiaries.

Current U.S. Cannabis Market

LOGO

Source: https://thecannabisindustry.org/ncia-news-resources/state-by-state-policies/

Due to the support for legal access to marijuana at the state level, there has been rapid opportunity growth in the U.S. market. Sales of legal cannabis flowers and cannabis-infused derivative and edible products totaled $6.1 billion in 2017⁶. The U.S. market for direct legal cannabis sales (including both medical and adult use) alone is projected to grow to $22.2 billion by 2022.⁷ By 2030, the size of the U.S. cannabis market is projected to be approximately $63 billion.⁸ Going forward, the Company expects that the U.S. cannabis industry will continue to be subject to state legislation, with additional states regulating the medical and recreational use of cannabis.

⁶	Marijuana Business Daily. (2017). Marijuana Business Factbook, 2017. Available from https://mjbizdaily.com/factbook/.

⁷	Arcview Market Research & BDS Analytics. (2019). The State of Legal Marijuana Markets (6th ed.), pp. 25. Available from https://bdsanalytics.com/wp-content/uploads/2019/07/2019_Update_20190409.pdf

⁸	Eight Capital. (2018). What’s Going on Down There? A $63 B Market Cannot be Ignored.

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The number of medical cannabis patients in states with existing comprehensive medical cannabis programs was approximately 1.5 million by the end of 2017, served by approximately 1,500-2,000 medical dispensaries nationwide, a disproportionate number of those in California. It is currently estimated that each patient spends about $2,000 annually,⁹ and that the total number of medical cannabis patients nationwide is expected to grow to 2.5 million by 2021.¹⁰

The Company has current operations in the states of Illinois, Pennsylvania, Ohio, California, Nevada, Arizona, Maryland, Massachusetts, and New York with approved expansion into Michigan via an affiliated entity. It intends to expand into other states within the U.S. that have legalized cannabis use either medicinally or recreationally. On December 20, 2018, the 2018 Farm Bill (the “Farm Bill”) became law in the United States. Under the Farm Bill, industrial and commercial hemp is no longer to be classified as a Schedule I controlled substance in the United States. Hemp includes the plant cannabis sativa L and any part of that plant, including seeds, derivatives, extracts, cannabinoids and isomers. To qualify under the Farm Bill, hemp must contain no more than 0.3 % of delta-9-tetrahydrocannabinol (“THC”). The Farm Bill explicitly allows interstate commerce of hemp which will enable the transportation and shipment of hemp.

DESCRIPTION OF THE BUSINESS

General

Cresco is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco is built to become the most important company in the cannabis industry by combining the most strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) approach to cannabis, Cresco’s 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, Remedi and Mindy’s, a line of edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside*, Cresco’s national dispensary brand, is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry.

Rooted in the fundamentals of CPG brand building, Cresco has implemented a CPG strategy to create and distribute a differentiated portfolio of brands that are aligned to distinct audiences, need states and occasions.

Cresco operates the following family of brands:

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Cresco – Elevating everyday cannabis. Cresco offers the most popular and consistent strains, available in a wide variety of product forms at dispensaries and retail locations nationwide.

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Reserve – Reserve is a demonstration of the cannabis plant’s highest potential. Reserve selects strains with exclusive, proprietary genetics, nurture them with masterful cultivation techniques, and harvest just the top 10% of the flower by hand.

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Remedi – Remedi products provide a safe, consistent and trusted alternative to traditional pharmaceuticals like opioids. With familiar formats and user-friendly delivering systems, Remedi is designed to help patients and consumers feel comfortable with cannabis.

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Mindy’s – Restaurant-quality edibles created by James Beard Award-Winning Pastry Chef and Mistress of Deliciousness, Mindy Segal. Infused with the best-quality cannabis oils, a wide variety of uniquely delicious bites are available at multiple potency levels, all with a dose of decadence.

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High Supply – High Supply is quality cannabis, available in bulk. High Supply buds are expertly grown, lab-tested and available in popcorn, shake, pre-rolls and vapes.

⁹	Marijuana Business Daily. (2017). Marijuana Business Factbook, 2017. Available from https://mjbizdaily.com/factbook/.

¹⁰	New Frontier Financial. (2015). Modeling of State Patient Counts. Cannabis Weekly.

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•

Good News – Good News is a line of cannabis products that removes the complexity of understanding terpenes and strains by creating easy to understand formulations, each named after a social mindset (Me Time, Brunch, Friyay and Vegas). Good News products are easy to use, benefit forward and made for sharing.

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Wonder – Wonder Wellness products are designed to simplify cannabis, with a focus on consumers who are new to the experience. The Wonder line is built around manageable, micro-dose forms, with a range of ratios across products.

With a portfolio consisting of approximately 350 products and 5,000 SKUs, Cresco’s products (dependent upon closing of pending acquisitions) are sold in over 700 dispensaries across the country. Cresco has consistently demonstrated the ability to place its branded products on the shelves of most dispensaries in a targeted state. The CPG and wholesale strategy enables Cresco to maximize its points of distribution and drive revenue growth independent of the expansion of its retail presence. Cresco prioritizes wholesale in order to reach as many consumers as possible, accessing the scaled benefits of a national footprint.

Cresco’s 16 owned dispensaries (and 7 additional retail licenses) give it the ability to not only sell its own products but focus on educating and building trust within the surrounding communities. These dispensaries serve as a critical platform for innovation and powerful consumer insights as it shapes the future of cannabis.

On December 3, 2018, the Company began trading on the CSE under the ticker symbol “CL.”

On March 6, 2019, the Company’s shares had been approved to be quoted on the Over-the-Counter-Market (“OTC”) and will trade under the ticker symbol “CRLBF.”

On August 13, 2019, the Company began trading on the Frankfurt Stock Exchange under the symbol “6CQ.”

Significant Events or Milestones

The principal milestones that must occur during the next 12-month period for the business objectives described herein to be accomplished are as follows: hire key personnel, obtain necessary regulatory approvals, implement marketing plans and commence production and sales in Cresco’s new markets, including retail stores for recreational and medical cannabis where legislation permits.

The Company has put in place a team of executives, board of advisors and consultants with various areas of expertise and experience in multiple industries including commercial agriculture, pharmaceutical, manufacturing, consumer packaged goods and traditional healthcare. In the interest of progressing a professional medical dialogue and educating as many physicians as possible on the use of medical cannabis as a therapeutic treatment for patients, it has organized a team of physicians to educate, train, and inform medical professionals on all aspects of cannabis as medicine.

Cresco previously engaged Denver Relief Consulting, LLC, to provide advisory services to acquire new licenses in merit-based application states and to review potential acquisitions as it seeks to expand into new legalized cannabis markets.

On January 16, 2019, the Company announced its first legal sale under Ohio’s state program.

On January 28, 2019, the Company appointed Thomas Manning as Chairman of the Board of Directors.

On February 1, 2019, the Company announced that its FloraMedex dispensary launched Illinois’ Opioid Alternative Pilot Program.

On February 20, 2019, the Company announced the opening of Hope Heal Health Dispensary in Bristol County, Massachusetts.

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On February 25, 2019, the Company announced the formation of a new wellness subsidiary, Well Beings, which has its own unique product line and produce CBD versions of Cresco Labs’ house of branded products including Cresco, Remedi and Mindy’s Edibles.

On February 26, 2019, the Company announced the opening of its third Pittsburgh area dispensary and launch of online ordering in Western Pennsylvania.

On March 12, 2019, the Company’s shares were upgraded to the OTCQX Best Market. The OTCQX Best Market is for established, investor-focused U.S. and international companies. To qualify for the OTCQX market, companies must meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, be current in their disclosure, and have a professional third-party sponsor introduction. The companies found on OTCQX are distinguished by the integrity of their operations and diligence with which they convey their qualifications.

On March 18, 2019, the Company announced its entrance into the Florida cannabis market through a letter agreement to acquire ownership interests or assets of VidaCann Ltd. This agreement was subsequently terminated in November 2019.

On March 25, 2019, the Company announced it 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 Company applied for a cultivation and processing facility to be located in a former 100,000+ square foot factory in Marshall, Michigan. The Company was granted conditional local approval to build and operate the facility pending final approval of its state facility license application.

On April 1, 2019, the Company announced its intention to acquire Origin House. On June 11, 2019, it provided an update on the acquisition. See the “General Development of the Business – Acquisitions and Dispositions – Origin House” section, above, for greater detail.

On April 11, 2019, the Company announced that it received approval from the Illinois Department of Financial and Professional Regulation for Cresco’s previously announced acquisitions of licensed medical cannabis dispensaries MedMar Rockford and MedMar Lakeview (located in the popular Wrigleyville neighborhood of Chicago).

On April 15, 2019, the Company announced HHH’s cultivation facility and dispensary in Fall River, Bristol County, Massachusetts received provisional approvals for adult-use cannabis cultivation, manufacturing, and retail licenses.

On May 28, 2019, the Company announced voluntary lock-up agreements with its founders, insiders and key shareholders. See the “Risk Factors – Outstanding Securities are Restricted from Immediate Resale but May be Sold in the Near Future” section, below, for greater detail.

On May 29, 2019, the Company announced the launch of its Social Equity & Educational Development program, the cannabis industry’s first national social equity initiative promoting inclusion, expungement, equality, access and community engagement.

On June 25, 2019, the Company provided an update on its expansion plan to serve the adult use cannabis market in Illinois including the ability to open five (5) additional retail dispensaries for the sale of adult-use cannabis, bringing its total number of dispensaries in the state to ten (10), on January 1, 2020.

On July 1, 2019, the Company announced the hiring of Mo Dastagir as Chief Information Officer. Former Chief Information Officer, Zach Marburger, took on a new role as Entrepreneur in Residence.

On July 17, 2019, the Company announced the hiring of Angie Demchenko as its Chief People Officer.

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On July 29, 2019, the Company announced the creation of Sunnyside*, a dispensary brand created to accelerate growth and shift expectations around shopping for cannabis through a new retail and marketing approach. The first Sunnyside* location will open in Philadelphia, Pennsylvania in November with future locations planned for Illinois, Ohio, Arizona, Massachusetts and Michigan.

On August 8, 2019, the Company announced that it received regulatory approval for its acquisition of 100% of the membership interests of Gloucester. See the “General Development of the Business – Acquisitions and Dispositions –

Valley AG” section, above, for greater detail.

On September 16, 2019, the Company announced its intention to acquire Tryke. On October 30, 2019, the Company announced the expiration of the HSR Act waiting period. See the “General Development of the Business – Acquisitions and Dispositions – Tryke” section, above, for greater detail.

On September 17, 2019, the Company announced that it and Origin House submitted certifications of substantial compliance with the request for additional information under the HSR Act. On October 22, 2019, the Company announced the expiration of the HSR Act waiting period. On November 13, 2019, the Company announced amendments to the arrangement agreement. On January 8, 2020, the Company announced the closing of its acquisition. See the “General Development of the Business – Acquisitions and Dispositions – Origin House” section, above, for greater detail.

On September 27, 2019, the Company announced that it signed a binding agreement to sell its Joliet and Kankakee, Illinois properties to Innovative Industrial Properties (“IIP”) for approximately $46.3 million. Concurrent with the closing, Cresco will enter 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.

On September 30, 2019, Cresco’s three cultivation facilities located in Joliet, Kankakee and Lincoln were approved for growing adult-use cannabis by the Illinois Department of Agriculture.

On October 8, 2019, the Company announced the completion of its acquisition of Gloucester. See the “General Development of the Business – Acquisitions and Dispositions – Valley AG” section, above, for greater detail.

On October 16, 2019, Cresco’s five existing Illinois cannabis dispensaries received early approval adult-use dispending organization licenses making it the only company approved for both adult-use cultivation and adult-use dispensary operations in the state.

On November 6, 2019, the Company announced the launch of its incubator program for Illinois adult-use market dispensary applicants.

On November 15, 2019, the Company announced that its Sunnyside* dispensaries were granted three cannabis dispensary licenses in the city of Chicago.

On November 26, 2019, the Company announced that it had signed agreements to sell its Yellow Springs, Ohio and Marshall, Michigan properties to IIP for approximately $38 million in total, which amount includes proceeds for additional tenant improvements at both properties. Concurrent with the closing of the sale, the Company will enter into long-term, triple-net lease agreements with IIP and will continue to operate each property as a licensed cannabis cultivation and processing facility. The two properties represent approximately 166,500 square feet of industrial space in aggregate.

On December 9, 2019, the Company announced the first harvest of crop from its expanded cultivation facility in Lincoln, Illinois.

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On December 12, 2019, the Company announced the closing of an agreement to sell its Lincoln, Illinois cultivation facility to GreenAcreage Real Estate Corp for $50 million. Concurrent with the closing, Cresco has agreed to enter into a long-term, triple-net lease agreement with GreenAcreage and will continue to operate the property as a licensed medical & recreational cannabis cultivation and processing facility.

On December 30, 2019, the Company announced the opening of its first five Sunnyside* dispensaries in Lakeview, Elmwood Park, Champaign, Buffalo Grove and Rockford, Illinois.

On January 22, 2020, the Company announced the signing of a senior secured Credit Agreement. On February 3,

2020, it announced its closing. See the “General Development of the Business – Financing Activities – Credit Facility” section, above, for greater detail.

On January 28, 2020, the Company closed an agreement to sell its Yellow Springs, Ohio property to IIP for approximately $10.5 million. Concurrent with the closing of the sale, the Company will enter into a long-term, triple-net lease agreement with IIP and will continue to operate as a licensed cannabis cultivation and processing facility.

On February 7, 2020, the Company announced the closing of its acquisition of HHH. See the “General Development of the Business – Acquisitions and Dispositions – Hope Heal Health” section, above, for greater detail.

On February 13, 2020, the Company announced the naming of former Molson Coors marketing executive, Gregory Butler, as its first-ever Chief Commercial Officer.

On February 27, 2020, the Company announced the conversion and rebranding of its dispensaries in Brooklyn, Huntington, New Hartford and Bardonia to Sunnyside* branded dispensaries.

On March 3, 2020, the Company announced the resignation of Joe Caltabiano as President. Mr. Caltabiano’s management responsibilities were taken up by CEO and co-founder, Charlie Bachtell as well as other members of the Company’s leadership team.

On March 9, 2020, the Company announced that its Sunnyside* dispensary in the River North neighborhood of Chicago received special use approval from the Zoning Board of Appeals.

On March 19. 2020, the Company provided an update on its response to COVID-19. See the “Risk Factors – COVID-

19 Pandemic” section, below, for greater detail.

On April 8, 2020, the Company announced that it plans to hire 250 people in Illinois for its retail operations.

On April 8, 2020, the Company announced additions to its senior leadership team, including the appointment of Tom Manning as Chair of the Board and Executive Chair; Todd West as Executive Vice President of Operations; Donny Trivisonno as Executive Vice President of Planning, Insights and Analytics; Brenna Albert as Senior Vice President and Controller of Accounting, Treasury and Tax; Drew Duval, Senior Vice President – Cultivation; Cora Colvin, Executive Vice President – Compliance; Geoff Mikelsons, Vice President – Finance.

On April 13, 2020, the Company announced that it will be expanding its local workforce to hire displaced workers and provide extra support to its employees in response to COVID-19.

On April 16, 2020. the Company announced that it has completed the expansion of its cultivation facility in Lincoln, IL, the largest in the state, and the first phase of expansion at its Kankakee facility. These expansions add approximately 180,000 square feet of additional indoor and greenhouse cultivation space, bringing the total cultivation space to 215,000 square feet across all three of its Illinois facilities.

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On April 23, 2020, the Company announced that it has completed the agreement to sell its Marshall, MI property to IIP. The previously announced sale was for consideration of approximately $16 million, which includes $11 million in proceeds for tenant improvements.

See the “General Development of the Business – Financing Activities” section, above, for a description of the significant financing activities of the Company.

Growth Strategy

The legalization of cannabis throughout the United States continues to expand both recreationally and medically. Analysts at Cowen and Co. have established that the size of the U.S. cannabis market could surpass $50 billion by 2026.11 On the recreational side, there are currently multiple states in which the recreational sale of cannabis has been approved. These states include Alaska, Oregon, Washington, Nevada, California, Colorado, Massachusetts, Illinois, Michigan and Maine. In these markets, recreational sales should continue to grow as cannabis retailers benefit from a shift in consumers from illegal sales to legal sales and from new cannabis consumers. Cresco plans on capitalizing on the significant increase in cannabis consumption in these recreational markets through both an expansion of its retail footprint, as well an entry into other sizable recreational markets. Cresco will also seek opportunities to expand its cultivation and production operations in recreational markets through expansions of its existing facilities or through acquisitions of additional licenses or cultivation operators.

With respect to medical marijuana, as more research centers study the effects of cannabis-based products in treating or addressing therapeutic needs, and assuming that research findings demonstrate that such products are effective in doing so, management believes that the size of the U.S. medical cannabis market will also continue to grow as more states expand their medical marijuana programs and new states legalize medical marijuana. Given Cresco’s existing operations in Illinois and Pennsylvania, Cresco is well-versed in operating within a medical-only market and will continue to seek opportunities to expand into both new medical-only markets as well as adult use markets.

Cresco plans to leverage the success in Illinois, Pennsylvania, Ohio, Nevada, California, Arizona, Massachusetts, and New York to expand into legalized cannabis markets in other states, while focusing on compliance, control, efficiency, and product performance in the medicinal or adult use cannabis industry. Its strategy is to create a national brand by executing on the following actions:

•

Pursue acquisition of license or existing cannabis operations in other legal cannabis markets

•

Complete application process for new states beginning or expanding medical cannabis programs, such as Michigan

•

Create licensing and/or distribution partnerships to expand Mindy Segal edible products into growing markets, such as Nevada and California

Cresco has proven its ability to become operational in new markets and plans on continuing this trend. It completed construction of three cultivation facilities, with over 110,000 square feet of cultivation space, in approximately six months. It was one of the first operators in the State of Pennsylvania to be approved and come to market as a cultivator and dispensary. It was also one of the first cultivators to be deemed operational after acquiring a cultivation license in the State of Ohio.

¹¹	https://www.marketwatch.com/story/marijuana-industry-could-be-worth-50-billion-annually-by-2026-2017-04-20

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Cultivation

Cresco is building or has built and/or renovated thirteen separate cultivation facilities, totaling approximately 1.0 million12 cultivation square feet, across eight states (being Illinois, Nevada, Arizona, Ohio, California, Pennsylvania, Massachusetts and New York currently) which includes other non-cultivation activities. It operates both indoor and hybrid green houses. Cresco’s multiple cultivation, extraction and processing facilities allow it to produce cannabis products across several product categories.

Cresco currently has the following approximate cultivation square footage in each respective state of operation:


State	Current (sq ft) ¹³		Planned (sq ft) ¹⁴		Total
Illinois		210,000		—		210,000
Pennsylvania		88,000		—		88,000
Ohio		27,000		—		27,000
California		166,000		265,000		431,000
Massachusetts		18,000		38,000		56,000
Arizona		94,000		—		94,000
Nevada		—		—		—
New York		—		—		—
Michigan		—		53,000		53,000
Total		603,000		356,000		959,000

Designed to provide consistency of product, increase yields and minimize the possibility of crop failure, each of Cresco’s facilities is equipped with traditional commercial agriculture components, automated environmental control systems, and watering and feed fertigation systems. Developed over years of research, its proprietary nutritional regimen is utilized to ensure crop quality. Using organic and soluble-based plant nutritional supplements, secondary metabolites (cannabinoids/terpenes) are maximized resulting in superior flower quality, yield and consistency. Cresco has invested more than $45 million in cultivation and processing facilities and plans on continuing to do so.

Manufacturing

Cresco’s laboratory instrumentation gives it the ability to formulate and develop a variety of products based on traditional pharmaceutical delivery systems – pills, tinctures, topical salves, transdermal patches and edible forms with a variety of cannabinoid profiles. Cresco’s kitchen is outfitted with equipment that allows us to produce shelf-stable quality confections with consistency. Cresco has plans to develop a kitchen and laboratory in every state it operates in with the exception of Pennsylvania and New York due to regulatory restrictions on production and sales of edible products. It is expected that 40-50% of the raw cannabis produced at Cresco’s production facilities (except for raw

¹²

These statements constitute forward-looking information related to possible events, conditions or financial performance based on future economic conditions and courses of action. These statements involve known and unknown risks, assumptions, uncertainties and other factors that may cause actual results or events to differ materially. Cresco believes there is reasonable basis for the expectation reflected in the forward-looking statements, however these expectations may not prove to be correct.

¹³	These figures are approximate measurements of square footage.

¹⁴

Cresco’s expansion, production and cultivation plans are subject to a number of risks and uncertainties, including the need for new licenses or amendments to existing licenses, additional regulatory or municipal approvals, including zoning and other risks associated with construction and cultivation generally, See Risk Factors. No assurances are given as to the precise cost or timing.

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cannabis produced in Pennsylvania and New York) will be used at Cresco’s kitchens and laboratories to make the vaporizable, oral, topical and edible products sold under the Cresco, ‘Reserve’, ‘Remedi’, and ‘Mindy’s’ brands.

Dispensaries

Wholesale

Cresco collaborates with its retail partners on strategic in-store promotions, customer events, and shelf space tactics to ensure maximum sell throughput. The Company takes a data-driven approach in its efforts to create an optimized sale process.

Retail

Cresco has an ownership interest (assuming the completion of and regulatory approval for the transactions contemplated herein) in the following: five (5) operational dispensaries in the State of Illinois; six (6) dispensaries in the State of Pennsylvania (three of which are currently operational); one (1) dispensary in the State of Arizona; one (1) dispensary in the State of Ohio; four (4) dispensaries in the State of New York; and one (1) dispensary in the State of Massachusetts.

Real Estate Strategy

Cresco is focused on entering cannabis markets with demand potential, supply constraints and high barriers to entry. Within its core markets, Cresco spends time and resources in selecting real estate in premium locations with significant foot traffic and proximity to popular attractions (restaurants, malls, sports arenas, hotels, etc.). Cresco targets retail spaces based on the market and available real estate. Cresco utilizes both its internal real estate team and a network of real estate brokers to negotiate leases and purchases on behalf of the company. Cresco typically prefers purchasing the underlying real estate for its retail operations and has been successful in securing debt financing for its real estate acquisitions. When purchasing real estate is not possible, it attempts to secure long-term leases and purchase options. Recently, Cresco entered into a number of sale and leaseback transactions in order to unlock real estate value. See the “Significant Events or Milestones” section above for a description of significant sale and leaseback transactions related to Cresco’s operations.

Branding and Marketing

Cresco utilizes a multi-brand approach to product development. The brand “Cresco” features THC-focused products available in flower, vape pens, and multiple forms of extracts. Each product falls into one of three proprietary categories: “Rise”, “Refresh”, “Rest”, named and color-coded to help the user intuitively identify the desired effects of the relevant strain’s cannabinoid profile. “Mindy’s Artisanal Edibles” and “Mindy’s Kitchen” are brands created in collaboration with James Beard Award Winning Chef Mindy Segal and are the industry’s first true culinary-backed edible option. Both of Mindy’s lines are lauded for their unique flavor profiles and delectability. “Reserve” products are made from Cresco’s most premium and exclusive plants and are the reward of years of selective breeding. “Remedi” products are designed for the medically-minded patient, with forms reminiscent of traditional pharmaceuticals. Additionally, the Company recently introduced three new brands “High Supply”, “Wonder” and “Good News.” “Sunnyside*” the Company’s national dispensary brand was introduced in late 2019.

Banking and Processing

Cresco deposits funds from its dispensary operations into its banking partners in each respective market. These state-chartered banks are fully aware of the nature of Cresco’s business and continue to remain supportive of Cresco’s growth plans. Cresco’s dispensaries currently accept only cash and debit card and do not process credit card payments. It is anticipated that over time all forms of payment will be accepted by each of the dispensaries.

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Product Selection and Offerings

Product selection decisions are currently made by leaders from the product development, operations, finance, marketing and sales teams, who negotiate and receive bids from potential brand vendors across all product categories including flower, vape pens, oils, extracts, edibles and pre-rolls. Cresco bases its product selection decisions on market demand and opportunity, product quality, margin potential, consumer feedback and the ability for the respective brands to scale. Cresco also anticipates requiring brands to pay slotting fees for shelf space.

Cresco’s manufactured products are sold through Company-owned and managed dispensaries as well as third-party dispensaries. In the future, as production capacity increases, Cresco expects to sell bulk product, as well as new branded products to other dispensaries through both Company-owned and third-party distributors. The full extent of this will depend upon the ultimate extent of the Cresco-owned and managed retail footprint, as well as the ultimate expanded production capacity of Cresco’s cultivation and production facilities.

Cresco offers or plans to offer, the following products in the following states:


State		Offering
Illinois (Currently manufactures)		Cannabis dry flower, vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products, cannabis edible products and other cannabis products. Product lines include: THC focused products available in flower, vape pens, and multiple forms of extracts under the “Cresco” brand; “Reserve” products made from premium and exclusive plants; “High Supply” products that include flower and vape; “Good News” products that include flower, vape and edibles; “Wonder” that includes vape and edibles; and “Remedi” products including: tinctures, capsules, salves, ingestibles, sublingual oils and transdermal patches. Cresco Labs also sells cannabis infused edibles through its partnership with James Beard Award Winning Chef Mindy Segal. Under the brand “Mindy’s,” Cresco Labs sells cannabis infused edibles including but not limited to: chocolate and toffee confections, fruit-forward gummies, hard sweet and chews. Retail locations in Illinois sell a variety of these brands and their corresponding products.

Pennsylvania (Currently manufactures)		Cannabis dry flower, vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products and other cannabis products. The product lines include THC focused products available in flower, vape pens, and multiple forms of extracts under their “Cresco” brand; “Reserve” products made from premium and exclusive plants and “Remedi” products which include precisely-dosed non-combustible products including tinctures, capsules, salves and sublingual oils. Retail locations in Pennsylvania sell a variety of these brands and their corresponding products.

Ohio (Currently manufactures)		Cannabis dry flower for vaporizerization. If awarded a processor license, Cresco will also manufacture cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products and other cannabis products. The product lines include (or will include if Cresco receives a processor license) THC focused products available in flower, vape pens, and multiple forms of extracts under their “Cresco” brand; “Reserve” products made from premium and exclusive plants and “Remedi” products which include precisely-dosed non-combustible products including tinctures, capsules, salves, sublingual oils and transdermal patches. Retail locations in Ohio will sell a variety of these brands and their corresponding products.

California (Currently manufactures)		Cannabis dry flower, vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products, cannabis edible products and other cannabis products. The product lines include THC focused products available in flower, vape pens, and multiple forms of extracts under their “Cresco” brand; and “Remedi” products. Cresco also sells cannabis infused edibles through its partnership with James Beard Award Winning Chef Mindy Segal. Under the brand “Mindy’s,” Cresco sells cannabis infused edibles, and fruit- forward gummies. Retail locations in California sell a variety of these brands and their corresponding products.

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Nevada (Plans to manufacture)		Cannabis dry flower, vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products, cannabis edible products and other cannabis products. The product lines will include, THC focused products available in flower, vape pens, and multiple forms of extracts under their “Cresco” brand; “Reserve” products made from premium and exclusive plants and “Remedi” products which include precisely-dosed, non-combustible products including: tinctures, capsules, salves and sublingual oils. Cresco also sells cannabis infused edibles through its partnership with James Beard Award Winning Chef Mindy Segal under the brand “Mindy’s.” Mindy’s products are currently available in Nevada. Cresco will also sell cannabis infused edibles, including chocolate and toffee confections, fruit-forward gummies, hard sweet and chews. Retail locations in Nevada will sell a variety of these brands and their corresponding products.

Arizona (Plans to manufacture)		Cannabis dry flower, vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products, cannabis edible products and other cannabis products. The product lines will include THC focused products available in flower, vape pens, and multiple forms of extracts under their “Cresco” brand. Cresco will also sell cannabis infused edibles through its partnership with James Beard Award Winning Chef Mindy Segal. Under the brand “Mindy’s,” Cresco will also sell cannabis infused edibles including chocolate and toffee confections, fruit-forward gummies, hard sweet and chews. Retail locations in Arizona will sell a variety of these brands and their corresponding products.

Massachusetts (Currently manufactures)		Cannabis dry flower, vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products, cannabis edible products and other cannabis products. The product lines will include, THC focused products available in flower, vape pens, and multiple forms of extracts under their “Cresco” brand; “Reserve” products made from premium and exclusive plant and “Remedi” products which include precisely-dosed, non-combustible products, including tinctures, capsules, salves, sublingual oils and transdermal patches. Cresco will also cannabis infused edibles through its partnership with James Beard Award Winning Chef Mindy Segal under the brands “Mindy’s.” Cresco will also sell cannabis infused edibles, including chocolate and toffee confections, fruit-forward gummies, hard sweet and chews. Retail locations in Massachusetts will sell a variety of these brands and their corresponding products.

New York (Plans to manufacture)		Vaporizer forms of cannabis, cannabis oil in capsule, oral and sublingual solutions, cannabis in topical products and other cannabis products. The product lines include THC focused products available in vape carts and pens under their “Cresco” brand; “Remedi” products which include precisely-dosed non-combustible products including tinctures, capsules, salves and sublingual oils. Retail locations in New York will sell a variety of these brands and their corresponding products.

Product Pricing

Cresco’s prices vary based on the market conditions and product pricing of vendor partners. Generally, Cresco strives to keep pricing consistent across all store locations. Cannabis and cannabis product pricing is based on operating costs, materials costs, growth time, and other applicable variables. Additionally, product pricing reflects existing pricing regulations in Cresco’s markets where applicable. For example, the State of Nevada does not regulate pricing and licensed dispensing organizations within the State of Nevada. Companies may set their own prices for cannabis and cannabis products. However, products sold at dispensaries in Nevada are subject to a 10% cannabis excise and sales tax.

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Inventory Management

Cresco has comprehensive inventory management procedures, which are compliant with the rules set forth by the applicable state and local laws, regulations, ordinances, and other requirements. These procedures ensure strict control over Cresco’s cannabis and cannabis product inventory from delivery by a licensed distributor to sale or delivery to a consumer, or disposal as cannabis waste. Such inventory management procedures also include measures to prevent contamination and maintain the safety and quality of the products dispensed at Cresco’s retail locations. Cresco understands its responsibility to the greater community and the environment and is committed to providing consumers with a safe, consistent and high-quality supply of cannabis.

Employees

As of December 31, 2019, Cresco had over 1,400 employees across its operating jurisdictions, primarily employed in Cresco’s cultivation, manufacturing, and processing operations and support thereof. Other significant departments include retail and other operations, logistics and supply chain, sales and marketing, legal and compliance, and other administrative and support functions. Cresco recruits, hires and promotes individuals that are best qualified for each position, priding itself on using a selection process that recruits people who are trainable, cooperative and share its core values as a company. In addition, the safety of employees is a priority and Cresco is committed to the prevention of illness and injury through the provision and maintenance of a healthy workplace. Cresco takes all reasonable steps to ensure staff are appropriately informed and trained to ensure the safety of themselves as well as others around them. See the “Significant Events or Milestones” section, above, for a description of significant hiring decisions of the Company.

Specialized Skill and Knowledge of Employees

To remain a leader in its field, Cresco relies on a motivated and experienced team, focused on offering the highest-quality product, in accordance with the regulations in force. The Company employs a diverse group of people for their particular administrative, operational and financial expertise, as well as numerous industry cultivation and growing of wellness and medical marijuana.

Competition

With respect to retail operations, Cresco expects to compete with other retail license holders across the markets that it operates in. Many of Cresco’s competitors in those markets are small local operators. In certain markets, such as California, there are also a number of illegally operating dispensaries, which serve as competition. However, it is expected that the majority of these dispensaries will be forced to cease operations in the next twelve months. In addition to physical dispensaries, Cresco also expects to compete with third-party delivery services, which provide direct-to-consumer delivery services.

In terms of cultivation and production, Cresco expects to compete with other licensed cultivators and operators in the states in which it operates. Similar to retail, there are a number of illegally operating cultivators in California which will serve as competition in the near-term. However, it is expected that the majority of these cultivators will cease operations over the next twelve months.

Intellectual Property

Cresco has developed numerous proprietary technologies and processes. These proprietary technologies and processes include its cultivation and extraction techniques, and certain cultivation equipment and irrigation systems. While exploring the patentability of these techniques and processes, Cresco relies on non-disclosure and confidentiality arrangements and trade secret protection.

Cresco has invested significant resources towards developing recognizable and unique brands and is in the process of seeking registration of trademarks with the United States Patent and Trademark Office and the states in which it operates. Cresco owns or operate 30 website domains, (including www.crescolabs.com, www.chooseremedi.com, www.cydispensary.com, www.crescocannabis.com, www.highsupplyofficial.com, www.mindysedibles.com and www.suunnysidedispensary.com) numerous social media accounts across all major platforms and various phone and web application platforms.

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Cresco’s legal counsel monitors and proactively addresses potential intellectual property infringement. Additionally, Cresco maintains strict standards and operating procedures regarding its intellectual property, including the standard use of non-disclosure, confidentiality, and intellectual property assignment agreements.

Trademarks:

Cresco is in the process of registering the following brands for trademark protection at the Canadian federal level, U.S. federal level and/or in the states in which the brands are offered. For additional details on the risks associated with the lack of trademark protection please see “Risk Factors – Intellectual Property”:


	Stylized Design	Rebranded Stylized Design (as applicable)

The text and stylized logo for “Cresco”,

The text and stylized logo for “Cresco Labs”

The text and stylized logo for “Cresco Sun”

The text and stylized logo for “Remedi”

The text and stylized logo for “Reserve”

The stylized logo

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The text and stylized logo for “Mindy’s Kitchen”

The text and stylized logo for “Mindy’s Artisanal Edibles”

The text and stylized logo for “CY+”

The stylized logo

The text and stylized logo for “Wonder Wellness Co.”

The text and stylized logo for “Good News”

The text and stylized logo for “High Supply”

Cresco has successfully registered for seven (7) at the U.S. federal level. Additionally, Cresco has successfully registered for forty-five (45) trademarks across seven (7) states including Illinois, Ohio, Pennsylvania, Nevada,

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California, Arizona and New York for the brands offered within each state. The following table identifies the volume of protected marks by jurisdiction:


Jurisdiction	No. Registration Application Submitted		No. Registration Awarded as of 4/28/2020		Renewal Year
US PTO⁽¹⁾		38		7		—
Illinois		27		27		2024
Pennsylvania		7		7		2024
Ohio		3		3		2029
Nevada		2		2		2024
California⁽¹⁾		5		3		2024
Arizona		1		1		2029
New York		2		2		2030
Maryland⁽¹⁾		1		—		—
Canada		31		—		—

⁽¹⁾	Awaiting notice of successful application reviews

Ongoing application review is occurring at the Canadian and U.S. Federal level as well as within the state of California. Due to recent increases in the number of IP applications in the cannabis industry, Cresco anticipates feedback on the remaining submitted applications to be seen on a rolling basis and as early as the end of the third quarter 2020. As such, Cresco will continue to rely on common law protection for these brands during the trademark registration process. Moreover, Cresco will proactively seek intellectual property protection for brand expansions in current markets as well as any new market expansion. For additional details on the risks associated with the lack of trademark protection please see “Risk Factors – Intellectual Property”.

Patents

Cresco is in the process of registering two (2) patents for the proprietary technologies and processes specifically in extraction process for producing liquid live resin. Applications seeking expedited review were submitted to the United States Patent and Trademark Office in the fourth quarter of 2019. However, with the ongoing application review and increased number of IP applications in the cannabis industry, Cresco anticipates feedback on both applications as early as the end of the fourth quarter of 2020. For additional details on the risks associated with the lack of patent protection please see “Risk Factors – Intellectual Property.”

Jurisdiction

No. Registration
Application
Submitted

No. Registration
Awarded as of
4/28/2020

Renewal Year

US PTO⁽¹⁾

⁽¹⁾	Awaiting notice of successful application reviews

United States Regulatory Environment

The following sections describe the legal and regulatory landscape in the states in which Cresco operates. While Cresco’s operations are in full compliance with all applicable state laws, regulations and licensing requirements, for the reasons described above and the risks further described in “Risk Factors”, there are significant risks associated with the business of Cresco. Readers are strongly encouraged to carefully read all of the risk factors contained in “Risk Factors” below.

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Federal Regulatory Environment

Under U.S. federal law, marijuana is currently a Schedule I drug. The CSA has five different tiers or schedules. A Schedule I drug means the Drug Enforcement Agency (“DEA”) considers it to have a high potential for abuse, no accepted medical treatment, and lack of accepted safety for the use of it even under medical supervision. Other Schedule I drugs are heroin, LSD and ecstasy. Cresco believes the CSA categorization as a Schedule I drug is not reflective of the medicinal properties of marijuana or the public perception thereof, and numerous studies show cannabis is not able to be abused in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered. Additionally, while studies show cannabis is less harmful than alcohol,¹⁵ alcohol is not classified under the CSA.

The U.S. federal position is also not necessarily consistent with democratic approval of marijuana at the state government level in the United States. Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of marijuana under the Cannabis Act (Canada), marijuana is largely regulated at the state level in the United States. State laws regulating cannabis conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts. Although the Company’s activities are compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law nor provide a defense to federal criminal charges that may be brought against the Company. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and state law, federal law shall apply.

Nonetheless, more than half of the U.S. states have now legalized adult-use and/or medical marijuana. As more and more states legalized medical and/or adult-use marijuana, the federal government sought to provide guidance to enforcement agencies and banking institutions with the introduction of the DOJ Memorandum drafted by former Deputy Attorney General James Michael Cole in 2013 (the “Cole Memo”)¹⁶ and the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) guidance in 2014.¹⁷

The Cole Memo offered guidance to federal enforcement agencies as to how to prioritize civil enforcement, criminal investigations and prosecutions regarding marijuana in all states. The memo put forth eight prosecution priorities:

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Preventing the distribution of marijuana to minors;

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Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

¹⁵

See Lachenmeier, DW & Rehm, J. (2015). Comparative risk assessment of alcohol, tobacco, cannabis and other illicit drugs using the margin of exposure approach. Scientific Reports, 5, 8126. doi: 10.1038/srep08126; Thomas, G & Davis, C. (2009). Cannabis, Tobacco and Alcohol Use in Canada: Comparing risks of harm and costs to society. Visions Journal, 5. Retrieved from http://www.heretohelp.bc.ca/sites/default/files/visions_cannabis.pdf; Jacobus et al. (2009). White matter integrity in adolescents with histories of marijuana use and binge drinking. Neurotoxicology and Teratology, 31, 349-355. https://doi.org/10.1016/j.ntt.2009.07.006; Could smoking pot cut risk of head, neck cancer? (2009 August 25). Retrieved from https://www.reuters.com/article/us-smoking-pot/could-smoking-pot-cut-risk-of-head-neck-cancer-idUSTRE57O5DC20090825; Watson, SJ, Benson JA Jr. & Joy, JE. (2000). Marijuana and medicine: assessing the science base: a summary of the 1999 Institute of Medicine report. Arch Gen Psychiatry Review, 57, 547-552. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/10839332; Hoaken, Peter N.S. & Stewart, Sherry H. (2003). Drugs of abuse and the elicitation of human aggressive behavior. Addictive Behaviours, 28, 1533-1554. Retrieved from http://www.ukcia.org/research/AgressiveBehavior.pdf; and Fals-Steward, W.,Golden, J. & Schumacher, JA. (2003). Intimate partner violence and substance use: a longitudinal day-to-day examination. Addictive Behaviors, 28, 1555-1574. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/14656545.

¹⁶	U.S. Dept. of Justice. (2013). Memorandum for all United States Attorneys re: Guidance Regarding Marijuana Enforcement. Washington, DC: US Government Printing Office. Retrieved from https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.

¹⁷	Department of the Treasury Financial Crimes Enforcement Network. (2014). Guidance re: BSA Expectations Regarding Marijuana-Related Businesses (FIN-2014-G001). Retrieved from https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses.

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•

Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;

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Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

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Preventing the violence and the use of firearms in the cultivation and distribution of marijuana;

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Preventing the drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

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Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

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Preventing marijuana possession or use on federal property.

Following the inauguration of President Trump, a Task Force on Crime Reduction and Public Safety was established through an executive order by the President of the U.S. in February 2017. The Task Force was to deliver its recommendations by July 27, 2017. To date, its recommendations have not been made public.

In March 2017, U.S. Attorney General Jeff Sessions acknowledged the validity of the Cole Memo and noted limited federal resources due to the appropriations restrictions.

However, in January 2018, United States Attorney General, Jeff Sessions, issued a memorandum (the “Sessions Memo”), which rescinded the Cole Memo and thereby created a vacuum of guidance for enforcement agencies and the DOJ. As an industry best practice, despite the recent rescission of the Cole Memo, the Company continues to do the following to ensure compliance with the guidance provided by the Cole Memo:

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ensure the operations of its subsidiaries (or third parties, in the jurisdictions where Cresco conducts its business as an ancillary services provider) are compliant with all licensing requirements that are set forth with regards to cannabis operation by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions. To this end, Cresco retains appropriately experienced legal counsel to conduct the necessary due diligence to ensure compliance of such operations with all applicable regulations;

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the activities relating to cannabis business adhere to the scope of the licensing obtained – for example, in the states where only medical cannabis is permitted, the products are only sold to patients who hold the necessary documentation to permit the possession of the cannabis; and in the states where cannabis is permitted for adult recreational use, the products are only sold to individuals who meet the requisite age requirements;

•

in working with licensed operators, such as cultivators and manufacturers in due diligence on the policies and procedures to ensure that the products are not distributed to minors. Additionally, Cresco employs professional consultants to investigate any past license violations and ensure that the business has not been involved in these types of violations;

•

Cresco only works through licensed operators, which must pass a range of requirements, adhere to strict business practice standards and be subjected to strict regulatory oversight with sufficient checks and balances to ensure that no revenue is distributed to criminal enterprises, gangs and cartels. Furthermore, as a part of its due diligence, Cresco retains professional consultants to vet the ownership of such cannabis businesses to ensure that no profits or revenues are used for the benefit of criminal enterprises;

•

as a part of its compliance audit, Cresco also ensures that the licensed operators have an adequate inventory tracking system and necessary procedures in place to ensure that such compliance system is effective in tracking inventory. This is done to ensure that there is no diversion of cannabis or cannabis products into the states where cannabis is not permitted by state law, or cross the state lines in general;

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•

Cresco conducts the necessary review of financial records and where appropriate retains professional third-party consultants to do so, to ensure that the state-authorized cannabis business activity is not used as a cover or pre-text for trafficking of other illegal drugs or engaged in other illegal activity or any activities that are contrary to any applicable anti-money laundering statutes;

•

Cresco conducts background checks to ensure that the principals and management of the licensed operators are of good character, and have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or distribution of cannabis;

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Cresco conducts reviews of activities of the cannabis businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of licensed premises (including the cases where such possession permitted by regulation – e.g. transfer of products between licensed premises). These activities are done to ensure that no licensed operators possess or use cannabis on federal property or engage in manufacturing or cultivation of cannabis on federal lands; and

•

Cresco conducts reviews of products and product packaging to ensure that the products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving.

On November 7, 2018, Mr. Sessions tendered his resignation as Attorney General at the request of President Donald Trump. Following Mr. Sessions’ resignation, Matthew Whitaker began serving as Acting United States Attorney General. On February 14, 2018, President Trump’s nominee William Barr was confirmed as the Attorney General. Mr. Barr served as Attorney General in the presidential administration of George H.W. Bush from 1991 to 1993. Mr. Barr has stated that as Attorney General, he does not intend to prosecute parties, who have complied with state law in reliance on the Cole Memo. Mr. Barr has also stated the need for more legal growers of marijuana for research, and is acknowledging that a recent bill legalizing hemp has broad implications for sale of cannabis products. Further, prior to Mr. Barr’s confirmation, he stated that he has not considered or determined whether further administrative guidance would be appropriate, or what such guidance might look like. however, he did note that if confirmed, he would give the matter careful consideration (collectively the “Barr Comments”).

Due to the ambiguity of the Sessions Memo and the uncertainty of the actions Mr. Barr may take, there can be no assurance that the federal government will not seek to prosecute cases involving marijuana businesses that are otherwise compliant with state law. The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property, but has relied on State and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and adult-use marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.

Since the issuance of the Sessions Memo, limited public comments have been made by the U.S. Attorneys in the jurisdictions in which the reporting issuer operates regarding the enforcement of federal law related to cannabis. The U.S. Attorneys who have made statements where the reporting issuer operates are outlined below.

Benjamin C. Glassman, U.S. Attorney for the Southern District of Ohio, stated that “Congress made marijuana illegal under the Controlled Substances Act. That was true under Deputy Attorney General Cole’s 2013 memorandum on marijuana enforcement, and it’s just as true under the Sessions Memo today.” Further Mr. Glassman has taken the position that federal law enforcement continues to work with limited resources and is focused on prosecutions that have the biggest impact on public safety.

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Justin E. Herdman, U.S. Attorney for the Northern District of Ohio, stated that he does not plan to change his approach to bringing criminal cases involving marijuana, even in light of guidance from the Sessions Memo the has freed the ability of prosecutors to pursue such cases.

A spokesperson for McGregor Scott, U.S. Attorney for the Eastern District of California, has stated that that marijuana violations in the Eastern District will be evaluated in accordance with our district’s federal law enforcement priorities and resources.

Adam Braverman, U.S. Attorney for the Southern District of California, commented that the DOJ is committed to reducing violent crime and enforcing the laws as enacted by Congress. The cultivation, distribution, and possession of marijuana has long been and remains a violation of federal law and the Southern District of California will utilize long-established prosecutorial priorities to carry out its mission to combat violent crime, disrupt and dismantle transnational criminal organizations, and stem the rising tide of the drug crisis.

Andrew Lelling, U.S. Attorney for the District of Massachusetts, commented that Congress has unambiguously made it a federal crime to cultivate, distribute and/or possess marijuana and as a law enforcement officer in the Executive Branch, it is his sworn responsibility to enforce that law, guided by the Principles of Federal Prosecution. Mr. Lelling acknowledged that he will proceed on a case-by-case basis, assessing each matter according to those principles and deciding whether to use limited federal resources to pursue it. Mr. Lelling expressed concern deciding, in advance, to immunize a certain category of actors from federal prosecution would be to effectively amend the laws Congress has already passed. The kind of categorical relief sought by those engaged in state-level marijuana legalization efforts can only come from the legislative process.

John Childress, U.S. Attorney for the Central District of Illinois, commented that for citizens of central Illinois, the Sessions Memo does not change long-established prosecutorial principles to enforce federal law and that his office will continue to work together with our law enforcement partners, to promote the safety and interests of our local communities.

Matthew Schneider, U.S. Attorney for the Eastern District of Michigan, was reported as saying that his office will review marijuana cases in terms of where those cases fit within our priorities and our limited federal resources.

Scott Brady, U.S. Attorney for the Western District of Pennsylvania, released a statement which noted that his office will continue to deploy all prosecutorial tools at our disposal to protect the citizens of western Pennsylvania from those individuals and criminal organizations which traffic in all illegal controlled substances, including marijuana. This was in contrast to Pennsylvania Governor Tom Wolf who views the Sessions Memo as a backwards move and vowed to protect cancer patients, kids with epilepsy, veterans with PTSD and all Pennsylvanians seeking relief from legal medical marijuana. Governor Wolf was critical of the Trump Administration and affirmed his commitment to do everything in his power to protect Pennsylvania patients.

On January 8, 2018, Mr. Andrew E. Lelling, U.S. Attorney for the District of Massachusetts, commented that his office cannot provide assurances that certain categories of participants in the state-level marijuana trade will be immune from federal prosecution. In addition, Mr. Lelling’s office released the following statement:

“This is a straightforward rule of law issue. Congress has unambiguously made it a federal crime to cultivate, distribute and/or possess marijuana. As a law enforcement officer in the Executive Branch, it is Mr. Lelling’s sworn responsibility to enforce that law, guided by the Principles of Federal Prosecution. To do that, however, Mr. Lelling must proceed on a case-by-case basis, assessing each matter according to those principles and deciding whether to use limited federal resources to pursue it. Deciding, in advance, to immunize a certain category of actors from federal prosecution would be to effectively amend the laws Congress has already passed, and that Mr. Lelling will not do. The kind of categorical relief sought by those engaged in state-level marijuana legalization efforts can only come from the legislative process.”

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Notwithstanding the foregoing, there is no guarantee that the current Presidential administration will not change the stated policy of the previous administration regarding the low-priority enforcement of U.S. federal laws that conflict with state laws. The Trump administration and Congress could decide to enforce U.S. federal laws vigorously.

Due to the CSA categorization of marijuana as a Schedule I drug, U.S. federal law makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the United States Currency and Foreign Transactions Reporting Act of 1970 (the “Bank Secrecy Act”). Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy.

On January 16, 2018, a coalition of 19 attorney generals from various states, including: Ms. Lisa Madigan, Illinois Attorney General, Xavier Becerra, California Attorney General, Eric T. Schneiderman, New York Attorney General (who has since been replaced by Barbara Underwood) and Josh Shapiro, Pennsylvania Attorney General released a joint statement urging Congress to advance legislation that would allow states with legalized medical or recreational marijuana to participate in the banking system. Banks and other depository institutions are currently hindered by federal law from providing financial services to marijuana businesses, even in states where those businesses are regulated. In February 2019, the House Financial Services subcommittee took up proposed legislation, the Secure and Fair Enforcement Banking Act of 2019 or SAFE Banking Act (the “SAFE Act”), that would protect banks and their employees from punishment for providing services to cannabis businesses that are legal on a state level. First hearings for the SAFE Banking Act occurred in February 2019 and the bill was introduced in Congress in March 2019.

While the United States Congress is contemplating the SAFE Act, if Congress fails to pass the SAFE Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

While there has been no change in U.S. federal banking laws to account for the trend towards legalizing medical and recreational marijuana by U.S. states, FinCEN has issued guidance advising prosecutors of money laundering and other financial crimes not to focus their enforcement efforts on banks and other financial institutions that serve marijuana-related businesses, so long as that business is legal in their state and none of the federal enforcement priorities are being violated (such as keeping marijuana away from children and out of the hands of organized crime). The FinCEN guidance also clarifies how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing so at their own risk. The customer due diligence steps include:

verifying with the appropriate state authorities whether the business is duly licensed and registered;

reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;

requesting from state licensing and enforcement authorities available information about the business and related parties;

developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);

ongoing monitoring of publicly available sources for adverse information about the business and related parties;

ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and

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refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

Due to the fear by financial institutions of being implicated in or prosecuted for money laundering, marijuana businesses are often forced into becoming “cash-only” businesses. As banks and other financial institutions in the U.S. are generally unwilling to risk a potential violation of federal law without guaranteed immunity from prosecution, most refuse to provide any kind of services to marijuana businesses. Despite the attempt by FinCEN to legitimize marijuana banking, in practice its guidance has not made banks much more willing to provide services to marijuana businesses. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due diligence on each marijuana business they take on as a customer. Recently, some banks that have been servicing marijuana businesses have been closing accounts operated by marijuana businesses and are now refusing to open accounts for new marijuana businesses for the reasons enumerated above.

The few credit unions who have agreed to work with marijuana businesses are limiting those accounts to no more than 5% of their total deposits to avoid creating a liquidity risk. Since the federal government could change the banking laws as it relates to marijuana businesses at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from marijuana businesses in a single day, while also servicing the need of their other customers.

The U.S. Treasury Department, headed by Stephen Mnuchin, has publicly stated they were not informed of the Attorney General Jeff Sessions’ desire to rescind the Cole Memo and do not have a desire to rescind the FinCEN guidance for financial institutions.¹⁸Multiple legislators believe that Sessions’ rescinding of the Cole Memo invites an opportunity for Congress to pass more definitive protections for marijuana businesses in states with legal marijuana programs during this Congress.¹⁹

On December 20, 2014, President Obama signed into law a federal spending bill with a Congressional appropriation rider for the year ending September 30, 2015, providing that “None of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including Arizona, Nevada and California, from implementing their own laws that have authorized the use, distribution, possession, or cultivation of medical marijuana” (the “Rohrabacher-Blumenauer Amendment”). This limitation was carried over for the year ending September 30, 2016. The DOJ addressed the impact of the Rohrabacher-Blumenauer Amendment in a memorandum dated February 27, 2015, which was released to the public in August 2015. That memorandum took the position that the Rohrabacher-Blumenauer Amendment does not bar the use of funds for civil and criminal enforcement “consistent with the existing DOJ guidance….” The DOJ’s interpretation appears to have been firmly rejected by the U.S. Court of Appeals for the Ninth Circuit (which includes federal court districts of Arizona and Nevada). In a decision dated August 16, 2016, the Court specifically ruled that the Rohrabacher-Blumenauer Amendment prohibited the use of DOJ funds for “conduct completely authorized by State law” United States v McIntosh, No.15-10117, 2016 WL 4363168, at 32 (9th Cir. Aug. 16, 2016). Both Congress and marijuana-related businesses recognize that guidance is not law and thus have worked to continually renew the Rohrabacher-Blumenauer Amendment since 2014. This amendment prevents the DOJ from using congressional funds to prosecute cannabis businesses in states that have medical marijuana laws and programs. In 2017, Senator Patrick Leahy (D-Vermont) introduced a similar amendment to H.R.1625 – a vehicle for the Consolidated Appropriations Act of 2018), preventing federal prosecutors from using federal funds to impede the implementation of medical cannabis

¹⁸

Angell, Tom. (2018 February 6). Trump Treasury Secretary Wants Marijuana Money In Banks. Retrieved from https://www.forbes.com/sites/tomangell/2018/02/06/trump-treasury-secretary-wants-marijuana-money-in-banks/#2848046a3a53; see also Mnuchin: Treasury is reviewing cannabis policies. (2018 February 7). Retrieved from http://www.scotsmanguide.com/News/2018/02/Mnuchin—Treasury-is-reviewing-cannabis-policies/.

¹⁹	Jackson, Cherese. (2018 January 30). State-by-State Analysis of Sessions Move to Rescind Cole Memo. Retrieved from

http://guardianlv.com/2018/01/state-state-analysis-sessions-move-rescind-cole-memo/; see also Velasquez, Josefa. (2018 January 23). NY Lawmarker Asks US Attorneys to Keep Hands Off State’s Med Marijuana Programs. Retrieved from https://www.law.com/newyorklawjournal/sites/newyorklawjournal/2018/01/22/ny-lawmaker-asks-us-attorneys-to-keep-hands-off-states-med-marijuana-programs/?slreturn=20180205182803; see also “This is Outrageous”: Politicians react to news that A.G. Sessions is rescinding Cole Memo. (January 4, 2018). Retrieved from https://www.thecannabist.co/2018/01/04/sessions-marijuana-cole-memo-politicians/95890/.

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laws enacted at the state level, subject to Congress restoring such funding, being the Leahy Amendment. The Leahy Amendment was set to expire with the 2018 fiscal year on September 30, 2018, but was effectively extended to December 21, 2018 when Congress passed the Continuing Appropriations Act, 2019 in September 2018. On December 22, 2018, the U.S. Congress failed to pass an omnibus appropriations bill for fiscal year 2019, causing a shutdown of the federal government. Currently, the Leahy Amendment is no longer in effect. At this time, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law. Further, while the Leahy Amendment is currently included in both the House version (referred to therein as the Joyce Amendment) and the Senate version (referred to therein as the Leahy Amendment) of the 2019 omnibus appropriations bill, there can be no assurances that it will be included in final appropriations package. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favor of the Company.

For fiscal year 2019, the strategy amongst the Congressional Marijuana Working Group, is to introduce numerous marijuana-related appropriations amendments in the Appropriations Committee in both the House and Senate, similar to the strategy employed in fiscal year 2018.²⁰ The amendments will include protections for marijuana-related businesses in states with medical and adult use marijuana laws, as well as protections for financial institutions that provide banking services to state-legal marijuana businesses.²¹ On February 15, 2019, the President of the United States signed an omnibus appropriations bill in respect of certain appropriations bills for the remainder of fiscal year 2019 which included appropriations protecting the medical cannabis industry.²² ²³ The Leahy Amendment was included in the 2020 Fiscal Year Appropriations Package of the federal budget for fiscal year 2020 which runs from October 1, 2019 to September 30, 2020, and was signed by the President of the United States on December 20, 2019 to pass. However, it should be noted that there is no assurance that such amendments will be passed into law.

On June 7, 2018, the Strengthening the Tenth Amendment Through Entrusting States Act (the “STATES Act”) was introduced in the Senate by Republican Senator Cory Gardner of Colorado and Democratic Senator Elizabeth Warren of Massachusetts. A companion bill was introduced in the House by Democratic representative Jared Polis of Colorado. The bill provides in relevant part that the provisions of the CSA, as applied to marijuana, “shall not apply to any person acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.” Even though marijuana will remain within Schedule I under the STATES Act, it makes the CSA unenforceable to the extent it is in conflict with state law. In essence, the bill extends the limitations afforded by the protection within the federal budget—which prevents the DOJ and the DEA from using funds to enforce federal law against state-legal medical cannabis commercial activity – to both medical and recreational cannabis activity in all states where it has been legalized. By allowing continued prohibition to be a choice by the individual states, the STATES Act does not fully legalize cannabis on a national level. In that respect, the bill emphasizes states’ rights under the Tenth Amendment, which provides that “the powers not delegated to the

United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Under the STATES Act, companies operating legal cannabis operations would no longer be considered “trafficking” under the CSA, and this would likely assist financial institutions in transacting with individuals and

²⁰	Congress of the United States. (2018 January 12). Letter to The Honorable Paul Ryan, The Honorable Nancy Pelosi, Chairman Rodney P. Frelinghuysen and Ranking Member Nita Lowey. Retrieved from https://polis.house.gov/uploadedfiles/marijuana_appropriations_mcclintock-polis_language_1-12-18.pdf.

²¹

Congress of the United States. (2018 January 17). Letter to Director Kenneth Blanco of the Financial Crimes Enforcement Network of the Department of the Treasury. Retrieved from https://dennyheck.house.gov/sites/dennyheck.house.gov/files/FINCEN%20MJ%20Guidance%20Letter%20FINAL.pdf; see also United States Senate. (2018 January 11). Letter to Director Kenneth Blanco of the Financial Crimes Enforcement Network of the Department of the Treasury. Retrieved from https://www.documentcloud.org/documents/4347431-368944892-Letter-Urging-FinCEN-to-Maintain.html#document/p1; see also United States Senate. (2018 January 18). Letter to Director Kenneth Blanco of the Financial Crimes Enforcement Network of the Department of the Treasury. Retrieved from https://www.documentcloud.org/documents/4356160-18-01-18-FinCEN-LTR-Cannabis-Banking.html; see also Congress of the United States. (2018 January 25). Letter to The Honorable Donald Trump. Retrieved from https://www.warren.senate.gov/files/documents/2018_01_25%20Letter%20to%20Trump%20on%20Sessions%20withdrawal%20of%20the%20Cole%20memo.pdf.

²²	Boston Globe. Trump issues signing statement on medical marijuana provision of funding bill. Retrieved from https://www.bostonglobe.com/news/marijuana/2019/02/15/trump-issues-signing-statement-medical-marijuana-provisionfunding-bill/UwqDzyQwhRppWqN9lCvuiP/story.html

²³	Committee for a Responsible Federal Budget. Appropriations Watch: FY 2019. Retrieved from http://www.crfb.org/blogs/appropriations-watch-fy-2019

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businesses in the cannabis industry without the threat of money laundering prosecution, civil forfeiture, and other criminal violations that could lead to a charter revocation. The STATES Act is currently draft legislation and there is no guarantee that it will become law in its current form.

Since 2014, Congress has made immense strides in marijuana policy. The bipartisan Congressional Cannabis Caucus launched in 2017 and is headed by Representatives Dana Rohrabacher (CA-48), Earl Blumenauer (OR-03), Don Young (AK-At Large), and Jared Polis (CO-02). The group is “dedicated to developing policy reforms that bridge the gap between federal laws banning marijuana and the laws in an ever-growing number of states that have legalized it for medical or recreational purposes.“²⁴ Additionally, each year more Representatives and Senators sign on and co-sponsor marijuana legalization bills including the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end U.S. federal marijuana prohibition, Congressman Blumenauer and Senator Wyden introduced the three-bill package, Path to Marijuana Reform which would fix the 280E provision, eliminate civil asset forfeiture and federal criminal penalties for businesses complying with state law, reduce barriers to banking, and would de-schedule, tax and regulate marijuana in 2017.²⁵ Senator Booker has also introduced the Marijuana Justice Act, which would de-schedule marijuana, and in 2018 Congresswoman Barbara Lee introduced the House companion.

An additional challenge to marijuana-related businesses is that the provisions of the Internal Revenue Code of 1986 as amended (the “U.S. Tax Code”), Section 280E, are being applied by the IRS to businesses operating in the medical and adult use marijuana industry. Section 280E of the U.S. Tax Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing them to pay higher effective U.S. federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.

On December 20, 2018, Congress passed the Farm Bill, which became law in the United States and included the legalization of hemp, which will change how hemp and hemp-derived products like CBD are regulated in the U.S., which is expected to be regulated by the United States Department of Agriculture

Currently, there are 33 states plus the District of Columbia, Puerto Rico and Guam that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Other states are considering similar legislation. Conversely, under the CSA, the policies and regulations of the federal government and its agencies are that cannabis has no proven medical benefit and a range of activities including cultivation and the personal use of cannabis is prohibited.

Local, state, and U.S. federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require the Company to incur substantial costs associated with compliance or alter certain aspects of its business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the Company’s business plan and result in a material adverse effect on certain aspects of its planned operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to certain aspects of the Company’s business. No prediction can be made as to the nature of any future laws, regulations, interpretations or applications, nor can it be determined what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.

Notwithstanding the permissive regulatory environment of medical marijuana at the state level, marijuana continues to be categorized as a controlled substance under the CSA. Under the CSA, the policies and regulations of the U.S. federal government and its agencies are that cannabis has no “proven” medical benefits. Unless and until Congress amends the CSA with respect to medical marijuana, as to the timing or scope of any such potential amendments there can be no assurance, there is a risk that U.S. federal authorities may enforce current U.S. federal law, and we may be deemed to be producing, cultivating, or dispensing marijuana in violation of U.S. federal law with respect to the Company’s current or proposed business operations, or the Company may be deemed to be facilitating the sale or

²⁴	Huddleston, Tom Jr. (2017 February 17). Pro-Pot Lawmakers Launch a Congressional Cannabis Caucus. Retrieved from http://fortune.com/2017/02/16/congress-cannabis-caucus/.

²⁵	Wyden, Blumenauer. (2017 March 30). Wyden, Blumenauer announce bipartisan path to marijuana reform. Retrieved from https://blumenauer.house.gov/media-center/press-releases/wyden-blumenauer-announce-bipartisan-path-marijuana-reform.

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distribution of drug paraphernalia in violation of U.S. federal law. A change in the U.S. federal government’s approach to begin more active enforcement of cannabis may adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated U.S. federal policy remains uncertain.

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect the proposed operations of the Company. The risk of U.S. federal enforcement and other risks associated with the Company’s business are described “Risk Factors” below.

State Regulatory Environment

STATE LEVEL U.S. CANNABIS OPERATIONS

Illinois

Illinois Regulatory Landscape

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 and is extended through July 1, 2020. There are more than 50 qualifying conditions as part of the medical program, including epilepsy, traumatic brain injury, and post-traumatic stress disorder (“PTSD”). Illinois’ retail market size for 2017 was over $86 million, representing an over 140% year-over-year increase. As of October 3, 2018, total retail sales were over $97 million representing an approximate 12% increase over 2017 retail sales (with 2 months remaining).²⁶ On August 28, 2018, the Alternatives to Opioids Act (Public Act 100-1114) was signed into law. The Alternative to Opioids Act significantly expands the Illinois’ medical marijuana market by enabling patients to access medical marijuana in place of pharmaceutical opioid medications. The Illinois Department of Public Health reports that there were more than 5.3 million prescriptions for opioid-based painkillers filled last year. This paves the way for the single-largest expansion of the existing Illinois Medical Cannabis Pilot Program, which has about 42,000 authorized patients. Those patients have brought the state about $200 million in sales tax revenue since the program’s inception in late 2015.²⁷ On August 9, 2019, the “Pilot” status was removed and the medcal program became permanent.

The Opioid Alternative Pilot Program launched January 31, 2018 with registration open through the Illinois Department of Public Health. The pilot program is part of the Alternative to Opioids Act, which former Gov. Bruce Rauner signed into law in August 2018, with the aim of combating the opioid epidemic. The pilot program will allow patients that receive or are qualified to receive opioid prescriptions access to medical marijuana as an alternative to prescription opioid medications such as OxyContin, Percocet and Vicodin. Medical Cannabis Pilot Program patients with one of more than 50 qualifying medical conditions designated by the state of Illinois, and a doctor recommendation can also receive a temporary medical cannabis card online and make immediate cannabis purchases without waiting for their permanent card to be processed. In January 2019, one of Cresco’s Illinois dispensary locations launched its participation in this pilot program and made the first sale of medical cannabis thereunder.

In January 2019, JB Pritzker was sworn into office as Governor of Illinois. Cresco’s CEO and co-founder, Charles Bachtell, has been appointed to the Cannabis Legalization Subcommittee of the governor’s transition team. Cannabis Legalization is one of four subcommittees under the Governor’s Restorative Justice and Safe Communities Transition Committee. The primary goals of the Cannabis Legalization Subcommittee are to evaluate and develop implementation recommendations for the Governor-elects platform on legalizing cannabis. As outlined during the Governor’s campaign, these priorities include safely legalizing and decriminalizing cannabis, reviewing and commuting the sentences of people incarcerated for cannabis offenses in Illinois, as well as a focus on diversity and community outreach.

²⁶	Illinois Medical Cannabis Pilot Program. (2018 October 3). Overall Medical Cannabis Pilot Program Data, as of 24/10/2018. Retrieved from https://www2.illinois.gov/sites/mcpp/Pages/update10032018.aspx

²⁷	Illinois News Network (2018 August 28). New law expands access to medical marijuana in Illinois to curb opioid use https://www.ilnews.org/news/health/new-law-expands-access-to-medical-marijuana-in-illinois-to/article_4b2a156c-ab05-11e8-95a9-037d97496f1a.html

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On June 25, 2019, Governor Pritzker signed into law the Cannabis Regulation and Tax Act, thereby legalizing the recreational use of cannabis. The establishment of a regulatory scheme and the grant of licenses to cultivate, distribute, and sell recreational cannabis in Illinois are in process for new operators. Sales of recreational cannabis began on or about January 1, 2020.

Cresco entered into sale and leaseback transactions related to three properties for its Illinois operations. See the “Significant Events or Milestones” section, above, for greater detail.

Illinois Licenses

Cresco currently operates three medical cannabis cultivation and manufacturing centers in Illinois and holds an ownership interest in five dispensary locations in Illinois. The cultivation and manufacturing licenses were awarded based on merit in a competitive application process to applicants who demonstrated operational expertise and financial backing.

Cresco is licensed to operate in the state of Illinois as a medical cultivator and medical product manufacturer. Phoenix Farms of Illinois, LLC d/b/a Phoenix Botanical d/b/a Sunnyside (“Phoenix Farms”), PDI Medical III, LLC d/b/a PDI Medical d/b/a Sunnyside (“PDI”), FloraMedex LLC d/b/a Sunnyside (“FloraMedex”), MedMar Lakeview d/b/a Sunnyside, and MedMar Rockford d/b/a Sunnyside, are licensed to operate retail dispensaries in the State of Illinois. The Table below lists the licenses issued to Cresco, Phoenix Farms, PDI, FloraMedex, MedMar Lakeview, and MedMar Rockford in respect of its operations in Illinois. Under applicable laws, the licenses permit Cresco, Phoenix Farms, PDI, FloraMedex, MedMar Lakeview and MedMar Rockford to cultivate, manufacture, process, package, sell, and purchase (as applicable) marijuana pursuant to the terms of the licenses, which are issued by the Department of Agriculture and the Department of Financial and Professional Regulation under the provisions of the Illinois Revised Statutes 410 ILCS 130. All licenses are, as of the date hereof, active with the State of Illinois. There are two categories of licenses in Illinois: (i) cultivation/processing and (ii) dispensary. The licenses are independently issued for each approved activity.

Licenses in the State of Illinois


Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description
Cresco Labs, LLC	Early Approval Adult Use Cultivation Center License License Number: 1503060739-EA	Kankakee	03/31/21	Permit to operate an early approval adult use cultivation center
Cresco Labs, LLC	Early Approval Adult Use Cultivation Center License License Number: 1503060740-EA	Lincoln	03/31/21	Permit to operate an early approval adult use cultivation center

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	Early Approval Adult Use Cultivation Center License License Number: 1503060741-EA	Joliet	03/31/21	Permit to operate an early approval adult use cultivation center

Cresco Labs, LLC	Medical Cannabis Cultivation Center Operating Permit License Number: 1503060739	Kankakee	05/18/20	Permit to operate medical cannabis cultivation center

	Medical Cannabis Cultivation Center Operating Permit License Number: 1503060740	Lincoln	03/09/21	Permit to operate medical cannabis cultivation center

	Medical Cannabis Cultivation Center Operating Permit License Number: 1503060741	Joliet	03/09/21	Permit to operate medical cannabis cultivation center

	Industrial Hemp Processor License License Number: 1204- 301	Kankakee	12/31/22	Permit to process industrial hemp

	Industrial Hemp Processor License License Number: 1204- 302	Joliet	12/31/22	Permit to process industrial hemp

	Industrial Hemp Processor License License Number: 1204- 303	Lincoln	12/31/22	Permit to process industrial hemp

Phoenix Farms of Illinois, LLC	Registered Medical Cannabis Dispensing Organization Certificate License: DISP.000035	Champaign	04/26/21	Permit to operate a medical cannabis dispensary

Phoenix Farms of Illinois, LLC d/b/a Phoenix Botanical	Registered Adult Use Dispensing Organization Certificate License: AUDO:000006	Champaign	03/31/21	Permit to operate a recreational cannabis dispensary

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PDI Medical III, LLC	Registered Medical Cannabis Dispensing Organization Certificate License: DISP.000016	Buffalo Grove	12/07/20	Permit to operate a medical cannabis dispensary

PDI Medical, III, LLC d/b/a PDI Medical	Registered Adult Use Dispensing Organization Certificate License: AUDO:000009	Buffalo Grove	03/31/21	Permit to operate a recreational cannabis dispensary

FloraMedex, LLC	Registered Medical Cannabis Dispensing Organization Certificate License: DISP.000034	Elmwood Park	04/18/21	Permit to operate a medical cannabis dispensary

FloraMedex, LLC	Registered Adult Use Dispensing Organization Certificate License: AUDO:000010	Elmwood Park	03/31/21	Permit to operate a recreational cannabis dispensary

MedMar Lakeview, LLC	Registered Medical Cannabis Dispensing Organization Certificate License: DISP.000050	Chicago	01/13/21	Permit to operate a medical cannabis dispensary

MedMar Lakeview, LLC	Registered Adult Use Dispensing Organization Certificate License: AUDO:000008	Chicago	03/31/21	Permit to operate a recreational cannabis dispensary

MedMar Rockford, LLC	Registered Medical Cannabis Dispensing Organization Certificate License: DISP.000013	Rockford	11/24/20	Permit to operate a medical cannabis dispensary

MedMar Rockford, LLC	Registered Adult Use Dispensing Organization Certificate License: AUDO:000007	Rockford	3/31/21	Permit to operate a recreational cannabis dispensary

Illinois License and Regulations

The medical retail dispensary license permits Cresco to purchase marijuana and marijuana products from cultivation/processing facilities and allows the sale of marijuana and marijuana products to registered patients. The adult use retail dispensary license permits Cresco to purchase adult use marijuana and marijuana products from cultivation/processing facilities and allows the sale of adult use marijuana and marijuana products to purchasers aged 21 or older.

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The medical cultivation licenses permit Cresco to acquire, possess, cultivate, manufacture/process marijuana 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. The adult use cultivation licenses permit Cresco to acquire, possess, cultivate, manufacture/process adult use marijuana into edible marijuana products and/or marijuana-infused products, deliver, transfer, have tested, transport, supply or sell marijuana and related supplies to adult use marijuana dispensaries.

Illinois imposes an income surtax, equal to the amount of federal income tax levied, on any direct or indirect transfer of Illinois license permit.

Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Illinois Reporting Requirements

The State of Illinois uses BioTrack as the state’s computerized track-and-trace (“T&T”) system for seed-to-sale. Individual licensees whether directly or through third-party integration systems are required to push data to the state to meet all reporting requirements. Cresco uses the commercial version of BioTrack as its in-house computerized seed to sale software, which integrates with the state’s BioTrack program and captures the required data points for cultivation, manufacturing and retail as required in the Illinois Compassionate Use of Medical Cannabis Pilot Program Act. In February 2019, BioTrackTHC, a subsidiary of Helix TCS Inc., announced that it was requested by the State of Illinois to provide the software solution that will track medical cannabis sales for patients participating in the state’s Opioid Alternative Pilot Program. BioTrackTHC is already responsible for tracking and tracing the state’s medical cannabis supply chain, and its software now provides a unified solution for these programs.

Illinois Storage and Security Requirements

As to its cultivation facilities, the regulations require Cresco to store marijuana and marijuana infused products in a safe, vault or secured room in such a manner to prevent diversion, theft or loss. Any marijuana that is not a finished product must likewise be maintained in a secured area within the facility only accessible to authorized personnel. All locks and security equipment safeguarding the marijuana must be kept in good working order, and the storage areas must be locked and protected from unauthorized access at all times.

The cultivation facilities must also have an operational 24-hour, seven days a week, closed circuit television surveillance system on the premises that complies with certain regulatory minimum standards. Access to the surveillance area is restricted to only those people who are essential to surveillance operations, law enforcement agencies, security system service personnel and the regulator. In addition, video surveillance recordings shall be retained for 90 days at the facilities and an additional 90 days off site.

Cresco must also maintain an alarm system at its cultivation facilities. The cultivation facilities must maintain and use a professionally monitored robbery and burglary alarm system that meets certain regulatory minimum standards. A qualified alarm system vendor must test the system annually.

With respect to its Illinois dispensaries, Cresco must store inventory on site in a secured and restricted access area consistent with the security regulations and tracked in accordance with the inventory tracking regulations. Any containers storing medical marijuana that have been tampered with or opened must be stored separately until disposed; such materials can only be stored at the dispensary for one week.

The dispensaries must also implement security measures to deter and prevent entry into and theft from restricted access areas that contain marijuana and/or currency, including having a commercial grade alarm and surveillance system installed by an Illinois licensed private alarm contractor or private alarm contractor agency. The facility must also have security measures to protect the premises, registered qualifying patients, designated caregivers and dispensing organization agents.

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Pennsylvania

Pennsylvania Regulatory Landscape

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 17 qualifying conditions, including epilepsy, chronic pain, and PTSD. The state operates as a high-barrier market with very limited market participation. Retail sales opened in February 2018 to a limited number of retail locations across the state. Pennsylvania is the fifth-largest state in the country, home to nearly 13 million people. Pennsylvania’s medical marijuana market is expected to become one of the biggest markets in the U.S.²⁸

The state originally awarded only 12 licenses to grow/process and 27 licenses to operate retail dispensaries (which entitled holders to up to three medical dispensary locations). Cresco Yeltrah, LLC (“Cresco Yeltrah”), a subsidiary of Cresco, was awarded one medical cannabis grow and processing license and one dispensary license in Pennsylvania (allowing for three (3) dispensary locations in Pennsylvania). Cresco subsequently obtained an additional dispensary license in December 2018 for three (3) additional dispensary locations, for a total of six (6) in the state of Pennsylvania, three of which are currently operational.

Retail sales opened in February 2018 to a limited number of retail locations across the state. Cresco Yeltrah, on February 15, was the first cultivator/processor to release product into Pennsylvania market (approximately 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 will include 13 additional grow/processing licenses and 23 additional dispensary licenses. The application period ran from April 2018 through May 17, 2018. Cresco Yeltrah obtained an additional dispensary license which will amount for three (3) additional dispensaries.

It was announced on April 17, 2018 that dry flower would be included in the regulations as an approved product form for sale and consumption (in addition to the already approved forms of concentrates, pills, and tinctures). Simultaneously, it was announced that the list of qualifying conditions would expand from 17 to 21, including additions of cancer remission therapy and opioid-addiction therapy.

Pennsylvania Licenses

Cresco Yeltrah is licensed to operate in the Commonwealth of Pennsylvania as a medical cannabis grower/processor and to operate six (6) medical cannabis dispensaries, three (3) of which are currently operational. After winning its initial licenses in the state in 2017, in December 2018, Cresco Yeltrah was awarded a second merit-based license for dispensary operations in Pennsylvania. The permit allows Cresco Yeltrah six months in which to become operational before it can begin dispensing medical marijuana and has been extended administratively by the Department of Health as Cresco Yeltrah continues to build out these facilities. Cresco Yeltrah is licensed for three (3) additional medical cannabis dispensaries under its second license. The table below lists the licenses issued to Cresco Yeltrah in respect of its operations in Pennsylvania. Under applicable laws, the licenses permit Cresco 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 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 Cresco Yeltrah facilities in Pennsylvania.

²⁸	https://mjbizdaily.com/chart-pennsylvanias-medical-marijuana-market-set-become-one-countrys-biggest/

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All cultivation/processing establishments must register with Pennsylvania Department of Health. All dispensaries must register with the Pennsylvania Department of Health. 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, for licenses that Cresco Yeltrah currently holds, each have undergone one renewal period.


Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description

	Medical Marijuana Dispensary Permit Applicant ID: D-5016-17	Butler	06/29/20	Permit to operate a medical marijuana dispensary

	Medical Marijuana Dispensary Permit Applicant ID: D-5016-17	Pittsburgh	06/29/20	Permit to operate a medical marijuana dispensary

	Medical Marijuana Dispensary Permit Applicant ID: D-5016-17	New Kensington	06/29/20	Permit to operate a medical marijuana dispensary

Cresco Yeltrah, LLC	Medical Marijuana Grower/Processor Permit Applicant ID: GP-6012-17	Brookville	06/20/19	Permit to grow and process medical marijuana

	Medical Marijuana Dispensary Permit Applicant ID: D18-1007	Exeter Township Originally approved at Reading address	12/18/19 (administratively extended by DOH)	Permit to operate a medical marijuana dispensary (not operational)

	Medical Marijuana Dispensary Permit Applicant ID: D18-1007	TBD in Southeast Region	12/18/19 (administratively extended by DOH)	Permit to operate a medical marijuana dispensary

	Medical Marijuana Dispensary Permit Applicant ID: D18-1007	TBD in Southeast Region	12/18/19 (administratively extended by DOH)	Permit to operate a medical marijuana dispensary

Pennsylvania License and Regulations

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

The medical cultivation licenses permit Cresco 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.

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Pennsylvania Reporting Requirements

The Commonwealth of Pennsylvania uses MJ Freeway as the state’s computerized T&T system for seed-to-sale. Individual licensees are required to use MJ Freeway to push data to the state to meet all reporting requirements. Cresco Yeltrah uses MJ Freeway as its in-house computerized seed to sale software, which integrates with the state’s MJ Freeway program and captures the required data points for cultivation, manufacturing and retail as required in the Pennsylvania medical marijuana laws and regulations.

Pennsylvania Storage and Security

The regulations require the maintenance of storage areas at Cresco Yeltrah’s grower/processor location in a clean and orderly condition, free from infestation. These separate and locked limited access areas are used for the grower/processor to store seeds, immature plants, mature plants and medical marijuana that is expired, damaged, deteriorated, mislabeled, contaminated, recalled or whose containers or packages have been opened or breached until such product is destroyed or otherwise disposed of.

The regulations also require Cresco Yeltrah’s grower/processor facility to have a commercial grade security system to prevent unauthorized entry and to prevent and detect any attempted diversion. This security must include an alarm system that covers the interior and exterior of the facility, including a silent alarm.

A dispensary must also have a locked limited access area for the storage of medical marijuana that is expired, damaged, deteriorated, mislabeled, contaminated, recalled or whose containers or packages have been opened or breached until such product is returned to the grower/processor.

Cresco Yeltrah’s dispensaries must have a security system with the same features as that for the grower/processor facility. This system must be professionally monitored 24-hours a day and seven days a week with fixed cameras on the interior and exterior of the facilities. The surveillance system must store data for a period of four years in a readily available format for investigative purposes.

Ohio

Ohio Regulatory Landscape

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. Ohio’s medical cannabis sales are projected to be between $200 and $400 million once the system is fully matured.²⁹ According to industry experts, Ohio could become a national “powerhouse” for the medical marijuana industry, largely because of its population — it’s the seventh largest state — and because the broad list of conditions eligible for treatment with medical marijuana includes “pain.”³⁰ House Bill 523 required that the framework for the MMCP will be in place no later than 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 first medical marijuana sales were on January 16, 2019. Cresco Labs Ohio, LLC was one of four (4) dispensaries open on the first day.

The three following state government agencies are responsible for the operation of Ohio’s Medical Marijuana Control Program: (i) the Ohio Department of Commerce is responsible for overseeing medical marijuana cultivators, processors and testing laboratories; (ii) the State of Ohio Board of Pharmacy is responsible for overseeing medical marijuana retail dispensaries, the registration of medical marijuana patients and caregivers, the approval of new forms

²⁹	https://cannabusinessplans.com/ohios-medical-cannabis-market/

³⁰	https://cannabusinessplans.com/ohios-medical-cannabis-market/

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of medical marijuana and coordinating the Medical Marijuana Advisory Committee; and (iii) 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. Qualifying medical conditions for medical marijuana include: HIV/AIDS, Lou Gehrig’s disease, Alzheimer’s disease, cancer, chronic traumatic encephalopathy, Crohn’s disease, epilepsy or other seizure disorder, fibromyalgia, glaucoma, hepatitis C, inflammatory bowel disease, multiple sclerosis (MS), pain (either chronic, severe, or intractable), Parkinson’s disease, PTSD, sickle cell anemia, spinal cord disease or injury, tourette’s syndrome, traumatic brain injury and ulcerative colitis. In order for a patient to be eligible to obtain medical marijuana, a physician must make the diagnosis of one of these conditions.

Cresco entered into a sale and leaseback transaction related to its Ohio operations. See the “Significant Events or Milestones” section, above, for greater detail.

Ohio Licenses

On June 4, 2018, the State of Ohio Board of Pharmacy awarded 56 medical marijuana provisional dispensary licenses. The licenses were awarded after a 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 State of Ohio Board of Pharmacy. Per rule, all provisional license holders have a maximum of six months to demonstrate compliance with the dispensary operational requirements to obtain a certificate of operation (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 State of Ohio Board of Pharmacy is limited to issuing up to 60 dispensary licenses across the state, but will have the authority to increase the number of licenses after September 8, 2018. To date, no announcement has been made if the number of licenses will be increased. Per the program rules, the 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 Ohio”), a subsidiary of Cresco, was awarded one provisional dispensary license on June 7, 2018. A provisional license serves as authorization from the board for Cresco Ohio to begin the construction or modification of your facility and to secure any other applicable permits you may need from your local jurisdiction in order to receive a Certificate of Operation. In December 2018, Cresco Ohio received approval to operate a medial dispensary in the Ohio. The dispensary is located in Winterville, Ohio and commenced operations on January 16, 2019 under the name “CY+”.

Cresco Ohio applied for and on November 30, 2017 received one provisional cultivation license. Cresco Ohio’s cultivation facility is a hybrid greenhouse structure located in Yellow Springs, Ohio and is currently comprised of approximately 25,000 square feet of cultivation space. This facility is currently undergoing an expansion which, when completed, would increase the cultivation space to a total of approximately 50,000 square feet.³¹ All of the 50,000 square feet will be used for cultivation.

³¹

These statements constitute forward-looking information related to possible events, conditions or financial performance based on future economic conditions and courses of action. These statements involve known and unknown risks, assumptions, uncertainties and other factors that may cause actual results or events to differ materially. Cresco believes there is a reasonable basis for the expectations reflected in the forward-looking statements, however these expectations may not prove to be correct.

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authorization from the Ohio Department of Commerce for Cresco Ohio to begin the construction or modification of the facility and to secure any other applicable permits needed from local jurisdictions in order to receive a Certificate of Operation. Pursuant to Ohio Administrative Code s. 3796:2-1-06(B), a provisional license holder has nine months to obtain a Certificate of Operation. On September 14, 2018, Cresco Ohio received its Certificate of Operation.

Licenses in the State of Ohio


Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description
Cresco Labs Ohio, LLC	MMCPC00017	Yellow Springs	09/13/20	Cultivation License
Cresco Labs Ohio, LLC	MMD 0700002	Wintersville	12/04/20	Dispensary License

	N/A	N/A	N/A	Medical Processor License³²

	MMCPP00117	Yellow Springs	11/24/20	Processor Plant Only Level 1

Ohio License and Regulations

The dispensary license permits Cresco Ohio to purchase marijuana and marijuana products from cultivation and/or processing facilities, and allows the sale of marijuana and marijuana products to registered patients.

The medical cultivation licenses permit Cresco Ohio to acquire, possess, cultivate, manufacture/process into medical marijuana products, deliver, transfer, have tested, transport, supply or sell marijuana and related supplies to medical marijuana dispensaries.

A medical processor license allows for the manufacturing and production of medical marijuana products. Cresco Ohio submitted an application for a processor license, which was denied. Cresco Ohio is currently appealing this decision.

Ohio Reporting Requirements

Ohio uses METRC as its seed-to-sale tracking system. Licensees are required to use METRC in Ohio to push data to the state to meet all of the reporting requirements. Cresco Ohio integrates its in-house seed-to-sale tracking system (BioTrack) with METRC to capture the required data points as required in the Ohio medical marijuana laws and regulations.

Ohio Storage and Security Requirements

For Cresco Ohio’s dispensaries, a designated representative is responsible for providing supervision and control of medical marijuana and medical marijuana products to ensure that they are dispensed in accordance with the law and regulations. In addition, the dispensaries must have physical or electronic security over such items. In particular, Cresco Ohio’s dispensaries must also maintain security (with alarms and surveillance equipment) as required by the

³²	Application is currently in the appeal process.

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regulations to prevent diversion and theft, as well as to protect patients, caregivers and employees. The dispensary department, restricted access areas and stock of medical marijuana must be secured by a physical barrier with suitable locks and an electronic barrier. Medical marijuana must also be stored in a secure area and tracked in the inventory tracking system. No person is permitted in this secure area unless under the personal supervision of a licensed dispensary employee. The storage area must be clean and free of infestation. Containers storing expired, damaged, deteriorated, misbranded, adulterated or opened medical marijuana shall be separated from other medical marijuana until they are properly destroyed; these materials can only be stored for one week.

The regulations permit Cresco Ohio to store medical marijuana inventory at its cultivation facility in a designated, enclosed, locked facility identified in Cresco Ohio’s plans and specifications that it submitted to the Ohio Department of Commerce. This storage area can only be accessible by authorized individuals. On an annual basis and as a condition to renewal of its cultivator license, Cresco Ohio must perform a physical, manual inventory, of the medical marijuana on hand and compare it to the annual report generated by the inventory tracking system. The cultivation facility must install a commercial grade security alarm system to prevent and detect diversion, theft, or loss. The facility also must maintain surveillance equipment to capture the entire facility and provide direct access to the regulator on a real-time basis. All of this equipment must be kept in good working order and inspected and tested on an annual basis by a third party.

California

California Regulatory Landscape

In 1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act of 1996. This legalized the use, possession and cultivation of medical marijuana by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which marijuana provides relief.

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 adult-use 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. The four agencies that regulate marijuana at the state level are the California Bureau of Cannabis Control (the “BCC”), California Department of Food and Agriculture, California Department of Public Health, and California Department of Tax and Fee Administration.

MAUCRSA went into effect on January 1, 2018.

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The California marijuana market is expected to be one of the fastest growing industries in California over the next five years. Market analysts forecast a stabilized market to occur after 2025 where the California marijuana market is estimated to be valued at approximately US$10 billion.³³ In 2016, California recorded approximately $850 million in medical marijuana retail sales from operated dispensaries state wide; however, it is estimated approximately 85% of total transactions are unrecorded for revenue and are carried out through illegal transactions. The University of California Agricultural Issues Center predicts the illegal market to shrink to less than 30%, legal adult-use sales to increase to approximately 62%, and legal medical sales to decrease from approximately 15% to less than 10% as patients are provided with an alternative to obtaining medical marijuana physician recommendations for a fee.³⁴

California Operations - SLO Cultivation Inc. and Origin House

On June 7, 2018, Cresco acquired a 60% ownership interest in SLO Cultivation Inc. (“SLO”). On September 27, 2018, Cresco acquired a further 20% ownership interest in SLO bringing its total ownership to 80%. Moreover, SLO wholly-owns Bolivar Distribution Services, LLC, Mandela Manufacturing Services, LLC and Mahatma Distribution Services, LLC (the “Cal Subsidiaries”). SLO operates a marijuana cultivation operation in the cities of Carpinteria (Santa Barbara County) and San Luis Obispo (San Luis Obispo County) California. The cultivation facility has a capacity of up to 600,000 square feet of greenhouse production space. As a result of Cresco’s acquisition, Cresco has essentially complete management and operational control (except for certain farm-specific functions that remain under the supervised management of SLO). The cannabis will initially be cultivated from the Carpinteria facilities. From there, the harvest will ultimately be transported as fresh (or fresh frozen) material to our manufacturing facilities in Mendota (Fresno County) California. Although the facilities at Mendota recently started operations³⁵, Cresco will continue to have its harvested product converted into cannabis-related products through certain third-party contractors. Though Cresco contemplates having its own annual distribution license by the end of this year, distribution into the southern California and northern California markets will be undertaken by certain third-party contractors. These contract distributors will deliver the Cresco cannabis-related products directly to retail dispensaries for sale to the public.

While the facility in Santa Barbara was initially limited to medical cannabis activities only by local ordinance, in October 2018, the County of Santa Barbara ratified its ordinance to allow for “commercial” cannabis, which includes both medical and recreational cannabis under California state law.

On January 8, 2020, the Company announced the closing of its acquisition of Origin House. See the “General

Development of the Business – Acquisitions and Dispositions – Origin House” section, above, for greater detail. Origin House operates as the leading California cannabis wholesale distribution and cultivation operator. The acquisition of Origin House makes Cresco a leading wholesale distributor in California, selling into over 575 dispensaries, representing approximately 65% of California’s storefront dispensaries. Origin House’s Continuum distribution platform distributes thirteen (13) third party brands, including Kings Garden. Origin House’s 92,000 square feet of ultra-premium indoor cultivation and production facilities is expected to allow Cresco to expand its offering of Cresco branded products across California rapidly; growing market share, generating brand equity, and driving shareholder value.

Licenses in the State of California

Pursuant to MAUCRSA, as set out herein, SLO will be applying for and/or has been granted licenses permitting it to cultivate, process, manufacture, distribute and retail medical (and in some instances, adult use) cannabis and cannabis-related products:

³³

Sources: Berke, Jeremy. (2017 December 8). The legal marijuana market is exploding – it’ll hit almost $10 billion sales this year. Retrieved from http://www.businessinsider.com/legal-weed-market-to-hit-10-billion-in-sales-report-says-2017-12; Morris, Chris. (2017 December 6). Legal Marijuana Sales Are Expected to Hit $10 Billion This Year. Retrieved from http://fortune.com/2017/12/06/legal-marijuana-sales-10-billion/; The Arcview Group. (2017 December 6). NEW REPORT: Legal Marijuana Sales to Grow 33% to $10 Billion in 2017. Retrieved from https://globenewswire.com/news-release/2017/12/06/1234230/0/en/NEW-REPORT-Legal-Marijuana-Sales-to-Grow-33-to-10-Billion-in-2017.html.

³⁴	McGreevy, Patrick. (2017 June 11). Legal marijuana could be a $5-billion boon to California’s economy. Retrieved from http://www.latimes.com/politics/la-pol-ca-pot-economic-study-20170611-story.html.

³⁵

These statements constitute forward-looking information related to possible events, conditions or financial performance based on future economic conditions and courses of action. These statements involve known and unknown risks, assumptions, uncertainties and other factors that may cause actual results or events to differ materially. Cresco believes there is a reasonable basis for the expectations reflected in the forward-looking statements, however these expectations may not prove to be correct.

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Mendota (Fresno County)

•

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

•

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

•

SLO submitted annual applications for the two listed license types to the state regulators, received provisional licenses and is awaiting approval of annual renewal applications.

Willow Road (SLO County)

•

SLO maintains good standing on this property and has the ability to pursue medical cannabis licenses; however, for strategic purposes SLO will not be submitting applications at this time.

Carpinteria (SB County)

•

SLO has been issued provisional licenses for Cultivation: Small Mixed-Light Tier 1. Additionally, SLO has been issued provisional licenses in:

•

Nursery, allowing for the planting and cultivation of medical cannabis from seeds, clones, and immature plants.

•

Processor Type, allowing for the harvesting, drying, curing, grading or tanning of cannabis as well as the packaging and labelling of certain non-manufactured cannabis.

•

SLO submitted annual applications for the three (3) listed license types to the state regulator, received provisional licenses and is awaiting approval annual renewals.

Cresco also maintains an active Cannabis Event Provisional License with the Bureau of Cannabis Control enabling the company to host events.

SLO:


Holding Entity	Permit/License	City	Description	Expiration/Renewal Date (if applicable) (MM/DD/YY)
SLO Cultivation Inc. (dba Cresco California)	Provisional Manufacturing Number: CDPH-10003334	Mendota	Medical and Adult Use Manufacturing	05/31/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: C11-0000193-LIC	Mendota	Medical and Adult Use Distribution	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002726	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002733	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

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Holding Entity	Permit/License	City	Description	Expiration/Renewal Date (if applicable) (MM/DD/YY)
SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002727	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002728	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002729	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002731	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002765	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002764	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002763	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002762	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002761	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002760	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002759	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002757	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

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Holding Entity	Permit/License	City	Description	Expiration/Renewal Date (if applicable) (MM/DD/YY)
SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002756	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002756	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002755	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002754	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002753	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002752	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002766	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional License Number: CCL18- 0002751	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional Nursery License Number: CCL18- 0002850	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional Processor License Number: CCL18- 0002849	Carpinteria	Cultivation Small Mixed Light, Tier 1	05/28/20

SLO Cultivation Inc. (dba Cresco California)	Provisional Processor License Number: CCL18- 0002816	Carpinteria	Nursery	05/31/20

SLO Cultivation Inc. (dba Cresco California)	Provisional Processor License Number: CCL18- 0002817	Carpinteria	Processor	05/28/20

-47-

Holding Entity

Permit/License

City

Description

Expiration/Renewal

Date (if applicable)

(MM/DD/YY)

SLO Cultivation, Inc.

Provisional Event Organizer License Number: CEO14- 0000044-LIC

Carpinteria

Event Organizer

07/01/20

Origin House:


Holding Entity	Permit/License	City	Description	Expiration/Renewal Date (if applicable) (MM/DD/YY)

FloraCal	Medium Indoor Cultivation (Provisional) CCL18-0002186	Santa Rosa	Cultivation: Medical Medium Indoor:	03/21/21

FloraCal	Processor (Provisional) CCL19-0000639	Santa Rosa	Processor	06/27/21

Cub City, LLC	Small Indoor Cultivation (Provisional) CCL18-0002062	Santa Rosa	Cultivation: Medical Small Indoor	03/21/21

Kaya Management, Inc.¹	Non-Volatile Manufacturing (Annual) CDPH-10003151	Oakland	Type 6 Manufacturing: Non Volatile Solvent Extraction	05/10/20

Zenco Manufacturing, Inc.	Non-Volatile Manufacturing (Annual) CDPH-10003744	Oakland	Type N Manufacturing: Infusion:	07/23/20

Alta Supply, Inc. d/b/a Continuum	Distribution (Provisional) C11-0000372-LIC	Oakland	Distribution	06/13/20

Vista Distribution, Inc.	Distribution (Provisional) C11-0000890-LIC	Oakland	Distribution	07/22/20

River Distributing Co., LLC d/b/a Continuum	Distribution (Provisional) C11-0000933-LIC	Sacramento	Distribution	07/22/20

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Holding Entity

Permit/License

City

Description

Expiration/Renewal
Date (if applicable)
(MM/DD/YY)

River Distributing Co., LLC d/b/a Continuum

Distribution (Provisional)

C11-0000608-LIC

La Habra

Distribution

07/01/20

California state and local licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by the corresponding regulatory agency. While renewals are annual, there is no limit to the number of renewals a licensee may obtain. Additionally, with respect of the renewal process for the licenses issued to SLO, the Cal Subsidiaries and Origin House, each state and local license is submitted for renewal in a timely manner as required by applicable law. Further, no California cannabis regulatory body has notified Cresco Labs, SLO, the Cal Subsidiaries or Origin House of any material adverse issues with license renewal requests. While Origin House, SLO’s and the Cal Subsidiaries’ compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that the licenses will be renewed in the future in a timely manner.

Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of the Company and could have a material adverse effect on its business, financial condition, results of operations or prospects.

California License and Regulations

A Medicinal Retailer licenses permits the sale of medicinal cannabis and cannabis products by a medicinal cannabis patient in California who possesses a physician’s recommendation. Only certified physicians may provide medicinal marijuana recommendations.

An Adult-Use Retailer license permits the sale of cannabis and cannabis products to any individual 21 years of age or older. It does not require the individual to possess a physician’s recommendation. Under the terms of such licenses, the holder is permitted to sell adult-use cannabis and cannabis products to any person, provided the local jurisdiction permits the sale of adult use cannabis and the person presents a valid government- issued photo identification.

The Medicinal Cultivation licenses that have been granted to SLO, Origin House and/or the Cal Subsidiaries permits commercial cannabis cultivation activity involving the planting, growing, harvesting, drying, curing, grading or trimming of cannabis. Such licenses further permit the production, labeling and packaging of a limited number of non-manufactured cannabis products (e.g., pre-rolled joints) and permit the licensee to sell cannabis to certain licensed entities (both Medical and Adult-Use licensees) within the State of California for resale or manufacturing purposes.

Adult-Use and Medicinal Distribution licenses permit cannabis related distribution activity, which means the procurement, sale, and transportation of cannabis and cannabis products between licensed entities. Distribution activity is permissible to and from certain Cresco owned and non-Cresco owned licensees.

Cresco maintains an open and collaborative relationship with the each of the four California regulatory agencies: the BCC, Manufactured Cannabis Safety Branch of the California Department of Public Heath, the CalCannabis Licensing Division of the California Department of Food and Agriculture and the California Department of Tax and Fee Administration, as well as the local jurisdiction’s cannabis regulatory agencies.

Cresco and Origin House submit timely annual renewals and are in the process of submitting renewals for all 27 applications in the normal course.

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In the State of California, only cannabis that is grown in the state can be sold in the state. Although California is not a vertically integrated system, the state also allows SLO and the Cal Subsidiaries to make wholesale purchase of cannabis from, or a distribution of cannabis and cannabis product to, another licensed entity within the state.

California Reporting Requirements

The State of California has selected Franwell Inc.’s METRC solution as the state’s T&T system used to track commercial cannabis activity and movement across the distribution chain (“seed-to-sale”). The METRC system is in the process of being implemented state-wide but has not yet been released. When operational, the system will allow for other third-party system integration via application programming interface (“API”). Cresco will utilize an electronic system independent of METRC that will integrate with METRC via API. T&T currently captures required data points for cultivation, distribution and retail as stipulated in the corresponding regulatory agencies’ regulations. Cresco will implement its own interim track-and-trace solution, leveraging its own internal controls and standard operating procedures, ensuring maximum compliance and transparency, until the statewide T&T solution is ready to be deployed.

California Storage and Security

To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, Cresco is required to do the following:

•

maintain a fully operational security alarm system;

•

contract for security guard services;

•

maintain a video surveillance system that records continuously 24 hours a day;

•

ensure that the facility’s outdoor premises have sufficient lighting;

•

not dispense from its premises outside of permissible hours of operation;

•

store cannabis and cannabis product only in areas per the premises diagram submitted to the State of California during the licensing process;

•

store all cannabis and cannabis products in a secured, locked room or a vault;

•

report to local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis; and

•

to ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a delivery manifest in any vehicle transporting cannabis and cannabis products. Only vehicles registered with the BCC, that meet BCC distribution requirements, are to be used to transport cannabis and cannabis products.

Nevada

Nevada Regulatory Landscape

Nevada is one of the most dynamic markets anticipated for the full development of the recreational market. By certain estimates, the recreational market in Nevada is projected to have a cumulative average growth rate of 25%.³⁶ With most of the state population and tourism located in Las Vegas, the opportunity in Las Vegas is strengthened by the

³⁶	Frontier Financial Group Inc. (2017). Change in Compensation: Working in Cannabis. Retrieved from https://newfrontierdata.com/marijuana-insights/change-in-compensation-working-in-cannabis/.

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fact that Las Vegas has a limited number of licenses and the city of Las Vegas has placed a priority for current license holders to be preferred in obtaining other non-operating retail licenses. The City of Las Vegas has historically seen nearly forty million tourists in a year, making it one of the most visited cities in the United States. Industry estimates put the overall cannabis market size in Las Vegas to be over $800 million per year.³⁷

Medical marijuana use was legalized in Nevada by a ballot initiative in 2000. In November 2016, voters in Nevada passed an adult use marijuana measure to allow for the sale of recreational marijuana in the state. The first dispensaries to sell adult use marijuana began sales in July 2017. The Nevada Department of Taxation (“DOT”) is the regulatory agency overseeing the medical and adult use cannabis programs. Similar to California, cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue.

Cresco Labs Nevada, LLC, a subsidiary of Cresco, acquired an approximately 1.2% equity ownership interest in Lighthouse Strategies, LLC (“Lighthouse”) via a Unit Purchase and Sales Agreement dated August 12, 2019. Nevada Business Services Group (“NBSG”) is a subsidiary of Lighthouse and is the sole owner of Paradise Wellness Center, LLC (“Paradise Wellness”) d/b/a Las Vegas Releaf and Silver State Wellness, LLC (“Silver State”), entities licensed to operate in the State of Nevada.

Nevada Licenses

NBSG is licensed to operate in the State of Nevada as a medical dispensary and retail dispensary. Silver State is licensed to operate in the State of Nevada as a cultivator. Under applicable laws, the licenses permit the applicable entities to cultivate, manufacture/process, package, sell or purchase pursuant to the terms of the license, which is issued by the DOT under the provisions of Nevada Revised Statutes section 453A. All Nevada Licenses are, as of the date hereof, active with the State of Nevada. All licenses are independently issued for each approved activity for use at Paradise Wellness and Silver State facilities and retail location in Nevada. Silver State is currently building a 36,000 sq/ft cultivation space.³⁸ Paradise Wellness currently operates an approximately 12,000 sq/ft processing center and dispensary called “Releaf” located one block from the Las Vegas strip, near the SLS hotel.

All marijuana establishments must register with DOT. If applications contain all required information and after vetting by officers, establishments are issued a medical marijuana establishment registration certificate. In a local governmental jurisdiction that issues business licenses, the issuance by DOT of a medical marijuana establishment registration certificate is considered provisional until the local government has issued a business license for operation and the establishment is in compliance with all applicable local governmental ordinances. Final 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 DOT and include a renewal form. The renewal periods serve as an update for DOT on the licensee’s status toward active licensure. It is important to note that provisional licenses do not permit the operation of any commercial or medical cannabis activity. Only after a provisional licensee has gone through necessary state and local inspections, if applicable, and has received a final registration certificate from DOT may an entity engage in cannabis business operation.

Nevada License and Regulations

In the State of Nevada, only cannabis that is grown or produced in the state by a licensed establishment may be sold in the state. Although Nevada is not a vertically integrated system, NBSG is vertically integrated and has the capabilities to cultivate, harvest, process and sell, dispense and/or deliver cannabis and cannabis products.

³⁷	Retrieved from https://newfrontierdata.com/cannabits/.

³⁸

These statements constitute forward-looking information related to possible events, conditions or financial performance based on future economic conditions and courses of action. These statements involve known and unknown risks, assumptions, uncertainties and other factors that may cause actual results or events to differ materially. Cresco believes there is a reasonable basis for the expectations reflected in the forward-looking statements, however these expectations may not prove to be correct.

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The retail dispensary license and registration certificate permit NBSG to purchase marijuana from cultivation facilities, marijuana and marijuana products from product manufacturing facilities and marijuana from other retail stores and allows the sale of marijuana and marijuana products to consumers.

The medical cultivation license permits NBSG to acquire, possess, cultivate, deliver, transfer, have tested, transport, supply or sell marijuana and related supplies to medical marijuana dispensaries, facilities for the production of edible medical marijuana products and/or medical marijuana-infused products, or other medical marijuana cultivation facilities.

The medical product manufacturing license permits NBSG to acquire, possess, manufacture, deliver, transfer, transport, supply, or sell edible marijuana products or marijuana infused products to other medical marijuana production facilities or medical marijuana dispensaries.

Nevada Reporting Requirements

The State of Nevada uses METRC as the state’s computerized T&T system used to track commercial cannabis activity and seed-to-sale. Individual licensees whether directly or through third-party integration systems are required to push data to the state to meet all reporting requirements. For the Nevada Licenses, Silver State will designate an in-house computerized seed to sale software that will integrate with METRC via API. The chosen seed-to-sale system captures the required data points for cultivation, manufacturing and retail as required in Nevada Revised Statutes section 453A. For the operating dispensary, Silver State currently uses BioTrackTHC’s seed-to-sale solution and anticipates full integration of processes through METRC.

Storage and Security

To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, Paradise Wellness and Silver State are required to do the following:

•

be an enclosed, locked facility;

•

have a single secure entrance;

•

train employees in security measures and controls, emergency response protocol, confidentiality requirements, safe handling of equipment, procedures for handling products, as well as the differences in strains, methods of consumption, methods of cultivation, methods of fertilization and methods for health monitoring;

•

install security equipment to deter and prevent unauthorized entrances, which includes:

•

devices that detect unauthorized intrusion which may include a signal system;

•

exterior lighting to facilitate surveillance;

•

electronic monitoring including, without limitation:

•

at least one call-up monitor that is 19 inches or more;

•

a video printer capable of immediately producing a clear still photo from any video camera image;

•

video cameras with a recording resolution of at least 704 x 480 which provide coverage of all entrances to and exits from limited access areas and all entrances to and exits from the building and which can identify any activity occurring in or adjacent to the building;

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•

a video camera at each point-of-sale location which allows for the identification of any person who holds a valid registry identification card, including, without limitation, a designated primary caregiver, purchasing medical marijuana;

•

a video camera in each grow room that can identify any activity occurring within the grow room in low light conditions;

•

a method for storing video recordings from the video cameras for at least 30 calendar days;

•

a failure notification system that provides an audible and visual notification of any failure in the electronic monitoring system;

•

sufficient battery backup for video cameras and recording equipment to support at least five (5) minutes of recording in the event of a power outage; and

•

a security alarm to alert local law enforcement of unauthorized breach of security; and

•

implement security procedures that:

•

restrict access of the establishment to only those persons/employees authorized to be there;

•

deter and prevent theft;

•

provide identification (badge) for those persons/employees authorized to be in the establishment;

•

prevent loitering;

•

require and explain electronic monitoring; and

•

require and explain the use of automatic or electronic notification to alert local law enforcement of an unauthorized breach of security.

Arizona

Arizona Regulatory Landscape

In 2010, Arizona passed Ballot Proposition 203, which amended Title 36 to the Arizona Revised Statutes (“ARS”). This amendment added Chapter 28.1, titled the Arizona Medical Marijuana Act (the “AMMA”). The AMMA also appointed the Arizona Department of Health Services (the “ADHS”) as the regulator for the program and authorized ADHS to promulgate, adopt and enforce regulations for the AMMA. The ADHS has established the Arizona Department of Health Services Medical Marijuana Program (“MMJ Program”), which includes a vertically integrated license, meaning if allocated a Medical Marijuana Dispensary Registration Certificate (“AZ Dispensary License”), entities are authorized to dispense and cultivate medical cannabis. Arizona’s medical marijuana market is one of the largest in the nation as well as one of the hottest. The amount of medical marijuana sold has more than doubled from 5,012 pounds in August 2016 to 10,826 pounds in August 2018, according to the ADHS. The patient count during that period has surged from 105,076 to 178,257.³⁹

The ADHS Regulations are embodied in the Arizona Administrative Code Title 9 Chapter 17 (the “Rules”). ARS § 36-2801(11) defines a ‘‘nonprofit medical cannabis dispensary’’ as a not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, sells or dispenses cannabis or related supplies and educational materials to cardholders.

³⁹	https://mjbizdaily.com/arizonas-sizzling-medical-marijuana-market-entices-investors-despite-legal-uncertainties/

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

The ADHS has established a registration application system for patients and nonprofit marijuana dispensaries, as well as a web-based verification platform for use by law enforcement officials and dispensaries to verify a patient’s status as such. The ADHS also specified patients’ rights, qualifying medical conditions, and allowed out-of-state medical marijuana patients to maintain their patient status (though not to purchase cannabis).

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

In order to qualify to use medical marijuana under the AMMA, a patient is required to have a “debilitating medical condition”. Valid medical conditions include: HIV, cancer, glaucoma, immune deficiency syndrome, hepatitis C, Chron’s disease, agitation of Alzheimer’s disease, ALS, cachexia/wasting syndrome, muscle spasms, nausea, seizures, severe and chronic pain or another chronic or debilitating condition.

Arizona Licensing Requirements

In order for an applicant to receive a Dispensary Registration Certificate (a “Certificate”) they must: (i) fill out an application on the form proscribed by ADHS, (ii) submit the applying entity’s articles of incorporation and by-laws, (iii) submit fingerprints for each principal officer or board member of the applicant for a background check to exclude felonies, (iv) submit a business plan and policies and procedures for inventory control, security, patient education, and patient recordkeeping that are consistent with the AMMA and the Rules to ensure that the dispensary will operate in compliance and (v) designate an Arizona licensed physician as the Medical Director for the dispensary. Certificates are renewed annually so long as the dispensary is in good standing with ADHS and pays the renewal fee and submits an independent third-party financial audit.

Once an applicant has been issued a Certificate, they are allowed to establish one physical retail dispensary location, one cultivation location which is co-located at the dispensary’s retail site (if allowed by local zoning) and one 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. This approval to operate requires: (i) an application on the ADHS form, (ii) demonstration of compliance with local zoning regulations, (iii) a site plan and floor plan for the applicable property, and (iv) an in-person inspection by ADHS of the proposed location to ensure compliance with the Rules and consistency with the dispensary’s applicable policies and procedures.

On or about November 16, 2018, Cresco acquired 100% of the membership interests of Arizona Facilities Supply, LLC (“AFS”). AFS provides management and advisory services to Encanto Green Cross Dispensary, a non-profit entity that holds a vertical license to cultivate, process and dispense medical marijuana in the State of Arizona and operates a medical marijuana dispensary in Phoenix, Arizona, and owns real property used for cultivation in Salome, Arizona.

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Arizona Licenses

Holding Entity

Permit/License

Registration Number

City

Expiration/Renewal
Date (if applicable)
(MM/DD/YY)

Description

Encanto Green Cross Dispensary

Medical
Marijuana
Dispensary and
Cultivation
Site
Registration
Certificate;
Approval to
Operate

00000080DCQI00709964

Phoenix

08/07/20

Approval to
cultivate and
dispense medical
marijuana

Encanto Green Cross Dispensary

Medical
Marijuana
Dispensary
Registration
Certificate;
Approval to
Operate

00000080DCQI00709964

Salome

08/07/20

Approval to
cultivate medical
marijuana

The Arizona license is renewed annually. Before the expiration date, licensees are required to submit a renewal application. While renewals are granted annually, there is no ultimate expiration date after which no renewals are permitted. Additionally, in respect of the renewal process, provided that the requisite renewal fees are paid, if the renewal application is submitted in a timely manner, and there are no material violations noted against the applicable license, Cresco would expect to receive the applicable renewed license in the ordinary course of business. While Cresco’s compliance controls have been developed to mitigate the risk of any material violations of a license, there is no assurance that the license will be renewed in the future in a timely manner.

Arizona Security Requirements for Dispensary Facilities

Any dispensary facility (both retail and cultivation) must abide by the following security requirements: (i) ensure that access to the facilities is limited to authorized agents of the dispensary who are in possession of a dispensary agent identification card; and (ii) equip the facility with: (a) intrusion alarms and surveillance equipment, (b) exterior and interior lighting to facilitate surveillance, (c) at least one 19-inch monitor for surveillance and a video capable of printing a high resolution still image, (d) high resolution video cameras at all points of sale, entrances, exits, and limited access areas, both in and around the building, (e) 30 days’ video storage, (f) failure notifications and battery backups for the security system and (g) panic buttons inside each building.

Arizona Storage Requirements

Any dispensary facility (both retail and cultivation) must abide by the following requirements for the storage of product: (i) product must be stored in an area that is separate from areas used to store toxic and flammable materials; (ii) product must be stored in a manner that is clean and sanitary; (iii) product must be protected from flies, dust, dirt, and any other contamination; and (iv) all surfaces and objects used in the handling and storage of product must be cleaned daily. Additionally, the Rules establish strict inventory protocols for tracking product from “seed to sale,” which requires all product to be traceable to the original plants used to grow the cannabis used in the product.

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Arizona Transportation Requirements

Dispensaries may transport medical cannabis between their own sites or between their sites and another dispensary’s site and must comply with the following Rules: (i) prior to transportation, the dispensary agent must complete a trip plan showing: (a) the name of the dispensary agent in charge of transporting the cannabis, (b) the date and start time of the trip, (c) a description of the cannabis, cannabis plants, or cannabis paraphernalia being transported; and (d) the anticipated route of transportation; (ii) during transport the dispensary agent shall: (a) carry a copy of the trip plan at all times, (b) use a vehicle with no medical cannabis identification, (c) carry a cell phone, and (d) ensure that no cannabis is visible; and (iii) dispensaries must maintain trip plan records.

ADHS Inspections and Enforcement

ADHS may inspect a facility at any time upon five (5) days’ notice to the dispensary. However, if someone has alleged that the dispensary is not in compliance with the AMMA or the Rules, ADHS may conduct an unannounced inspection. ADHS will provide written notice to the dispensary of any violations found during any inspection and the dispensary then has 20 working days to take corrective action and notify ADHS.

ADHS must revoke a Certificate if a dispensary: (i) operates before obtaining approval to operate a dispensary from the ADHS; (ii) dispenses, delivers, or otherwise transfers cannabis to an entity other than another dispensary with a valid dispensary registration certificate issued by the ADHS, a qualifying patient with a valid registry identification card, or a designated caregiver with a valid registry identification card; (iii) acquires usable cannabis or mature cannabis plants from any entity other than another dispensary with a valid dispensary registration certificate issued by the ADHS, a qualifying patient with a valid registry identification card, or a designated caregiver with a valid registry identification card; or (iv) if a principal officer or board member has been convicted of an excluded felony offense.

Furthermore, ADHS may revoke a Certificate if a dispensary does not: (i) comply with the requirements of the AMMA or the Rules, or (ii) implement the policies and procedures or comply with the statements provided to the ADHS with the dispensary’s application.

New York

New York is one of the most promising medical cannabis markets that opened in 2016. The state population numbers near twenty million and New York City is among the most populous and visited cities in the U.S.⁴⁰ The New York program, when initially implemented, allowed for only five fully vertically integrated licenses. The licenses allowed each license holder the opportunity to operate a cultivation facility, extraction and manufacturing, and four retail medical marijuana dispensaries. The state program was adjusted to increase the range of qualifying conditions which, as of the date hereof, includes chronic and severe pain. In August 2017, the State of New York also increased the number of licensed operators in the state to a total of ten. Each of the newly added licenses can carry out the same operations as the original license holders. The state has made progress towards the ability to increase the outreach to qualified patients through the ten licensed operators via the disbursement of retail locations across the state, the increase in range of qualifying conditions, and other various methods to support patient access. In July, the New York Department of Health filed emergency regulations to add any condition, for which an opioid could be prescribed, as a qualifying condition for medical marijuana. This legislation was signed into law on September 24, 2018. From July 10 to September 25, 2018 the number of certified patients in the system rose to 18%.⁴¹

⁴⁰

United States Census Bureau. (2017). QuickFacts United States. Retrieved from https://www.census.gov/quickfacts/NY; see also NYC and Company. NYC Travel & Tourism Visitation Statistics. Retrieved from http://www.nycandcompany.org/research/nyc-statistics-page; see also World Atlas. (2017 November 9). The Most Visited Cities In The US. Retrieved from https://www.worldatlas.com/articles/the-most-visited-cities-in-the-us.html.

⁴¹	https://mjbizdaily.com/new-york-formalizes-medical-cannabis-as-alternative-to-opioids-market-boost-seen/

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New York Regulatory Landscape

In July 2014, the New York Legislature and Governor enacted the Compassionate Care Act (A06357E, S07923) (the “CCA”) to provide a comprehensive, safe and effective medical marijuana program to meet the needs of New Yorkers. The program allows ten (10) “Registered Organizations” to hold vertically-integrated licenses and service qualified patients and caregivers. Limited product types are allowed in the state and smoking of cannabis flower is prohibited. The NYSDOH is the regulatory agency overseeing the medical marijuana program.

New York Licenses

Valley Ag is licensed to operate as a medical marijuana cultivator, manufacturer and retailer, as a “Registered Organization”, under applicable New York jurisdictional law. Valley Ag holds five licenses, one cultivation/manufacturing license and four dispensary licenses (collectively, the “NY Licenses”), under the CCA and Medical Use of Marihuana Regulations (Title 10, Chapter XIII, Part 1004) by the NYSDOH, permitting Valley Ag to possess, cultivate, process, transport, dispense and sell medical cannabis in the State of New York. Cresco will obtain the rights to the NY Licenses following closing of its acquisition of Valley Ag’s parent entity as described in “General Development of the Business” above.

While there are individual licenses issued for each site in New York, at present there are no material assets held by Valley Ag other than the NY Licenses. Following the acquisition of Valley Ag, the Company intends to develop and invest appropriate funding to develop Valley Ag into a vertically-integrated cannabis company whereby through the licenses to operate one cultivation/manufacturing facility in Middletown and four dispensaries geographically dispersed throughout the state per the CCA (in Brooklyn, Huntington, Bardonia and New Hartford), Valley Ag will become a vertically-integrated cannabis company. Please see the table below for a list of the licenses issued to Valley Ag in New York.

New York Licenses


Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description
Valley Agriceuticals, LLC	Certificate of Registration Number: MM0801M	Middletown	07/31/21	Acquiring, possession, manufacture, sale, transporting and distributing medical marijuana
	Certificate of Registration Number: MM0802D	Brooklyn	07/31/21	Acquiring, possession, sale, transporting, distributing, and dispensing medical marijuana
	Certificate of Registration Number: MM0803D	Huntington	07/31/21	Acquiring, possession, sale, transporting, distributing, and dispensing medical marijuana

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Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description
	Certificate of Registration Number: MM0804D	Bardonia	07/31/21	Acquiring, possession, sale, transporting, cutting, and dispensing medical marijuana

	Certificate of Registration Number: MM0805D	New Hartford	07/31/21	Acquiring, possession, sale, transporting, distributing, and dispensing medical marijuana

The state licenses in New York are renewed every two years. Before the two-year period ends, licensees are required to submit a renewal application per guidelines published by the NYSDOH. While renewals are granted every two years, there is no ultimate expiration date 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, Valley Ag would expect to receive the applicable renewed license in the ordinary course of business. While Valley Ag’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Valley Ag’s 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 Valley Ag and have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

New York Regulations

The NY Licenses permit the sale of medical cannabis products to any qualified patient who possesses a physician’s recommendation. Under the terms of the NY Licenses, Valley Ag is permitted to sell NYSDOH approved medical marijuana manufactured products to any qualified patient, provided that the patient presents a valid government-issued photo identification and NYSDOH-issued registry identification card proving that the patient or designated caregiver meets the statutory conditions to be a qualified patient or designated caregiver. Registry identification cards are valid for one year after the date the certification is signed. The card contains the recommendation from the physician and the limitation on form or dosage of medical marijuana.

For a physician to recommend medical marijuana, the physician must pay for and pass a NYSDOH approved physician certification training program which lasts for four hours. The content of the course includes: “pharmacology of marijuana; contraindications; side effects; adverse reactions; overdose prevention; drug interactions; dosing; routes of administration; risks and benefits; warnings and precautions; abuse and dependence; and such other components as determined by the commissioner.”

In order for a patient or registered caregiver to receive dispensed marijuana, they must be logged into the Prescription Monitoring Program (“PMP”) registry. The PMP registry is monitored by the NYSDOH and contains controlled substance prescription dispensing history and medical marijuana dispensing history to ensure that patients only receive a maximum of 30 days’ worth of dispensed product from one Registered Organization. Only registered pharmacists can dispense medical marijuana to approved patients and caregivers.

Allowable forms of medical marijuana in New York State are the following: metered liquid or oil preparations, solid and semisolid preparations (e.g. capsules, chewable and effervescent tablets, lozenges), metered ground plant preparations, topical forms and transdermal patches.

Medical marijuana may not be incorporated into food products by the Registered Organization, unless approved by the Commissioner of Health. Smoking is not an approved route of administration.

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Qualifying conditions in the State of New York are the following: cancer, HIV infection or AIDS, ALS, Parkinson’s disease, multiple sclerosis, spinal cord injury with spasticity, epilepsy, inflammatory bowel disease, neuropathy, Huntington’s disease, PTSD or chronic pain. The severe debilitating or life-threatening condition must also be accompanied by one or more of the following associated or complicating conditions: cachexia or wasting syndrome, severe or chronic pain, severe nausea, seizures, or severe or persistent muscle spasms.

In the State of New York, only cannabis that is grown and manufactured in the state can be sold in the State. New York is a vertically integrated system however it does allow Registered Organizations to wholesale manufactured products to one another. As such, Valley Ag has the ability to be vertically integrated and cultivate, harvest, process, transport, sell and dispense cannabis products. Delivery is allowed from dispensaries to patients, however, the delivery plan must be pre-approved by the NYSDOH. As of the date hereof, Valley Ag has not submitted a delivery plan to the NYSDOH.

New York Reporting Requirements

The State of New York has selected BioTrackTHC’s solution as the state’s T&T system used to track commercial cannabis activity and seed-to-sale. The BioTrackTHC system is required to serve as all Registered Organizations’ patient verification system but is optional as the Registered Organizations’ facing tracking system. Valley Ag currently uses BioTrackTHC as its seed-to-sale tracking system but is also exploring more robust options for the future that more seamlessly integrate with its tracking systems used in other states.

Every month the NYSDOH requests a dispensing report in Excel format, via email, showing all products dispensed for the month. This is the only report Valley Ag is required to submit to the NYSDOH. All other data is pulled by the NYSDOH directly from Valley Ag’s seed-to-sale tracking system.

Storage and Security

To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, Valley Ag is required to:

•

Maintain a security operations plan that includes the following at a minimum:

•

a perimeter alarm;

•

motion detectors;

•

video cameras in all areas that may contain marijuana and at all points of entry and exit, which shall be appropriate for the normal lighting conditions of the area under surveillance. The manufacturing facility or dispensing facility shall direct cameras at all approved safes, approved vaults, dispensing areas, marijuana sales areas and any other area where marijuana is being manufactured, stored, handled, dispensed or disposed of. At entry and exit points, the manufacturing facility or dispensing facility shall angle cameras so as to allow for the capture of clear and certain identification of any person entering or exiting the facility;

•

24 hour recordings from all video cameras, which the manufacturing facility or dispensing facility shall make available for immediate viewing by the department or the department’s authorized representative upon request and shall be retained for at least 90 days. The registered organization shall provide the department with an unaltered copy of such recording upon request. If a registered organization is aware of a pending criminal, civil or administrative investigation or legal proceeding for which a recording may contain relevant information, the registered organization shall retain an unaltered copy of the recording until the investigation or proceeding is closed or the entity conducting the investigation or proceeding notifies the registered organization that it is not necessary to retain the recording;

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•

a duress alarm, which for purposes of this section means a silent security alarm system signal generated by the entry of a designated code into an arming station in order to signal that the alarm user is being forced to turn off the system;

•

a panic alarm, which for purposes of this section means an audible security alarm system signal generated by the manual activation of a device intended to signal a life threatening or emergency situation requiring a law enforcement response;

•

a holdup alarm, which for purposes of this section means a silent alarm signal generated by the manual activation of a device intended to signal a robbery in progress;

•

an automatic voice dialer or digital dialer, which for purposes of this section means any electrical, electronic, mechanical, or other device capable of being programmed to send a prerecorded voice message, when activated, over a telephone line, radio or other communication system, to a law enforcement, public safety or emergency services agency requesting dispatch, or other department-approved industry standard equivalent;

•

a failure notification system that provides an audible, text or visual notification of any failure in the surveillance system. The failure notification system shall provide an alert to the manufacturing facility or dispensing facility within five minutes of the failure, either by telephone, email, or text message;

•

the ability to immediately produce a clear color still photo that is a minimum of 9600 dpi from any camera image (live or recorded);

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a date and time stamp embedded on all recordings. The date and time shall be synchronized and set correctly and shall not significantly obscure the picture; and

•

the ability to remain operational during a power outage.

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As a registered organization, ensure that any manufacturing facility and dispensing facility maintains all security system equipment and recordings in a secure location so as to prevent theft, loss, destruction or alterations;

•

In addition to the requirements listed in of the first bullet above, ensure that each manufacturing facility and dispensing facility shall have a back-up alarm system approved by the department that shall detect unauthorized entry during times when no employees are present at the facility and that it shall be provided by a company supplying commercial grade equipment;

•

As a registered organization, limit access to any surveillance areas solely to persons that are essential to surveillance operations, law enforcement agencies, security system service employees, the department or the department’s authorized representative, and others when approved by the department. A registered organization shall make available to the department or the department’s authorized representative, upon request, a current list of authorized employees and service employees who have access to any surveillance room. A manufacturing facility and dispensing facility shall keep all on-site surveillance rooms locked and shall not use such rooms for any other function;

•

As a registered organization, keep illuminated the outside perimeter of any manufacturing facility and dispensing facility that is operated under the registered organization’s license;

•

Ensure that all video recordings shall allow for the exporting of still images in an industry-standard image format (including .jpeg, .bmp, and .gif). Exported video shall have the ability to be archived in a proprietary format that ensures authentication of the video and guarantees that no alteration of the recorded image has taken place. Exported video shall also have the ability to be saved in an industry-standard file format that can be played on a standard computer operating system. A registered organization shall erase all recordings prior to disposal or sale of the facility;

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•

As a registered organization, keep all security equipment in full operating order and test such equipment no less than semi-annually at each manufacturing facility and dispensing facility that is operated under the registered organization’s registration. Records of security tests must be maintained for five years and made available to the department upon request;

•

With respect to the manufacturing facility of the registered organization, it must be securely locked and protected from unauthorized entry at all times. In this regard:

•

The registered organization shall be responsible for ensuring the integrity of the security of the manufacturing facility and the maintenance of sanitary operations when permitting access to the facility; and

•

The manufacturing facility shall maintain a visitor log of all persons other than registered organization’s employees or emergency personnel responding to an emergency that access any secured areas, which shall include the name of the visitor, date, time and purpose of the visit. The visitor log shall be available to the department at all times during operating hours and upon request.

•

Ensure that all marijuana is stored in a secure area or location within the registered organization accessible to the minimum number of employees essential for efficient operation and in such a manner as approved by the department in advance, to prevent diversion, theft or loss;

•

Return marijuana to its secure location immediately after completion of manufacture, distribution, transfer or analysis;

•

Ensure that all medical marijuana is stored in such a manner as to protect against physical, chemical and microbial contamination and deterioration of the product;

•

Ensure that all approved safes, vaults and any other approved equipment or areas used for the manufacturing or storage of marijuana and approved medical marijuana products are securely locked or protected from entry, except for the actual time required to remove or replace marijuana or approved medical marijuana products;

•

Ensure that keys are not left in the locks or stored or placed in a location accessible to individuals who are not authorized access to marijuana or manufactured medical marijuana products;

•

Ensure that all security measures, such as combination numbers, passwords or biometric security systems, are not accessible to individuals other than those specifically authorized to access marijuana or manufactured medical marijuana products;

•

Prior to transporting any medical marijuana, a registered organization shall complete a shipping manifest using a form determined by the department;

•

A copy of the shipping manifest must be transmitted to the destination that will receive the products and to the department at least two business days prior to transport unless otherwise expressly approved by the department. In this regard:

•

The registered organization shall maintain all shipping manifests and make them available to the department for inspection upon request, for a period of 5 years; and

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•

Approved medical marijuana products must be transported in a locked storage compartment that is part of the vehicle transporting the marijuana and in a storage compartment that is not visible from outside the vehicle.

•

Ensure that its employees, when transporting approved medical marijuana products, travel directly to his or her destination(s) and shall not make any unnecessary stops in between;

•

As a registered organization, ensure that all approved medical marijuana product delivery times are randomized;

•

As a registered organization, staff all transport vehicles with a minimum of two employees. At least one transport team member shall remain with the vehicle at all times that the vehicle contains approved medical marijuana products;

•

Ensure that its transport team member shall have access to a secure form of communication with employees at the registered organization’s manufacturing facility at all times that the vehicle contains approved medical marijuana products;

•

Ensure its transport team member possesses a copy of the shipping manifest at all times when transporting or delivering approved medical marijuana products and produces it to the commissioner, the commissioner’s authorized representative or law enforcement official upon request.

Massachusetts

In November 2015, Massachusetts, a medical cannabis market since January 2013, voted in favor of “Question 4”, approving the legalization of adult use. Research firm Arcview Market Research projects that the Massachusetts market will grow to over $1 billion by 2020 at a compound annual growth rate of 113%. The Question 4 ballot initiative requiring the state legislature to authorize the adult use of cannabis in the state was approved by the Massachusetts electorate in November 2016. The first adult use dispensaries opened their doors on July 1, 2018. Located in the very populous North-Eastern region of the U.S., tourism is anticipated to be an important factor in driving market growth in a state that itself has a growing population of 6.8 million. The adjoining states represent an additional “tourist” market of 26 million, vastly exceeding the very successful industry in Colorado. The new legislation allows local control policy, allowing local government officials in towns that voted “no” on the 2016 ballot initiative to ban marijuana businesses until December 2019. For towns that voted “yes” in 2016, any bans must be placed on a local ballot for voters to approve. The maximum sales tax rate will increase from 12% to 20%. Under the bill, the state tax will be 17% and the local option will be 3%.

The Medical Use of Marijuana Program (the “MUMP”) registers qualifying patients, personal caregivers, Registered Marijuana Dispensaries (“RMD”), and RMD agents. The MUMP was established by Chapter 369 of the Acts of 2012, ‘‘An Act for the Humanitarian Medical Use of Marijuana,’’ following the passage of Ballot Question 3 in the 2012 general election. Registered Marijuana Dispensary certifications are vertically integrated licenses in that each RMD license entitles a license holder to (3) cultivation facilities, three (3) processing facilities and up to three (3) dispensary locations. There is a limit of three RMD licenses per person/entity.

Massachusetts Regulatory Framework

The Massachusetts Department regulations 105 CMR 725.000 et seq. provide a regulatory framework that requires licensed producers, which are statutorily defined as ‘‘Registered Marijuana Dispensaries’’, to cultivate, process, transport and dispense medical cannabis in a vertically integrated marketplace. Patients with debilitating medical conditions qualify to participate in the program, including conditions such as cancer, glaucoma, positive status for human immunodeficiency virus (HIV), acquired immune deficiency virus (AIDS), hepatitis C, ALS, Crohn’s disease, Parkinson’s disease, and multiple sclerosis (MS) when such diseases are debilitating, and other debilitating conditions as determined in writing by a qualifying patient’s healthcare provider.

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Massachusetts Licensing Requirements

On December 23, 2018, administration and oversight of the Massachusetts Medical Use of Marijuana Program was transferred from the Department of Public Health (DPH) to the Cannabis Control Commission (CCC) which also oversees the adult-use cannabis program. Licensed entities must demonstrate the following: (i) they are licensed and in good standing with the Secretary of the Commonwealth of Massachusetts; (ii) no executive, member or any entity owned or controlled by such executive or member directly or indirectly controls more than three RMD licenses; (iii) vaporizers must be made available for sale; (iv) a RMD may not cultivate and dispense medical cannabis from more than two locations statewide; (v) all dispensary agents must be registered with the Massachusetts Department; (vi) a RMD must have a program to provide reduced cost or free marijuana to patients with documented verifiable financial hardships; (vii) one executive of a RMD must register with the Massachusetts Department of Criminal Justice Information Services on behalf of the entity as an organization user of the Criminal Offender Record Information (iCORI) system; (viii) the RMD applicant has at least US$500,000 in its control as evidenced by bank statements, lines of credit or equivalent; and (ix) payment of the required application fee. In a RMD application, an applicant must also demonstrate or include: (i) the name, address date of birth and resumes of each executive of the applicant and of the members of the entity; (ii) proof of liability insurance coverage in compliance with statutes; (iii) a detailed summary of the business plan for the RMD; (iv) an operational plan for the cultivation of marijuana including a detailed summary of all policies and procedures; and (v) a detailed summary of the operating policies and procedures for the operations of the RMD including security, prevention of diversion, storage of marijuana, transportation of marijuana, inventory procedures, procedures for quality control and testing of product for potential contaminants, procedures for maintaining confidentiality as required by law, personnel policies, dispensing procedures, record keeping procedures, plans for patient education and any plans for patient or personal caregiver home delivery. A RMD applicant must also demonstrate that it has (i) a successful track record of running a business; (ii) a history of providing healthcare services or services providing marijuana for medical purposes in or outside of Massachusetts; (iii) proof of compliance with the laws of the Commonwealth of Massachusetts; (iv) complied with all laws and orders of the Commonwealth of Massachusetts; and (v) a satisfactory criminal and civil background. Upon the determination by the Massachusetts Department that a RMD applicant has responded to the application requirements in a satisfactory fashion, the RMD applicant is required to pay the applicable registration fee and shall be issued a provisional certificate of registration. Thereafter, the Massachusetts Department shall review architectural plans for the building of the RMD’s cultivation facility and/or dispensing facilities, and shall either approve, modify or deny the same. Once approved, the RMD provisional license holder shall construct its facilities in conformance with the requirements of the Massachusetts Regulations. Once the Massachusetts Department completes all inspections and issues approval for a RMD of its facilities, the Massachusetts Department shall issue a final certificate of registration to the RMD applicant. RMD final certificates of registration are valid for one year and shall be renewed by filing the required renewal application no later than sixty days prior to the expiration of the certificate of registration.

Massachusetts Licenses

As described in the “General Development of the Business – Acquisitions and Dispositions – Hope Heal Health” above, Cresco recently acquired HHH. HHH holds a final certificate of registration from the Massachusetts Department that will allow for cultivation, manufacturing and processing and the establishment and operation of a medical cannabis dispensary in Fall River, Massachusetts once a final certificate of registration is granted, and has the ability to apply for up to two additional such licenses. HHH has entered into host community agreements with the municipalities of Rockland, North Attleborough, and Fall River to allow for the siting of a medical cannabis dispensary, subject to site approval, and is in the process of applying for adult-use licenses from the Massachusetts Cannabis Control Commission.

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Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description
Hope Heal Health, Inc.	Final Medical Marijuana	Fall River	11/20/20	Cultivation, manufacturing and processing and it
	Treatment Center License			establishes and allows for dispensary operations

Hope Heal Health, Inc.	MC281478	Fall River	06/18/20	Marijuana Cultivator -Tier 4

Hope Heal Health, Inc.	MC281361	Fall River	06/18/20	Marijuana Product Manufacturer

Hope Heal Health, Inc.	MC281337	Fall River	06/18/20	Marijuana Retailer

Before the expiration date, licensees are required to submit a renewal application. While renewals are granted annually, there is no ultimate expiration date 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 would expect to receive the applicable renewed license in the ordinary course of business. While Cresco’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that licenses will be renewed in the future in a timely manner.

Massachusetts Dispensary Requirements

A RMD shall follow its written and approved operation procedures in the operation of its dispensary locations. Operating procedures shall include (i) security measures in compliance with the Massachusetts Regulations; (ii) employee security policies including personal safety and crime prevention techniques; (iii) hours of operation and after-hours contact information; (iv) a price list for marijuana; (v) storage protocols in compliance with state law; (vi) a description of the various strains of marijuana that will be cultivated and dispensed, and the forms that will be dispensed; (vii) procedures to ensure accurate recordkeeping including inventory protocols; (viii) plans for quality control; (ix) a staffing plan and staffing records; (x) diversion identification and reporting protocols; and (xi) policies and procedures for the handling of cash on RMD premises including storage, collection frequency and transport to financial institutions. The siting of dispensary locations is expressly subject to local/municipal approvals pursuant to state law, and municipalities control the permitting application process that a RMD must comply with. More specifically, a RMD shall comply with all local requirements regarding siting, provided, however, that if no local requirements exist, a RMD shall not be sited within a radius of five hundred feet of a school, daycare center, or any facility in which children commonly congregate. The 500-foot distance under this section is measured in a straight line from the nearest point of the facility in question to the nearest point of the proposed RMD. There is no specified numeric maximum amount that a RMD may have on its premises. The Massachusetts Regulations require that RMDs must limit their inventory of seeds, plants, and useable marijuana to reflect the projected needs of registered qualifying patients. A RMD shall only dispense to a registered qualifying patient who has a current valid certification.

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Massachusetts Security Requirements

A RMD shall implement sufficient security measures to deter and prevent unauthorized entrance into areas containing marijuana and theft of marijuana at the RMD. These measures must include: (i) allowing only registered qualifying patients, caregivers, dispensary agents, authorized persons, or approved outside contractors access to the RMD facility; (ii) preventing individuals from remaining on the premises of a RMD if they are not engaging in activities that are permitted; (iii) disposing of marijuana or byproducts in compliance with law; (iv) establishing limited access areas accessible only to authorized personnel; (v) storing all finished marijuana in a secure locked safe or vault; (vi) keeping all equipment, safes, vaults or secured areas securely locked at all times; (vii) ensuring that the outside perimeter of the RMD is sufficiently lit to facilitate surveillance; and (viii) ensuring that all landscaping or foliage outside of the RMD does not allow a person to conceal themselves. A RMD shall also utilize a security/alarm system that: (i) monitors all entry and exit points and windows and doors; (ii) includes a panic/duress alarm; (iii) includes system failure notifications; (iv) includes 24 hour video surveillance of all safes, vaults, sales areas, areas where marijuana is cultivated, processed or dispensed; and (v) includes date and time stamping of all records and the ability to produce a clear, color still photo. The video surveillance system shall have the capacity to remain operational during a power outage. The RMD shall also maintain a backup alarm system with all of the capabilities of the primary system, and both systems shall be in good working order at all times and shall be inspected and tested on regular intervals.

Massachusetts Transportation

Marijuana or marijuana-infused products (“MIPs”) may only be transported by dispensary agents on behalf of a RMD: (i) between separately-owned RMDs in compliance with 725.105(B)(2) of the Massachusetts Regulations; (ii) between RMD sites owned by the same non-profit entity; (iii) between a RMD and a testing laboratory; (iv) from the RMD to the destruction or disposal site; or (v) from a RMD to the primary residences of registered qualifying patients. A RMD shall staff all transport vehicles with a minimum of two dispensary agents. At least one dispensary agent shall remain with the vehicle at all times that the vehicle contains marijuana or MIPs. Prior to leaving the origination location, a RMD must weigh, inventory, and account for, on video, all marijuana to be transported.

Marijuana must be packaged in sealed, labeled, and tamper-proof packaging prior to and during transportation. In the case of an emergency stop, a log must be maintained describing the reason for the stop, the duration, the location, and any activities of personnel exiting the vehicle. A RMD shall ensure that all delivery times and routes are randomized. Each dispensary agent shall carry his or her Massachusetts department-issued MUMP ID card at all times when transporting marijuana or MIPs and shall produce it to Massachusetts Department representatives or law enforcement officials upon request. Where videotaping is required when weighing, inventorying, and accounting of marijuana before transportation or after receipt, the video must show each product being weighed, the weight, and the manifest. A RMD must document and report any unusual discrepancy in weight or inventory to the Massachusetts Department and local law enforcement within 24 hours. A RMD shall report to the Massachusetts Department and local law enforcement any vehicle accidents, diversions, losses, or other reportable incidents that occur during transport, within 24 hours. A RMD shall retain all transportation manifests for no less than one year and make them available to the Massachusetts Department upon request. Any cash received from a qualifying patient or personal caregiver must be transported to a RMD immediately upon completion of the scheduled deliveries. Vehicles used in transportation must be owned, leased or rented by the RMD, be properly registered, and contain a GPS system that is monitored by the RMD during transport of marijuana and said vehicle must be inspected and approved by the Massachusetts Department prior to use.

During transit, a RMD shall ensure that: (i) marijuana or MIPs are transported in a secure, locked storage compartment that is part of the vehicle transporting the marijuana or MIPs; (ii) the storage compartment cannot be easily removed (for example, bolts, fittings, straps or other types of fasteners may not be easily accessible and not capable of being manipulated with commonly available tools); (iii) marijuana or MIPs are not visible from outside the vehicle; and (iv) all product is transported in a vehicle that bears no markings indicating that the vehicle is being used to transport marijuana or MIPs and does not indicate the name of the RMD. Each dispensary agent transporting marijuana or MIPs shall have access to a secure form of communication with personnel at the origination location at all times that the vehicle contains marijuana or MIPs.

Massachusetts Department Inspections

The Massachusetts Department or its agents may inspect a RMD and affiliated vehicles at any time without prior notice. A RMD shall immediately upon request make available to the Massachusetts Department all information that may be relevant to a Massachusetts Department inspection, and the Massachusetts Department may direct a RMD to

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test marijuana for contaminants. Any violations found will be noted in a deficiency statement that will be provided to the RMD, and the RMD shall thereafter submit a Plan of Correction to the Massachusetts Department outlining with particularity each deficiency and the timetable and steps to remediate the same. The Massachusetts Department shall have the authority to suspend or revoke a certificate of registration in accordance with 105 CMR 725.405 of the Regulation of adult-use cannabis in Massachusetts. Adult-use cannabis ‘’Marijuana Establishments’’ are regulated in Massachusetts by the Cannabis Control Commission pursuant to 935 CMR 500.000 et seq. Pursuant to section 500.101(2), RMDs that have received a provisional or final certificate of registration are authorized to apply for a vertically-integrated Marijuana Establishment license on a priority basis over new applicants without a RMD certification. The same application requirements exist for a Marijuana Establishment license as a RMD application, and each owner, officer or member must undergo background checks and fingerprinting with the Cannabis Control Commission. Applicants must submit the location and identification of each site, and must establish a property interest in the same, and the applicant and the local municipality must have entered into a host agreement authorizing the location of the adult-use Marijuana Establishment within the municipality, and said agreement must be included in the application. Applicants must include disclosure of any and all regulatory actions against it by the Commonwealth of Massachusetts, as well as the civil and criminal history of the applicant and all owners, officers, principals or members. The application must include the RMD applicant’s plans for separating medical and adult-use operations, proposed timeline for achieving operations, liability insurance, business plan, and a detailed summary describing and/or updating or modifying the RMD’s existing medical marijuana operating policies and procedures for adult-use including security, prevention of diversion, storage, transportation, inventory procedures, quality control, dispensing procedures, personnel policies, record keeping, maintenance of financial records and employee training protocols.

The adult-use license application process commenced on April 1, 2018 for existing RMD license holders and will commence for all non-RMD license holders on July 1, 2018. Existing RMD license holders that timely applied for an adult-use license on or before April 1, 2018 are eligible to receive three adult-use licenses per medical RMD license. Namely, one integrated RMD medical license is eligible, if awarded by the Cannabis Control Commission, to receive three adult-use licenses as follows: one for cultivation, one for processing and one for dispensary. Additionally, there is a 100,000 square foot cultivation canopy for adult-use licenses; however, there is no canopy restriction for RMD license holders relative to their cultivation facility.

Maryland

Maryland adopted a comprehensive law legalizing medical cannabis in 2014. The Maryland program will result in a large medical marijuana market as a result of an expansive list of qualifying conditions, less restrictive provisions for obtaining cannabis certifications from doctors, and patient freedom to choose preferred methods of ingestions. The Maryland Medical Cannabis Commission began to sell through dispensaries on December 1, 2017. 14 growers, 12 processors and nine dispensaries have been licensed by the Maryland Medical Cannabis Commission, and on the day sales began, approximately 15,000 people had signed up to be prospective patients. Almost 550 healthcare providers have registered with Maryland to recommend cannabis to their patients. Maryland has a population of over 6 million people.

The Maryland Medical Cannabis Commission (the “MMCC”) grants medical cannabis grower, processor, dispensary and transportation licenses. A licensee may hold a license in each category to obtain vertical integration. The applicant must first seek pre-approval from the MMCC in order to be granted a license. As part of the pre-approval application, the applicant must submit information related to its operations; safety and security; medical cannabis professionalism; retail management factors; business and economic factors; and other additional factors that may apply.

Maryland Licensing Requirements

In order to become a licensed medical cannabis dispensary, each applicant must submit an application detailing the location of the proposed dispensary, the personal details of each principal officer or director, and operating procedures the dispensary will use. All owners, members, shareholders, officers, and directors of dispensary holding a 5% or greater interest in the company must undergo a criminal and financial background checks. All employee, volunteers and personnel who will be working in the dispensary with access to the non-public areas are required to undergo background checks and register as a dispensary agent with the MMCC.

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Maryland Licenses

Cresco has entered into a financing and consulting arrangement with AFS Maryland LLC, a former affiliate of AFS

(“AFS Maryland”). AFS Maryland holds a processing license for medical cannabis issued by the Maryland Medical Cannabis Commission. Under the arrangement, Cresco will provide funding and consulting services to support the development and operations of AFS Maryland and will receive interest and fee payments and the right to take assignment of the membership interests of AFS Maryland in lieu of receiving such payments as and when permitted by applicable law.


Holding Entity	Permit/License	City	Expiration/Renewal Date (if applicable) (MM/DD/YY)	Description
AFS Maryland	P-17-00010	Snow Hill	01/03/23	Business license for an establishment

Maryland Reporting Requirements

Once licensed, the medical cannabis dispensary is required to submit to the MMCC quarterly reports including the following information: (i) the number of patients served; (ii) the county of residence of each patient served; (iii) the medical condition for which medical cannabis was recommended; (iv) the type and amount of medical cannabis dispensed; and (v) if available, a summary of clinical outcomes, including adverse events and any cases of suspected diversion. The medical cannabis dispensary must not include any patient personal information in the quarterly report.

Maryland Inspections

Licensees must be inspected by the MMCC prior to receiving approval from the MMCC to be authorized to begin cultivation, processing, and dispensing. Licensees are eligible to apply to renew their license every two years during which time a full inspection of the facility is performed. Spot-inspections may be performed at the dispensary at any time and without advance notice.

Maryland Safety and Security Requirements

As part of the medical cannabis dispensary application, the applicant must provide information about the dispensary’s operating procedures consistent with the oversight regulations established by the MMCC, including the following: (i) storage of cannabis and products containing cannabis only in enclosed and locked facilities; (ii) security features and procedures; (iii) how the dispensary will prevent diversion; and (iv) safety procedures. As part of the safety and security requirements, the applicant must detail how the premises will be constructed to prevent unauthorized entry, including a designation of a secured room that meets high-security requirements. The applicant must describe how it would train all registered dispensary agents on safety procedures, including responding to: (i) a medical emergency; (ii) a fire; (iii) a chemical spill; and (iv) a threatening event including: (a) an armed robbery, (b) an invasion, (c) a burglary, or (d) any other criminal incident.

The applicant must describe its security and surveillance plan with information including the following: (i) an alarm system that covers all perimeter entry points, windows, and portals at the premises that: (a) will be continuously monitored; (b) detects smoke and fire capabilities; (c) detects power loss capabilities; (d) includes panic alarm devices mounted at convenient, readily-accessible locations through the licensed premises; (e) inclusion of a second, independent alarm system to protect where records are stored on-and off-site and where any secure room holds medical cannabis; (f) equipped with auxiliary power to continue operation for at least 48 hours; (ii) a video surveillance that: (a) records continuously for 24 hours per day for 365 days a year without interruption, (b) has cameras in fixed places

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that allow for the clear facial identification and of activities in the controlled areas of the premises, including where medical cannabis is packaged, tested, processed, stored, or dispensed, (c) has the capability of recording clear images and displays the time and date of the recording, and (d) demonstrates a plan for retention of recordings for at least 30 days.

Following licensure, no major renovation or modification may be undertaken without notification to the MMCC. Other than while the dispensary is open for business and one hour before and one hour after, the medical cannabis inventory must be stored in the secure room.

Maryland Operating Requirements

As part of the dispensary application, the applicant must provide information about the dispensary’s operations, including the following: (i) communication systems; (ii) facility odor mitigation; and (iii) back-up systems for all cultivation and processing systems. The applicant must establish a standard operating procedure of all aspects of the receipt, storage, packaging, labelling, handling, tracking, and dispensing of products containing medical cannabis and medical cannabis waste.

In addition, the applicant must provide information about the dispensary’s medical cannabis professionalism, including the following information: (i) experience, knowledge, and training in training dispensary agents in the science and use of medical cannabis; and (ii) use of a clinical director (optional).

The applicant must also provide information about the dispensary’s retail management operations, including the following: (i) a detailed plan to preserve the quality of the medical cannabis; (ii) a plan to minimize any negative impact on the surrounding community and businesses; (iii) a detailed inventory control plan; and (iv) a detailed medical cannabis waste disposal plan.

The business and economic factors of the dispensary business must also detail the following information: (i) a business plan demonstrating a likelihood of success, demonstrating sufficient business ability and experience on the part of the applicant, and providing for appropriate employee working conditions, benefits, and training; (ii) demonstration of adequate capitalization; and (iii) a detailed plan evidencing how the dispensary will enforce the alcohol and drug free workplace policy.

Additional information the applicant must also provide includes the following: (i) demonstration of Maryland residency among the owners and investors; (ii) evidence that the applicant is not in arrears regarding any tax obligation in Maryland or other jurisdictions; and (iii) the medical cannabis extracts and medical cannabis-infused products proposed to be dispensed with proposed cannabinoid profiles, including varieties with high cannabidiol content, and the varieties of routes of administration.

Maryland Record Keeping and Inventory Tracking

Maryland requires use of a seed-to-sale tracking system operated by METRC. Licensees must create and use a perpetual inventory control system that identifies and tracks the stock of medical cannabis from the time it is delivered or produced to the time it is delivered to a patient or qualified caregiver. The applicant must describe how it will assure the integrity of the electronic manifest and inventory control system and that a cannabis transportation agent will continue the chain of custody to a dispensary agent.

The applicant must retain attendance records and ensure dispensary agents are trained on the record retention and standard operating procedure. MMCC regulators have the authority to audit the records of licensees to ensure they comport with the reporting in METRC.

Maryland Transportation

Only licensed medical cannabis growers, processors and authorized secure transportation companies may transport business-to-business packages containing medical cannabis. Dispensaries are not authorized to pick up medical cannabis products from licensed growers or processors. Owners and employees of secure transportation companies

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must register as transportation agents with the MMCC by undergoing criminal and financial background checks, and they must carry identification cards evidencing that they hold current registration at all times while in possession of medical cannabis. Transportation agents must possess a current, valid driver’s license and may not wear any clothing or symbols that indicate ownership or possession of medical cannabis while on duty. Medical cannabis transport vehicles must be approved by the MMCC and shall display current registration from the state, be insured, and may not display any sign or illustration related to medical cannabis or a licensee.

Electronic manifests must accompany all shipments to record the chain of custody and includes (i) the name and address of the shipping licensee; (ii) the shipping licensee’s shipment identification number; (iii) the weight and description of each individual package that is part of the shipment, and the total number of individual packages; (iv) the name of the licensee agent that prepared the shipment; (v) the name and address of the receiving licensee; (vi) any special handling or storage instructions; (vii) the date and time the shipment was prepared; (viii) the date and time the package was placed in the secure transport vehicle; and (ix) a listing of any other people who had custody or control over the shipment, and the person’s identity, circumstances, duration and disposition.

Dispensary licensees in Maryland are authorized to perform home delivery directly to patients. To do so, the dispensary must (i) independently verify the patients identification and registration status; (ii) enter the transaction in METRC prior to delivery; (iii) perform the delivery through a registered dispensary agent; and (iv) confirm that the transaction otherwise complies with all other requirements regarding the sale of medical cannabis under applicable regulations. The policy committee of the MMCC recently recommended several changes to the home delivery rules that would require all home delivery be performed using a secure medical cannabis transport vehicle.

Michigan

Michigan Regulatory Landscape

In November 2008, Michigan residents approved the Michigan Medical Marihuana Act⁴² (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 Act⁴³ (the “MMFLA”) and the Marihuana Tracking Act⁴⁴ (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program.⁴⁵ 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.

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.⁴⁶ According to Proposal 1, LARA is required to start accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.⁴⁷

⁴²	Michigan Legislature. Initiated Law 1 of 2008. Retrieved from http://www.legislature.mi.gov/(S(2wgqx52pio2mltrnmi13rr0a))/mileg.aspx?page=getObject&objectName=mcl-Initiated-Law-1- of-2008.

⁴³	Michigan Legislature. Act 281 of 2016. Retrieved from http://www.legislature.mi.gov/(S(xy4vurthgtuob3hr0napuhxv))/mileg.aspx?page=getObject&objectName=mcl-Act-281-of-2016.

⁴⁴	Michigan Legislature. Act 282 of 2016. Retrieved from http://www.legislature.mi.gov/(S(zup32t1bwxxnrdiax0r4ji2p))/mileg.aspx?page=getobject&objectname=mcl-Act-282-of2016&query=on&highlight=marihuana%20AND%20tracking.

⁴⁵

LARA’s “Emergency Rules” were filed on May 30, 2018 and updated in September and October 2018. “Department of Licensing and Regulatory Affairs, Bureau of Medical Marihuana Regulation, Medical Marihuana Facilities Licensing Act, Emergency Rules Filed with the Secretary of State.” (2018 September 11). Retrieved from https://www.michigan.gov/documents/lara/Medical_Marihuana_Facilities_Licensing_Emergency_Rules_9-7-18_634831_7.pdf.

⁴⁶	Coalition to Regulate Marijuana Like Alcohol. Initiative Text. Retrieved from https://www.regulatemi.org/initiative/

⁴⁷	16 Michigan Proposal 1, Marijuana Legalization Initiative (2018). Retrieved from https://ballotpedia.org/Michigan_Proposal_1,_Marijuana_Legalization_Initiative_(2018).

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On November 13, 2019, the state’s Marijuana Regulatory Agency announced that any existing medically licensed businesses would be allowed to sell recreational use cannabis beginning December 1, 2019.

In December 2019, the state’s Marijuana Regulatory Agency adopted rules for adult-use cannabis.

Michigan License

On March 25, 2019, an affiliate of the Company (the “Michigan Affiliate”) announced that it had completed the most comprehensive portion of Michigan’s application process, being pre-qualified for a cultivation and processing license 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 March 4, 2020, the Michigan Affiliate was granted approval to commence manufacturing medical products at its facility in Marshall, Michigan. As the construction of the cultivation part of this location continues, the Michigan Affiliate will seek the necessary inspections and approvals for cultivation.

The Michigan Affiliate has also received pre-qualification for adult-use.

State operating licenses for marijuana businesses have a 1 year term and are annually renewable if certain conditions are met: (a) the renewal application is submitted prior to the date the license expires, or within sixty (60) days of expiration if all other conditions are met and a late fee is paid, (b) the licensee pays the regulatory assessment fee set by LARA and (c) the licensee continues to meet the requirements to be a licensee under the Michigan Cannabis Regulations. Each renewal application is reviewed by LARA, but there is no guarantee of a timely renewal. There is no ultimate expiry after which no renewals are permitted.

Michigan Regulations

Products may be purchased in a retail setting from a provisioning center by registered qualified patients or registered primary caregivers connected to a registered qualifying patient (each, a “Michigan Qualified Purchaser”); in each case, Michigan Qualified Purchasers must present a valid registry identification card issued by LARA (a “Michigan Registry ID”). For a Michigan Qualified Purchaser to receive Products, provision centers must deploy an inventory control and tracking system that is capable of interfacing with the statewide monitoring system to determine (a) whether a Michigan Qualified Purchaser holds a Michigan Registry ID and (b) whether the sale or transfer will exceed the then-current daily and monthly purchasing limit for the holder of the Michigan Registry ID.

In order to receive a Michigan Registry ID, an applicant must provide: a completed application dated within one year of submission, a written certification from a physician with a bona-fide physician-patient relationship to the underlying patient, the application or renewal fee, contact information for the patient, caregiver (if applicable) and physician, as well as proof of Michigan residency.

For registered qualifying patients, the daily purchasing limit is 2.5 ounces, and for registered primary caregivers, the daily purchasing limit is 2.5 ounces per underlying registered qualifying patient that the registered primary caregiver is connected with through the registration process. Finally, the licensee shall verify in the statewide monitoring system that the sale or transfer does not exceed the monthly purchasing limit of ten (10) ounces of marijuana product per month to a qualifying patient, either directly or through the qualifying patient’s registered primary caregiver.⁴⁸

⁴⁸	Michigan Department of Licensing and Regulatory Affairs. Medical Marihuana Regulation, Rule 41: Daily Purchasing Limits; Provisioning Center. Retrieved from https://www.michigan.gov/lara/0,4601,7-154-79571_83994-454569--,00.html.

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Allowable forms of medical marijuana includes smokable dried flower, dried flower for vaporizing and marijuana infused products, which are defined under the Act to include topical formulations, tinctures, beverages, edible substances or similar products containing usable marijuana that is intended for human consumption in a matter other than smoke inhalation. Under the Michigan Cannabis Regulations, marijuana-infused products shall not be considered food.

Qualifying conditions for the medical marijuana program in Michigan are the following:

•

Cancer, glaucoma, positive status for human immunodeficiency virus, acquired immune deficiency syndrome, hepatitis C, amyotrophic lateral sclerosis, Crohn’s disease, agitation of Alzheimer’s disease, nail patella or the treatment of these conditions;

•

A chronic or debilitating disease or medical condition or its treatment that produces 1 or more of the following: cachexia or wasting syndrome; severe and chronic pain; severe nausea; seizures, including but not limited to those characteristic of epilepsy; or severe and persistent muscle spasms, including but not limited to those characteristic of multiple sclerosis;

•

Post-Traumatic Stress Disorder (PTSD); and/or

•

Any other medical condition or its treatment approved by the department under the Michigan Cannabis Regulations.

In the state of Michigan, only cannabis that is grown and manufactured in the state can be sold in the state.

Reporting Requirements

Pursuant to the requirements of the MTA, Michigan selected Franwell’s METRC software as the state’s third-party solution for integrated marijuana industry verification. Using METRC, regulators are able to track third party inventory, permissible sales and seed-to-sale information. Additionally, provisioning centers can use the METRC API to connect their own inventory management and/or point-of-sale systems to verify the identity as well as permissible sales for Michigan Qualified Purchasers.⁴⁹

Storage and Security

To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, a provisioning center is required to:

•

Maintain and submit a security operations plan that includes the following at a minimum:⁵⁰

•

Escorts for all non-employee personnel in limited access areas.

•

Secure locks for all interior rooms, windows and points of entry and exits with commercial grade, nonresidential door locks.

⁴⁹	Michigan Department of Licensing and Regulatory Affairs. “LARA - UPDATED - LARA Announces Medical Marihuana Educational Sessions.” (2017 October 9). Retrieved from https://www.michigan.gov/lara/0,4601,7-154-10573_11472-449362-- ,00.html.

⁵⁰	Michigan Department of Licensing and Regulatory Affairs. Medical Marihuana Regulation, Rule 27: Security Measures; Required Plan; Video Surveillance System. Retrieved from https://www.michigan.gov/lara/0,4601,7-154-79571_83994-454548-- ,00.html.

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•

An alarm system. Licensees will make all information related to the alarm system including monitoring and alarm activity available to LARA.

•

A video surveillance system that, at a minimum, consists of digital or network video recorders, cameras, video monitors, digital archiving devices and a color printer capable of delivering still photos.

•

24-hour surveillance footage with fixed, mounted cameras, tamper/theft proof secured storage mediums and a notification system for interruption or failure of surveillance footage or storage of surveillance footage. All surveillance footage must be of sufficient resolution to identify individuals, have accurate time/date stamps and be stored for a minimum of 14 days unless state regulators notify that such recordings may be destroyed. Surveillance footage must cover:

•

All activity within 20 feet of all points of entry and exit to a facility.

•

Any areas where marijuana products are weighed, packed, stored loaded, and unloaded for transportation, prepared or moved within the marijuana facility.

•

Limited-access areas and security rooms. Transfers between rooms must be recorded.

•

Areas storing a surveillance system storage device with at least 1 camera recording the access points to the secured surveillance recording area.

•

All entrances and exists to the building must be recorded from both indoor and outdoor vantage points. The areas of entrance and exit between marijuana facilities at the same location if applicable, including any transfers between marijuana facilities.

•

Point of sale areas where Michigan marijuana products are sold and displayed for sale.

•

State access to view and obtain copies of any surveillance footage through LARA or related investigators, agents, auditors and/or state police. A facility shall also provide copies of recordings to LARA upon request.

•

Logs of the following:

•

The identities of the employee or employees responsible for monitoring the video surveillance system.

•

The identity of the employee who removed the recording from the video surveillance system storage device and the time and date removed.

•

The identity of the employee who destroyed any recording.

•

Maintain marijuana storage plan for provisioning centers that includes the following at a minimum:

•

A secured limited access area for inventories of Products.

•

Clearly labeled containers (a) marked, labeled or tagged, (b) enclosed on all sides and (c) latched or locked to keep all contents secured within. All such containers must be identified and tracked in accordance with the MTA.

•

A locked area for chemical and solvents separate from Products.

•

Separation of marijuana-infused products from toxic or flammable materials.

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•

A sales or transfer counter or barrier separated from stock rooms to ensure registered qualifying patients or registered primary caregivers do not have direct access to Products

Cresco signed a binding agreement to sell and leaseback its Marshall property. See the “Significant Events or Milestones” section, above, for a description of the transaction.

Cresco Compliance Program

Cresco oversees, maintains, and implements a compliance program in conjunction with its operations in each jurisdiction. In addition to Cresco’s robust legal and compliance departments, Cresco also has local regulatory/compliance counsel engaged in every jurisdiction (state and local) in which it operates. The Facility Directors and / or Compliance Managers for each jurisdiction serve as the liaison to state and local regulators during both regular business hours and after hours. The compliance department is responsible for ensuring operations and employees strictly comply with applicable laws, regulations and licensing conditions and ensure that operations do not endanger the health, safety or welfare of the community. The Facility Director and / or the Compliance Manager for each location coordinate with each operational unit within each facility to ensure that the operation and all employees are following and complying with Cresco’s written security procedures and all regulatory compliance standards.

In conjunction with Cresco’s human resources and operations departments, the compliance and quality departments help oversee and implement training for all employees, including on the following topics:

•

Compliance with state and local laws

•

Dispensing procedures

•

Security & safety policies and procedures

•

Inventory control

•

Track-and-Trace training session

•

Quality control

•

Transportation procedures

Cresco’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Only authorized, properly trained employees are allowed to access Cresco’s computerized seed-to-sale system.

Cresco’s compliance department and legal team, comprised of in-house and local outside counsel, monitors all compliance notifications from the regulators and inspectors in each market, timely resolving any issues identified. The team maintains records of all compliance notifications received from the state regulators or inspectors and how and when the issue was resolved. Cresco has created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and ensuring the accuracy of inventory tracking and recordkeeping. Cresco maintains accurate records of its inventory at all licensed facilities. Adherence to Cresco’s standard operating procedures is mandatory and ensures that Cresco’s operations are compliant with the rules set forth by the applicable state and local laws, regulations, ordinances, licenses and other requirements. Training on these standard operating procedures is mandatory by all employees and defined by function and role.

In addition to the above disclosure, please see “Risk Factors” below for further risk factors associated with the operations of Cresco and the Company.

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Compliance Software

The Company utilizes an enterprise compliance platform, which integrates the inventory management program of the manager and licensed entities with the software’s compliance checklists and auditing features to facilitate continued compliance with state and local requirements. The software features a robust auditing system that allows for both internal as well as third-party compliance auditing, covering all state and municipal, facility and operational requirements. The enterprise compliance platform offers building tools to facilitate the implementation and maintenance of compliant operations and tracks all required licensing maintenance criteria, which include countdown features and automatically generated reminders for initiating renewals and required reporting.

Compliance Program

Cresco has developed and continues to refine a robust compliance program designed to ensure operational and regulatory requirements continue to be satisfied, and has worked closely with outside counsel, (“Regulatory Counsel”) to assist Cresco in the development of compliance procedures which will assist the Company in monitoring its compliance with U.S. state law on an ongoing basis. Cresco will continue to work closely with Regulatory Counsel and other compliance experts, and is evaluating the engagement of one or more independent third party providers to further develop, enhance and improve its compliance and risk management and mitigation processes and procedures in furtherance of continued compliance with the complex regulatory frameworks of the states to the jurisdiction of which Cresco’s operations are subject. The internal compliance program currently in place includes continued monitoring by managers and executives of Cresco and its subsidiaries to ensure that all operations conform to and comply with required laws, regulations and operating procedures. Cresco further requires its operating subsidiaries to report and disclose all instances of non-compliance, regulatory, administrative, or legal proceedings that may be initiated against them.

RISK FACTORS

MARIJUANA IS ILLEGAL UNDER U.S. FEDERAL LAW AND ENFORCEMENT OF RELEVANT LAWS IS A SIGNIFICANT RISK.

READERS ARE STRONGLY ENCOURAGED TO CAREFULLY READ ALL OF THE RISK FACTORS CONTAINED IN THIS SECTION.

The following are certain factors relating to the business of the Company. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or currently deemed immaterial by the Company, may also impair the operations of the Company. If any such risks actually occur, shareholders of the Company could lose all or part of their investment and the business, financial condition, liquidity, results of operations and prospects of the Company could be materially adversely affected and the ability of the Company to implement its growth plans could be adversely affected.

The acquisition of any of the securities of the Company is speculative, involving a high degree of risk and should be undertaken only by persons whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the securities of the Company should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. Company shareholders should evaluate carefully the following risk factors associated with the Company’s securities, along with the risk factors described elsewhere in this AIF.

The following table is intended to assist readers in identifying those parts of this AIF that address the disclosure expectations outlined in Staff Notice 51-352 for issuers that currently have marijuana-related activities in U.S. states where such activity has been authorized within a state regulatory framework.

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Industry Involvement	Specific Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties	AIF Cross Reference

All Issuers with U.S. Marijuana-Related Activities	Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table.	General Development of the Business Description of the Business—State Level U.S. Cannabis Operations

	Prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk.	Risk Factors

	Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.	Risk Factors – U.S. Federal Regulation Risk Factors – Variation in State Regulations Risk Factors – Anti-money Laundering Laws and Regulations Risk Factors – Access to Banks Risk Factors – Investments in the United States May be Subject to Heightened Scrutiny Risk Factors – Constraints on Marketing Products Risk Factors – Intellectual Property Risk Factors – Lack of access to U.S. bankruptcy protections Risk Factors – Legality of contracts Risk Factors – Newly established legal regime Risk Factors – Risk of civil asset forfeiture

	Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations.	Risk Factors – Newly established legal regime Risk Factors – Access to Banks

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Industry Involvement	Specific Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties	AIF Cross Reference

	Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities.	Note: the major operations of the Company are only in the United States

	Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.	Legal advice has been obtained.

U.S. Marijuana Issuers with direct involvement in cultivation or distribution	Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.	Description of the Business - State Level U.S. Cannabis Operations

	Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s license, business activities or operations.	General Development of the Business – United States Industry Background and Trends Description of the Business - State Level U.S. Cannabis Operations Risk Factors – U.S. State Regulatory Uncertainty

U.S. Marijuana Issuers with indirect involvement in cultivation or distribution	Outline the regulations for U.S. states in which the issuer’s investee(s) operate.	Description of the Business – State Level U.S. Cannabis Operations – Nevada

	Provide reasonable assurance through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.	Cresco is not aware of any non- compliance

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Industry Involvement	Specific Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties	AIF Cross Reference

U.S. Marijuana Issuers with material ancillary involvement	Provide reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.	Not applicable.

In accordance with Staff Notice 51-352, Cresco’s subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the adult-use and/or medicinal cannabis marketplace in the states of Illinois, Pennsylvania, Ohio, Nevada, Arizona, New York, Massachusetts, Maryland and California. In accordance with Staff Notice 51-352, Cresco will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended 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. Any non-compliance, citations or notices of violation which may have an impact on any license, business activities or operations will be promptly disclosed by the Company.

RISKS ASSOCIATED WITH THE SECURITIES OF THE COMPANY

Founder Voting Control

As a result of the Super Voting Shares, Charlie Bachtell, Joe Caltabiano, Robert Sampson, Dominic Sergi and Brian McCormack (the “Founders”) exercise approximately 72.3% of the voting power in respect of the Company’s outstanding shares. The Subordinate Voting Shares are entitled to 1 vote per share, the Proportionate Voting Shares are entitled to 200 votes per share (subject to adjustment in accordance with the terms thereof) and the Super Voting Shares are entitled to 2,000 votes per share. As a result, the Founders (and any three of the Founders for certain actions not requiring a 2/3 majority) potentially have the ability to control the outcome of matters submitted to the Company’s shareholders for approval, including the election and removal of directors and any arrangement or sale of all or substantially all of the assets of the Company. If the Founders’ employment with the Company is terminated or they resign from their positions with the Company, they will continue to have the ability to exercise the same significant voting power. Additionally, each Super Voting Share, may be so transferred to the holder’s immediate family members, or in connection with estate or tax planning matters.

In addition, because the number of Super Voting Shares held by a holder thereof from time to time is dependent upon the number of Cresco Redeemable Units (and Cresco Corp Redeemable Shares, if and when issued) beneficially owned, directly or indirectly, or deemed to be so beneficially owned by such holder from time to time, should the Company cause Cresco to issue additional Cresco Redeemable Units or Cresco Redeemable Units in the future to a Founder in connection with employee equity incentive programs, it would prolong the Founder’s voting control.

To supplement the rights, privileges, restrictions and conditions attached to the Super Voting Shares, the Company and the Founders, being the initial holders of Super Voting Shares, entered into an investment agreement effective as of the completion of the Business Combination which, among other things, provides that (i) each Super Voting Share will be transferable only to the holder’s immediate family members or an affiliated entity or a transfer to the other Founder or an entity affiliated with the other Founder, and (ii) upon any sale of Super Voting Shares to a third party purchaser not listed in clause (i), such Super Voting Shares will immediately be redeemed by the Company for their issue price.

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The concentrated control through the Super Voting Shares could delay, defer, or prevent a change of control of the Company, arrangement involving the Company or sale of all or substantially all of the assets of the Company that it’s other shareholders support. Conversely, this concentrated control could allow the Founders to consummate such a transaction that the Company’s other shareholders do not support. In addition, the Founders may make long-term strategic investment decisions and take risks that may not be successful and may seriously harm the Company’s business.

As directors and/or officers of the Company, the Founders have control over the day-to-day management and the implementation of major strategic decisions of the Company, subject to authorization and oversight by the Company Board. As board members and/or officers, the Founders owe a fiduciary duty to the Company’s shareholders and are obligated to act honestly and in good faith with a view to the best interests of the Company. As shareholders, even controlling shareholders, the Founders are entitled to vote their shares, and shares over which they have voting control, in their own interests, which may not always be in the interests of the Company or the other shareholders of the Company.

Unpredictability Caused by the Capital Structure and Founder Voting Control

Although other Canadian-based companies have dual class or multiple voting share structures, given the concentration of voting control that is held by the Founders and given the other unique features of the capital structure of the Company, including the existence of a significant amount of redeemable equity securities that have been issued by, and are issuable pursuant to the exercise, conversion or exchange of the applicable convertible securities of, Cresco Labs, LLC, which equity securities are redeemable from time to time for Proportionate Voting Shares, in accordance with their terms, the Company is not able to predict whether this structure and control will result in a lower trading price for or greater fluctuations in the trading price of the Subordinate Voting Shares or will result in adverse publicity to the Company or other adverse consequences.

Additional Issuance of Subordinate Voting Shares and Subsidiary Securities May Result in Dilution

The Company may issue additional securities in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Subordinate Voting Shares, and existing shareholders will have no pre-emptive rights in connection with such further issuance. The Company’s Board has discretion to determine the price and the terms of further issuances. Moreover, additional Subordinate Voting Shares will be issued by the Company on the conversion of the Proportionate Voting Shares in accordance with their terms. The Company may also issue Subordinate Voting Shares to finance future acquisitions. The Company cannot predict the size of future issuances of Subordinate Voting Shares or the effect that future issuances and sales of Subordinate Voting Shares will have on the market price of the Subordinate Voting Shares. Issuances of a substantial number of additional Subordinate Voting Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Subordinate Voting Shares. With any additional issuance of Subordinate Voting Shares, investors will suffer dilution to their voting power and the Company may experience dilution in its revenue per share.

Additionally, the subsidiaries of the Company, such as Cresco U.S. Corp. and the Cresco Labs, LLC, may issue additional securities, including Cresco Corp Redeemable Shares, Cresco Redeemable Units and LTIP Units to new or existing shareholders, members or securityholders, including in exchange for services performed or to be performed on behalf of such entities or to finance future acquisitions. Any such issuances could result in substantial dilution to the indirect equity interest of the holders of Subordinate Voting Shares in Cresco Labs, LLC.

Additional Financing

The Company expects to require substantial additional capital in the near future to continue operations at its cultivation and production facilities, dispensaries, expansion of its product lines, development of its intellectual property base, increasing production capabilities and expanding its operations in states where it currently operates and states where it currently does not have operations. The Company may not be able to obtain additional financing on terms acceptable to it, or at all. If the Company fails to raise additional capital, as needed, its ability to implement its business model and strategy could be compromised.

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Even if the Company obtains financing for its near-term operations, it expects that it will require additional capital thereafter. The capital needs of the Company will depend on numerous factors including: (i) profitability; (ii) the release of competitive products by competitors; (iii) the level of investment in research and development; and (iv) the amount of our capital expenditures, including acquisitions. There can be no assurance that the Company will be able to obtain capital in the future to meet its needs.

Although the Company has accessed private financing in the past, there is neither a broad nor deep pool of institutional capital that is available to companies in the U.S. cannabis industry. There can be no assurance that additional financing, if raised privately, will be available to the Company when needed or on terms which are acceptable.

No Guaranteed Return

There is no guarantee that an investment in the Subordinate Voting Shares will earn any positive return in the short, medium or long term. There is no assurance that holders of the Subordinate Voting Shares will receive cash distributions or any rate of return on, or repayment of, their investment in the Subordinate Voting Shares. In fact, an investor could lose its entire investment in the Subordinate Voting Shares.

Volatile Market Price of the Subordinate Voting Shares and Other Listed Securities

The market price of the Subordinate Voting Shares and other listed securities of the Company from time to time, cannot be predicted and has been and may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control. This volatility may affect the ability of holders of Subordinate Voting Shares or such other securities to sell their securities at an advantageous price. Market price fluctuations in the Subordinate Voting Shares or such other securities may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or competitive, regulatory or economic trends, adverse changes in the economic performance or market valuations of companies in the industry in which the Company operates, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other material public announcements by the Company or its competitors or government and regulatory authorities, operating and share price performance of the companies that investors deem comparable to the Company, addition or departure of the Company’s executive officers and other key personnel, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Subordinate Voting Shares or such other securities.

Financial markets have at times historically experienced significant price and volume fluctuations that have particularly affected the market prices of equity and convertible securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Subordinate Voting Shares and other listed securities of the Company from time to time, may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue or arise, the Company’s operations may be adversely impacted, and the trading price of the Subordinate Voting Shares and such other securities may be materially adversely affected.

Outstanding Securities are Restricted from Immediate Resale but May be Sold in the Near Future

On May 28, 2019, Cresco announced that shareholders representing 205,172,192 Subordinate Voting Shares (on an as-if converted basis) entered into voluntary lock-up agreements representing 97% of the shares subject to the initial lock-up and 80% of the then total issued Subordinate Voting Shares (on an as-if converted basis). The voluntary lock-up agreements stipulate that these shareholders will not, subject to limited exception, offer to sell, contract to sell, lend, pledge or otherwise dispose of any Cresco securities, or enter into any transaction to such effect, directly or indirectly, in addition to other restrictions until December 3, 2019 when a portion of the shares will be released followed by the remainder of the shares being released by June 3, 2020.

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Sales by Existing Shareholders

Sales of a substantial number of Subordinate Voting Shares in the public market could occur at any time either by existing holders of Subordinate Voting Shares or by holders of Cresco Corp Redeemable Shares (if issued) or Cresco Redeemable Units upon redemption of the same and issuance to such holders of the applicable Proportionate Voting Shares and their subsequent conversion to Subordinate Voting Shares. These sales, or the market perception that the holders of a large number of Subordinate Voting Shares, Proportionate Voting Shares, Cresco Corp Redeemable Shares (if issued) or Cresco Redeemable Units intend to sell Subordinate Voting Shares, could reduce the market price of the Subordinate Voting Shares and other listed securities of the Company from time to time. If this occurs and continues, it could impair the Company’s ability to raise additional capital through the sale of securities.

Limited Market for Securities

Notwithstanding that the Subordinate Voting Shares are listed on the CSE, there can be no assurance that an active and liquid market for the Subordinate Voting Shares will develop or be maintained and a Company shareholder may find it difficult to resell any securities of the Company.

Dividends

The Company has no earnings or dividend record and does not anticipate paying any dividends on the Subordinate Voting Shares in the foreseeable future. Dividends paid by the Company would be subject to tax and, potentially, withholdings.

Tax

Canadian federal and provincial and U.S. federal and state tax issues should be taken into consideration prior to investing in the Subordinate Voting Shares. The return on an investor’s investment is subject to taxes and to changes in Canadian and U.S. tax laws. There can be no assurance that tax laws, regulations or judicial or administrative interpretations of these laws and regulations will change in a manner that fundamentally alters the tax consequences to investors holding or disposing of the Subordinate Voting Shares.

If you are purchasing the Subordinate Voting Shares outside of Canada, you should consult your own tax advisor for advice for your local jurisdiction.

RISKS ASSOCIATED WITH THE COMPANY’S INDEBTEDNESS

Substantial Indebtedness

In January 2020, the Company borrowed $100 million under the Credit Agreement governing the Senior Loan. The Credit Agreement contains a mutual option of the Company and the lenders to increase the Senior Loan up to $200 million. The Company’s substantial indebtedness could have important consequences. For example, it could:

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require the Company to dedicate a substantial portion of available cash flow to pay interest on its outstanding debt, which will reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes;

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limit flexibility in planning for and reacting to changes in the Company’s business and in the industry in which it operates;

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increase the Company’s vulnerability to general adverse economic and industry conditions and to deterioration in operating results;

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limit the Company’s ability to engage in strategic transactions or implement its business strategies;

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limit the Company’s ability to borrow additional funds, or to refinance, repay or restructure its indebtedness; and

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place the Company at a disadvantage compared to any competitors that have less debt.

Any of the factors listed above could materially and adversely affect the Company’s business and results of operations.

If the Company does not have sufficient cash flow to service its debt, the Company may be required to refinance all or part of its existing debt, sell assets, borrow more money or sell securities, none of which the Company can guarantee it will be able to do.

The Company may be able to incur significant additional indebtedness in the future. Although the Credit Agreement contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to important qualifications and exceptions, including an exception for the incurrence of additional indebtedness consented to by the lenders. If the Company incurs new indebtedness, the related risks, including those described above, could intensify.

The Company’s Ability to Service its Indebtedness Depends on Factors Beyond its Control

The Company’s ability to satisfy its debt obligations will depend principally upon its future operating performance. As a result, prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond the Company’s control, will affect its ability to make payments on its indebtedness.

The required repayment of the Senior Loan will be accelerated if, among other things, any governmental authority enforces a prohibition or ban on the Company’s business or if certain cannabis-related licenses are revoked, suspended or cancelled without replacement.

If the Company does not generate sufficient cash flow from operations to satisfy its debt service obligations, it may have to pursue alternative financing plans, such as refinancing or restructuring its indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. The Company’s ability to refinance or restructure its debt will depend on the capital markets, the prevailing regulatory environment and the Company’s financial condition at such time. In addition, the terms of the Credit Agreement may restrict it from adopting some of these alternatives. The Company’s inability to generate sufficient cash flow to satisfy its debt service obligations, or to refinance its obligations on commercially reasonable terms, would have an adverse effect, which could be material, on the Company’s business, financial position, results of operations and cash flows.

Restrictive Covenants

The Credit Agreement contains, and any future indebtedness of the Company would likely contain, a number of restrictive covenants imposing significant operating and financial restrictions on the Company and some or all of its subsidiaries, including restrictions that may limit the Company’s ability to engage in acts that may be in its long-term best interests.

The Credit Agreement includes covenants restricting, among other things, the ability of the Company and its subsidiaries to:

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incur or guarantee additional debt;

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pay dividends or make redemptions, repurchases or distributions, with respect to equity interests;

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create or incur liens;

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make loans or investments;

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engage in mergers, acquisitions, amalgamations, asset sales and sale and leaseback transactions other than those specified in the Credit Agreement; and

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engage in transactions with affiliates.

These restrictions are subject to important exceptions. In addition, the Company must maintain a minimum cash balance.

The operating and financial restrictions and covenants in the Credit Agreements and any future financing agreements may adversely affect the Company’s ability to finance future operations or capital needs or to engage in other business activities. If a default occurs under the Credit Agreement, the lenders may, subject to certain cure periods, elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable and enforce their security interest. If the Company were unable to repay outstanding borrowings when due, the lenders would have the right to proceed against the collateral granted to them to secure the Senior Loan.

RISKS ASSOCIATED WITH THE BUSINESS OF THE COMPANY

COVID-19 Pandemic

The novel coronavirus commonly referred to as “COVID-19” was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by President Donald Trump. The outbreak has spread throughout Europe, the Middle East and North America, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While these effects are expected to be temporary, the duration of the business disruptions internationally and related financial impact cannot be reasonably estimated at this time.

The rapid development of the COVID-19 pandemic and the measures being taken by governments and private parties to respond to it are extremely fluid. While the Company has continuously sought to assess the potential impact of the pandemic on its financial and operating results, any assessment is subject to extreme uncertainty as to probability, severity and duration. The Company has attempted to assess the impact of the pandemic by identifying risks in the following principle areas:

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Mandatory Closure. In response to the pandemic, many states and localities have implemented mandatory shut-downs of business to prevent the spread of COVID-19. In most of the states of the Company’s operation, the Company’s business has been deemed an “essential service”, permitting the Company’s operations to stay open despite the mandatory closure of non-essential businesses. While the Company is working closely with state and local regulators to seek temporary measures that allow it to remain operational, there is no guarantee that the Company will be permitted to remain operational. The Company’s ability to generate revenue could be materially impacted by any shut down of its operations.

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Customer Impact. While the Company has not yet noticed an overall downturn in demand for its products in connection with the pandemic, if its customers become ill with COVID-19, are forced to quarantine, decide to self-quarantine or not to visit its dispensaries or distribution points to observe “social distancing”, it may have a material negative impact on demand for its products while the pandemic continues. While the Company is seeking to implement measures, where permitted, such as “curb side” sales and delivery, to reduce infection risk to its customers, regulators may not permit such measures, or such measures may not prevent a reduction in demand.

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Supply Chain Disruption. The Company relies on third party suppliers for equipment and services to produce its products and keep its operations going. If its suppliers are unable to continue operating due to mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating. At this time, the Company has not experienced any failure to secure critical supplies or services. In particular, while the Company procures certain equipment, including components of its vaping and other products, from China where the pandemic has caused extensive business closures, the Company currently

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believes that it will be able to continue to source such products at a cost within historical ranges. However, disruptions in our supply chain may affect our ability to continue certain aspects of the Company’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

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Staffing Disruption. The Company is, for the time being, implementing among its staff where feasible “social distancing” measures recommended by such bodies as the Center of Disease Control, the Presidential Administration, as well as state and local governments. The Company has cancelled nonessential travel by employees, implemented remote meetings where possible, and permitted all staff who can work remotely to do so. For those whose duties require them to work on-site, measures have been implemented to reduce infection risk, such as reducing contact with customers, mandating additional cleaning of workspaces and hand disinfection and providing masks and gloves to certain personnel. Nevertheless, despite such measures, the Company may find it difficult to ensure that its operations remain staffed due to employees falling ill with COVID-19, becoming subject to quarantine, or deciding not to come to come to work on their own volition to avoid infection. At certain locations, the Company has experienced increased absenteeism due to the pandemic. If such absenteeism increases, the Company may not be able, including through replacement and temporary staff, to continue to operate in some or all locations.

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Regulatory Backlog. Regulatory authorities, including those that oversee the cannabis industry on the state level, are heavily occupied with their response to the pandemic. These regulators as well as other executive and legislative bodies in the states in which we operate may not be able to provide the level of support and attention to day-to-day regulatory functions as well as to needed regulatory development and reform that they would otherwise have provided. Such regulatory backlog may materially hinder the development of the Company’s business by delaying such activities as product launches, facility openings and business acquisitions, thus materially impeding development of its business.

The Company is actively addressing the risk to business continuity represented by each of the above factors through the implementation of a broad range of measures throughout its structure and is re-assessing its response to the COVID-19 pandemic on an ongoing basis. The above risks individually or collectively may have a material impact on the Company’s ability to generate revenue. Implementing measures to remediate the risks identified above may materially increase our costs of doing business, reduce our margins and potentially result in losses. While the Company is not currently in financial distress, if the Company’s financial situation materially deteriorates as a result of the impact of the pandemic, the Company could eventually be unable to meet its obligations to third parties, including observing financial covenants under the Credit Agreement. See the “Risk Factors – Substantial Indebtedness” and “Risk Factors – Restrictive Covenants” sections, above for greater detail.

U.S. Federal Regulation

MARIJUANA IS ILLEGAL UNDER U.S. FEDERAL LAW AND ENFORCEMENT OF RELEVANT LAWS IS A SIGNIFICANT RISK.

The Company could be found to be violating laws related to medical cannabis. For an overview of the U.S. cannabis regulatory environment, see the “Description of the Business – United States Regulatory Environment” section, above. Below is a summary of the potential risks related to federal and state level laws related to the operations of the Company and Cresco.

Risk of U.S. Federal Law Proceedings Against the Company

Potential proceedings under U.S. federal law could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favor of the Company. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company or the seizure of corporate assets. However, as of the date hereof, the Company and has obtained legal advice in respect thereof that proceedings of this nature have historically been sufficiently uncommon to be characterized as remote absent a shift by federal authorities to a more aggressive enforcement approach. The Company has also received advice from its legal counsel regarding the potential exposure and implications arising from U.S. federal law generally. As the legal landscape at both the U.S. federal level and the state level is evolving, all such legal advice is historical in nature, and is only effective up to the date such advice was received.

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Following the issuance of the Sessions Memo and the Barr Comments, the Company continues to look to the guidelines of the Cole Memo as an industry best practice and continues to do the following to ensure compliance with the Cole Memo:

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ensuring the operations of its subsidiaries are compliant with all licensing requirements that are set forth with regards to cannabis operation by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions. To this end, the Company retains appropriately experienced legal counsel and other professionals to conduct the necessary due diligence to ensure compliance of such operations with all applicable;

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the activities relating to the cannabis business adhere to the scope of the licensing obtained. Accordingly, in the states where only medical cannabis is permitted, the products are only sold to patients who hold the necessary documentation to permit the possession of the cannabis; and in the states where cannabis is permitted for adult-use, the products are only sold to individuals who meet the requisite age requirements;

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the Company only works through licensed operators, which must pass a range of requirements, adhere to strict business practice standards and be subjected to strict regulatory oversight whereby sufficient checks and balances ensure that no revenue is distributed to criminal enterprises, gangs and cartels; and

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the Company conducts reviews of products and product packaging to ensure that the products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving.

The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program and standard operating procedures. While the Company’s operations are in full compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal under U.S. federal law. For the reasons described above and the risks further described below, there are significant risks associated with the business of the Company.

Variation in State Regulations

Variations in state and local regulation, and enforcement in states that have legalized medical cannabis, may restrict marijuana-related activities, including activities related to medical cannabis, which may negatively impact our revenues and prospective profits.

The marijuana laws of each state are not necessarily consistent with those of other states. A number of states have decriminalized marijuana to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. Four States, Alaska, Colorado, Oregon, Washington and the District of Columbia have previously legalized the adult-use of cannabis. In November 2016, four additional states, California, Massachusetts, Maine and Nevada, voted to legalize adult-use cannabis, although adult-use will not commence in those states until appropriate regulatory frameworks have been put in place. The exception is Nevada California and Massachusetts, which began its adult-use program on July 1, 2017, January 2018 and November 2018, respectively. Variations exist among states that have legalized, decriminalized, or created medical marijuana exemptions. For example, Alaska, Colorado, and the District of Columbia have limits on the number of marijuana plants that can be homegrown. In most states, the cultivation of marijuana for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical marijuana needing care or that person’s caregiver. Active enforcement of state laws that prohibit personal cultivation of marijuana may indirectly and adversely affect our business and our revenue and profits.

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The Company is in compliance with, and has obtained legal advice in respect of its compliance with, U.S. state laws and the related licensing framework of Illinois, Pennsylvania, Ohio, Nevada, Arizona, California, Massachusetts and New York applicable to its respective business operations.

Change of Cannabis Laws

It is possible that U.S. federal or state legislation could be enacted in the future that would prohibit the Company from selling cannabis and cannabis products, and if such legislation were enacted, the Company’s revenues could decline, leading to a loss of shareholder investment. Additionally, it is possible that regulatory bodies could impose new restrictions on our ability to operate in the U.S., which could lead to a loss of shareholder investment.

U.S. State Regulatory Uncertainty

The rulemaking process for cannabis operators at the state level in any state will be ongoing and result in frequent changes. As a result, a compliance program is essential to manage regulatory risk. All operating policies and procedures implemented in the operation will be compliance-based and derived from the state regulatory structure governing ancillary cannabis businesses and their relationships to state-licensed or permitted cannabis operators, if any. Notwithstanding the Company’s efforts, regulatory compliance and the process of obtaining regulatory approvals can be costly and time-consuming. No assurance can be given that the Company will receive the requisite licenses, permits or cards to operate its businesses.

In addition, local laws and ordinances could restrict the Company’s business activity. Although legal under the laws of the states in which the Company’s business will operate, local governments have the ability to limit, restrict, and ban cannabis businesses from operating within their jurisdiction. Land use, zoning, local ordinances, and similar laws could be adopted or changed, and have a material adverse effect on the Company’s business.

The Company is aware that proportionate states are considering special taxes or fees on businesses in the marijuana industry. Illinois has, for example, imposed a license transfer surtax. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. This could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

The Company is required to obtain or renew government permits and licenses for its current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on the Company’s part. The duration and success of the Company’s efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. The Company may not be able to obtain, amend or renew permits or licenses that are necessary to its operations. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations of the Company. To the extent necessary permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with its ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require the Company to pay substantial amounts of funds, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition, results of operations or prospects.

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Risk of Legal, Regulatory or Political Change

Delays in enactment of new state or U.S. federal regulations could restrict the ability of the Company to reach strategic growth targets and lower return on investor capital. The strategic growth strategy of the Company is reliant upon certain federal and state regulations being enacted to facilitate the legalization of medical and adult-use marijuana. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, the growth targets of the Company, and thus, the effect on the return of investor capital, could be detrimental. The Company is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.

Further, 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. If the U.S. federal government begins to enforce 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. It is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of marijuana in a manner that will make it extremely difficult or impossible to transact business that is necessary for the continued operation of the marijuana industry. Federal actions against individuals or entities engaged in the marijuana industry or a repeal of applicable marijuana related legislation could adversely affect the Company and its business, results of operations, financial condition and prospects.

The Company is aware that multiple states are considering special taxes or fees on businesses in the marijuana industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. This could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

The commercial medical and adult-use marijuana industry is in its infancy and the Company anticipates that such regulations will be subject to change as the jurisdictions in which the Company does business matures. The Company has in place a detailed compliance program with dedicated staff who oversee, maintain, and implement the compliance program and personnel. In addition to the Company’s robust legal and compliance departments, the Company also has local regulatory/compliance counsel engaged in every jurisdiction in which it operates. The Company’s compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Additionally, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for monitoring inventory at all stages of development and distribution. The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the marijuana industry.

Overall, the medical and adult-use marijuana industry is subject to significant regulatory change at both the state and federal level. The inability of the Company to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.

WARNING TO CANADIAN INVESTORS - Canadian Investors May be Barred from Entering the U.S.

Todd Owen, executive assistant commissioner for the Office of Field Operations of the U.S. Customs and Border Protection Agency (“CBP”) has stated that Canadians who work in the marijuana industry and those who invest in the cannabis sector risk a lifetime ban on travel to the U.S. The CBP will continue to apply long-standing U.S. federal laws and regulations that treat marijuana as a banned substance and participants in the cannabis industry as drug traffickers who are inadmissible into the U.S. Although some U.S. states have eased marijuana laws, the U.S. continues to maintain a federal prohibition that applies at the border. CBP officials are not planning to go out of their way to

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interrogate every Canadian traveler about marijuana use. However, other factors may cause them to raise the topic. In July 2018, a venture-capitalist from Vancouver, British Columbia who had invested more than $100,000 into legal American cannabis companies, was denied entry to the U.S. and barred from future entry as his investments were deemed to be assisting and abetting in the illicit trafficking of drugs.

On September 21, 2018, CBP released a statement outlining its current position with respect to enforcement of the laws of the United States. It stated that Canada’s legalization of cannabis will not change CBP enforcement of United States laws regarding controlled substances and because cannabis continues to be a controlled substance under United States law, working in or facilitating the proliferation of the legal cannabis industry in U.S. states where it is deemed legal or Canada may affect admissibility to the United States. As a result, CBP has affirmed that, employees, directors, officers, managers and investors of companies involved in business activities related to cannabis in the United States or Canada (such as the Company), who are not United States citizens face the risk of being barred from entry into the United States for life. As described above, on October 9, 2018, CBP released an additional statement regarding the admissibility of Canadian citizens working in the legal cannabis industry. CBP stated that a Canadian citizen working in or facilitating the proliferation of the legal cannabis industry in Canada coming into the United States for reasons unrelated to the cannabis industry will generally be admissible to the United States; however, if such person is found to be coming into the United States for reasons related to the cannabis industry, such person may be deemed inadmissible.

Internal Controls

The failure to implement and maintain proper and effective internal controls and disclosure controls could result in material weaknesses in the Company’s financial reporting, such as errors in its financial statements and in the accompanying footnote disclosures that could require restatements. Investors may lose confidence in the Company’s reported financial information and disclosure, which could negatively impact its share price.

The Company does not expect that its internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Global Economic Conditions

The Company’s business, financial condition, results of operations, and cash flow have been, and may in the future be, negatively impacted by challenging global economic conditions.

A global economic slowdown would cause disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, and declining consumer and business confidence, which can lead to decreased levels of consumer spending. These macroeconomic developments have and could negatively impact the Company’s business, which depends on the general economic environment and levels of consumer spending. As a result, the Company may not be able to maintain its existing customers or attract new customers, or it may be forced to reduce the price of its products. The Company is unable to predict the likelihood of the occurrence, duration, or severity of such disruptions in the credit and financial markets and adverse global economic conditions. Any general or market-specific economic downturn could have a material adverse effect on the business, financial condition, results of operations, and cash flow of the Company.

Limited Operating History

As a high growth enterprise, Cresco does not have a history of profitability. The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.

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Reliance on Management

The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results, financial condition or prospects.

Competition

There is potential that the Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the Company. Increased competition by larger and better financed competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the Company.

Because of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely affect the business, financial condition, results of operations or prospects of the Company.

Difficulty in Recruiting and Retaining Management and Key Personnel

The Company’s future success depends on its key executive officers and its ability to attract, retain, and motivate qualified personnel.

Future success largely depends upon the continued services of the Company’s executive officers and management team. If one or more of the executive officers are unable or unwilling to continue in their present positions, replacements may not be readily available, if at all. Additionally, the Company may incur additional expenses to recruit and retain new executive officers. If any of the executive officers joins a competitor or forms a competing corporation, we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations, and thereby an investment in the Subordinate Voting Shares.

The continuing ability to attract and retain highly qualified personnel will also be critical to the reporting issuer’s success because it will need to hire and retain additional personnel as the business grows. There can be no assurance that highly qualified personnel will be retained or available. Due to the competition for skilled personnel in the U.S. cannabis industry it is more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, The Company may not be able to effectively manage or grow its business, which could adversely affect its financial condition and the value of any investment in the Company could be significantly reduced or completely lost.

Unreliability of Forecasts

Any forecasts made by the Company about its operations may prove to be inaccurate. The Company must, among other things, determine appropriate risks, rewards, and level of investment in its product lines, respond to economic and market variables outside of its control, respond to competitive developments and continue to attract, retain, and motivate qualified employees. There can be no assurance that the Company will be successful in meeting these challenges and addressing such risks and the failure to do so could have a materially adverse effect on our business, results of operations, and financial condition. The prospects of the Company must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stage of development. As a result of these risks, challenges, and uncertainties, the value of any investment in the Company could be significantly reduced or completely lost.

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Managing Growth

The Company may not be able to effectively manage its growth or improve its operational, financial, and management information systems, which would impair its results of operations.

In the near term, the Company intends to expand the scope of its operations and activities significantly. If it is successful in executing its business plan, it will experience growth that could place a significant strain on its business operations, finances, management, and other resources. The factors that may place strain on the Company’s resources include, but are not limited to, the following:

the need for continued development of financial and information management systems;

the need to manage strategic relationships and agreements with manufacturers, customers, and partners; and

difficulties in hiring and retaining skilled management, technical, and other personnel necessary to support and manage the business.

Additionally, the strategy of the Company envisions a period of rapid growth that may impose a significant burden on its administrative and operational resources. The ability to effectively manage growth will require it to substantially expand the capabilities of its administrative and operational resources and to attract, train, manage, and retain qualified management and other personnel. There can be no assurance that the Company will be successful in recruiting and retaining new employees, or retaining existing employees.

The Company cannot provide assurances that its management will be able to manage this growth effectively and the failure to successfully manage growth could result in its sales not increasing commensurately with capital investments or otherwise materially adversely affecting the business, financial condition, or results of operations.

Inability to Innovate and Find Efficiencies

If the Company is unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected. In the area of innovation, the Company must be able to develop new technologies and products that appeal to its customers. This depends, in part, on the technological and creative skills of the Company’s personnel and on our ability to protect our intellectual property rights. The Company may not be successful in the development, introduction, marketing, and sourcing of new technologies or innovations, that satisfy customer needs, achieve market acceptance, or generate satisfactory financial returns.

Website

Prospective customers may be deterred from doing business with the Company with a significant nationwide online presence because of fears of U.S. federal or state enforcement of laws prohibiting possession and sale of medical or adult-use marijuana.

The Company’s website is visible in jurisdictions where medicinal and/or adult-use of marijuana is not permitted and, as a result, the Company may be found to be violating the laws of those jurisdictions. The Company could lose potential customers as they could fear federal prosecution for buying its marijuana, reducing its revenue.

Operational Risk

The Company will be affected by a number of operational risks and the it may not be adequately insured for certain risks, including: labour disputes; catastrophic accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of non-compliance with laws and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and ground movements. There is no assurance that the foregoing

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risks and hazards will not result in damage to, or destruction of, the Company’s properties, grow facilities and extraction facilities, personal injury or death, environmental damage, adverse impacts on the Company’s operation, costs, monetary losses, potential legal liability and adverse governmental action, any of which could have an adverse impact on the Company’s future cash flows, earnings and financial condition. Also, the Company may be subject to or affected by liability or sustain loss for certain risks and hazards against which the Company cannot insure or which the Company may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition.

Reliance on third-party suppliers, manufacturers and contractors; Reliance on Key Inputs

The Company’s business is dependent on a number of key inputs from third parties and their related costs including raw materials and supplies related to its cultivation and production operations, as well as electricity, water and other local utilities. Due to the uncertain regulatory landscape for regulating cannabis in the U.S., the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs from third parties could materially impact the business, financial condition and operating results of the Company. Some of these inputs may only be available from a single supplier or a limited group of suppliers in the future. If the Company becomes reliant upon a sole source supplier and it was to go out of business or suspend services the Company might be unable to find a replacement for such source in a timely manner or at all. Similarly, if any future sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Additionally, any supplier could at any time suspend or withdraw services. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the Company’s business, financial condition and operating results.

Revenue Shortfalls

Revenue shortfalls from budget may result from lower than expected sales volume, sale price and/or inventory due to inadequate marketing or lower than expected market stimulation. Average sales prices may be less than budgeted due to aggressive competitor pricing below the Company’s prices.

Failure to Complete Acquisitions

The Company currently expects to complete certain transactions in the future. These acquisitions are subject to a number of customary closing conditions including in certain instances, regulatory approval and may not close for a variety of reasons including if the closing conditions are not satisfied or waived, some of which may not be within the control of the Company. In addition, even if these transactions were to be completed, they may not close on terms or within the timing currently expected. If one or more of these transactions do not close or are completed pursuant to terms or timelines different than expected, it could have an adverse effect on the Company’s future capital plans and require the Company to reallocate funds.

Permits and Authorizations

The Company may be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations, or may only be able to do so at great cost, to operate its medical marijuana business. In addition, the Company may not be able to comply fully with the wide variety of laws and regulations applicable to the medical marijuana industry. Failure to comply with or to obtain or maintain the necessary licenses, permits, authorizations, or accreditations could result in restrictions on our ability to operate the medical marijuana business, which could have a material adverse effect on our business.

Potential for Conflict of Interest

All decisions to be made by such directors and officers involving the Company are required to be made in accordance with their duties and obligations to act honestly and in good faith with a view to the best interests of the Company. In addition, such directors and officers are required to declare their interests in, and such directors are required to refrain from voting on any matter in which they may have a material conflict of interest. For a description of certain risks associated with the Company’s dual class voting structure, see “Founder Voting Control”.

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Certain of the Company’s directors and officers are, and may continue to be, or may become, involved in other business ventures through their direct and indirect participation in, among other things, corporations, partnerships and joint ventures, that are or may become competitors of the products and services the Company provides or intends to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Company’s interests. In accordance with applicable corporate law, directors who have a material interest in a contract or transaction or a proposed contract or transaction with the Company that is material to the Company are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the transaction. This does not impact the directors and officers obligation to act honestly and in good faith with a view to the Company’s best interests. However, in conflict of interest situations, the Company’s directors and officers may owe the same duty to another company and will need to balance their competing interests with their duties to the Company. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavorable to the Company.

Difficulty in Enforcing Judgments and Effecting Service of Process on Directors and Officers

The directors and officers of the Company reside outside of Canada. Some or all of the assets of such persons may be located outside of Canada. Therefore, it may not be possible for Company shareholders to collect or to enforce judgments obtained in Canadian courts predicated upon the civil liability provisions of applicable Canadian securities laws against such persons. Moreover, it may not be possible for Company shareholders to effect service of process within Canada upon such persons.

Intellectual Property

If the Company fails to protect its intellectual property, its business could be adversely affected. Viability will depend, in part, on the Company’s ability to develop and maintain the proprietary aspects of its technology to distinguish its products from its competitors’ products. The Company relies on copyrights, trademarks, trade secrets, and confidentiality provisions to establish and protect our intellectual property.

The Company will not be able to register any United States federal trademarks or patents for its cannabis products due to producing, manufacturing, processing, possessing, distributing, selling, and using cannabis being a crime under the CSA. The United States Patent and Trademark Office will not permit the registration of any patent or trademark that identifies cannabis products. As a result, the Company likely will be unable to protect its cannabis product trademarks beyond the geographic areas in which it conducts business. The use of its trademarks outside the states in which it operates by one or more other persons could have a material adverse effect on the value of such trademarks.

Any infringement or misappropriation of the Company’s intellectual property could damage its value and limit its ability to compete. The Company may have to engage in litigation to protect the rights to its intellectual property, which could result in significant litigation costs and require a significant amount of its time. In addition, the Company’s ability to enforce and protect its intellectual property rights may be limited in certain countries outside the U.S., which could make it easier for competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by the Company.

Competitors may also harm the Company’s sales by designing products that mirror the capabilities of its products or technology without infringing on its intellectual property rights. If the Company does not obtain sufficient protection for its intellectual property, or if it is unable to effectively enforce its intellectual property rights, its competitiveness could be impaired, which would limit its growth and future revenue.

The Company may also find it necessary to bring infringement or other actions against third parties to seek to protect its intellectual property rights. Litigation of this nature, even if successful, is often expensive and time- consuming to prosecute and there can be no assurance that the Company will have the financial or other resources to enforce its rights or be able to enforce its rights or prevent other parties from developing similar technology or designing around its intellectual property.

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Although the Company believes that its technology does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on the business.

The Company is not aware of any infringement by it of any person’s or entity’s intellectual property rights. In the event that products sold by the Company are deemed to infringe upon the patents or proprietary rights of others, the Company could be required to modify its products or obtain a license for the manufacture and/or sale of such products or cease selling such products. In such event, there can be no assurance that the Company would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon the Company’s business.

There can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. If the Company’s products or proposed products are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, the Company could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on the Company’s business and its financial condition.

Information Technology Systems and Cyber-Attacks

The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology (“IT”) systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

Trade Secrets

The Company’s trade secrets may be difficult to protect as it depends upon the skills, knowledge, and experience of its scientific and technical personnel, consultants and advisors, as well as licensors and contractors. Because of the highly competitive nature of the U.S. cannabis industry, the Company relies in part on trade secrets to protect its proprietary technology and processes. However, trade secrets are difficult to protect. The Company enters into confidentiality or non-disclosure agreements with its corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties confidential information developed by the receiving party or made known to the receiving party by the Company during the course of the receiving party’s relationship with the Company. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to the Company will be the Company’s exclusive property, and the Company enters into assignment agreements to perfect its rights.

These confidentiality, inventions, and assignment agreements may be breached and may not effectively assign intellectual property rights to the Company. Trade secrets also could be independently discovered by competitors, in which case the Company would not be able to prevent the use of such trade secrets by competitors. The enforcement of a claim alleging that a party illegally obtained and was using the Company’s trade secrets could be difficult, expensive, and time consuming and the outcome would be unpredictable. In addition, courts outside the U.S. may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect the Company’s competitive position.

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Lack of Access to U.S. Bankruptcy Protections

Because the use of cannabis is illegal under U.S. federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Company, which would have a material adverse effect.

Fluctuations in Currency Exchange Rates

Fluctuations in currency exchange rates may adversely affect Cresco’s financial position. Fluctuations in currency exchange rates may significantly impact Cresco’s financial position and results. Cresco does not have in place a policy for managing or controlling foreign currency risks since, to date, its primary activities have not resulted in material exposure to foreign currency risk.

Insurance Coverage

There is a risk that a greater number of state regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal marijuana to post a bond or significant fees when applying for example for a dispensary license or renewal as a guarantee of payment of sales and franchise tax. Cresco is not able to quantify at this time the potential scope for such bonds or fees in the states in which it currently or may in the future operate. Any bonds or fees of material amounts could have a negative impact on the ultimate success of the Company’s business.

The Company’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labour disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.

The Company’s insurance coverage may be inadequate to cover all significant risk exposures as it will be exposed to liabilities that are unique to the products we provide. While the Company intends to maintain insurance for certain risks, the amount of its insurance coverage may not be adequate to cover all claims or liabilities, and it may be forced to bear substantial costs resulting from risks and uncertainties of its business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to the Company, or at all, could have a material adverse effect on its business, financial condition, and results of operations. The Company does not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

Anti-money Laundering Laws and Regulations

The Company is subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada.

In February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the Treasury Department issued a memorandum (the “FCEN Memo”) providing instructions to banks seeking to provide services to marijuana-related businesses. The FCEN Memo states that in some circumstances, it is permissible for banks to provide services to marijuana-related businesses without risking prosecution for violation of U.S. federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors relating to the prosecution of money laundering offenses predicated on marijuana-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FCEN Memo.

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In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its common shares in the foreseeable future, in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

Risk of Civil Asset Forfeiture

Investments in the United States May be Subject to Heightened Scrutiny

For the reasons set forth above, the Company’s existing operations in the U.S., and any future operations or investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to operate or invest in the U.S. or any other jurisdiction, in addition to those described herein.

Government policy changes or public opinion may also result in a significant influence over the regulation of the marijuana industry in Canada, the U.S. or elsewhere. A negative shift in the public’s perception of medical marijuana in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical marijuana, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.

Constraints on Marketing Products

The development of the Company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the United States limits the Company’s ability to compete for market share in a manner similar to other industries. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and operating results could be adversely affected.

Settlements of Trades

On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“MOU”) with Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the Toronto Stock Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS Clearing and Depository Services Inc. (“CDS”) as it relates to issuers with cannabis-related activities in the United States. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is no CDS ban

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on the clearing of securities of issuers with cannabis-related activities in the United States. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the common shares are listed on a stock exchange, it would have a material adverse effect on the ability of holders of common shares to make and settle trades. In particular, the common shares would become highly illiquid until an alternative was implemented, investors would have no ability to effect a trade of the common shares through the facilities of the applicable stock exchange.

Environmental Risk and Regulation

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its current or proposed production, manufacturing or sale of marijuana or marijuana products or from proceeding with the development of its operations as currently proposed.

Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

Amendments to current laws, regulations and permits governing the production, manufacturing or sale of marijuana or marijuana products, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production or manufacturing costs or reduction in levels of production, manufacturing or sale or require abandonment or delays in development.

Access to Banks

The Company may have difficulty accessing the service of banks, which may make it difficult for it to operate.

Since the use of marijuana is illegal under U.S. federal law, and in light of concerns in the banking industry regarding money laundering and other federal financial crime related to marijuana, U.S. banks have been reluctant to accept deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. Likewise, marijuana businesses have limited, if any, access to credit card processing services. As a result, marijuana businesses in the U.S. are largely cash-based. This complicates the implementation of financial controls and increases security issues. The inability to open or maintain bank accounts or take credit cards may make it difficult for us to operate our contemplated medical marijuana businesses.

Legality of contracts

Because the Company’s contracts involve cannabis and other activities that are not legal under U.S. federal law and in some jurisdictions, the Company may face difficulties in enforcing its contracts in U.S. federal and certain state courts.

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Holding Company

The Company is a holding company and essentially all of its assets are the capital stock of its material subsidiaries. As a result, investors in the Company are subject to the risks attributable to its subsidiaries. Consequently, the Company’s cash flows and ability to complete current or desirable future opportunities are dependent on the earnings of its subsidiaries. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such entities and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Company.

Unfavorable Tax Treatment of Cannabis Businesses

Under Section 280E (“Section 280E”) of the U.S. Tax Code, “no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” This provision has been applied by the U.S. Internal Revenue Service to cannabis operations, prohibiting them from deducting expenses directly associated with the sale of cannabis. Section 280E therefore has a significant impact on the retail side of cannabis, but a lesser impact on cultivation and manufacturing operations. A result of Section 280E is that an otherwise profitable business may, in fact, operate at a loss, after taking into account its U.S. income tax expenses. There are currently several pending cases before various administrative and federal courts challenging these restrictions. There can be no guarantee that any of these challenges will result in any favorable interpretation of Section 280E for cannabis businesses.

United States Tax Classification of the Company

The Company, which is and will continue to be a Canadian corporation as of the date of this AIF, is also expected to be classified for U.S. federal income tax purposes as a United States corporation under Section 7874 of the U.S. Tax Code. Section 7874 of the U.S. Tax Code, contains rules that can cause a non-United States corporation to be taxed as a United States corporation for United States federal income tax purposes. Under section 7874 of the U.S. Tax Code, a corporation created or organized outside the United States. (i.e., a non-United States corporation) will nevertheless be treated as a United States corporation for United States federal income tax purposes (such treatment is referred to as an inversion) if each of the following three conditions are met: (i) the non-United States corporation acquires, directly or indirectly, or is treated as acquiring under applicable United States Treasury Regulations, substantially all of the assets held, directly or indirectly, by a United States corporation or United States trade or business, (ii) after the acquisition, the former stockholders of the acquired United States corporation hold at least 80% (by vote or value) of the shares of the non-United States corporation by reason of holding shares of the United States acquired corporation, trade or business, and (iii) after the acquisition, the non-United States corporation’s expanded affiliated group does not have substantial business activities in the non- United States corporation’s country of organization or incorporation when compared to the expanded affiliated group’s total business activities.

The Company intends to be treated as a United States corporation for United States federal income tax purposes under section 7874 of the U.S. Tax Code and is expected to be subject to United States federal income tax on its worldwide income. However, for Canadian tax purposes, the Company is expected, regardless of any application of section 7874 of the U.S. Tax Code, to be 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 Company will be subject to taxation both in Canada and the United States which could have a material adverse effect on its financial condition and results of operations. The Company may not qualify for certain U.S.-Canada income tax treaty benefits, which could have a material adverse effect on its financial condition and results of operations.

It is unlikely that the Company will pay any dividends on the Subordinate Voting Shares in the foreseeable future. However, dividends received by shareholders who are residents of Canada for purpose of the ITA will be subject to U.S. withholding tax. Any such dividends may not qualify for a reduced rate of withholding tax under the Canada-United States tax treaty. In addition, a foreign tax credit or a deduction in respect of foreign taxes may not be available.

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Dividends received by U.S. shareholders will not be subject to U.S. withholding tax but will be subject to Canadian withholding tax. Dividends paid by the Company will be characterized as U.S. source income for purposes of the foreign tax credit rules under the U.S. Tax Code. Accordingly, U.S. shareholders generally will not be able to claim a credit for any Canadian tax withheld unless, depending on the circumstances, they have an excess foreign tax credit limitation due to other foreign source income that is subject to a low or zero rate of foreign tax.

Dividends received by shareholders that are neither Canadian nor U.S. shareholders will be subject to U.S. withholding tax and will also be subject to Canadian withholding tax. These dividends may not qualify for a reduced rate of U.S. withholding tax under any income tax treaty otherwise applicable to a shareholder of the Company, subject to examination of the relevant treaty.

Because the common shares will be treated as shares of a U.S. domestic corporation, the U.S. gift, estate and generation-skipping transfer tax rules generally apply to a non-U.S. shareholder of common shares.

EACH SHAREHOLDER SHOULD SEEK TAX ADVICE, BASED ON SUCH SHAREHOLDER’S PARTICULAR CIRCUMSTANCES, FROM AN INDEPENDENT TAX ADVISOR.

Consumer Acceptance of Marijuana

We are dependent on the popularity of consumer acceptance of Cresco product lines.

The Company’s ability to generate revenue and be successful in the implementation of the Company’s business plan is dependent on consumer acceptance and demand of Cresco products. Acceptance of Cresco products will depend on several factors, including availability, cost, ease of use, familiarity of use, convenience, effectiveness, safety, and reliability. If these customers do not accept Cresco products, or if such products fail to meet customers’ needs and expectations adequately, our ability to continue generating revenues could be reduced.

A drop in the retail price of medical marijuana products may negatively impact the business.

The demand for Cresco products depends in part on the price of commercially-grown marijuana. Fluctuations in economic and market conditions that impact the prices of commercially-grown marijuana, such as increases in the supply of such marijuana and the decrease in the price of products using commercially-grown marijuana, could cause the demand for marijuana products to decline, which would have a negative impact on our business.

Security Risks

As cash businesses, the premises of the marijuana dispensaries are a target for theft. While the Company has implemented security measures and continues to monitor and improve its security measures, its cultivation, processing and dispensary facilities could be subject to break-ins, robberies and other breaches in security. In the event of robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers and cultivation and processing equipment could have a material adverse impact on the business, financial condition and results of operation of the Company.

As the Company’s business involves the movement and transfer of cash which is collected from dispensaries and used to purchase trim, accessories etc. or deposited into its bank, there is a risk of theft or robbery during the transport of cash. The Company has engaged a security firm to provide armed guards and security in the transport and movement of large amounts of cash. Sales representatives sometimes transport cash and/or products and each sales representative has a panic button in their vehicle and, if requested, may be escorted by armed guards. While the Company has taken robust steps to prevent theft or robbery of cash during transport, there can be no assurance that there will not be a security breach during the transport and the movement of cash involving the theft of product or cash.

Risk of Litigation

If the Company incurs substantial liability from litigation, complaints, or enforcement actions, its financial condition, business and results of operation could suffer.

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The Company’s participation in the medical marijuana industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various U.S. federal, state, or local governmental authorities against the Company or its subsidiaries. Litigation, complaints, and enforcement actions involving the Company or its subsidiaries could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability, and growth prospects. The Company’s subsidiaries are presently engaged in the distribution of marijuana, however, neither the Company nor its subsidiaries are currently, subject to any litigation, complaint or enforcement action regarding marijuana brought by any U.S. federal, state, or local governmental authority with respect to the business.

From time-to-time in the normal course of business operations, the Company may become subject to litigation that may result in liability material to its financial statements as a whole or may negatively affect its operating results if changes to its business operations are required. The cost to defend such litigation may be significant and may require a diversion of resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of the business, regardless of whether the allegations are valid or whether the Company is ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of the Company’s insurance coverage for any claims could adversely affect its business and the results of operations.

Risks Inherent in an Agricultural Business

The Company’s business involves the growing of medical and adult-use marijuana, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although the Company expects that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.

Vulnerability to Rising Energy Costs

Adult-use and medical marijuana growing operations consume considerable energy, making the Company potentially vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business, results of operations, financial condition or prospects of the Company.

Reliance on License

The Company’s ability to cultivate, store, produce and distribute medical and adult-use marijuana products in Illinois, Pennsylvania, Ohio, Nevada, Arizona, California and New York is dependent on maintaining its licenses in good standing with each applicable State regulator. Failure to comply with the requirements of any of its licenses or any failure to maintain any of the licenses would have a material adverse impact on the business, financial condition and operating results of the Company. The Company’s (or its subsidiaries) licenses related to its ability to cultivate, store, produce and distribute medical and adult-use marijuana products (as applicable) in Illinois, Pennsylvania, Ohio, Nevada, Arizona, California and New York are currently in good standing and the Company remains fully compliant with the respective associated state laws and regulations.

Product Liability

As a distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the sale of the Company’s products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of the Company’s products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that the Cresco’s products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.

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A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company. Although the Company has secured product liability insurance, and strictly enforces a quality standard within the operations, there can be no assurances that the Company will be able to maintain its product liability insurance on acceptable terms or with adequate coverage against potential liabilities. This scenario could prevent or inhibit the commercialization of the Company’s potential products. To date, there have been no product related issues.

Product Recalls

Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of the Company’s products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the Company’s significant brands were subject to recall, the image of that brand and the Company as its owner could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of the Company’s operations by the FDA or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

Regulatory or Agency proceedings, Investigations and Audits

The Company’s business requires compliance with many laws and regulations. Failure to comply with these laws and regulations could subject the Company to regulatory or agency proceedings or investigations and could also lead to damage awards, fines and penalties. The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require the Company to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition and results of operation.

Newly Established Legal Regime

The Company business activities will rely on newly established and/or developing laws and regulations in the states in which it operates. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Company’s profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, Securities and Exchange Commission, the DOJ, the Financial Industry Regulatory Advisory or other U.S. federal or applicable state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or nonmedical purposes in the United States. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the industry may adversely affect the business and operations of the Company, including without limitation, the costs to remain compliant with applicable laws and the impairment of its business or the ability to raise additional capital.

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General Economic Risks

The Company’s operations could be affected by the economic context should the unemployment level, interest rates or inflation reach levels that influence consumer trends and spending and, consequently, impact the Company’s sales and profitability.

DIVIDENDS AND DISTRIBUTIONS

It is contemplated by the Company that it will reinvest all future earnings in order to finance the development and growth of its business. As a result, it is not contemplated that dividends will be paid on the Subordinate Voting Shares in the foreseeable future. Any future determination to pay distributions will be at the discretion of the Company’s Board and will be made in accordance with applicable law and will depend on the financial condition, business environment, operating results, capital requirements, any contractual restrictions on the payment of distributions and any other factors that the Company’s Board deems relevant.

DESCRIPTION OF CAPITAL STRUCTURE

The Company is authorized to issue an unlimited number of Subordinate Voting Shares, an unlimited number of Proportionate Voting Shares and an unlimited number of Super Voting Shares. As of April 28, 2020, the outstanding capital of the Company consists of: (i) 153,262,290 Subordinate Voting Shares; (ii) 264,458 Proportionate Voting Shares (which includes securities to be issued in connection with an acquisition and are convertible on a 1:200 basis into 52,891,696 Subordinate Voting Shares); and (iii) 500,000 Super Voting Shares.

Summary of Share Provisions

Subordinate Voting Shares


Right to Notice and Vote		Holders of Subordinate Voting Shares will be entitled to notice of and to attend at 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 Subordinate Voting Shares will be entitled to one vote in respect of each Subordinate Voting Share held.

Class Rights & Right of First Refusal		As long as any Subordinate Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Subordinate Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Subordinate Voting Shares. Holders of Subordinate Voting Shares will not be entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company.

Dividends		Holders of Subordinate Voting Shares will be entitled to receive as and when declared by the directors of the Company, dividends in cash or property of the Company.

Participation		In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Subordinate Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Subordinate Voting Shares (including, without restriction, the Super Voting Shares) be entitled to participate ratably along with all other holders of Subordinate Voting Shares and the Proportionate Voting Shares (on an as converted to Proportionate Voting Shares basis).

Changes		No subdivision or consolidation of the Subordinate Voting Shares shall occur unless, simultaneously, the Subordinate Voting Shares, the Proportionate Voting Shares and the Super Voting Shares are subdivided or consolidated in the same manner or such other adjustment is made so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

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Conversion		In the event that an offer is made to purchase Proportionate Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules or conditions of listing of a stock exchange on which the Proportionate Voting Shares are then listed, to be made to all or substantially all the holders of Proportionate Voting Shares in a given province or territory of Canada to which these requirements apply, each Subordinate Voting Share shall become convertible at the option of the holder into Proportionate Voting Shares at the inverse of the Conversion Ratio then in effect at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Proportionate Voting Shares pursuant to the offer, and for no other reason. In such event, the Company’s transfer agent shall deposit the resulting Proportionate Voting Shares on behalf of the holder. Should the Proportionate Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by shareholders or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Proportionate Voting Shares resulting from the conversion shall be automatically reconverted, without further intervention on the part of the Company or on the part of the holder, into Subordinate Voting Shares at the Conversion Ratio then in effect.

Conversion of Subordinate Voting Shares		In the event that an offer is made to purchase Proportionate Voting Shares, and the offer is one which is required, pursuant to applicable securities legislation or the rules of a stock exchange, if any, on which the Proportionate Voting Shares are then listed, to be made to all or substantially all the holders of Proportionate Voting Shares in a province or territory of Canada to which the requirement applies, each Subordinate Voting Share shall become convertible at the option of the holder into Proportionate Voting Shares at the inverse of the conversion ratio then in effect, at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Proportionate Voting Shares under the offer, and for no other reason. In such event, the transfer agent for the Subordinate Voting Shares shall deposit under the offer the resulting Proportionate Voting Shares, on behalf of the holder. To exercise such conversion right, the holder or his or its attorney duly authorized in writing shall

		(a) give written notice to the transfer agent of the exercise of such right, and of the number of Subordinate Voting Shares in respect of which the right is being exercised;

		(b) deliver to the transfer agent the share certificate or certificates representing the Subordinate Voting Shares in respect of which the right is being exercised, if applicable; and

		(c) pay any applicable stamp tax or similar duty on or in respect of such conversion.

		No share certificates representing the Proportionate Voting Shares, resulting from the conversion of the Subordinate Voting Shares will be delivered to the holders on whose behalf such deposit is being made. If Proportionate Voting Shares, resulting from the conversion and deposited pursuant to the offer, are withdrawn by the holder or are not taken up by the offeror, or the offer is abandoned, withdrawn or terminated by the offeror or the offer otherwise expires without such Proportionate Voting Shares being taken up and paid for, the Proportionate Voting Shares resulting from the conversion will be re-converted into Subordinate Voting Shares at the then conversion ratio and a share certificate representing the Subordinate Voting Shares will be sent to the holder by the transfer agent. In the event that the offeror takes up and pays for the Proportionate Voting Shares resulting from conversion, the transfer agent shall deliver to the holders thereof the consideration paid for such shares by the offeror.

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Take-Over Bid Protection

The Founders have entered into an investment agreement with the Company whereby, upon any sale of Super Voting Shares to a third party purchaser that is not the holder’s immediate family members or an affiliated entity or a transfer to the other Founder or an entity affiliated with the other Founder, such Super Voting Shares will immediately be redeemed by the Company for their issue price. See “Super Voting Shares – Investment Agreement” below.

Additionally, as noted above, the Company’s articles entitle the holders of Subordinate Voting Shares to convert to Proportionate Voting Shares and tender to any take-over bid made solely to the holders of Proportionate Voting Shares.

Proportionate Voting Shares


Right to Vote		Holders of Proportionate Voting Shares will be entitled to notice of and to attend at 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 Proportionate Voting Shares will be entitled to one vote in respect of each Subordinate Voting Share into which such Proportionate Voting Share could ultimately then be converted, which for greater certainty, shall initially be equal to 200 votes per Proportionate Voting Share (subject to adjustment at the discretion of the Company Board, depending upon the ratios necessary to preserve foreign private issuer status).

Class Rights		As long as any Proportionate Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Proportionate Voting Shares and Super Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Proportionate Voting Shares. Consent of the holders of a majority of the outstanding Proportionate Voting Shares and Super Voting Shares shall be required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Proportionate Voting Shares. In connection with the exercise of the voting rights for the foregoing only, each holder of Proportionate Voting Shares will have one vote in respect of each Proportionate Voting Share held.

Rights to Subscribe; Pre-Emptive Rights		The holders of Proportionate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company.

Dividends		The holder of Proportionate Voting Shares shall have the right to receive dividends, out of any cash or other assets legally available therefor, pari passu (on an as converted basis, assuming conversion of all Proportionate Voting Shares into Subordinate Voting Shares) as to dividends and any declaration or payment of any dividend on the Subordinate Voting Shares. No dividend will be declared or paid on the Proportionate Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares.

Participation		In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Proportionate Voting Shares will, subject to the prior rights of the holders of any shares of the Company

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		ranking in priority to the Proportionate Voting Shares (including, without restriction, the Super Voting Shares), be entitled to participate ratably along with all other holders of Proportionate Voting Shares (on an as-converted to Subordinate Voting Share basis) and the Subordinate Voting Shares.

Changes		No subdivision or consolidation of the Proportionate Voting Shares shall occur unless, simultaneously, the Subordinate Voting Shares, the Proportionate Voting Shares and the Super Voting Shares are subdivided or consolidated in the same manner or such other adjustment is made so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

Conversion		The Proportionate Voting Shares each have a restricted right to convert into 200 Subordinate Voting Shares (the “Conversion Ratio”), subject to adjustments for certain customary corporate changes and foreign private issuer considerations. The ability to convert the Proportionate Voting Shares is subject to a restriction that the aggregate number of Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares held of record, directly or indirectly, by residents of the United States (as determined in accordance with Rules 3b-4 and 12g3-2(a) under the Securities Exchange Act of 1934, as amended), may not exceed forty percent (40%) (subject to adjustment) of the aggregate number of Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares issued and outstanding after giving effect to such conversions and to a restriction on beneficial ownership of Subordinate Voting Shares exceeding certain levels. In addition, the Proportionate Voting Shares will be automatically converted into Subordinate Voting Shares in certain circumstances, including upon the registration of the Subordinate Voting Shares under the United States Securities Act of 1933, as amended.

Super Voting Shares

Right to Vote		Holders of Super Voting Shares shall be entitled to notice of and to attend at 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 Super Voting Shares shall be entitled to 2,000 votes in respect of each Super Voting Share held provided that, if at any time the aggregate number of issued and outstanding (i) Cresco Corp Redeemable Shares in the capital of Cresco Corp (if applicable) and (ii) Cresco Redeemable Units in the capital of Cresco (or such securities of any successor to Cresco Corp or Cresco as may exist from time to time) beneficially owned, directly or indirectly by a holder of the Super Voting Shares (the “Holder”) and the Holder’s predecessor or transferor, permitted transferees and permitted successors, and any prior transferor’s transferor and any prior permitted transferee’s permitted transferee (the “Holder’s Group”), divided by the aggregate number of (i) Cresco Corp Redeemable Shares (if applicable) and (ii) Cresco Redeemable Units beneficially owned, directly or indirectly by the Holders and the Holder’s Group as at the date of completion of the business combination transaction involving, among others, the Company, Cresco Corp and Cresco be less than 50% (the “Triggering Event”), the Holder shall from that time forward be entitled to 50 votes in respect of each Super Voting Share held. The holders of Super Voting Shares shall, from time to time upon the request of the Company, provide to the Company evidence as to such holders’ direct and indirect beneficial ownership (and that of its permitted transferees and permitted successors) of Cresco Corp Redeemable Shares (if applicable) and Cresco Redeemable Units to enable the Company to determine the voting entitlement of the Super Voting Shares. For the purposes of these calculations, a Holder shall be deemed to beneficially own Cresco Corp Redeemable Shares (if applicable) held by an intermediate company or fund in proportion to their equity ownership of such company or fund.

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Class Rights		As long as any Super Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Super Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Super Voting Shares. Consent of the holders of a majority of the outstanding Super Voting Shares shall be required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Super Voting Shares. In connection with the exercise of these voting rights, each holder of Super Voting Shares will have one vote in respect of each Super Voting Share held.

Rights to Subscribe; Pre-Emptive Rights		The holders of Super Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company not convertible into Super Voting Shares, now or in the future.

Dividends		The holders of the Super Voting Shares shall not be entitled to receive dividends.

Participation		In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the Company will distribute its assets firstly and in priority to the rights of holders of any other class of shares of the Company (including the holders of Subordinate Voting Shares and the Proportionate Voting Shares) to return the issue price of the Super Voting Shares to the holders, thereof and if there are insufficient assets to fully return the issue price to the holders of the Super Voting Shares, such holders will receive an amount equal to their pro rata share in proportion to the issue price of their Super Voting Shares along with all other holders of Super Voting Shares. The holders of Super Voting Shares shall not be entitled to receive directly or indirectly as holders of Super Voting Shares any other assets or property of the Company and their sole rights will be to the return of the issue price of such Super Voting Shares in accordance with this paragraph.

Changes		No subdivision or consolidation of the Super Voting Shares shall occur unless, simultaneously, the Super Voting Shares, Proportionate Voting Shares and the Subordinate Voting Shares are subdivided or consolidated in the same manner, so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

Conversion		The holders of the Super Voting Shares shall have no right of conversion.

Redemption Rights		Upon the occurrence of a Triggering Event, the Company has the right to redeem all or some of the Super Voting Shares from the Holder and Holder’s Group who caused the Triggering Event to occur, by providing two days prior written notice to the Holder and Holder’s Group of such Super Voting Shares, for an amount equal to the issue price for each Super Voting Share, payable in cash to the holders of the Super Voting Shares so redeemed. The Company need not redeem Super Voting Shares on a pro-rata basis among the Holders or Holder’s Group. Holders of Super Voting Shares to be redeemed by the Company shall surrender the certificate or certificates representing such Super Voting Shares to the Company at its records office duly assigned or endorsed for transfer to the Company (or accompanied by duly executed share transfers relating thereto).

		Each surrendered certificate shall be cancelled, and the Company shall thereafter make payment of the applicable redemption amount by certified cheque, bank draft or wire transfer to the registered holder of such certificate; provided that, if less than all the Super Voting Shares represented by a surrendered certificate are redeemed then a new share certificate representing the unredeemed balance of Super Voting Shares represented by such certificate shall be issued in the name of the applicable registered holder of the cancelled share certificate. If on the applicable redemption date the redemption price is paid

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		(or tendered for payment) for any of the Super Voting Shares to be redeemed then on such date all rights of the holder in the Super Voting Shares so redeemed and paid or tendered shall cease and such redeemed Super Voting Shares shall no longer be deemed issued and outstanding, regardless of whether or not the holder of such Super Voting Shares has delivered the certificate(s) representing such securities to the Company, and from and after such date the certificate formerly representing the retracted Super Voting Shares shall evidence only the right of the former holder of such Super Voting Shares to receive the redemption price to which such holder is entitled.

Transfer		No Super Voting Share may be transferred by the holder thereof unless such transfer is to an immediate family member or a transfer for the purposes of estate or tax planning to a company or person that is wholly beneficially owned by such holder or immediate family members of such holder or which such holder or immediate family members of such holder are the sole beneficiaries thereof. In order to be effective, any transfer shall require the prior written consent of the Company.

Investment Agreement		To supplement the rights, privileges, restrictions and conditions attached to the Super Voting Shares, the Company and the Founders, being the initial holders of Super Voting Shares, entered into an investment agreement effective as of the completion of the Business Combination which, among other things, provides that (i) each Super Voting Share will be transferable only to the holder’s immediate family members or an affiliated entity or a transfer to the other Founder or an entity affiliated with the other Founder, and (ii) upon any sale of Super Voting Shares to a third party purchaser not listed in clause (i), such Super Voting Shares will immediately be redeemed by the Company for their issue price.

DESCRIPTION OF SHARE CAPITAL OF CRESCO CORP

The share capital of Cresco Corp consists of Cresco Corp Voting Shares and Cresco Corp Redeemable Shares. As of the date hereof no Cresco Corp Redeemable Shares are issued or outstanding.

Holders of Cresco Corp Voting Shares are entitled to receive notice of, attend and vote at meetings of the securityholders of Cresco Corp (other than meetings at which only holders of another class or series of shares are entitled to vote separately as a class or series). Each Cresco Corp Voting Share entitles the holder thereof to one vote on all matters upon which holders of Cresco Corp Voting Shares are entitled to vote.

Holders of Cresco Corp Redeemable Shares (if and when issued) are entitled to exchange or redeem their Cresco Corp Redeemable Shares for Proportionate Voting Shares pursuant to the terms specified in the articles of incorporation of Cresco Corp. Cresco Corp Redeemable Shares do not entitle the holders thereof to receive notice of, attend or vote at meetings of the securityholders.

A holder of Cresco Corp Redeemable Shares (other than the Company), if and when issued, has the right to cause Cresco Corp to redeem its Cresco Corp Redeemable Shares. If a holder of Cresco Corp Redeemable Shares (other than the Company) exercises its redemption or exchange right, Cresco Corp will repurchase for cancellation each such Cresco Corp Redeemable Share submitted for redemption or exchange in consideration for either Proportionate Voting Shares (currently, at a ratio of 1 Proportionate Voting Share for every 200 Cresco Corp Redeemable Shares exchanged) or a cash amount equal to the cash settlement amount applicable to such Cresco Corp Redeemable Share, as determined by Cresco Corp; provided that Cresco Corp may assign to the Company its rights and obligations to effect a redemption or exchange directly with the redeeming holder. For further details on the rights attached to Proportionate Voting Shares, please see – “Proportionate Voting Shares” above. For greater certainty, Cresco Corp or Cresco may elect to deliver Subordinate Voting Shares (currently, on a 1:1 basis) in lieu of the Proportionate Voting Shares for the Cresco Corp Redeemable Shares exchanged.

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DESCRIPTION OF UNIT CAPITAL OF CRESCO

Management of Cresco

Following consummation of the Business Combination, Cresco Corp will be the sole manager of Cresco and will have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Cresco, subject to the terms of the A&R LLC Agreement and applicable laws.

A&R LLC Agreement

The following is a summary of the material provisions set forth in the A&R LLC Agreement to be entered into between Cresco and each of the Cresco Members in accordance with the provisions of the Pre-Combination LLC Agreement, which A&R LLC Agreement will amend and restate the Pre-Combination LLC Agreement and come into effect on the closing date.

Duration

Cresco has perpetual existence and will continue as a limited liability company until and unless Cresco is terminated or dissolved in accordance with the A&R LLC Agreement and the ILLCA.

Purpose of Cresco

The principal purpose and business of Cresco shall be to engage in any lawful act or activity for which a limited liability company may be organized under the ILLCA and to conduct such other activities as may be necessary, advisable, convenient or appropriate to promote or conduct the business of Cresco as set forth herein, including, but not limited to, entering into partnership agreements in the capacity of a general or limited partner, becoming a member of a joint venture or a limited liability company, participating in forms of syndication for investment, owning stock in corporations and the incurring of indebtedness and the granting of liens and security interests on the real and personal property of Cresco.

Management: The Manager

Cresco Corp is the sole manager of Cresco and will manage all of Cresco’s operations and activities in accordance with the A&R LLC Agreement. Cresco Corp has the capacity and authority to act as the manager of Cresco.

Subject to the terms of the A&R LLC Agreement and the ILLCA, Cresco Corp has the full and exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Cresco. Among other things, Cresco Corp is empowered to negotiate, execute and perform all agreements, conveyances or other instruments on behalf of Cresco, and to mortgage, charge or otherwise create a security interest over any or all of the property of Cresco or its subsidiaries, and to sell property subject to such a security interest.

The A&R LLC Agreement provides that, where Cresco Corp is permitted or required to take any action or to make a decision in its “sole discretion”, “discretion”, with “complete discretion” or any other grant of similar authority and latitude under the A&R LLC Agreement in managing Cresco’s operations and activities, Cresco Corp shall be entitled to consider only such interests and factors as it desires, including its own interests, and shall, to the fullest extent permitted by the ILLCA, have no duty or obligation (fiduciary or otherwise) to give any consideration to any interest of, or factors affecting, Cresco or the other Cresco Members.

Despite the foregoing, Cresco Corp will only be able to take certain types of actions (as set forth in the A&R LLC Agreement) if the same are approved, consented to or directed by a majority of the Cresco Members.

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Capital Structure of Cresco and Cresco Corp

Upon the closing of the Business Combination, the capital of Cresco shall initially consist of three classes of units: the interest of Cresco Corp is to be represented by Common Units with the number of issued Common Units immediately following the Business Combination to be equal to the respective number of Subordinate Voting Shares issued and outstanding, provided that such Common Units held by Cresco Corp shall not entitle Cresco Corp to any exchange or redemption rights with respect to such Common Units. The interests of other Cresco Members will be represented by Common Units, pursuant to which all such other Cresco Members shall be entitled to certain exchange rights and redemption rights, as provided in the A&R LLC Agreement. Such Common Units held by such other Cresco Members are referred to herein as “Cresco Redeemable Units.” The A&R LLC Agreement shall also authorize the issuance of AO LTIP Units, FV LTIP Units, or other classes or series of membership units issued in accordance with Exhibit A of the A&R LLC Agreement (“LTIP Units”) to persons who provide services for or on behalf of Cresco, which such LTIP Units shall entitle the holder to certain rights and privileges, including the right to convert such LTIP Units to Common Units, subject to certain restrictions, qualifications and limitations, each as provided in the A&R LLC Agreement.

When the Company issues Subordinate Voting Shares, it may contribute all or a portion of the net proceeds to Cresco Corp in exchange for additional shares of Cresco Corp stock. Upon receipt of any such net proceeds from the Company, Cresco Corp will generally contribute such net proceeds to Cresco as a capital contribution on account of its Common Units. In the event that a new class of shares in the capital of the Company is created, Cresco Corp may create a corresponding new class of Cresco units that has corresponding distribution rights to such new class of Company shares and will cause Cresco to issue new units of such class to Cresco Corp. The Company may contribute all or a portion of the net proceeds from the issuance of any such shares to Cresco Corp and Cresco Corp, upon receipt of such proceeds, will generally contribute such net proceeds to Cresco in exchange for units of Cresco.

If the Company proposes to redeem, repurchase or otherwise acquire any Subordinate Voting Shares for cash, the A&R LLC Agreement requires that Cresco Corp cause Cresco to redeem a corresponding number of Common Units held by Cresco Corp at an aggregate redemption price equal to the aggregate purchase or redemption price of the Subordinate Voting Shares being repurchased or redeemed by the Company (plus any expenses related thereto) and upon such other terms as are the same for the redemption by the Company, and the A&R LLC Agreement further requires that Cresco Corp, immediately prior to such redemption, repurchase or acquisition by the Company, but immediately following the redemption by Cresco, to redeem a corresponding number of shares of Cresco Corp stock held by the Company at an aggregate redemption price equal to the aggregate purchase or redemption price of the Subordinate Voting Shares being repurchased or redeemed by the Company (plus any expenses related thereto) and upon such other terms as are the same for the redemption by the Company.

In the event that any change is effected in the share capital of the Company, Cresco shall undertake all actions requested by Cresco Corp, including a reclassification, distribution, division or recapitalization of the Common Units to maintain at all times the same ratios between the number of Subordinate Voting Shares, the number of Cresco Corp shares and the number of Common Units issued and outstanding immediately prior to any such reclassification, consolidation, split, dividend of securities or other recapitalization including, without limitation, also effecting a reclassification, consolidation, split, dividend of securities or other recapitalization with respect to, as applicable, the Subordinate Voting Shares, Cresco Corp shares and Common Units.

Exchange Mechanism

A holder of Common Units (other than Cresco Corp) will have the right to cause Cresco to redeem its Common Units. If a holder of Common Units (other than Cresco Corp) exercises its exchange right, Cresco will repurchase for cancellation each such Common Unit submitted for exchange in consideration for either Proportionate Voting Shares (at a ratio of 1 Proportionate Voting Share for every 200 Common Units exchanged) or a cash amount equal to the cash settlement amount applicable to such Common Unit, as determined by Cresco Corp, provided that Cresco Corp shall have the right to complete such exchange directly with the redeeming holder or may assign to the Company its rights and obligations to effect an exchange directly with the redeeming holder. For greater certainty, Cresco may elect to deliver Subordinate Voting Shares (currently, on a 1:1 basis) in lieu of the Proportionate Voting Shares for the Common Units exchanged.

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Any holder that causes Cresco to redeem its Common Units pursuant to the terms of the A&R LLC Agreement and otherwise fails to comply with the documentation requirements of U.S. Tax Code Section 1446, including the requirement that such holder provide to Cresco a properly completed IRS Form W-9 or satisfy another exception as permitted within U.S. Tax Code Section 1446, prior to the effective time of any such redemption or exchange, will generally be subject to U.S. withholding tax equal to ten percent (10%) of the fair market value of the Proportionate Voting Shares or the cash, as applicable, to be delivered to such holder pursuant to such redemption or exchange.

Additional Common Units; No Preemptive Rights

Except as described above, the A&R LLC Agreement authorizes Cresco Corp to cause Cresco to issue additional Common Units and securities convertible or exchangeable into Common Units on any terms and conditions of offering and sale as Cresco Corp in its discretion may determine, including with respect to acquisitions by Cresco of additional assets or equity interests in corporations, partnerships, limited liability companies and other entities and with respect to executive compensation. Unless otherwise determined by Cresco Corp, no person or entity shall have preemptive, preferential or any other similar right with respect to the issuances of any interest in Cresco.

LTIP Units

Cresco may issue LTIP Units to new or existing Cresco Members in exchange for services performed or to be performed on behalf of Cresco. LTIP Units are intended to qualify as “profits interests” for U.S. federal income tax purposes in Cresco. Two initial series of LTIP Units designated as AO LTIP Units and FV LTIP Units, respectively, will be established. The number of LTIP Units, AO LTIP Units and FV LTIP Units that may be issued by Cresco shall not be limited.

LTIP Units may, in the sole discretion of Cresco Corp, be issued subject to vesting, forfeiture and additional restrictions on transfer pursuant to the terms of an award, vesting or other similar agreement. The terms of any such award, vesting or similar agreement may be modified by Cresco Corp from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant award, vesting or similar agreement or by the terms of any plan pursuant to which the LTIP Units are issued, if applicable.

Unless otherwise specified in the relevant award, vesting or similar agreement, upon the occurrence of any event specified in such an agreement resulting in either the forfeiture of any LTIP Units or the repurchase thereof by Cresco at a specified purchase price, then, upon the occurrence of the circumstances resulting in such forfeiture or repurchase by Cresco, the relevant LTIP Units shall immediately and without any further action be treated as cancelled and no longer outstanding for any purpose or as transferred to Cresco.

Upon the occurrence of certain events, including (A) Cresco making a distribution on all outstanding Common Units in Units; (B) Cresco subdividing the outstanding Common Units into a greater number of Units or combining the outstanding Common Units into a smaller number of Units; or (C) Cresco issuing any Units in exchange for its outstanding Common Units by way of reclassification or recapitalization, then Cresco Corp shall make a corresponding adjustment to the LTIP Units to maintain the same correspondence between the Common Units and LTIP Units as existed prior to the occurrence of any such actions.

A holder of LTIP Units shall have the right, at his or her option, at any time to convert all or a portion of his or her vested LTIP Units as follows:

an AO LTIP Unit that has become a vested LTIP Unit shall be converted into a number (or fraction thereof) of fully paid and non-assessable Common Units, giving effect to all adjustments (if any) made pursuant to terms of the A&R LLC Agreement equal to the applicable conversion factor as provided in the A&R LLC Agreement; and

A FV LTIP Unit that has become a vested LTIP Unit shall be converted into a number (or fraction thereof) of fully paid and non-assessable Common Units, giving effect to all adjustments (if any) made pursuant to the terms of the A&R LLC Agreement equal to the applicable conversion factor as provided in the A&R LLC Agreement.

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If Cresco or Cresco Corp is a party to any transaction (including without limitation a merger, consolidation, unit exchange, self-tender offer for all or substantially all Common Units or other business combination or reorganization, or sale of all or substantially all of Cresco’s assets, but excluding any transaction which constitutes an event requiring an adjustment to the LTIP Units to maintain the same correspondence between the Common Units and the LTIP Units, as described above) as a result of which Common Units shall be exchanged for or converted into the right, or the holders of Common Units shall otherwise be entitled to receive cash, securities or other property or any combination thereof, then Cresco Corp shall, immediately prior to such transaction, insure the conversion of the maximum number of LTIP Units then eligible for conversion, taking into account any allocations that occur in connection with such transaction or that would occur in connection with such transaction if the assets of Cresco were sold at the applicable price of such transaction or, if applicable, at a value determined by Cresco Corp in good faith using the value attributed to the Common Units in the context of the such transaction (in which case the date of the forced LTIP Unit conversion shall be the effective date of such transaction and the conversion shall occur immediately prior to the effectiveness of such transaction).

LTIP Units will not be redeemable at the option of Cresco; provided, however, that the foregoing shall not prohibit Cresco from repurchasing LTIP Units from the holder thereof if and to the extent that such holder agrees to sell such LTIP Units.

Except as otherwise set forth in the relevant award, vesting or similar agreement or other separate agreement entered into between Cresco and an LTIP Unit holder, and subject to the terms and conditions set forth in the A&R LLC Agreement, on or at any time after an applicable LTIP Unit conversion date each LTIP Unit holder will have the right to require Cresco to redeem all or a portion of the Common Units into which such LTIP Unit holder’s LTIP Units were converted in exchange for cash, unless the terms of the A&R LLC Agreement, the relevant award, vesting or similar agreement or other separate agreement entered into between Cresco and the LTIP Unit holder expressly provide that such Common Units are not entitled to such redemption right.

Except as otherwise provided in the A&R LLC Agreement, holders of LTIP Units shall not have the right to vote on any matters submitted to a vote of the Cresco Members.

Subject to the terms of the relevant award, vesting or similar agreement or other documentation pursuant to which LTIP Units are granted, except in connection with the exercise of a redemption, a holder of LTIP Units may not transfer all or any portion of his or her LTIP Units without the prior written consent of Cresco Corp, which consent may be given or withheld in Cresco Corp’s sole and absolute discretion.

Transfer of Common Units

Except as permitted by the A&R LLC Agreement, no holder of Common Units may transfer any interest in such Common Units. The A&R LLC Agreement permits a transfer of Common Units pursuant to (i) the prior written approval of Cresco Corp; (ii) certain transactions that cause a change of control of Cresco; (iii) the exercise of exchange or redemption rights by any holder of Common Units; or (iv) certain other limited circumstances. Prior to transferring any Common Units (other than pursuant to certain transactions that cause a change of control of Cresco) the transferring holder of Common Units will cause the transferee to execute a joinder to the A&R LLC Agreement and any other agreements required pursuant to the terms of the A&R LLC Agreement. Any transfer or attempted transfer of any Common Units in violation of any provision of the A&R LLC Agreement shall be void and Cresco shall not record such transfer on its books or treat any purported transferee as the owner of such Common Units for any purpose.

In no event shall any transfer of Common Units be effective to the extent that such transfer could, in the reasonable determination of Cresco Corp:

•

result in a violation of the United States Securities Act of 1933, as amended, or any other applicable federal, state or foreign laws;

•

cause an assignment under the United States Investment Company Act of 1940, as amended;

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•

be a violation of or a default (or an event that, with notice or the lapse of time or both, would constitute a default) under, or result in an acceleration of any indebtedness under, any promissory note, mortgage, loan agreement, indenture or similar instrument or agreement to which Cresco or Cresco Corp is a party; provided that the payee or creditor to whom Cresco or Cresco Corp owes such obligation is not an affiliate of Cresco or Cresco Corp;

•

be a transfer to a person who is not legally competent or who has not achieved his or her majority under applicable law (excluding trusts for the benefit of minors);

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cause Cresco to lose its status as a partnership for U.S. federal income tax purposes or, without limiting the generality of the foregoing, be effected on or through an “established securities market” or a “secondary market or the substantial equivalent thereof,” as such terms are used in Section 1.7704-1 of United States Treasury Regulations;

•

cause Cresco or any Cresco Member or Cresco Corp to be treated as a fiduciary under the United States Employee Retirement Income Security Act of 1974, as amended;

•

cause Cresco (as determined by Cresco Corp in its sole discretion) to be treated as a “publicly traded partnership” or to be taxed as a corporation pursuant to Section 7704 of the U.S. Tax Code or successor provision of the U.S. Tax Code; or

•

result in Cresco having more than one hundred (100) partners, within the meaning of Treasury Regulations Section 1.7704-1(h)(1) (determined pursuant to the rules of Treasury Regulations Section 1.7704-1(h)(3)) in any taxable year that is not a “restricted taxable year” (as defined in the A&R LLC Agreement).

Any holder that transfers its Common Units pursuant to the terms of the A&R LLC Agreement and otherwise fails to comply with the documentation requirements of U.S. Tax Code Section 1446, including the requirement that such holder provide to Cresco a properly completed IRS Form W-9 or satisfy another exception as permitted within U.S. Tax Code Section 1446, prior to the effective time of any such transfer, will generally be subject to U.S. withholding tax equal to ten percent (10%) of the fair market value of the consideration to be delivered to such holder pursuant to such redemption or exchange.

Power of Attorney

Each Cresco Member who is an individual, including those persons who become Cresco Members in connection with receiving any Common Units, automatically and irrevocably will appoint Cresco Corp, with full power of substitution, as that Cresco Member’s agent to execute and file documents or instruments required for, among other things, but subject in each case to the other provisions of the A&R LLC Agreement, the A&R LLC Agreement (or a joinder thereto), all instruments that Cresco Corp deems appropriate or necessary to reflect any amendment, change, modification or restatement of the A&R LLC Agreement, all conveyances and other instruments or documents which Cresco Corp deems appropriate or necessary to reflect the dissolution or liquidation of Cresco pursuant to the terms of the A&R LLC Agreement, all instruments relating to the admission, withdrawal or substitution of a Cresco Member pursuant to the terms of the A&R LLC Agreement, and any other ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the reasonable judgment of Cresco Corp, to evidence, confirm or ratify any vote, consent, approval, agreement, or other action made or given by the Cresco Members in accordance with the terms of the A&R LLC Agreement.

Capital Contributions

Following the issuance of the Common Units to the Cresco Members pursuant to the adoption of the A&R LLC Agreement, the Cresco Members will not be required to make further contributions to Cresco.

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Neither Cresco nor Cresco Corp is liable for the return of any capital contribution made by a Cresco Member to Cresco.

Limited Liability of the Cresco Members

Subject to the provisions of the ILLCA and of similar legislation in other jurisdictions of the United States and the A&R LLC Agreement: (i) the liability of each Cresco Member for the debts, liabilities and obligations of Cresco will be limited to the Cresco Member’s capital contribution, plus the Cresco Member’s share of any undistributed income of Cresco; and (ii) following payment of a Cresco Member’s capital contribution, such Cresco Member may be required to return amounts previously distributed to such Cresco Member in accordance with the ILLCA and the laws of the State of Illinois.

Limitation on Authority of the Cresco Members and Limited Liability

The A&R LLC Agreement states that a Cresco Member (in its capacity as a Cresco Member) does not have the authority or power to do any of the following:

act for or on behalf of Cresco;

to do any act that would be binding upon Cresco;

make any expenditure on behalf of Cresco;

seek or obtain partition by court decree or operation of law of any Cresco property; or

own or use particular or individual assets of Cresco.

The A&R LLC Agreement provides that Cresco will indemnify each Cresco Member for all liabilities incurred by the Cresco Member that arises solely by reason of such Cresco Member being a member of Cresco.

Distributions

Subject to the provisions set forth in the A&R LLC Agreement, Cresco Corp will cause distributions to be made by Cresco as follows: (i) “distributable cash” (as defined in the A&R LLC Agreement) or other funds or property legally available to the extent permitted by the ILLCA and applicable law, to the Cresco Members pro rata in accordance to each Cresco Member’s proportionate ownership interest in Cresco in amounts on terms as Cresco Corp will determine; and (ii) not less than five business days prior to the due date of a U.S. federal income tax return for an individual calendar year taxpayer, cash in an amount equal to the excess of each Cresco Member’s “assumed tax liability” (as defined in the A&R LLC Agreement) over distributions previously made to such Cresco Member with respect to each such taxable period.

In no case will Cresco be required to make a distribution if such distribution would violate the ILLCA or any other applicable law.

Amendment of the A&R LLC Agreement

The A&R LLC Agreement may be amended or modified by Cresco Corp as determined to be necessary or advisable, in the sole discretion of Cresco Corp, in connection with the adoption, implementation, modification or termination of certain equity plans by the Company. Subject to the right of Cresco Corp to amend the A&R LLC Agreement in connection with the adoption, implementation, modification or termination of certain equity plans by the Company, unless otherwise specified in the A&R LLC Agreement that a specific amendment requires the approval or action of certain persons, the A&R LLC Agreement may only be amended with the consent of Cresco Corp and Cresco Members holding a majority of the outstanding Common Units.

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Merger, Sale or Other Disposition of Assets

Cresco Corp shall have the power and authority to effectuate the sale, lease, transfer, exchange or other disposition of any, all or substantially all of the assets of Cresco (including the exercise or grant of any conversion, option, privilege or subscription right or any other right available in connection with any assets at any time held by Cresco) or the merger, consolidation, reorganization or other combination of Cresco with or into another entity.

Treatment of Cresco as a Partnership for U.S. Federal Income Tax Purposes

The Cresco Members intend that Cresco be treated as a partnership for U.S. federal and, if applicable, state or local income tax purposes. Each Cresco Member and Cresco will file all tax returns and will otherwise take all tax and financial reporting positions in a manner consistent with such treatment.

Dissolution

Cresco will dissolve, and its affairs will be wound up, upon the occurrence of any of the following:

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the decision of Cresco Corp together with the holders of a majority of the then- outstanding Common Units entitled to vote to dissolve Cresco;

•

a dissolution of Cresco under the ILLCA; or

•

the entry of a decree of judicial dissolution of Cresco under the ILLCA.

Except as otherwise provided in the A&R LLC Agreement, Cresco is intended to have perpetual existence. The withdrawal of a Cresco Member shall not cause a dissolution of Cresco and Cresco shall continue in existence subject to the terms and conditions of the A&R LLC Agreement.

Procedure on Dissolution

Upon dissolution of Cresco, the procedure is as follows:

the liquidators shall cause a proper accounting to be made by a recognized firm of certified public accountants of Cresco’s assets, liabilities and operations through the last day of the calendar month in which the dissolution occurs or the final liquidation is completed, as applicable;

the liquidators shall cause the notice described in the ILLCA to be mailed to each known creditor of and claimant against Cresco in the manner described thereunder;

the liquidators shall pay, satisfy or discharge from Cresco funds, or otherwise make adequate provision for payment and discharge thereof (including the establishment of a cash fund for contingent liabilities in such amount and for such term as the liquidators may reasonably determine): first, all expenses incurred in liquidation; and second, all of the debts, liabilities and obligations of Cresco; and

all remaining assets of Cresco shall be distributed to the Cresco Members in accordance with the terms of the A&R LLC Agreement by the end of the taxable year during which the liquidation of Cresco occurs (or, if later, by ninety (90) days after the date of the liquidation), which shall constitute a complete return to the Cresco Members of their capital contributions to Cresco, a complete distribution to the Cresco Members of their interest in Cresco and all of Cresco’s property. To the extent that a Cresco Member returns funds to Cresco, it has no claim against any other Cresco Member for those funds.

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Withdrawal and Removal of the Manager

Cresco Corp may resign as the sole manager of Cresco at any time by giving written notice to the Cresco Members. Unless otherwise specified in the notice, the resignation shall take effect upon receipt thereof by the Cresco Members, and the acceptance of the resignation shall not be necessary to make it effective. The Cresco Members have no right under the A&R LLC Agreement to remove or replace Cresco Corp as the sole manager of Cresco. Vacancies in the position of manager occurring for any reason will be filled by Cresco Corp (or, if Cresco Corp has ceased to exist without any successor or assign, then by the holders of a majority in interest of the voting capital stock of Cresco Corp immediately prior to such cessation).

Indemnification

Under the A&R LLC Agreement, in most circumstances, Cresco will indemnify and hold harmless any person to the fullest extent permitted under the ILLCA, as the same now exists or may hereafter be amended, substituted or replaced (but, in the case of any such amendment, substitution or replacement only to the extent that such amendment, substitution or replacement permits Cresco to provide broader indemnification rights than Cresco is providing immediately prior to such amendment, substitution or replacement), against all expenses, liabilities and losses (including attorneys’ fees, judgments, fines, excise taxes or penalties) reasonably incurred or suffered by such person (or one or more of such person’s affiliates) by reason of the fact that such person is or was a Cresco Member or is or was serving at the request of Cresco as the manager, an officer, an employee or another agent of Cresco or is or was serving at the request of Cresco as a manager, member, employee or agent of another limited-liability company, corporation, partnership, joint venture, trust or other enterprise; provided, however, that no such person shall be indemnified for actions against Cresco, the Manager or Managers or any other Cresco Members, or which are not made in good faith and not or in a manner which he or she reasonably believed to be in or not opposed to the best interests of Cresco, or, with respect to any criminal action or proceeding other than by or in the right of Cresco, had reasonable cause to believe the conduct was unlawful, or for any present or future breaches of any representations, warranties or covenants by such person or its affiliates as provided in the A&R LLC Agreement or other agreements to which Cresco is a party.

Expenses, including attorneys’ fees, incurred by any such person in defending a proceeding shall be paid by Cresco as they are incurred and in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined by a court of competent jurisdiction that such person is not entitled to be indemnified by Cresco.

Cresco will maintain directors’ and officers’ liability insurance, or make other financial arrangements at its expense, to protect any person indemnified pursuant to the A&R LLC Agreement against certain expenses, liabilities or losses described in the A&R LLC Agreement whether or not Cresco would otherwise have the power to indemnify such person against such expenses, liabilities or losses under the provisions of the A&R LLC Agreement. Cresco shall use its commercially reasonable efforts to purchase directors’ and officers’ liability insurance (including employment practices coverage) with a carrier and in an amount determined necessary or desirable as determined in good faith by Cresco Corp.

Books and Records

Cresco shall keep, or cause to be kept, appropriate books and records with respect to Cresco’s business, including all books and records necessary to provide any information, lists and copies of documents required to be provided to each person who was a Cresco Member during each fiscal year of Cresco as is reasonably necessary for the preparation of such person’s U.S. federal and applicable state income tax returns.

Tax Matters

All decisions to make or refrain from making any tax elections will be determined by Cresco Corp. Cresco Corp is authorized to represent Cresco, at Cresco’s expense, in connection with all examinations of Cresco’s affairs by tax authorities, including resulting administrative and judicial proceedings. Each Cresco Member agrees to cooperate with Cresco Corp and to do or refrain from doing any or all things with regard to all things reasonably required by Cresco

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Corp to conduct such proceedings. Cresco Corp shall keep all Cresco Members fully advised on a current basis of any contacts by or discussions with the tax authorities, and the Cresco Members shall have the right to observe and participate through representatives of their own choosing (at their sole expense) in any tax proceedings.

TAX RECEIVABLE AGREEMENT

In connection with the Business Combination, Cresco Corp will enter into a tax receivable agreement with Cresco, the Cresco Members and the Cresco LTIP Unitholders (the “Tax Receivable Agreement”). Cresco Corp expects to obtain an increase in its share of the tax basis of the assets of Cresco when a Cresco Member receives cash or Subordinate Voting Shares in connection with a redemption or exchange of such Cresco Member’s Common Units for Subordinate Voting Shares or cash (such basis increase is referred to as the “Basis Adjustments”).

The Tax Receivable Agreement provides for the payment by Cresco Corp to Cresco Members and Cresco LTIP Unitholders of 85% of the amount of tax benefits, if any, that Cresco Corp actually realizes, or in some circumstances is deemed to realize, as a result of the redemption and exchange transactions described above, including increases in the tax basis of the assets of Cresco arising from such transactions, tax basis increases attributable to payments made under the Tax Receivable Agreement and deductions attributable to imputed interest and other payments of interest pursuant to the Tax Receivable Agreement. Cresco Corp expects to benefit from the remaining 15% of tax benefits, if any, that Cresco Corp may actually realize.

Cresco intends to treat such acquisition of Common Units as a direct purchase by Cresco of Common Units from a Cresco Member for U.S. federal income and other applicable tax purposes, regardless of whether such Common Units are surrendered by a Cresco Member to Cresco, Cresco Corp or the Company upon the exercise by Cresco Corp of its election to acquire such Common Units directly or the exercise by Cresco Corp to assign its rights to acquire such Common Units directly to the Company. Basis Adjustments may have the effect of reducing the amounts that Cresco Corp may otherwise owe in the future to various tax authorities. The Basis Adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. The actual Basis Adjustments, as well as any amounts paid to the Cresco Members under the Tax Receivable Agreement, will vary depending on a number of factors, including:

•

the timing of any subsequent redemptions or exchanges—for instance, the increase in any tax deductions will vary depending on the fair value, which may fluctuate over time, of the depreciable or amortizable assets of Cresco at the time of each redemption or exchange;

•

the price of Subordinate Voting Shares at the time of redemptions or exchanges—the Basis Adjustments, as well as any related increase in any tax deductions, is directly related to the price of Subordinate Voting Shares at the time of each redemption or exchange;

•

the extent to which such redemptions or exchanges are taxable—if a redemption or exchange is not taxable for any reason, increased tax deductions will not be available; and

•

the amount and timing of Cresco Corp’s income—the Tax Receivable Agreement generally will require Cresco Corp to pay 85% of the tax benefits as and when those benefits are treated as realized under the terms of the Tax Receivable Agreement. If Cresco Corp does not have taxable income, it generally will not be required (absent a change of control or other circumstances requiring an early termination payment) to make payments under the Tax Receivable Agreement for that taxable year because no tax benefits will have been actually realized. However, any tax benefits that do not result in realized tax benefits in a given taxable year will likely generate tax attributes that may be utilized to generate tax benefits in previous or future taxable years. The utilization of any such tax attributes will result in payments under the Tax Receivable Agreement.

Cresco will have in effect an election under Section 754 of the U.S. Tax Code effective for each taxable year in which a redemption or exchange of Common Units for Subordinate Voting Shares or cash occurs. These Tax Receivable Agreement payments are not conditioned upon any continued ownership interest in either Cresco or the Company by any Cresco Member. The rights of each Member under the Tax Receivable Agreement are assignable to transferees of its Common Units (other than Cresco Corp as transferee pursuant to subsequent redemptions or exchanges of the transferred Common Units), subject to the satisfaction of certain requirements.

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For purposes of the Tax Receivable Agreement, cash savings in income and franchise taxes will be computed by comparing Cresco Corp’s actual income and franchise tax liability to the amount of such taxes that Cresco Corp would have been required to pay had there been no Basis Adjustments and had the Tax Receivable Agreement not been entered into. The Tax Receivable Agreement will generally apply to each taxable year in which the Tax Receivable Agreement remains effective, beginning with the first taxable year ending after the completion of the Business Combination. There is no maximum term for the Tax Receivable Agreement; however, the Tax Receivable Agreement may be terminated by Cresco Corp pursuant to an early termination procedure that requires Cresco Corp to pay the Cresco Members and Cresco LTIP Unitholders an agreed upon amount equal to the estimated present value of the remaining payments to be made under the Tax Receivable Agreement (calculated based on certain assumptions, including regarding tax rates and utilization of the Basis Adjustments).

The payment obligations under the Tax Receivable Agreement are obligations of Cresco Corp and not of the Company or Cresco. The actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary. Any payments made by Cresco Corp to Cresco Members and Cresco LTIP Unitholders under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to Cresco Corp (or to the Company or Cresco) and, to the extent that Cresco Corp is unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by Cresco Corp.

Decisions made by Cresco Corp in the course of running its business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by a Cresco Member or Cresco LTIP Unitholder under the Tax Receivable Agreement. For example, the earlier disposition of assets following a transaction that results in a Basis Adjustment will generally accelerate payments under the Tax Receivable Agreement and increase the present value of such payments.

The Tax Receivable Agreement provides that if (i) Cresco Corp materially breaches any of its material obligations under the Tax Receivable Agreement; (ii) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur; or (iii) Cresco Corp elects an early termination of the Tax Receivable Agreement, then Cresco Corp’s (or its successor’s) obligations under the Tax Receivable Agreement would accelerate and become due and payable, based on certain assumptions, including an assumption that Cresco Corp would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.

As a result, (i) Cresco Corp could be required to make cash payments to the Cresco Members and Cresco LTIP Unitholders that are greater than the specified percentage of the actual benefits it ultimately realizes in respect of the tax benefits that are subject to the Tax Receivable Agreement, and (ii) if Cresco Corp elects to terminate the Tax Receivable Agreement early, Cresco Corp would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, Cresco Corp’s obligations under the Tax Receivable Agreement could have a material adverse effect on its or the Company’s liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control. There can be no assurance that Cresco Corp will be able to finance its obligations under the Tax Receivable Agreement.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that Cresco Corp determines. If any such position is subject to a challenge by a taxing authority the outcome of which would reasonably be expected to materially affect a recipient’s payments under the Tax Receivable Agreement, then Cresco Corp will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each Cresco Member that directly or indirectly owns at least 10% of the outstanding Common Units and LTIP Units. Cresco Corp will not be reimbursed for any cash payments previously made to any Cresco Member pursuant to the Tax Receivable Agreement if any tax benefits initially claimed by Cresco Corp are subsequently challenged by a taxing authority and ultimately disallowed. Instead, in such circumstances, any excess cash payments made by Cresco Corp to a Cresco Member or Cresco LTIP Unitholder will be netted against any future cash payments

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that Cresco Corp might otherwise be required to make under the terms of the Tax Receivable Agreement. However, Cresco Corp might not determine that it has effectively made an excess cash payment to the Cresco Members or Cresco LTIP Unitholders for a number of years following the initial time of such payment and, if Cresco Corp’s tax reporting positions are challenged by a taxing authority, it will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. As a result, it is possible that Cresco Corp could make cash payments under the Tax Receivable Agreement that are substantially greater than its actual cash tax savings.

Payments are generally due under the Tax Receivable Agreement within a specified period of time following the filing of Cresco Corp’s U.S. federal income tax return (or, if Cresco Corp becomes a member of an affiliated or consolidated group of corporations that files a consolidated U.S. federal income tax return pursuant to Section 1501 of the U.S. Tax Code or any provision of U.S. state or local law, then such consolidated U.S. federal income tax return) for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Any late payments that may be made under the Tax Receivable Agreement will continue to accrue interest at LIBOR plus 500 basis points until such payments are made, including any late payments that Cresco Corp may subsequently make because Cresco Corp did not have enough available cash to satisfy its payment obligations at the time at which they originally arose.

SUPPORT AGREEMENT

Pursuant to the support agreement entered into by and among the Company, Cresco Corp and Cresco (the “Support Agreement”), the Company will agree that, so long as any Common Units not owned by Cresco Corp or its affiliates are outstanding or Common Units are issuable pursuant to the exercise, conversion or exchange of any outstanding securities of Cresco, the Company shall:

•

take all such actions and do all such things as are reasonably necessary or desirable to enable and permit Cresco, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of a redemption of Common Units by a holder thereof in respect of each issued and outstanding Common Unit upon a redemption of such Common Units by Cresco and, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to enable and permit Cresco to cause to be delivered Proportionate Voting Shares, Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Common Units in accordance with the provisions of the A&R LLC Agreement, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Common Units (if any);

•

take all such actions and do all such things as are reasonably necessary or desirable to enable and permit Cresco Corp, if it elects to effect an exchange of Common Units directly with the holder thereof, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of the redemption or exchange of Common Units by a holder thereof and, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to enable and permit Cresco Corp to cause to be delivered Proportionate Voting Shares, Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Common Units in accordance with the provisions of the A&R LLC Agreement, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Common Units (if any);

•

if Cresco Corp so elects, take all such actions and do all things as are reasonably necessary or desirable to effect the exchange of Common Units directly with the holder thereof, in accordance with applicable law, take all such actions and do all such things as are necessary or desirable to cause to be delivered directly Proportionate Voting Shares, Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Common Units in accordance with the provisions of the A&R LLC Agreement, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Common Units (if any); and

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•

ensure that Cresco Corp does not exercise its vote as the manager of Cresco to initiate the voluntary liquidation, dissolution or winding up of Cresco nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of Cresco.

The Company will further agree that, so long as any Cresco Corp Redeemable Shares (if and when issued) not owned by the Company or its affiliates which are redeemable or exchangeable for Proportionate Voting Shares (or Subordinate Voting Shares, at the election of Cresco Corp and/or Cresco) are outstanding or any Cresco Corp Redeemable Shares are issuable pursuant to the exercise, conversion or exchange of any outstanding securities of Cresco Corp, the Company shall:

•

take all such actions and do all such things as are reasonably necessary or desirable to enable and permit Cresco Corp, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of a redemption of Cresco Corp Redeemable Shares by a holder thereof in respect of each issued and outstanding Cresco Corp Redeemable Share upon the redemption of such Cresco Corp Redeemable Shares by Cresco Corp and, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to enable and permit Cresco Corp to cause to be delivered Proportionate Voting Shares, Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Cresco Corp Redeemable Shares in accordance with the articles of incorporation and bylaws of Cresco Corp, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Cresco Corp Redeemable Shares (if any);

•

upon the election of Cresco Corp for the Company to effect an exchange directly with a holder of Cresco Corp Redeemable Shares, take all such actions and do all things as are reasonably necessary or desirable to effect the exchange of Cresco Corp Redeemable Shares directly with the holder thereof, in accordance with applicable law, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to cause to be delivered directly Proportionate Voting Shares, Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Cresco Corp Redeemable Shares in accordance with the provisions of the articles of incorporation of Cresco Corp, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions (if any) with respect to such Cresco Corp Redeemable Shares; and

•

ensure that Cresco Corp is not voluntarily liquidated, dissolved or wound up nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of Cresco Corp.

The Support Agreement provides that in the event that a tender offer, share exchange offer, issuer bid, take-over bid or similar transaction with respect to Proportionate Voting Shares and/or Subordinate Voting Shares is proposed by the Company or is proposed to the Company or its shareholders and is recommended to the Company Board, or is otherwise effected or to be effected with the consent or approval of the Company Board, and the Common Units are not redeemed by Cresco or purchased by Cresco Corp or the Company pursuant to the terms of the A&R LLC Agreement or the Cresco Corp Redeemable Shares (if and when issued) are not redeemed by Cresco Corp or purchased by Cresco Corp or the Company pursuant to the terms of the articles of incorporation of Cresco Corp, the Company will use its reasonable efforts in good faith to take all such actions and do all such things as are necessary or desirable to enable and permit holders of Common Units (other than Cresco Corp and its affiliates) and Cresco Corp Redeemable Shares (other than the Company and its affiliates) to participate in such offer to the same extent and on an economically equivalent basis as the holders of Proportionate Voting Shares and/or Subordinate Voting Shares, without discrimination. Without limiting the generality of the foregoing, the Company will use its reasonable efforts in good faith to ensure that holders of Common Units and Cresco Corp Redeemable Shares (if and when issued) may participate in each such offer without being required to redeem Common Units as against Cresco and Cresco Corp Redeemable Shares against Cresco Corp (or, if so required, to ensure that any such retraction, shall be effective only upon, and shall be conditional upon, the closing of such offer and only to the extent necessary to tender or deposit to the offer). Nothing in the Support Agreement will limit the ability of the Company (or any of its subsidiaries including, without limitation, Cresco Corp or Cresco) to make ordinary market purchases of Subordinate Voting Shares in accordance with applicable laws and regulatory and stock exchange requirements.

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The Support Agreement provides that while any Common Units (or other rights pursuant to which Common Units may be acquired upon the exercise thereof) other than Common Units held by Cresco Corp or its affiliates are outstanding, and at all times while any Cresco Corp Redeemable Shares (or other rights pursuant to which Cresco Corp Redeemable Shares may be acquired upon the exercise thereof) other than Cresco Corp Redeemable Shares held by the Company or its affiliates are outstanding, the Company will make available such number of Proportionate Voting Shares and/or Subordinate Voting Shares (or other shares or securities into which Proportionate Voting Shares and/or Subordinate Voting Shares may be reclassified or changed) without duplication equal to the sum of (i) the number of Common Units issued and outstanding from time to time; (ii) the number of Common Units issuable upon the exercise of all rights to acquire Common Units outstanding from time to time; (iii) the number of Cresco Corp Redeemable Shares issued and outstanding from time to time; and (iv) the number of Cresco Corp Redeemable Shares issuable upon the exercise of all rights to acquire Cresco Corp Redeemable Shares outstanding from time to time in addition to any additional Proportionate Voting Shares and/or Subordinate Voting Shares as may be required to enable and permit the Company to meet its obligations under the A&R LLC Agreement, the Tax Receivable Agreement and under any other security or commitment pursuant to which the Company may be required to deliver Proportionate Voting Shares and/or Subordinate Voting Shares to any person, to enable and permit Cresco Corp to meet its obligations under each of the A&R LLC Agreement and the Tax Receivable Agreement with respect to the delivery of Proportionate Voting Shares and/or Subordinate Voting Shares and payment of the tax benefits contemplated under the Tax Receivable Agreement and to enable and permit Cresco to meet its obligations under the Support Agreement and under the A&R LLC Agreement.

With the exception of changes for the purpose of (i) adding to the covenants of any or all of the parties; (ii) making such amendments or modifications not inconsistent with the Support Agreement as may be necessary or desirable with respect to matters or questions arising thereunder; or (iii) curing or correcting any ambiguities or defect or inconsistent provision or clerical omission or mistake or manifest errors (provided, in the case of (i), (ii) or (iii) that the board of directors of each of the Company and Cresco Corp and the manager of Cresco are of the good faith opinion that such amendments are not prejudicial to the rights or interests of the holders of Common Units or Cresco Corp Redeemable Shares), the Support Agreement may not be amended except by agreement in writing executed by Cresco, Cresco Corp, and the Company and approved by the holders of a majority of the Common Units in accordance with the terms of the A&R LLC Agreement and a majority of the Cresco Corp Redeemable Shares in accordance with the terms of the articles of incorporation and the bylaws of Cresco Corp.

Prior Sales of Cresco Securities

The following tables set forth details regarding issuances of Subordinate Voting Shares or issuances of securities convertible into or exchangeable, redeemable or exercisable for Subordinate Voting Shares during the financial year ended December 31, 2019:


Date Issued	Number of Cresco Securities	Issue Price per Unit ($)	Aggregate Issue Price ($)		Nature of Consideration
January 18, 2019 – April 1, 2019	1,743.75 Proportionate Voting Shares⁽¹⁾	$200.00 – $450.00	$	431,225	Cash (Option Exercises)
April 11, 2019	15,101 Proportionate Voting Shares⁽¹⁾	$1,291	$	19,498,000	Share Exchange (in connection with the acquisition of MedMar, Inc. see “Acquisitions and Dispositions” for further details)

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Date Issued	Number of Cresco Securities	Issue Price per Unit ($)		Aggregate Issue Price ($)		Nature of Consideration
April 30, 2019	21,740	C$	6.09	C$	132,397	Cash (exercise of warrants)
June 5, 2019	60,000	$	1.00	$	60,000	Cash (exercise of options)
June 17, 2019	10,000	C$	8.50		C85,000	Cash (exercise of warrants)
June 23, 2019	23,750	$	1.08	$	25,675	Cash (exercise of options)
June 25, 2019	7,500	$	1.14	$	8,550	Cash (exercise of options)
July 22, 2019	124,464	C$	8.50	C$	1,057,944	Cash (exercise of warrants)
August 13, 2019	13,341	C$	6.09	C$	81,247	Cash (exercise of warrants)
August 13, 2019	100,000	$	0.50	$	50,000	Cash (exercise of options)
August 21, 2019	39,600	$	1.00	$	39,600	Cash (exercise of options)
September 24, 2019	7,350,000	C$	10.00	C$	73,500,700	Cash (sale of Subordinate Voting Shares and Warrants)
October 2, 2019	7,813	$	3.75	$	29,300	Cash (exercise of options)
October 8, 2019	43,301 Proportionate Voting Shares⁽¹⁾	$	1,129	$	48,881,000	Share Exchange (in connection with the acquisition of Valley Ag - see “Acquisitions and Dispositions” for further details)
October 18, 2019	178,774	$	1.26	$	225,242	Cash (exercise of options)
October 24, 2019	551,250	C$	2.16	C$	1,190,700	Cash (sale of Warrants)
November 14, 2019	50,000	$	3.75	$	187,500	Cash (exercise of options)
December 13, 2019	10,000	$	3.75	$	37,500	Cash (exercise of options)
December 17, 2019	25,000	$	3.20	$	80,000	Cash (exercise of options)
December 30, 2019	62,269	$	1.14	$	70,725	Cash (exercise of options)

(1)	As discussed above, Proportionate Voting Shares are convertible into Subordinate Voting Shares on a 1:200 basis.

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OPTIONS
Date Issued	Number of Units	Exercise Price per Unit ($)	Total Aggregate Proceeds Assuming the Exercise of all Options	Nature of Consideration
February 4, 2019	5,000 Options to purchase Subordinate Voting Shares	C$8.53	C$42,650 (assuming the exercise of all options)	Cash
February 18, 2019	70,000 Options to purchase Subordinate Voting Shares	C$8.60	C$602,000 (assuming the exercise of all options)	Cash
February 25, 2019	15,000 Options to purchase Subordinate Voting Shares	C$8.57	C$128,550 (assuming the exercise of all options)	Cash
March 31, 2019	582,000 Options to purchase Subordinate Voting Shares	C$15.03	C$8,747,460 (assuming the exercise of all options)	Cash
June 30, 2019	1,340,000 Options to purchase Subordinate Voting Shares	C13.45	C$18,023,000 (assuming the exercise of all options)	Cash
September 30, 2019	1,420,000 Options to purchase Subordinate Voting Shares	C$7.81	C$11,090,200 (assuming the exercise of all options)	Cash
December 31, 2019	842,000 Options to purchase Subordinate Voting Shares	C$8.61	C$7,249,620 (assuming the exercise of all options)	Cash


Conversion of Proportionate Voting Shares to Subordinate Voting Shares
Date Issued	Number of Proportionate Voting Shares		Number of Subordinate Voting Shares issued on Conversion
January 1 – December 31, 2019		184,611.60		37,122,320

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MARKET FOR SECURITIES

Trading Price and Volume

Subordinate Voting Shares

The issued and outstanding Subordinate Voting Shares are listed and posted for trading on the CSE under the symbol “CL.” The following table sets forth the reported intraday high and low prices and monthly trading volumes of the Subordinate Voting Shares from January 1, 2019 up to December 31, 2019 (source: CSE).


Period	High Trading Price (in C$)		Low Trading Price (in C$)		Volume
January, 2019	$	9.78	$	8.37		2,467,024
February, 2019	$	12.17	$	9.30		4,386,453
March, 2019	$	15.72	$	10.26		6,422,531
April, 2019	$	18.37	$	14.56		9,167,934
May, 2019	$	17.79	$	13.71		3,432,157
June, 2019	$	15.42	$	11.90		5,490,213
July, 2019	$	14.10	$	10.04		5,938,437
August, 2019	$	12.49	$	9.40		2,514,289
September, 2019	$	12.65	$	7.00		7,793,845
October, 2019	$	8.89	$	6.67		7,028,723
November, 2019	$	8.88	$	7.11		3,142,772
December, 2019	$	9.45	$	5.90		7,160,536

CONSOLIDATED CAPITALIZATION

The following table summarizes the share capital of Cresco and the Company as of April 28, 2020.


THE COMPANY
Total Debt (in US$)	$	100,550,000

Security	Number
Super Voting Shares⁽¹⁾		500,000
Subordinate Voting Shares		153,262,290
Proportionate Voting Shares⁽²⁾		52,891,696
Cresco Redeemable Units⁽³⁾		140,092,056
Basic Shares Outstanding (on an as converted to Subordinate Voting Share basis)		346,746,042
Origin House shares to be issued		4,223,119
Options⁽⁴⁾		25,910,662
Warrants⁽⁵⁾		6,441,786
Restricted share units		267,705
Fully-Diluted Outstanding		383,589,313

⁽¹⁾	Each carrying 2,000 votes. In the aggregate, the Super Voting Shares represent approximately 72.3% voting control.

⁽²⁾

As discussed above under the heading “Description of the Securities”, in order to maintain foreign private issuer status, certain US resident members of Cresco will receive Proportionate Voting Shares rather than Subordinate Voting Shares on a 1:200 basis. Proportionate Voting Shares carry voting and economic rights proportionate to Subordinate Voting Shares. Each Proportionate Voting Share is convertible into 200 Subordinate Voting Shares. This table presents the Proportionate Voting Shares on an as-converted basis. Total includes 4,792,000 of contingently issuable shares related to the Valley Ag acquisition.

⁽³⁾	Cresco Redeemable Units are convertible to Proportionate Voting Shares on a 200:1 basis and such Proportionate Voting Shares are convertible into Subordinate Voting Shares on a 1:200 basis.

⁽⁴⁾	20,691,026 options outstanding at a blended average exercise price of $3.36 per Subordinate Voting Shares. 5,123,598 options reserved for future grants.

⁽⁵⁾	Each exercisable into one Subordinate Voting Share at a blended average price of $7.73.

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DIRECTORS AND EXECUTIVE OFFICERS

The following table sets out, for each of the Company’s directors and executive officers, the person’s name, age, state and country of residence, position with the Company, principal occupation(s) during the last five (5) years, and, if an existing officer of Cresco prior to the Business Combination, the date on which the person became such an officer. The Company’s directors are elected annually and, unless re-elected, will retire from office at the end of the next annual general meeting of shareholders.

Directors and Officers


Name and State and Country of Residence	Age	Position(s) with the Company	Cresco Officer/Director Since	Principal Occupation(s)⁽¹⁾	Number of Securities of Company Directly or Indirectly Held⁽²⁾
Charles Bachtell Chicago IL, United States	42	Chief Executive Officer and Director	02/2015	Chief Executive Officer, Cresco	16,874,008 / 6.06%

Ken Amann Chicago IL, United States	49	Chief Financial Officer	09/2015	Chief Financial Officer, Cresco	500,000 / 0.18%

Mo Dastagir	43	Chief Information Officer	07/2019	Chief Information Officer, Cresco	—

David Ellis Chicago IL, United States	38	Chief Operating Officer	06/2017	Chief Operating Officer, Cresco	225,766 / 0.08%

Jason Erkes, Chicago, IL, United States	49	Chief Communications Officer	09/2018	Chief Communications Officer, Cresco	66,694 / 0.02%

John Schetz, Chicago, IL, United States	44	General Counsel	06/2018	General Counsel, Cresco	9,388 / 0.003%

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Name and State and Country of Residence	Age	Position(s) with the Company	Cresco Officer/Director Since	Principal Occupation(s)⁽¹⁾	Number of Securities of Company Directly or Indirectly Held⁽²⁾
Angie Demchenko	39	Chief People Officer	07/2019	Chief People Officer, Cresco	—

Gregory Butler	40	Chief Commercial Officer	02/2020	Chief Commercial Officer, Cresco	—

Dominic A. Sergi⁽³⁾⁽⁵⁾ Glen Ellyn, IL, United States	37	Director	02/2015	Real Estate Investor	11,105,780 / 3.99%

Brian McCormack⁽⁵⁾ Chicago, Illinois, United States	52	Director	02/2015	Founder and Director of InnerWorkings	27,486,707 / 9.87%

Robert M. Sampson⁽³⁾ Downers Grove, IL United States	46	Director	05/2015	Chief Executive Officer of Bemortgage	12,901,771 / 4.63%

John R. Walter⁽⁵⁾ Naples, FL, United States	73	Director	03/2017	Chief Executive Officer of Ashlin Management Company	235,340 / 0.08%

Gerald Corcoran⁽³⁾⁽⁴⁾ Winnetka, Illinois, United States	65	Director	03/2017	Chairman of the Board of O’Brien & Associates, LLC	997,395 / 0.36%

Thomas Manning Evanston, Illinois, United States	64	Executive Chairman and Director	10/2016	Executive Chairman, Cresco	100,000 / 0.04%

Randy Podolsky⁽⁴⁾ Lincolnshire, IL, United States	65	Director	12/2016	Principal of Podolsky Circle CORFAC International	1,014,387 / 0.36%

Joe Caltabiano⁽⁶⁾ Chicago IL, United States	43	Director	02/2015	Former President of the Company	17,387,390 / 6.24%

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Notes:

(1)	For prior occupations of each director and officer for the last 5 years, if applicable, please see biographies below. (2) Includes Proportionate Voting Shares, Subordinate Voting Shares and redeemable LLC units. Excludes all options.

(3)	Denotes members of the audit committee for the Company. The Company’s audit committee meets the composition requirement for “venture issuers” as set out in NI 52-110.

(4)	Denotes member of the nominating and governance committee of the Company. (5) Denotes member of the compensation committee of the Company.

(6)	Joe Caltabiano resigned as President of the Company on March 2, 2020.

Biographies

The following are brief profiles of the Company’s executive officers and directors.

Charles Bachtell, Chief Executive Officer and Director

Charles Bachtell is the CEO of Cresco. Bachtell is an attorney and brings with him legal expertise in both corporate governance and regulatory compliance. Bachtell is a founding member of the Illinois Cannabis Bar Association and industry trade associations in IL, PA, and OH. Prior to Cresco, Bachtell served for 8 years as the Executive Vice President and General Counsel of Guaranteed Rate. Bachtell also serves as an adjunct Professor at Northwestern University Pritzker School of Law teaching a course on the legal and regulatory issues in the emerging cannabis industry.

Ken Amann, Chief Financial Officer

Ken Amann brings nearly 20 years of financial management and consulting experience as the Chief Financial Officer of Cresco. Prior to joining Cresco, Amann spent two years as the Chief Financial Officer for nSource, a BPO and consulting practice located in Chicago. Prior to that, he was the Chief Financial Officer for eight years at Williams Lea, a $2+ billion dollar global BPO business specializing in corporate information solutions that re-engineer end-to-end business processes. He was responsible for over 170 employees located in 7 different countries. He is a Certified Public Accountant.

Mo Dastagir, Chief Information Officer

Mo Dastagir joins the Company from Sears Holding Company, where he served as Vice President and Chief Technology Officer with responsibilities for managing all technology programs designed to drive growth and improve profitability in the Sears Home Services (“SHS”) Business. During his tenure, the highly profitable SHS business made several technology investments to intensify its focus on providing a best-in-class and differentiated experience in the Home Appliance Repair and Home Services category. Prior to Sears, Dastagir spent eight years in Switzerland working at Novartis Pharmaceuticals and Roche Pharmaceuticals as part of a strategic team leading technology transformations in highly regulated portfolios such as Diabetes Care and Pharma Drug Development. As part of the Diabetes Care IT leadership team, he was responsible for the digitization of the Diabetes Care portfolio into a remote care management powerhouse. Prior to Switzerland, Dastagir spent time in India and was one of the first five employees at Amazon Hyderabad and helped lay the foundation for what has turned into Amazon.com’s India operations today. He was part of the leadership team responsible for setting up a new technology operations center in India and moving functions from various locations in the United States to the new facility.

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David Ellis, Chief Operating Officer

David Ellis is the Chief Operating Officer for the Company. Ellis brings a decade of executive level operations experience across several industries to the team. Most recently, Ellis founded and served as the President and CEO of Greens & Gills, a 10,000 square foot, controlled environment, hydroponic and aquaponic farm on the South Side of Chicago. Through operational best practices and proprietary software, Ellis was able to build one of the only profitable urban farming businesses in the country. Ellis works with the Operations Team to design, implement and ensure that all operational activities at Cresco are optimized to industry leading standards.

Jason Erkes, Chief Communications Officer

Jason Erkes is Cresco’s Chief Communications Officer and has been managing the company’s media relations and external messaging since its inception. He is a former Emmy-Award winning journalist and political advisor who has advised dozens of CEOs, thought-leaders, and politicians on executing effective communication strategies. Erkes has penned guest columns for several cannabis-focused publications discussing managing crisis situations and has been quoted as a media expert in Forbes and Entrepreneur.

John Schetz, General Counsel

John Schetz is Cresco’s General Counsel. Schetz combines experience as a Partner in a large law firm and as Chief Legal Officer of a multinational public company with broad and deep legal and business experience in multiple industries. Schetz previously served as Executive Vice President and General Counsel of Stericycle, Inc. (NASDAQ: SRCL) where he was responsible for global legal affairs, completed approximately 70 M&A transactions, including leading all aspects of a $2.3B acquisition, engineered the favorable settlement of enterprise-threatening class action litigation, and spearheaded the creation of the company’s legal and compliance functions. Prior to his tenure at Stericycle, Schetz was a Partner in the Corporate Department of McDermott Will & Emery LLP in Chicago where he advised public and private companies and private equity firms on a wide range of acquisitions, dispositions, investments, joint ventures and strategic partnerships, capital markets transactions, corporate governance, SEC reporting and compliance, and general corporate matters. Schetz received his undergraduate and law degrees from the University of Michigan in Ann Arbor, MI.

Angie Demchenko, Chief People Officer

Angie Demchenko has an impressive track record of managing the human resources functions of dynamic, high-growth companies. Demchenko most recently served as Vice President, Head of Human Resources for Starwood Retail Partners, a leading operator of shopping malls and lifestyle centers. Prior to Starwood Retail Partners, Demchenko served as Vice President, Human Resources for GGP (General Growth Properties), one of the largest shopping mall owners in the United States prior to its acquisition by Brookfield Property Partners. From 2008-2016, Demchenko served as Senior Vice President, Human Resources for Jones Lang LaSalle, a Fortune 500 commercial real estate services firm. Demchenko began her career as Human Resources Manager in the Global Business Services Group at Accenture. Demchenko received a Bachelor of Business Administration degree with a concentration in Human Resources Management from the University of Western Ontario.

Gregory Butler, Chief Commercial Officer

Gregory Butler brings a strong background in driving brand growth for top-tier CPG companies including Pfizer, Johnson & Johnson and Molson Coors, wellness retail execution for Walgreens, and business growth and capital management strategic advising for leading private equity portfolio companies. After a year serving as Operating Partner at MNML Ventures, Butler has stepped into a full-time CCO role to continue to execute the long-term growth plan that has already delivered significant results. He led the creation of a pioneering occasion-based portfolio strategy, relaunched seven cannabis brands with new brand positionings, identities and packaging design, oversaw the creation of a multi-year innovation pipeline, and drove the concept and launch of the national Sunnyside* retail brand. He also helped reshape the Company’s robust marketing, retail operations and sales teams that are made up of notable hires from Apple, Starbucks, PepsiCo and Red Bull. Greg graduated from Queen’s University and received his MBA from Harvard Business School.

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Dominic A. Sergi, Director

Dominic Sergi is a successful real estate, business and financial expert who devotes much of his free time raising funds to help patients fighting leukemia and lymphoma. As president and chief executive officer of a Chicago-based investment real estate company, Sergi draws on his strategic and business acumen to deliver on the company’s long-term vision and provide asset budgeting forecasts, which have exceeded $120 million in value. Sergi’s many other responsibilities as leader of a growing firm include oversight of all operations and personnel management. He is also very involved in his family’s $100 million dollar Union Electrical Contracting business and serves on the board of the 400-employee company. Sergi is active in a number of community and charitable organizations and is passionate about giving back to the community.

Brian McCormack, Director

Brian McCormack, one of Illinois’ most innovative and successful business entrepreneurs, brings a creative, progressive approach to business, finance and manufacturing at Cresco as he seeks to position the company at the forefront of cannabis cultivation in Illinois. McCormack is the founder and director of InnerWorkings (NASDAQ: INWK), a print management company in Chicago that he built into a successful global operation that employs more than 1,800 people and grosses over US$1 billion in annual revenue. His innovative business strategies, manufacturing expertise and focus on employee satisfaction led InnerWorkings to financial growth and to being named by Forbes as one of the Best Companies to Work For in 2010. Prior to founding InnerWorkings, McCormack founded and served as CEO of McWitt Graphic Communications. He also provided financial and manufacturing operations insight to uBid.com and EZLinks Golf Company as a director on the companies’ advisory boards.

Robert M. Sampson, Director

Prior to his work with Cresco, Robert Sampson had more than 20 years of operating experience in large business, including 12 years in the heavily regulated mortgage industry, having served as Chief Operating Officer at Guaranteed Rate, the nation’s seventh largest retail mortgage bank. As the former COO of Cresco Labs, Sampson oversaw the construction of two 40,000 sq/ft cement precast structures and one 30,000 sq/ft hybrid greenhouse structure and was responsible for all facility operations and systems including the design and implementation of fertigation and irrigation systems, inventory control systems, compliance process procedures, audits, security, and IT. Sampson is currently the CEO of Bemortgage, a mortgage firm, based in Chicago.

John R. Walter, Director

John R. Walter is Chairman of Ashlin Management Company, a private investment and management services firm. He is the retired President and COO of AT&T Company, a position he held from 1996 to 1997, and retired Chairman and CEO of R.R. Donnelley & Sons Company, a position he held from 1989 through 1996. Walter joined R.R. Donnelley & Sons Company in 1969 and held various positions during his career. Walter has served as a Director of Manpower Inc. since 1998, and served as Non-Executive Chairman of the company from 1999 to 2001. Mr. Walter also serves as a Director of Cresco, ecoAmerica and The Conservancy of Southwest Florida. He previously served on the boards of other companies, including Innerworkings, Echo Global Logistics, VASCO Data Securities, Media Bank, LLC, Groupon, Deere & Company, Abbott Laboratories, Inc., AT&T Company, Target Company and Jones Lang LaSalle. Walter was the founding Chairman of InnerWorkings, Inc. Walter also served as Chairman of SNP Corp. of Singapore and an Advisory member of the Singapore Economic Development Board. Walter is on the Board of Trustees for Steppenwolf Theater, Northwestern University and The Naples Children & Education Foundation. Walter was previously a Director of NorthShore University HealthSystem and Chairman Emeritus of the NorthShore University HealthSystem Foundation Board. In addition, he was a Director of the African Wildlife Foundation, the Metropolitan Pier and Exposition Authority and the Chicago Symphony Orchestra. Walter earned a Bachelor of Science Degree in Management and holds an Honorary Doctorate Degree from Miami University, Oxford, Ohio.

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Gerald Corcoran, Director

Gerry Corcoran has served as Chief Executive Officer of R.J. O’Brien & Associates, LLC (RJO) since 2000 and Chairman of the Board since 2007. Chicago-based RJO, which celebrated its Centennial in 2014, is the nation’s oldest and largest independent futures brokerage firm and the last surviving founding member of the Chicago Mercantile Exchange (now CME Group). In July 2014, Corcoran was elected Chairman of the FIA (formerly Futures Industry Association), and he served in that position until March 2016. At that time, following the January merger of the organization with its European and Asian counterparts, he was elected Treasurer of the Board of Directors of the newly unified FIA, the leading trade organization for the futures, options and cleared swaps markets worldwide. He served in that role until March 2017. Corcoran serves on the FIA’s Executive Committee as well as its Americas Advisory Board. He has been a member of FIA’s Board of Directors since March 2008 and served as Vice Chairman from March 2013 until July 2014. Corcoran also serves on the Board of Directors and Executive Committee of the National Futures Association (NFA), the self-regulatory organization for the futures industry. In addition, he is on the Board of the Clearing Company Charitable Foundation and is a member of the Risk Committee of the CME Group. He previously served on the Board of the Institute for Financial Markets (IFM). In November 2013, he received the Heart of Mercy Award from Misericordia Home, which supports more than 600 children and adults living with developmental disabilities.

Thomas Manning, Executive Chairman and Director

Tom Manning is the former Chairman and Chief Executive Officer of Dun & Bradstreet (NYSE), a leading provider of corporate information and analytics. He is a director of CommScope (NASDAQ) and Clear Media (HKSE). He is also an executive-in-residence at the Booth School of Business at the University of Chicago and teaches corporate governance, private equity, innovative problem-solving, and US-China relations at the University of Chicago Law School. While based in Hong Kong for nearly 20 years, he served as CEO of Cerberus Capital Asia, Capgemini Asia, and Ernst & Young Consulting Asia, and also as a senior partner at Bain & Company. During the past decade, he served on the boards of several large, publicly-listed Chinese companies, including Bank of Communications, Gome Electrical Appliances, AsiaInfo-Linkage, and iSoftStone. Earlier in his career, he was extensively involved in the medical field as the founder and CEO of a biomedical device company and the founder of McKinsey’s health care consulting practice. A graduate of Harvard University and Stanford University, he speaks Mandarin and is a frequent speaker at conferences and contributor to media.

Randy Podolsky, Director

Randy D. Podolsky has served the entrepreneurial, corporate, institutional and not-for-profit clients of Podolsky Circle CORFAC International for over 40 years, and served as Managing Principal of the firm from 1986 to 2015. As a Principal of the firm, Podolsky provided personalized transaction and contract negotiation and advisory services to financial institutions, users, owners and not-for-profits for all facets of commercial real estate. Podolsky leads the firms Development Team, which has completed numerous development and redevelopment projects. Strategizing and executing complex real estate and debt transaction solutions is his passion. In 2005, Podolsky recognized increased overspending on commercial real estate and, anticipating a near-term bubble burst, advised nearly 100 investors to divest of their commercial real estate holdings. Podolsky serves as a Board Member and Chair of the Real Estate Committee of the Waukegan Port District. Additionally, he is a volunteer member of the U.S. Coast Guard Auxiliary since 1991 and served as the elected District Commodore (DCO) of the Ninth Western Region in 2009-2010.

Joe Caltabiano, Director

Joe Caltabiano is a director of Cresco and formerly served as the Company’s President. Joe brings more than a decade of finance experience to his role. He is also a leukemia survivor who is committed to supporting organizations and efforts that help patients in their fight against cancer. Caltabiano has expertise working in the regulated mortgage industry. He has received awards for mortgage production, client experience and community involvement.

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Cease Trade and Bankruptcy

None of the Company’s directors or executive officers has, within the 10 years prior to the date of this AIF, been a director, chief executive officer or chief financial officer of any company (including the Company) that, while such person was acting in that capacity (or after such person ceased to act in that capacity but resulting from an event that occurred while that person was acting in such capacity) was the subject of a cease trade order, an order similar to a cease trade order, or an order that denied the company access to any exemption under securities legislation, in each case for a period of more than 30 consecutive days.

None of the Company’s directors or executive officers has, within the 10 years prior to the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or comprise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of such director or executive officer, been a director or executive officer of any company, that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or comprise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

No director or executive officer of the Company has: (i) been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

To the best of the Company’s knowledge, there are no known existing or potential material conflicts of interest among the Company or a subsidiary of the Company and a director or officer of the Company or a subsidiary of the Company as a result of their outside business interests except that certain of the Company’s or its subsidiaries’ directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties as a director or officer of such other companies.

PROMOTERS

No person or company has been within the two years immediately preceding the date of this AIF, a promoter of the Company.

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

Other than a civil dispute whereby Cresco, as plaintiff, is seeking damages for breach of contract, to the Company’s knowledge, there are no legal proceedings or regulatory actions material to the Company to which it is a party, or has been a party to, or of which any of its property is or was the subject matter of, and no such proceedings or actions are known by the Company to be contemplated.

There have been no material penalties or sanctions imposed against the Company by a court or regulatory authority, and the Company has not entered into any settlement agreements before any court relating to provincial or territorial securities legislation or with any securities regulatory authority, in the three years prior to the date of this AIF.

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INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

Other than as disclosed below and elsewhere in this AIF no director, executive officer or unitholder or shareholder that beneficially owns, or controls or directs, directly or indirectly, more than 10% of the voting securities of the Company, or any of their respective associates or affiliates, has any material interest, direct or indirect, in any transaction within the three years before the date of this AIF which has materially affected or is reasonably expected to materially affect the Company or a subsidiary of the Company.

AUDITOR, TRANSFER AGENT AND REGISTRAR

The auditor of the Company is Marcum LLP and the transfer agent and registrar for the Subordinate Voting Shares, Proportionate and Super Voting Shares is Odyssey Trust Company at its principal offices in Calgary, Alberta.

MATERIAL CONTRACTS

The Company is a party to the following material contracts:

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Support Agreement entered into by and among the Company, Cresco Corp and Cresco (see the “Description of Capital Structure – Support Agreement” section for greater detail.);

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Tax Receivable Agreement entered into by and among Cresco Corp, Cresco, the Cresco Members and the Cresco LTIP Unitholders (see the “Description of Capital Structure – Tax Receivable Agreement” section for greater detail.);

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A&R LLC Agreement (see the “Description of Capital Structure – Description of Unit Capital of Cresco – A&R LLC Agreement” section for greater detail.);

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Arrangement Agreement entered into by and among the Company and Origin House (see the “General Development of the Business – Acquisitions and Dispositions – Origin House” section for greater detail.);

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Underwriting Agreement entered into by and among the Company and Canaccord Genuity Corp., Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P. (see the “General Development of the Business – Financing Activities” section for greater detail.); and

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Senior Secured Term Loan Agreement entered into by and among the Company, a third-party administrative agent, and a syndicate of lenders (see the “General Development of the Business – Financing Activities” section for greater detail.).

INTERESTS OF EXPERTS

No person or corporation whose profession or business gives authority to a statement made by the person or corporation and who is named as having prepared or certified a part of this AIF or as having prepared or certified a report or valuation described or included in this AIF holds any beneficial interest, direct or indirect, in any securities or property of Cresco or of an associate or affiliate of Cresco and no such person is expected to be elected, appointed or employed as a director, senior officer or employee of Cresco or of an associate or affiliate of Cresco and no such person is a promoter of Cresco or an associate or affiliate of Cresco. Marcum LLP is independent of the Company in accordance with the rules of professional conduct of the Institute of Chartered Professional Accountants of Ontario.

ADDITIONAL INFORMATION

Additional information relating to the Company can be found under the Company’s profile on SEDAR at www.sedar.com. Additional financial information is provided in the Financial Statements and MD&A, which is also available on SEDAR.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a summary of certain material U.S. federal income tax considerations for U.S. Holders and Non-U.S. Holders (each as defined below) relating to the ownership and disposition of Subordinate Voting Shares. This summary is general in nature and does not discuss all aspects of U.S. federal income taxation that may be relevant to a holder of Subordinate Voting Shares in light of its particular circumstances. In addition, this summary does not

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address the U.S. federal alternative minimum tax, the Medicare tax on net investment income, U.S. federal estate and gift taxes, U.S. state and local taxes or foreign taxes. This summary deals only with Subordinate Voting Shares held as capital assets within the meaning of Section 1221 of the U.S. Tax Code (generally, property held for investment), and does not address tax considerations applicable to any holder of Subordinate Voting Shares that may be subject to special treatment under the United States federal income tax laws, including:

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a bank or other financial institution;

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a tax-exempt or governmental organization;

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a retirement plan or other tax-deferred account (other than with respect to U.S. Holders in the 401(k) Plan),

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a partnership, an S corporation or other entity treated as a partnership or pass-through (or an investor therein);

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an insurance company;

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a mutual fund, regulated investment company or real estate investment trust;

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a person that purchases or sells Subordinate Voting Shares as part of a wash sale for tax purposes;

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a dealer or broker in stocks and securities, or currencies;

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a trader in securities that elects mark-to-market treatment;

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a holder of Subordinate Voting Shares subject to the alternative minimum tax provisions of the U.S. Tax Code;

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a holder of Subordinate Voting Shares that received Subordinate Voting Shares through the exercise of an employee stock option, through a tax qualified retirement plan or otherwise as compensation;

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a person that owns (or is deemed to own) 5% or more of the outstanding Subordinate Voting Shares;

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a U.S. Holder whose functional currency is not the U.S. dollar;

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a person that holds Subordinate Voting Shares as part of a hedge, straddle, constructive sale, conversion or other integrated transaction;

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“controlled foreign corporations” within the meaning of the U.S. Tax Code;

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“passive foreign investment companies” within the meaning of the U.S. Tax Code; or

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a U.S. expatriate.

This summary is based on the U.S. Tax Code, Treasury Regulations promulgated under the U.S. Tax Code, and rulings and judicial decisions, all as in effect as of the date hereof, and all of which are subject to change or differing interpretations at any time, possibly with retroactive effect. We have not sought, and do not intend to seek, any ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and no assurance can be given that the IRS will agree with the views expressed herein, or that a court will not sustain any challenge by the IRS in the event of litigation.

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If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds Subordinate Voting Shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership holding Subordinate Voting Shares should consult its own tax advisors regarding the tax consequences of acquiring, holding and disposing of Subordinate Voting Shares.

THIS DISCUSSION IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO A HOLDER OF SHARES AND SHOULD BE READ IN CONJUNCTION WITH THE DISCUSSION OF CANADIAN TAX CONSIDERATIONS HEREIN. WE URGE BENEFICIAL OWNERS OF SHARES TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER OR THE MERGER IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.

U.S. Holders.

For purposes of this discussion, a “U.S. Holder” of Subordinate Voting Shares means a holder that is for U.S. federal income tax purposes:

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An individual citizen or resident of the U.S.;

•

A corporation (or other entity taxable as a corporation) created or organized in or under the laws of the U.S. or any state thereof or the District of Columbia;

•

An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

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A trust if it: (1) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust; or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

With respect to the first bullet point above, an individual is generally treated as a resident of the U.S. for U.S. federal income tax purposes in any calendar year if the individual either (i) is the holder of a green card, generally during any point of such year, or (ii) is present in the U.S. for at least 31 days in that calendar year, and for an aggregate of at least 183 days during the three-year period ending on the last day of the current calendar year. For purposes of the 183-day calculation (often referred to as the Substantial Presence Test), all of the days present in the U.S. during the current year, one-third of the days present in the U.S. during the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Residents are generally treated for U.S. federal income tax purposes as if they were U.S. citizens. Residents who are also residents or citizens of Canada should also review the discussion of Canadian tax considerations and are urged to consult their own tax advisors regarding the tax consequences of acquiring, holding and disposing of Subordinate Voting Shares. Note that the Company expects to be treated as both a Canadian company for Canadian tax purposes and a U.S. company for U.S. federal income tax purposes. As a result, we expect the Company will not be eligible for benefits under the income tax treaty between the U.S. and Canada.

Non-U.S. Holders.

A “Non-U.S. Holder” is a beneficial owner of Subordinate Voting Shares (other than an entity or arrangement classified as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder.

Tax Classification as a U.S. Domestic Company

As a result of the Business Combination, pursuant to Section 7874(b) of the U.S. Tax Code and the Treasury Regulations promulgated thereunder, notwithstanding that the Company is organized under the provisions of the BCBCA in Canada, solely for U.S. federal income tax purposes, it is anticipated that the Company will be treated as a U.S. domestic corporation.

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The Company anticipates that it will experience a number of significant and complicated U.S. federal income tax consequences as a result of being treated both as a Canadian company for Canadian income tax purposes and as a U.S. domestic corporation for U.S. federal income tax purposes, and this summary does not attempt to describe all such U.S. federal income tax consequences. Section 7874 of the U.S. Tax Code and the Treasury Regulations promulgated thereunder do not address all the possible tax consequences that arise from the Company being treated as a U.S. domestic corporation for U.S. federal income tax purposes. Accordingly, there may be additional or unforeseen U.S. federal income tax consequences to the Company that are not discussed in this summary. Please also note that most, but not all, states adopt Section 7874 of the U.S. Tax Code (California is an exception) and holders should discuss potential differences between federal and state treatment with their own tax advisors.

Generally, the Company is expected be subject to U.S. federal income tax on all of its taxable income and will be required to file a U.S. federal income tax return annually with the IRS. The Company anticipates that it will also be subject to tax in Canada. It is unclear whether the Company will be entitled to foreign tax credits under the U.S. Tax Code and how the foreign tax credit rules will operate in certain circumstances, as a result of the Company being treated as a U.S. domestic corporation for U.S. federal income tax purposes and the taxation of the Company also in Canada. Accordingly, it is possible that the Company will be subject to double taxation with respect to all or part of its taxable income. It is anticipated that such U.S. and Canadian tax treatment will continue indefinitely and that the Subordinate Voting Shares will be treated indefinitely as shares in a U.S. domestic corporation for U.S. federal income tax purposes, notwithstanding future transfers, and may also be considered shares in a Canadian corporation for Canadian tax purposes. The remainder of this summary assumes that the Company will be treated as a U.S. domestic corporation for U.S. federal income tax purposes.

Tax Considerations for U.S. Holders

Distributions

The Company has not and does not foresee making distributions with respect to its Subordinate Voting Shares. Distributions of cash or property with respect to Subordinate Voting Shares will constitute dividends for U.S. federal income tax purposes to the extent paid from the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Dividends will generally be taxable to a non-corporate U.S. Holder at the preferential rates applicable to long-term capital gains, provided that such holder meets certain holding period and other requirements. Distributions in excess thereof will generally be treated first, as a return of capital and be applied against, and reduce, a U.S. Holder’s adjusted tax basis in its Subordinate Voting Shares, but not below zero, and thereafter be treated as capital gain and treated as described under “Sale or Other Taxable Disposition” below. Such distributions may also be subject to Canadian withholding taxes.

Dividends received by corporate U.S. Holders may be eligible for a dividends received deduction, subject to certain restrictions relating to, among others, the corporate U.S. Holder’s taxable income, holding period and debt financing.

Sale or Other Taxable Disposition

Upon the sale or other taxable disposition of Subordinate Voting Shares, a U.S. Holder will generally recognize a capital gain or loss equal to the difference between (i) the amount realized by such U.S. Holder in connection with such sale or other taxable disposition, and (ii) such U.S. Holder’s adjusted tax basis in such stock. Such capital gain or loss will generally be long-term capital gain or loss if the U.S. Holder’s holding period respecting such stock is more than twelve months. U.S. Holders who are individuals are eligible for preferential rates of taxation respecting their long-term capital gains. Deductions for capital losses are subject to limitations.

Foreign Tax Credit Limitations

Because it is anticipated that the Company will be subject to tax both as a U.S. domestic corporation and as a Canadian corporation, a U.S. Holder may pay, through withholding, Canadian tax, as well as U.S. federal income tax, with respect to dividends paid on Subordinate Voting Shares. For U.S. federal income tax purposes, a U.S. Holder generally may elect for any taxable year to receive either a credit or a deduction for foreign income taxes paid by the holder during the year. Complex limitations apply to the foreign tax credit, including a general limitation that the credit

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cannot exceed the proportionate share of a taxpayer’s U.S. federal income tax that the taxpayer’s foreign source taxable income bears to the taxpayer’s worldwide taxable income. In applying this limitation, items of income and deduction must be classified, under complex rules, as either foreign source or U.S. source. The status of the Company as a U.S. domestic corporation for U.S. federal income tax purposes will cause dividends paid by the Company to be treated as U.S. source rather than foreign source for this purpose. As a result, a foreign tax credit may be unavailable to U.S. Holders for any Canadian tax paid on dividends received from the Company. Similarly, to the extent a sale or disposition of the Subordinate Voting Shares by a U.S. Holder results in Canadian tax payable by the U.S. Holder (for example, in the event the Subordinate Voting Shares constitute taxable Canadian property within the meaning of the ITA), a U.S. foreign tax credit may be unavailable to the U.S. Holder for such Canadian tax. In each case, however, the U.S. Holder should be able to take a deduction for the U.S. Holder’s Canadian tax paid, provided that the U.S. Holder has not elected to credit other foreign taxes during the same taxable year. The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisors regarding these rules.

Foreign Currency

The amount of any distribution paid to a U.S. Holder in foreign currency, or the amount of proceeds paid in foreign currency on the sale, exchange or other taxable disposition of Subordinate Voting Shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisors regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

Information Reporting and Backup Withholding

U.S. backup withholding (currently 24%) is imposed upon certain payments to persons that fail (or are unable) to furnish the information required pursuant to U.S. information reporting requirements. Distributions to U.S. Holders will generally be exempt from backup withholding, provided the U.S. Holder meets applicable certification requirements, including providing a U.S. taxpayer identification number on a properly completed IRS Form W-9, or otherwise establishes an exemption. The Company must report annually to the IRS and to each U.S. Holder the amount of distributions and dividends paid to that U.S. Holder and the proceeds from the sale or other disposition of Subordinate Voting Shares, unless such U.S. Holder is an exempt recipient.

Backup withholding does not represent an additional tax. Any amounts withheld from a payment to a U.S. Holder under the backup withholding rules will generally be allowed as a credit against such U.S. Holder’s U.S. federal income tax liability, and may entitle such U.S. Holder to a refund, provided the required information and returns are timely furnished by such U.S. Holder to the IRS.

Tax Considerations for Non-U.S. Holders

Distributions

The Company has not and does not foresee making distributions with respect to its Subordinate Voting Shares. Distributions of cash or property on Subordinate Voting Shares will constitute U.S. source dividends for U.S. federal income tax purposes to the extent paid from the Company’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess thereof will first constitute a return of capital and be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its Subordinate Voting Shares, but not below zero, and thereafter be treated as capital gain and will be treated as described under “Sale or Other Taxable Disposition” below.

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Subject to the discussions under “Information Reporting and Backup Withholding” above and under “FATCA” below, any dividend paid to a Non-U.S. Holder of Subordinate Voting Shares generally will be subject to U.S. federal withholding tax at a rate of 30%, or such lower rate as may be specified under an applicable income tax treaty, unless the dividend is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the U.S. In order to receive a reduced treaty rate, a Non-U.S. Holder must provide its financial intermediary with an IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or an appropriate successor form), properly certifying such holder’s eligibility for the reduced rate. If a Non-U.S. Holder holds Subordinate Voting Shares through a financial institution or other agent acting on the Non-U.S. Holder’s behalf, the Non-U.S. Holder will be required to provide appropriate documentation to such agent, and the Non-U.S. Holder’s agent will then be required to provide such (or a similar) certification to us, either directly or through other intermediaries. A Non-U.S. Holder that does not timely furnish the required certification, but that qualifies for a reduced treaty rate, generally may apply for and obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their own tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

Dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the U.S. (or, if required by an applicable income tax treaty, are attributable to a U.S. permanent establishment, or fixed base, of the Non-U.S. Holder) generally will be exempt from the withholding tax described above and instead will be subject to U.S. federal income tax on a net income basis at regular graduated U.S. federal income tax rates applicable to U.S. Holders. In such case, the Company will not have to withhold U.S. federal tax so long as the Non-U.S. Holder timely complies with the applicable certification and disclosure requirements. In order to obtain this exemption from withholding tax, a Non-U.S. Holder must provide its financial intermediary with an IRS Form W-8ECI properly certifying its eligibility for such exemption. Any such effectively connected dividends received by a corporate Non-U.S. Holder may be subject to an additional “branch profits tax” at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty), as adjusted for certain items. Non-U.S. Holders should consult their own tax advisors regarding any applicable tax treaties that may provide for different rules.

Sale or Other Taxable Disposition

Subject to the discussions under “Information Reporting and Backup Withholding” above and under “FATCA” below, any gain realized on the sale or other disposition of Subordinate Voting Shares by a Non-U.S. Holder generally will not be subject to U.S. federal income tax unless:

•

the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the U.S. (or, if required by an applicable income tax treaty, is attributable to a U.S. permanent establishment, or fixed base, of the Non-U.S. Holder);

•

the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition, and certain other conditions are met; or

•

the rules of the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) apply to treat the gain as effectively connected with a U.S. trade or business.

A Non-U.S. Holder who has gain that is described in the first bullet point immediately above generally will be subject to U.S. federal income tax on the gain derived from the sale or other disposition pursuant to regular graduated U.S. federal income tax rates in the same manner as if it were a U.S. Holder. In addition, a corporate Non-U.S. Holder described in the first bullet point immediately above may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits (or at such lower rate as may be specified by an applicable income tax treaty), as adjusted for certain items.

A Non-U.S. Holder who meets the requirements described in the second bullet point immediately above will be subject to a flat 30% tax (or a lower tax rate specified by an applicable tax treaty) on the gain derived from the sale or other disposition, which gain may be offset by certain U.S. source capital losses (even though the individual is not considered a resident of the U.S.), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

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With respect to the third bullet point above, pursuant to FIRPTA, in general, a Non-U.S. Holder is subject to U.S. federal income tax in the same manner as a U.S. Holder on any gain realized on the sale or other disposition of a “U.S. real property interest” (“USRPI”). For purposes of these rules, a USRPI generally includes stock in a U.S. corporation if such corporation’s interests in U.S. real property constitute 50% or more, by value, of the sum of the U.S. corporation’s (i) assets used in a trade or business, (ii) U.S. real property interests, and (iii) interests in real property outside of the U.S. A U.S. corporation whose interests in U.S. real property constitute 50% or more, by value, of the sum of such assets is commonly referred to as a U.S. real property holding corporation (“USRPHC”). If Subordinate Voting Shares are treated as regularly traded on an established securities market (within the meaning of Section 897(c)(3) of the U.S. Tax Code), FIRPTA generally will not apply to a disposition of Subordinate Voting Shares by a Non-U.S. Holder that owns directly (or is deemed to own pursuant to attribution rules) 5% or less of the Subordinate Voting Shares at any time during the relevant period, in which case such gain will be subject to U.S. federal income tax at rates generally applicable to U.S. Holders, except that the branch profits tax will not apply. The Company believes that it is not, and has not been, a USRPHC at any time during the relevant five-year period.

Information Reporting and Backup Withholding

With respect to distributions and dividends on Subordinate Voting Shares, the Company must report annually to the IRS and to each Non-U.S. Holder the amount of distributions and dividends paid to such Non-U.S. Holder and any tax withheld with respect to such distributions and dividends, regardless of whether withholding was required with respect thereto. Copies of the information returns reporting such dividends and distributions and withholding also may be made available to the tax authorities in the country in which the Non-U.S. Holder resides or is established under the provisions of an applicable income tax treaty, tax information exchange agreement or other arrangement. A Non-U.S. Holder will be subject to backup withholding for dividends and distributions paid to such Non-U.S. Holder unless either (i) such Non-U.S. Holder certifies under penalty of perjury that it is not a U.S. person (as defined in the U.S. Tax Code), which certification is generally satisfied by providing a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, or IRS Form W-8ECI (or appropriate successor form), and the payor does not have actual knowledge or reason to know that such holder is a U.S. person, or (ii) such Non-U.S. Holder otherwise establishes an exemption.

With respect to sales or other dispositions of Subordinate Voting Shares, information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale or other disposition of Subordinate Voting Shares within the U.S. or conducted through certain U.S.-related financial intermediaries, unless either (i) such Non-U.S. Holder certifies under penalty of perjury that it is not a U.S. person (as defined in the U.S. Tax Code), which certification is generally satisfied by providing a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, or IRS Form W-8ECI (or appropriate successor form), and the payor does not have actual knowledge or reason to know that such holder is a U.S. person, or (ii) such Non-U.S. Holder otherwise establishes an exemption.

Whether with respect to distributions and dividends, or the sale or other disposition of Subordinate Voting Shares, backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS.

FATCA

Withholding taxes may be imposed pursuant to FATCA (Sections 1471 through 1474 of the U.S. Tax Code) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, except as discussed below, a 30% withholding tax may be imposed on dividends on, or gross proceeds from the sale or other disposition (including certain distributions treated as a sale or other disposition) of, Subordinate Voting Shares paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the U.S. Tax Code).

Such 30% FATCA withholding will not apply to a foreign financial institution if such institution undertakes certain diligence and reporting obligations, or otherwise qualifies for an exemption from these rules. The diligence and reporting obligations include, among others, entering into an agreement with the U.S. Department of Treasury pursuant to which the foreign financial institution must (i) undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the U.S. Tax Code), (ii) annually report certain information about such accounts, and (iii) withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the U.S. governing FATCA may be subject to different rules.

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The 30% FATCA withholding will not apply to a non-financial foreign entity which either certifies that it does not have any “substantial United States owners” (as defined in the U.S. Tax Code), furnishes identifying information regarding each substantial United States owner, or otherwise qualifies for an exemption from these rules.

Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA (i) generally applies currently to payments of dividends on Subordinate Voting Shares, and (ii) will apply to payments of gross proceeds from the sale or other disposition of such stock (including certain distributions treated as a sale or other disposition) on or after January 1, 2019.

United States Tax Classification of the Company

The Company, which is and will continue to be a Canadian corporation as of the date of this AIF, is also expected to be classified for U.S. federal income tax purposes as a United States corporation under Section 7874 of the U.S. Tax Code. Under Section 7874 of the U.S. Tax Code, a corporation created or organized outside the United States (i.e., a non-United States corporation) will nevertheless be treated as a United States corporation for United States federal income tax purposes (such treatment is referred to as an inversion if each of the following three conditions are met (i) the non-United States corporation acquires, directly or indirectly, or is treated as acquiring under applicable United States Treasury Regulations, substantially all of the assets held, directly or indirectly, by a United States corporation or United States trade or business, (ii) after the acquisition, the former owners of the acquired United States corporation or business hold at least 80% (by vote or value) of the shares of the non-United States corporation by reason of their ownership of the United States acquired corporation, trade or business, and (iii) after the acquisition, the non-United States corporation’s expanded affiliated group does not have substantial business activities in the non-United States corporation’s country of organization or incorporation when compared to the expanded affiliated group’s total business.

The Company expects and intends to be treated as a United States corporation for United States federal income tax purposes under Section 7874 of the U.S. Tax Code and is expected to be subject to United States federal income tax on its worldwide income indefinitely. However, for Canadian tax purposes, the Company is expected, regardless of any application of Section 7874 of the U.S. Tax Code, to be treated as a Canadian resident company (as defined in the ITA) for Canadian income tax purposes.

The Company will be subject to taxation both in Canada and the United States and also may not qualify for certain U.S.-Canada income tax treaty benefits, which could have a material adverse effect on its financial condition and results of operations.

It is unlikely that the Company will pay any dividends on the common shares in the foreseeable future. However, dividends received by shareholders who are residents of Canada for purpose of the ITA will be subject to U.S. withholding tax. Any such dividends may not qualify for a reduced rate of withholding tax under the Canada-United States tax treaty. In addition, a foreign tax credit or a deduction in respect of foreign taxes may not be available.

As described above, dividends received by U.S. Holders will not be subject to U.S. withholding tax but will be subject to Canadian withholding tax. Dividends paid by the Company will be characterized as U.S. source income for purposes of the foreign tax credit rules under the U.S. Tax Code. Accordingly, U.S. Holders generally will not be able to claim a credit for any Canadian tax withheld unless, depending on the circumstances, they have an excess foreign tax credit limitation due to other foreign source income that is subject to a low or zero rate of foreign tax.

Because Subordinate Voting Shares will be treated as shares of a U.S. domestic corporation, the U.S. gift, estate and generation-skipping transfer tax rules generally apply to a non-U.S. shareholder of common shares.

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THE FOREGOING SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE DESCRIPTION OF ALL TAX CONSEQUENCES THAT MAY BE RELEVANT TO PARTICULAR HOLDERS OF SUBORDINATE VOTING SHARES AND IS NOT TAX OR LEGAL ADVICE. HOLDERS OF SUBORDINATE VOTING SHARES SHOULD ALSO REVIEW THE DISCLOSURE CONCERNING CANADIAN TAX CONSIDERATIONS AND SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL, NON-U.S. INCOME AND OTHER TAX LAWS) OF ACQUIRING, HOLDING AND DISPOSING OF SUBORDINATE VOTING SHARES.

GLOSSARY

The following is a glossary of certain general terms used in this AIF including in the summary hereof. Terms and abbreviations used in the financial statements appended to this AIF are defined separately and the terms and abbreviations defined below are not used therein, except where otherwise indicated. Words importing the singular, where the context requires, include the plural and vice versa and words importing any gender include all genders.

“A&M” has the meaning ascribed thereto under the heading “Description of the Business”.

“A&R LLC Agreement” means the Amended and Restated Limited Liability Company Agreement of Cresco, entered into by Cresco and each of the members of Cresco on November 30, 2018.

“ADHS” has the meaning ascribed thereto under the heading “Description of the Business”.

“Adjusted EBITDA” means earnings before interest, taxes, depreciation and amortization, each as determined in accordance with generally accepted accounting principles applied on a consistent basis, for the most recent trailing twelve month period, provided that the effects of any of the following shall be excluded from Adjusted EBITDA: (1) any profit or loss attributable to acquisitions or dispositions of stock or assets, (2) any intangibles/goodwill amortization charges attributable to acquisitions or dispositions of stock or assets, (3) any changes in accounting standards or practices utilized in preparing the financial statements of the relevant business, (4) all items of gain, loss or expense for the applicable year related to restructuring charges for the relevant business and (5) all items of gain, loss or expense for the year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business.

“AFS” has the meaning ascribed thereto under the heading “Description of the Business”.

“AFS Maryland” has the meaning ascribed thereto under the heading “Description of the Business”.

“Agents” means Canaccord Genuity Inc. and GMP Securities L.P., as agents in connection with the SR Offering.

“AIF” has the meaning ascribed thereto under the heading “General”.

“AMMA” has the meaning ascribed thereto under the heading “Description of the Business”.

“AO LTIP Unit” means a unit of Cresco which is designated as an “Appreciation Only LTIP Unit” in the applicable vesting agreement or other documentation pursuant to which such AO LTIP Unit is granted or issued, having the rights, powers, privileges, restrictions, qualifications and limitations set forth in Exhibit A to the A&R LLC Agreement in respect of the holder thereof, as well as any applicable vesting agreement or other documentation pursuant to which such AO LTIP Unit is granted or issued.

“API” has the meaning ascribed thereto under the heading “Description of the Business”.

“Arrangement” has the meaning ascribed thereto under the heading “General Development of the Business”.

“ARS” has the meaning ascribed thereto under the heading “Description of the Business”.

“ATC” means an alternative treatment center.

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“ATM Program” has the meaning ascribed thereto under the heading “General Development of the Business”.

“AUMA” has the meaning ascribed thereto under the heading “Description of the Business”.

“AZ Dispensary License” has the meaning ascribed thereto under the heading “Description of the Business”.

“Bank Secrecy Act” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Barr Comments” has the meaning ascribed thereto under the heading “Description of the Business”.

“Basis Adjustments” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“BCBCA” means the Business Corporations Act (British Columbia), as amended.

“BCC” has the meaning ascribed thereto under the heading “Description of the Business”.

“Business Combination” means the business combination among Randsburg and Cresco pursuant to which Cresco completed a reverse take-over of Randsburg.

“Cal Subsidiaries” has the meaning ascribed thereto under the heading “Description of the Business”.

“Canadian Securities Administrators” refers to an umbrella organization of Canada’s provincial and territorial securities regulators.

“CARERS Act” means the Compassionate Access, Research Expansion, and Respect States Act of 2015, as amended.

“CBP” has the meaning ascribed thereto under the heading “Risk Factors”.

“CCA” has the meaning ascribed thereto under the heading “Description of the Business”.

“CDS” has the meaning ascribed thereto under the heading “Risk Factors”.

“Certificate” has the meaning ascribed thereto under the heading “Description of the Business”.

“Certificate of Operation” has the meaning ascribed thereto under the heading “Description of the Business”.

“Cole Memo” has the meaning ascribed thereto under the heading “Description of the Business”.

“Common Units” means those units designated by Cresco after Cresco effected a recapitalization of its outstanding unit capital in connection with the Business Combination, whereby under such recapitalization all previously issued Cresco Units were combined into a single class of non-voting units of Cresco.

“Company” means Cresco Labs Inc., a corporation existing under the BCBCA and being Randsburg after completing the Business Combination.

“Company Board” means the board of directors of the Company as the same is constituted from time to time.

“Conversion Ratio” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“COVID-19” has the meaning ascribed thereto under the heading “Cautionary Statement Regarding Forward-Looking Information”.

“CPG” has the meaning ascribed thereto under the heading “Description of the Business”.

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“Credit Agreement” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Cresco” means Cresco Labs, LLC, a limited liability company existing under the laws of the state of Illinois.

“Cresco Corp” means Cresco U.S. Corp., a company existing under the laws of the state of Illinois and an entity that became a direct subsidiary of Randsburg as a result of the Business Combination.

“Cresco Corp Redeemable Shares” means the non-voting common shares in the capital of Cresco Corp.

“Cresco Corp Voting Shares” means the voting common shares in the capital of Cresco Corp.

“Cresco LTIP Unitholder” means the holders of the LTIP Units.

“Cresco Members” means the holders of Cresco Units.

“Cresco Ohio” has the meaning ascribed thereto under the heading “Description of the Business”.

“Cresco Redeemable Units” means the Common Units of Cresco following completion of the Business Combination held by Cresco Members other than Cresco Corp.

“Cresco Units” means the Class A units, Class B units, Class C units, Class D units, Class E units and Class F units in the capital of Cresco existing prior to the recapitalization of Cresco in connection with the completion of the Business Combination.

“Cresco Yeltrah” has the meaning ascribed thereto under the heading “Description of the Business”.

“CSA” has the meaning ascribed thereto under the heading “General Development of the Business”.

“CSE” means the Canadian Securities Exchange.

“CUMMA” has the meaning ascribed thereto under the heading “Description of the Business”.

“DEA” has the meaning ascribed thereto under the heading “Description of the Business”.

“DOJ” has the meaning ascribed thereto under the heading “General Development of the Business”.

“DOT” has the meaning ascribed thereto under the heading “Description of the Business”.

“EBITDA” means earnings before interest, taxes, depreciation, and amortization as reported in the financial records of the Company, or the financial records of any other company, or segment thereof, against whom the performance of the Company is being compared.

“Farm Bill” has the meaning ascribed thereto under the heading “General Development of the Business”.

“FATCA” means Foreign Account Tax Compliance Act.

“FCEN” has the meaning ascribed thereto under the heading “Risk Factors”.

“FCEN Memo” has the meaning ascribed thereto under the heading “Risk Factors”.

“FDA” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Financial Statements” has the meaning ascribed thereto under the heading “General”.

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“FinCEN” has the meaning ascribed thereto under the heading “Description of the Business”.

“FIRPTA” has the meaning ascribed thereto under the heading “Additional Information”.

“FloraMedex” has the meaning ascribed thereto under the heading “Description of the Business”.

“Founders” has the meaning ascribed thereto under the heading “Risk Factors”.

“FV LTIP Unit” means a unit of Cresco which is designated as a “Full Value LTIP Unit” in the applicable vesting agreement or other documentation pursuant to which such FV LTIP Unit is granted or issued, having the rights, powers, privileges, restrictions, qualifications and limitations set forth in Exhibit A to the A&R LLC Agreement in respect of the holder thereof, as well as any applicable vesting agreement or other documentation pursuant to which such FV LTIP Unit is granted or issued.

“Gloucester” has the meaning ascribed thereto under the heading “General Development of the Business”.

“HHH” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Holder” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“Holder’s Group” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“HSR Act” has the meaning ascribed thereto under the heading “General Development of the Business”.

“IFRS” means International Financial Reporting Standards.

“IIP” has the meaning ascribed thereto under the heading “Description of the Business”.

“ILLCA” Illinois Limited Liability Company Act, as amended.

“IRS” means the Internal Revenue Service.

“IT” has the meaning ascribed thereto under the heading “Risk Factors”.

“ITA” has the meaning ascribed thereto under the heading “Risk Factors”.

“LARA” has the meaning ascribed thereto under the heading “Description of the Business”.

“Leahy Amendment” has the meaning ascribed thereto under the heading “Description of the Business”.

“LIBOR” means the London Inter-bank Offered Rate.

“Lighthouse” has the meaning ascribed thereto under the heading “Description of the Business”.

“LTIP Units” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“Marijuana Establishment” has the meaning ascribed thereto under the heading “Description of the Business”.

“Massachusetts Department” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Massachusetts Regulations” has the meaning ascribed thereto under the heading “Description of the Business”.

“MAUCRSA” has the meaning ascribed thereto under the heading “Description of the Business”.

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“MCA” has the meaning ascribed thereto under the heading “Description of the Business”.

“MCRSA” has the meaning ascribed thereto under the heading “Description of the Business”.

“MD&A” has the meaning ascribed thereto under the heading “General”.

“MedMar” has the meaning ascribed thereto under the heading “General Development of the Business “.

“MedMar Lakeview” has the meaning ascribed thereto under the heading “General Development of the Business “.

“MedMar Rockford” has the meaning ascribed thereto under the heading “General Development of the Business “.

“Meeting” has the meaning ascribed thereto under the heading “General Development of the Business”.

“METRC” an end-to-end tracking and tracing software for marijuana plants and products provided by Franwell Inc.

“Michigan Affiliate” has the meaning ascribed thereto under the heading “Description of the Business”.

“Michigan Cannabis Regulations” has the meaning ascribed thereto under the heading “Description of the Business”.

“Michigan Qualified Purchaser” has the meaning ascribed thereto under the heading “Description of the Business”.

“Michigan Registry ID” has the meaning ascribed thereto under the heading “Description of the Business”.

“MIPs” has the meaning ascribed thereto under the heading “Description of the Business”.

“MJ Freeway” means MJ Freeway Inc. a corporation providing cloud-based, seed-to-sale, cannabis compliance software for marijuana businesses including retail, delivery, wholesale, cultivation, and manufacturing.

“MMCC” has the meaning ascribed thereto under the heading “Description of the Business”.

“MMCP” has the meaning ascribed thereto under the heading “Description of the Business”.

“MMFLA” has the meaning ascribed thereto under the heading “Description of the Business”.

“MMJ Program” has the meaning ascribed thereto under the heading “Description of the Business”.

“MMMA” has the meaning ascribed thereto under the heading “Description of the Business”.

“MOU” has the meaning ascribed thereto under the heading “Risk Factors”.

“MTA” has the meaning ascribed thereto under the heading “Description of the Business”.

“MUMP” has the meaning ascribed thereto under the heading “Description of the Business”.

“NBSG” has the meaning ascribed thereto under the heading “Description of the Business”.

“Nevada Licenses” has the meaning ascribed thereto under the heading “Description of the Business”.

“NJDOH” means the New Jersey Department of Health.

“Non-U.S. Holder” has the meaning ascribed thereto under the heading “Additional Information”.

“NY Licenses” has the meaning ascribed thereto under the heading “Description of the Business”.

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“NYSDOH” has the meaning ascribed thereto under the heading “Description of the Business”.

“OH Amended Arrangement Agreement” has the meaning ascribed thereto under the heading “General Development of the Business”.

“OH Arrangement” has the meaning ascribed thereto under the heading “General Development of the Business”.

“OTC” has the meaning ascribed thereto under the heading “Description of the Business”.

“Paradise Wellness” has the meaning ascribed thereto under the heading “Description of the Business”.

“PDI” has the meaning ascribed thereto under the heading “Description of the Business”.

“Phoenix Farms” has the meaning ascribed thereto under the heading “Description of the Business”.

“PMP” has the meaning ascribed thereto under the heading “Description of the Business”.

“Pre-Combination LLC Agreement” means the Cresco limited liability company agreement dated October 8, 2013, as amended and restated as of March 28, 2015 and as further amended and restated as of March 17, 2018.

“Proportionate Voting Shares” means the Proportionate Voting Shares in the capital of the Company, after giving effect to the Business Combination.

“PTSD” has the meaning ascribed thereto under the heading “Description of the Business”.

“Randsburg” has the meaning ascribed thereto under the heading “Corporate Structure”.

“Randsburg Shareholders” means the holders of common shares of Randsburg prior to giving effect to the Business Combination.

“REFER Act” means the H.R.4779: REFER Act of 2018.

“Registered Organizations” has the meaning ascribed thereto under the heading “Description of the Business”.

“Regulatory Counsel” has the meaning ascribed thereto under the heading “Description of the Business”.

“RFA” has the meaning ascribed thereto under the heading “Description of the Business”.

“RMD” has the meaning ascribed thereto under the heading “Description of the Business”.

“Rohrabacher-Blumenauer Amendment” has the meaning ascribed thereto under the heading “Description of the Business”.

“RTA” has the meaning ascribed thereto under the heading “Description of the Business”.

“Rules” has the meaning ascribed thereto under the heading “Description of the Business”.

“SAFE Act” has the meaning ascribed thereto under the heading “Description of the Business”.

“SEC” means the U.S. Securities & Exchange Commission.

“Section 280E” has the meaning ascribed thereto under the heading “Risk Factors”.

“seed-to-sale” has the meaning ascribed thereto under the heading “Description of the Business”.

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“Senior Loan” has the meaning ascribed thereto under the heading “General Development of the Business”.

“September Financing” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Sessions Memo” has the meaning ascribed thereto under the heading “Description of the Business”.

“Shelf Prospectus” has the meaning ascribed thereto under the heading “General Development of the Business”.

“SHS” has the meaning ascribed thereto under the heading “Directors and Executive Officers”.

“Silver State” has the meaning ascribed thereto under the heading “Description of the Business”.

“SLO” has the meaning ascribed thereto under the heading “Description of the Business”.

“SR Offering” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Staff Notice 51-352” has the meaning ascribed thereto under the heading “Description of the Business”.

“STATES Act” has the meaning ascribed thereto under the heading “Description of the Business “.

“Subordinate Voting Shares” means the Subordinate Voting Shares in the capital of the Company, after giving effect to the Business Combination.

“Super Voting Shares” means the non-participating Super Voting Shares in the capital of the Company, after giving effect to the Business Combination.

“Support Agreement” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“T&T” has the meaning ascribed thereto under the heading “Description of the Business”.

“Tax Receivable Agreement” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“THC” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Treasury Regulations” refers to the United States Treasury Regulations issued by the United States Internal Revenue Service, a bureau of the United States Department of the Treasury.

“Triggering Event” has the meaning ascribed thereto under the heading “Description of Capital Structure”.

“Tryke” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Tryke Acquisition” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Underlying Shares” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Units” has the meaning ascribed thereto under the heading “General Development of the Business”.

“U.S. Holder” has the meaning ascribed thereto under the heading “Additional Information”.

“U.S. Marijuana Issuers” as defined in the Canadian Securities Administrators Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities.

“U.S. Tax Code” has the meaning ascribed thereto under the heading “Description of the Business”.

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“USRPHC” has the meaning ascribed thereto under the heading “Additional Information”.

“USRPI” has the meaning ascribed thereto under the heading “Additional Information”.

“Valley Ag” has the meaning ascribed thereto under the heading “General Development of the Business”.

“VidaCann” has the meaning ascribed thereto under the heading “General Development of the Business”.

“Warrant” has the meaning ascribed thereto under the heading “General Development of the Business”.

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EX-99.19 20 d945319dex9919.htm EX-99.19 EX-99.19

Exhibit 99.19

FORM 52-109FV1

CERTIFICATION OF ANNUAL FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Kenneth Amann, Chief Financial Officer of Cresco Labs Inc., certify the following:

Date: April 28, 2020

“Kenneth Amann”

Kenneth Amann

Chief Financial Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.20 21 d945319dex9920.htm EX-99.20 EX-99.20

Exhibit 99.20

FORM 52-109FV1

CERTIFICATION OF ANNUAL FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Charles Bachtell, Chief Executive Officer of Cresco Labs Inc., certify the following:

Date: April 28, 2020

“Charles Bachtell”

Charles Bachtell

Chief Executive Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.21 22 d945319dex9921.htm EX-99.21 EX-99.21

Exhibit 99.21

Cresco Labs

Page 1 of 8

CRESCO LABS ANNOUNCES FIRST QUARTER 2020 RESULTS

•	Record revenue of $66.4 million in Q1’20, 60% growth over Q4’19 revenue, 26% growth on the same asset base as net pro-forma Q4’19¹

•	Completed largest cultivation expansion in company history adding 6x cultivation space in Illinois and 4x cultivation space in Pennsylvania with incremental first harvests continuing on a rolling basis throughout 2020

•	144% YoY same store sales increase over Q1’19² and 87% sequential retail revenue growth from Q4

•	In April, Cresco Labs realized its highest-ever share of the Illinois retail market

•	40% growth of Cresco brands QoQ in California

CHICAGO – May 28, 2020 – Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) (FSE: 6CQ) (“Cresco” or the “Company”) one of the largest vertically integrated multistate cannabis operators in the United States, today released its unaudited financial results for the first quarter ended March 31, 2020. All financial information presented in this release is in U.S. dollars, unless otherwise noted.

Management Commentary

Charles Bachtell, Co-founder and CEO of Cresco Labs stated, “I couldn’t be more proud of what our team has achieved year to date – we have become an even better operating company since the beginning of the year. We generated another sequential quarter of substantial revenue growth from the same asset base as pro-forma Q4 and our fourth consecutive quarter of positive adjusted EBITDA. I’m equally proud of the expansion to our operations during this quarter. In Q1 we built, staffed, integrated, and refined our operations in the largest and most important cannabis markets in the U.S. This positions us incredibly well to see the fruits of that labor in the coming quarters. We continue with our very clear focus, having the most strategic geographic footprint possible and gaining meaningful, material positions in those markets. With our major CapEx investments behind us, our outstanding transactions substantially completed, increased capacity coming online, and additional dispensaries opening, Cresco expects to deliver substantial growth in 2020.”

First Quarter 2020 Financial Highlights

Operating Results

•

Revenue for the first quarter of 2020 was $66.4 million, an increase of 60% over Q4’19 revenue and 26% over Q4’19 net pro-forma revenue¹ on the same asset base. Revenue growth was driven by increased cultivation and retail efficiency in Illinois and Pennsylvania, along with operational improvements in California.

•

Operational Gross Profit³ as a Percentage of Revenue was 48% in the quarter as compared to 51% the prior quarter. Operational Gross Profit margin was lower as lower margin revenue in California made up a higher portion of total revenue, offset by increased efficiency in Illinois and Pennsylvania.

¹	Pro-forma revenue for Q4’19 of $56.0 million excluding $3.4 million in revenue that would have been considered intercompany. Pro-forma revenue includes the impact of pending acquisitions and certain minority investments.

²	On nine stores that were open Q1 2019.

³	See “Non-IFRS Financial Measures” at the end of this press release for more information regarding the Company’s use of non-IFRS financial measures.

Cresco Labs

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•	SG&A was $46.7 million. SG&A included $11.8 million in non-core costs associated with the close of three transactions and $1.4 million in share-based compensation. Excluding these non-core and non-cash items, SG&A would have been $33.4 million or 50% of revenue.

•	Net loss⁴ was $13.4 million, which includes unrealized gains on mark-to-market instruments that fluctuate until obligations are settled, changes in fair value of biological assets, interest expense and tax expense.

•	Adjusted EBITDA⁵ was $3.2 million, an increase of 11%. This was achieved while consolidating Origin House during the quarter and was driven primarily from higher revenues and increased operational gross profit in Illinois and Pennsylvania.

Balance Sheet


Numbers in millions unless otherwise noted	Q1 2020		Q4 2019		p
Cash and Cash Equivalents	$	68.6	$	49.1		40	%
Net Working Capital⁶	$	75.1	$	9.2		719	%
Total Assets	$	1,157.0	$	616.6		88	%
Total Liabilities	$	417.3	$	293.9		42	%

Shares Outstanding

Total shares on a fully converted basis were 373,139,010 as of March 31, 2020.

Progress on Strategic Priorities

Cresco Labs outlined the following 2020 strategic goals on the April 27, 2020, fourth quarter 2019 earnings conference call: Expand Cresco’s market-leading position in Illinois and Pennsylvania; Integrate Origin House and turn California into a center of profitable growth; Lay the foundation for future growth in other states.

Illinois & Pennsylvania

Recent Announcements

•

On April 16, 2020, Cresco Labs announced the completion of its cultivation facility in Lincoln, IL, the largest in the state, and the first phase of expansion at its Kankakee facility – adding almost 180,000 square feet of additional indoor and greenhouse cultivation space, bringing the total cultivation space to 215,000 square feet across all three of its Illinois facilities. The additional capacity is expected to begin to contribute on a rolling basis throughout the rest of the year.

•

On May 7, 2020, Cresco Labs announced the completion of an additional 66,000 square feet of cultivation space in Pennsylvania, a 4x increase in capacity. The additional capacity is expected to begin to contribute on a rolling basis throughout the rest of the year.

•

On May 27, 2020, Cresco Labs announced the opening of Sunnyside* Danville, IL.

•

On May 28, 2020, Cresco Labs announced the opening of the first adult-use dispensary in downtown Chicago – Sunnyside* River North.

⁴	Net loss includes amounts attributable to noncontrolling interests.

⁵	See “Non-IFRS Financial Measures” at the end of this press release for more information regarding the Company’s use of non- IFRS financial measures.

⁶	Net Working Capital is calculated as current assets minus current liabilities.

Cresco Labs

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California

Recent Announcements

•

On January 8, 2020, Cresco Labs announced the closing of its acquisition of Origin House.

•

On February 4, 2020, Cresco Labs announced the launch of Mindy’s Edibles in California.

Other States

Recent Announcements

•

On February 7, 2020, Cresco Labs announced the legal close and funding of its acquisition of Hope Heal Health in Massachusetts.

•

On February 27, 2020, Cresco Labs announced the opening of four Sunnyside* dispensaries in New York.

•

On May 26, 2020, Cresco Labs announced its agreement to acquire four additional operating dispensaries in Ohio.

Capital Markets

Recent Announcements

•

On January 28, 2020, Cresco Labs announced the closing of a sale-and-leaseback agreement for its Yellow Springs, Ohio property for total non-dilutive funding of $12 million.

•

On February 2, 2020, Cresco Labs announced the closing of a $100 million senior secured credit facility.

•

On April 23, 2020, Cresco Labs announced the closing of a sale-and-leaseback agreement for its Marshall, Michigan property for total non-dilutive funding of $16 million.

Conference Call and Webcast

The Company will host a conference call and webcast to discuss its financial results and provide investors with key business highlights on Thursday, May 28, 2020, at 5pm Eastern Time (4pm Central Time). The conference call may be accessed via webcast or by dialing 866-688-4235 (409-216-0711 for international callers) and providing conference ID 9666613. Archived access to the webcast will be available for one year on the Cresco investor relations website.

Consolidated Financial Statements

The financial information reported in this news release is based on unaudited management prepared financial statements for the three months ended March 31, 2020. The Company will file its unaudited interim consolidated financial statements on SEDAR by May 29, 2020. Accordingly, such financial information may be subject to change. All financial information contained in this news release is qualified in its entirety with reference to such financial statements. While the Company does not expect there to be any material changes, to the extent that the financial information contained in this news release is inconsistent with the information contained in the Company’s financial statements, the financial information contained in this news release shall be deemed to be modified or superseded by the Company’s financial statements. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation for purposes of applicable securities laws. Further, the reader should refer to the additional disclosures in the Company’s audited financial statements for the year ended December 31, 2019, previously filed on SEDAR.

Cresco Labs

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About Cresco Labs Inc.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The Company has also provided unaudited pro-forma financial information, which assumes that closed and pending mergers and acquisitions in 2019 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2019. This measure also includes revenue for certain pending or completed minority investments, for which revenue is not consolidated under IFRS rules. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein. Accordingly, the following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS.

Forward Looking Statements

Cresco Labs

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Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the Company’s Prospectus dated July 26, 2019, Annual Information Form dated April 28, 2020, and other documents filed by the Company with Canadian securities regulatory authorities; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

312-953-2767

Investors

Aaron Miles, Cresco Labs

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

Cresco Labs

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Cresco Labs Inc.

Unaudited Financial Information and Non-IFRS Reconciliations

(All amounts expressed in thousands of U.S. Dollars)

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income

For the Three Months Ended March 31, 2020 and 2019


	For the Three Months Ended
	March 31
($ in thousands)	2020			2019
	(Unaudited)			(Unaudited)
Revenue	$	66,380		$	21,055
Cost of Sales – Production Costs		(46,200	)		(14,714	)

Gross Profit Before Fair Value Adjustments		20,180			6,341
Realized Changes in Fair Value of Inventory Sold		(24,584	)		(15,895	)
Unrealized Gain on Changes in Fair Value of Biological Assets		38,544			20,206

Gross Profit		34,140			10,652
GP%		51.4	%		50.6	%
Expenses:
Selling, General and Administrative		46,653			16,773
Depreciation and Amortization		4,619			973

Total Expenses		51,272			17,746
Loss from Operations		(17,132	)		(7,094	)

Other (Expense) Income:
Interest Expense, Net		(8,216	)		(419	)
Other Income (Expense), Net		15,523			(134	)
(Loss) Income from Investment in Associate		(144	)		36

Total Other Income (Expense), Net		7,163			(517	)

Loss Before Income Taxes		(9,969	)		(7,611	)
Income Tax Expense (Recovery)		(3,462	)		37

Net Loss ¹	$	(13,431	)	$	(7,574	)

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

Cresco Labs

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Cresco Labs Inc.

Unaudited Summarized Consolidated Statements of Financial Position

As of March 31, 2020 and December 31, 2019


($ in thousands)	3/31/2020		12/31/2019
	(Unaudited)		(Audited)
Cash and Cash Equivalents	$	68,581	$	49,102
Other Current Assets		147,668		110,236
Property and Equipment, Net		187,872		155,839
Intangible Assets, Net		192,755		94,206
Goodwill		458,041		137,719
Other Long-Term Assets		102,111		69,452

Total Assets	$	1,157,028	$	616,554

Total Current Liabilities	$	141,190	$	150,169
Total Long-Term Liabilities		276,130		143,762
Total Shareholders’ Equity		739,708		322,623

Total Liabilities and Shareholders’ Equity	$	1,157,028	$	616,554

Cresco Labs Inc.

Unaudited Revenue and Gross Profit Metrics

For the Three Months Ended March 31, 2020 and 2019


	For the Three Months Ended
($ in thousands)	March 31,
	2020			2019
Revenue	$	66,380		$	21,055
Cost of Sales - Production Costs¹		(46,200	)		(14,714	)
Realized Changes in Fair Value of Inventory Sold		(24,584	)		(15,895	)
Unrealized Gain on Changes in Fair Value of Biological Assets		38,544			20,206

Gross Profit	$	34,140		$	10,652

Cultivation Costs Expensed Under IAS 41²		6,050			3,043
Net Impact of Fair Value of Biological Assets		(13,960	)		(4,311	)
Expansion, Relaunch and Rebranding Costs³		3,881			—
Fair Value Mark-up for Acquired Inventory		1,889			—

Operational Gross Profit (Non-IFRS)	$	32,000		$	9,384

Operational Gross Profit % (Non-IFRS)		48.2	%		44.6	%

¹	Production (manufacturing, processing and cultivation) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

³	Costs related to non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

Cresco Labs

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Cresco Labs Inc.

Unaudited Reconciliation of Net Income to Adjusted EBITDA

For the Three Months Ended March 31, 2020 and 2019


	For the Three Months Ended
($ in thousands)	March 31,
	2020			2019
Net Loss¹	$	(13,431	)	$	(7,574	)
Depreciation and Amortization		8,368			2,759
Interest Expense, Net		8,216			419
Income Tax Expense (Recovery)		3,462			(37	)

Earnings (Loss) Before Interest, Taxes, Depreciation and Amortization (EBITDA) (Non-IFRS)	$	6,615		$	(4,469	)

Expansion, Relaunch and Rebranding Costs ²		3,881			—
Other (Income) Expense, Net		(15,523	)		134
Loss (Income) from Investment in Associate		144			(36	)
Fair Value Mark-up for Acquired Inventory		1,889			—
Cultivation Costs Expensed Under IAS 41 ³		6,050			3,043
Acquisition and Other Non-Core Costs		11,843			2,458
Management Incentive Compensation (Share-Based)		2,235			3,008

Adjusted EBITDA (Non-IFRS)	$	17,134		$	4,173

Net Impact of Fair Value of Biological Assets		(13,960	)		(4,311	)

Adjusted EBITDA (non-IFRS), Net of Impact of Biological Assets	$	3,174		$	(138	)

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

²	Costs related to non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

EX-99.22 23 d945319dex9922.htm EX-99.22 EX-99.22

Exhibit 99.22

CRESCO LABS INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL

STATEMENTS

(Unaudited)

THREE MONTHS ENDED

MARCH 31, 2020 AND 2019

(Expressed in United States Dollars)

Cresco Labs Inc.

INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:

Condensed Interim Consolidated Statements of Financial Position			2

Condensed Interim Consolidated Statements of Operations			3

Condensed Interim Consolidated Statements of Comprehensive Loss			4

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity			5

Condensed Interim Consolidated Statements of Cash Flows			6

Notes to the Condensed Interim Consolidated Financial Statements			7

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Financial Position

As of March 31, 2020 and December 31, 2019

(In thousands of United States Dollars)


		(Unaudited)
		March 31,			December 31,
		2020			2019
ASSETS
Current assets:
Cash and cash equivalents		$	68,581		$	49,102
Restricted cash			2,795			5,050
Accounts receivable, net	Note 3		14,211			16,455
Biological assets	Note 4		39,980			31,791
Inventory, net	Note 5		81,171			49,555
Loans receivable, short-term	Note 20		3,143			644
Other current assets			6,368			6,741

Total current assets			216,249			159,338
Non-current assets:
Property and equipment, net	Note 6		187,872			155,839
Right-of-use assets	Note 7		75,211			46,696
Intangible assets, net	Note 9		192,755			94,206
Loans receivable, long-term	Note 20		16,852			18,633
Investments	Note 8		4,682			1,278
Security deposits			2,026			1,084
Goodwill	Note 9		458,041			137,719
Deferred tax asset	Note 24		3,159			1,761
Other non-current assets			181			—

Total non-current assets			940,779			457,216

TOTAL ASSETS		$	1,157,028		$	616,554

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Current liabilities:
Accounts payable and other accrued expenses	Note 10	$	57,625		$	62,834
Short-term borrowings	Note 14		20,787			—
Income tax payable	Note 24		21,735			15,198
Current portion of lease liabilities	Note 7		18,030			12,019
Deferred consideration, contingent consideration and other payables	Note 13		22,810			59,940
Derivative liabilities, short-term	Note 20		203			178

Total current liabilities			141,190			150,169
Long-term liabilities:
Long-term notes payable and loans payable	Note 14		95,555			550
Derivative liabilities, long-term	Note 20		4,902			15,243
Lease liabilities	Note 7		116,781			82,856
Deferred tax liability	Note 24		49,392			23,212
Deferred consideration and contingent consideration	Note 13		9,500			21,901

Total long-term liabilities			276,130			143,762

TOTAL LIABILITIES			417,320			293,931

SHAREHOLDERS’ EQUITY:
Share capital			684,217			275,851
Contributed surplus			56,099			25,863
Accumulated other comprehensive income			104			—
Accumulated deficit			(130,297	)		(114,632	)

Equity of Cresco Labs Inc.			610,123			187,082
Non-controlling interests	Note 11		129,585			135,541

TOTAL SHAREHOLDERS’ EQUITY			739,708			322,623

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,157,028		$	616,554

Nature of Operations (Note 1)

Commitments and Contingencies (Note 19)

Subsequent Events (Note 25)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Operations

For the Three Months Ended March 31, 2020 and 2019

(Unaudited - In thousands of United States Dollars, except per share data)


		(Unaudited)
		Three months ended
		March 31,
		2020			2019
Revenue, net	Note 15	$	66,380		$	21,055
Costs of sales - production costs	Note 5		(46,200	)		(14,714	)

Gross profit before fair value adjustments			20,180			6,341
Realized changes in fair value of inventory sold	Note 5		(24,584	)		(15,895	)
Unrealized gain on changes in fair value of biological assets	Note 4		38,544			20,206

Gross profit			34,140			10,652

Expenses:
Selling, general and administrative	Note 16		46,653			16,773
Depreciation and amortization	Note 6, 9, 12		4,619			973

Total expenses			51,272			17,746

Loss before other income (expense) and income taxes			(17,132	)		(7,094	)
Other income (expense):
Interest expense, net	Note 23		(8,216	)		(419	)
Other income (expense), net	Note 17		15,523			(134	)
(Loss) income from investment in associate	Note 8		(144	)		36

Total other income (expense), net			7,163			(517	)

Loss before income taxes			(9,969	)		(7,611	)
Income tax (expense) recovery	Note 24		(3,462	)		37

Net loss		$	(13,431	)	$	(7,574	)
Net loss attributable to non-controlling interests, net of tax	Note 11		(6,042	)		(1,347	)

Net loss attributable to Cresco Labs Inc.		$	(7,389	)	$	(6,227	)

Net loss per share - attributable to Cresco Labs Inc. shareholders
Loss per share - Basic	Note 22	$	(0.04	)	$	(0.05	)
Loss per share - Diluted	Note 22	$	(0.04	)	$	(0.05	)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Comprehensive Loss

For the Three Months Ended March 31, 2020 and 2019

(Unaudited - In thousands of United States Dollars)


	(Unaudited)
	Three months ended
	March 31,
	2020			2019
Net loss for the period	$	(13,431	)	$	(7,574	)
Other comprehensive gain for the period
Foreign currency translation differences, net of tax		104			—

Total net loss and comprehensive loss for the period	$	(13,327	)	$	(7,574	)

Comprehensive loss attributable to non-controlling interests, net of tax		(6,042	)		(1,347	)

Total net loss and comprehensive loss attributable to Cresco Labs Inc.	$	(7,285	)	$	(6,227	)

See accompanying notes to unaudited condensed interim consolidated financial statements

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2020 and 2019

(Unaudited - In thousands of United States Dollars)


		$ Amount
												Accumulated
												other
												comprehensive
	Notes	Share capital		Shares to be issued		Contributed surplus			Accumulated deficit			income		Non-controlling interests			Total
Balance as of January 1, 2019		$	142,118	$	20,064	$	11,594		$	(52,745	)		—	$	161,950		$	282,981
Net loss			—		—		—			(6,227	)		—		(1,347	)		(7,574	)
Share-based compensation expense	Note 12		—		—		4,043			—			—		—			4,043
Exercise of options and warrants			563		—		(139	)		—			—		—			424
Change in ownership interest	Note 11(f)		—		—		—			(150	)		—		(34	)		(184	)
Cumulative effect of adoption of IFRS 16 Leases			—		—		—			(837	)		—		(1,526	)		(2,363	)

Ending Balance as of March 31, 2019		$	142,681	$	20,064	$	15,498		$	(59,959	)		—	$	159,043		$	277,327

Balance as of January 1, 2020		$	275,851		—	$	25,863		$	(114,632	)		—	$	135,541		$	322,623
Net loss			—		—		—			(7,389	)		—		(6,042	)		(13,431	)
Share-based compensation expense	Note 12		—		—		1,767			—			—		—			1,767
Exercise of options	Note 12		589		—		(160	)		—			—		—			429
Exercise of warrants	Note 11(c)		91		—		—			—			—		—			91
Vesting of RSUs			1,674		—		(2,445	)		—			—		—			(771	)
Income tax reserve	Note 25		—		—		(597	)		(58	)		—		—			(655	)
Foreign currency translation			—		—		—			—			104		—			104
Issuance of shares related to Origin House	Note 11(b)(i)		396,575		—		31,671			—			—		—			428,246
Equity issued related to Valley Ag acquisition	Note 11(b)(ii)		1,305		—		—			—			—		—			1,305
Cresco LLC share redemptions and other adjustments			8,132		—		—			(8,218	)		—		86			—

Ending Balance as of March 31, 2020		$	684,217		—	$	56,099		$	(130,297	)	$	104	$	129,585		$	739,708

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2020 and 2019

(Unaudited - In thousands of United States Dollars)


	(Unaudited)
	Three months Ended March 31,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(13,431	)	$	(7,574	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		8,367			2,919
Bad debt expense		241			120
Share-based compensation expense		2,235			3,131
Loss (gain) on investments		678			(7	)
(Gain) loss on changes in fair value of deferred and contingent consideration		(5,967	)		42
(Gain) loss on derivative instruments and warrants		(9,715	)		235
Loss, net of gains, on loans receivable		548			—
Accrued interest expense, net of income		587			—
Impairment on intangible asset		1,194			—
Loss recognized on sale-leaseback transactions		22			—
Realized changes in fair value of inventory sold		20,494			15,895
Loss on inventory write-offs		1,674			—
Provision for inventory reserve		2,416
Unrealized gain, net of losses, on changes in fair value of biological assets		(38,544	)		(20,206	)
Change in deferred taxes		(3,295	)		(900	)
Accretion of discount and deferred financing costs on debt arrangements		1,197			—
Foreign currency gain		(600	)		—
Changes in operating assets and liabilities:
Accounts receivable		9,568			(1,796	)
Inventory		(41,146	)		(27,266	)
Biological assets		32,357			22,650
Other current assets		1,733			21
Security deposits		(805	)		(71	)
Accounts payable and other accrued expenses		(14,057	)		6,346
Other current liabilities		(2,389	)		(1,156	)
Deferred rent		—			73
Income tax payable		6,537			863

NET CASH USED IN OPERATING ACTIVITIES		(40,101	)		(6,681	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(41,703	)		(11,959	)
Purchases of intangibles		(596	)		(107	)
Proceeds from sale and leaseback transactions and lease tenant incentives		21,276			—
Payment of acquisition consideration, net of cash acquired		(13,447	)		—
Loans receivable for entities to be acquired		(4,171	)		(5,417	)

NET CASH USED IN INVESTING ACTIVITIES		(38,641	)		(17,483	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants		520			424
Proceeds from the issuance of long-term debt		100,000			—
Payment of issuance costs of financing		(3,855	)		—
Acquisition of non-controlling interests		—			(184	)
Payments for taxes related to net share settlements of restricted stock units		(771	)		—
Principal payments of leases		(874	)		(703	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		95,020			(463	)

Effect of foreign currency exchange rate changes on cash		946			—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH		17,224			(24,627	)
Cash and cash equivalents and restricted cash, beginning of period		54,152			138,028

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	71,376		$	113,401

CASH PAID DURING THE PERIOD FOR:
Interest	$	4,286		$	824
NON-CASH TRANSACTIONS:
Equity issued for acquisitions	$	429,715		$	—
Net liability upon adoption of IFRS 16 Leases and subsequent additions		31,265			47,398
Liability incurred to purchase property and equipment		3,641			—

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

1.	NATURE OF OPERATIONS

On November 30, 2018, in connection with the 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 the Super Voting Shares (“MVS”).

On December 3, 2018, the Company began trading on the Canadian Securities Exchange (“CSE”) under the ticker symbol “CL.” On March 6, 2019, Cresco shares were approved to be quoted on the Over-the-Counter Market (“OTC”) and is traded under the ticker symbol “CRLBF.” On August 13, 2019, the Company began trading its Euro-dominated shares on the Frankfurt Stock Exchange (“FSE”) and are trading under the symbol “6CQ.”

The Company is licensed to cultivate, manufacture and sell retail and medical cannabis and retail and medical cannabis products and operates a retail, wholesale and online nicotine vape business. The Company operates in and/or has ownership interests in Illinois, Pennsylvania, Ohio, California, Maryland, Nevada, Arizona, New York, Massachusetts, and Canada, pursuant to the Illinois Compassionate Use of Medical Cannabis Pilot Program 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 Nevada Revised Statutes section 453A, the Arizona Medical Marijuana Act, the New York Compassionate Care Act, the Massachusetts Cannabis Control Commission and the Canada Tobacco and Vaping Products Act, respectively.

The Company’s head office is located at Suite 110, 400 W Erie St, Chicago, IL 60654 and the registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Basis of Preparation

The unaudited condensed interim consolidated financial statements of the Company have been prepared under International Financial Reporting Standards (“IFRS”) in accordance with International Accounting Standards (“IAS”) 34 Interim Financial Reporting, which was adopted by the International Accounting Standards Board (“IASB”).

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The unaudited condensed interim consolidated financial statements are presented in United States dollars and are prepared in accordance with accounting policies, consistently applied, critical estimates, and methods described in the Company’s annual consolidated financial statements. The unaudited condensed interim consolidated financial statements do not include all information and disclosures required in the Company’s annual consolidated financial statements and should be read in conjunction with the Company’s annual consolidated financial statements for the years ended December 31, 2019 and 2018.

These unaudited condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on May 28, 2020.

(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 biological assets which are measured at fair value less cost to sell; certain investments in associates, which are accounted for under the equity method; loans receivable measured at fair value through profit or loss (“FVTPL”); 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 and the contractual obligation for liabilities.

Management has applied judgements in concluding that there remain no material uncertainties related to events or conditions that may cast doubt upon the entity’s ability to continue as a going concern, which judgments include effect of subsequent events (see Note 25); and the Company’s ability to realize its assets and settle its obligations in the normal course of operations for at least twelve months from the date of the financial statements.

(c)

Functional and Presentation Currency

The Company’s functional currency and that of the majority of its subsidiaries, as determined by management, is the United States (“U.S.”) dollar. The Company’s presentation currency is the U.S. dollar. As such, the accompanying consolidated financial statements are presented in U.S. dollars. 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 and revenues and expenses at the rate of exchange prevailing at the dates of the transactions during the period. Gains or losses on translation of foreign subsidiaries and net investments in foreign operations are included in other comprehensive income.

(d)

Basis of Consolidation

The unaudited condensed interim consolidated financial statements include the accounts of the Company and its subsidiaries with intercompany balances and transactions eliminated on 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’s wholly owned subsidiaries and entities over which the Company has control as of March 31, 2020:

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)


			Percentage
Entity	Location	Purpose	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		44.6	%
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 (d/b/a Sunnyside - Lakeview)	Illinois	Dispensary		87.6	%
MedMar Rockford, LLC (d/b/a Sunnyside - Rockford)	Illinois	Dispensary		75	%
CannaRoyalty Corp. (d/b/a Origin House)	Ontario, Canada	Holding Company		100	%
Cali-AntiFragile Corp.	California	Holding Company		100	%
Alta Supply Inc.	California	Distribution		100	%
Kaya Management Inc.	California	Production		100	%
RPE Inc.	California	Distribution		100	%
FloraCal	California	Cultivation		100	%
Cub City, LLC	California	Distribution		100	%
CRHC Holdings Corp.	Ontario, Canada	Holding Company		100	%
2360149 Ontario Inc. (d/b/a 180 Smoke)	Ontario, Canada	Nicotine Vape Company		100	%

			Percentage
Entity	Location	Purpose	Held
Cresco Labs Notes Issuer, LLC	Illinois	Holding Company
Cresco Labs Ohio, LLC	Ohio	Cultivation, Production and Dispensary Facility		99	%
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	%
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 (d/b/a Sunnyside - Buffalo Grove)	Illinois	Dispensary		98	%
Cresco Labs Phoenix Farms, LLC	Illinois	Holding Company		100	%
Phoenix Farms of Illinois, LLC (d/b/a
Sunnyside - Champaign)	Illinois	Dispensary		100	%
JDC Elmwood, LLC	Illinois	Holding Company		100	%
FloraMedex, LLC (d/b/a Sunnyside -
Elmwood Park)	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 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 statements of financial position, and the share of income (loss) attributable to NCI is shown as a component of net income (loss) in the unaudited Condensed Interim Consolidated Statements of Operations and in the unaudited Condensed Interim Consolidated Statements of Comprehensive Loss. Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(e)

Intangible Assets

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date or date of consolidation/control. Amortization of definite-lived intangible assets is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any, over the following terms:


Market Related Intangibles		12 – 18 months
Customer Relationships		7 – 19 years
Non-Compete Agreements		4 – 5 years
Trade Names		10 years
Permit Application Fees		1 – 2 years

(f)

Significant Accounting Judgements, Estimates, and Assumptions

The preparation of the Company’s unaudited condensed interim consolidated financial statements under IFRS requires management to make judgements, estimates, and assumptions about the carrying amounts of certain assets and liabilities. Estimates and related assumptions are based on historical experience and other relevant factors. Actual results may differ from these estimates.

Significant judgements, estimates, and assumptions within these unaudited condensed interim consolidated financial statements, unless stated herein, are consistently applied to the annual consolidated financial statements for the years ended December 31, 2019 and 2018.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(g)

Recently Issued Accounting Standards

The Company does not believe any recently issued, but not yet effective IFRS standards that have been issued by the IASB will have a material impact on the Company’s financial statements.

3.	ACCOUNTS RECEIVABLE

As of March 31, 2020 and December 31, 2019, Accounts receivable consisted of the following:


	March 31,			December 31,
($ in thousands)	2020			2019
Accounts receivable, gross	$	14,719		$	16,726
Allowance for doubtful accounts		(508	)		(271	)

Total Accounts receivable, net	$	14,211		$	16,455

See Note 20 for the analysis of accounts receivable aging and disclosure of bad debt expense.

4.	BIOLOGICAL ASSETS

The Company’s biological assets consist of cannabis plants. The changes in the carrying value of biological assets to March 31, 2020 from December 31, 2019, consisted of the following:


($ in thousands)
Biological assets at January 1, 2020	$	31,791
Biological Assets Acquired (Note 13)		2,002
Transferred to inventory upon harvest		(32,357	)
Changes in fair value of biological assets		38,544

Biological assets at March 31, 2020	$	39,980

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

cash flow model which assumes the biological assets at the balance sheet date will grow to maturity, be harvested and converted into finished goods inventory and sold in the retail and medical cannabis market.

This model utilizes the following significant assumptions:


Inputs and assumptions	Calculation method	Effect changes of unobservable inputs has on fair value
Selling price per gram, less cost to sell	Based on observable market data or calculated wholesale prices with reasonable margins.	An increase in selling price per gram would increase the fair value of biological assets.

Attrition rate	Based on weighted average number of plants lost during each stage of production.	An increase in attrition rate would result in a decrease to the fair value of biological assets.

Average yield per plant	Based on the average number of grams of dried cannabis inventory expected to be harvested from each cannabis plant.	An increase to the average yield per plant would result in an increase to the fair value of biological assets.

Cumulative stage of completion in the production process	Based on an average number of days in production over a total average grow cycle of between 14 and 18 weeks.	An increase to the average stage of completion of the plants would result in an increase to the fair value of biological assets.

The Company estimates the harvest yields for cannabis at various stages of growth. As of March 31, 2020 and December 31, 2019, it was expected that the Company’s biological assets would yield approximately 18,080 thousand and 13,142 thousand grams, respectively.

The Company has quantified the sensitivity of the inputs in relation to biological assets as of March 31, 2020 and 2019 and expects the following effect on fair value as shown in the table below:


			Effect on fair value
($ in thousands)			March 31,
Significant inputs & assumptions	Range of inputs	Sensitivity	2020		2019
Selling price per gram, less cost to sell	$1.43 to $6.83	Increase 5%	$	3,517	$	1,894
		Decrease 5%	(3,517)		(1,894)
Attrition rate	5% to 26%	Increase 5%		1,882		849
		Decrease 5%	(1,951)		(849)
Average yield per plant	21 grams to 197 grams	Increase 5%		1,999		761
		Decrease 5%	(1,999)		(761)
Cumulative stage of completion	18% to 58% complete	Increase 5%		4,532		1,761
		Decrease 5%	(4,552)		(1,761)

5.	INVENTORY

As of March 31, 2020 and December 31, 2019, inventory was comprised primarily of cannabis and cannabis-related products. The Company wrote off $1,674 thousand and $2,263 thousand of inventory during the three months ended March 31, 2020 and 2019, respectively, primarily related to the damaged work-in-process inventory in its

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

Ohio operation. This write-off is included in the fair value of inventory sold presented on the unaudited Condensed Interim Consolidated Statements of Operations. As of March 31, 2020 and December 31, 2019, the Company had inventory reserves of $2,590 thousand and $173 thousand, respectively. During the three months ended March 31, 2020, the Company recorded $2,416 thousand of provisions for inventory reserves in Cost of sales – production costs.

Inventory as of March 31, 2020 and December 31, 2019, consisted of the following:


($ in thousands)	March 31, 2020		December 31, 2019
Raw materials	$	19,716	$	16,521
Raw materials - non-cannabis		15,671		5,820
Work-in-process		22,237		14,100
Finished goods		23,547		13,114

Total Inventory	$	81,171	$	49,555

During the three months ended March 31, 2020 and 2019, the Company recognized $70,784 thousand and $30,609 thousand, respectively, of inventory expensed in the unaudited Condensed Interim Consolidated Statements of Operations, which includes $46,200 thousand and $14,714 thousand, respectively, of Cost of sales – production costs and $24,584 thousand and $15,895 thousand, respectively, of non-cash expense relating to the changes in fair value of inventory sold.

6.	PROPERTY AND EQUIPMENT

As of March 31, 2020 and December 31, 2019, property and equipment consisted of the following:


				Machinery			Furniture						Computer									Construction
	Land and			and			and			Leasehold			Equipment and			Website and						In
($in thousands)	Buildings			Equipment			Fixtures			Improvements			Software			Software			Vehicles			Progress			Total
Cost
As of January 1, 2020	$	28,007		$	15,650		$	10,458		$	62,965		$	2,315		$	400		$	715		$	42,048		$	162,558

Additions		403			3,486			2,785			11,624			1,363			105			296			9,637			29,699
Transfers		1,519			31			—			31,786			—			—			—			(33,336	)		—
Disposals		—			(137	)		—			—			—			—			—			—			(137	)
Sale related to sale-leaseback transactions		(11,947	)		—			—			—			—			—			—			—			(11,947	)
Additions from acquisition		—			455			473			11,615			493			92			331			5,166			18,625
Effect of foreign exchange and other adjustments		—			(170	)		(496	)		(65	)		(367	)		—			—			—			(1,098	)

As of March 31, 2020	$	17,982		$	19,315		$	13,220		$	117,925		$	3,804		$	597		$	1,342		$	23,515		$	197,700

Accumulated depreciation
As of January 1, 2020	$	(432	)	$	(1,248	)	$	(994	)	$	(3,142	)	$	(586	)	$	(157	)	$	(160	)	$	—		$	(6,719	)

Depreciation		(118	)		(385	)		(448	)		(1,838	)		(212	)		(44	)		(64	)		—			(3,109	)

As of March 31, 2020	$	(550	)	$	(1,633	)	$	(1,442	)	$	(4,980	)	$	(798	)	$	(201	)	$	(224	)	$	—		$	(9,828	)

Net book value
As of March 31, 2020	$	17,432		$	17,682		$	11,778		$	112,945		$	3,006		$	396		$	1,118		$	23,515		$	187,872

As of December 31, 2019	$	27,575		$	14,402		$	9,464		$	59,823		$	1,729		$	243		$	555		$	42,048		$	155,839

As of March 31, 2020 and December 31, 2019, costs related to construction at the Company’s facilities were capitalized in construction in progress and not depreciated. Depreciation will commence when construction is completed and the facility is available for its intended use.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

Depreciation of $3,109 thousand and $857 thousand was incurred during the three months ended March 31, 2020 and 2019, respectively, of which $859 thousand and $264 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

As of March 31, 2020, ending inventory includes $527 thousand of capitalized depreciation. For the three months ended March 31, 2020 and 2019, $2,249 thousand and $528 thousand, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $300 thousand and $126 thousand, respectively, related to depreciation capitalized to inventory in prior quarters.

7.	LEASES

Effective January 1, 2019, the Company adopted IFRS 16 Leases. The Company is the lessee in the majority 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 15 years. Certain leases permit renewal options, including multiple successive renewal options ranging from 0.5 to 35 years.

ROU Assets - As of March 31, 2020, the Company’s leases consisted of the following:


($ in thousands)	As of March 31, 2020
Real estate	$	75,127
Vehicles		84

Total Right-of-use assets	$	75,211

Included in the ROU asset balance are $17,984 thousand of additions resulting from the acquisition of CannaRoyalty Corp. (“Origin House”) and $11,386 thousand of additions related to new leases, partially offset by $11 thousand of terminations for the three months ended March 31, 2020.

Total interest expense of $4,218 thousand and $855 thousand was recorded for the three months ended March 31, 2020 and 2019, respectively.

Total leasing depreciation of $1,843 thousand and $1,449 thousand was recorded for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 and 2019, $899 thousand and $404 thousand, respectively, of leasing depreciation is included in Selling, general and administrative expense with the remainder in Cost of sales – production costs and ending inventory.

As of March 31, 2020, ending inventory includes $118 thousand of capitalized depreciation. For the three months ended March 31, 2020 and 2019, $879 thousand and $914 thousand, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $88 thousand and $205 thousand, respectively, related to depreciation capitalized to inventory in prior quarters.

For short-term leases with durations of twelve months or less, the Company recorded $256 thousand and $139 thousand for the three months ended March 31, 2020 and 2019, respectively, in rent expense within Selling, general and administrative expenses. The Company recognizes this expense on a straight-line basis over the lease term.

The Company is the lessor in three real estate operating leasing arrangements and one equipment finance leasing arrangement. For the three months ended March 31, 2020, the Company recorded rental income of $173 thousand in relation to the operating leases. At March 31, 2020, the deferred rent receivable for operating leases was $21 thousand and the investment in leased asset for the finance lease was $97 thousand. The Company also recorded a sublease receivable of $65 thousand for the three months ended March 31, 2020.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

During the three months ended March 31, 2020, the Company entered into certain sale and leaseback agreements whereby the Company sold properties related to its cultivation and dispensary operations with a total net book value of $11,629 thousand and recorded a $22 thousand loss on asset sale recorded in Selling, general, and administrative expense in the unaudited Condensed Interim Consolidated Statements of Operations. The sales and leaseback transactions resulted in net funding of $11,754 thousand, a net increase to ROU assets of $11,004 thousand, a net increase to lease liability of $11,447 thousand, and expected additional tenant improvement allowances of $1,926 thousand, with the remaining impact related to settlement of security deposits and prepaid expenses.

As of March 31, 2020, the Company has received tenant improvement allowances of $9,522 thousand for all leasing arrangements, and expects to receive an additional $13,758 thousand for a total of $23,280 thousand.

As of March 31, 2020, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	16,143
2021		21,238
2022		21,542
2023		22,404
2024		22,917
Thereafter		271,816

Total lease payments	$	376,060

Less: interest		(227,491	)
Less: tenant improvement allowance		(13,758	)

Present value of lease liabilities		134,811

Less: short-term lease liabilities		(18,030	)

Present value of long-term lease liabilities	$	116,781

8.	INVESTMENTS

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

(a)

Investments at Fair Value

The Company has investments in three entities: 420 Capital Management, LLC (“420 Capital”), a cannabis investment company; Lighthouse Strategies, LLC (“Lighthouse”), a diversified cannabis investment company; and Fleurish Cannabis, Inc. (“Fleurish”), an entity that focuses on cannabis production licenses. The 420 Capital, Lighthouse and Fleurish investments are accounted for at fair value. On August 12, 2019, the Company settled its outstanding loan receivable with Lighthouse of $3,264 thousand through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company, with a fair value of $761 thousand as of March 31, 2020. See Note 20 for additional details. Upon the acquisition of Origin House on January 8, 2020, the Company obtained a 1.3% ownership stake in Fleurish with a fair value of $139 thousand as of the acquisition date. See Note 13 for additional details.

The Company previously had an investment in MassRoots, Inc. (“MassRoots”), a publicly traded cannabis company, with an ownership stake of less than 1%. However, the Company elected to write off the investment as of March 31, 2020 as the investment was determined to not have any value.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The following is a summary of the investments held as of March 31, 2020 and December 31, 2019:


	March 31,		December 31,
($ in thousands)	2020		2019
420 Capital	$	68	$	68
Lighthouse		761		1,209
Fleurish		45		—
MassRoots		—		1

Total Investments	$	874	$	1,278

The Company recorded a mark-to-market loss of $534 thousand and a gain of $3 thousand for the three months ended March 31, 2020 and 2019, respectively.

(b)

Investment in Associates

As part of the Origin House acquisition, the Company obtained 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 Trichrome investment was valued at $4,302 thousand. The Company’s ownership stake in Trichome is approximately 23% as of March 31, 2020.

The following is a summary of the investments held as of March 31, 2020 and December 31, 2019:


	March 31,		December 31,
($ in thousands)	2020		2019
Trichome	$	3,808	$	—

Total Investment	$	3,808	$	—

The Company recorded an investment loss of $144 thousand and investment income of $36 thousand for the three months ended March 31, 2020 and 2019, respectively, partially offset by distributions of $nil and $32 thousand for the three months ended March 31, 2020 and 2019, respectively. Prior period investment income and distributions relate to a previously held equity method investment which was dissolved in the fourth quarter of 2019.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

9.	INTANGIBLE ASSETS AND GOODWILL

The following is a reconciliation of the balances of intangible assets and goodwill from the beginning balances at December 31, 2019 to the ending balances on March 31, 2020:


							Permit
	Customer			Trade			Application					Other
($ in thousands)	Relationships			Names			Costs			Licenses		Intangibles (a)			Goodwill		Total
Cost
Balance at January 1, 2020	$	6,929		$	—		$	6,842		$	83,447	$	2,133		$	137,719	$	237,070

Additions		—			—			451			—		145			—		596
Additions from acquisitions		52,200			41,800			—			5,900		2,865			320,322		423,087
Impairment		—			—			—			—		(1,194	)		—		(1,194	)

Balance at March 31, 2020	$	59,129		$	41,800		$	7,293		$	89,347	$	3,949		$	458,041	$	659,559

Accumulated amortization
Balance at January 1, 2020	$	(858	)	$	—		$	(3,265	)	$	—	$	(1,022	)	$	—	$	(5,145	)

Amortization		(907	)		(1,045	)		(710	)		—		(956	)		—		(3,618	)

Balance at March 31, 2020	$	(1,765	)	$	(1,045	)	$	(3,975	)	$	—	$	(1,978	)	$	—	$	(8,763	)

Net book value
March 31, 2020	$	57,364		$	40,755		$	3,318		$	89,347	$	1,971		$	458,041	$	650,796

December 31, 2019	$	6,071		$	—		$	3,577		$	83,447	$	1,111		$	137,719	$	231,925

(a)	Other Intangibles includes market-related, non-compete agreements and internally developed software

During the three months ended March 31, 2020, the Company recorded an impairment charge of $1,194 on a market-related intangible due to changing market conditions.

Amortization of $3,618 thousand and $613 thousand was recorded for the three months ended March 31, 2020 and 2019, respectively, of which $2,997 thousand and $305 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

As of March 31, 2020, ending inventory includes $233 thousand of capitalized amortization. For the three months ended March 31, 2020 and 2019, $621 thousand and $209 thousand, respectively, of amortization expense was recorded to Cost of sales – production costs, which includes $186 thousand and $85 thousand, respectively, related to amortization capitalized to inventory in prior quarters.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

10.

ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES

As of March 31, 2020 and December 31, 2019, Accounts payable and other accrued expenses were comprised of the following:


	March 31,		December 31,
($ in thousands)	2020		2019
Accounts payable	$	35,251	$	32,463
Accrued expenses		13,758		24,133
Payroll liabilities		6,088		5,195
Excise taxes payable		1,833		540
Contract liability - loyalty programs		198		—
Tax penalty		477		455
Property taxes payable		20		48

Total Accounts payable and other accrued expenses	$	57,625	$	62,834

11.

SHARE CAPITAL

(a)

Authorized

The authorized share capital of the Company is comprised of the following:

Unlimited Number of Subordinate Voting Shares

ii.

Unlimited Number of Proportionate Voting Shares

Holders of PVS will be entitled to notice of and to attend at 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.

During the three months ended March 31, 2020 and 2019, 45 thousand and 34 thousand PVS, respectively, were exchanged for 8,909 thousand and 6,720 thousand SVS, respectively, at a rate of 1 PVS for 200 SVS.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

iii.

500,000 Super Voting Shares

Holders of MVS shall be entitled to notice of and to attend at 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.

(b)

Issued and Outstanding

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units for the three months ended March 31, 2020 is as follows:


(in thousands)		Redeemable Units			Subordinate Voting Shares (SVS)		Super Voting Shares (MVS)		Proportionate Voting Shares (PVS)*
Beginning balance, January 1, 2020			142,172			73,600		500		57,937

Stock options exercised	Note 12		—			314		—		—
Warrants exercised	Note 11(c)		—			—		—		12
RSUs vested	Note 12		—			567		—		—
Issuance of Origin House shares	Note 11(b)(i)		—			66,482		—		—
Issuance of Valley Ag shares	Note 11(b)(ii)		—			—		—		239
Cresco LLC redemption	Note 11(d)		(1,980	)		1,980		—		—
PVS converted to SVS	Note 11(a)		—			8,909		—		(8,909	)

Ending balance, March 31, 2020			140,192			151,852		500		49,279

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

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units for the three months ended March 31, 2019 is as follows:


(in thousands)		Redeemable Units		Subordinate Voting Shares (SVS)		Super Voting Shares (MVS)		Proportionate Voting Shares (PVS)*			Shares to be issued
Beginning balance, January 1, 2019			143,844		26,711		500		82,803			3,020

Stock options exercised			—		—		—		343			—
PVS converted to SVS	Note 11(a)		—		6,720		—		(6,720	)		—

Ending balance, March 31, 2019			143,844		33,431		500		76,426			3,020

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

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(i)

Issuance of Shares - Origin House

In January 2020, in conjunction with the acquisition of Origin House, the Company issued 66,482 thousand SVS, valued at $396,575 thousand.

(ii)

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

In February 2020, the Company issued 239 thousand PVS (as converted), valued at $1,305 thousand to satisfy certain obligations related to interest on deferred consideration.

(c)

Stock Purchase Warrants

Each whole warrant entitles the holder to purchase one PVS of the Company. A summary of the status of the warrants outstanding is as follows:


	Number of warrants			Weighted- average exercise price
Balance as of January 1, 2020		6,453,784		$	7.73
Exercised		(12,000	)		4.24

Balance as of March 31, 2020		6,441,784		$	7.73

During the three months ended March 31, 2020, the Company recorded $91 thousand of warrant exercises into share capital. Of the 6,441,784 warrants outstanding, 6,232,503 warrants issued to underwriters associated with the September 2019 financing, sellers from the Valley Ag acquisition and previous holders of Randsburg warrants, and were classified as long-term derivative liabilities. See Note 20 for information about valuation of liability-classified warrants.

No equity-classified warrants were issued during the three months ended March 31, 2020 and 2019.

(d)

Changes in Ownership and Non-controlling Interests

In the three months ended March 31, 2020, redemptions of 1,980 thousand redeemable units occurred which were converted into an equivalent number of SVS. This redemption resulted in a decrease of 0.8% in non-controlling interest in Cresco Labs, LLC, an increase to accumulated deficit of $6,344 thousand, and a decrease of $1,788 thousand in non-controlling interest.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

As of and for the three months ended March 31, 2020, non-controlling interest included the following amounts after intercompany eliminations:


($ in thousands) January 1, 2020	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other entities including Cresco Labs, LLC¹			Total
Non-current assets		3,447			26,644			20,290			12,414			24,111			853,873			940,779
Current assets		13,016			1,150			1,284			32,462			41,614			126,723			216,249
Non-current liabilities		—			(1,108	)		(1,310	)		—			—			(273,712	)		(276,130	)
Current liabilities		(652	)		(3,649	)		(3,011	)		(11,473	)		(18,116	)		(104,289	)		(141,190	)

Net assets		15,811			23,037			17,253			33,403			47,609			602,595			739,708

Net assets attributable to NCI		119			2,995			2,330			119			(3,812	)		127,834	³		129,585

Revenue		2,733			3,720			4,380			704			2			54,841			66,380
Gross profit		1,832			2,271			2,660			(1,358	)		(2,579	)		31,314			34,140

Total comprehensive income (loss)		1,508			715			998			(3,121	)		(4,358	)		(9,173	)		(13,431	)

Comprehensive income (loss) allocated to NCI		377			89			250			(31	)		(872	)		(5,855	)		(6,042	)

NCI percentage at March 31, 2020		25	%¹		12.4	%²		25	%²		1.0	%¹		20.0	%¹		55.4	%

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 55.4% NCI related to NCI for Cresco Labs Inc.

²	The NCI percentage reflects the NCI that exists at Cresco Labs, Inc.

³	Includes the effect of LLC unit redemptions and other adjustments

As of and for the twelve months ended December 31, 2019, non-controlling interest included the following amounts after intercompany eliminations:


($ in thousands) January 1, 2019	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other Entities including Cresco Labs, LLC¹			Total
Non-current assets		3,185			20,231			17,855			12,575			23,317			380,053			457,216
Current assets		3,075			1,037			1,356			5,186			15,579			133,105			159,338
Non-current liabilities		—			(1,803	)		(1,824	)		(95	)		(13,940	)		(126,100	)		(143,762	)
Current liabilities		(907	)		(718	)		(955	)		(1,061	)		(4,669	)		(141,859	)		(150,169	)

Net assets		5,353			18,747			16,432			16,605			20,287			245,199			322,623

Net assets attributable to NCI		1,567			2,658			2,330			150			(2,940	)		131,776			135,541

Revenue		5,593			4,088			5,310			2,212			12,042			99,289			128,534
Gross profit		6,303			1,999			2,564			(1,972	)		(6,749	)		61,936			64,081

Total comprehensive income (loss)		5,747			(981	)		(556	)		(6,278	)		(15,308	)		(47,926	)		(65,302	)

Comprehensive income (loss) allocated to NCI		1,437			(122	)		(139	)		(63	)		(3,062	)		(20,152	)		(22,101	)

NCI percentage at December 31, 2019		25.0	%¹		12.4	%²		25.0	%²		1.0	%¹		20.0	%¹		56.2	%

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 56.2% NCI related to NCI for Cresco Labs Inc.

²	The NCI percentage reflects the NCI that exists at Cresco Labs, Inc.

12.

SHARE-BASED COMPENSATION

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

A summary of the status of the options outstanding consisted of the following:


	Number of stock options outstanding			Weighted- average exercise price
Outstanding - January 1, 2020		22,370,168		$	3.19
Granted		602,000			2.99
Exercised		(313,750	)		1.37
Origin House replacement awards		629,275			4.24
Forfeited		(2,491,667	)		2.45

Outstanding - March 31, 2020		20,796,026		$	3.33

Exercisable - March 31, 2020		7,506,467		$	2.13

The following table summarizes the stock options outstanding as of March 31, 2020:


Expiration date	Stock options outstanding		Exercise price		Stock options exercisable
February 2023		5,273	$	5.20		2,636
April 2025		17,578		2.81		17,577
May 2025		21,093		4.03 - 5.79		8,787
June 2025		200,000		0.50		200,000
July 2025		22,851		4.29 - 4.97		18,455
September 2025		10,000		1.00		10,000
January - March 2026		215,000		1.00		215,000
May - June 2026		700,000		1.00		575,000
November - December 2026		32,500		1.00		18,750
January - March 2027		30,000		1.00		28,750
September 2027		40,000		1.00		33,936
October - November 2027		425,000		1.00		207,600
November - December 2027		237,731		1.14		87,731
December 2027		562,480		3.74		562,480
January - March 2028		9,755,833		1.14		4,379,081
May - June 2028		850,000		2.25		287,500
July 2028		200,000		2.25		50,000
July - September 2028		767,187		3.75		186,434
October - November 2028		2,082,500		3.75		458,750
December 2028		220,000		6.50		55,000
February 2029		90,000		6.50		22,500
March 2029		322,000		11.25		80,500
June 2029		1,270,000		10.28		—
September 2029		1,300,000		5.90		—
December 2029		822,000		6.86		—
March 2030		597,000		2.99		—

		20,796,026				7,506,467

Weighted average stock price of options on the dates on which options were exercised during the three months ended March 31, 2020 and 2019 was $5.58 and $7.31, respectively.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The fair value of stock options granted under the Plan during the three months ended March 31, 2020 was determined using the Black-Scholes option-pricing model with the following range of assumptions at the time of the grant:


		March 31, 2020
Risk-free annual interest rate		1.18% to 1.28%
Expected annual dividend yield		0%
Expected stock price volatility		67% to 68%
Expected life of stock options		5.5 to 7 years
Forfeiture rate		5%
Fair value at grant date		$1.84
Stock price at grant date		$2.99
Exercise price		$2.99

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.

During the three months ended March 31, 2020, and 2019 the weighted-average fair value of stock options granted was $1.84 and $4.86 per option, respectively. As of March 31, 2020, stock options outstanding have a weighted-average remaining contractual life of 8.5 years.

In the three months ended March 31, 2020, the Company issued 629,275 replacement options with a weighted average exercise price of $4.24 in connection with the Origin House acquisition. The replacement options have expiration dates ranging between February 2023 and December 2027, though expiration will accelerate upon termination of employment. As of March 31, 2020, 609,935 options with a weighted average exercise price of $4.21 are deemed to be exercisable.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

Restricted stock units (“RSUs”)

During 2019, the Company established 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 the date of grant. A number of RSUs granted have the ability to settle in cash. These awards have been determined to be liability-classified awards and are required to be marked-to-market as of the end of each reporting period. As of March 31, 2020 and December 31, 2019, the Company recorded $178 thousand and $339 thousand, respectively, in Deferred consideration, contingent consideration and other payables on the unaudited Condensed Interim Consolidated Statements of Financial Position related to these awards.

A summary of outstanding RSUs is provided below:


	Number of			Weighted
	RSUs			average
	outstanding			fair value
Outstanding - January 1, 2020		404,215		$	8.58
Vested		(877,961	)		6.04
Origin House replacement awards		3,430,476			5.96
Forfeited		(10,530	)		9.33

Outstanding - March 31, 2020		2,946,200		$	6.29

Liability classified as of March 31, 2020		42,982		$	5.19

Of the liability classified awards above, 24,428 awards were vested as of January 2020 pending issuance into shares.

In the three months ended March 31, 2020, the Company issued 3,430 thousand replacement RSUs with a weighted average fair value of $5.96 in connection with the Origin House acquisition. As a result of the acquisition, the vesting of the replacement RSUs was accelerated. As such, there is no post-acquisition compensation expense required for these awards.

Deferred share awards

In the three months ended March 31, 2020, the Company issued 1,632 thousand replacement deferred share awards in connection with the Origin House acquisition. The awards have a fair value of $5.96, which is based on the Company’s share price as of the acquisition date. The awards’ issuance were deferred through September 2020 as part of Origin House’s acquisition of RVR Distribution in 2018. Awards are considered to be fully vested as of the acquisition date and therefore require no post-acquisition compensation expense.

Expense Attribution

The Company recorded compensation expense for option awards in the amount of $1,435 thousand and $3,131 thousand for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 and 2019, the Company expensed $1,253 thousand and $2,877 thousand, respectively, to Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. Unrecognized compensation expense as of March 31, 2020 for option awards is $18,852 thousand and will be recorded over the course of the next four years.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The Company recorded compensation expense for RSU awards in the amount of $226 thousand and nil for the three months ended March 31, 2020 and 2019, respectively, of which $50 thousand and $nil, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. Unrecognized compensation expense as of March 31, 2020 is $1,487 thousand and will be recognized over the course of the next four years.

The Company recorded post-acquisition compensation expense for replacement option in the amount of $83 thousand for the three months ended March 31, 2020 in Selling, general and administrative expenses. Unrecognized compensation for replacement options was $24 thousand as of March 31, 2020 and will be recognized through the third quarter of 2021.

As of March 31, 2020, ending inventory includes $424 thousand of capitalized compensation expense related to both options and RSUs. For the three months ended March 31, 2020 and 2019, $847 thousand and $171 thousand, respectively, of compensation expense was recorded to Cost of sales – production costs, which includes $640 thousand and $36 thousand, respectively, related to compensation expense capitalized to inventory in prior quarters.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

13.

ACQUISITIONS AND MERGERS

(a)

Business Combinations

The table below summarizes business combinations completed during the three months ended March 31, 2020:


Completed during the three months ended March 31, 2020	Origin House
($ in thousands)
Total consideration
Common shares issued	$	396,575
Replacement awards		31,671

	$	428,246

Net identifiable assets (liabilities) acquired
Cash	$	32,984
Accounts receivable		7,565
Inventory		14,658
Biological assets		2,002
Other current assets		2,197
Property & equipment		18,625
Right-of-use asset		17,984
Loans receivable, long-term		331
Investment in associate		4,302
Investments		139
Customer relationships		52,200
Trade names		41,800
Licenses		5,900
Market related intangible		2,374
Internally developed software		491

Total identifiable assets acquired	$	203,552

Short-term liabilities	$	(24,349	)
Lease liability		(18,002	)
Deferred and contingent consideration		(3,807	)
Notes payable		(22,045	)
Deferred tax liability		(27,425	)

Net identifiable assets acquired	$	107,924

Purchase price allocation
Net identifiable assets acquired	$	107,924
Goodwill		320,322

Total consideration	$	428,246

Net cash acquired
Cash consideration paid	$	—
Cash acquired		32,984

Total	$	32,984

The Company is currently determining whether any goodwill related to this acquisition is expected to be deductible for tax purposes. Additionally, per IFRS 3, the Company will retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of the acquisition date. During the measurement period, the Company will also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of the acquisition date. The measurement period ends as soon as the Company receives the

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date. The purchase price allocation for this transaction is substantially complete, with the exception of certain amounts related to intangible assets and income taxes. Purchase accounting is expected to be completed within twelve months from the acquisition date.

(i)

Origin House

On January 8, 2020, the Company announced that it had closed its acquisition of 100% of the membership interests of Origin House. As a result of this acquisition, the Company now holds additional licenses to cultivate and process medical and adult-use marijuana and new licenses to distribute medical and adult-use cannabis in the State of California. Additionally, the Company now holds licenses to operate a nicotine vape business with retail, online and wholesale revenues, as well as franchise locations.

Total consideration for the acquisition was $428,246 thousand and consisted of 66,482 thousand SVS issued as of the acquisition date, valued at $396,575 thousand, and 5,961 thousand replacement awards, valued at $31,671 thousand, which is comprised of 3,430 thousand replacement RSUs, 1,632 thousand deferred share awards and 629 thousand replacement options. The Company recorded $83 thousand of post-acquisition share-based compensation expense related to the replacement options. See Note 12 for additional detail.

As part of the acquisition, the Company recorded reserves of $107 thousand for potential payments contingent on future events that were probable to be paid and estimable as of the acquisition date.

The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the Origin House acquisition had occurred as of January 1, 2020. These pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2020 or of the future consolidated operating results.

Total pro forma Revenue and Net loss for the combined company for the three months ended March 31, 2020 was $67,009 thousand and $13,882 thousand, respectively.

Contributed Revenue and Net loss from the Origin House acquisition was $13,955 thousand and $12,960 thousand, respectively, for the three months ended March 31, 2020.

Since the first quarter of 2019, the Company recorded transaction costs of $5,435 thousand in connection with the Origin House acquisition as Selling, general and administrative expenses in the unaudited Condensed Interim Consolidated Statements of Operations.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(b)

Deferred Consideration, Contingent Consideration and Other Payables

The following is a summary of deferred consideration and other payables balances as of March 31, 2020 and December 31, 2019:


($ in thousands)	IFRS 9 classification		March 31, 2020		December 31, 2019
MedMar contingent consideration liability for tax payments -current		FVTPL	$	2,000	$	2,000
MedMar contingent consideration liability - current		FVTPL		1,958		1,927
Interest payable - short term		Amortized Cost		—		1,464
Valley Ag deferred consideration		Amortized Cost		—		18,750
HHH deferred consideration		FVPTL		—		27,237
Valley Ag operating cash flows consideration		FVTPL		7,626		7,423
Valley Ag make-whole liability		FVTPL		7,200		800
Origin House legacy acquisition consideration liability		FVTPL		3,848		—
Liability-classified equity awards		FVTPL		178		339

Total Deferred consideration, contingent consideration and other payables			$	22,810	$	59,940

Decreases in deferred consideration between December 31, 2019 and March 31, 2020 are due to payments of deferred consideration related to acquisitions of Valley Ag and Hope Heal Health, Inc. (“HHH”). During the three months ended March 31, 2020, the Company paid $18,750 thousand and issued 239 thousand PVS (as converted), valued at $1,305 thousand, to settle the Valley Ag deferred consideration and corresponding interest payable. During the three months ended March 31, 2020, the Company paid $27,500 thousand to settle the HHH deferred consideration and recorded $303 thousand in interest expense.

During the three months ended March 31, 2020, the Company recorded a $203 thousand increase to deferred consideration due to interest accretion.

During the three months ended March 31, 2020, the fair value of the Company’s make-whole adjustment liability related to its Valley Ag acquisition increased $6,400 thousand, with a corresponding adjustment in the unaudited Condensed Interim Consolidated Statements of Operations, to $7,200 thousand due to changes in the Company’s stock price.

The Company’s liability related to liability-classified equity awards decreased to $178 thousand as of March 31, 2020 due to changes in the Company’s share price and cash settlement of vested awards. See Note 12 for further details.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(c)

Contingent Consideration

The following is a summary of the current contingent consideration as of March 31, 2020 and December 31, 2019:


($ in thousands)	2020		2019
MedMar contingent consideration liability for tax payments - current		2,000	$	2,000
MedMar contingent consideration liability - current		1,958		1,927

Total	$	3,958	$	3,927

For the three months ended March 31, 2020, the fair value of the liability increased by $31 thousand, utilizing a discount rate of 11.2% and an updated period of 0.8 years.

The following is a summary of the non-current contingent consideration as of March 31, 2020 and December 31, 2019:

($ in thousands)

IFRS 9
classification

March 31,
2020

December 31,
2019

Valley Ag contingent consideration

FVTPL

9,500

21,901

Total Long-term contingent consideration

9,500

21,901

During the three months ended March 31, 2020, the Company recorded a mark-to-market fair value gain of $12,401 thousand related to contingent equity consideration for its Valley Ag acquisition due to changes in the Company’s stock price.

14.

LONG-TERM NOTES AND LOANS PAYABLE

The following table represents the Company’s loans payable balances as of March 31, 2020 and December 31, 2019:


($ in thousands)	March 31, 2020			December 31, 2019
OCN Loan	$	20,787		$	—
HHH Loan		550			550
Term Loan		95,005			—

Total borrowings		116,342			550

Less Short-term borrowings		(20,787	)		—

Total Long-term notes and loans payable	$	95,555		$	550

(a)

Senior Secured 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 $100,000 thousand, with the option to increase the principal amount to $200,000 thousand. Of the $100,000 thousand Term Loan commitment, $92,350 thousand was committed by Tranche A lenders (the “Tranche A Commitment”) and $7,650 thousand was committed by Tranche B lenders (the “Tranche B Commitment”).

The Tranche A Commitment accrues interest at a rate of 12.7% per annum, payable in cash quarterly, and has a stated maturity of July 2021. The Tranche B Commitment accrues interest at a rate of 13.2% per annum, payable in cash quarterly, and has a stated maturity of January 2022. The Company’s effective interest rates for the Tranche A Commitment and Tranche B Commitment of their Term Loan are 16.7% and 15.9%, respectively. The Company capitalized $5,160 thousand and $379 thousand, respectively, of borrowing costs related to the Tranche A Commitment and Tranche B Commitment.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The Term Loan is secured by a guarantee from certain material subsidiaries of the Company, as well as by a security interest in certain assets of the Company and such material subsidiaries. The Term 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.

The Company may redeem in whole or in part the Term Loan at any time prior to the stated maturity dates, subject to certain conditions, upon the payment of the outstanding principal amount (plus a specified redemption premium) and all accrued and unpaid interest and fees.

The Company recognized interest expense of $2,705 thousand for the three months ended, March 31, 2020, including interest expense related to the amortization of the debt issuance costs of $544 thousand.

As of March 31, 2020, the Company is in compliance with all covenants related to the Term Loan.

(b)

Other Loans

In conjunction with its October 1, 2019 acquisition of HHH, the Company recorded a long-term liability (the “HHH Loan”) for an aggregate balance of $550 thousand as of March 31, 2020, subject to a 6.50% interest rate and a stated maturity of June 2021. Land and building with a March 31, 2020 carrying value of $7,458 thousand has been pledged as collateral. The Company believes fair value approximates carrying value. The Company recognized interest expense of $9 thousand for the three months ended March 31, 2020.

In conjunction with its January 8, 2020 acquisition of Origin House, the Company recorded a short-term liability with Opaskwayak Cree Nation (the “OCN Loan”) for an aggregate balance of $22,045 thousand as of the acquisition date and $20,787 thousand as of March 31, 2020, subject to a 10% interest rate and a stated maturity of June 2020. The weighted average effective interest rate of the OCN Loan is 23.8%. The Company recognized interest expense of $1,197 thousand for the three months ended March 31, 2020, including interest expense related to the accretion of discount on the OCN Loan of $653 thousand. Total outstanding commitment fees as of the acquisition date were $721 thousand of which $330 thousand was still outstanding as of March 31, 2020.

15.

REVENUE AND LOYALTY PROGRAMS

(a)

Revenue

The following table represents the Company’s disaggregated revenue by source, primarily due to the Company’s contracts with its customers, for the three months ended March 31, 2020 and 2019:


	Three months ended March 31,
($in thousands)	2020		2019
Wholesale	$	38,136	$	11,646
Dispensary		28,244		9,409

Total Revenue	$	66,380	$	21,055

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(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 and vape products as part of an in-store sales transaction. In addition, the Company records a performance obligation as a reduction of revenue based on the estimated probability of point obligation incurred, which is calculated based on a standalone selling price that ranges between $0.025 and $0.10 per loyalty point. Upon redemption, the loyalty program obligation is relieved and the offset is recorded as revenue. As of March 31, 2020, there were 24,360 thousand points outstanding, with an approximate value of $198 thousand. The Company expects the outstanding loyalty points will be redeemed within 1 year.

16.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three months ended March 31, 2020 and 2019, Selling, general and administrative expenses consisted of the following:


	Three months ended March 31,
($ in thousands)	2020		2019
Salaries and related	$	18,276		4,349
Consulting and professional fees		11,152		3,368
Office		4,069		675
Advertising and marketing		3,984		2,290
Excise taxes		1,868		729
Travel and entertainment		1,566		633
Share-based compensation		1,387		2,877
Technology		1,234		190
Intangible asset impairment		1,194		—
Insurance		993		524
Business expansion costs		127		558
Other		803		580

Total Selling, general and administrative expenses	$	46,653	$	16,773

17.

OTHER INCOME (EXPENSE), NET

For the three months ended March 31, 2020 and 2019, Other income (expense), net consisted of the following:


	Three months ended March 31,
($ in thousands)	2020			2019
Gain (loss) on derivative instruments (Note 20)	$	9,676			(235	)
Gain (loss) on changes in fair value of contingent consideration (Note 13)		5,967			(42	)
Loss on changes in fair value of loans receivable		(548	)		—
Dividend income		—			34
Unrealized (loss) gain on investments held at fair value (Note 8)		(534	)		3
Gain on foreign currency		600			—
Other income		362			106

Total Other income (expense), net	$	15,523		$	(134	)

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

18.

RELATED PARTY TRANSACTIONS

(a)

Compensation of 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. Other than the lease and lending arrangements described below, for the three months ended March 31, 2020, there were no material changes to other related party transactions disclosed in the annual consolidated financial statements for the years ended December 31, 2019 and 2018. Key management personnel compensation for the three months ended March 31, 2020 and 2019 was as follows:


	Three months ended March 31,
($ in thousands)	2020		2019
Management compensation	$	1,411	$	527
Share-based compensation expense		1,172		1,391

Total	$	2,583	$	1,918

As of March 31, 2020 and December 31, 2019, the Company had receivables of $204 thousand and $712 thousand, respectively, with key management personnel.

For both periods ending March 31, 2020 and December 31, 2019, the Company had payables of $113 thousand with key management personnel.

Key management personnel hold 85,550 thousand redeemable units of Cresco Labs, LLC, which is equal to $76,922 thousand of Non-controlling interests as of March 31, 2020.

(b)

Related Parties – Debt

As of March 31, 2020, the Company had borrowings with related parties of $8,250 thousand related to the Company’s Term Loan. See Note 14 for additional details.

(c)

Related Parties - Leases

The Company has lease liabilities for real estate lease agreements in which the lessors have minority interest in SLO and MedMar, Inc. The lease liabilities were incurred in January 2019 and will expire in 2027 through 2050.

Below is a summary of the expense resulting from the related party lease liabilities for the three months ended March 31, 2020 and 2019.


	Three months ended March 31, 2020				Three months ended March 31, 2019
($ in thousands)	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	82	$	403	$	99	$	399
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		16		21		16		22
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		22		22		23		22

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)


	As of March 31, 2020				As of December 31, 2019
($ in thousands)	ROU asset		Lease liability		ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	9,627	$	11,846	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		633		689		649		694
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		681		733		643		686

19.

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 March 31, 2020, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers, or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

(b)

Contingencies

20.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

Financial Instruments

The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses, as applicable) or FVTPL. The carrying values of financial instruments held at amortized cost approximate their fair values as of March 31, 2020 and December 31, 2019 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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;

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

•

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

•

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

Unless otherwise noted, the Company considers all financial instruments classified as FVTPL to be Level 1 instruments.

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

The following table summarizes the Company’s financial instruments as of March 31, 2020 and December 31, 2019:


($ in thousands)	March 31, 2020		December 31, 2019
Financial Assets:
Cash and cash equivalents	$	68,581	$	49,102
Restricted cash		2,795		5,050
Accounts receivable, net		14,211		16,455
Loans receivable, short-term		3,143		644
Loans receivable, long-term		16,852		18,633
Security deposits		2,026		1,084
Financial Liabilities:
Accounts payable and other accrued expenses	$	57,625	$	62,834
Short-term borrowings		20,787		—
Current portion of lease liabilities		18,030		12,019
Deferred consideration, contingent consideration and other payables		22,810		59,940
Derivative liabilities		203		178
Derivative liabilities – long-term		4,902		15,243
Lease liabilities		116,781		82,856
Contingent consideration		9,500		21,901
Long-term notes payable and loans payable		95,555		550

(a)

Short-Term Loans Receivable

The following is a summary of short-term loans receivable balances and IFRS 9 classifications (discussed further below) as of March 31, 2020 and December 31, 2019:


($ in thousands)	IFRS 9 classification		March 31, 2020		December 31, 2019
Short-term loans receivable - Lighthouse		FVTPL	$	2,236	$	—
Interest receivable		Amortized cost		907		644

Total Short-term loans receivable			$	3,143	$	644

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

(b)

Short-Term Loans Receivable with Derivative Features

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. The loan has a maturity of 18 months and an option for the Company to convert into additional membership units. As of March 31, 2020 and December 31, 2019, this loan had a fair value of $2,236 thousand. This loan is measured at FVTPL and transferred classification from a long-term loan receivable to a short-term loan receivable in the current period. See Note 8 for discussion of the Company’s investment in Lighthouse.

Expected Credit Loss (ECL)

(c)

Loans Receivable, Long-Term

The Company entered into certain loan arrangements with Verdant Creations, LLC. that contained embedded derivatives comprising of a call and put option and a stated interest rate of 5.25%. Settlement of the instruments varies based on contingent events and returns are not fixed. As such, the Company records this loan receivable at FVTPL. Each period, the loan is measured using a probability-weighting analysis of expected outcomes, which utilize Level 3 inputs. The inputs included market rates ranging from 5.8% to 18.4%, a risk-free rate of 0.2% and expected settlement timing of 1.22 to 1.44 years. Changes in Level 3 inputs and assumptions utilized resulted in a fair value gain of $548 thousand as of March 31, 2020. At March 31, 2020 and December 31, 2019, of the $15,500 thousand maximum loan commitment, $14,598 thousand and $10,741 thousand, respectively, had been drawn on these loans.

As of March 31, 2020 and December 31, 2019, the Company has a loan receivable of $434 thousand and $390 thousand, respectively. The Company records this loan receivable at amortized cost and has a stated interest rate of 10%.

In connection with the acquisition of Origin House, the Company assumed a loan receivable with a fair value of $331 thousand at both the acquisition date and March 31, 2020.

(d)

Derivative Liability

In conjunction with its acquisition of PDI, the Company recorded a derivative liability of $178 thousand at the acquisition date for an NCI put option, by which the remaining NCI could put their shares for a fixed amount of cash within one year of the acquisition legal close/funding date (April 2020). The derivative was valued using a discount rate of 9%. In April 2020, the holders of the unowned NCI exercised their put option which resulted in the Company paying $203 thousand to purchase the unowned interest of PDI. As a result, during the three months ended March 31, 2020, the Company recorded a $25 thousand mark-to-market loss to match the expected settlement value.

(e)

Share Purchase Warrants

At March 31, 2020, the Company had 6,441,784 warrants outstanding. Of the outstanding warrants, 6,232,503 warrants issued to underwriters associated with September 2019 financing, sellers from the Valley Ag acquisition and previous holders of Randsburg warrants were classified as long-term derivative liabilities. In the three months ended March 31, 2020, 12 thousand Valley Ag warrants were exercised for $51 thousand, resulting in a realized loss of $6 thousand and an increase to share capital of $91 thousand. There were no warrant exercises in the three months ended March 31, 2019.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

For the three months ended March 31, 2020, the Company recorded a mark-to-market gain, due to changes in the Company’s share price, of $9,708 thousand and an unrealized foreign exchange gain of $600 thousand.

All warrants classified as long-term derivative liabilities are measured at FVTPL.

As of March 31, 2020 and December 31, 2019, the fair value of liability-classified warrants was determined using the Black-Scholes option-pricing model utilizing the following assumptions:


	March 31, 2020	December 31, 2019
Risk-free annual interest rate	1.09% - 1.10%	1.58% - 1.61%
Expected annual dividend yield	0%	0%
Expected stock price volatility	79%	81%
Expected life of stock warrants	0.5 - 2.6 years	0.4 - 1.4 years
Forfeiture rate	0%	0%
Share price at period end	$2.99	$6.86

Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies.

Financial Risk Management

(a)

Credit and Banking Risk

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at March 31, 2020 and December 31, 2019 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 our 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 House of Representatives but have not yet been voted on within the 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.

The novel coronavirus or COVID-19 was declared a pandemic by the World Health Organization on March 12, 2020 and has caused significant economic uncertainty and consequently it is difficult to reliably measure the potential impact of this uncertainty on our future financial results.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The Company’s aging of Accounts receivables as of March 31, 2020 and December 31, 2019 was approximately as follows:


($ in thousands)	March 31, 2020		December 31, 2019
0 to 60 days	$	11,316	$	10,276
61 to 120 days		1,968		5,551
120 days +		1,435		899

Total accounts receivable, gross	$	14,719	$	16,726

The Company recorded bad debt expense of $213 thousand and $120 thousand for the three months ended March 31, 2020 and 2019, respectively, to account for expected credit loss, and recorded an additional $28 thousand in bad debt expense related to invoice write-offs for the three months ended March 31, 2020.

(b)

Asset Forfeiture Risk

(c)

Liquidity Risk

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

In addition to the commitments outlined in Note 10 and Note 13, the Company has the following contractual obligations as of March 31, 2020:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable & other accrued expenses	$	57,625	$	—	$	—	$	57,625
Deferred consideration, contingent consideration and other payables		22,810		—		—		22,810
Deferred and contingent consideration		—		9,500		—		9,500
Long-term notes payable and loans payable and Short-term borrowings		20,787		95,555		—		116,342

Total obligation as of March 31, 2020	$	101,222	$	105,055	$	—	$	206,277

In addition to the commitments outlined in Note 10 and Note 13, the Company had the following contractual obligations as of December 31, 2019:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable and other accrued expenses	$	62,834	$	—	$	—	$	62,834
Deferred consideration, contingent consideration and other payables		59,940		—		—		59,940
Deferred and contingent consideration		—		21,901		—		21,901
Other long-term liabilities		—		550		—		550

Total obligation as of December 31, 2019	$	122,774	$	22,451	$	—	$	145,225

(d)

Market Risk

Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of March 31, 2020 and December 31, 2019, 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 a $600 thousand foreign exchange gain related to warrants during the three months ended March 31, 2020. See Note 17 for additional detail.

As of March 31, 2020 and December 31, 2019, 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.

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. The Company calculates an incremental borrowing rate to use in the valuation of its financial instruments. The Company’s effective interest rates for its Term Loan range from 15.9% to 16.7% and the stated interest rate varies from 12.7% to 13.2% based on the term elected by the lender. The Company’s weighted average effective interest rate for its OCN Loan is 23.8% and its stated interest rate is 10%. See Note 14 for further information.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

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, contingent consideration and liability-classified RSUs 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 in fair value and Other income (expense), net of $2,072 thousand.

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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 24 for the Company’s disclosure of uncertain tax positions.

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 can have on the goals and operations of the business as a whole.

21.

SEGMENT INFORMATION

The Company operates in one segment, the cultivation, manufacturing, distribution, and sale of cannabis.

For the three months ended March 31, 2020, the Company generated 97.2% of its revenue in the United States with the remainder generated in Canada. For the three months ended March 31, 2019, all revenues were generated in the United States.

22.

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.

Potentially dilutive securities of approximately 141,843 and 154,410 thousand were excluded in the calculation of EPS for the three months ended March 31, 2020 and 2019, respectively, as their impact would have been anti-dilutive due to net losses in both periods.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

The following is a reconciliation for the calculation of basic and diluted loss per share for the three months ended March 31, 2020 and 2019:


	Three months ended March 31,
(in thousands, except per share data)	2020			2019
Basic and diluted loss per share
Net loss attributable to Cresco Labs Inc. shareholders	$	(7,389	)	$	(6,227	)
Weighted-average number of shares outstanding		197,736			113,259

Loss per share – basic and diluted	$	(0.04	)	$	(0.05	)

23.

INTEREST EXPENSE, NET

Interest expense, net consisted of the following for the three months ended March 31, 2020 and 2019:


	Three months ended March 31,
($ in thousands)	2020			2019
Interest expense – leases	$	(4,218	)	$	(855	)
Interest expense – notes and loans payable		(2,714	)		—
Accretion of debt discount and amortization of deferred financing fees		(1,197	)		—
Interest expense		(375	)		(7	)
Interest income		288			443

Total Interest expense, net	$	(8,216	)	$	(419	)

See Note 7 for additional information regarding Interest expense – leases and Note 14 for additional information on Interest expense – notes and loans payable and accretion of debt discount and amortization of deferred financing fees.

24.

PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES

The Company’s effective tax rate was (34.7)% and 0.5% with tax expense of $3,462 thousand and tax recovery of $37 thousand, respectively, for the three months ended March 31, 2020 and 2019.

Income tax expense is recognized based on management’s estimate of the effective annual income tax rate expected for the full financial year with one-time events recorded in the period incurred.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

Deferred tax liabilities and deferred tax assets were primarily comprised of the following:


($ in thousands)	March 31, 2020			December 31, 2019
Deferred tax assets
Share-based compensation	$	439		$	1,177
Net operating losses		5,292			1,285
Lease liabilities		17,694			13,202
Inventory		—			188
Other		1,156			425

Total deferred tax assets	$	24,581			16,277
Deferred tax liabilities
ROU assets	$	(9,342	)	$	(6,488	)
Biological assets		(6,153	)		(4,213	)
Inventory		(252	)		—
Property, plant and equipment		(7,669	)		(7,923	)
Intangible assets		(47,106	)		(18,877	)
Other		(292	)		(227	)

Total deferred tax liabilities	$	(70,814	)		(37,728	)

Net deferred tax liabilities	$	(46,233	)	$	(21,451	)

The Company recognized a total net benefit related to one-time events of $92 thousand and $nil for the three months ended March 31, 2020 and 2019, respectively.

No tax expense or benefit was recognized for financial losses of $4,912 thousand and $4,494 thousand for the three months ended March 31, 2020 and 2019, respectively.

The Company determined that the tax impact of certain arrangements between its management companies and operating companies is not probable that it would be sustained under IFRIC 23 due to the evolving interpretations of Section 280E. As a result, the Company recorded a reserve for an uncertain tax positions of $8,857 thousand as of March 31, 2020, an increase during the three months ended March 31, 2020 of $1,362 thousand. The reserve includes interest and penalties of $759 thousand, an increase of $58 thousand for the three months ended March 31, 2020.

25.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through May 28, 2020, which is the date on which these financial statements were issued.

On April 23, 2020, the Company closed a sale-and-leaseback agreement for its Marshall, Michigan property for total proceeds of $16 million.

EX-99.23 24 d945319dex9923.htm EX-99.23 EX-99.23

Exhibit 99.23

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

OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019.

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Cresco Labs Inc. (the “Company” or “Cresco”) is for the three months ended March 31, 2020 and 2019. It is supplemental to, and should be read in conjunction with, the Company’s audited combined financial statements and accompanying notes for the year ended December 31, 2019, and the Company’s unaudited condensed interim consolidated financial statements and accompanying notes for the three months ended March 31, 2020 and 2019. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial information presented in this MD&A is presented in United States dollars (“$” or “US$”), unless otherwise indicated.

OVERVIEW OF THE COMPANY

Additionally, the Company operates a nicotine vape business in Canada.

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Cresco Labs, LLC (“Cresco IL”), of which the Company owns 44.6%.

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Cresco Labs Notes Issuer, LLC (“Cresco Notes”), of which Cresco IL owns 100%.

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Cresco Labs PA, LLC (“Cresco PA”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Cresco Yeltrah, LLC (“Yeltrah”).

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Cresco Notes holds a 99% interest in an operating company, Cresco Labs Ohio, LLC (“Cresco Ohio”).

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Cresco Edibles, LLC, wholly-owned by Cresco Notes, which holds a 75% interest in an operating company, TSC Cresco, LLC (“TSC”).

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Cresco Labs SLO, LLC (“California”), wholly-owned by Cresco Notes, which holds an 80% interest in an operating company, SLO Cultivation, Inc. (“SLO”)

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Cresco Labs TINAD, LLC (“TINAD”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating entity, PDI Medical III, LLC d/b/a Sunnyside – Buffalo Grove (“PDI”).

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Cresco Labs Phoenix Farms, LLC, wholly-owned by Cresco Notes, which holds an 100% interest in an operating company, Phoenix Farms of Illinois, LLC d/b/a Sunnyside – Champaign (“Phoenix”).

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Cresco Labs Arizona, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Arizona Facilities Supply, LLC (“Arizona”).

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MedMar Inc., wholly-owned by Cresco, which holds an 87.6% interest in MedMar Lakeview, LLC d/b/a Sunnyside – Lakeview (“Medmar Lakeview”) and a 75% interest in MedMar Rockford, LLC d/b/a Sunnyside – Rockford (“Medmar Rockford”).

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JDC Elmwood, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, FloraMedex, LLC d/b/a Sunnyside – Elmwood Park (“FloraMedex”).

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Gloucester Street Capital, LLC (“GSC”), wholly-owned by Cresco, which holds a 100% interest in an operating company, Valley Agriceuticals, LLC (“Valley Ag”).

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CannaRoyalty Corp., wholly-owned by Cresco, which holds a 100% interest in Cali-AntiFragile Corp., a California corporation, which holds a 100% interest in operating companies: Kaya Management Inc., Alta Supply Inc., FloraCal, Cub City, LLC and RPE Inc., (collectively referred to as the operating company “Origin House”). The Origin House acquisition closed on January 8, 2020.

Cresco 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 exists to provide high-quality and consistent cannabis-based products to consumers. Cresco’s 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 medical and adult-use cannabis cultivation and manufacturing centers in Illinois and seven dispensary locations in Illinois; one medical cannabis cultivation and manufacturing center in Pennsylvania, three dispensary locations in Pennsylvania and two additional dispensary locations under construction in Pennsylvania; one medical cannabis cultivation center and one dispensary location in Ohio; three cultivation centers, one processing facility and two distribution facilities in California; two cultivation centers in Arizona and one manufacturing and dispensary location in Arizona; one processing center in Maryland; one medical cannabis cultivation center license in New York and four dispensary locations in New York; one cultivation center and dispensary in Massachusetts; and thirty (30) nicotine vape stores in Canada. In Illinois, Cresco’s dispensary applications received the highest, second highest and third highest scores, respectively, of all applications reviewed by the State of Illinois. Subsequently, the Company was the first cultivator to receive approvals to grow adult-use cannabis; all three cultivation facilities were granted approvals in that state. Additionally, the Company’s five dispensary locations were approved for dispensing adult-use cannabis in that state upon legalization, effective January 1, 2020. Secondary sites corresponding to the five current dispensary licenses were also awarded, allowing for up to ten

dispensary locations upon zoning approval by local jurisdictions. The zoning for the first such secondary site dispensary located in Chicago’s River North neighborhood was approved by the City of Chicago on March 6, 2020. On May 28, 2020, the Company began adult-use cannabis sales at this location. In Pennsylvania, Cresco was awarded the highest score during the application process and had the second highest overall score, making it one of only five cultivators that was also awarded a dispensary license which allows for up to three dispensaries. The Company was subsequently awarded a second dispensary license allowing an additional three dispensaries for a total of six locations across the state. During 2019, the Company announced a new dispensary brand, Sunnyside*, created to accelerate industry growth and shift people’s expectations and perceptions around shopping for cannabis from intimidation and doubt to curiosity and acceptance through a new trail and marketing approach. Five Sunnyside* dispensaries opened on January 1, 2020 in the Illinois market with two additional locations beginning operations in May 2020.

Cresco is currently located at Suite 110, 400 W. Erie St, Chicago, IL 60654 and employs approximately 1,700 people, while being voted a finalist for “Best Places to Work” by Crain’s Chicago Business in 2019.

Issuing IPO, Reverse Takeover & Corporate Structure

Set forth below is the organization chart of the Company.

LOGO

Recent Developments

On April 26, 2019, the Company announced that it filed and received a receipt for a preliminary short form base shelf prospectus (the “Shelf Prospectus”) with the securities commissions in each of the provinces of Canada, except Québec. The Shelf Prospectus, when made final, will allow the Company to offer up to C$500,000 thousand of subordinate voting shares, debt securities, subscription receipts, warrants, and units, or any combination thereof, from time to time during the 25-month period that the final Shelf Prospectus is effective. The Company filed this Shelf Prospectus in order to maintain financial strength and flexibility going forward; the final version of the Shelf Prospectus was filed and accepted on July 26, 2019. The specific terms of any future offering of securities, including the use of proceeds from any offering, will be established in prospectus supplements to the Shelf Prospectus, which will be filed with the applicable Canadian securities regulatory authorities.

On September 18, 2019, the Company filed a prospectus supplement (the “Offering”), together with the short form base shelf prospectus described above, which qualified the distribution of 7,350,000 units (the “Offered Units”) of Cresco at a price of C$10.00 per Offered Unit (the “Offering Price”) pursuant to an amended and restated underwriting agreement (the “Underwriting Agreement”) dated as of September 16, 2019 between Cresco and Canaccord Genuity Corp., Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P. (collectively, the “Underwriters”). Each Offered Unit was comprised of one subordinate voting share (“SVS”) of Cresco (each, a “Unit Share”) and one-half of one SVS purchase warrant of Cresco (each whole SVS purchase warrant, a “Warrant”). Each Warrant is exercisable into one SVS of Cresco (each, a “Warrant Share”) at an exercise price of C$12.50 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on the date that is 36 months following the closing of the Offering. The Offered Units immediately separate into Unit Shares and Warrants upon issuance. Pursuant to the Underwriting Agreement, Cresco agreed to pay to the Underwriter a fee representing 5.0% of the aggregate gross proceeds of the Offering.

On February 2, 2020, the Company closed on a senior secured term loan agreement (the “Term Loan”) for an aggregate principal amount of $100,000 thousand, with the mutual option to increase the principal amount to $200,000 thousand.

Federal Regulatory Environment

Cresco 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 March 31, 2020, the Company is directly involved (through licensed subsidiaries) in both the adult-use and medical cannabis industry in the states of Illinois, Pennsylvania, Ohio, Arizona, Maryland, California and Massachusetts as permitted within such states under applicable state law which states have regulated such industries.

Despite the current state of the federal law and the CSA, the states of California, Nevada, Massachusetts, Maine, Michigan, Illinois, Washington, Oregon, Colorado, Vermont and Alaska, and the District of Columbia, have legalized recreational use of cannabis. Maine has not yet begun recreational cannabis commercial operations as of March 31, 2020. In early 2018, Vermont became the first state to legalize recreational cannabis by passage in a state legislature but does not allow commercial sales of recreational cannabis. 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.

For these reasons, the Company’s investments in the United States cannabis market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian authorities. There are a number of risks associated with the business of the Company. See sections entitled “Regulatory Overview” and “Risk Factors” in “United States Regulatory Environment”, “Risk Factors” and “General Development of the Business” and “Description of the Business” in the Annual Information Form dated April 28, 2020.

On September 25, 2019, the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”) was passed by the U.S. House of Representatives in a 321 to 103 vote. The SAFE Banking Act would permanently protect state-chartered banks and credit unions that service state-legal cannabis companies from being penalized by federal regulators. On May 17, 2020, the legislative language of the SAFE Banking Act was included in a stimulus bill known as The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act”). The HEROES Act was passed by the U.S. House of Representatives in a 208 to 199 vote. The bill or a version of it is expected to be up for vote in the Republican-controlled Senate in the coming months.

The States In Which We Operate, Their Legal Framework and How It Affects Our Business

Illinois Operations

Illinois’ retail market for the first three calendar months of 2020 was $188 million, representing a 322% year-over-year increase.

Cresco currently operates three (3) medical/adult-use cannabis cultivation and manufacturing centers in Illinois and owns five (5) medical/adult-use dispensary locations in Illinois. Licenses were awarded based on merit in a highly competitive application process to applicants who demonstrated strong operational expertise and financial backing. Since the beginning of 2019, Cresco has established a 21% wholesale market share in Illinois.

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. The five dispensary locations were approved on October 16, 2019 to begin dispensing adult-use cannabis on January 1, 2020 and were also approved to open secondary site adult-use dispensaries by the Illinois Department of Financials and Professional Regulation. Two of the five additional dispensaries will be located within the City of Chicago. The zoning for the first such secondary site dispensary located in Chicago’s River North neighborhood was approved by the City of Chicago on March 6, 2020. In May 2020, the Company announced the opening of the sixth and seventh Sunnyside* locations in Danville and Chicago-River North, respectively.

Pennsylvania Operations

On September 25, 2019, Pennsylvania’s Governor held a press conference to announce 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 31, 2019, Senate Bill 350 (“SB 350”) was introduced to legalize cannabis for adult-use. SB 350, in due course, will be assigned to a Senate committee for consideration by the Pennsylvania State Senate.

Ohio Operations

The Company has certain agreements with Verdant Creations, LLC and its affiliates (“Verdant”) that will give the Company the option to purchase four additional Ohio dispensaries currently operated by Verdant. Completion of the transaction is subject to approval by the Ohio Board of Pharmacy and, upon closing, Cresco will have a total of five dispensaries in Ohio, the maximum allowed by the state.

California Operations

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. The four agencies that regulate marijuana at the state level are the BCC, the California Department of Food and Agriculture, the California Department of Public Health, and the California Department of Tax and Fee Administration.

SLO is licensed to operate as a medical and adult-use cultivator and processor under applicable California and local jurisdictional law (the “California License”). The California License permits SLO to cultivate and process medical and adult-use cannabis in the state of California pursuant to the terms of the California License issued by the BCC under the provision of the MAUCRSA and California Assembly Bill No. 133. In California, licenses are independently issued for each approved activity for use.

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

Mendota (Fresno County)

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

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

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

Carpinteria (SB County)

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SLO has been issued provisional licenses for Cultivation: Small Mixed-Light Tier 1. Additionally, SLO has been issued provisional licenses in:

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Nursery, allowing for the planting and cultivation of medical cannabis from seeds, clones, and immature plants.

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Processor Type, allowing for the harvesting, drying, curing, grading or tanning of cannabis as well as the packaging and labelling of certain non-manufactured cannabis.

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SLO submitted annual applications for the three listed license types to the state regulator awaiting approval of annual applications.

Origin House

The 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 will be: 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 has become a leading distributor and provider of brand support services in California, the world’s largest regulated cannabis market. 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. Origin House delivers over 50+ cannabis brands to more than 500 dispensaries in California, representing approximately 60% market penetration. Following the closing of this acquisition, Cresco brands are expected to be in over 725 dispensaries and Cresco will have access to several additional licenses for cultivation, manufacturing and distribution of cannabis within the state of California.

On January 8, 2020, the Company announced it had closed on its acquisition of Origin House in which the Company acquired 100% of all equity interests of Origin House for 66,482 thousand Cresco shares and 5,961 thousand replacement equity awards, valued at $428,246 thousand.

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. (the “AMMA”). The AMMA is codified in Arizona Revised Statutes (‘‘ARS’’) § 36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (the “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 (‘‘AAC’’) Title 9 Chapter 17 (the ‘‘Rules’’).

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 on-site cultivation facility, and one 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 an annual 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 October 24, 2018, Cresco obtained a 100% ownership interest in Arizona Facilities Supply, LLC which includes a vertically integrated cultivation, processing and dispensary operation in Arizona.

Nevada Operations

Medical marijuana use was legalized in Nevada by a ballot initiative in 2000. In November 2016, voters in Nevada passed an adult use marijuana measure to allow for the sale of recreational marijuana in the state. The first dispensaries to sell adult-use marijuana began sales in July 2017. The Nevada Department of Taxation (“DOT”) is the regulatory agency overseeing the medical and adult-use cannabis programs. Similar to California, cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue.

On August 12, 2019, the Company settled its outstanding loan receivable with Lighthouse, which has cannabis operations in Nevada, through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company. The remaining escrow balance was issued as a new secured convertible promissory note convertible, at the Company’s discretion, into additional membership units approximating 1% ownership of the parent company.

New York Operations

In November 2017, Governor Cuomo signed a bill to add PTSD as a qualifying condition, and, 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. During Governor Cuomo’s January 2019 State of the State Address, he announced the proposal of the governmental agency, The Office of Cannabis Management. This agency would regulate and oversee the state’s medical marijuana program, adult-use program and hemp program. The executive director of this agency would have the authority to grant ROs currently registered and in good standing with the NYSDOH, the ability to be licensed to cultivate, process or sell adult-use cannabis and cannabis products.

Each RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH-designated regions throughout the state, and one 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.

On October 8, 2019, the Company closed the acquisition of GSC, the parent entity of Valley Ag, for consideration consistent of cash, deferred consideration, equity and contingent consideration based upon the achievement or occurrence of certain milestones or events, all totaling $129,574 thousand. 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 medical cannabis dispensaries in the state of New York. To date, Valley Ag has four (4) dispensaries and a processing facility open. Valley Ag has successfully renewed their initial licenses and all licenses are, as of the date hereof, active with the State of New York.

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% 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% 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 had 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 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 percent of what it produced. Medical dispensaries that wish to add the ability to sell cannabis products to nonpatients will be required to reserve 35 percent 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 or about November 19, 2018, Cresco entered into a definitive agreement to acquire 100% of the shares and membership interests, as applicable, of HHH and an affiliated real estate entity for consideration consisting of cash and the assumption of certain indebtedness. HHH holds a final certificate of registration from the State of Massachusetts Department of Health that allows for cultivation, manufacturing and processing, and the establishment and operation of a medical cannabis dispensary in Fall River, Massachusetts. The final certificate of registration allows HHH the ability to apply for up to two additional such licenses. HHH holds a final license from the Massachusetts Cannabis Control Commission that allows for cultivation, manufacturing and processing, and the establishment and operation of an adult-use cannabis dispensary in Fall River, Massachusetts. On October 1, 2019, Cresco Labs, LLC acquired HHH via certain agreements giving it operational control before cash consideration was settled. In January 2020, HHH entered into a host community agreement with the municipality of Fall River to allow for the siting of a medical/adult-use cannabis dispensary. On February 7, 2020, the Company announced the legal close of the acquisition and cash funding of $27,500 thousand. The closing coincided with state approval allowing recreational cannabis sales at the Company’s Fall River dispensary.

Michigan Operations

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, the Company’s affiliate was issued a medical processing license to begin manufacturing and processing flower into edible medical marijuana products and/or medical marijuana-infused products. It is estimated that Michigan has over 280,000 medical marijuana patients, which represents the second largest medical marijuana patient based in the United States.

On March 16, 2020, the Company’s affiliate received pre-qualification to operate in the adult-use market and expects to receive an adult-use processor license in late May or early June of 2020.

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 months ended March 31, 2020, represents approximately 58% of our revenue. Revenue from company-owned retail dispensary locations, for the three months ended March 31, 2020 represents the remaining 42%. Retail revenue includes medical and adult-use cannabis sales in the United States along with nicotine vape sales in Canada.

Gross Profit

Gross profit is calculated as revenue less cost of sales – production costs, which includes cultivation costs of biological assets; realized changes in fair value of inventory sold; and unrealized gain (loss) on changes in fair value of biological assets. Cost of sales – production costs includes the direct costs attributable to the production of the products sold and is comprised of the following:

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

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

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

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

Cultivation costs of biological assets are comprised of cannabis plant costs and are immediately expensed in cost of sales – production costs in the period in which they are incurred.

Selling, General and Administrative Expenses (“SG&A”)

SG&A expenses consist mainly of salary and benefits costs of executive and back office staff, consulting and professional fees such as legal and accounting, office, advertising and marketing, excise taxes, travel and entertainment and share-based compensation.

For the three months ended March 31, 2020 and 2019, Selling, general and administrative expenses were comprised of the following:


	Three months ended
	March 31,
($ in thousands)	2020		2019
Salaries and related	$	18,276	$	4,349
Consulting and professional fees		11,152		3,368
Office		4,069		675
Advertising and marketing		3,984		2,290
Excise taxes		1,868		729
Travel and entertainment		1,566		633
Share-based compensation		1,387		2,877
Technology		1,234		190
Intangible asset impairment		1,194		—
Insurance		993		524
Business expansion costs		127		558
Other		803		580

Selling, general and administrative expenses	$	46,653	$	16,773

Income Taxes

The Company, which is and will continue to be a Canadian corporation, is also expected to be classified for U.S. federal income tax purposes as a United States corporation under Section 7874 of the Code. 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 legal cannabis industry, the Company is subject to the limits of the Internal Revenue Code (“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.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS and may not be comparable to similar measures presented by other issuers. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein.

SELECTED FINANCIAL INFORMATION

The following table sets forth selected combined 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 IFRS.

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


	Three months ended
	March 31,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	66,380		$	21,055		$	45,325			215	%
Cost of sales - production costs		(46,200	)		(14,714	)		(31,486	)		214	%
Realized changes in fair value of inventory sold		(24,584	)		(15,895	)		(8,689	)		55	%
Unrealized gain on changes in fair value of biological assets		38,544			20,206			18,338			91	%
Gross profit		34,140			10,652			23,488			221	%
Total expenses		51,272			17,746			33,526			189	%
Total other income (expense), net		7,163			(517	)		7,680			nm	%
Income tax (expense) recovery		(3,462	)		37			(3,499	)		nm	%
Net loss		(13,431	)		(7,574	)		(5,857	)		77	%
Net loss attributable to Cresco Labs Inc.		(7,389	)		(6,227	)		(1,162	)		19	%

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Three months ended
	March 31,
($ in thousands)	2020			2019			$Change			% Change
Revenue	$	66,380		$	21,055		$	45,325			215	%
Cost of sales - production costs¹		(46,200	)		(14,714	)		(31,486	)		214	%
Realized changes in fair value of inventory sold		(24,584	)		(15,895	)		(8,689	)		55	%
Unrealized gain on changes in fair value of biological assets		38,544			20,206			18,338			91	%

Gross profit		34,140			10,652			23,488			221	%

Cultivation costs expensed under IAS 41²		6,050			3,043			3,007			99	%
Net impact of fair value of biological assets		(13,960	)		(4,311	)		(9,649	)		224	%
Expansion, relaunch and rebranding costs³		3,881			—			3,881			100	%
Fair value mark-up for acquired inventory		1,889			—			1,889			100	%

Operational gross profit (Non-IFRS)	$	32,000		$	9,384		$	22,616			241	%

Operational gross profit % (Non-IFRS)		48.2%			44.6%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Impact of non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net loss to adjusted EBITDA (non-IFRS):


	Three months ended
	March 31,
($ in thousands)	2020			2019			$ Change			% Change
Net loss¹	$	(13,431	)	$	(7,574	)	$	(5,857	)		77	%
Depreciation and amortization		8,368			2,759			5,609			203	%
Interest expense, net		8,216			419			7,797			nm	%
Income tax expense (recovery)		3,462			(37	)		3,499			nm	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	6,615		$	(4,433	)	$	11,048			249	%

Expansion, relaunch and rebranding costs²		3,881			—			3,881			100	%
Other (income) expense, net		(15,523	)		134			(15,657	)		nm	%
Loss (income) from investment in associate		144			(36	)		180			nm	%
Cultivation costs expensed under IAS 41³		6,050			3,043			3,007			99	%
Adjustments for acquisition, financing and other non-core costs		11,843			2,458			9,385			382	%
Management incentive compensation (share-based)		2,235			3,008			(773	)		(26	)%
Fair value mark-up for acquired inventory		1,889			—			1,889			100	%

Adjusted EBITDA (Non-IFRS)	$	17,134		$	4,174		$	12,960			310	%

Net impact of fair value of biological assets		(13,960	)		(4,311	)		(9,649	)		224	%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	3,174		$	(137	)	$	3,311			nm	%

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

²	Impact of non-core third-party product costs and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Revenue

Revenue for the three months ended March 31, 2020 was $66,380 thousand, an increase of $45,325 thousand, or 215%, compared to revenue of $21,055 thousand for the three months ended March 31, 2019. The increase in revenue was driven by the acquisitions of Origin House, Valley Ag and HHH and continued growth in the states where the Company operates.

Cost of Sales – Production Costs, Gross Profit, and Operational Gross Profit (non-IFRS)

Cost of sales – production costs for the three months ended March 31, 2020 was $46,200 thousand, an increase of $31,486 thousand compared to cost of sales – production costs of $14,714 thousand for the three months ended March 31, 2019. The increase was primarily attributable to the Origin House, Valley Ag and HHH acquisitions and increased cultivation capacity in the Illinois and Pennsylvania markets. This also included net cultivation costs which were immediately expensed under the Company’s accounting policy for biological assets of $6,050 thousand and $3,043 thousand in the three months ended March 31, 2020 and 2019, respectively.

Gross profit increased primarily due to the increase in revenue from the prior-year quarter. Operational gross profit for the first quarter of 2020, a non-IFRS measure which excludes the impact of biological assets accounting and cultivation costs immediately expensed, as discussed above, was $32,000 thousand, compared to an operational gross profit of $9,384 thousand for the prior year. Operational gross profit reflects revenue less costs related to products sold in the period. The increase of $22,616 thousand from the prior year was primarily driven by the addition of Origin House, Valley Ag and HHH, organic growth and greater scale and improved operational efficiencies in its established Illinois and Pennsylvania markets. Operational gross profit percentage of approximately 48.2% was higher when compared with the prior year, as the benefit of operational efficiencies in the Company’s more established markets exceeded the impact of emerging and recently acquired businesses where the Company is focused on footprint expansion and relaunching Cresco-branded products. The Company expects margin expansion as these operations scale.

Total Expenses

Total expenses for the three months ended March 31, 2020 were $51,272 thousand, an increase of $33,526 thousand compared to total expenses of $17,746 thousand for the three months ended March 31, 2019. The increase in total expenses was attributable to acquisition and other non-core costs, depreciation and amortization, as well as significant investments in our team and operational infrastructure to drive strategic initiatives that better position the Company for future growth.

Total Other Income (Expense)

Total other income for the three months ended March 31, 2020 was $7,163 thousand, a change of $7,680 thousand compared to other expense of $517 thousand for the three months ended March 31, 2019. The increase in total other income (expense) was primarily due to unrealized gains recognized on financial instruments carried at fair value, partially offset by higher interest expense resulting from the loan agreements the Company entered into and acquired during the period. See Notes 17 and 20 in the unaudited condensed interim consolidated financial statements for the periods ended March 31, 2020 and 2019 for more information.

Provision for Income Taxes

Income tax expense for the three months ended March 31, 2020 was $3,462 thousand compared to a recovery of $37 thousand in the prior period. The change was due to increased amounts of permanently nondeductible expenses under Section 280E.

Net Loss and Adjusted EBITDA (non-IFRS)

Net loss for the three months ended March 31, 2020 was $13,431 thousand, compared to a net loss of $7,574 thousand for the three months ended March 31, 2019. Higher gross profit in the current year was more than offset by higher operating expenses and current period income tax expense.

Adjusted EBITDA, a non-IFRS measure which excludes non-cash items such as depreciation and amortization, net interest expense, income taxes, other income and expense, as well as share-based compensation and acquisition and other non-core costs, was $17,134 thousand and $4,174 thousand for the three months ended March 31, 2020 and 2019, respectively. Excluding the impact of biological assets, adjusted EBITDA was $3,174 thousand and $(137) thousand for the three months ended March 31, 2020 and 2019, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Overview

As of March 31, 2020, the Company held $68,581 thousand in cash and cash equivalents, $2,795 thousand in restricted cash and $75,059 thousand of working capital compared to December 31, 2019, where we held $49,102 thousand in cash and cash equivalents, $5,050 thousand in restricted cash and $9,169 thousand of working capital. The increase of $65,890 thousand in working capital was primarily due to an increase in inventory and cash and cash equivalents as well as a decrease in deferred consideration, contingent consideration and other payables between periods.

Cash Flows

Operating Activities

Net cash used in operating activities was $40,101 thousand for the three months ended March 31, 2020, an increase of $33,420 thousand compared to net cash used in operating activities of $6,681 thousand for the three months ended March 31, 2019. The increase in net cash used in operating activities was primarily due to timing of working capital requirements in the current period driven by increased costs associated with our expansion in new and existing markets as well as higher non-core and acquisition-related costs.

Investing Activities

Net cash used in investing activities was $38,641 thousand for the three months March 31, 2020, an increase of $21,158 thousand compared to $17,483 thousand used in investing for the three months ended March 31, 2019. The increase in net cash used in investing activities was primarily due to increases in purchases of property and equipment as the Company continues to expand its operations and payment of deferred consideration related to prior-year acquisitions, partially offset by proceeds received from sale and leaseback transactions.

Financing Activities

Net cash provided by financing activities was $95,020 thousand for the three months ended March 31, 2020, a change of $95,483 thousand compared to $463 thousand of cash used in financing activities for the three months ended March 31, 2019. The increase in net cash provided by financing activities was primarily due to proceeds from the issuance of long-term debt during the period.

CONTRACTUAL OBLIGATIONS

As of March 31, 2020, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	16,143
2021		21,238
2022		21,542
2023		22,404
2024		22,917
Thereafter		271,816

Total lease payments		376,060

Less: interest		(227,491	)
Less: tenant improvement allowance		(13,758	)

Present value of lease liabilities		134,811

Less: short-term lease liabilities		(18,030	)

Present value of long-term lease liabilities	$	116,781

OFF-BALANCE SHEET ARRANGEMENTS AND PROPOSED TRANSACTIONS

RELATED PARTY TRANSACTIONS

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Aside from key management personnel compensation and the lease and lending arrangements described below for the three months ended March 31, 2020, there were no material transactions with or changes to other related party balances relative to the period ended December 31, 2019. Key management personnel compensation for the three months ended March 31, 2020 and 2019 are as follows:


	Three months ended
	March 31,
($ in thousands)	2020		2019
Management compensation	$	1,411	$	527
Share-based compensation expense		1,172		1,391

Total	$	2,583	$	1,918

As of March 31, 2020 and December 31, 2019, the Company had receivables of $204 thousand and $712 thousand, respectively, with key management personnel.

For both periods ending March 31, 2020 and December 31, 2019, the Company had payables of $113 thousand with key management personnel.

Key management personnel hold 85,550 thousand redeemable units of Cresco Labs, LLC, which is equal to $76,922 thousand of Non-controlling interests as of March 31, 2020.

As of March 31, 2020, the Company had borrowings with related parties of $8,250 thousand related to the Company’s Term Loan. See Note 14 for additional details.

Below is a summary of the expense resulting from the related party lease liabilities for the periods ended March 31, 2020 and 2019.


	Three months ended				Three months ended
	March 31, 2020				March 31, 2019
	Depreciation		Interest		Depreciation		Interest
($ in thousands)	expense		expense		expense		expense
Finance lease liability; lessor has minority interest in SLO	$	82	$	403	$	99	$	399
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		16		21		16		22
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		22		22		23		22


	As of				As of
	March 31, 2020				December 31, 2019
($ in thousands)	ROU asset		Lease liability		ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	9,627	$	11,846	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		633		689		649		694
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		681		733		643		686

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 through profit or loss (“FVTPL”). The carrying values of financial instruments held at amortized cost approximate their fair values as of March 31, 2020 and December 31, 2019 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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

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

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

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

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

Unless otherwise noted, the Company considers all financial instruments measured at FVTPL to be Level 1 instruments.

The following table summarizes the Company’s financial instruments as of March 31, 2020 and December 31, 2019:


	March 31,		December 31,
($ in thousands)	2020		2019
Financial Assets:
Cash and cash equivalents	$	68,581	$	49,102
Restricted cash		2,795		5,050
Accounts receivable, net		14,211		16,455
Loans receivable, short-term		3,143		644
Loans receivable, long-term		16,852		18,633
Security deposits		2,026		1,084
Financial Liabilities:
Accounts payable and other accrued expenses	$	57,625	$	62,834
Short-term borrowings		20,787		—
Current portion of lease liabilities		18,030		12,019
Deferred consideration, contingent consideration and other payables		22,810		59,940
Derivative liabilities		203		178
Derivative liabilities - long-term		4,902		15,243
Lease liabilities		116,781		82,856
Deferred and contingent consideration		9,500		21,901
Long-term notes payable and loans payable		95,555		550

Financial Risk Management

Credit and Banking Risk

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at March 31, 2020 and December 31, 2019 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 primarily on cannabis industry growth in our 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 House of Representatives, but has not yet been voted on within the 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 and deposit funds from businesses involved with the cannabis industry.

ii.

Asset Forfeiture Risk

iii.

Liquidity Risk

iv.

Market Risk

Currency Risk

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. The Company calculates an incremental borrowing rate to use in the valuation of its financial instruments. The Company’s effective interest rates for its Term Loan range from 15.9% to 16.7% and the stated interest rate ranges from 12.7% to 13.2% based on the term elected by the lender. The Company’s weighted average effective interest rate for its Opaskwayak Cree Nation (“OCN”) loan is 23.8% and its stated interest rate is 10%. See Note 14 of the Company’s unaudited condensed interim consolidated financial statements for further information.

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, contingent consideration and liability classified restricted stock units 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 in fair value and Other income (expense), net of $2,072 thousand.

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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 24 of the Company’s unaudited condensed interim consolidated financial statements for the Company’s disclosure of uncertain tax positions.

Regulatory Risk

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 can have on the goals and operations of the business as a whole.

EX-99.24 25 d945319dex9924.htm EX-99.24 EX-99.24

Exhibit 99.24

FORM 52-109FV2

CERTIFICATION OF INTERIM FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Charles Bachtell, Chief Executive Officer of Cresco Labs Inc., certify the following:

1.	Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Cresco Labs Inc. (the “issuer”) for the interim period ended March 31, 2020.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

Date: May 28, 2020.

/s/ Charles Bachtell

Charles Bachtell

Chief Executive Officer

NOTE TO READER

In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.25 26 d945319dex9925.htm EX-99.25 EX-99.25

Exhibit 99.25

FORM 52-109FV2

CERTIFICATION OF INTERIM FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Kenneth Amann, Chief Financial Officer of Cresco Labs Inc., certify the following:

1.	Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Cresco Labs (the “issuer”) for the interim period ended March 31, 2020.

Date: May 28, 2020.

/s/ Kenneth Amann

Kenneth Amann

Chief Financial Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.26 27 d945319dex9926.htm EX-99.26 EX-99.26

Exhibit 99.26

LOGO

May 29, 2020

Filed via SEDAR

To All Applicable Exchanges and Securities Administrators

Subject: Cresco Labs Inc. (“Issuer”)

Notice of Meeting and Record Date

Dear Sir/Madam:

We are pleased to confirm the following amended information with respect to the Issuer’s upcoming meeting of securityholders:


Meeting Type:		Annual General
Meeting Date:		June 29, 2020
Record Date for Notice of Meeting:		May 11, 2020
Record Date for Voting:		May 11, 2020
Beneficial Ownership Determination Date:		May 11, 2020
Class of Securities Entitled to Vote:		Subordinate Voting/ Proportionate Voting/Super Voting
ISIN:		CA22587M1068/ CA22587M2058
Meeting Location:		Chicago Illinois
Issuer sending proxy materials directly to NOBOs:		No
Issuer paying for delivery to OBOs:		No
Notice and Access for Beneficial Holders:		No
Notice and Access for Registered Holders:		No

In accordance with applicable securities regulations we are filing this information with you in our capacity as agent of the Issuer.

Yours truly,

ODYSSEY TRUST COMPANY

signed “Jacquie Fisher”

Jacquie Fisher

Director, Client Services

EX-99.27 28 d945319dex9927.htm EX-99.27 EX-99.27

Exhibit 99.27

CRESCO LABS INC.

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON JUNE 29, 2020

NOTICE IS HEREBY GIVEN that the annual and special meeting (the “Meeting”) of the holders (the “Shareholders”) of Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares (collectively, the “Voting Shares”) of Cresco Labs Inc. (“Cresco” or the “Corporation”) will be held at Aon Center, Randolph Training Room, 200 East Randolph St., Suite 5100, Chicago, Illinois at 10:00 a.m. (Central Daylight Time) on June 29, 2020 and will be available by teleconference toll free within North America at 1.800.901.0218 and outside of North America at 1.719.234.0223, Meeting ID: 499 321 5764. The Meeting will be held for the following purposes:

1.	to receive and consider the Corporation’s financial statements for the years ended December 31, 2019 and 2018, together with the auditor’s report thereon (collectively, the “Financial Statements”);

2.	to set the number of directors of the Corporation at ten, subject to permitted increases under the articles of the Corporation or otherwise;

3.	to elect the directors of the Corporation to serve until the next annual meeting of Shareholders or until their successors are elected or appointed;

4.	to appoint Marcum LLP as independent auditor of the Corporation to hold office until the next annual meeting of Shareholders and to authorize the directors to fix the remuneration thereof;

to consider and, if deemed advisable, to pass a special resolution to amend the authorized share structure and articles of the Corporation by creating a new class of Special Subordinate Voting Shares and to vary the special rights and restrictions attached to the Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares to reflect the creation of the Special Subordinate Voting Shares; and

6.	to transact any other business as may properly be brought before the Meeting or any adjournment(s) or postponement thereof.

The details of all matters proposed to be put before the Shareholders at the Meeting are set forth in the management information circular accompanying this Notice of Annual and Special Meeting (the “Information Circular”).

The record date for determination of the Shareholders entitled to receive notice of and to vote at the Meeting is May 11, 2020 (the “Record Date”). All Shareholders of record as at the close of business on the Record Date are entitled to attend, participate and vote at the Meeting or by proxy.

Due to the ongoing concerns related to the spread of the coronavirus (COVID-19) and in order to protect the health and safety of Shareholders, employees, other stakeholders and the community, Shareholders are strongly encouraged to listen to the Meeting via teleconference instead of attending the Meeting in person and to vote on the matters before the Meeting by proxy, appointing the person designated by management in the proxy form or voting instruction form.

A Shareholder who wishes to appoint a person other than the management nominees identified on the form of proxy or voting instruction form, to represent him, her or it at the Meeting may do so by inserting such person’s name in the blank space provided in the form of proxy or voting instruction form and following the instructions for submitting such form of proxy or voting instruction form. In order to be valid and acted upon at the Meeting, completed proxies or votes must be received by Odyssey Trust Company by 10:00 a.m. (Central Daylight Time) on June 25, 2020 or, in the case of any adjournment or postponement of the Meeting, at least 48 hours (excluding Saturdays, Sundays and holidays) prior to the time of the adjourned or postponed Meeting. A person appointed as proxyholder need not be a Shareholder. See the Information Circular for further instructions.

Shareholders should follow the instructions on the forms they receive and if they have any questions contact their intermediaries or Odyssey Trust Company, the Corporation’s transfer agent, toll free within North America at 1.800.517.4553, outside of North America at 1.587.885.0960 or by e-mail at proxy@odysseytrust.com.

We ask that Shareholders also review and follow the instructions of any regional health authorities of the State of Illinois, including the City of Chicago and any other health authority holding jurisdiction over the areas you must travel through to attend the Meeting. Please do not attend the Meeting in person if you are experiencing any cold or flu-like symptoms, or if you or someone with whom you have been in close contact has travelled to/from outside of the United States or Canada within the 14 days immediately prior to the Meeting. All Shareholders are strongly encouraged to vote by submitting their completed form of proxy (or voting instruction form) prior to the Meeting by one of the means described in the Information Circular accompanying this Notice.

The Corporation reserves the right to take any additional pre-cautionary measures deemed to be appropriate, necessary or advisable in relation to the Meeting in response to further developments in the COVID-19 outbreak and in order to ensure compliance with federal, state and local laws and orders, including without limitation: (i) holding the Meeting virtually or by providing a webcast of the Meeting; (ii) hosting the Meeting solely by means of remote communication; (iii) changing the Meeting date and/or changing the means of holding the Meeting; (iv) denying access to persons who exhibit cold or flu-like symptoms, or who have, or have been in close contact with someone who has, travelled to/from outside of the United States or Canada within the 14 days immediately prior to the Meeting; and (v) such other measures as may be recommended by public health authorities in connection with gatherings of persons such as the Meeting. Should any such changes to the Meeting format occur, the Corporation will announce any and all of these changes by way of news release, which will be filed under the Corporation’s profile on SEDAR at www.sedar.com as well as on our Corporation website at www.crescolabs.com. We strongly recommend you check the Corporation’s website prior to the Meeting for the most current information. In the event of any changes to the Meeting format due to the COVID-19 outbreak, the Corporation will not prepare or mail amended materials in respect of the Meeting.

This Information Circular will be available on Cresco’s website at www.investors.crescolabs.com as of June 3, 2020 and will remain on the website for one full year thereafter. This Notice, the Financial Statements, the form of proxy and the Information Circular will also be available on SEDAR at www.sedar.com.

DATED as of the 3^rd day of June, 2020.


Yours truly,

		(signed) “Thomas J. Manning”
		Thomas J. Manning
		Executive Chairman of the Board

EX-99.28 29 d945319dex9928.htm EX-99.28 EX-99.28

Exhibit 99.28

LOGO

CRESCO LABS INC.

NOTICE OF ANNUAL AND SPECIAL MEETING

AND

MANAGEMENT INFORMATION CIRCULAR

WITH RESPECT TO

THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS OF

CRESCO LABS INC.

TO BE HELD ON JUNE 29, 2020

DATED JUNE 3, 2020

CRESCO LABS INC.

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON JUNE 29, 2020

1.	to receive and consider the Corporation’s financial statements for the years ended December 31, 2019 and 2018, together with the auditor’s report thereon (collectively, the “Financial Statements”);

2.	to set the number of directors of the Corporation at ten, subject to permitted increases under the articles of the Corporation or otherwise;

3.	to elect the directors of the Corporation to serve until the next annual meeting of Shareholders or until their successors are elected or appointed;

4.	to appoint Marcum LLP as independent auditor of the Corporation to hold office until the next annual meeting of Shareholders and to authorize the directors to fix the remuneration thereof;

6.	to transact any other business as may properly be brought before the Meeting or any adjournment(s) or postponement thereof.

DATED as of the 3^rd day of June, 2020.


Yours truly,

		(signed) “Thomas J. Manning”
		Thomas J. Manning
		Executive Chairman of the Board

CRESCO LABS INC.

ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON JUNE 29, 2020

MANAGEMENT INFORMATION CIRCULAR

GENERAL

This management information circular (the “Circular”) is furnished to holders (“Shareholders”) of Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares (collectively, the “Voting Shares”) of Cresco Labs Inc. (the “Corporation” or “Cresco”) in connection with the solicitation of proxies by the management of the Corporation for use at the annual and special meeting of Shareholders (the “Meeting”), and at any adjournment or postponement thereof, for the purposes set forth in the accompanying Notice of Annual and Special Meeting (the “Notice of Meeting”). The Meeting is scheduled to be held on June 29, 2020 at 10:00 a.m. (Central Daylight Time), at Aon Center, Randolph Training Room, 200 East Randolph St., Suite 5100, Chicago, Illinois and will be available by teleconference toll free within North America at 1.800.901.0218 and outside of North America at 1.719.234.0223, Meeting ID: 499 321 5764.

The information contained herein is given as of June 3, 2020, except where otherwise indicated.

If you hold Voting Shares through a broker, investment dealer, bank, trust company, nominee or other intermediary (collectively, an “Intermediary”), you should contact your Intermediary for instructions and assistance in voting the Voting Shares that you beneficially own.

This solicitation is made on behalf of management of the Corporation. The costs incurred in the preparation of both the form of proxy and this Circular will be borne by the Corporation. In addition to the use of mail, proxies may be solicited by telephone or any form of electronic communication or by directors, officers and employees of the Corporation who will not be directly compensated therefor.

Due to the ongoing concerns related to the spread of the coronavirus (COVID-19) and in order to protect the health and safety of Shareholders, employees, other stakeholders and the community and to comply with the procedures imposed by both federal, state and local governments, Shareholders are strongly encouraged to listen to the Meeting via teleconference instead of attending the Meeting in person and to vote on the matters before the Meeting by proxy, appointing the Management Designees (as defined below) named in the accompanying proxy form or voting instruction form in order to limit the number of attendees in person.

No person is authorized to give any information or to make any representation other than those contained in this Circular and, if given or made, such information or representation should not be relied upon as having been authorized by the Corporation. The delivery of this Circular shall not, under any circumstances, create an implication that there has not been any change in the information set forth herein since the date hereof.

Please read this Circular carefully to obtain information about how you may participate at the Meeting either in person or through the use of proxies.

PROXY RELATED INFORMATION

Attendance and Voting

Only registered Shareholders, or the persons they appoint as their proxies, are permitted to attend, speak and vote on all matters that may properly be voted upon at the Meeting.

Beneficial Shareholders who have not duly appointed themselves as proxyholder will not be able to attend, participate or vote at the Meeting. This is because the Corporation and its transfer agent do not have a record of the Beneficial Shareholders of the Corporation, and, as a result, will have no knowledge of your shareholdings or entitlement to vote,

unless you appoint yourself as proxyholder. If you are a Beneficial Shareholder and wish to vote at the Meeting, you have to appoint yourself as proxyholder, by inserting your own name in the space provided on the voting instruction form sent to you and must follow all of the applicable instructions provided by your Intermediary. See “Appointment of Third Party as Proxy.”

All references to Shareholders in this Circular and the accompanying form of proxy and Notice of Meeting are to Shareholders of record, unless specifically stated otherwise.

While as of the date of this Circular, the Corporation intends to hold the Meeting in physical face to face format, we are continuously monitoring the current coronavirus (COVID-19) outbreak. In light of the rapidly evolving news and guidelines related to COVID-19, we ask that, in considering whether to attend the Meeting in person, Shareholders follow the instructions of any regional health authorities of the State of Illinois, including the City of Chicago and any other health authority holding jurisdiction over the areas you must travel through to attend the Meeting. Please do not attend the Meeting in person if you are experiencing any cold or flu-like symptoms, or if you or someone with whom you have been in close contact has travelled to/from outside of the United States or Canada within the 14 days immediately prior to the Meeting. All Shareholders are strongly encouraged to vote by submitting their completed form of proxy (or voting instruction form) prior to the Meeting by one of the means described in the Circular.

The Meeting will be available via teleconference and all Shareholders are urged to listen to the Meeting as follows:

To join the Meeting via teleconference, please dial: 1.800.901.0218, within North America, 1.719.234.0223 outside North America and when prompted by the telephone system, enter the Meeting ID: 499 321 5764.

Please note that you will not be able to vote via teleconference. If you intend to listen to the Meeting via teleconference you must vote on the matters prior to the Meeting. Votes must be received by Odyssey Trust Company (“Odyssey”) no later than 10:00 a.m. (Central Daylight Time) on June 25, 2020 (the “Proxy Deadline”) or no later than forty-eight (48) hours (excluding Saturdays, Sundays or statutory holidays in the Province of British Columbia) before any adjournment or postponement of the Meeting.

Appointment of Third Party as Proxy

The persons named in the enclosed form of proxy are officers and/or directors of the Corporation and each is a management designee (collectively, the “Management Designees”). Management Designees will vote IN FAVOUR of each of the matters specified in the Notice of Meeting and all other matters proposed by management at the Meeting. Each Shareholder submitting a proxy has the right to appoint a person, who need not be a Shareholder (a “third party proxyholder”), to represent, attend, participate or vote at the Meeting on such Shareholder’s behalf, other than the Management Designees. A Shareholder may exercise this right by completing the steps set forth below and depositing the completed proxy to Odyssey prior to the Proxy Deadline.

The following applies to Shareholders who wish to appoint a person other than the Management Designees (including someone who is not a Shareholder) set forth in the form of proxy or voting instruction form as proxyholder, including Beneficial Shareholders who wish to appoint themselves as proxyholder to attend, participate or vote at the Meeting.

To appoint a third party proxyholder, insert such person’s name in the blank space provided in the form of proxy or voting instruction form (if permitted) and follow the instructions for submitting such form of proxy or voting instruction form. If you are a Beneficial Shareholder located in the United States, you must also provide Odyssey with a duly completed legal proxy if you wish to attend, participate or vote at the Meeting or, if permitted, appoint a third party as your proxyholder. See below under this section for additional details.

If you are a Beneficial Shareholder and wish to attend, participate or vote at the Meeting, you have to insert your own name in the space provided on the voting instruction form sent to you by your Intermediary and follow all of the applicable instructions provided by your Intermediary. By doing so, you are instructing your Intermediary to appoint you as proxyholder. It is important that you comply with the signature and return instructions provided by your Intermediary.

Legal Proxy – U.S. Beneficial Shareholders

If you are a Beneficial Shareholder located in the United States and wish to attend, participate or vote at the Meeting or, if permitted, appoint a third party as your proxyholder, in addition to the steps described above and below, you must obtain a valid legal proxy from your Intermediary. Follow the instructions from your Intermediary included with the legal proxy form and the voting information form sent to you, or contact your Intermediary to request a legal proxy form or a legal proxy if you have not received one. After obtaining a valid legal proxy from your Intermediary, you must then submit such legal proxy to Odyssey prior to the Proxy Deadline.

Refusal of Proxy

The Corporation may refuse to recognize any instrument of proxy received later than the Proxy Deadline.

Revocability of Proxy

A Shareholder who has given a proxy has the power to revoke it at any time prior to the exercise thereof. In addition to revocation in any other manner permitted by law, a proxy may be revoked by:

(a)

signing a proxy with a later date and delivering it to the place noted above prior to the Proxy Deadline;

(b)

signing and dating a written notice of revocation and delivering it to Odyssey, or by transmitting a revocation by telephonic or electronic means, to Odyssey, at any time up to and including the last business day preceding the day of the Meeting, or any adjournment of it, at which the proxy is to be used, or delivering a written notice of revocation and delivering it to the Chair of the Meeting prior to the commencement of the Meeting or any adjournment or postponement thereof; or

(c)

attending the Meeting or any adjournment or postponement of the Meeting and registering with the scrutineer as a shareholder present.

Advice to Beneficial Holders of Voting Shares

The information in this section is of significant importance to many Shareholders, as a substantial number of Shareholders do not hold their Voting Shares in their own name. Shareholders who do not hold their Voting Shares in their own name, referred to in this Circular as “Beneficial Shareholders,” are advised that only proxies deposited by Shareholders whose names appear on the records of the Corporation as the registered holders of Voting Shares can be recognized and acted upon at the Meeting. If Voting Shares are listed in an account statement provided to a Shareholder by an Intermediary, then in almost all cases those Voting Shares will not be registered in the Shareholder’s name on the records of the Corporation. Such Voting Shares will more likely be registered under the name of CDS & Co. (the registration name for CDS is Clearing and Depository Services Inc., which acts as nominee for many Canadian brokerage firms).

Existing regulatory policy requires Intermediaries to seek voting instructions from Beneficial Shareholders in advance of shareholders’ meetings. The various Intermediaries have their own mailing procedures and provide their own return instructions to clients, which should be carefully followed by Beneficial Shareholders in order to ensure that their Voting Shares are voted at the Meeting. The form of proxy supplied to a Beneficial Shareholder by its Intermediary (or the agent of the Intermediary) is substantially similar to the form of proxy provided directly to registered Shareholders by the Corporation. However, its purpose is limited to instructing the registered Shareholder (i.e., the Intermediary or agent of the Intermediary) how to vote on behalf of the Beneficial Shareholder. The vast majority of Intermediaries now delegate responsibility for obtaining instructions from clients to Broadridge Financial Solutions, Inc. (“Broadridge”) in Canada. Broadridge typically prepares a machine-readable voting instruction form, mails those forms to Beneficial Shareholders and asks Beneficial Shareholders to return the forms to Broadridge, or otherwise communicate voting instructions to Broadridge (by way of the internet or telephone, for example). Broadridge then tabulates the results of all instructions received and provides appropriate instructions respecting the voting of shares to be represented at the Meeting. A Beneficial Shareholder who receives a Broadridge voting instruction form cannot use that form to vote Voting Shares directly at the Meeting. The voting instruction forms must be returned to Broadridge (or instructions respecting the voting of Voting Shares must otherwise be communicated to Broadridge) well in advance of the Meeting in order to have the Voting Shares voted. If you have any questions regarding the voting of Voting Shares held through an Intermediary, please contact that Intermediary for assistance.

Although a Beneficial Shareholder may not be recognized directly at the Meeting for the purposes of voting, Voting Shares registered in the name of an Intermediary, a Beneficial Shareholder may attend the Meeting as proxyholder for the registered Shareholder and vote the Voting Shares in that capacity. Beneficial Shareholders who wish to attend the Meeting and indirectly vote their Voting Shares as proxyholder for the registered Shareholder, should enter their own names in the blank space on the form of proxy provided to them and return the same to their Intermediary (or the Intermediary’s agent) in accordance with the instructions provided by such Intermediary.

For purposes of applicable securities regulatory policies relating to the dissemination of proxy-related materials and other securityholder materials and the request for voting instructions from Beneficial Shareholders, there are two categories of Beneficial Shareholders. Non-objecting Beneficial Shareholders (“NOBOs”) are Beneficial Shareholders who have advised their Intermediary that they do not object to their Intermediary disclosing ownership information to the Corporation, consisting of their name, address, e-mail address, securities holdings and preferred language of communication. Securities legislation restricts the use of that information to matters strictly relating to the affairs of the Corporation. Objecting Beneficial Shareholders (“OBOs”) are Beneficial Shareholders who have advised their Intermediary that they object to their Intermediary disclosing such ownership information to the Corporation. Cresco will not send its proxy-related materials directly to NOBOs under National Instrument 54-101. Cresco does not intend to pay for Intermediaries to forward the proxy-related materials and the voting instruction form to OBOs under National Instrument 54-101. In the case of an OBO, the OBO will not receive the materials unless the OBO’s Intermediary assumes the cost of delivery.

Exercise of Discretion with Respect to Proxies

The Voting Shares represented by the enclosed proxy will be voted or withheld from voting on any motion, by ballot or otherwise, in accordance with any indicated instructions contained in a proxy. In the absence of any such direction, such shares will be voted IN FAVOUR of each of the matters set forth in the Notice of Meeting and in this Circular and all other matters proposed by management at the Meeting.

If any amendment or variation to matters identified in the Notice of Meeting is proposed at the Meeting or any adjournment or postponement thereof, or if any other matters properly come before the Meeting or any adjournment or postponement thereof, the enclosed proxy confers discretionary authority to vote on such amendments or variations or such other matters according to the best judgment of the appointed proxyholder. As at the date of this Circular, the management of the Corporation is not aware of any amendments or variations or other matters to come before the Meeting.

VOTING SECURITIES AND PRINCIPAL HOLDERS OF VOTING SECURITIES

The authorized share capital of the Corporation consists of an unlimited number of Subordinate Voting Shares, of which 158,874,983 are issued and outstanding as of the date of this Circular, an unlimited number of Proportionate Voting Shares, of which 252,994 (which are convertible on a 1:200 basis into 50,598,820 Subordinate Voting Shares) are issued and outstanding as of the date of this Circular, and an unlimited number of Super Voting Shares, of which 500,000 are issued and outstanding as of the date of this Circular.

Voting Rights

Each Subordinate Voting Share is entitled to one vote per Subordinate Voting Share, each Proportionate Voting Share is entitled to one vote in respect of each Subordinate Voting Share into which such Proportionate Voting Share could ultimately then be converted, which is currently equal to 200 votes per Proportionate Voting Share, and each Super Voting Share is currently entitled to 2,000 votes per Super Voting Share on all matters upon which the holders of shares of the Corporation are entitled to vote, in each case as of the Record Date, and holders of Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares will vote together on all matters subject to a vote of holders of each of those classes of shares as if they were one class of shares, except to the extent that a separate vote of holders as a separate class is required by law or provided by the articles of the Corporation.

As of the date of this Circular, the Subordinate Voting Shares represent approximately 12.8%, the Proportionate Voting Shares represent approximately 4.2% and the Super Voting Shares represent approximately 83% of the voting rights attached to outstanding Voting Shares of the Corporation.

Subordinate Voting Shares

The Subordinate Voting Shares are “restricted securities” within the meaning of such term under applicable Canadian securities laws. In the event that a take-over bid is made for the Super Voting Shares, the holders of Subordinate Voting Shares will not be entitled to participate in such offer and may not tender their shares into any such offer, whether under the terms of the Subordinate Voting Shares or under any coattail trust or similar agreement. Notwithstanding this, any take-over bid for solely the Super Voting Shares is unlikely, given that by the terms of the investment agreement entered into by the Corporation and the holders of the Super Voting Shares in connection with the issuance of the Super Voting Shares to such holders, upon any sale of Super Voting Shares to an unrelated third party purchaser, such Super Voting Shares will be redeemed by the Corporation for their issue price. Additionally, holders of Subordinate Voting Shares are entitled to convert to Proportionate Voting Shares and tender to any take-over bid made solely to the holders of Proportionate Voting Shares.

Record Date

The record date for the determination of Shareholders entitled to receive notice of and to vote at the Meeting or any adjournment or postponement thereof is May 11, 2020 (the “Record Date”). Accordingly, only Shareholders whose names have been entered in the register of Shareholders at the close of business on the Record Date will be entitled to receive notice of and to vote at the Meeting, or any adjournments or postponements thereof.

Principal Holders of Securities

To the best of the knowledge of the Corporation, based on publicly available filings, as of the Record Date, no person or company, owns, or controls or directs, directly or indirectly, Voting Shares carrying 10% or more of the voting rights attached to any class of Voting Shares of the Corporation, except for the following:


Name of Shareholder	Number of Super Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly		Percentage of Super Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly			Number of Proportionate Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly^(1)(2)(6)			Percentage of Proportionate Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly⁽¹⁾⁽²⁾			Number of Subordinate Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly⁽¹⁾⁽²⁾		Percentage of Subordinate Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly⁽¹⁾⁽²⁾			Percentage of Votes Attaching to All Outstanding Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly⁽³⁾
Charles Bachtell⁽⁴⁾		100,000		20.0	%		4,362	⁽⁴⁾		1.7	%⁽⁴⁾		3,886		<0.1	%		16.7	%
Joseph Caltabiano		100,000		20.0	%		200			<0.1	%		0		0	%		16.6	%
Brian McCormack		100,000		20.0	%		0			0	%		0		0	%		16.6	%
Robert M. Sampson		100,000		20.0	%		4			<0.1	%		0		0	%		16.6	%
Dominic A. Sergi⁽⁵⁾		100,000		20.0	%		0			0	%		15,555		<0.1	%		16.6	%

Note:

(1)	Proportionate Voting Shares convert to Subordinate Voting Shares on a 1:200 basis.

(2)	On an issued and undiluted basis, not giving effect to the conversion or exercise of securities convertible, redeemable or exchangeable into such shares held by such person, as applicable.

(3)	Total voting percentage is based on actual number of votes. The voting percentages differ from beneficial ownership percentages as the Corporation’s Super Voting Shares carry 2,000 votes per Super Voting Share and the Proportionate Voting Shares carry 200 votes per Proportionate Voting Share.

(4)	Owned indirectly through 82.1% ownership in CB2 Initiative LLC.

(5)	Owned indirectly through 50% ownership of Sergi Ventures LLC.

(6)	Excludes holdings of units in Cresco Labs, LLC that are redeemable for Proportionate Voting Shares.

INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

No person who has been a director or executive officer of the Corporation at any time since the beginning of the last financial year, nor any proposed nominee for election as a director of the Corporation, nor any associate or affiliate of any of the foregoing, has any material interest, directly or indirectly, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Meeting.

MATTERS TO BE CONSIDERED AT THE MEETING

To the knowledge of the board of directors of the Corporation (the “Board”), the only matters to be brought before the Meeting are those matters set forth in the Notice of Meeting.

Receiving the Financial Statements

The financial statements of the Corporation for the years ended December 31, 2019 and 2018, together with the auditor’s report thereon (the “Financial Statements”), have been mailed to the Corporation’s registered and Beneficial Shareholders who requested to receive them. The Financial Statements are also available on SEDAR at www.sedar.com. The Financial Statements of the Corporation for the years ended December 31, 2019 and 2018 will be placed before the Meeting.

Number of Directors and Election of Directors

Nominees

At the Meeting, Shareholders will be asked to (i) fix the number of directors of the Corporation at ten, subject to permitted increases under the articles of the Corporation or otherwise; and (ii) elect, on an individual basis, each of the ten nominees of Cresco set forth in the table below (the “Cresco Nominees”) as directors of the Corporation to hold office until the next annual meeting of Shareholders or until their successors are duly elected or appointed pursuant to the articles of the Corporation, unless their offices are earlier vacated in accordance with the provisions of the Business Corporations Act (British Columbia) (“BCBCA”) or the Corporation’s articles. Each of the Cresco Nominees has consented to being named in this Circular and to serve as a director, if elected. The present term of office of each current director of the Corporation will expire at the Meeting.

The following table sets forth a brief background regarding the Cresco Nominees. The information contained herein is based upon information furnished by the respective nominees.


Name and Province or State and Country of Residence	Director Since	Principal Occupation for Past Five Years	Voting Shares Beneficially Owned, or Controlled or Directed, Directly or Indirectly⁽⁹⁾
Charles Bachtell⁽⁸⁾ Chicago, IL, United States	November 2018	Chief Executive Officer of the Corporation; formerly Executive Vice President and General Counsel of Guaranteed Rate, a residential mortgage company.	100,000 Super Voting Shares 3,886 Subordinate Voting Shares 4,363 Proportionate Voting Shares

Dominic A. Sergi⁽²⁾^{(6) (8)}Glen Ellyn, IL, United States	November 2018	Chief Executive Officer and President of Clear Height Properties, a real estate management and investment company.	100,000 Super Voting Shares 15,555 Subordinate Voting Shares

Brian McCormack⁽⁵⁾⁽⁸⁾ Chicago, IL, United States	November 2018	Founder of InnerWorkings, Inc., a marketing execution company.	100,000 Super Voting Shares

Robert M. Sampson⁽²⁾⁽⁸⁾ Downers Grove, IL, United States	November 2018	Executive Vice President of CrossCountry Mortgage, Inc.; formerly Chief Executive Officer of bemortgage and Chief Operating Officer of Guaranteed Rate, a residential mortgage company.	100,000 Super Voting Shares 4 Proportionate Voting Shares

John R. Walter⁽⁶⁾⁽⁸⁾ Naples, FL, United States	November 2018	Chairman of Ashlin Management Company, a consulting firm.	1,177 Proportionate Voting Shares

Gerald F. Corcoran⁽¹⁾⁽⁴⁾⁽⁸⁾ Winnetka, IL, United States	November 2018	Chairman of the Board and Chief Executive Officer of O’Brien & Associates, LLC, a futures brokerage firm.	—

Thomas J. Manning⁽³⁾⁽⁶⁾⁽⁷⁾⁽⁸⁾ Evanston, IL, United States	November 2018	Executive Chairman of the Board of Directors of the Corporation; formerly Chairman and Chief Executive Officer of Dun and Bradstreet, a data and analytics company.	500 Proportionate Voting Shares

Randy D. Podolsky⁽⁴⁾⁽⁸⁾Lincolnshire, IL, United States	November 2018	Principal of Podolsky Circle CORFAC International (now, Colliers International), a real estate company.	—

Marc Lustig Vancouver, British Columbia, Canada	N/A	Non-Executive Chairman of IM Cannabis Corp. since 2019; Founder, Chairman and Chief Executive Officer of CannaRoyalty Corp. (dba Origin House) since 2016; Head of Capital Markets at Dundee Capital Markets from 2012 to 2014.	2,335,054 Subordinate Voting Shares

Name and Province or

State and Country of

Residence

Director

Since

Principal Occupation for Past Five Years

Voting Shares
Beneficially
Owned, or
Controlled or
Directed, Directly
or Indirectly⁽⁹⁾

Michele Roberts
New York City, NY, United States

N/A

Executive Director of the National Basketball Players Association since 2014. Previously, Ms. Roberts was an attorney with Skadden, Arps, Slate, Meagher & Flom

—

Notes:

(1)	Chair of the Audit Committee.

(2)	Member of the Audit Committee.

(3)	Chair of the Nominating and Governance Committee.

(4)	Member of the Nominating and Governance Committee.

(5)	Chair of the Compensation Committee.

(6)	Member of the Compensation Committee.

(7)	Chair of the Executive Committee.

(8)	Member of the Executive Committee.

(9)	Information as to personal shareholdings is given to the Corporation’s knowledge based on publicly available sources and excludes any units in Cresco Labs, LLC held by a Cresco Nominee that are redeemable for Proportionate Voting Shares.

The enclosed form(s) of proxy allows the Shareholders to direct proxyholders to vote individually for each of the Cresco Nominees as a director of the Corporation. Unless otherwise directed, it is the intention of the persons named in the enclosed form of proxy to vote proxies IN FAVOUR of the election of each of the Cresco Nominees as directors of the Corporation.

Cease Trade Orders

To the knowledge of the Corporation, none of the Cresco Nominees (or any personal holding company of a Cresco Nominee) are, as at the date of this Circular, and have not been within 10 years before the date of this Circular, a director, chief executive officer or chief financial officer of any company (including the Corporation) that, while acting in that capacity, was the subject of a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days, or after ceasing to be a director, chief executive officer or chief financial officer of the company, was the subject of a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, for a period of more than 30 consecutive days, which resulted from an event that occurred while acting in such capacity.

Bankruptcies

To the knowledge of the Corporation, none of the Cresco Nominees are, and have not within the past 10 years been, a director or executive officer of any company, including the Corporation, that, while acting in such capacity, or within a year of ceasing to act in such capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets or has, within the past 10 years, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold any of the Cresco Nominees assets.

Penalties and Sanctions

To the knowledge of the Corporation, none of the Cresco Nominees (or any personal holding company of a Cresco Nominee) have been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority nor entered into a settlement agreement with a securities regulatory authority or been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in deciding whether to vote for a proposed director.

3. Appointment of Auditors

On August 22, 2019, the Corporation appointed Marcum LLP as independent auditors of the Corporation. At the Meeting, the Shareholders will be asked to reappoint Marcum LLP as independent auditors of the Corporation to serve until the close of the next annual meeting of Shareholders and to authorize the directors to fix their remuneration.

Unless otherwise directed to the contrary, it is the intention of the persons named in the enclosed form of proxy to vote proxies IN FAVOUR of the appointment of Marcum LLP as independent auditors of the Corporation at remuneration to be fixed by the Board. In order to be effective, the ordinary resolution must be approved by not less than a majority of the votes cast thereon by Shareholders who are present at the Meeting or by proxy.

4. Adoption of Amendment to Articles

The Board proposes to amend the Corporation’s current authorized share structure and articles (the “Existing Articles”) by amending the authorized share structure and articles (the “Amended Articles”) to create a new class of special subordinate voting shares (the “Special Subordinate Voting Shares”) and to vary the special rights and restrictions attached to the Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares to reflect the creation of the Special Subordinate Voting Shares.

The Board proposes to issue Special Subordinate Voting Shares to officers of the Corporation who are not resident in the United States from time to time as part of their executive compensation, in order to increase and further align such officers’ interest in the Corporation with that of Shareholders. Further, the issuance of Special Subordinate Voting Shares to such officers will decrease the proportion of the outstanding voting securities of the Corporation that are held by “U.S. persons” for the purposes of determining whether the Corporation is a “foreign private issuer” under United States securities laws.

Amendments in the Amended Articles

Below is a summary of the proposed amendments contained in the Amended Articles, with such summary qualified in its entirety by the Existing Articles, and the Amended Articles, a copy of which is attached hereto as Schedule “B”.

(a)

The Amended Articles contemplate the creation of an unlimited number of Special Subordinate Voting Shares which are convertible under certain circumstances, initially, into 0.00001 of a Subordinate Voting Share.

(b)

The Corporation intends to issue Special Subordinate Voting Shares from time to time to officers of the Corporation who are not resident in the United States as part of their executive compensation in order to increase and further align such officers’ interests in the Corporation with those of the Shareholders. The issuance of Special Subordinate Voting Shares would also decrease the proportion of the outstanding voting securities of the Corporation that are held by “U.S. persons” for purposes of determining whether the Corporation is a “foreign private issuer” under United States securities laws.

(c)

The Special Subordinate Voting Shares shall be entitled to receive notice of and to attend at any meeting of the shareholders of Corporation, except a meeting of which only holders of another particular class or series of shares of the Corporation shall have the right to vote. At such meeting, holders of Special Subordinate Voting Shares will be entitled to one vote in respect of each Subordinate Voting Shares into which such Special Subordinate Voting Shares could ultimately then be converted, which for greater certainty, shall initially be equal to 0.00001 of a vote per Special Subordinate Voting Share.

(d)

The holders of the Special Subordinate Voting Shares shall be entitled to receive dividends as may be granted to holders of the Subordinate Voting Shares or Proportionate Voting Shares, on an as-converted basis, assuming conversion of all Special Subordinate Voting Shares into Subordinate Voting Shares at the Special Conversion Ratio. The initial “Special Conversion Ratio” for shares of Special Subordinate Voting Shares will be 0.00001 Subordinate Voting Shares, subject to certain

adjustments. No dividends will be declared or paid on the Special Subordinate Voting Shares unless the Corporation simultaneously declares or pay, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares and the Proportionate Voting Shares. In the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of the Special Subordinate Voting Shares shall be entitled to receive the remaining property and assets of the Corporation together with the holders of the Subordinate Voting Shares and Proportionate Voting Shares, on an as-converted into Subordinate Voting Shares basis. Subject to certain restrictions, each Special Subordinate Voting Share may be converted, based on the Special Conversion Ratio, to Subordinate Voting Share upon prior written consent of the Board or a committee thereof. The Special Subordinate Voting Shares will also be automatically converted into Subordinate Voting Shares in certain circumstances.

(e)

As long as any Special Subordinate Voting Shares remain outstanding, the Corporation will not, without the consent of the holders of the Special Subordinate Voting Shares by special resolution, prejudice or interfere with any right or special right attached to the Special Subordinate Voting Shares.

(f)

The Corporation also has the right to redeem all or some of the Special Subordinate Voting Shares with two days prior written notice to such holders for either (i) cash, at a price per Special Subordinate Voting Share equal to the Special Conversion Ratio multiplied by the average volume weighted average trading price of the Subordinate Voting Shares on the Canadian Securities Exchange (or such other stock exchange or quotation system the Subordinate Voting Shares are then principally listed or quoted) for the ten (10) trading days immediately prior to the date the Corporation delivers the redemption notice to the holder; or (ii) Subordinate Voting Shares at the Special Conversion Ratio. In the event that a take-over bid is made for the Super Voting Shares or the Subordinate Voting Shares, the holders of the Special Subordinate Voting Shares shall not be entitled to participate in such offer and may not tender their shares into any such offer, whether under the terms of the Special Subordinate Voting Shares or under any coattail trust or similar agreement, absent being permitted to convert such shares into Subordinate Voting Shares.

(g)

No Special Subordinate Voting Share may be transferred by the holder without prior written consent of the Board (or a committee thereof).

(h)

In certain circumstances, the holders of Special Subordinate Voting Shares may be entitled to a proportionate share of certain distributions as though they were the holders of Subordinate Voting Shares. If the Corporation effects a recapitalization or stock split, as defined in the Amended Articles, provisions may be made so that the holders of Special Subordinate Voting Shares may receive the number of Subordinate Voting Shares or other securities or property of the Corporation to which holders of Subordinate Voting Share would have been entitled to subject to certain adjustments.

(i)

No fractional Subordinate Voting Shares will be issued upon the conversion or redemption of any Special Subordinate Voting Shares and the number of Subordinate Voting Shares to be issued will be rounded up or down to the nearest whole Subordinate Voting Share. The Corporation will provide, upon written request, a certificate detailing any adjustments and readjustments to the Special Conversion Ratio for the Special Subordinate Voting Shares at the time in effect, and the number of Subordinate Voting Shares which would be received upon conversion or redemption of a Special Subordinate Voting Share. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Special Subordinate Voting Shares, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. A holder of Special Subordinate Voting Shares that beneficially owns more than 5% of the issued and outstanding Special Subordinate Voting Shares has certain dispute rights with respect to calculations under the Special Conversion Ratio.

(j)

The Special Subordinate Voting Shares may be subdivided or consolidated by resolution of the Board (or a committee thereof) without the simultaneous subdivision or consolidation of the Subordinate Voting Shares, the Proportionate Voting Shares and the Super Voting Shares in the same manner, provided that the Special Conversion Ratio is correspondingly adjusted and the voting rights of the Special Subordinate Voting Shares is correspondingly adjusted such that the aggregate number of votes held by all holders of Special Subordinate Voting Shares prior to subdivision or consolidation is equal to the aggregate number of votes held by all holders of Special Subordinate Voting Shares following the subdivision or consolidation.

(k)

The creation of the Special Subordinate Voting Shares will in no way materially change the rights and privileges attached to the Subordinate Voting Shares or the Proportionate Voting Shares. Such holders are and will remain entitled to: receive notice of and to attend and vote at all meetings of Shareholders (except meetings of holders of a specified class of shares); receive such dividends as the Board (or a committee thereof) may by resolution determine; and subject to prior rights of the holders of any class of shares having a preference upon liquidation, receive the remaining property and assets of the Corporation in the event of the liquidation, dissolution or winding-up of the Corporation, in each case, in accordance with the rights, privileges, restrictions and conditions attached to each such class of shares. Conversion restrictions notwithstanding each Special Subordinate Voting Share is the functional equivalent of 0.00001 (subject to the Special Conversion Ratio) of one Subordinate Voting Share. Any future issuance to non-US resident officers is expected to have an immaterial impact on the aggregate voting and economic power of existing Shareholders. In some instances, Special Subordinate Voting Shares are afforded the same treatment and rights as other classes of shares of the Corporation including, broadly, events of liquidation, consolidation, and the distribution of dividends. Certain parts of the Articles describing the rights of the other classes of Shares have been amended to reflect this.

The foregoing is only a summary of the Amended Articles. Readers are encouraged to refer to Schedule “B” for the full text of the Amended Articles.

The Board has determined that the creation of the Special Subordinate Voting Shares is in the best interests of the Corporation and has authorized the creation of the Special Subordinate Voting Shares to the Shareholders for their approval at the Meeting.

At the Meeting, Shareholders will be asked to consider, and if thought appropriate, to pass, with or without amendment, a special resolution as follows (the “Amendment Resolution”):

“IT IS RESOLVED as a special resolution that:

1.	The Corporation’s authorized share structure, its notice of articles and Existing Articles be altered by:

(a)

creating a class of Special Subordinate Voting Shares without par value with no maximum number;

(b)

creating and attaching to the Special Subordinate Voting Shares the special rights and restrictions contained in Part 30 of the Articles of the Corporation as set out in Schedule “B” to this Circular;

(c)

varying the special rights and restrictions attached to:

(i)

the Subordinate Voting Shares to the form set out in Part 27 of Schedule “B” to this Circular;

(ii)

the Super Voting Shares to the form set out in Part 28 of Schedule “B” to this Circular; and

(iii)

the Proportionate Voting Shares to the form set out in Part 29 of Schedule “B” to this Circular;

(d)

amending the current Parts 27, 28 and 29 of the Existing Articles in their entirety and adding Parts 27, 28, 29 and Part 30, substantially as set out in Schedule “B” to this Circular, to the Articles of the Corporation.

2.	The alterations made to the Existing Articles of the Corporation by this resolution will not take effect until the Notice of Articles of the Corporation has been altered to reflect the alterations made by this resolution.

3.	Subject to the deposit of this resolution at the Corporation’s records office, the solicitors for the Corporation are authorized and directed to electronically file the required Notice of Alteration with the Registrar of Companies.

4.	The board of directors of the Corporation is authorized in its absolute discretion, to determine whether or not to proceed with the foregoing resolution, without further approval, ratification or confirmation by the Shareholders.

Any one director or officer of the Corporation is hereby authorized and directed to do all such acts and things and to execute and deliver all such documents, instruments and assurances as in the opinion of such director or officer may be necessary or desirable to give effect to the foregoing special resolution.”

Unless otherwise directed to the contrary, it is the intention of the persons named as proxyholders in the enclosed form of proxy to vote proxies IN FAVOUR of the Amendment Resolution adopting the Amended Articles.

In order to be effective, the Amendment Resolution must be approved by the affirmative vote of at least (i) two-thirds (66 2/3%) of the votes cast by holders of Subordinate Voting Shares, (ii) two-thirds (66 2/3%) of the votes cast by holders of Proportionate Voting Shares, and (iii) two-thirds (66 2/3%) of the votes cast by holders of Super Voting Shares, present or represented by proxy at the Meeting, voting separately as classes and in each case excluding votes cast by Shareholders that are “affiliates” or “control persons” of the Corporation (within the meaning of Ontario Securities Commission Rule 56-501 – Restricted Shares (“OSC Rule 56-501”) and National Instrument 41-101 – General Prospectus Requirements (“NI 41-101”)).

OSC Rule 56-501 and Part 12 of NI 41-101 (collectively, the “Restricted Share Rules”) regulate the creation and distribution of “restricted shares” (as defined in OSC Rule 56-501) and “restricted securities” (as defined in NI 41-101) by reporting issuers in Canada. The definitions of “restricted shares” and “restricted securities” include equity shares which have voting rights exercisable in all circumstances, irrespective of the number or percentage of shares owned, that are less, on a per share basis, than the voting rights attached to any other shares of an outstanding class of shares of the issuer.

“Minority approval” means, for the purposes of the Restricted Share Rules, approval by a majority of the votes cast by holders of Voting Shares, and if required by applicable corporate law, by a majority of the votes cast by holders of a class of shares voting separately as a class, other than, in both cases, (A) “affiliates” of the issuer, or (B) “control persons” of the issuer, as those terms are defined in the Restricted Share Rules.

The Special Subordinate Voting Shares will be “restricted shares” (as defined in OSC Rule 56-501) and “restricted securities” (as defined in NI 41-101). Therefore, the Amendment Resolution must be approved by a majority of the votes cast by the Shareholders, other than the votes attached at the time to the Voting Shares held directly or indirectly by “affiliates” or “control persons” of the Corporation, so that the Corporation can utilize prospectus exemptions under Ontario securities laws or file a prospectus in connection with the distribution of Special Subordinate Voting Shares, for the purposes of future offerings of Special Subordinate Voting Shares without having to obtain the approval of the Shareholders (in accordance with the Restricted Share Rules) for each distribution of Special Subordinate Voting Shares.

To the best of the knowledge of management and the Board, there are no “affiliates” or “control persons” (within the meaning of such term in the Restricted Share Rules) and, accordingly, no Voting Shares of the Corporation are required to be excluded from the applicable vote.

5. Other Business

Management is not aware of any other matters to come before the Meeting, other than those set out in the Notice of Meeting. If other matters come before the Meeting, or if there are amendments or variations to the items of business, the Management Designees will have the discretion to vote as he or she sees fit.

EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Securities legislation requires the disclosure of compensation received by each “Named Executive Officer” of the Corporation for the two most recently completed financial years.

“Named Executive Officer” refers to each individual who, during any part of the most recently completed financial year, served as chief executive officer, each individual who, during any part of the most recently completed financial year, served as chief financial officer, and the most highly compensated executive officer, other than the chief executive officer and chief financial officer, at the end of the most recently completed financial year whose total compensation was more than $150,000 for that financial year. The Corporation currently has three Named Executive Officers.

Director and Named Executive Officer Compensation

The following table sets forth information concerning all compensation paid, payable, awarded, granted, given or otherwise provided, directly or indirectly, by the Corporation, or a subsidiary of the Corporation, to each Named Executive Officer and director, other than stock options and other compensation securities, for each of the two most recently completed financial years.


Table of compensation excluding compensation securities ⁽¹⁾
Name and position	Year		Salary, consulting fee, retainer or commission ($US)		Bonus ($ US)		Committee or meeting fees⁽⁶⁾($US)		Value of perquisites ($US)			Value of all other compensation ($US)		Total compensation ($ US)
Charles Bachtell		2019	$	350,000	$	262,500	$	50,000	$	1,200	⁽⁵⁾		—	$	663,700
Director and Chief Executive Officer⁽¹⁾		2018	$	350,000	$	562,175		—	$	11,483	⁽³⁾		—	$	923,658
Ken Amann		2019	$	250,000	$	125,000		—	$	3,300			—	$	378,300
Chief Financial Officer		2018	$	250,000	$	257,278		—	$	2,100	⁽⁴⁾		—	$	509,378
Joe Caltabiano⁽²⁾		2019	$	350,000	$	262,500	$	50,000	$	800	⁽⁵⁾		—	$	663,300
Director and Former President⁽¹⁾		2018	$	260,000	$	284,375		—		—			—	$	544,375

Notes:

⁽¹⁾	Board of Directors did not receive any compensation outside of equity securities in 2018.

⁽²⁾	Mr. Caltabiano resigned from his position as President of the Corporation on March 3, 2020.

⁽³⁾	Relates to individual’s cost of medical benefit premiums that were paid by the Corporation.

⁽⁴⁾	Relates to annual auto allowance provided by the Corporation.

⁽⁵⁾	Relates to annual cell phone and auto allowances.

⁽⁶⁾	All directors were paid US$50,000, payable quarterly in compensation for board membership in 2019.

Stock Options and Other Compensation Securities

The following table sets forth certain information in respect of all compensation securities granted or issued to each Named Executive Officer and director by the Corporation or one of its subsidiaries in the financial year of the Corporation ended December 31, 2019 for services provided or to be provided, directly or indirectly, to the Corporation or any of its subsidiaries.

Compensation securities

Closing

price of

Closing

Number of

security or

price of

compensation

Issue,

underlying

security or

securities, number

conversion

security on

underlying

Type of

of underlying

Date of

or exercise

date of

security at

compensation

securities, and

issue or

price

grant

year end

Expiry

Name and position

security⁽¹⁾

percentage of class

grant

($US)

($CDN)

date

Thomas J. Manning

Director

Options⁽²⁾

37,469 Options exercisable for 37,469 Subordinate Voting Shares (<0.1%)

January 17, 2019

6.67

8.95

8.93

January 17, 2029

Randy D. Podolsky

Director

Options⁽²⁾

37,469 Options exercisable for 37,469 Subordinate Voting Shares (<0.1%)

January 17,

2019

6.67

8.95

8.93

January 17, 2029

John R. Walter

Director

Options⁽²⁾

37,469 Options exercisable for 37,469 Subordinate Voting Shares (<0.1%)

January 17,

2019

6.67

8.95

8.93

January 17, 2029

Gerald F. Corcoran

Director

Options⁽²⁾

37,469 Options exercisable for 37,469 Subordinate Voting Shares (<0.1%)

January 17,

2019

6.67

8.95

8.93

January 17, 2029

Notes:

(1)	Represents all options to acquire Subordinate Voting Shares issued pursuant to the Incentive Plan (as defined herein) to the individual in the financial year of the Corporation ended December 31, 2019.

(2)	Awards were fully vested as of the grant date.

Exercise of Compensation Securities by Directors and Named Executive Officers

Difference

Closing

between

price per

exercise price

Total

Number of

Exercise

security on

and closing

value on

Type of

underlying

price per

date of

price on date

exercice

Name and

compensation

securities

security

Date of

exercise

of exercise

date

position

security

exercised

($US)

exercice

($US)

($US)⁽¹⁾

Ken Amann

Option

62,500

2.25

01/31/19

7.09

4.84

302,500

Chief Financial Officer

Option

25,000

1.14

03/12/19

8.35

7.21

180,250

Incentive Plans

2018 Long-term Incentive Plan

On November 29, 2018, the Board adopted a long-term incentive plan (the “Incentive Plan”) which was approved by the Shareholders at the special meeting of Shareholders on November 14, 2018. The Incentive Plan provides that the aggregate number of Subordinate Voting Shares reserved for issuance pursuant to awards granted under the Incentive Plan will be 10% of the number of Subordinate Voting Shares issued and outstanding, on a rolling basis, as may be adjusted from time to time, on a fully diluted and as-converted basis in accordance with the policies of the Canadian Securities Exchange. Awards that may be granted under the Incentive Plan include stock options, stock appreciation rights, stock awards, restricted stock units, performance shares, performance units and other stock-based awards (“Awards”).

The Incentive Plan was established to (i) promote the long-term financial interests and growth of Cresco by attracting and retaining management and other personnel and key service providers with the training, experience and ability to enable them to make a substantial contribution to the success of Cresco’s business, (ii) motivate management personnel by means of growth-related incentives to achieve long-range goals, and (iii) further the alignment of interests of participants in the Incentive Plan with those of the shareholders of Cresco through opportunities for increased stock or stock-based ownership in Cresco.

The Incentive Plan is administered by the Compensation Committee and provides that Awards may be issued to (i) officers and employees of Cresco or any of its subsidiaries, (ii) members of the Board, and (iii) other individuals, including non-employee directors and consultants who provide bona fide services to or for Cresco or any of its subsidiaries, provided that such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for Cresco’s securities. The Compensation Committee establishes the terms of all Awards consistent with the terms of the Incentive Plan, including vesting and maximum terms.

Oversight and Description of Director and Named Executive Officer Compensation

Cresco’s Compensation Committee is responsible for determining the compensation for the directors and the executive officers.

The Compensation Committee’s primary responsibilities include, among other things, assisting the Board with the selection, retention, adequacy and form of the compensation of senior management and the Board. The Compensation Committee has been tasked with establishing an executive compensation program, which includes equity compensation under the Incentive Plan, and the other elements of compensation described under the heading “Director and Named Executive Officer Compensation.”

Compensation Objectives and Principles

The primary goal of the Corporation’s executive compensation program is to attract, motivate and retain the key executives necessary for the Corporation’s long-term success, to encourage executives to further the development of the Corporation, and to align the interests of executives with the Corporation’s shareholders. The key elements of the executive compensation program are: (i) base salary; and (ii) Awards granted under the Incentive Plan.

Compensation Process

The Corporation relies on its Compensation Committee, through discussion without any formal objectives, criteria or analysis, to determine the compensation of the Corporation’s executive officers. The Compensation Committee has not established formal criteria or goals that are tied to total compensation or any significant element of total compensation. The Board is ultimately responsible for all forms of compensation for the Corporation’s executive officers. The Board is responsible for reviewing the recommendations respecting compensation of other officers of the Corporation from time to time, to ensure such arrangements reflect the responsibilities and risks associated with each position. When determining compensation, the Compensation Committee considers a range of factors, including: (i) company performance and individual contributions against key performance indicators, and (ii) peer group benchmarking. The Compensation Committee annually reviews the applicability of the compensation peer group and adjusts the peer group, as necessary, to ensure it remains relevant and comparable with the ever-evolving size and scope of the Corporation’s operations.

CORPORATE GOVERNANCE DISCLOSURE

General

The Board views effective corporate governance as an essential element for the effective and efficient operation of the Corporation. The Corporation believes that effective corporate governance improves corporate performance and benefits all its Shareholders. The following statement of corporate governance practices sets out the Board’s review of the Corporation’s governance practices relative to National Instrument 58-101—Disclosure of Corporate Governance Practices (“NI 58-101”) and National Policy 58-201—Corporate Governance Guidelines.

Board of Directors

The Board, which is responsible for supervising the management of the business and affairs of the Corporation, is, as of the date of this Circular, comprised of nine directors, four of which are independent as such term is defined in NI 58-101 and in National Instrument 52-110 – Audit Committees (“NI 52-110”). The independent directors are Brian McCormack, John R. Walter, Gerald F. Corcoran and Randy D. Podolsky. Charles Bachtell, Joe Caltabiano and Robert M. Sampson, the Chief Executive Officer, former President and former Chief Operating Officer, respectively, are not independent by virtue of them being members of the Corporation’s management within the past three years. Dominic Sergi may not be considered independent by virtue of his affiliation to Clear Height Properties, which completed two sale and leaseback transactions with the Corporation in 2019 and 2020. These transactions were not material to the Corporation individually or in aggregate, and they were completed on arm’s length terms and upon the advice of independent real property valuators. Of the two new proposed Cresco Nominees, Marc Lustig would not be considered independent by virtue of his role as executive officer of Cresco’s subsidiary Origin House, and Michele Roberts would be considered independent. Subsequent to the financial year ended December 31, 2019, Thomas J. Manning was elevated to Executive Chairman of the Corporation and as such, would no longer be considered independent.

The independent directors meet for in camera sessions without non-independent directors and members of management at the end of each regular Board meeting (unless such requirement is waived by the independent directors).

Directorships

Certain of the Cresco Nominees are currently directors or officers of other reporting issuers (or equivalent) in a jurisdiction or a foreign jurisdiction as follows:


Name	Name of Reporting Issuer	Name of Exchange or Market	Position	From
Thomas J. Manning	CommScope Holding Company, Inc.	NASDAQ	Director	2014
	Clear Media Limited	HKSE	Director	2012

Marc Lustig	National Access Cannabis Corp.	TSXV	Director	2014
	Trichome Financial Corp. (formerly 22 Capital Corp.)	TSXV	Chairman & Director	2017
	IM Cannabis Corp. (formerly Navasota Resources Inc.)	CSE	Non- Executive Chairman & Director	2019

Orientation and Continuing Education of Board Members

The Board has not implemented a formal program for the orientation of new directors. It is expected that existing directors will orient and educate any new members on an informal basis. The Board has also not implemented a formal continuing education program for the directors; however, the Board and the Corporation’s management encourage directors to attend or participate in courses and seminars related to financially literacy, corporate governance and related matters. Each director has the responsibility for ensuring that he or she maintains the skill and knowledge necessary to meet his or her obligations as a director.

Ethical Business Conduct

The Board expects that the Corporation’s employees, officers, directors and representatives will act with honesty and integrity and will avoid any relationship or activity that might create, or appear to create, a conflict between their personal interest and the interests of the Corporation.

Nomination of Directors

The Board is responsible for nominating individuals for election to the Board by the Corporation’s shareholders at each annual general meeting of shareholders. The Board is also responsible for filling vacancies on the Board that may occur between annual and general meetings of shareholders. The Nominating and Governance Committee, in accordance with its charter, is responsible for identifying, reviewing, evaluating and recommending to the Board candidates to serve as directors.

Compensation of Directors and Officers

The Compensation Committee, in accordance with its charter, is responsible for reviewing on an annual basis the compensation and benefits paid to the directors and executive officers of the Corporation in light of market conditions and practice, and risks and responsibilities.

Other Board Committees

The Board has four standing committees: the Audit Committee, the Nominating and Governance Committee, the Compensation Committee and the Executive Committee.

Assessment of Directors, the Board and Board Committees

The Board monitors the strategic direction and processes of the Board and its committees to ensure that the Board, its committees, and individual directors are performing effectively. Additionally, each director is subject to an annual evaluation of his or her individual performance, and the collective performance of the Board and of each committee of the Board are subject to annual review.

AUDIT COMMITTEE

Pursuant to section 224(1) of the BCBCA and NI 52-110, the Corporation is required to have an Audit Committee comprised of not less than three directors, a majority of whom are not executive officers, control persons or employees of the Corporation or an affiliate of the Corporation. NI 52-110 requires the Corporation, as a venture issuer, to disclose annually in its management information circular certain information concerning the constitution of its Audit Committee and its relationship with its independent auditor, as set forth below.

Audit Committee Charter

The Audit Committee Charter is set forth in Schedule “A” attached hereto. The Audit Committee Charter provides that the Audit Committee must consist of at least three directors, a majority of whom must be “independent” and all of whom must be “financially literate” (as defined under NI 52-110).

Composition of the Audit Committee

Following the Meeting, the Audit Committee¹ is expected to be comprised of:


Gerald F. Corcoran	Independent	Financially literate

Robert M. Sampson	Not Independent	Financially literate

Randy D. Podolsky	Independent	Financially literate

¹ Dominic A. Sergi is an outgoing member of the Audit Committee who is expected to be replaced by Randy D. Podolsky on June 29, 2020.

Relevant Education and Experience of Audit Committee Members

Gerald F. Corcoran

Gerry Corcoran has served as Chief Executive Officer of R.J. O’Brien & Associates, LLC (“RJO”) since 2000 and Chairman of the Board since 2007. Chicago-based RJO is the nation’s oldest and largest independent futures brokerage firm and the last surviving founding member of the Chicago Mercantile Exchange (now CME Group). In July 2014, Corcoran was elected Chairman of the FIA (formerly Futures Industry Association), and he served in that position until March 2016. At that time, following the January merger of the organization with its European and Asian counterparts, he was elected Treasurer of the Board of Directors of the newly unified FIA, the leading trade organization for the futures, options and cleared swaps markets worldwide. Mr. Corcoran served in that role until March 2017. Mr. Corcoran serves on the FIA’s Executive Committee as well as its Americas Advisory Board. He has been a member of FIA’s Board of Directors since March 2008 and served as Vice Chairman from March 2013 until July 2014. Mr. Corcoran also serves on the Board of Directors and Executive Committee of the National Futures Association, the self-regulatory organization for the futures industry. Mr. Corcoran previously served on the Board of the Institute for Financial Markets.

Robert M. Sampson

Prior to forming Cresco, Robert Sampson had more than 20 years of operating experience in large business, including 12 years in the heavily regulated mortgage industry, having served as Chief Operating Officer at Guaranteed Rate, the nation’s seventh largest retail mortgage bank. As the former COO of Cresco Labs, Mr. Sampson oversaw the construction of two 40,000 sq/ft cement precast structures and one 30,000 sq/ft hybrid greenhouse structure and was responsible for all facility operations and systems including the design and implementation of fertigation and irrigation systems, inventory control systems, compliance process procedures, audits, security, and IT. Mr. Sampson holds a Bachelor of Science degree in Business Administration and Finance and is currently Executive Vice President of CrossCountry Mortgage, Inc.

Randy D. Podolsky

Randy D. Podolsky has served the entrepreneurial, corporate, institutional and Not-For-Profit clients of Podolsky Circle CORFAC International (now, Colliers International) for over 40 years, and served as Managing Principal of the firm from 1986 to 2015. As a Principal of the firm, Randy provides personalized transaction and contract negotiation and advisory services to financial institutions, users, owners and Not-For-Profits for all facets of commercial real estate. Strategizing and executing complex real estate and debt transaction solutions is his passion. Mr. Podolsky serves as a board member and chair of the Real Estate Committee of the Waukegan Port District, which owns and operates Waukegan Harbor & Marina, the Port of Waukegan and Waukegan National Airport. Since 2012, Mr. Podolsky has orchestrated the District’s bond refinance, increased the value of its real estate and derived income, spearheaded adoption of the Harbor Master Plan, and, most notably, negotiated the agreements for the District’s first marina use development by a private party in over 4 decades.

Audit Committee Oversight

During the year ended December 31, 2019, no recommendations of the Audit Committee to nominate or compensate an external auditor were adopted by the Board.

Reliance on Certain Exemptions

As an issuer listed on the Canadian Securities Exchange, the Corporation currently relies on the exemption set forth in Section 6.1 of NI 52- 110 pertaining to reporting obligations under NI 52-110.

External Auditor Service Fees (By Category)

The aggregate fees billed by the Corporation’s external auditors in the years ending December 31, 2019 and 2018 are set out below:

Financial Year Ending

Audit Fees

Audit-Related Fees

Tax Fees

All Other Fees

December 31, 2019

US$

2,147,624

US$

153,741

US$

35,706

US$

26,837

December 31, 2018

US$

270,700

Nil

US$

65,400

Nil

EXECUTIVE COMMITTEE

The Executive Committee consists of Charles Bachtell, Dominic Sergi, Brian McCormack, Robert M. Sampson, John R. Walter, Gerald Corcoran, Thomas Manning and Randy D. Podolsky, with Thomas Manning serving as chairman. The Executive Committee has been authorized to manage, or supervise the management, of the business and affairs of the Corporation other than matters that may not be delegated under section 19.1 of the Corporation’s articles and applicable corporate law.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth, as of December 31, 2019, information with respect to compensation plans under which equity securities of the Corporation are authorized for issuance.


Plan Category	Number of Subordinate Voting Shares to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of Subordinate Voting Shares remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		29,228,167	$	4.27		5,075,745
Equity compensation plans not approved by security holders		—		—		—
Total		29,228,167	$	4.27		5,075,745

Note:

The above disclosure is based on Subordinate Voting Shares issuable under the Incentive Plan equal to 10% of the number of issued and outstanding Subordinate Voting Shares on an “as converted” basis as at December 31, 2019, being 278,501,278 Subordinate Voting Shares, less 29,228,167 Subordinate Voting Shares issuable upon the exercise of Awards under the Incentive Plan as at December 31, 2019.

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

No current or former director, executive officer or employee of the Corporation, or any of the Cresco Nominees, or any of their respective associates or affiliates, is or has been at any time since the beginning of the last completed fiscal year, indebted to the Corporation or any of its subsidiaries nor has any such person been indebted to any other entity where such indebtedness is the subject of a guarantee, support agreement, letter of credit or similar arrangement or understanding, provided by the Corporation or any of its subsidiaries.

INTERESTS OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

Other than as set forth herein, the Corporation is not aware of any material interest, direct or indirect, of any “informed person” of the Corporation, any proposed director of the Corporation or any associate or affiliate of any of the foregoing in any transaction since the commencement of the Corporation’s most recently completed financial year or in any proposed transaction which has materially affected or would materially affect the Corporation or any of its subsidiaries.

For the purposes of the above, “informed person” means: (a) a director or executive officer of the Corporation; (b) a director or executive officer of a company that is itself an informed person or subsidiary of the Corporation; (c) any person or company who beneficially owns, directly or indirectly, voting securities of the Corporation or who exercises control or direction over voting securities of the Corporation or a combination of both carrying more than 10% of the voting rights attached to all outstanding voting securities of the Corporation other than voting securities held by the person or company as underwriter in the course of a distribution; and (d) the Corporation after having purchased, redeemed or otherwise acquired any of its securities, for so long as it holds any of its securities.

There are potential conflicts of interest to which all of the directors and officers of the Corporation may be subject in connection with the operations of the Corporation. All of the directors and officers are engaged in and will continue to be engaged in corporations or businesses, including publicly traded corporations, which may be in competition with the search by the Corporation for businesses or assets. Accordingly, situations may arise where all of the directors and officers will be in direct competition with the Corporation. Conflicts, if any, will be subject to the procedures and remedies as provided under the BCBCA.

MANAGEMENT CONTRACTS

The Corporation has no management contracts or other arrangement in place where management functions are performed by a person or company other than the directors or executive officers of the Corporation.

ADDITIONAL INFORMATION

Additional information relating to the Corporation is available under the Corporation’s profile on the SEDAR website at www.sedar.com, including financial information which is provided in Cresco’s annual comparative Financial Statements for the years ended December 31, 2019 and 2018 and related management’s discussion and analysis. Copies of the Corporation’s Financial Statements and related management’s discussion and analysis are available on SEDAR at www.sedar.com. Shareholders may contact the Corporation at its registered office address at Suite 2500 Park Place, 666 Burrard Street, Vancouver, British Columbia, V6C 2X8 to request copies of the Corporation’s financial statements and management’s discussion and analysis.

SCHEDULE “A”

AUDIT COMMITTEE CHARTER

CRESCO LABS INC.

CHARTER OF THE AUDIT COMMITTEE

This charter (the “Charter”) sets forth the purpose, composition, responsibilities, duties, powers and authority of the Audit Committee (the “Committee”) of the directors (the “Board”) of Cresco Labs Inc. (“Cresco”).

1.0

PURPOSE

The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities with respect to:

(a)

financial reporting and disclosure requirements;

(b)

ensuring that an effective risk management and financial control framework has been implemented by the management of Cresco; and

(c)

external and internal audit processes.

2.0

COMPOSITION AND MEMBERSHIP

(a)

The members (collectively “Members” and individually a “Member”) of the Committee shall be appointed by the Board to serve one-year terms. The Board may remove a Member at any time and may fill any vacancy occurring on the Committee. A Member may resign at any time and a Member will cease to be a Member upon ceasing to be a director of Cresco.

(b)

The Committee will consist of at least three Members. Every Member must be a director of Cresco who is independent and financially literate to the extent required by (and subject to the exemptions and other provisions set out in) applicable laws, rules, regulations and stock exchange requirements (collectively “Applicable Laws”), it being understood that for such time as Cresco remains a “venture issuer” under Applicable Laws, a majority (rather than all) of the Members of the Committee is required to be “independent”. In this Charter, the terms “independent” and “financially literate” have the meanings ascribed to such terms in Applicable Laws and include the meanings given to similar terms in Applicable Laws to the extent such similar terms are used in this Charter and are applicable under Applicable Laws.

(c)

The chairman of the Committee (the “Chair”) will be appointed by the Board and confirmed by the Committee or appointed by the Committee from time to time and must have such accounting or related financial management expertise as the Board or Committee may determine in their business judgment is necessary. The Corporate Secretary of Cresco (the “Secretary”) will be the secretary of all meetings and will maintain minutes of all meetings, deliberations and proceedings of the Committee. In the absence of the Secretary at any meeting, the Committee will appoint another person who may, but need not, be a Member to be the secretary of that meeting.

3.0

MEETINGS

(a)

Meetings of the Committee will be held at such times and places as the Chair may determine, but in any event not less than four (4) times per year. Any Member or the auditor of Cresco may call a meeting of the Committee at any time upon not less than forty-eight (48) hours advance notice being given to each Member orally, by telephone, by facsimile or by email, unless all Members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings either in person or by conference call.

(b)

At the request of the external auditors of Cresco, the Chief Executive Officer or the Chief Financial Officer of Cresco or any Member will convene a meeting of the Committee. Any such request will set out in reasonable detail the business proposed to be conducted at the meeting so requested.

(c)

The Chair, if present, will act as the Chair of meetings of the Committee. If the Chair is not present at a meeting of the Committee, then the Members present may select one of their number to act as chairman of the meeting.

(d)

A majority of Members will constitute a quorum for a meeting of the Committee. Each Member will have one vote and decisions of the Committee will be made by an affirmative vote of the majority of Members present at the meeting at which the vote is taken. The Chair may cast a deciding vote in the case of a deadlock of votes. Actions of the Committee may also be taken by written resolution signed by all Members.

(e)

The Committee may invite from time to time such persons as the Committee considers appropriate to attend its meetings and to take part in the discussion and consideration of the affairs of the Committee, except to the extent the exclusion of certain persons is required pursuant to this Charter or by Applicable Laws. At each meeting, the Committee will meet in executive session (i) with only Members present, (ii) with only Members and Cresco’s external auditors present, and (iii) with only Members and management present.

(f)

In advance of every regular meeting of the Committee, the Chair, with the assistance of the Secretary, will prepare and distribute to the Members and others as deemed appropriate by the Chair, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require officers and employees of Cresco to produce such information and reports as the Committee may deem appropriate in order to fulfill its duties.

4.0

DUTIES AND RESPONSIBILITIES

The duties and responsibilities of the Committee as they relate to the following matters, to the extent considered appropriate or desirable or required by Applicable Laws, are to:

4.1

Financial Reporting and Disclosure

(a)

oversee, review and discuss, as the Committee deems appropriate, with management and the external auditors, Cresco’s accounting practices and policies;

(b)

review the audited annual financial statements of Cresco, including the auditors’ report thereon, the management’s discussion and analysis of Cresco prepared in connection with the annual financial statements, financial reports of Cresco, guidance with respect to earnings per share, and any initial public release of financial information of Cresco through press release or otherwise, and report on the results of such review to the Board prior to approval and release to Cresco’s shareholders;

(c)

review the quarterly financial statements of Cresco including the management’s discussion and analysis prepared in connection with the quarterly financial statements, and report on the results of such review to the Board prior to approval and release to Cresco’s shareholders;

(d)

review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms, annual reports to shareholders, management proxy circulars, material change disclosures of a financial nature and similar disclosure documents;

(e)

review with management of Cresco and with the external auditors of Cresco significant accounting principles and disclosure requirements and alternative treatments under International Financial Reporting Standards (“IFRS”) all with a view to gaining reasonable assurance that financial statements are accurate, complete and present fairly Cresco’s financial position and the results of its operations in accordance with IFRS;

(f)

annually review Cresco’s Corporate Disclosure Policy and recommend any proposed changes to the Board for consideration; and

(g)

review the minutes from each meeting of the disclosure committee of Cresco established pursuant to Cresco’s Corporate Disclosure Policy, since the last meeting of the Committee.

4.2

Internal Controls and Audit

(a)

review and assess the adequacy and effectiveness of Cresco’s system of internal control and management information systems through discussions with management and the external auditor of Cresco to ensure that Cresco maintains: (i) the necessary books, records and accounts in sufficient detail to accurately and fairly reflect Cresco’s transactions; (ii) effective internal control systems; and (iii) adequate processes for assessing the risk of material misstatement of the financial statements of Cresco and for detecting significant deficiencies or material weaknesses in controls or fraud. From time to time the Committee will assess whether a formal internal audit department is necessary or desirable having regard to the size and stage of development of Cresco at any particular time;

(b)

satisfy itself that management has established adequate procedures for the review of Cresco’s disclosure of financial information extracted or derived directly from Cresco’s financial statements;

(c)

review and assess the adequacy of Cresco’s systems and procedures to ensure compliance with regulatory requirements and recommendations and the security of Cresco’s data and information systems;

(d)

review and assess the major financial risk exposures of Cresco and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities; and

(e)

review and assess, and in the Committee’s discretion make recommendations to the Board regarding, the adequacy of Cresco’s risk management policies and procedures with regard to identification of Cresco’s principal risks and implementation of appropriate systems to manage such risks including an assessment of the adequacy of insurance coverage maintained by Cresco.

4.3

External Audit

(a)

recommend to the Board a firm of external auditors to be engaged by Cresco;

(b)

ensure the external auditors report directly to the Committee on a regular basis;

(c)

review the independence of the external auditors, including a written report from the external auditors respecting their independence and consideration of applicable auditor independence standards;

(d)

review and approve the compensation of the external auditors, and the scope and timing of the audit and other related services rendered by the external auditors;

(e)

review the audit plan of the external auditors prior to the commencement of the audit;

(f)

establish and maintain a direct line of communication with Cresco’s external and, if applicable, internal auditors;

(g)

review the performance of the external auditors who are accountable to the Committee and the Board as representatives of the shareholders, including the lead partner of the independent auditors team;

(h)

oversee the work of the external auditors appointed by the shareholders of Cresco with respect to preparing and issuing an audit report or performing other audit, review or attest services for Cresco, including the resolution of issues between management of Cresco and the external auditors regarding financial disclosure;

(i)

review the results of the external audit and the report thereon including, without limitation, a discussion with the external auditors as to the quality of accounting principles used and any alternative treatments of financial information that have been discussed with management of Cresco and the ramifications of their use, as well as any other material changes. Review a report describing all material written communication between management and the auditors such as management letters and schedule of unadjusted differences;

(j)

discuss with the external auditors their perception of Cresco’s financial and accounting personnel, records and systems, the cooperation which the external auditors received during their course of their review and availability of records, data and other requested information and any recommendations with respect thereto;

(k)

review the reasons for any proposed change in the external auditors which is not initiated by the Committee or Board and any other significant issues related to the change, including the response of the incumbent auditors, and enquire as to the qualifications of the proposed auditors before making its recommendations to the Board; and

(l)

review annually a report from the external auditors in respect of their internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review of the external auditors, or by any inquiry or investigation by governmental or professional authorities respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues.

4.4

Associated Responsibilities

(a)

monitor and periodically review Cresco’s Whistleblower Policy and associated procedures for:

(i)

the receipt, retention and treatment of complaints received by Cresco regarding accounting, internal accounting controls or auditing matters;

(ii)

the confidential, anonymous submission by directors, officers and employees of Cresco of concerns regarding questionable accounting or auditing matters; and

(iii)

any violations of any Applicable Laws that relate to corporate reporting and disclosure, or violations of Cresco’s Code of Conduct and Ethics;

(b)

review and approve the hiring policies of Cresco regarding employees and partners, and former employees and partners, of the present and former external auditors of Cresco; and

(c)

provide oversight of related party transactions entered into or proposed to be entered into by Cresco.

4.5

Non-Audit Services

Pre-approve all non-audit services to be provided to Cresco or any subsidiary entities by its external auditors or by the external auditors of such subsidiary entities. The Committee may delegate to one or more of its members the authority to pre-approve non-audit services but pre- approval by such Member or Members so delegated shall be presented to the Committee at its first scheduled meeting following such pre-approval.

4.6

Oversight Function

While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to determine that Cresco’s financial statements are complete and accurate or are in accordance with IFRS and applicable rules and regulations. These are the responsibilities of the management of Cresco. The external auditors are responsible for planning and carrying out an audit of the annual consolidated financial statements in accordance with generally accepted auditing standards to provide reasonable assurance that such financial statements are in accordance with generally accepted accounting standards. The Committee, the Chair and any Members identified as having accounting or related financial expertise are directors of Cresco, appointed to the Committee to provide broad oversight of the financial, risk and control related activities of Cresco, and are specifically not accountable or responsible

for the day to day operation or performance of such activities. Although the designation of a Member as having accounting or related financial expertise for disclosure purposes is based on that individual’s education and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such designation does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Committee and Board in the absence of such designation. Rather, the role of a Member who is identified as having accounting or related financial expertise, like the role of all Members, is to oversee the process, not to certify or guarantee the internal or external audit of Cresco’s financial information or public disclosure.

5.0

REPORTING

The Committee shall provide the Board with a summary of all actions taken at each Committee meeting or by written resolution. The Committee will annually review and approve the Committee’s report for inclusion in the management proxy circular. The Secretary will circulate the minutes of each meeting of the Committee and each written resolution passed by the Committee to the Board. The Committee shall produce and provide the Board with all reports or other information required to be prepared under Applicable Laws.

6.0

ACCESS TO INFORMATION AND AUTHORITY

The Committee will be granted unrestricted access to all information regarding Cresco and all directors, officers and employees will be directed to cooperate as requested by Members. The Committee has the authority to retain, at Cresco’s expense, outside legal, financial and other advisors, consultants and experts, to assist the Committee in fulfilling its duties and responsibilities. The Committee also has the authority to communicate directly with external and, if applicable, internal auditors of Cresco.

7.0

REVIEW OF CHARTER

The Committee will annually review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.

8.0

CHAIR

The Chair of the Committee shall:

(a)

provide leadership to the Committee with respect to its functions as described in this mandate and as otherwise may be appropriate, including overseeing the operation of the Committee;

(b)

chair meetings of the Committee, unless not present, including in camera sessions, and report to the Board following each meeting of the Committee on the activities and any recommendations of the Committee;

(c)

ensure that the Committee meets at least once per quarter and otherwise as considered appropriate;

(d)

in consultation with the Chair of the Board and the Committee members, establish dates for holding meetings of the Committee;

(e)

set the agenda for each meeting of the Committee, with input from other Committee members, the Chair of the Board, and any other appropriate persons;

(f)

ensure that Committee materials are available to any director upon request as the Chair or the Committee consider appropriate;

(g)

act as liaison and maintain communication with the Chair of the Board and the Board to optimize and co-ordinate input from directors, and to optimize the effectiveness of the Committee. This includes reporting to the Board on all decisions of the Committee at the first meeting of the Board after each Committee meeting and at such other times and in such manner as the Committee considers advisable; and

(h)

report annually to the Board on the role of the Committee and the effectiveness of the Committee in contributing to the effectiveness of the Board.

Approved by the Audit Committee—June 2020

SCHEDULE “B”

AMENDED ARTICLES

PROPOSED AMENDMENT TO THE ARTICLES AND THE ADDITION OF SPECIAL RIGHTS AND RESTRICTIONS OF SPECIAL SUBORDINATE VOTING SHARES

27.

SUBORDINATE VOTING SHARES

27.1

Special Rights and Restrictions

An unlimited number of Subordinate Voting Shares, without nominal or par value, having attached thereto the special rights and restrictions as set forth below:

(1)

Voting Rights. Holders of Subordinate Voting Shares shall be entitled to notice of and to attend at 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 Subordinate Voting Shares shall be entitled to one vote in respect of each Subordinate Voting Share held.

(2)

Alteration to Rights of Subordinate Voting Shares. As long as any Subordinate Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Subordinate Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Subordinate Voting Shares.

(3)

Dividends. Holders of Subordinate Voting Shares shall be entitled to receive as and when declared by the directors, dividends in cash or property of the Company.

(4)

(5)

Rights to Subscribe; Pre-Emptive Rights. The holders of Subordinate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company now or in the future.

(6)

Subdivision or Consolidation. No subdivision or consolidation of the Subordinate Voting Shares shall occur unless, simultaneously, the Subordinate Voting Shares, the Special Subordinate Voting Shares, the Proportionate Voting Shares and the Super Voting Shares are subdivided or consolidated in the same manner or such other adjustment is made so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

(7)

Conversion: In the event that an offer is made to purchase Proportionate Voting Shares and the offer is one which is required, pursuant to applicable securities legislation or the rules of a stock exchange on which the Proportionate Voting Shares are then listed, to be made to all or substantially all the holders of Proportionate Voting Shares in a given province or territory of Canada to which these requirements apply, each Subordinate Voting Share shall become convertible at the option of the holder into Proportionate Voting Shares at the inverse of the Conversion Ratio then in effect at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Proportionate Voting Shares pursuant to the offer, and for no other reason. In such event, the Company’s transfer agent shall deposit the resulting Proportionate Voting Shares on behalf of the holder. Should the Proportionate Voting Shares issued upon conversion and tendered in response to the offer be withdrawn by shareholders or not taken up by the offeror, or should the offer be abandoned or withdrawn, the Proportionate Voting Shares resulting from the conversion shall be automatically reconverted, without further intervention on the part of the Company or on the part of the holder, into Subordinate Voting Shares at the Conversion Ratio then in effect.

(8)

Conversion of Subordinate Voting Shares Upon an Offer. In the event that an offer is made to purchase Proportionate Voting Shares, and the offer is one which is required, pursuant to applicable securities legislation or the rules of a stock exchange, if any, on which the Proportionate Voting Shares are then listed, to be made to all or substantially all the holders of Proportionate Voting Shares in a province or territory of Canada to which the requirement applies, each Subordinate Voting Share shall become convertible at the option of the holder into Proportionate Voting Shares at the inverse of the Conversion Ratio (as defined in Article 29) then in effect, at any time while the offer is in effect until one day after the time prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to the offer. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Proportionate Voting Shares under the offer, and for no other reason. In such event, the transfer agent for the Subordinated Voting Shares shall deposit under the offer the resulting Proportionate Voting Shares, on behalf of the holder. To exercise such conversion right, the holder or his or its attorney duly authorized in writing shall

(a)

give written notice to the transfer agent of the exercise of such right, and of the number of Subordinate Voting Shares in respect of which the right is being exercised;

(b)

deliver to the transfer agent the share certificate or certificates representing the Subordinate Voting Shares in respect of which the right is being exercised, if applicable; and

(c)

pay any applicable stamp tax or similar duty on or in respect of such conversion.

No share certificates representing the Proportionate Voting Shares, resulting from the conversion of the Subordinate Voting Shares will be delivered to the holders on whose behalf such deposit is being made. If Proportionate Voting Shares, resulting from the conversion and deposited pursuant to the offer, are withdrawn by the holder or are not taken up by the offeror, or the offer is abandoned, withdrawn or terminated by the offeror or the offer otherwise expires without such Proportionate Voting Shares being taken up and paid for, the Proportionate Voting Shares resulting from the conversion will be re-converted

into Subordinate Voting Shares at the then Conversion Ratio and a share certificate representing the Subordinate Voting Shares will be sent to the holder by the transfer agent. In the event that the offeror takes up and pays for the Proportionate Voting Shares resulting from conversion, the transfer agent shall deliver to the holders thereof the consideration paid for such shares by the offeror.

27.2

Take-Over Bid

In the event that a take-over bid is made for the Super Voting Shares, the holders of Subordinate Voting Shares will not be entitled to participate in such offer and may not tender their shares into any such offer, whether under the terms of the Subordinate Voting Shares or under any coattail trust or similar agreement. Notwithstanding this, any take-over bid for solely the Super Voting Shares is unlikely given that by the terms of the Investment Agreement (as defined in 28.1(9)), upon any sale of Super Voting Shares to an unrelated third party purchaser, such Super Voting Shares will be redeemed by the Corporation for their issue price.

28.

SUPER VOTING SHARES

28.1

Special Rights and Restrictions

An unlimited number of Super Voting Shares, without nominal or par value, having attached thereto the special rights and restrictions as set forth below:

(1)

Voting Rights. Holders of Super Voting Shares shall be entitled to notice of and to attend at 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 Super Voting Shares shall be entitled to 2,000 votes in respect of each Super Voting Share held provided that if at any time the aggregate number of issued and outstanding (i) non-voting common shares (the “Cresco Corp. Redeemable Shares”) in the capital of Cresco U.S. Corp. (“Cresco Corp.”) and (ii) Common Units (the “Cresco Redeemable Units”) in the capital of Cresco Labs, LLC (“Cresco”) (or such securities of any successor to Cresco Corp. or Cresco as may exist from time to time) beneficially owned, directly or indirectly by a holder of the Super Voting Shares (the “Holder”) and the Holder’s predecessor or transferor, permitted transferees and permitted successors (in accordance with the Investment Agreement (as defined in 28.1(9)), and any prior tranferor’s transferor and any prior permitted transferee’s permitted transferee (the “Holder’s Group”), divided by the aggregate number of (i) Cresco Corp. Redeemable Shares and (ii) Cresco Redeemable Units beneficially owned, directly or indirectly by the Holders and the Holder’s Group as at the date of completion of the business combination transaction involving, among others, the Company, Cresco Corp. and Cresco be less than 50% (the “Triggering Event”), the Holder shall from that time forward be entitled to 50 votes in respect of each Super Voting Share held. The holders of Super Voting Shares shall, from time to time upon the request of the Company, provide to the Company evidence as to such holders’ direct and indirect beneficial ownership (and that of its permitted transferees and permitted successors) of Cresco Corp. Redeemable Shares and Cresco Redeemable Units to enable the Company to determine the voting entitlement of the Super Voting Shares. For the purposes of these calculations, a Holder shall be deemed to beneficially own Cresco Corp. Redeemable Shares held by an intermediate company or fund in proportion to their equity ownership of such company or fund.

(2)

Alteration to Rights of Super Voting Shares. As long as any Super Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Super Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Super Voting Shares. Consent of the holders of a majority of the outstanding Super Voting Shares shall be required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Super Voting Shares. In connection with the exercise of the voting rights contained in this paragraph (b) each holder of Super Voting Shares will have one vote in respect of each Super Voting Share held.

(3)

Dividends. The holder of Super Voting Shares shall not be entitled to receive dividends.

(4)

Liquidation, Dissolution or Winding-Up. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the Company will distribute its assets firstly and in priority to the rights of holders of any other class of shares of the Company (including the holders of Subordinate Voting Shares, Special Subordinate Voting Shares and the Proportionate Voting Shares) to return the issue price of the Super Voting Shares to the holders thereof and if there are insufficient assets to fully return the issue price to the holders of the Super Voting Shares such holders will receive an amount equal to their pro rata share in proportion to the issue price of their Super Voting Shares along with all other holders of Super Voting Shares. The holders of Super Voting Shares shall not be entitled to receive directly or indirectly as holders of Super Voting Shares any other assets or property of the Company and their sole rights will be to the return of the issue price of such Super Voting Shares in accordance with this Article 28.1(4).

(5)

Rights to Subscribe; Pre-Emptive Rights. The holders of Super Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company not convertible into Super Voting Shares, now or in the future.

(6)

Subdivision or Consolidation. No subdivision or consolidation of the Super Voting Shares shall occur unless, simultaneously, the Super Voting Shares, Proportionate Voting Shares, the Special Subordinate Voting Shares and the Subordinate Voting Shares are subdivided or consolidated in the same manner, so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

(7)

Redemption Rights. Upon the occurrence of a Triggering Event, the Company has the right to redeem all or some of the Super Voting Shares from the Holder and Holder’s Group who caused the Triggering Event to occur, by providing two days prior written notice to the Holder and Holder’s Group of such Super Voting Shares, for an amount equal to the issue price for each Super Voting Share, payable in cash to the holders of the Super Voting Shares so redeemed. The Company need not redeem Super Voting Shares on a pro-rata basis among the Holders or Holder’s Group. Holders of Super Voting Shares to be redeemed by the Company shall surrender the certificate or certificates representing such Super Voting Shares to the Company at its records office duly assigned or endorsed for transfer to the Company (or accompanied by duly executed share transfers relating thereto). Each surrendered certificate shall be cancelled, and the Company shall thereafter make payment of the applicable redemption amount by certified cheque, bank draft or wire transfer to the registered holder of such certificate; provided that, if less than all the Super Voting Shares represented by a surrendered certificate are redeemed then a new share

certificate representing the unredeemed balance of Super Voting Shares represented by such certificate shall be issued in the name of the applicable registered holder of the cancelled share certificate. If on the applicable redemption date the redemption price is paid (or tendered for payment) for any of the Super Voting Shares to be redeemed then on such date all rights of the holder in the Super Voting Shares so redeemed and paid or tendered shall cease and such redeemed Super Voting Shares shall no longer be deemed issued and outstanding, regardless of whether or not the holder of such Super Voting Shares has delivered the certificate(s) representing such securities to the Company, and from and after such date the certificate formerly representing the retracted Super Voting Shares shall evidence the only the right of the former holder of such Super Voting Shares to receive the redemption price to which such holder is entitled.

(8)

Transfer Restrictions. No Super Voting Share may be transferred by the holder thereof unless such transfer is to an Immediate Family Member or a transfer for purposes of estate or tax planning to a company or person that is wholly beneficially owned by such holder or Immediate Family Members of such holder or which such holder or Immediate Family Members of such holder are the sole beneficiaries thereof (in each case, a “Permitted Transfer”). In order to be effective, any Permitted Transfer shall require the prior written consent of the Company.

For the purposes of this Article 28.1(8), “Immediate Family Member” means with respect to any individual, each parent (whether by birth or adoption), spouse (including if such person is legally married to such individual, lives in civil union with such individual or is a common law partner with such individual, as defined in the Income Tax Act (Canada), as amended), child or other descendants (whether by birth or adoption) of such individual, each spouse of any of the aforementioned persons, each trust created solely for the benefit of such individual and/or one or more of the aforementioned persons. For greater certainty, a person who was a spouse of an individual within the meaning of this paragraph shall continue to be considered a spouse of such individual after the death of such individual.

(9)

Investment Agreement. To supplement the rights, privileges, restrictions and conditions attached to the Super Voting Shares, the Company and Charlie Bachtell, Joe Caltabiano, Robert M. Sampson, Brian McCormack and Dominic Sergi being the initial holders of Super Voting Shares (the “Founders”), entered into an investment agreement, dated November 30, 2018 (the “Investment Agreement”) which, among other things, provides that (i) each Super Voting Share will be transferable only to the holder’s immediate family members or an affiliated entity or a transfer to the other Founder or an entity affiliated with the other Founder, and (ii) upon any sale of Super Voting Shares to a third party purchaser not listed in clause (i), such Super Voting Shares will immediately be redeemed by the Company for their issue price.

29.

PROPORTIONATE VOTING SHARES

29.1

Special Rights and Restrictions

An unlimited number of Proportionate Voting Shares, without nominal or par value, having attached thereto the special rights and restrictions as set forth below:

(1)

Voting Rights. Holders of Proportionate Voting Shares shall be entitled to notice of and to attend at 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 Proportionate Voting Shares will be entitled to one vote in respect of each Subordinate Voting Share into which such Proportionate Voting Share could ultimately then be converted, which for greater certainty, shall initially be equal to 200 votes per Proportionate Voting Share (subject to adjustment at the discretion of the Board, depending upon the ratios necessary to preserve foreign private issuer status in accordance with Article 29.1(6)(c)).

(2)

Alteration to Rights of Proportionate Voting Shares. As long as any Proportionate Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Proportionate Voting Shares and Super Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Proportionate Voting Shares. Consent of the holders of a majority of the outstanding Proportionate Voting Shares and Super Voting Shares shall be required for any action that authorizes or creates shares of any class having preferences superior to or on a parity with the Proportionate Voting Shares. In connection with the exercise of the voting rights contained in this Article 29.1(2) each holder of Proportionate Voting Shares will have one vote in respect of each Proportionate Voting Share held.

(3)

Dividends. The holder of Proportionate Voting Shares shall have the right to receive dividends, out of any cash or other assets legally available therefor, pari passu (on an as converted basis, assuming conversion of all Proportionate Voting Shares into Subordinate Voting Shares at the Conversion Ratio) as to dividends and any declaration or payment of any dividend on the Subordinate Voting Shares. No dividend will be declared or paid on the Proportionate Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares and the Special Subordinate Voting Shares.

(4)

(5)

Rights to Subscribe; Pre-Emptive Rights. The holders of Proportionate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company now or in the future.

(6)

Conversion. Subject to the Conversion Restrictions set forth in this Article 29.1(6), holders of Proportionate Voting Shares shall have conversion rights as follows:

(a)

Right to Convert. Each Proportionate Voting Share shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Company or any transfer agent for such shares, into fully paid and nonassessable Subordinate Voting Shares as is determined by multiplying the number of Proportionate Voting Shares by the Conversion Ratio applicable to such share, determined as hereafter provided, in effect on the date the Proportionate

Voting Share is surrendered for conversion. The initial “Conversion Ratio” for shares of Proportionate Voting Shares shall be 200 Subordinate Voting Shares, subject to adjustment for each Proportionate Voting Share; provided, however, that the Conversion Ratio shall be subject to adjustment as set forth in Articles 29.1(6)(h) and (i).

(b)

Conversion Limitations. Before any holder of Proportionate Voting Shares shall be entitled to convert the same into Subordinate Voting Shares, the Board of Directors (or a committee thereof) shall designate an officer of the Company to determine if any Conversion Limitation set forth in Article 29.1(6)(d) shall apply to the conversion of Proportionate Voting Shares.

(c)

Foreign Private Issuer Protection Limitation: The Company will use commercially reasonable efforts to maintain its status as a “foreign private issuer” (as determined in accordance with Rule 3b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, the Company may, in its sole discretion, refuse to effect any conversion of Proportionate Voting Shares, and the holders of Proportionate Voting Shares shall not have the right to convert any portion of the Proportionate Voting Shares, pursuant to Article 29.1(6) or otherwise, without the consent of the Company, to the extent that after giving effect to all permitted issuances after such conversions of Proportionate Voting Shares, the aggregate number of Subordinate Voting Shares, Special Subordinate Voting Shares, Super Voting Shares and Proportionate Voting Shares held of record, directly or indirectly, by residents of the United States (as determined in accordance with Rules 3b-4 and 12g3-2(a) under the Exchange Act (“U.S. Residents”)) would exceed forty percent (40%) (the “40% Threshold”) of the aggregate number of Subordinate Voting Shares, Super Voting Shares, Special Subordinate Voting Shares and Proportionate Voting Shares issued and outstanding after giving effect to such conversions (the “FPI Protective Restriction”). The Board may by resolution increase the 40% Threshold to an amount not to exceed 50% and in the event of any such increase all references to the 40% Threshold herein, shall refer instead to the amended threshold set by such resolution.

(d)

Conversion Limitations. In order to effect the FPI Protection Restriction, each holder of Proportionate Voting Shares will be subject to the 40% Threshold based on the number of Proportionate Voting Shares held by such holder as of the date of the initial issuance of the Proportionate Voting Shares and thereafter at the end of each of the Company’s subsequent fiscal quarters (each, a “Determination Date”), calculated as follows:

X = [(A x 0.4) -B] x (C/D)

Where on the Determination Date:

X = Maximum number of Subordinate Voting Shares available for issue upon conversion of Proportionate Voting Shares by a holder.

A = The number of Subordinate Voting Shares, Special Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares issued and outstanding on the Determination Date.

B = The aggregate number of Subordinate Voting Shares, Special Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares held of record, directly or indirectly, by U.S. Residents on the Determination Date.

C = The aggregate number of Proportionate Voting Shares held by holder on the Determination Date.

D = The aggregate number of all Proportionate Voting Shares on the Determination Date.

For purposes of this subsection (d), the Board of Directors (or a committee thereof) shall designate an officer of the Company to determine as of each Determination Date: (A) the 40% Threshold and (B) the FPI Protective Restriction. Unless the Company determines otherwise in its sole discretion, to the extent that requests for conversion of Proportionate Voting Shares subject to the FPI Protection Restriction would result in the 40% Threshold being exceeded, the number of such Proportionate Voting Shares eligible for conversion held by a particular holder shall be prorated relative to the number of Proportionate Voting Shares submitted for conversion. To the extent that the FPI Protective Restriction contained in this Article 29.1(6)(d) applies, the determination of whether Proportionate Voting Shares are convertible shall be in the sole discretion of the Company.

(e)

Mandatory Conversion. Notwithstanding anything contained herein to the contrary, the Company may require each holder of Proportionate Voting Shares to convert all, and not less than all, the Proportionate Voting Shares at the applicable Conversion Ratio (a “Mandatory Conversion”) if at any time all the following conditions are satisfied (or otherwise waived by special resolution of holders of Proportionate Voting Shares):

(A)

the Subordinate Voting Shares issuable upon conversion of all the Proportionate Voting Shares are registered for resale and may be sold by the holders thereof pursuant to an effective registration statement and/or prospectus covering the Subordinate Voting Shares under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”);

(B)

the Company is subject to the reporting requirements of Section 13 or 15(d) of the U.S. Exchange Act; and

(C)

the Subordinate Voting Shares are listed or quoted (and are not suspended from trading) on a recognized North American stock exchange or by way of reverse takeover transaction on the Toronto Stock Exchange, the TSX Venture Exchange, the Canadian Securities Exchange or Aequitas NEO Exchange (or any other stock exchange recognized as such by the Ontario Securities Commission).

The Company will issue or cause its transfer agent to issue each holder of Proportionate Voting Shares of record a Mandatory Conversion Notice at least 20 days prior to the record date of the Mandatory Conversion, which shall specify therein, (i) the number of Subordinate Voting Shares into which the Proportionate Voting Shares are convertible and (ii) the address of record for such holder. On the record date of a Mandatory Conversion, the Company will issue or cause its transfer agent to issue each holder of record on the Mandatory Conversion Date certificates representing the number of Subordinate Voting Shares into which the Proportionate Voting Shares are so converted and each certificate representing the Proportionate Voting Shares shall be null and void.

(f)

Disputes. In the event of a dispute as to the number of Subordinate Voting Shares issuable to a Holder in connection with a conversion of Proportionate Voting Shares, the Company shall issue to the Holder the number of Subordinate Voting Shares not in dispute and resolve such dispute in accordance with Article 29.1(6)(m).

(g)

Mechanics of Conversion. Before any holder of Proportionate Voting Shares shall be entitled to convert Proportionate Voting Shares into Subordinate Voting Shares, the holder thereof shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for Subordinate Voting Shares, and shall give written notice to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for Subordinate Voting Shares are to be issued (each, a “Conversion Notice”). The Company shall (or shall cause its transfer agent to), as soon as practicable thereafter, issue and deliver at such office to such holder, or to the nominee or nominees of such holder, a certificate or certificates for the number of Subordinate Voting Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Proportionate Voting Shares to be converted, and the person or persons entitled to receive the Subordinate Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Subordinate Voting Shares as of such date.

(h)

Adjustments for Distributions. In the event the Company shall declare a distribution to holders of Subordinate Voting Shares payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not otherwise causing adjustment to the Conversion Ratio (a “Distribution”), then, in each such case for the purpose of this Article 29.1(6)(h), the holders of Proportionate Voting Shares shall be entitled to a proportionate share of any such Distribution as though they were the holders of the number of Subordinate Voting Shares into which their Proportionate Voting Shares are convertible as of the record date fixed for the determination of the holders of Subordinate Voting Shares entitled to receive such Distribution.

(i)

Recapitalizations; Stock Splits. If at any time or from time-to-time, the Company shall (i) effect a recapitalization of the Subordinate Voting Shares; (ii) issue Subordinate Voting Shares as a dividend or other distribution on outstanding Subordinate Voting Shares; (iii) subdivide the outstanding Subordinate Voting Shares into a greater number of Subordinate Voting Shares; (iv) consolidate the outstanding Subordinate Voting Shares into a smaller number of Subordinate Voting Shares; or (v) effect any similar transaction or action (each, a “Recapitalization”), provision shall be made so that the holders of Proportionate Voting Shares shall thereafter be entitled to receive, upon conversion of Proportionate Voting Shares, the number of Subordinate Voting Shares or other

securities or property of the Company or otherwise, to which a holder of Subordinate Voting Shares deliverable upon conversion would have been entitled on such Recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Article 29.1(6) with respect to the rights of the holders of Proportionate Voting Shares after the Recapitalization to the end that the provisions of this Article 29.1(6) (including adjustment of the Conversion Ratio then in effect and the number of Proportionate Voting Shares issuable upon conversion of Proportionate Voting Shares) shall be applicable after that event as nearly equivalent as may be practicable.

(j)

No Fractional Shares and Certificate as to Adjustments. No fractional Subordinate Voting Shares shall be issued upon the conversion of any Proportionate Voting Shares and the number of Subordinate Voting Shares to be issued shall be rounded up or down to the nearest whole Subordinate Voting Share. Whether or not fractional Subordinate Voting Shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Proportionate Voting Shares the holder is at the time converting into Subordinate Voting Shares and the number of Subordinate Voting Shares issuable upon such aggregate conversion.

(k)

Adjustment Notice. Upon the occurrence of each adjustment or readjustment of the Conversion Ratio pursuant to this Article 29.1(6), the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Proportionate Voting Shares a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of Proportionate Voting Shares, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Ratio for Proportionate Voting Shares at the time in effect, and (C) the number of Subordinate Voting Shares and the amount, if any, of other property which at the time would be received upon the conversion of a Proportionate Voting Share.

(l)

Effect of Conversion. All Proportionate Voting Shares which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the time of conversion (the “Conversion Time”), except only the right of the holders thereof to receive Subordinate Voting Shares in exchange therefor and to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion.

(m)

Disputes. Any holder of Proportionate Voting Shares that beneficially owns more than 5% of the issued and outstanding Proportionate Voting Shares may submit a written dispute as to the determination of the conversion ratio or the arithmetic calculation of the conversion ratio of Proportionate Voting Shares to Subordinate Voting Shares, the Conversion Ratio, 40% Threshold, FPI Protective Restriction or the Beneficial Ownership Limitation by the Company to the Board of Directors (or a committee thereof) with the basis for the disputed determinations or arithmetic calculations. The Company shall respond to the holder within five (5) Business Days of receipt, or deemed receipt, of the dispute notice with a written calculation of the Conversion Ratio, 40% Threshold, FPI Protective Restriction or

the Beneficial Ownership Limitation, as applicable. If the holder and the Company are unable to agree upon such determination or calculation of the Conversion Ratio, 40% Threshold, FPI Protective Restriction or the Beneficial Ownership Limitation, as applicable, within five (5) Business Days of such response, then the Company and the holder shall, within one (1) Business Day thereafter submit the disputed arithmetic calculation of the conversion ratio, Conversion Ratio, FPI Protective Restriction or the Beneficial Ownership Limitation to the Company’s independent, outside accountant. The Company, at the Company’s expense, shall cause the accountant to perform the determinations or calculations and notify the Company and the holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

(7)

Subdivision or Consolidation. No subdivision or consolidation of the Proportionate Voting Shares shall occur unless, simultaneously, the Subordinate Voting Shares, the Special Subordinate Voting Shares, the Proportionate Voting Shares and the Super Voting Shares are subdivided or consolidated in the same manner or such other adjustment is made so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes.

(8)

Notices of Record Date. Except as otherwise provided under applicable law, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Proportionate Voting Shares, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

30.

SPECIAL SUBORDINATE VOTING SHARES

30.1

Special Rights and Restrictions

An unlimited number of Special Subordinate Voting Shares, without nominal or par value, having attached thereto the special rights and restrictions as set forth below:

(1)

Voting Rights. Holders of Special Subordinate Voting Shares shall be entitled to notice of and to attend at 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 Special Subordinate Voting Shares will be entitled to one vote in respect of each Subordinate Voting Share into which such Special Subordinate Voting Shares could ultimately then be converted, which for greater certainty, shall initially be equal to 0.00001 of a vote per Special Subordinate Voting Share.

(2)

Alteration to Rights of Special Subordinate Voting Shares. As long as any Special Subordinate Voting Shares remain outstanding, the Company will not, without the consent of the holders of the Special Subordinate Voting Shares by separate special resolution, prejudice or interfere with any right or special right attached to the Special Subordinate Voting Shares. In connection with the exercise of the voting rights contained in this Article 30.1(1) each holder of Special Subordinate Voting Shares will have one vote in respect of each Special Subordinate Voting Share held.

(3)

Dividends. The holders of Special Subordinate Voting Shares shall have the right to receive dividends, out of any cash or other assets legally available therefor, pari passu (on an as converted basis, assuming conversion of all Special Subordinate Voting Shares into Subordinate Voting Shares at the Special Conversion Ratio, as defined in 30.1(8)(a)) as to dividends and any declaration or payment of any dividend on the Subordinate Voting Shares. No dividend will be declared or paid on the Special Subordinate Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares and the Proportionate Voting Shares.

(4)

Liquidation, Dissolution or Winding-Up. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Special Subordinate Voting Shares will, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Special Subordinate Voting Shares (including, without restriction, the Super Voting Shares), be entitled to participate rateably along with all other holders of Special Subordinate Voting Shares (on an as-converted to Subordinate Voting Share basis), the Proportionate Voting Shares (on an as-converted to Subordinate Voting Share basis) and the Subordinate Voting Shares.

(5)

Right to Subscribe; Pre-Emptive Rights. The holders of Special Subordinate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of Subordinate Voting Shares, or bonds, debentures or other securities of the Company now or in the future.

(6)

Ownership Restrictions. The Special Subordinate Voting Shares may only be beneficially owned or controlled, directly or indirectly, by a person or persons who are not a U.S. Person.

A “U.S. Person” shall mean an individual resident in the United States, an estate or trust of which any executor or administrator or trustee, respectively, is a U.S. Person and any partnership or corporation organized or incorporated under the laws of the United States (as defined in Regulation S under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”)).

(7)

Transfer Restrictions. No Special Subordinate Voting Share or any rights or interests therein may be transferred legally, beneficially or in any other manner by the holder thereof without the prior written consent of the Board of Directors (or a committee thereof), which may be withheld in its sole discretion.

(8)

Conversion. Subject to the conversion restrictions set forth in this Article 30.1(8), holders of Special Subordinate Voting Shares shall have conversion rights as follows:

(a)

Right to Convert. Each Special Subordinate Voting Share shall be convertible, at the option of the holder provided that such holder has received the prior written consent of the Board of Directors (or a committee thereof), which may be withheld in its sole discretion, at any time after the date of issuance of such share at the

office of the Company or any transfer agent for such shares, into fully paid and nonassessable Subordinate Voting Shares as is determined by multiplying the number of Special Subordinate Voting Share by the Special Conversion Ratio applicable to such share, determined as hereafter provided, in effect on the date the Special Subordinate Voting Share is surrendered for conversion. The initial “Special Conversion Ratio” for shares of Special Subordinate Voting Shares shall be 0.00001 Subordinate Voting Shares, subject to adjustment for each Special Subordinate Voting Share; provided, however, that the Special Conversion Ratio shall be subject to adjustment as set forth in Articles 30.1(10) and 30.1(11).

(b)

Mechanics of Conversion. Before any holder of Special Subordinate Voting Shares shall be entitled to convert Special Subordinate Voting Shares into Subordinate Voting Shares, the holder thereof shall: (i) have received the prior written consent of the Board of Directors (or a committee thereof) as provided in Article 30.1(8)(a); and (ii) have surrendered the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for Subordinate Voting Shares, and shall give written notice to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for Subordinate Voting Shares are to be issued (each, a “Special Conversion Notice”). The Company shall (or shall cause its transfer agent to), as soon as practicable thereafter:

(A)

issue and deliver at such office to such holder, or, subject to payment by the registered holder of any stock transfer or other applicable taxes and compliance with any other reasonable requirements of the Company in respect of such transfer, in such name or names as such registered holder may direct in writing, a certificate or certificates for the number of Subordinate Voting Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Special Subordinate Voting Shares to be converted, and the person or persons entitled to receive the Subordinate Voting Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Subordinate Voting Shares as of such date;

(B)

remove or cause the removal of such holder from the register of holders in respect of the Special Subordinate Voting Shares for which the conversion privilege is being exercised, add the holder (or any person or persons in whose name or names such converting holder shall have directed the resulting Subordinate Voting Shares to be registered) to the register of holders in respect of the resulting Subordinate Voting Shares, cancel or cause the cancellation of the certificate or certificates representing such Special Subordinate Voting Shares; and

(C)

if less than all of the Special Subordinate Voting Shares represented by any certificate are to be converted, the holder shall be entitled to receive a new certificate representing the Special Subordinate Voting Shares represented by the original certificate which are not converted.

(c)

Mandatory Conversion. Notwithstanding anything contained herein to the contrary, the Company may require each holder of Special Subordinate Voting Shares to convert all, and not less than all, of the Special Subordinate Voting Shares at the applicable Special Conversion Ratio (a “Special Mandatory Conversion”) if at any time all the following conditions are satisfied (or otherwise waived by special resolution of holders of Special Subordinate Voting Shares):

(A)

the Company is no longer a “foreign private issuer” (as determined in accordance with Rule 3b-4 of the Exchange Act); or

(B)

the Board of Directors (or a committee thereof) determine that the Special Subordinate Voting Shares are no longer necessary or required.

(d)

Mechanics of Mandatory Conversion. Upon a Special Mandatory Conversion, the Company shall at its expense:

(A)

issue (or cause its transfer agent to issue) to each holder of Special Subordinate Voting Shares of record a Mandatory Conversion notice at least 20 days prior to the record date of the Mandatory Conversion, which shall specify therein, (i) the number of Subordinate Voting Shares into which the Special Subordinate Voting Shares are convertible; and (ii) the address of record for such holder;

(B)

on the record date of a Special Mandatory Conversion, issue (or cause its transfer agent to issue) each holder of record on the date of the Mandatory Conversion certificates representing the number of Subordinate Voting Shares into which the Special Subordinate Voting Shares are so converted and each certificate representing the Special Subordinate Voting Shares shall be null and void; and

(C)

remove or cause the removal of such holder from the register of holders in respect of the Special Subordinate Voting Shares, add such holder to the register of holders in respect of the resulting Subordinate Voting Shares.

(e)

Effect of Conversion. All Special Subordinate Voting Shares which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the time of conversion except only the right of the holders thereof to receive Subordinate Voting Shares.

(9)

Redemption Rights. The Company has the right to redeem all or some of the Special Subordinate Voting Shares from any holder thereof at any time by providing two (2) days prior written notice (the “Redemption Notice”) to such holder for either: (i) cash, at a price per Special Subordinate Voting Share equal to the Special Conversion Ratio (as may be adjusted in accordance with this Article 30) multiplied by the average volume weighted average trading price of the Subordinate Voting Shares on the CSE (or such other stock exchange or quotation system the Subordinate Voting Shares are then principally listed or quoted) for the ten (10) trading days immediately prior to the date of the Redemption Notice (a “Cash Redemption”); or (ii) Subordinate Voting Shares at the Special Conversion Ratio, as may be adjusted in accordance with this Article 30 (a “Share Redemption”). The Company need not redeem Special Subordinate Voting Shares on a pro-rata basis among the holders of Special Subordinate Voting Shares. Holders of Special Subordinate Voting Shares to be redeemed by the Company shall surrender the

certificate(s) representing such Special Subordinate Voting Shares to the Company at its records office duly assigned or endorsed for transfer to the Company (or accompanied by duly executed share transfers relating thereto). Each surrendered certificate shall be cancelled, and the Company shall: (i) in the event of a Cash Redemption, make payment of the applicable redemption amount by certified cheque, bank draft or wire transfer to the registered holder of such certificate; or (ii) in the event of a Share Redemption issue and deliver to the registered holder, or, subject to payment by the registered holder of any stock transfer or other applicable taxes and compliance with any other reasonable requirements of the Company in respect of such transfer, in such name or names as such registered holder may direct in writing, a certificate or certificates for the number of Subordinate Voting Shares at the Special Conversion Ratio, as may be adjusted in accordance with this Article 30. In the event that less than all the Special Subordinate Voting Shares represented by a surrendered certificate are redeemed by the Company then a new certificate representing the unredeemed balance of Special Subordinate Voting Shares represented by such certificate shall be issued in the name of the applicable registered holder of the cancelled certificate. If on the applicable redemption date the redemption price is paid (or tendered for payment) in the case of a Cash Redemption or the Company issues (or cause its transfer agent to issue) Subordinate Voting Shares in the case of a Share Redemption, for any of the Special Subordinate Voting Shares to be redeemed then on such date all rights of the holder in the Special Subordinate Voting Shares so redeemed shall cease and such redeemed Special Subordinate Voting Shares shall no longer be deemed issued and outstanding, regardless of whether or not the holder of such Special Subordinate Voting Shares has delivered the certificate(s) representing such securities to the Company, and from and after such date the certificate(s) formerly representing the redeemed Special Subordinate Voting Shares shall evidence the only the right of the former holder of such Special Subordinate Voting Shares to receive the applicable redemption price to which such holder is entitled.

(10)

Adjustments for Distributions. In the event the Company shall declare a distribution to holders of Subordinate Voting Shares payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not otherwise causing adjustment to the Special Conversion Ratio (a “Special Distribution”), then, in each such case for the purpose of this Article 30.1(10), the holders of Special Subordinate Voting Shares shall be entitled to a proportionate share of any such Special Distribution as though they were the holders of the number of Subordinate Voting Shares into which their Special Subordinate Voting Shares are convertible as of the record date fixed for the determination of the holders of Subordinate Voting Shares entitled to receive such Special Distribution.

(11)

Recapitalizations; Stock Splits. If at any time or from time-to-time, the Company effects a Recapitalization, provisions shall be made so that the holders of Special Subordinate Voting Shares shall thereafter be entitled to receive, upon conversion or redemption of Special Subordinate Voting Shares, the number of Subordinate Voting Shares or other securities or property of the Company or otherwise, to which a holder of Subordinate Voting Shares deliverable upon conversion or redemption would have been entitled on such Recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Articles 30.1(8) and 30.1(8)(e) with respect to the rights of the holders of Special Subordinate Voting Shares after the Recapitalization to the end that the provisions of Articles 30.1(8) and 30.1(8)(e) (including adjustment of the Special Conversion Ratio then in effect and the number of Subordinate Voting Shares issuable upon conversion of Special Subordinate Voting Shares) shall be applicable after that event as nearly equivalent as may be practicable.

(12)

No Fractional Shares and Certificate as to Adjustments. No fractional Subordinate Voting Shares shall be issued upon the conversion or redemption (in the case of a Share Redemption) of any Special Subordinate Voting Shares and the number of Subordinate Voting Shares to be issued shall be rounded up or down to the nearest whole Subordinate Voting Share. Whether or not fractional Subordinate Voting Shares are issuable upon such conversion or redemption (in the case of a Share Redemption) shall be determined on the basis of the total number of Special Voting Shares of the holder being redeemed or converted into Subordinate Voting Shares and the number of Subordinate Voting Shares issuable upon such aggregate conversion or redemption (in the case of a Share Redemption).

(13)

Adjustment Notice. Upon the occurrence of each adjustment or readjustment of the Special Conversion Ratio pursuant to this Article 30, the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Special Subordinate Voting Shares a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of Special Subordinate Voting Shares, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Special Conversion Ratio for the Special Subordinate Voting Shares at the time in effect, and (C) the number of Subordinate Voting Shares and the amount, if any, of other property which at the time would be received upon the conversion or redemption of a Special Subordinate Voting Share.

(14)

Subdivision or Consolidation. The Special Subordinate Voting Shares may be subdivided or consolidated by resolution of the directors (or a committee thereof) without the simultaneous subdivision or consolidation of the Subordinate Voting Shares, the Proportionate Voting Shares and the Super Voting Shares in the same manner, provided that the Special Conversion Ratio is correspondingly adjusted and the Voting Rights of the Special Subordinate Voting Shares is correspondingly adjusted such that the aggregate number of votes held by all holders of Special Subordinate Voting Shares prior to subdivision or consolidation is equal to the aggregate number of votes held by all holders of Special Subordinate Voting Shares following the subdivision or consolidation.

(15)

Notices of Record Date. Except as otherwise provided under applicable law, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, the Company shall mail to each holder of Special Subordinate Voting Shares, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

(16)

Disputes. Any holder of Special Subordinate Voting Shares that beneficially owns more than 5% of the issued and outstanding Special Subordinate Voting Shares may submit a written dispute as to the determination of or the arithmetic calculation of the Special Conversion Ratio by the Company to the Board of Directors (or a committee thereof) with

the basis for the disputed determinations or arithmetic calculations. The Company shall respond to the holder within five (5) Business Days of receipt, or deemed receipt, of the dispute notice with a written calculation of then the applicable Special Conversion Ratio. If the holder and the Company are unable to agree upon such determination or calculation of the Special Conversion Ratio, within five (5) Business Days of such response, then the Company and the holder shall, within one (1) Business Day thereafter submit the disputed arithmetic calculation of the Special Conversion Ratio to the Company’s independent, outside accountant. The Company, at the Company’s expense, shall cause the accountant to perform the determinations or calculations and notify the Company and the holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

30.2

Take-Over Bid.

In the event that a take-over bid is made for the Super Voting Shares or the Subordinate Voting Shares, the holders of Special Subordinate Voting Shares will not be entitled to participate in such offer and may not tender their shares into any such offer, whether under the terms of the Special Subordinate Voting Shares or under any coattail trust or similar agreement, absent being permitted to convert such shares into Subordinate Voting Shares. Notwithstanding this, any take-over bid for solely the Super Voting Shares is unlikely given that by the terms of the Investment Agreement (as defined in 28.1(9)), upon any sale of Super Voting Shares to an unrelated third party purchaser, such Super Voting Shares will be redeemed by the Company for their issue price.

EX-99.29 30 d945319dex9929.htm EX-99.29 EX-99.29

Exhibit 99.29

CRESCO LABS INC.

Form of Proxy – Annual and Special Meeting to be held on June 29, 2020

LOGO

Stock Exchange Tower

1230, 300 5^th Ave SW

Calgary, AB T2P 3C4


Appointment of Proxyholder I/We being the undersigned holder(s) of Cresco Labs Inc. hereby appoint Charles Bachtell or failing this person, Thomas J. Manning.	OR	Print the name of the person you are appointing if this person is someone other than the Management Nominees listed herein:

as my/our proxyholder with full power of substitution and to attend, act, and to vote for and on behalf of the holder in accordance with the following direction (or if no directions have been given, as the proxyholder sees fit) and all other matters that may properly come before the Annual and Special Meeting of Cresco Labs Inc. to be held at Aon Center, Randolph Training Room, 200 East Randolph St., Suite 5100, Chicago Illinois at 10:00 a.m. (Central Daylight Time), and will be available by teleconference toll free within North America at 1.800.901.0218 and outside of North America at 1.719.234.0223, Meeting ID: 499 321 5764, or at any adjournment thereof.

Number of Directors. To set the number of directors to be elected at the Meeting to at ten (10), subject to permitted increases under the articles of the Corporation or otherwise.

For

☐

Against

☐

Election of Directors.

For

Withhold

For

Withhold

For

Withhold

a. Charles Bachtell

☐

b. Dominic A. Sergi

☐

c. Brian McCormack

☐

d. Robert M. Sampson

☐

e. John R. Walter

☐

f. Gerald F. Corcoran

☐

g. Thomas J. Manning

☐

h. Randy D. Podolsky

☐

i. Marc Lustig

☐

j. Michele Roberts

☐

Appointment of Auditors. To appoint Marcum LLP as independent auditor of the Corporation to hold office until the next annual meeting of Shareholders and to authorize the directors to fix the remuneration thereof.

For

☐

Against

☐

Special Resolution. To consider and, if deemed advisable, to pass a special resolution to amend the authorized share structure and articles of the Corporation by creating a new class of Special Subordinate Voting Shares and to vary the special rights and restrictions attached to the Subordinate Voting Shares, Proportionate Voting Shares and Super Voting Shares to reflect the creation of the Special Subordinate Voting Shares.

For

☐

Against

☐


Authorized Signature(s) – This section must be completed for your instructions to be executed.		Signature(s):	Date
			/ /
I/we authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Meeting. If no voting instructions are indicated above, this Proxy will be voted as recommended by Management.			MM / DD / YY

Interim Financial Statements – Check the box to the right if you would like to RECEIVE Interim Financial Statements and accompanying Management’s Discussion & Analysis by mail. See reverse for instructions to sign up for delivery by email.	☐	Annual Financial Statements – Check the box to the right if you would like to RECEIVE the Annual Financial Statements and accompanying Management’s Discussion and Analysis by mail.	☐

This form of proxy is solicited by and on behalf of Management.

Proxies must be received by 10:00 a.m., (Central Daylight Time), on June 25, 2020.

Notes to Proxy

Each holder has the right to appoint a person, who need not be a holder, to attend and represent him or her at the Annual and Special Meeting. If you wish to appoint a person other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided on the reverse.

If the securities are registered in the name of more than one holder (for example, joint ownership, trustees, executors, etc.) then all of the registered owners must sign this proxy in the space provided on the reverse. If you are voting on behalf of a corporation or another individual, you may be required to provide documentation evidencing your power to sign this proxy with signing capacity stated.

This proxy should be signed in the exact manner as the name appears on the proxy.

If this proxy is not dated, it will be deemed to bear the date on which it is mailed by Management to the holder.

The securities represented by this proxy will be voted as directed by the holder; however, if such a direction is not made in respect of any matter, this proxy will be voted as recommended by Management.

The securities represented by this proxy will be voted or withheld from voting, in accordance with the instructions of the holder, on any ballot that may be called for and, if the holder has specified a choice with respect to any matter to be acted on, the securities will be voted accordingly.

This proxy confers discretionary authority in respect of amendments to matters identified in the Notice of Meeting or other matters that may properly come before the meeting.

This proxy should be read in conjunction with the accompanying documentation provided by Management.

INSTEAD OF MAILING THIS PROXY, YOU MAY SUBMIT YOUR PROXY USING SECURE ONLINE VOTING. PROXIES MUST BE SUBMITTED BY 10:00 A.M., (CENTRAL DAYLIGHT TIME), ON JUNE 25, 2020:

LOGO

To Vote Your Proxy Online please visit:

http://odysseytrust.com/Transfer-Agent/Login

and click on

You will require the CONTROL NUMBER printed with your address to the right. If you vote by Internet, do not mail this proxy.

To request the receipt of future documents via email and/or to sign up for Securityholder Online services, you may contact Odyssey Trust Company at info@odysseytrust.com.

Voting by mail may be the only method for securities held in the name of a corporation or securities being voted on behalf of another individual. A return envelope has been enclosed for voting by mail.

Shareholder Address and Control Number Here

EX-99.30 31 d945319dex9930.htm EX-99.30 EX-99.30

Exhibit 99.30

LOGO

June 16, 2020

British Columbia Securities Commission (as principal regulator)

Ontario Securities Commission

Manitoba Securities Commission

Alberta Securities Commission

Financial and Consumer Affairs Authority of Saskatchewan

New Brunswick Securities Commission

Nova Scotia Securities Commission

Prince Edward Island Securities Commission

Newfoundland and Labrador Securities Commission

Autorité des marchés financiers

Re:	Cresco Labs Inc.

We refer to the Prospectus Supplement dated December 3, 2019 to the short form base shelf prospectus dated July 25, 2019 (collectively the “Prospectus”) of Cresco Labs Inc. (the “Company”) relating to the offering for sale of up to $55,000,000 in the aggregate of subordinate voting shares of the Company pursuant to at-the-market distributions within the meaning of National Instrument 44-102 – Shelf Distributions.

We consent to being named in the above-mentioned Prospectus and to the use through the incorporation by reference of our report dated April 28, 2020, to the shareholders of the Company on the following financial statements:

a)	Consolidated Statement of financial position as at December 31, 2019;

b)	Consolidated Statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows for the year ended December 31, 2019; and

c)	Notes, comprising a summary of significant accounting policies and other explanatory information for the year ended December 31, 2019.

We report that we have read the Prospectus and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the consolidated financial statements upon which we have reported or that are within our knowledge as a result of our audit of such consolidated financial statements. We have complied with Canadian generally accepted standards for an auditor’s consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the prospectus as these terms are described in the CPA Canada Handbook – Assurance.

Yours truly yours,

LOGO

Marcum LLP

Certified Public Accountants

Chicago, IL, USA

LOGO

EX-99.31 32 d945319dex9931.htm EX-99.31 EX-99.31

Exhibit 99.31

Cresco Labs Announces the Appointment of National Basketball Players

Association Executive Director and Renowned Trial Lawyer

Michele Roberts to its Board of Directors

LOGO

Michele Roberts, National Basketball Players Association executive director and esteemed trial lawyer, joins Cresco Labs’ board.

CHICAGO—(June 10, 2020)—Cresco Labs (CSE:CL)(OTCQX:CRLBF) (“Cresco” or “the Company”), one of the largest vertically integrated multistate cannabis operators in the United States, announced that it has welcomed current Executive Director of the National Basketball Players Association (“NBPA”), Michele Roberts, to its board of directors, effective immediately. A distinguished trial lawyer, celebrated business leader and former member of the adjunct faculty at Harvard Law School, Ms. Roberts becomes the 10th director on Cresco’s board and its first female director.

“Ms. Roberts is an outstanding addition to our board,” said Tom Manning, Cresco Labs’ Executive Chairman and former Chairman and CEO of Dun & Bradstreet. “Drawing on her experience in leading one of the most important player organizations in the sports world and her expertise in law and litigation as a highly-accomplished trial attorney and educator, Michele will provide a unique perspective at a critical time of continued growth and expansion in the industry.”

Charlie Bachtell, Cresco Labs’ CEO and co-founder adds, “We are advocates of a more diverse and inclusive cannabis industry, and we are thrilled to have Michele’s counsel, experience and leadership to help influence the development of both our Company and this industry. We believe her contributions will be invaluable to Cresco.”

Since 2014, Ms. Roberts has served as the Executive Director of the NBPA, working on behalf of NBA players to ensure their rights are protected and are fairly compensated for the value they bring to the sport and their impact on society. Prior to joining the NBPA, she was an esteemed trial lawyer with Skadden, Arps, Slate, Meagher & Flom. Her practice focused on complex civil and white-collar criminal litigation before state and federal courts and in administrative proceedings. Ms. Roberts has tried more than 100 cases to jury verdicts, representing clients in a wide variety of areas, including products liability, white collar, racketeering, securities regulation violations, Title VII issues and premises liability. She is a top-ranked attorney who has received numerous accolades from Chambers Global, Chambers USA and Benchmark Litigation, among other notable publications.

Ms. Roberts is a Fellow of the American College of Trial Lawyers. She worked for eight years in the office of the Public Defender Service for the District of Columbia, where she was named Chief of the Trial Division and served as counsel in more than 40 jury trials. Ms. Roberts is a frequent lecturer and presenter to both the bench and bar on a variety of topics related to litigation and trial practice. She taught trial advocacy as an adjunct member of the faculty at Harvard Law School and was an instructor with the National Institute of Trial Advocacy.

“I am grateful for the opportunity to serve on Cresco Labs’ Board and work alongside the senior leadership and management teams in their efforts to elevate the company to the next level of excellence,” said Ms. Roberts. “I look forward to advancing Cresco Labs’ distinctive brands of high quality products and services, particularly those focused on the promise held by medicinal cannabis to treat conditions and illnesses where more traditional protocols have not met the patients’ needs, and I am also committed to supporting Cresco’s Labs’ social responsibility efforts which are focused on the industry’s first national Social Equity and Education Development initiative to better both individual lives and underrepresented communities.”

About Cresco Labs

Forward Looking Statements

or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media:

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles, VP of Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.32 33 d945319dex9932.htm EX-99.32 EX-99.32

Exhibit 99.32

Cresco Labs Announces Retirement of Ken Amann and Appointment of Dennis Olis as Chief Financial Officer

Mr. Amann to remain in an advisory role as part of the planned transition

LOGO

Dennis Olis has been named Chief Financial Officer of Cresco Labs

CHICAGO - June [16], 2020 — Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco” or “the Company”), one of the largest vertically integrated multistate cannabis operators in the United States, today announced that Ken Amann, who has been the Company’s Chief Financial Officer since 2015, is retiring effective December 31, 2020. As part of a planned transition, the Company also appointed Dennis Olis to replace Mr. Amann as Chief Financial Officer (“CFO”), effective July 1, 2020. Mr. Olis joins Cresco Labs after previously serving as CFO for Allscripts Healthcare Solutions (NASDAQ: MDRX). Mr. Olis brings an extensive background in operations, financial planning and analysis, accounting, financial reporting, tax, internal audit, treasury and mergers and acquisitions at Allscripts and previously at Motorola. Mr. Amann will remain in an advisory role through the remainder of 2020 to ensure a smooth transition of responsibilities.

Charlie Bachtell said, “Ken was an early investor in Cresco, and one of the first employees, joining as CFO shortly after Cresco won the initial licenses in Illinois. I know I speak for the entire management team and board of directors when I thank Ken for his significant contribution in growing Cresco to this point. This is bittersweet for me and the Cresco family – it is sad to see Ken go but we wish Ken and his wife, Lisa, nothing but the best in this new phase of their lives. They will always be a part of this Cresco family.”

Mr. Bachtell added, “After a thorough search, I’m thrilled to welcome Dennis Olis as our new CFO. Dennis has an impeccable reputation and brings extensive financial, operational, and strategic management experience. His track record of superior capital allocation and experience managing billions of dollars in annual sales as the SVP of Operations and Strategic Initiatives and as CFO makes him the perfect fit as Cresco enters the next phase of growth.”

Ken Amann said, “This experience at Cresco has been an amazing journey and certainly the highlight of my professional career. I would like to thank the board and management team as well as all of our loyal, long-term shareholders for their support over the past several years. I am confident the team will continue to build upon our leadership position in the U.S. cannabis space. I also know the Company is in great hands, Dennis is a proven, results-oriented CFO with experience in a variety of finance and operations roles at both Allscripts and Motorola.”

Mr. Olis has more than 20 years of financial and operational management experience. At Allscripts Healthcare Solutions, Olis was responsible for the company’s overall financial strategy, including cost management, capital allocation and balance sheet optimization. As CFO he led the $185 million acquisition of McKesson’s healthcare business, increasing revenue by $400 million and the integration effort leading to EBITDA improvement of $100 million within 15 months of the acquisition. Previously, Olis held a variety of senior finance and operations positions at Motorola Inc.

About Cresco Labs:

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media:

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.33 34 d945319dex9933.htm EX-99.33 EX-99.33

Exhibit 99.33

Cresco Labs Announces Appointment of Carol Vallone to its Board

and the Retirement of Brian McCormack

LOGO

Cresco Labs announced the appointment of Carol Vallone to its board of directors

CHICAGO – July 30, 2020 — Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco” or “the Company”), one of the largest vertically integrated multistate cannabis operators in the United States, today announced additional actions in board refreshment and corporate governance to further strengthen its leadership in the cannabis industry.

Appointment of Carol Vallone

Cresco has appointed Carol Vallone to its board of directors, effective immediately. Ms. Vallone is a well-known business leader, former CEO, and corporate board director, with a strong track record in launching, scaling, and managing global companies.

Currently, Ms. Vallone serves as Chair of the Board of Trustees at McLean Hospital, the #1 ranked freestanding psychiatric hospital and largest psychiatric affiliate of Harvard Medical School. She also serves on the board of trustees at MGH Institute of Health Professions, and on the finance committee at Mass General Brigham. Additionally, Ms. Vallone serves on the board of directors of the Bain Capital Double Impact portfolio company, Arosa; as an Advisory Director for the private investment firm Berkshire Partners; and as an Advisory Board Member of the healthcare-focused venture growth firm, Longitude Capital.

In the past, Ms. Vallone served as President and Chief Executive Officer of leading E-learning companies including WebCT Inc., where she grew the online learning company to cover almost two thousand institutions in seventy countries. She has also served on multiple boards at leading non-profit healthcare, public financial services, and e-commerce organizations.

In joining the Cresco Labs board of directors, Ms. Vallone will become the second female member of the board and will serve alongside Michele Roberts, the Executive Director of the NBA Players Association, who was elected in April.

Retirement of Brian McCormack

The Company today announced that Brian McCormack, Vice Chairman of the board, has retired from the Company’s board of directors as part of the planned board refreshment process. A serial entrepreneur, Mr. McCormack was a founder and one of the early investors in the company and led the initial development of the board. He was instrumental in helping create the business and in recruiting initial shareholders to the Company.

“Cresco Labs was the crowning achievement of my entrepreneurial endeavors,” said Brian McCormick. “I feel very fortunate to have met my founding partners and to have built the foundation for a company that has created a cultural shift in the way our country now views cannabis. As the Company prepares for the future, I am excited to see Michele Roberts and Carol Vallone join the board in order to help guide our executive team and propel Cresco to the next level.”

“Brian has served on the Cresco board since the Company was founded and has played an integral role in the Company’s early development,” said Charles Bachtell, CEO and Co-Founder of Cresco Labs. “I would like to thank him for his foresight in recommending that we implement a board refreshment plan to ensure we have a diverse set of experiences, skills, and ideas to help guide Cresco into the future.”

Tom Manning, Cresco Labs’ Executive Chairman, added, “I also want to recognize Brian for his early contributions and his vision. While we will miss him, I’m thrilled to welcome a powerful new voice, Carol Vallone, to the board. Carol has proven her ability to launch and scale global companies both as an executive and a board member, and her experience and passion for corporate governance are a tremendous fit for Cresco in its next phase of growth.”

About Cresco Labs:

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s CSE Listing Statement filed with SEDAR; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts

Media:

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

Investors:

Aaron Miles

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.34 35 d945319dex9934.htm EX-99.34 EX-99.34

Exhibit 99.34

Cresco Labs Announces Accelerating Revenue and Increasing Operating

Leverage in Record Second Quarter 2020 Results

•

Record revenue of $94.3 million, 42% growth QoQ

•

30+% sequential revenue growth in all of the Company’s U.S. markets except Massachusetts

•

Record adjusted EBITDA1 of $16.5 million, 419% growth QoQ

•

Reduced SG&A by $1.5 million QoQ

•

Wholesale revenue growth of 44% QoQ to $55 million and retail revenue growth of 39% QoQ to $39 million

CHICAGO—(BUSINESS WIRE)—August 20, 2020—Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) (FSE: 6CQ) (“Cresco Labs” or the “Company”), one of the largest vertically integrated multi-state cannabis operators in the United States, today released its unaudited financial results for the second quarter ended June 30, 2020. All financial information presented in this release is in U.S. dollars, unless otherwise noted.

Management Commentary

“While Q2 continued to be about building, scaling and refining our operations in the largest and most important cannabis markets in the U.S., we are also beginning to see the fruits of our labor come to bear,” said Charles Bachtell, Co-founder and CEO of Cresco Labs. “We grew revenue in every single one of our U.S. markets sequentially by more than 30%, with the exception of Massachusetts, where adult use was halted for part of the quarter. Cresco Labs is the largest wholesaler of branded cannabis products with nearly $55 million in revenue and our Sunnyside* retail strategy is outperforming with $39 million generated from our 17 locations. We are accelerating growth and beginning to generate substantial leverage as we scale our operations and benefit from the investments we’ve made over the past 12 months.”

Second Quarter 2020 Financial Highlights

Operating Results

•

Revenue for the second quarter of 2020 was $94.3 million, an absolute increase of nearly $28 million or a 42% increase over Q1’20 revenue. Revenue increased sequentially by more than 30% in every U.S. market, with the exception of Massachusetts. Wholesale growth was driven by product popularity in California and first harvests from expanded capacity in Illinois and Pennsylvania. Retail growth was driven by strong sequential same-store growth of 31% and two new store openings in Illinois.

•

Operational Gross Profit¹ as a Percentage of Revenue was 47% in the quarter as compared to 48% in the prior quarter. Operating costs associated with the expansion of the Company’s cultivation centers in PA and IL in Q4’19 and Q1’20 were associated with Q2 products sales, impacting the Company’s cost of products sold for the quarter.

•

SG&A was $45.2 million, a reduction of $1.5 million from Q1. SG&A included $5.2 million in non-core costs associated with the integration of Origin House and the termination of the Tryke transaction, $0.8 million in COVID-19 related expenses, and $6.7 million in share-based compensation. Excluding these non-core and non-cash items, SG&A would have been $32.5 million or 35% of revenue.

•

Adjusted EBITDA¹ was $16.5 million, an increase of 419% sequentially. This was achieved while integrating Origin House during the quarter, and was driven primarily from higher revenues and increased operational gross profit in Illinois and Pennsylvania.

•

Net Loss² was $4.7 million, which includes unrealized gains and losses on mark-to-market instruments that fluctuate until obligations are settled, changes in fair value of biological assets, interest expense and tax expense.

•

Net Cash Used in Operating Activities was $9.9 million, compared to $40.1 million used in Q1. The improvement in cash used in operating activities was driven by increased operating leverage across the business as the Company scales.

Shares Outstanding

Total shares on a fully converted basis were 377,691,701 as of June 30, 2020.

Conference Call and Webcast

The Company will host a conference call and webcast to discuss its financial results and provide investors with key business highlights on Thursday, August 20, 2020, at 5pm Eastern Time (4pm Central Time). The conference call may be accessed via webcast or by dialing 866-688-4235 (409-216-0711 for international callers) and providing conference ID 2957578. Archived access to the webcast will be available for one year on the Cresco Labs’ investor relations website.

Consolidated Financial Statements

The financial information reported in this news release is based on unaudited management prepared financial statements for the three months ended June 30, 2020. The Company expects to file its unaudited interim consolidated financial statements on SEDAR by August 20, 2020. Accordingly, such financial information may be subject to change. All financial information contained in this news release is qualified in its entirety with reference to such financial statements. While the Company does not expect there to be any material changes, to the extent that the financial information contained in this news release is inconsistent with the information contained in the Company’s financial statements, the financial information contained in this news release shall be deemed to be modified or superseded by the Company’s financial statements. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation for purposes of applicable securities laws. Further, the reader should refer to the additional disclosures in the Company’s audited financial statements for the year ended

December 31, 2019, previously filed on SEDAR.

Cresco Labs references certain non-IFRS financial measures throughout this press release, which may not be comparable to similar measures presented by other issuers. Please see the “Non-IFRS Financial Measures” section at the end of this press release for more detailed information.

About Cresco Labs Inc.

Cresco Labs is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco Labs is built to become the most important company in the cannabis industry by combining the most strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) 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, Remedi and Mindy’s, a line of edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside*, Cresco Labs’ national dispensary brand, is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco Labs has launched the industry’s first national comprehensive Social Equity and Educational Development (SEED) initiative designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein. Accordingly, the following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS.

Forward Looking Statements

any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the Company’s Annual Information Form dated April 28, 2020, and other documents filed by the Company with Canadian securities regulatory authorities; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco Labs’ shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

¹	See “Non-IFRS Financial Measures” at the end of this press release for more information regarding the Company’s use of non-IFRS financial measures.

²	Net loss includes amounts attributable to noncontrolling interests.

Cresco Labs Inc.

Unaudited Financial Information and Non-IFRS Reconciliations

(All amounts expressed in thousands of U.S. Dollars)

Unaudited Consolidated Statements of Operations

For the Three Months Ended June 30, 2020, March 31, 2020 and June 30, 2019


	For the Three Months Ended
($ in thousands)	6/30/2020			3/31/2020			6/30/2019
Revenue	$	94,256		$	66,380		$	29,890
Cost of sales - production costs		(60,835	)		(46,200	)		(17,145	)

Gross profit before fair value adjustments		33,421			20,180			12,745
Realized changes in fair value of inventory sold		(41,774	)		(24,584	)		(17,620	)
Unrealized gain on changes in fair value of biological assets		77,822			38,544			29,814

Gross profit		69,469			34,140			24,939
GP%		73.7	%		51.4	%		83.4	%
Expenses:
Selling, general and administrative		45,186			46,653			19,705
Depreciation and amortization		5,358			4,619			894

Total expenses		50,544			51,272			20,599


Gain (loss) from operations		18,925			(17,132	)		4,340

Other (expense) income:
Interest expense, net		(9,597	)		(8,216	)		(2,087	)
Other (expense) income, net		(740	)		15,523			(621	)
Income (loss) from investment in associate		24			(144	)		36

Total other expense, net		(10,313	)		7,163			(2,672	)

Income (loss) before income taxes		8,612			(9,969	)		1,668
Income tax expense		(13,312	)		(3,462	)		(5,586	)

Net loss ¹	$	(4,700	)	$	(13,431	)	$	(3,918	)

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

Cresco Labs Inc.

Summarized Consolidated Statements of Financial Position

As of June 30, 2020 and December 31, 2019


	June 30, 2020		December 31, 2019
($ in thousands)	(Unaudited)		(Audited)
Cash and cash equivalents	$	70,994	$	49,102
Other current assets		185,732		110,236
Property and equipment, net		175,281		155,839
Intangible assets, net		199,882		94,206
Goodwill		451,632		137,719
Other non-current assets		125,583		69,452

Total assets	$	1,209,104	$	616,554

Total current liabilities		163,396		150,169
Total long-term liabilities		308,890		143,762
Total shareholders’ equity		736,818		322,623

Total liabilities and shareholders’ equity	$	1,209,104	$	616,554

Cresco Labs Inc.

Unaudited Revenue and Gross Profit Metrics

For the Three Months Ended June 30, 2020, March 31, 2020 and June 30, 2019


	For the Three Months Ended
($ in thousands)	6/30/2020			3/31/2020			6/30/2019
Revenue	$	94,256		$	66,380		$	29,890
Cost of sales – production costs¹		(60,835	)		(46,200	)		(17,145	)
Realized changes in fair value of inventory sold		(41,774	)		(24,584	)		(17,620	)
Unrealized gain on changes in fair value of biological assets		77,822			38,544			29,814

Gross profit	$	69,469		$	34,140		$	24,939


Cultivation costs expensed under IAS 41²		3,951			6,050			912
Net impact of fair value of biological assets		(36,048	)		(13,960	)		(12,194	)
Expansion, relaunch and rebranding costs³		4,616			3,881			722
COVID-19 related expenses		1,887			—			—
Fair value markup for acquired inventory		331			1,889			—

Operational gross profit (Non-IFRS)	$	44,206		$	32,000		$	14,379

Operational GP%		46.9	%		48.2	%		48.1	%

¹	Production (cultivation, manufacturing, and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

³	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

Cresco Labs Inc.

Unaudited Reconciliation of Net Income to Adjusted EBITDA

For the Three Months Ended June 30, 2020, March 31, 2020 and June 30, 2019


	For the Three Months Ended
($ in thousands)	6/30/2020			3/31/2020			6/30/2019
Net loss¹	$	(4,700	)	$	(13,431	)	$	(3,918	)
Depreciation and amortization		9,626			8,368			2,075
Interest expense, net		9,597			8,216			2,087
Income tax expense		13,312			3,462			5,586

Earnings before interest, taxes, depreciation and amortization (EBITDA) (Non-IFRS)	$	27,835		$	6,615		$	5,830

Expansion, relaunch and rebranding costs²		4,616			3,881			722
COVID-19 related expenses		2,648			—			—
Other expense (income), net		740			(15,523	)		621
(Gain) loss from investment in associate		(24	)		144			(36	)
Fair value markup for acquired inventory		331			1,889			—
Cultivation costs expensed under IAS 41³		3,951			6,050			912
Adjustments for acquisition and other non-core costs		5,205			11,843			3,203
Management incentive compensation (share-based)		7,207			2,235			3,210

Adjusted EBITDA (Non-IFRS)	$	52,509		$	17,134		$	14,462

Net impact of fair value of biological assets		(36,048	)		(13,960	)		(12,194	)

Adjusted EBITDA (non-IFRS), net of impact of biological assets	$	16,461		$	3,174		$	2,268

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

²	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

Cresco Labs Inc.

Unaudited Summarized Consolidated Statements of Cash Flows

For the Three Months Ended June 30, 2020, March 31, 2020 and June 30, 2019


	For the Three Months Ended
($ in thousands)	6/30/2020			3/31/2020			6/30/2019
Net cash used in operating activities	$	(9,881	)	$	(40,101	)	$	(5,797	)
Net cash provided by (used in) investing activities		14,888			(38,641	)		(34,863	)
Net cash (used in) provided by financing activities		(2,227	)		95,020			(4,047	)
Effect of foreign currency exchange rate changes on cash		(288	)		946			—

Net increase in cash and cash equivalents		2,492			17,224			(44,707	)

Cash and cash equivalents and restricted cash, beginning of period		71,376			54,152			113,401

Cash and cash equivalents and restricted cash, end of period	$	73,868		$	71,376		$	68,694

Contacts

Media

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

312-953-2767

Investors

Aaron Miles, Cresco Labs

Vice President, Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.35 36 d945319dex9935.htm EX-99.35 EX-99.35

Exhibit 99.35

CRESCO LABS INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

THREE AND SIX MONTHS ENDED

JUNE 30, 2020 AND 2019

(Expressed in United States Dollars)

Cresco Labs Inc.

INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:

Condensed Interim Consolidated Statements of Financial Position			2

Condensed Interim Consolidated Statements of Operations			3

Condensed Interim Consolidated Statements of Comprehensive Loss			4

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity			5

Condensed Interim Consolidated Statements of Cash Flows			6

Notes to the Condensed Interim Consolidated Financial Statements			7

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Financial Position

As of June 30, 2020 and December 31, 2019

(In thousands of United States Dollars)


		(Unaudited)
		June 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	70,994		$	49,102
Restricted cash			2,874			5,050
Accounts receivable, net	Note 3		16,889			16,455
Biological assets	Note 4		56,683			31,791
Inventory, net	Note 5		100,219			49,555
Loans receivable, short-term	Note 20		2,400			644
Other current assets			6,667			6,741

Total current assets			256,726			159,338
Non-current assets:
Property and equipment, net	Note 6		175,281			155,839
Right-of-use assets	Note 7		93,593			46,696
Intangible assets, net	Note 9		199,882			94,206
Loans receivable, long-term	Note 20		19,289			18,633
Investments	Note 8		5,079			1,278
Security deposits			3,612			1,084
Goodwill	Note 9		451,632			137,719
Deferred tax asset	Note 24		3,827			1,761
Other non-current assets			183			—

Total non-current assets			952,378			457,216

TOTAL ASSETS		$	1,209,104		$	616,554

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Current liabilities:
Accounts payable and other accrued expenses	Note 10	$	66,915		$	62,834
Short-term borrowings	Note 14		23,922			—
Income tax payable			35,195			15,198
Current portion of lease liabilities	Note 7		26,036			12,019
Deferred consideration, contingent consideration and other payables	Note 13		11,317			59,940
Derivative liabilities, short-term	Note 20		11			178

Total current liabilities			163,396			150,169
Long-term liabilities:
Long-term notes payable and loans payable	Note 14		95,584			550
Derivative liabilities, long-term	Note 20		8,605			15,243
Lease liabilities	Note 7		139,976			82,856
Deferred tax liability	Note 24		51,605			23,212
Deferred consideration and contingent consideration	Note 13		13,120			21,901

Total long-term liabilities			308,890			143,762

TOTAL LIABILITIES			472,286			293,931

SHAREHOLDERS’ EQUITY:
Share capital			707,348			275,851
Contributed surplus			43,075			25,863
Accumulated other comprehensive income			(407	)		—
Accumulated deficit			(154,993	)		(114,632	)

Equity of Cresco Labs Inc.			595,023			187,082
Non-controlling interests	Note 11		141,795			135,541

TOTAL SHAREHOLDERS’ EQUITY			736,818			322,623

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,209,104		$	616,554

Nature of Operations (Note 1)

Commitments and Contingencies (Note 19)

Subsequent Events (Note 25)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited - In thousands of United States Dollars, except per share data)


		(Unaudited)						(Unaudited)
		Three months ended June 30,						Six months ended June 30,
		2020			2019			2020			2019
Revenue, net	Note 15	$	94,256		$	29,890		$	160,636		$	50,945
Costs of sales - production costs	Note 5		(60,835	)		(17,145	)		(107,035	)		(31,859	)

Gross profit before fair value adjustments			33,421			12,745			53,601			19,086
Realized changes in fair value of inventory sold	Note 5		(41,774	)		(17,620	)		(66,358	)		(33,515	)
Unrealized gain on changes in fair value of biological assets	Note 4		77,822			29,814			116,366			50,020

Gross profit			69,469			24,939			103,609			35,591

Expenses:
Selling, general and administrative	Note 16		45,186			19,705			91,839			36,478
Depreciation and amortization	Note 6, 7, 9		5,358			894			9,977			1,867

Total expenses			50,544			20,599			101,816			38,345

Gain (loss) before other (expense) income and income taxes			18,925			4,340			1,793			(2,754	)
Other (expense) income:
Interest expense, net	Note 23		(9,597	)		(2,087	)		(17,813	)		(2,506	)
Other (expense) income, net	Note 17		(740	)		(621	)		14,783			(755	)
Income (loss) from investment in associate	Note 8		24			36			(120	)		72

Total other expense, net			(10,313	)		(2,672	)		(3,150	)		(3,189	)

Income (loss) before income taxes			8,612			1,668			(1,357	)		(5,943	)
Income tax expense	Note 24		(13,312	)		(5,586	)		(16,774	)		(5,549	)

Net loss		$	(4,700	)	$	(3,918	)	$	(18,131	)	$	(11,492	)
Net income (loss) attributable to non-controlling interests, net of tax	Note 11		14,197			(1,892	)		8,155			(3,239	)

Net loss attributable to Cresco Labs Inc.		$	(18,897	)	$	(2,026	)	$	(26,286	)	$	(8,253	)

Net loss per share - attributable to Cresco Labs Inc. shareholders
Loss per share - Basic	Note 22	$	(0.09	)	$	(0.02	)	$	(0.13	)	$	(0.07	)
Loss per share - Diluted	Note 22	$	(0.09	)	$	(0.02	)	$	(0.13	)	$	(0.07	)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Comprehensive Loss

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited - In thousands of United States Dollars)


	(Unaudited)						(Unaudited)
	Three months ended June 30,						Six months ended June 30,
	2020			2019			2020			2019
Net loss for the period	$	(4,700	)	$	(3,918	)	$	(18,131	)	$	(11,492	)
Other comprehensive loss for the period
Foreign currency translation differences, net of tax		(511	)		—			(407	)		—

Total net loss and comprehensive loss for the period	$	(5,211	)	$	(3,918	)	$	(18,538	)	$	(11,492	)

Comprehensive income (loss) attributable to non-controlling interests, net of tax		14,197			(1,892	)		8,155			(3,239	)

Total net loss and comprehensive loss attributable to Cresco Labs Inc.	$	(19,408	)	$	(2,026	)	$	(26,693	)	$	(8,253	)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

For the Six Months Ended June 30, 2020 and 2019

(Unaudited - In thousands of United States Dollars)


		$ Amount
	Notes	Share capital		Shares to be issued			Contributed surplus			Accumulated deficit			Accumulated other comprehensive income			Non-controlling interests			Total
Balance as of January 1, 2019		$	142,118	$	20,064		$	11,594		$	(52,745	)		—		$	161,950		$	282,981
Cumulative effect of adoption of IFRS 16 Leases			—		—			—			(1,466	)		—			(1,526	)		(2,992	)
Net loss			—		—			—			(8,253	)		—			(3,239	)		(11,492	)
Share-based compensation expense	Note 12		—		—			6,649			—			—			—			6,649
Warrant expense					—			344			—			—			—			344
Exercise of options and warrants			688		—			(194	)		—			—			—			494
Change in ownership interest	Note 11(e)		—		—			—			(438	)		—			(395	)		(833	)
Distributions to limited liability company unit holders	Note 11(d)				—			—			(2,942	)		—			(688	)		(3,630	)
Income tax reserve					—			534			322			—			—			856
Issuance of shares related to MedMar			19,497		(19,497	)		—			—			—			—			—

Ending Balance as of June 30, 2019		$	162,303	$	567		$	18,927		$	(65,522	)		—		$	156,102		$	272,377

Balance as of January 1, 2020		$	275,851		—		$	25,863		$	(114,632	)		—		$	135,541		$	322,623
Exercise of options and warrants	Note 11(c), 12		1,166		—			(532	)		—			—			—			634
Equity-based compensation			3,815		—			2,119			—			—			—			5,934
Income tax reserve			—		—			(512	)		(110	)		—			—			(622	)
Employee taxes on certain share-based payment arrangements			2,681		—			(2,681	)		—			—			—			—
Equity issued related to acquisitions	Note 11(b)(ii-v)		408,013		—			27,885			—			—			—			435,898
Equity issuances	Note 11(b)(i)		437		—			—			—			—			—			437
Distributions to limited liability company unit holders	Note 11(d)		—		—			(9,067	)		—			—			(481	)		(9,548	)
Cresco LLC shares redeemed and other adjustments	Note 11(e)		15,385		—			—			(13,965	)		—			(1,420	)		—
Foreign currency translation			—		—			—			—			(407	)		—			(407	)
Net loss			—		—			—			(26,286	)		—			8,155			(18,131	)

Ending Balance as of June 30, 2020		$	707,348	$	—		$	43,075		$	(154,993	)	$	(407	)	$	141,795		$	736,818

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2020 and 2019

(Unaudited - In thousands of United States Dollars)


	(Unaudited)
	Six months Ended June 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(18,131	)	$	(11,492	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		17,994			4,699
Provision for expected credit loss		455			120
Share-based compensation expense		9,453			6,258
Loss on investments		433			7
(Gain) loss on changes in fair value of deferred and contingent consideration		(7,476	)		721
(Gain) loss on derivative instruments and warrants		(6,424	)		235
(Gain), net of losses, on loans receivable		(292	)		—
Accrued interest expense, net of income		4,118			—
Realized changes in fair value of inventory sold		60,642			31,252
Loss on inventory write-offs and provision		5,716			2,263
Unrealized (gain), net of losses, on changes in fair value of biological assets		(116,366	)		(50,020	)
Change in deferred taxes		(4,493	)		3,369
Accretion of discount and deferred financing costs on debt arrangements		2,310			—
Foreign currency gain		(178	)		(3	)
Acquisition termination charges settled in equity		1,279			—
Gain on debt modification		(1,084	)		—
Loss, net of (gains), on other adjustments to net income		94			—
Changes in operating assets and liabilities:
Accounts receivable		6,966			(4,767	)
Inventory		(101,699	)		(52,588	)
Biological assets		93,477			46,038
Other current assets		702			(711	)
Security deposits		(1,321	)		(102	)
Accounts payable and other accrued expenses		(15,150	)		9,390
Other current liabilities		(1,003	)		865
Deferred rent		—			16
Income tax payable		19,996			1,972

NET CASH USED IN OPERATING ACTIVITIES		(49,982	)		(12,478	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(53,262	)		(28,228	)
Purchases of intangibles		(1,166	)		(1,218	)
Proceeds from sale and leaseback transactions and lease tenant incentives		50,976			—
Payment of acquisition consideration, net of cash acquired		(15,434	)		(14,077	)
Loans receivable for entities to be acquired		(4,867	)		(8,823	)

NET CASH USED IN INVESTING ACTIVITIES		(23,753	)		(52,346	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, warrants and share issuances		875			688
Payment of issuance costs of financing		(191	)		—
Proceeds from the issuance of long-term debt		100,000			—
Payment of debt issuance costs		(3,855	)		—
Repayment of debt		(550	)		—
Acquisition of non-controlling interests		(203	)		(833	)
Distributions to non-controlling interest redeemable unit holders		(481	)		(3,630	)
Payments for taxes related to net share settlements of restricted stock units		(697	)		—
Principal payments of leases		(2,105	)		(735	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		92,793			(4,510	)

Effect of foreign currency exchange rate changes on cash		658			—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH		19,716			(69,334	)
Cash and cash equivalents and restricted cash, beginning of period		54,152			138,028

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	73,868		$	68,694

CASH PAID DURING THE PERIOD FOR:
Interest	$	9,197		$	2,359
Income tax, net		1,013			—
NON-CASH TRANSACTIONS:
Equity issued for acquisitions and escrows	$	434,618		$	—
Net liability upon adoption of IFRS 16 Leases and subsequent additions		51,781			46,892
Liability incurred to purchase property and equipment		2,872			—
Cashless exercise of stock options		384			—

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

1.	NATURE OF OPERATIONS

On December 3, 2018, the Company began trading on the Canadian Securities Exchange (“CSE”) under the ticker symbol “CL.” On March 6, 2019, Cresco shares were approved to be quoted on the Over-the-Counter Market (“OTC”) and is traded under the ticker symbol “CRLBF.” On August 13, 2019, the Company began trading its Euro-dominated shares on the Frankfurt Stock Exchange (“FSE”) and is trading under the symbol “6CQ.”

The Company is licensed to cultivate, manufacture and sell retail and medical cannabis as well as retail and medical cannabis products in certain U.S. states. The Company also operates a retail, wholesale and online nicotine vape business in Canada. The Company operates in and/or has ownership interests in Illinois, Pennsylvania, Ohio, California, Maryland, Nevada, Arizona, New York, Massachusetts, Michigan and Canada, 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 Nevada Revised Statutes section 453A, the Arizona Medical Marijuana Act, the New York Compassionate Care Act, the Massachusetts Cannabis Control Commission, the Michigan Medical Marihuana Act and the Canada Tobacco and Vaping Products Act, respectively.

The Company’s head office is located at Suite 110, 400 W Erie St, Chicago, IL 60654 and the registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Basis of Preparation

The unaudited condensed interim consolidated financial statements of the Company have been prepared under International Financial Reporting Standards (“IFRS”) in accordance with International Accounting Standards (“IAS”) 34 Interim Financial Reporting, which was adopted by the International Accounting Standards Board (“IASB”).

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

The unaudited condensed interim consolidated financial statements are presented in United States dollars and are prepared in accordance with consistently applied accounting policies, critical estimates, and methods described in the Company’s annual consolidated financial statements. The unaudited condensed interim consolidated financial statements do not include all information and disclosures required in the Company’s annual consolidated financial statements and should be read in conjunction with the Company’s annual consolidated financial statements for the years ended December 31, 2019 and 2018.

These unaudited condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 20, 2020.

(b)

Basis of Measurement

Management has applied judgement in concluding that there remain no material uncertainties related to events or conditions that may cast doubt upon the entity’s ability to continue as a going concern, which includes judgment of the effects of subsequent events, if applicable (see Note 25); and the Company’s ability to realize its assets and settle its obligations in the normal course of operations for at least twelve months from the date of the financial statements.

(c)

Functional and Presentation Currency

The Company’s functional currency and that of the majority of its subsidiaries, as determined by management, is the United States (“U.S.”) dollar. The Company’s presentation currency is the U.S. dollar. As such, the accompanying consolidated financial statements are presented in U.S. dollars. 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 rate of exchange prevailing at the dates of the transactions during the period. Gains or losses on translation of foreign subsidiaries and net investments in foreign operations are included in other comprehensive loss.

(d)

Basis of Consolidation

The unaudited condensed interim consolidated financial statements include the accounts of the Company and its subsidiaries with intercompany balances and transactions eliminated on 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’s wholly owned or effectively controlled subsidiaries and entities over which the Company has control as of June 30, 2020:

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)


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		45.2	%
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 (d/b/a Sunnyside - Lakeview and Sunnyside - River North)	Illinois	Dispensary		87.6	%
MedMar Rockford, LLC (d/b/a Sunnyside - Rockford and Sunnyside - South Beloit)	Illinois	Dispensary		75	%
CannaRoyalty Corp. (d/b/a Origin House)	Ontario, Canada	Holding Company		100	%
Cali-AntiFragile Corp.	California	Holding Company		100	%
Alta Supply Inc.	California	Distribution		100	%
Kaya Management Inc.	California	Production		100	%
RPE Inc.	California	Distribution		100	%
FloraCal	California	Cultivation		100	%
Cub City, LLC	California	Distribution		100	%
CRHC Holdings Corp.	Ontario, Canada	Holding Company		100	%
2360149 Ontario Inc. (d/b/a 180 Smoke)	Ontario, Canada	Nicotine Vape Company		100	%
Cresco Labs Michigan, LLC (a)	Michigan	Cultivation and Production Facility		85	%

(a)	Cresco Labs Michigan, LLC is 85% owned by related parties with management control 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	%
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	%
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 (d/b/a Sunnyside - Buffalo Grove)	Illinois	Dispensary		100	%
Cresco Labs Phoenix Farms, LLC	Illinois	Holding Company		100	%
Phoenix Farms of Illinois, LLC (d/b/a Sunnyside - Champaign and Sunnyside - Danville)	Illinois	Dispensary		100	%
JDC Elmwood, LLC	Illinois	Holding Company		100	%
FloraMedex, LLC (d/b/a Sunnyside - Elmwood Park)	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	%

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 statements of financial position, and the share of income (loss) attributable to NCI is shown as a component of net loss in the unaudited Condensed Interim Consolidated Statements of Operations and in the unaudited Condensed Interim Consolidated Statement of Comprehensive Loss. Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(e)

Intangible Assets


Market Related Intangibles			12 –18 months
Customer Relationships			7 – 19 years
Non-Compete Agreements			4 – 5 years
Trade Names			10 years
Permit Application Fees			1 – 2 years

(f)

Significant Accounting Judgements, Estimates, and Assumptions

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(g)

Recently Issued Accounting Standards

The Company does not believe any recently issued, but not yet effective IFRS standards that have been issued by the IASB will have a material impact on the Company’s financial statements.

3.	ACCOUNTS RECEIVABLE

As of June 30, 2020 and December 31, 2019, Accounts receivable consisted of the following:


($ in thousands)	June 30, 2020			December 31, 2019
Accounts receivable, gross	$	17,326		$	16,726
Allowance for doubtful accounts		(437	)		(271	)

Total Accounts receivable, net	$	16,889		$	16,455

See Note 20 for the analysis of accounts receivable aging and disclosure of bad debt expense.

4.	BIOLOGICAL ASSETS

The Company’s biological assets consist of cannabis plants. The changes in the carrying value of biological assets to June 30, 2020 from December 31, 2019, consisted of the following:


($ in thousands)
Biological assets at January 1, 2020	$	31,791
Biological assets acquired (Note 13)		2,002
Transferred to inventory upon harvest		(93,476	)
Changes in fair value of biological assets		116,366

Biological assets at June 30, 2020	$	56,683

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

This model utilizes the following significant assumptions:


Inputs and assumptions	Calculation method	Effect changes of unobservable inputs has on fair value

Selling price per gram, less cost to sell	Based on observable market data or calculated wholesale prices with reasonable margins.	An increase in selling price per gram would increase the fair value of biological assets.

Attrition rate	Based on weighted average number of plants lost during each stage of production.	An increase in attrition rate would result in a decrease to the fair value of biological assets.

Average yield per plant	Based on the average number of grams of dried cannabis inventory expected to be harvested from each cannabis plant.	An increase to the average yield per plant would result in an increase to the fair value of biological assets.

Cumulative stage of completion in the production process	Based on an average number of days in production over a total average grow cycle of between 13 and 15 weeks.	An increase to the average stage of completion of the plants would result in an increase to the fair value of biological assets.

The Company estimates the harvest yields for cannabis at various stages of growth. As of June 30, 2020 and December 31, 2019, it was expected that the Company’s biological assets would yield approximately 24,849 thousand and 13,142 thousand grams, respectively.

The Company has quantified the sensitivity of the inputs in relation to biological assets as of June 30, 2020 and 2019 and expects the following effect on fair value as shown in the table below:


($ in thousands)			Effect on fair value June 30,
Significant inputs & assumptions	Range of inputs	Sensitivity	2020			2019
Selling price per gram, less cost to sell	$1.60 to $6.28	Increase 5%	$	7,408		$	3,230
		Decrease 5%		(7,408	)		(3,230	)
Attrition rate	5% to 23%	Increase 5%		(2,963	)		(1,191	)
		Decrease 5%		2,004			1,191
Average yield per plant	50 grams to 138 grams	Increase 5%		2,834			1,083
		Decrease 5%		(2,834	)		(1,083	)
Cumulative stage of completion	26% to 57% complete	Increase 5%		5,734			2,376
		Decrease 5%		(5,916	)		(2,376	)

5.	INVENTORY

As of June 30, 2020 and December 31, 2019, inventory was comprised primarily of cannabis and cannabis-related products. The Company wrote off $261 thousand and $nil of inventory during the three months ended June 30, 2020 and 2019, respectively, primarily related to work-in-process inventory with a lower expected exit price in its Arizona operations. The Company wrote off $1,935 thousand and $2,263 thousand of inventory during the six months ended June 30, 2020 and 2019, respectively, primarily related to the damaged work-in-process inventory in Ohio and work-in-process inventory with a lower expected exit price in its Arizona operations. This write-off is

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

included in the fair value of inventory sold presented on the unaudited Condensed Interim Consolidated Statements of Operations. As of June 30, 2020 and December 31, 2019, the Company had inventory reserves of $3,955 thousand and $173 thousand, respectively. The Company recorded $1,365 thousand and $3,781 thousand of provision for inventory reserves in Cost of sales - production costs for the three and six months ended June 30, 2020, respectively. The Company recorded $ nil of provision for inventory reserves in Cost of sales - production costs for both the three and six month periods ending June 30, 2019.

Inventory as of June 30, 2020 and December 31, 2019, consisted of the following:


($ in thousands)	June 30, 2020		December 31, 2019
Raw materials	$	36,097	$	16,521
Raw materials - non-cannabis		16,116		5,820
Work-in-process		21,612		14,100
Finished goods		26,394		13,114

Total Inventory	$	100,219	$	49,555

During the three months ended June 30, 2020 and 2019, the Company recognized $102,609 thousand and $34,765 thousand, respectively, of inventory expensed in the unaudited Condensed Interim Consolidated Statements of Operations, which includes $60,835 thousand and $17,145 thousand, respectively, of Cost of sales – production costs and $41,774 thousand and $17,620 thousand, respectively, of non-cash expense relating to the changes in fair value of inventory sold.

During the six months ended June 30, 2020 and 2019, the Company recognized $173,393 thousand and $65,374 thousand, respectively, of inventory expensed in the unaudited Condensed Interim Consolidated Statements of Operations, which includes $107,035 thousand and $31,859 thousand, respectively, of Cost of sales – production costs and $66,358 thousand and $33,515 thousand, respectively, of non-cash expense relating to the changes in fair value of inventory sold.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

6.	PROPERTY AND EQUIPMENT

As of June 30, 2020 and December 31, 2019, property and equipment consisted of the following:


($ in thousands)	Land and Buildings			Machinery and Equipment			Furniture and Fixtures			Leasehold Improvements			Computer Equipment and Software			Website and Software			Vehicles			Construction In Progress			Total
Cost
As of January 1, 2020	$	28,007		$	15,650		$	10,458		$	62,965		$	2,315		$	400		$	715		$	42,048		$	162,558

Additions		585			4,671			3,346			14,049			1,686			105			338			15,639			40,419
Transfers		1,728			27			(91	)		38,442			—			—			—			(40,106	)		—
Disposals		—			(137	)		(3	)		(32	)		(21	)		—			—			—			(193	)
Sale related to sale-leaseback transactions		(22,083	)		—			—			—			—			—			—			(9,973	)		(32,056	)
Additions from acquisition		—			455			473			11,615			493			92			331			5,166			18,625
Effect of foreign exchange and other adjustments		—			(17	)		(233	)		(108	)		(13	)		—			—			—			(371	)

As of June 30, 2020	$	8,237		$	20,649		$	13,950		$	126,931		$	4,460		$	597		$	1,384		$	12,774		$	188,982

Accumulated depreciation
As of January 1, 2020	$	(432	)	$	(1,248	)	$	(994	)	$	(3,142	)	$	(586	)	$	(157	)	$	(160	)	$	—		$	(6,719	)

Depreciation		(213	)		(822	)		(994	)		(4,248	)		(474	)		(94	)		(137	)		—			(6,982	)

As of June 30, 2020	$	(645	)	$	(2,070	)	$	(1,988	)	$	(7,390	)	$	(1,060	)	$	(251	)	$	(297	)	$	—		$	(13,701	)

Net book value
As of June 30, 2020	$	7,592		$	18,579		$	11,962		$	119,541		$	3,400		$	346		$	1,087		$	12,774		$	175,281

As of December 31, 2019	$	27,575		$	14,402		$	9,464		$	59,823		$	1,729		$	243		$	555		$	42,048		$	155,839

As of June 30, 2020 and December 31, 2019, costs related to construction at the Company’s facilities were capitalized in construction in progress and not depreciated. Depreciation will commence when construction is completed and the facility is available for its intended use.

Depreciation of $3,873 thousand and $1,063 thousand was incurred during the three months ended June 30, 2020 and 2019, respectively, of which $1,093 thousand and $ 269 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

Depreciation of $6,982 thousand and $1,920 thousand was incurred during the six months ended June 30, 2020 and 2019, respectively, of which $1,952 thousand and $ 533 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

As of June 30, 2020, ending inventory includes $897 thousand of capitalized depreciation. For the three months ended June 30, 2020 and 2019, $2,833 thousand and $712 thousand, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $377 thousand and $ 110 thousand, respectively, related to depreciation capitalized to inventory in prior quarters. For the six months ended June 30, 2020 and 2019, $5,082 thousand and $1,240 thousand, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $365 thousand and $134 thousand, respectively, related to depreciation capitalized to inventory in prior quarters.

7.	LEASES

Effective January 1, 2019, the Company adopted IFRS 16 Leases. The Company is the lessee in the majority 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 permit renewal options, including multiple successive renewal options ranging from 0.5 to 35 years.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

ROU Assets - As of June 30, 2020 and December 31, 2019, the Company’s leases consisted of the following:


($ in thousands)	As of June 30, 2020		As of December 31, 2019
Real estate	$	93,547	$	46,696
Vehicles		46		—

Total Right-of-use assets	$	93,593	$	46,696

Included in the ROU asset balance are $17,984 thousand of additions resulting from the acquisition of CannaRoyalty Corp. (“Origin House”) and $32,804 thousand of additions related to new leases, partially offset by $91 thousand of terminations for the six months ended June 30, 2020.

Total interest expense of $4,971 thousand and $2,370 thousand was recorded for the three months ended June 30, 2020 and 2019, respectively and $9,189 thousand and $3,225 thousand for the six months ended June 30, 2020 and 2019, respectively.

Total leasing depreciation of $2,086 thousand and $580 thousand was recorded for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 and 2019, $1,079 thousand and $331 thousand, respectively, of leasing depreciation is included in Selling, general and administrative expense with the remainder in Cost of sales – production costs and ending inventory.

Total leasing depreciation of $ 3,929 thousand and $2,032 thousand was recorded for the six months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, $1,978 thousand and $735 thousand, respectively, of leasing depreciation is included in Selling, general and administrative expense with the remainder in Cost of sales – production costs and ending inventory.

As of June 30, 2020, ending inventory includes $298 thousand of capitalized depreciation. For the three months ended June 30, 2020 and 2019, $847 thousand and $221 thousand, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $80 thousand and $ 199 thousand, respectively, related to depreciation capitalized to inventory in prior quarters. For the six months ended June 30, 2020 and 2019, $1,726 thousand and $1,135 thousand, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $44 thousand and $255 thousand, respectively, related to depreciation capitalized to inventory in prior quarters.

For short-term leases with durations of twelve months or less, the Company recorded $302 thousand and $12 thousand for the three months ended June 30, 2020 and 2019, respectively, and $558 thousand and $154 thousand for the six months ended June 30, 2020 and 2019, respectively, in rent expense within Selling, general and administrative expenses. The Company recognizes this expense on a straight-line basis over the lease term.

The Company is the lessor in three real estate operating leasing arrangements and one equipment finance leasing arrangement. For the three and six months ended June 30, 2020, the Company recorded rental income in Other (expense) income of $162 thousand and $ 335 thousand, respectively, in relation to the operating leases. At June 30, 2020, the Company recorded deferred rent receivable for operating leases of $42 thousand, an investment in leased asset for the finance lease of $90 thousand, and a sublease receivable balance of $57 thousand.

During the three and six months ended June 30, 2020, the Company entered into and amended certain sale and leaseback agreements whereby the Company sold properties with a total net book value of $19,965 thousand and $31,594 thousand, respectively, and recorded a $nil and $22 thousand loss, respectively, on asset sale recorded in Selling, general, and administrative expense in the unaudited Condensed Interim Consolidated Statement of Operations. The new and amended 2020 sale and leaseback transactions resulted in net funding of $29,870 thousand, a net increase to ROU assets of $23,729 thousand, a net increase to lease liability of $24,457 thousand and expected additional tenant improvement allowance reimbursements of $52,936 thousand, with the remaining impact related to settlement of security deposits, the Hope Heal Health (“HHH”) Loan (“HHH Loan”), and prepaid expenses.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

The Company has received tenant improvement allowance reimbursements of $20,555 thousand across all leasing arrangements for the six months ended June 30, 2020 and expects to receive an additional $54,589 thousand for these arrangements, for a total of $75,145 thousand.

As of June 30, 2020, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	15,991
2021		32,122
2022		32,866
2023		34,035
2024		34,863
Thereafter		428,950

Total lease payments	$	578,827

Less: interest		(358,226	)
Less: tenant improvement allowance		(54,589	)

Present value of lease liabilities		166,012

Less: short-term lease liabilities		(26,036	)

Present value of long-term lease liabilities	$	139,976

8.	INVESTMENTS

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

(a)

Investments at Fair Value

The Company has investments in three entities: 420 Capital Management, LLC (“420 Capital”), a cannabis investment company; Lighthouse Strategies, LLC (“Lighthouse”), a diversified cannabis investment company; and Fleurish Cannabis, Inc. (“Fleurish”), an entity that focuses on cannabis production licenses. The 420 Capital, Lighthouse and Fleurish investments are accounted for at fair value. On August 12, 2019, the Company settled its outstanding loan receivable with Lighthouse of $3,264 thousand through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company, with a fair value of $978 thousand as of June 30, 2020. See Note 20 for additional details. Upon the acquisition of Origin House on January 8, 2020, the Company obtained a 1.3% ownership stake in Fleurish with a fair value of $139 thousand as of the acquisition date. See Note 13 for additional details.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

The following is a summary of the investments at fair value held as of June 30, 2020 and December 31, 2019:


($ in thousands)	June 30, 2020		December 31, 2019
420 Capital	$	68	$	68
Lighthouse		978		1,209
Fleurish		47		—
MassRoots		—		1

Total Investments	$	1,093	$	1,278

The Company recorded a mark-to-market gain of $219 thousand and a mark-to-market loss of $12 thousand for the three months ended June 30, 2020 and 2019, respectively, and a mark-to-market loss of $315 thousand and $9 thousand for the six months ended June 30, 2020 and 2019, respectively.

(b)

Investment in Associates

As part of the Origin House acquisition, the Company obtained 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 Trichome investment was valued at $4,302 thousand. The Company’s ownership stake in Trichome upon acquisition and as of June 30, 2020 is approximately 23%.

The following is a summary of the investment in associates accounted for as an equity method investment and held as of June 30, 2020 and December 31, 2019:


($ in thousands)	June 30, 2020		December 31, 2019
Trichome	$	3,986	$	—

Total Investment	$	3,986	$	—

The Company recorded investment income of $24 thousand and a loss of $120 thousand for the three and six months ended June 30, 2020, respectively. During the three and six months ended June 30, 2020, no distributions were made related to investments. For the three and six months ended June 30, 2019, the Company recorded investment income of $ 36 thousand and $72 thousand, respectively. During the three and six months ended June 30, 2019, this income was partially offset by distributions of $38 thousand and $70 thousand, respectively. Prior year investment income and distributions relate to a previously held equity method investment, which was dissolved in the fourth quarter of 2019.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

9.	INTANGIBLE ASSETS AND GOODWILL

The following is a reconciliation of the balances of intangible assets and goodwill from the beginning balances at

December 31, 2019 to the ending balances on June 30, 2020:


($ in thousands)	Customer Relationships			Trade Names			Permit Application Costs			Licenses		Other Intangibles (a)			Goodwill			Total
Cost
Balance at January 1, 2020	$	6,929		$	—		$	6,842		$	83,447	$	2,133		$	137,719		$	237,070

Additions		—			—			1,021			—		145			—			1,166
Additions from acquisitions		52,200			41,800			—			5,900		2,865			320,322			423,087
Foreign exchange		—			—			—			—		18			5			23
Measurement period adjustment		11,400			(2,100	)		—			—		(111	)		(6,414	)		2,775

Balance at June 30, 2020	$	70,529		$	39,700		$	7,863		$	89,347	$	5,050		$	451,632		$	664,121

Accumulated amortization
Balance at January 1, 2020	$	(858	)	$	—		$	(3,265	)	$	—	$	(1,022	)	$	—		$	(5,145	)

Amortization		(2,133	)		(1,985	)		(1,559	)		—		(1,785	)		—			(7,462	)

Balance at June 30, 2020	$	(2,991	)	$	(1,985	)	$	(4,824	)	$	—	$	(2,807	)	$	—		$	(12,607	)

Net book value
June 30, 2020	$	67,538		$	37,715		$	3,039		$	89,347	$	2,243		$	451,632		$	651,514

December 31, 2019	$	6,071		$	—		$	3,577		$	83,447	$	1,111		$	137,719		$	231,925

(a)	Other Intangibles includes market-related, non-compete agreements and internally developed software

During the three months ended March 31, 2020, the Company recorded an impairment charge of $1,194 thousand on a market-related intangible due to changing market conditions. During the three months ended June 30, 2020, the Company fully recovered the value of this intangible asset and recorded an impairment reversal of $1,194 thousand.

During the three months ended June 30, 2020, the Company recorded a measurement period adjustment related to the acquisition of Origin House, retrospectively applied to the opening balance sheet date. See Note 13 for further details.

Amortization of $3,844 thousand and $621 thousand was recorded for the three months ended June 30, 2020 and 2019, respectively, of which $3,050 thousand and $ 294 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

Amortization of $7,462 thousand and $1,234 thousand was recorded for the six months ended June 30, 2020 and 2019, respectively, of which $6,047 thousand and $598 thousand, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. As of June 30, 2020, ending inventory includes $328 thousand of capitalized amortization. For the three months ended June 30, 2020 and 2019, $588 thousand and $249 thousand, respectively, of amortization expense was recorded to Cost of sales – production costs, which includes $187 thousand and $76 thousand, respectively, related to amortization capitalized to inventory in prior quarters. For the six months ended June 30, 2020 and 2019, $1,209 thousand and $457 thousand, respectively, of amortization expense was recorded to Cost of sales – production costs, which includes $231 thousand and $88 thousand, respectively, related to amortization capitalized to inventory in prior quarters.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

10.

ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES

As of June 30, 2020 and December 31, 2019, Accounts payable and other accrued expenses were comprised of the following:


($ in thousands)	June 30, 2020		December 31, 2019
Accounts payable	$	38,324	$	32,463
Accrued expenses		11,790		24,133
Payroll liabilities		8,463		5,195
Excise taxes payable		7,109		540
Contract liability - loyalty programs		658		—
Tax penalty		495		455
Property taxes payable		76		48

Total Accounts payable and other accrued expenses	$	66,915	$	62,834

11.

SHARE CAPITAL

(a)

Authorized

The authorized share capital of the Company is comprised of the following:

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.

During the six months ended June 30, 2020 and 2019, 74.5 thousand and 99.9 thousand PVS, respectively, were exchanged for 14,893 thousand and 19,977 thousand SVS, respectively, at a rate of 1 PVS for 200 SVS.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

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 if and when declared by the directors of the Company, dividends in cash or property of the Company.

(b)

Issued and Outstanding

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units for the six months ended June 30, 2020 is as follows:


(in thousands)			Redeemable Units			Subordinate Voting Shares (SVS)		Super Voting Shares (MVS)		Proportionate Voting Shares (PVS)*			Special Subordinate Voting Shares (SSVS)**
Beginning balance, January 1, 2020				142,172			73,600		500		57,937			—

Options and warrants exercised	Note 11	(c), 12		—			470		—		12			—
RSUs issued	Note 12			—			1,098		—		—			—
Issuance of shares related to acquisitions	Note 11	(b)(ii-v)		—			69,465		—		265			—
Cresco LLC redemption	Note 11	(d)		(3,522	)		3,522		—		—			—
PVS converted to SVS	Note 11	(a)		—			14,893		—		(14,893	)		—
Employee taxes on certain share-based payment arrangements	Note 12			—			763		—		—			—
Share issuances	Note 11	(a),(b)(i)		—			99		—		—			1

Ending balance, June 30, 2020				138,650			163,910		500		43,321			1

*	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)

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units for the six months ended June 30, 2019 is as follows:


(in thousands)			Redeemable Units		Subordinate Voting Shares (SVS)		Super Voting Shares (MVS)		Proportionate Voting Shares (PVS)*			Shares to be issued
Beginning balance, January 1, 2019				143,844		26,711		500		82,803			3,020

Stock options exercised				—		—		—		440			—
Warrants exercised						32		—		—			—
Issuance of MedMar shares				—		—		—		3,020			(3,020	)
PVS converted to SVS	Note 11	(a)		—		19,977		—		(19,977	)		—

Ending balance, June 30, 2019				143,844		46,720		500		66,286			—

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

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(i)

Share Issuances

In December 2019, the Company entered an agreement (“ATM Offering”) with Canaccord Genuity Corp to sell up to C$55,000 thousand SVS at an at-the-market price. During the three and six months ended June 30, 2020, the Company issued 55 thousand shares at a weighted average price of $4.40 per share. Gross proceeds were $241 thousand, offset by equity issuance costs of $8 thousand. During the three and six months ended June 30, 2020, the Company also issued 44 thousand SVS, valued at $201 thousand, and 1 thousand SSVS (as converted), valued at $3 thousand.

(ii)

Issuance of Shares - Origin House

In January 2020, in conjunction with the acquisition of Origin House, the Company issued 66,483 thousand SVS, valued at $396,575 thousand.

During the six months ended June 30, 2020, the Company issued 1,060 thousand SVS, valued at $3,676 thousand, to satisfy certain obligations related to deferred consideration related to legacy acquisitions by Origin House.

In May 2020, the Company issued 338 thousand SVS, valued at $1,000 thousand, in accordance with the post combination remuneration agreement associated with Origin House’s previous acquisition of FloraCal.

In May 2020, the Company also issued 750 thousand SVS, valued at $2,220 thousand, to settle the deferred consideration associated with Origin House’s previous acquisition of Cub City. LLC (“Cub City”). See Note 13 for further details.

(iii)

Issuance of Shares – MedMar Lakeview

In April 2020, the Company issued 90 thousand SVS, valued at $352 thousand, to satisfy certain obligations related to contingent consideration.

(iv)

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

During the six months ended June 30, 2020, the Company issued 265 thousand PVS (as converted), valued at $1,415 thousand, to satisfy certain obligations related to interest on deferred consideration, and 451 thousand SVS, valued at $1,496 thousand, to satisfy a portion of the Company’s make-whole liability. See Note 13 and Note 20 for further details.

(v)

Issuance of Shares – Tryke

In April 2020, the Company issued 293 thousand SVS, valued at $1,279 thousand, 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 Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(c)

Stock Purchase Warrants

Each whole warrant entitles the holder to purchase one PVS of the Company. A summary of the status of the warrants outstanding (as-converted) is as follows:


	Number of warrants			Weighted- average exercise price
Balance as of January 1, 2020		6,453,784		$	7.73
Exercised		(12,000	)		4.24

Balance as of June 30, 2020		6,441,784		$	7.73

During the six months ended June 30, 2020, the Company recorded $91 thousand of warrant exercises into share capital. Of the 6,442 thousand warrants outstanding, 6,233 thousand warrants are from issuances to underwriters associated with the September 2019 financing, sellers from the Valley Ag acquisition and previous holders of Randsburg warrants. The warrants associated with the September 2019 financing and the Valley Ag acquisition are classified as long-term derivative liabilities, and the Randsburg warrants are classified as short-term derivative liabilities. See Note 20 for information about valuation of liability-classified warrants.

No equity-classified warrants were issued during the six months ended June 30, 2020 and 2019.

(d)

Distribution to LLC Unit Holders

During the three months ended June 30, 2020, in accordance with the underlying operating agreements, required tax distribution amounts were finalized and the Company communicated a distribution to 2019 unit holders of Cresco Labs, LLC and other minority interest holders. The total declared distribution was $9,548 thousand, which will reduce non-controlling interest upon payment. During the three months ended June 30, 2020, $481 thousand was paid, and the remaining $9,067 thousand liability was recorded in contributed surplus.

During the three months ended June 30, 2019, in accordance with the operating agreement of Cresco Labs LLC, the Company declared a distribution of profits to holders of Cresco Labs, LLC units during 2018. The total distribution was $3,630 thousand. The Company recorded a $688 thousand reduction to non-controlling interest of Cresco Labs, LLC for distributions to members who hold Redeemable Units. The remaining $2,942 thousand distribution was recorded as an increase to accumulated deficit.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(e)

Changes in Ownership and Non-controlling Interests

In the six months ended June 30, 2020, redemptions of 3,522 thousand redeemable units occurred which were converted into an equivalent number of SVS. This redemption resulted in a decrease of 1.4% in non-controlling interest in Cresco Labs, LLC, an increase to accumulated deficit of $13,965 thousand, and a decrease of $1,420 thousand in non-controlling interest.

In April 2020, the holders of the non-controlling interest put option previously recorded as a derivative liability related to the acquisition of PDI exercised the right to put their shares to the Company at a predetermined price. This transaction resulted in a change of NCI for PDI from 2% as of March 31, 2020 to 0% as of June 30, 2020. See Note 20 for additional details regarding the put option.

In February 2019, the Company acquired an additional 1% of Phoenix Farms of Illinois, LLC decreasing non-controlling interest from 11% to 10%. The consideration paid was $184 thousand. This resulted in a $150 thousand increase in accumulated deficit and a $34 thousand decrease in non-controlling interest.

In May 2019, the Company acquired the remaining 10% of non-controlling interest from Phoenix Farms of Illinois, LLC. The consideration paid was $649 thousand, which resulted in a $288 thousand increase in accumulated deficit and a $361 thousand decrease in non-controlling interest.

As of and for the six months ended June 30, 2020, non-controlling interest included the following amounts after intercompany eliminations:


($ in thousands) June 30, 2020	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other entities including Cresco Labs, LLC¹			Total
Non-current assets		3,249			31,730			19,949			10,900			25,057			861,493			952,378
Current assets		18,776			9,905			12,375			33,623			49,498			132,549			256,726
Non-current liabilities		—			(1,208	)		(1,172	)		(1	)		—			(306,509	)		(308,890	)
Current liabilities		(313	)		(16,553	)		(5,043	)		(10,014	)		(18,733	)		(112,740	)		(163,396	)

Net assets		21,712			23,874			26,109			34,508			55,822			574,793			736,818

Net assets attributable to NCI		104			2,989			2,387			104			(4,012	)		140,223	³		141,795

Revenue		3,509			5,594			5,697			2,176			(218	)		143,878			160,636
Gross profit		4,628			2,933			2,819			(15	)		970			92,274			103,609

Total comprehensive income (loss)		5,086			1,329			2,106			(1,538	)		(1,794	)		(23,320	)		(18,131	)

Comprehensive income (loss) allocated to NCI		1,271			165			526			(15	)		(359	)		6,567			8,155

NCI percentage at June 30, 2020		25	%¹		12.4	%²		25	%²		1.0	%¹		20.0	%¹		54.8	%

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 54.8% NCI related to NCI for Cresco Labs Inc.

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 Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

As of and for the twelve months ended December 31, 2019, non-controlling interest included the following amounts after intercompany eliminations:


($ in thousands) December 31, 2019	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other Entities including Cresco Labs, LLC¹			Total
Non-current assets		3,185			20,231			17,855			12,575			23,317			380,053			457,216
Current assets		3,075			1,037			1,356			5,186			15,579			133,105			159,338
Non-current liabilities		—			(1,803	)		(1,824	)		(95	)		(13,940	)		(126,100	)		(143,762	)
Current liabilities		(907	)		(718	)		(955	)		(1,061	)		(4,669	)		(141,859	)		(150,169	)

Net assets		5,353			18,747			16,432			16,605			20,287			245,199			322,623

Net assets attributable to NCI		1,567			2,658			2,330			150			(2,940	)		131,776			135,541

Revenue		5,593			4,088			5,310			2,212			12,042			99,289			128,534
Gross profit		6,303			1,999			2,564			(1,972	)		(6,749	)		61,936			64,081

Total comprehensive income (loss)		5,747			(981	)		(556	)		(6,278	)		(15,308	)		(47,926	)		(65,302	)

Comprehensive income (loss) allocated to NCI		1,437			(122	)		(139	)		(63	)		(3,062	)		(20,152	)		(22,101	)

NCI percentage at December 31, 2019		25.0	%¹		12.4	%²		25.0	%²		1.0	%¹		20.0	%¹		56.2	%

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 56.2% NCI related to NCI for Cresco Labs Inc.

²	The NCI percentage reflects the NCI that exists at Cresco Labs, Inc.

12.

SHARE-BASED COMPENSATION

A summary of the status of the options outstanding consisted of the following:


	Number of stock options outstanding			Weighted- average exercise price
Outstanding - January 1, 2020		22,370,168		$	3.19
Granted		5,290,950			4.31
Exercised		(610,544	)		1.52
Origin House replacement awards		629,275			4.24
Forfeited		(4,895,000	)		2.37

Outstanding - June 30, 2020		22,784,849		$	3.60

Exercisable - June 30, 2020		8,385,752		$	2.71

The following table summarizes the stock options outstanding as of June 30, 2020:


Expiration date	Stock options outstanding		Exercise price		Stock options exercisable
February 2023		5,273	$	5.20		2,637
April 2025		17,578		2.81		17,578
May 2025		21,093		4.03 - 5.79		8,789
June 2025		200,000		0.50		200,000
July 2025		22,851		4.29 - 4.97		18,455
January - February 2026		125,000		1.00		125,000
May - June 2026		700,000		1.00		700,000

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)


November - December 2026		27,500	1.00		18,750
January 2027		5,000	1.00		3,750
September 2027		20,000	1.00		16,667
October - November 2027		425,000	1.00		207,600
November - December 2027		212,500	1.14		62,500
December 2027		562,480	3.74		562,480
March 2028		526,250	1.14		233,750
May - June 2028		750,000	2.25		375,000
July 2028		200,000	2.25		50,000
July 2028		35,000	3.75		18,472
August 2028		308,750	3.75		65,000
September 2028		7,426,874	1.13 - 3.75		3,938,624
October - November 2028		1,988,750	3.75		457,500
December 2028		220,000	6.50		55,000
February 2029		85,000	6.50		21,250
March 2029		322,000	11.25		80,500
June 2029		1,270,000	10.28		317,500
September 2029		1,240,000	5.90		—
December 2029		787,000	6.86		—
January 2030		1,500,000	4.56		—
February 2030		1,000,000	4.56		250,000
March 2030		597,000	2.99		—
March 2030		1,000,000	4.56		250,000
May 2030		328,950	4.56		328,950
June 2030		855,000	4.11		—

	22,784,849			8,385,752

Weighted average stock price of options on the dates on which options were exercised during the six months ended June 30, 2020 and 2019 was $4.16 and $8.09 per option, respectively.

The fair value of stock options granted under the Plan during the six months ended June 30, 2020 was determined using the Black-Scholes option-pricing model with the following range of assumptions at the time of the grant:


		June 30, 2020
Risk-free annual interest rate		0.79% to 1.01%
Expected annual dividend yield		0%
Expected stock price volatility		65% to 81%
Expected life of stock options		5 to 7 years
Forfeiture rate		5%
Fair value at grant date		$2.57 to $2.92
Stock price at grant date		$4.11 to $4.56
Exercise price range		$4.11 to $4.56

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

During the three and six months ended June 30, 2020, the weighted-average fair value of stock options granted was $2.63 and $ 2.54 per option, respectively. During the three and six months ended June 30, 2019, the weighted-average fair value of stock options granted was $6.65 and $6.54 per option, respectively. As of June 30, 2020, stock options outstanding have a weighted-average remaining contractual life of 8.62 years.

In the six months ended June 30, 2020, the Company issued 629 thousand replacement options with a weighted average exercise price of $4.24 per option in connection with the Origin House acquisition. The replacement options have expiration dates ranging between February 2023 and December 2027, though expiration will accelerate upon termination of employment. As of June 30, 2020, 610 thousand options with a weighted average exercise price of $4.21 per option are exercisable.

Restricted Stock Units (“RSUs”)

During 2019, the Company established 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 the date of grant. A number of RSUs granted have the ability to settle in cash. These awards have been determined to be liability-classified awards and are required to be marked-to-market as of the end of each reporting period. As of June 30, 2020 and December 31, 2019, the Company recorded $53 thousand and $339 thousand, respectively, in Deferred consideration, contingent consideration and other payables on the unaudited Condensed Interim Consolidated Statements of Financial Position related to these awards.

A summary of outstanding RSUs is provided below:


	Number of RSUs outstanding			Weighted average fair value
Outstanding - January 1, 2020		404,215		$	8.58
Origin House replacement awards		3,430,456			5.96
Vested and settled		(1,791,162	)		6.01
Forfeited		(32,447	)		9.36

Outstanding - June 30, 2020		2,011,062		$	6.39

Liability classified as of June 30, 2020		15,467		$	3.64

Of the liability classified awards above, 6,432 awards vested in April 2020 pending issuance into shares.

In the six months ended June 30, 2020, the Company issued 3,430 thousand replacement RSUs with a weighted average fair value of $5.96 per share in connection with the Origin House acquisition. As a result of the acquisition, the vesting of the replacement RSUs was accelerated, with Canadian participants having the option to defer settlement. As such, there is no post-acquisition compensation expense required for these awards.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

Deferred Share Awards

In the six months ended June 30, 2020, the Company issued 1,632 thousand replacement deferred share awards in connection with the Origin House acquisition. The awards have a fair value of $5.96 per share, which is based on the Company’s share price as of the acquisition date. The awards’ issuance were deferred through September 2020 as part of Origin House’s acquisition of RVR Distribution in 2018. Awards are considered to be fully vested as of the acquisition date and therefore require no post-acquisition compensation expense. During the three and six months ended June 30, 2020, 1,060 thousand shares settled into share capital.

Expense Attribution

The Company recorded compensation expense for option awards in the amount of $6,577 thousand and $3,518 thousand for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 and 2019, the Company expensed $6,448 thousand and $ 2,973 thousand, respectively, to Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

The Company recorded compensation expense for option awards in the amount of $8,012 thousand and $ 6,649 thousand for the six months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019, the Company expensed $7,777 thousand and $5,850 thousand, respectively, to Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. Unrecognized compensation expense as of June 30, 2020 for option awards is $23,539 thousand and will be recorded over the course of the next four years.

The Company recorded compensation expense for RSU awards in the amount of $162 thousand and $nil for the three months ended June 30, 2020 and 2019, respectively, of which $30 thousand and $nil, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. The Company recorded compensation expense for RSU awards in the amount of $387 thousand and $nil for the six months ended June 30, 2020 and 2019, respectively, of which $80 thousand and $nil, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. Unrecognized compensation expense as of June 30, 2020 is $1,144 thousand and will be recognized over the course of the next three years.

The Company recorded a decrease of post-acquisition compensation expense for replacement options in the amount of $75 thousand and an increase of $9 thousand for the three and six months ended June 30, 2020, respectively, in Selling, general and administrative expenses. Unrecognized compensation for replacement options was $24 thousand as of June 30, 2020 and will be recognized through the third quarter of 2021.

As of June 30, 2020, ending inventory includes $261 thousand of capitalized compensation expense related to both options and RSUs. For the three months ended June 30, 2020 and 2019, $518 thousand and $237 thousand, respectively, of compensation expense was recorded to Cost of sales – production costs, which includes $293 thousand and $123 thousand, respectively, related to compensation expense capitalized to inventory in prior quarters. For the six months ended June 30, 2020 and 2019, $1,366 thousand and $408 thousand, respectively, of compensation expense was recorded to Cost of sales – production costs, which includes $803 thousand and $39 thousand, respectively, related to compensation expense capitalized to inventory in prior quarters.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

13.

ACQUISITIONS AND MERGERS

(a)

Business Combinations

The table below summarizes business combinations completed during the six months ended June 30, 2020:


Completed during the six months ended June 30, 2020	Origin House
($ in thousands)
Total consideration
Common shares issued	$	396,575
Replacement awards		31,671

Total consideration	$	428,246

Net identifiable assets (liabilities) acquired
Cash	$	32,984
Accounts receivable		7,565
Inventory		14,658
Biological assets		2,002
Other current assets		2,197
Property and equipment		18,625
Right-of-use assets		17,984
Loans receivable, long-term		331
Investment in associate		4,302
Investments		139
Customer relationships		63,600
Trade names		39,700
Licenses		5,900
Market related intangible		2,374
Internally developed software		380

Total identifiable assets acquired	$	212,741

Short-term liabilities	$	(24,349	)
Lease liability		(18,002	)
Deferred and contingent consideration		(3,807	)
Notes payable		(22,045	)
Deferred tax liability		(30,200	)

Net identifiable assets acquired	$	114,338

Purchase price allocation
Net identifiable assets acquired	$	114,338
Goodwill		313,908

Total consideration	$	428,246

Under IFRS 3, the Company will retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of the acquisition date. During the measurement period, the Company will also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date. During the six months ended June 30, 2020, the Company updated its valuation of Origin House intangible assets acquired, which resulted in an increase of $9,189 thousand to the acquisition date value of intangible assets and an associated increase of $2,775 thousand to the acquisition date value of the deferred tax liability, resulting in an offsetting reduction in goodwill. The Condensed Interim Consolidated Financial Statements and the above purchase price allocation schedule have been retrospectively adjusted for this measurement period adjustment. The purchase price allocation for the Origin House transaction is substantially complete, with the exception of certain amounts related to income taxes.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(i)

Origin House

On January 8, 2020, the Company announced that it had closed its acquisition of 100% of the membership interests of Origin House. As a result of this acquisition, the Company now holds additional licenses to cultivate and process medical and adult-use marijuana and new licenses to distribute medical and adult-use cannabis in the State of California. Additionally, the Company now holds licenses to operate a nicotine vape business in Canada with retail, online and wholesale revenues, as well as franchise locations.

Total consideration for the acquisition was $428,246 thousand and consisted of 66,482 thousand SVS issued as of the acquisition date, valued at $396,575 thousand, and 5,691 thousand replacement awards, valued at $31,671 thousand, which is comprised of 3,430 thousand replacement RSUs, 1,632 thousand deferred share awards and 629 thousand replacement options. The Company recorded a decrease of $75 thousand and increase of $9 thousand of post-acquisition share-based compensation expense related to the replacement options for the three and six months ended June 30, 2020, respectively. See Note 12 for additional detail.

As part of the acquisition, the Company recorded reserves of $107 thousand for potential payments contingent on future events that were probable to be paid and estimable as of the acquisition date.

Total pro forma Revenue and Net loss for the combined company for the six months ended June 30, 2020 was $161,265 thousand and $18,583 thousand, respectively.

Contributed revenue and Net loss from the Origin House acquisition for the three months ended June 30, 2020 was $19,260 thousand and $5,789 thousand, respectively, and $33,215 thousand and $18,749 thousand, respectively for the six months ended June 30, 2020.

Since the first quarter of 2019, the Company has recorded transaction costs of $5,449 thousand in connection with the Origin House acquisition as Selling, general and administrative expenses in the unaudited Condensed Interim Consolidated Statements of Operations.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(b)

Deferred Consideration, Contingent Consideration and Other Payables

The following is a summary of deferred consideration and other payables balances as of June 30, 2020 and December 31, 2019, which are classified as short term:


($ in thousands)	IFRS 9 classification	June 30, 2020		December 31, 2019
MedMar contingent consideration liability for tax payments -current	FVTPL	$	2,000	$	2,000
MedMar contingent consideration liability - current	FVTPL		984		1,927
Interest payable - short term	Amortized Cost		—		1,464
Valley Ag deferred consideration	Amortized Cost		—		18,750
HHH deferred consideration	FVTPL		—		27,237
Valley Ag operating cash flows consideration	FVTPL		7,109		7,423
Valley Ag make-whole liability	FVTPL		1,068		800
Origin House post combination remuneration liability	FVTPL		103		—
Liability-classified equity awards	FVTPL		53		339

Total Deferred consideration, contingent consideration and other payables		$	11,317	$	59,940

Decreases in deferred consideration between December 31, 2019 and June 30, 2020 are due to payments of deferred consideration related to acquisitions of Valley Ag and HHH. During the six months ended June 30, 2020, the Company paid $18,750 thousand and issued 265 thousand PVS (as converted), valued at $1,304 thousand, to settle the Valley Ag deferred consideration and corresponding interest payable. During the six months ended June 30, 2020, the Company paid $27,540 thousand to settle the HHH deferred consideration and recorded $303 thousand in interest expense. During the three months ended June 30, 2020, the Company recorded $1 thousand interest accretion and a $518 thousand unrealized gain related to Valley Ag operating cashflow deferred consideration, and recorded $204 thousand interest accretion and a $518 thousand unrealized gain for the six months ended June 30, 2020.

During the three and six months ended June 30, 2020, the Company recognized a mark-to-market gain of $4,636 thousand and a mark-to-market loss of $1,764 thousand, respectively, for the make-whole adjustment liability related to its Valley Ag acquisition from changes in the Company’s stock price, offset by a payment of 451 thousand SVS valued at $1,496 thousand during the three and six months ended June 30, 2020.

The Company’s liability related to liability-classified equity awards decreased to $53 thousand as of June 30, 2020 due to changes in the Company’s share price and settlement of vested awards. See Note 12 for further details.

In connection with the Origin House acquisition, the Company acquired deferred consideration liabilities valued at $3,807 thousand, primarily related to $3,700 thousand of deferred consideration associated with Origin House’s previous acquisition of Cub City. In May 2020, the Company settled these obligations through issuance of 750 thousand SVS, valued at $2,220 thousand and cash payment of $1,480 thousand. In April 2020, the Company issued 338 thousand shares, value at $1,000 thousand, in accordance with the post combination remuneration agreement with FloraCal. The remuneration agreement liability is $103 thousand as of June 30, 2020 and accrues monthly with the remaining payment due May 2021.

The Company holds various real estate property approximating $10,000 thousand in fair value as collateral for certain deferred payment obligations.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(c)

Contingent Consideration

The following is a summary of the current contingent consideration as of June 30, 2020 and December 31, 2019:


($ in thousands)	June 30, 2020		December 31, 2019
MedMar contingent consideration liability for tax payments - current	$	2,000	$	2,000
MedMar contingent consideration liability - current		984		1,927

Total	$	2,984	$	3,927

For the six months ended June 30, 2020, the fair value of the current contingent consideration liability decreased by $943 thousand primarily driven by the issuance of 90 thousand SVS, valued at $352 thousand and a cash payment of $648 thousand. As of June 30, 2020, the Company utilized a discount rate of 19.9% and an updated period of 0.1 years to determine the fair value of the remaining obligations. The Company recorded a mark-to-market loss of $23 thousand and $57 thousand for the three and six months ended June 30, 2020, respectively. These obligations are expected to be paid before December 31, 2020.

The following is a summary of the non-current contingent consideration as of June 30, 2020 and December 31, 2019:


($ in thousands)	IFRS 9 classification	June 30, 2020		December 31, 2019
Valley Ag contingent consideration	FVTPL	$	13,120	$	21,901

Total Long-term contingent consideration		$	13,120	$	21,901

During the three and six months ended June 30, 2020, the Company recorded a mark- to-market fair value loss of $3,620 thousand and gain of $8,781 thousand, respectively, related to contingent equity consideration for its Valley Ag acquisition due to changes in the Company’s stock price.

14.

LONG-TERM NOTES AND LOANS PAYABLE

The following table represents the Company’s loans payable balances as of June 30, 2020 and December 31, 2019:


($ in thousands)	June 30, 2020			December 31, 2019
OCN Loan	$	20,734		$	—
HHH Loan		—			550
Term Loan		95,584			—
Interest payable		3,188			—

Total borrowings and interest payable		119,506			550

Less Short-term borrowings and interest payable		(23,922	)		—

Total Long-term notes and loans payable	$	95,584		$	550

(a)

Senior Secured Term Loan

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

The Tranche A Commitment accrues interest at a rate of 12.7% per annum, payable in cash quarterly, and has a stated maturity of July 2021. The Tranche B Commitment accrues interest at a rate of 13.2% per annum, payable in cash quarterly, and has 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 are 17.0% and 16.1%, respectively. The Company capitalized $5,497 thousand and $407 thousand, respectively, of borrowing costs related to the Tranche A Commitment and Tranche B Commitment.

For the three and six months ended June 30, 2020, the Company recognized interest expense of $4,131 thousand and $6,836 thousand, respectively, including interest expense related to the amortization of the debt issuance costs of $944 thousand and $1,488 thousand, respectively.

As of June 30, 2020, the Company is in compliance with all covenants related to the Term Loan.

(b)

Other Loans

In conjunction with its October 1, 2019 acquisition of HHH, the Company recorded a long-term liability for the

HHH Loan for an aggregate balance of $550 thousand with a stated maturity of June 2021. During the three months ended June 30, 2020, the Company paid off the $550 thousand outstanding principal balance as part of a sale-leaseback transaction. See Note 7 for additional details on the transaction.

On June 30, 2020, the OCN Loan was amended to extend the maturity date from June 30, 2020 to June 30, 2021 for an extension fee of $560 thousand which is recorded within Accounts payable and other accrued expense and will be amortized over the extended term. Fees, interest and principal payments will be made in regular monthly installments through the maturity date. As a result of the non-substantial debt modification, the effective interest rate increased to 27.14% and a gain on debt modification of $1,084 thousand was recognized. For the three and six months ended June 30, 2020, the Company recognized interest expense of $1,253 thousand and $2,450 thousand, respectively, including interest expense related to the accretion of discount on the OCN Loan of $727 thousand and $1,380 thousand, respectively.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

15.

REVENUE AND LOYALTY PROGRAMS

(a)

Revenue

The following table represents the Company’s disaggregated revenue by source, primarily due to the Company’s contracts with its customers, for the three and six months ended June 30, 2020 and 2019:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2020		2019		2020		2019
Wholesale	$	54,944	$	18,419	$	93,080	$	30,065
Dispensary		39,312		11,471		67,556		20,880

Total Revenue	$	94,256	$	29,890	$	160,636	$	50,945

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 and vape products as part of an in-store sales transaction. In addition, the Company records a performance obligation as a reduction of revenue based on the estimated probability of point obligation incurred, which is calculated based on a standalone selling price that ranges between $0.025 and $0.10 per loyalty point. Upon redemption, the loyalty program obligation is relieved and the offset is recorded as revenue. As of June 30, 2020, there were 37,464 thousand points outstanding, with an approximate value of $658 thousand. The Company expects the outstanding loyalty points will be redeemed within one year.

16.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three and six months ended June 30, 2020 and 2019, Selling, general and administrative expenses consisted of the following:


	Three months ended June 30,					Six months ended June 30,
($ in thousands)	2020			2019		2020		2019
Salaries and related	$	19,034		$	5,517	$	37,310		9,768
Share-based compensation		6,689			2,973		8,076		5,850
Consulting and professional fees		5,625			4,245		16,777		7,613
Office		3,225			762		7,294		1,359
Advertising and marketing		2,780			2,352		6,764		4,642
Excise taxes		2,347			761		4,215		1,490
Technology		1,919			—		3,153		—
Business expansion costs		1,413			243		1,540		764
Travel, entertainment and delivery costs		1,066			925		2,632		1,445
Insurance		1,066			448		2,059		972
Intangible asset impairment (Note 9)		(1,194	)		—		—		—
Other		1,216			1,479		2,019		2,575

Total Selling, general and administrative expenses	$	45,186		$	19,705	$	91,839	$	36,478

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

17.

OTHER INCOME (EXPENSE), NET

For the three and six months ended June 30, 2020 and 2019, Other income (expense), net consisted of the following:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2020			2019			2020			2019
Gain (loss) on derivative instruments (Note 20)	$	(3,289	)	$	8		$	6,387		$	(227	)
Gain (loss) on changes in fair value of deferred and contingent consideration (Note 13)		993			(679	)		6,960			(721	)
Gain on debt modification (Note 14)		1,084			—			1,084			—
Gain on changes in fair value of loans receivable (Note 20)		840			—			292			—
Impairment on loan receivable (Note 20)		(113	)		—			(113	)		—
Dividend income		—			53			—			87
Unrealized gain (loss) on investments held at fair value (Note 8)		217			(12	)		(317	)		(9	)
Gain (loss) on foreign currency		(422	)		(10	)		178			(10	)
Other income (expense)		(50	)		19			312			125

Total Other (expense) income, net	$	(740	)	$	(621	)		$14,783		$	(755	)

18.

RELATED PARTY TRANSACTIONS

(a)

Compensation of 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. Other than the lease and lending arrangements described below, for the six months ended June 30, 2020, there were no material changes to other related party transactions disclosed in the annual consolidated financial statements for the years ended December 31, 2019 and 2018.

Key management personnel compensation for the three and six months ended June 30, 2020 and 2019 was as follows:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2020		2019		2020		2019
Management compensation	$	1,556	$	603	$	2,966	$	1,063
Share-based compensation expense		4,697		954		5,869		1,937

Total	$	6,253	$	1,557	$	8,835	$	3,000

As of June 30, 2020 and December 31, 2019, the Company had receivables of $204 thousand and $712 thousand, respectively, with key management personnel.

As of June 30, 2020 and December 31, 2019, the Company had payables of $553 thousand and $113 thousand, respectively, with key management personnel.

Key management personnel hold 84,550 thousand redeemable units of Cresco Labs, LLC, which is equal to $74,624 thousand of Non-controlling interests as of June 30, 2020.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(b)

Related Parties – Debt

As of June 30, 2020, the Company had borrowings with related parties of $8,250 thousand related to the Company’s Term Loan. See Note 14 for additional details.

(c)

Related Parties - Leases

The Company has lease liabilities for real estate lease agreements in which the lessor is a member of key management personnel. The lease liabilities were incurred during sale and leaseback transactions executed during the six months ended June 30, 2020 and will expire in 2030. For the three and six months ended June 30, 2020, the sale and leaseback transactions resulted in net funding of $7,405 thousand and $8,809 thousand, respectively. During the three months ended June 30, 2020, the Company received tenant improvement allowance reimbursements of $789 thousand related to these lease agreements and expects to receive further reiumbursements of $1,711 thousand as of June 30, 2020.

Below is a summary of the expense resulting from the related party lease liabilities for the three and six months ended June 30, 2020 and 2019.


	Three months ended June 30, 2020				Three months ended June 30, 2019
($ in thousands)	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	80	$	413	$	99	$	422
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		15		22		16		23
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		22		22		23		22
Finance lease liability; lessor is a member of key management personnel		55		93		—		—


	Six months ended June 30, 2020				Six months ended June 30, 2019
	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	162	$	816	$	198	$	832
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		31		43		31		45
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		44		44		46		45
Finance lease liability; lessor is a member of key management personnel		79		122		—		—

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)


	As of June 30, 2020				As of December 31, 2019
($ in thousands)	ROU asset		Lease liability		ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	9,547	$	12,195	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		618		683		649		694
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		659		720		643		686
Finance lease liability; lessor is a member of key management personnel		8,067		6,442		—		—

19.

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 June 30, 2020, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers, or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

(b)

Contingencies

20.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

Financial Instruments

The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses, as applicable) or FVTPL. The carrying values of financial instruments held at amortized cost approximate their fair values as of June 30, 2020 and December 31, 2019 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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;

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

•

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

•

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

Unless otherwise noted, the Company considers all financial instruments classified as FVTPL to be Level 1 instruments.

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

The following table summarizes the Company’s financial instruments as of June 30, 2020 and December 31, 2019:


($ in thousands)	June 30, 2020		December 31, 2019
Financial Assets:
Cash and cash equivalents	$	70,994	$	49,102
Restricted cash¹		2,874		5,050
Accounts receivable, net		16,889		16,455
Loans receivable, short-term		2,400		644
Loans receivable, long-term		19,289		18,633
Security deposits		3,612		1,084
Financial Liabilities:
Accounts payable and other accrued expenses	$	66,915	$	62,834
Short-term borrowings and current portion of long-term debt		23,922		—
Current portion of lease liabilities		26,036		12,019
Deferred consideration, contingent consideration and other payables		11,317		59,940
Derivative liabilities		11		178
Derivative liabilities – long-term		8,605		15,243
Lease liabilities		139,976		82,856
Deferred consideration and contingent consideration		13,120		21,901
Long-term notes payable and loans payable		95,584		550

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

(a)

Loans receivable, short-term

The following is a summary of Loans receivable, short-term balances and IFRS 9 classifications (discussed further below) as of June 30, 2020 and December 31, 2019:


($ in thousands)	IFRS 9 classification	June 30, 2020		December 31, 2019
Short-term loans receivable - Lighthouse	FVTPL	$	2,123	$	—
Interest receivable	Amortized cost		277		644

Total Loans receivable, short-term		$	2,400	$	644

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(b)

Loans receivable, short-term with Derivative Features

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. The loan has a maturity of 18 months and an option for the Company to convert into additional membership units. As of June 30, 2020, this loan had a fair value of $2,123 thousand. As of December 31, 2019, this loan had a fair value of $2,236 and was classified as a Loans receivable, long-term. This loan is measured at FVTPL and transferred classification from a long-term loan receivable to a short-term loan receivable in the current year. See Note 8 for discussion of the Company’s investment in Lighthouse.

Expected Credit Loss (ECL)

The Company calculates ECLs for loan receivables and restricted cash by considering cash shortfalls on a discounted basis it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring, which is determined through the exercise of judgement. The Company recognized impairment losses of $113 thousand during both the three and six month periods ended June 30, 2020 and $nil during both the three and six month periods ended June 30, 2019 on Loans receivable, short-term.

(c)

Loans Receivable, Long-Term

The Company entered into certain loan arrangements with Verdant Creations, LLC. that contained embedded derivatives comprising of a call and put option and a stated interest rate of 5.25%. Settlement of the instruments varies based on contingent events and returns are not fixed. As such, the Company records this loan receivable at FVTPL. Each period, the loan is measured using a probability-weighting analysis of expected outcomes, which utilize Level 3 inputs. The inputs included market rates ranging from 4.3% to 16.9%, a risk-free rate of 0.2% and expected settlement timing of 0.97 to 1.19 years. Changes in Level 3 inputs and assumptions utilized resulted in a fair value gain of $840 thousand and $292 thousand for the three and six months ended June 30, 2020, respectively, and $nil for both the three and six months ended June 30, 2019. The loan had a fair value of $17,584 thousand and $16,007 thousand as of June 30, 2020 and December 31, 2019, respectively. Interest receivable attributable to the loan was $901 thousand as of June 30, 2020 and $nil as of December 31, 2019. At June 30, 2020 and December 31, 2019, of the $15,500 thousand maximum loan commitment, $15,255 thousand and $10,741 thousand, respectively, had been drawn on these loans.

As of June 30, 2020 and December 31, 2019, the Company has a loan receivable of $473 thousand and $390 thousand, respectively. The Company records this loan receivable at amortized cost and has a stated interest rate of 10%.

In connection with the acquisition of Origin House, the Company assumed a loan receivable with a fair value of $331 thousand at both the acquisition date and June 30, 2020.

(d)

Derivative Liability

In conjunction with its acquisition of PDI, the Company recorded a derivative liability of $178 thousand at the acquisition date for an NCI put option, by which the remaining NCI holders could put their shares for a fixed amount of cash within one year of the acquisition legal close/funding date. The derivative was valued using a discount rate of 9%. In April 2020, these holders exercised their put option which resulted in the Company paying $203 thousand to purchase the unowned interest of PDI. As a result, during the six months ended June 30, 2020, the Company recorded a $25 thousand mark-to-market loss to match the settlement value.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

(e)

Share Purchase Warrants

At June 30, 2020, the Company had 6,442 thousand warrants outstanding. Of the outstanding warrants, 6,233 thousand warrants issued to underwriters associated with September 2019 financing, sellers from the Valley Ag acquisition and previous holders of Randsburg warrants were classified as long-term derivative liabilities. In the six months ended June 30, 2020, 12 thousand Valley Ag warrants were exercised for $ 51 thousand, resulting in a realized loss of $6 thousand and an increase to share capital of $91 thousand. In the six months ended June 30, 2019, 22 thousand broker warrants were exercised for $147 thousand, resulting in a realized gain of $8 thousand and an increase to share capital of $249 thousand.

For the three months ended June 30, 2020, the Company recorded a mark-to-market loss, due to changes in the Company’s share price and other market factors, of $3,291 thousand and an unrealized foreign exchange loss of $422 thousand. For the three months ended June 30, 2019, the Company did not record a mark-to-market gain or loss, and recorded an unrealized foreign exchange loss of $6 thousand.

For the six months ended June 30, 2020, the Company recorded a mark-to-market gain, due to changes in the Company’s share price and other market factors, of $6,418 thousand and an unrealized foreign exchange gain of $178 thousand. For the six months ended June 30, 2019, the Company recorded a mark-to- market loss, due to changes in the Company’s share price and other market factors, of $235 thousand and an unrealized foreign exchange gain of $6 thousand.

All warrants classified as long-term derivative liabilities are measured at FVTPL.

As of June 30, 2020 and December 31, 2019, the fair value of liability-classified warrants was determined using the Black-Scholes option-pricing model utilizing the following assumptions:


	June 30, 2020	December 31, 2019
Risk-free annual interest rate	0.14% - 0.22%	1.58% - 1.61%
Expected annual dividend yield	0%	0%
Expected stock price volatility	85%	81%
Expected life of stock warrants	0.3 - 2.3 years	0.4 - 1.4 years
Forfeiture rate	0%	0%
Share price at period end	$4.11	$6.86

Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies.

Financial Risk Management

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

(a)

Credit and Banking Risk

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

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 House of Representatives but have not yet been voted on within the 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.

The novel coronavirus (“COVID-19”) was declared a pandemic by the World Health Organization on March 12, 2020 and has caused significant economic uncertainty and consequently it is difficult to reliably measure the potential impact of this uncertainty on the Company’s future financial results.

The Company’s aging of Accounts receivables as of June 30, 2020 and December 31, 2019 was approximately as follows:


($ in thousands)	June 30, 2020		December 31, 2019
0 to 60 days	$	15,826	$	10,276
61 to 120 days		452		5,551
120 days +		1,048		899

Total accounts receivable, gross	$	17,326	$	16,726

For the three months ended June 30, 2020 and 2019, the Company recorded bad debt expense of $53 thousand and $nil, respectively, to account for expected credit loss and recorded an additional $72 thousand and $nil, respectively, in bad debt related to invoice write-offs. For the six months ended June 30, 2020 and 2019, the Company recorded bad debt expense of $266 thousand and $120 thousand, respectively, to account for expected credit loss and recorded an additional $100 thousand and $nil, respectively, in bad debt related to invoice write-offs.

(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 manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. In December 2019, the Company entered into the ATM Offering for subordinated voting shares in the Company to be issued at the discretion of management to raise up to C$55,000 thousand to fund corporate operations. See Note 11 for further information. In February 2020, the Company entered into a non-brokered credit agreement for a senior secured term loan with an initial principal balance of $100,000 thousand. The Company will continue to raise capital as needed to fund operations and expansion. The maturity analysis for lease obligations is located in Note 7.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

In addition to the commitments outlined in Note 7, the Company has the following contractual obligations as of June 30, 2020:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable & other accrued expenses	$	66,915	$	—	$	—	$	66,915
Deferred consideration, contingent consideration and other payables		11,317		—		—		11,317
Deferred and contingent consideration		—		13,120		—		13,120
Long-term notes payable and loans payable and Short-term borrowings		23,922		95,584		—		119,506

Total obligation as of June 30, 2020	$	102,154	$	108,704	$	—	$	210,858

In addition to the commitments outlined in Note 7, the Company has the following contractual obligations as of December 31, 2019:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable and other accrued expenses	$	62,834	$	—	$	—	$	62,834
Deferred consideration, contingent consideration and other payables		59,940		—		—		59,940
Deferred and contingent consideration		—		21,901		—		21,901
Other long-term liabilities		—		550		—		550

Total obligation as of December 31, 2019	$	122,774	$	22,451	$	—	$	145,225

(d)

Market Risk

Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of June 30, 2020 and December 31, 2019, 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 a $178 thousand foreign exchange gain and a $422 thousand foreign exchange loss during the three and six months ended June 30, 2020, respectively. The Company recorded an immaterial amount of foreign exchange losses in the three and six months ended June 30, 2019. See Note 17 for additional detail.

As of June 30, 2020 and December 31, 2019, 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.

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. The Company calculates an incremental borrowing rate to use in the valuation of its financial instruments. The Company’s effective interest rates for its Term Loan range from 16.1% to 17.0% and the stated interest rate varies from 12.7% to 13.2% based on the term elected by the lender. The Company’s weighted average effective interest rate for its OCN Loan is 27.1% and its stated interest rate is 10%. See Note 14 for further information.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

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, contingent consideration and liability-classified RSUs 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 in fair value and Other (expense) income, net of $3,119 thousand.

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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 24 for the Company’s disclosure of uncertain tax positions.

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.

21.

SEGMENT INFORMATION

The Company operates in one segment, the cultivation, manufacturing, distribution, and sale of cannabis.

For the three and six months ended June 30, 2020, the Company generated 98% and 97%, respectively, of its revenue in the United States with the remainder generated in Canada. For the three and six months ended June 30, 2019, all revenues were generated in the United States.

22.

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.

Potentially dilutive securities of approximately 143,236 thousand and 154,500 thousand for the three months ended June 30, 2020 and 2019, respectively, and 144,711 thousand and 154,500 thousand for the six months ended June 30, 2020 and 2019, respectively, were excluded in the calculation of diluted EPS for these periods as their impact would have been anti-dilutive due to net losses in the periods.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

The following is a reconciliation for the calculation of basic and diluted loss per share for the three and six months ended June 30, 2020 and 2019:


	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2020			2019			2020			2019
Basic and diluted loss per share
Net loss attributable to Cresco Labs Inc. shareholders	$	(18,897	)	$	(2,026	)	$	(26,286	)	$	(8,253	)
Weighted-average number of shares outstanding		206,349			113,397			202,166			113,336

Loss per share – basic and diluted	$	(0.09	)	$	(0.02	)	$	(0.13	)	$	(0.07	)

23.

INTEREST EXPENSE, NET

Interest expense, net consisted of the following for the three and six months ended June 30, 2020 and 2019:


	Three months ended June 30,						Six months ended June 30,
($ in thousands)	2020			2019			2020			2019
Interest expense – leases	$	(4,971	)	$	(2,370	)	$	(9,189	)	$	(3,225)
Interest expense – notes and loans payable		(3,716	)		—			(6,430	)		—
Accretion of debt discount and amortization of deferred financing fees		(1,671	)		—			(2,868	)		—
Other interest expense		479			(2	)		104			(10)
Interest income		282			285			570			729

Total Interest expense, net	$	(9,597	)	$	(2,087	)	$	(17,813	)	$	(2,506	)

24.

PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES

The Company’s effective tax rate was 155% and 335% with tax expense of $13,312 thousand and of $5,586 thousand, respectively, for the three months ended June 30, 2020 and 2019. The Company’s effective tax rate was (1,236)% and (93)% with tax expense of $16,744 thousand and of $5,549 thousand, respectively, for the six months ended June 30, 2020 and 2019.

Income tax expense is recognized based on management’s estimate of the effective annual income tax rate expected for the full financial year with one-time events recorded in the period incurred.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

Deferred tax liabilities and deferred tax assets were primarily comprised of the following:


($ in thousands)	June 30, 2020			December 31, 2019
Deferred tax assets
Share-based compensation	$	560		$	1,177
Net operating losses		9,635			1,285
Lease liabilities		19,597			13,202
Inventory		—			188
Other		1,162			425

Total deferred tax assets	$	30,954			16,277
Deferred tax liabilities
ROU assets	$	(9,532	)	$	(6,488	)
Biological assets		(8,310	)		(4,213	)
Inventory		(3,608	)		—
Property, plant and equipment		(7,621	)		(7,923	)
Intangible assets		(49,429	)		(18,877	)
Other		(232	)		(227	)

Total deferred tax liabilities	$	(78,732	)		(37,728	)

Net deferred tax liabilities	$	(47,778	)	$	(21,451	)

The Company recognized a total net benefit related to one-time events of $12 thousand and $3,298 for the three months ended June 30, 2020 and 2019, respectively, and $105 thousand and $3,298 for the six months ended June 30, 2020 and 2019, respectively.

No tax expense or benefit was recognized for financial losses of $3,661 thousand and $2,975 thousand for the three months ended June 30, 2020 and 2019, respectively, and $8,573 thousand and $5,551 thousand for the six months ended June 30, 2020 and 2019, respectively.

The Company determined that the tax impact of certain arrangements between its management companies and operating companies is not probable that it would be sustained under IFRIC 23 due to the evolving interpretations of Section 280E. As a result, the Company recorded a reserve for uncertain tax positions of $10,454 thousand as of June 30, 2020, an increase during the six months ended June 30, 2020 of $2,959 thousand. Interest and penalties associated with the reserve are $830 thousand, an increase of $129 thousand for the six months ended June 30, 2020.

25.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through August 20, 2020, which is the date on which these financial statements were issued, and concluded there were no material subsequent events for the period ended June 30, 2020.

EX-99.36 37 d945319dex9936.htm EX-99.36 EX-99.36

Exhibit 99.36

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

OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019.

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Cresco Labs Inc. (the “Company” or “Cresco”) is for the three and six months ended June 30, 2020 and 2019. It is supplemental to, and should be read in conjunction with, the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2019, and the Company’s unaudited condensed interim consolidated financial statements and accompanying notes for the three and six months ended June 30, 2020 and 2019. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial information presented in this MD&A is presented in United States dollars (“$” or “US$”), unless otherwise indicated.

This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable United States securities laws and Canadian securities laws. Please refer to the discussion of forward-looking statements and information set out under the heading “Cautionary Note Regarding Forward Looking Information,” located at the beginning of the Company’s Annual Information Form for the year ended December 31, 2019, filed on SEDAR. As a result of many factors, the Company’s actual results may differ materially from those anticipated in these forward-looking statements and information. Please refer to the discussion of risks and uncertainties set out under the heading “Risk Factors,” located within the Company’s Annual Information Form for the year ended December 31, 2019, filed on SEDAR.

OVERVIEW OF THE COMPANY

Wholly-owned or effectively controlled subsidiaries and affiliates of Cresco whose principal business is the cultivation, production, distribution, or sale of adult-use and medical cannabis and adult-use and medical cannabis products and retail, wholesale, and nicotine vape business, are listed below:

•

Cresco Labs, LLC (“Cresco IL”), of which the Company owns 45.2%.

•

Cresco Labs Notes Issuer, LLC (“Cresco Notes”), of which Cresco IL owns 100%.

•

Cresco Labs PA, LLC (“Cresco PA”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Cresco Yeltrah, LLC (“Yeltrah”).

•

Cresco Labs Ohio, LLC (“Cresco Ohio”), of which Cresco Notes holds a 99% interest.

•

Cresco Edibles, LLC, wholly-owned by Cresco Notes, which holds a 75% interest in an operating company, TSC Cresco, LLC (“TSC”).

•

Cresco Labs SLO, LLC (“California”), wholly-owned by Cresco Notes, which holds an 80% interest in an operating company, SLO Cultivation, Inc. (“SLO”)

•

Cresco Labs TINAD, LLC (“TINAD”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating entity, PDI Medical III, LLC d/b/a Sunnyside – Buffalo Grove (“PDI”).

•

Cresco Labs Phoenix Farms, LLC, wholly-owned by Cresco Notes, which holds an 100% interest in an operating company, Phoenix Farms of Illinois, LLC d/b/a Sunnyside – Champaign and Sunnyside – Danville (“Phoenix”).

•

Cresco Labs Arizona, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Arizona Facilities Supply, LLC (“Arizona”).

•

MedMar Inc., wholly-owned by Cresco, which holds an 87.6% interest in MedMar Lakeview, LLC d/b/a Sunnyside – Lakeview and Sunnyside – River North (“Medmar Lakeview”) and a 75% interest in MedMar Rockford, LLC d/b/a Sunnyside – Rockford and Sunnyside – South Beloit (“Medmar Rockford”).

•

JDC Elmwood, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, FloraMedex, LLC d/b/a Sunnyside – Elmwood Park and Sunnyside – Schaumburg (“FloraMedex”).

•

Gloucester Street Capital, LLC (“GSC”), wholly-owned by Cresco, which holds a 100% interest in an operating company, Valley Agriceuticals, LLC (“Valley Ag”).

•

CannaRoyalty Corp., wholly-owned by Cresco, which holds a 100% interest in Cali-AntiFragile Corp., a California corporation, which holds a 100% interest in operating companies: Kaya Management Inc., Alta Supply Inc., FloraCal, Cub City, LLC and RPE Inc., (collectively referred to as the operating company “Origin House”). The Origin House acquisition closed on January 8, 2020.

•

Cresco Labs, Michigan, LLC (“Cresco Michigan”) which is 85% owned by related parties with management control of the Company.

In Illinois, Cresco’s dispensary applications received the highest, second highest and third highest scores, respectively, of all applications reviewed by the State of Illinois. Subsequently, the Company was the first cultivator to receive approvals to grow adult-use cannabis; all three cultivation facilities were granted approvals in that state. Additionally, the Company’s five dispensary locations were approved for dispensing adult-use cannabis in that state upon legalization, effective January 1, 2020. Secondary sites corresponding to the five current dispensary licenses were also awarded, allowing for up to ten dispensary locations upon zoning approval by local jurisdictions. The zoning for the first such secondary site dispensary located in Chicago’s River North neighborhood was approved by the City of Chicago on March 6, 2020. On May 28, 2020, the Company began adult-use cannabis sales at this location. The Company began adult-use cannabis sales at the Danville, South Beloit, and Schaumburg locations on May 27, 2020, July 13, 2020, and August 6, 2020, respectively. In Pennsylvania, Cresco was awarded the highest score during the application process and had the second highest overall score, making it one of only five cultivators that was also awarded a dispensary license which allows for up to three dispensaries. The Company was subsequently awarded a second dispensary license allowing an additional three dispensaries for a total of six locations across the state. During 2019, the Company announced a new dispensary brand, Sunnyside*, 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 trail and marketing approach. Five (5) Sunnyside* dispensaries opened on January 1, 2020 in the Illinois market and four (4) additional locations began operations in May, July, and August 2020. Four (4) New York locations were rebranded as Sunnyside* dispensaries in February 2020. One (1) Arizona location was rebranded as a Sunnyside* dispensary in June 2020. One (1) Massachusetts location and three (3) Pennsylvania locations were rebranded as Sunnyside* dispensaries in July 2020.

Cresco is currently located at Suite 110, 400 W. Erie St, Chicago, IL 60654 and employs approximately 1,800 people, while being named one of the “Best Places to Work” by Crain’s Chicago Business in 2019.

Issuing IPO, Reverse Takeover & Corporate Structure

Set forth below is the organization chart of the Company.

LOGO

Recent Developments

On April 26, 2019, the Company announced that it filed and received a receipt for a preliminary short form base shelf prospectus (the “Shelf Prospectus”) with the securities commissions in each of the provinces of Canada, except Québec. The Shelf Prospectus, when made final, will allow the Company to offer up to C$500,000 thousand of subordinate voting shares, debt securities, subscription receipts, warrants, and units, or any combination thereof, from time to time during the 25-month period that the final Shelf Prospectus is effective. The Company filed this Shelf Prospectus in order to maintain financial strength and flexibility going forward; the final version of the Shelf Prospectus was filed and accepted on July 26, 2019. The specific terms of any future offering of securities, including the use of proceeds from any offering, will be established in prospectus supplements to the Shelf Prospectus, which will be filed with the applicable Canadian securities regulatory authorities.

On May 28, 2019, the Company announced that shareholders representing 205,172,192 common shares (the “Shareholders”) have entered into voluntary lock-up agreements with the Company (the “Agreements”), representing 97% of the shares subject to an initial lock-up and 80% of total issued subordinate voting shares (on an as-if converted basis). Included among the Shareholders are all of the Company’s founders, its entire executive management team and board of directors, as well as several of the largest outside investors in Cresco. The voluntary lock-up Agreements stipulate that these shareholders will not, subject to limited exception, offer to sell, contract to sell, lend, pledge or otherwise dispose of any Cresco securities, or enter into any transaction to such effect, directly or indirectly, in addition to other restrictions until December 3, 2019, when a portion of the shares will be released followed by the remainder of the shares being released by June 3, 2020. As of June 30, 2020, this lock-up has expired.

On September 18, 2019, the Company filed a prospectus supplement (the “Offering”), together with the short form base shelf prospectus described above, which qualified the distribution of 7,350,000 units (the “Offered Units”) of Cresco at a price of C$10.00 per Offered Unit (the “Offering Price”) pursuant to an amended and restated underwriting agreement (the “Underwriting Agreement”) dated as of September 16, 2019 between Cresco and Canaccord Genuity Corp., Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P. (collectively, the “Underwriters”). Each Offered Unit was comprised of one subordinate voting share (“SVS”) of Cresco (each, a “Unit Share”) and one-half of one SVS purchase warrant of Cresco (each whole SVS purchase warrant, a “Warrant”). Each Warrant is exercisable into one SVS of Cresco (each, a “Warrant Share”) at an exercise price of C$12.50 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on the date that is 36 months following the closing of the Offering. The Offered Units immediately separate into Unit Shares and Warrants upon issuance. Pursuant to the Underwriting Agreement, Cresco agreed to pay to the Underwriter a fee representing 5.0% of the aggregate gross proceeds of the Offering.

On December 3, 2019, the Company entered into an equity distribution agreement (“EDA”) with Canaccord Genuity Corp. pursuant to which the Company may, from time to time, sell up to C$55,000,000 of SVS (the “At-the-market Program”). The Company intends to use the net proceeds of the At-the-market Program, if any, principally for general corporate purposes, including repaying indebtedness outstanding from time to time, funding ongoing discretionary capital programs and potential future acquisitions. The volume and timing of sales, if any, will be determined at the sole discretion of the Company’s management and in accordance with the terms of the EDA.

On February 2, 2020, the Company closed on a senior secured term loan agreement (the “Term Loan”) for an aggregate principal amount of $100,000 thousand, with the mutual option to increase the principal amount to $200,000 thousand.

Federal Regulatory Environment

Cresco 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 June 30, 2020, the Company is directly involved (through licensed subsidiaries) in both the adult-use and medical cannabis industry in the states of Illinois, Pennsylvania, Ohio, Arizona, Maryland, California, Michigan, New York and Massachusetts as permitted within such states under applicable state law which states have regulated such industries.

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 (as defined herein). With the Cole 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 Justice Department from spending funds to interfere with the implementation of state medical cannabis laws. It first passed the House in May becoming 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.

Despite the current state of the federal law and the CSA, the states of California, Nevada, Massachusetts, Maine, Michigan, Illinois, Washington, Oregon, Colorado, Vermont and Alaska, and the District of Columbia, have legalized recreational use of cannabis. Maine has not yet begun recreational cannabis commercial operations as of June 30, 2020. In early 2018, Vermont became the first state to legalize recreational cannabis by passage in a state legislature but does not allow commercial sales of recreational cannabis. 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.

For these reasons, the Company’s investments in the United States cannabis market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian authorities. There are a number of risks associated with the business of the Company. See section entitled “Financial Risk Management” and see sections “Risk Factors”, “General Development of the Business” and “Description of the Business” in the Annual Information Form dated April 28, 2020.

On September 25, 2019, the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”) was passed by the U.S. House of Representatives in a 321 to 103 vote. The SAFE Banking Act would permanently protect state-chartered banks and credit unions that service state-legal cannabis companies from being penalized by federal regulators. On May 17, 2020, the legislative language of the SAFE Banking Act was included in a stimulus bill known as The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act”). The HEROES Act was passed by the U.S. House of Representatives in a 208 to 199 vote. A negotiated version of the fourth COVID-19 package is expected to be up for vote in the Senate in the future.

On November 20, 2019, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (“MORE Act”) in a 24 to 10 vote. The MORE Act would decriminalize and remove Cannabis as a Schedule I substance. The MORE Act may be readdressed by the Democratic-controlled House of Representatives before the end of 2020.

The States In Which We Operate, Their Legal Framework and How It Affects Our Business

Illinois Operations

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 JB Pritzker.

In January 2019, JB Pritzker was sworn into office as Governor of Illinois. Cresco’s 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, Governor Pritzker signed the Cannabis Regulation and Taxation Act into law, making Illinois the 11th state to legalize recreational marijuana.

Illinois’ retail market for the first six calendar months of 2020 was $410 million, representing a 295% year-over-year increase.

Cresco currently operates three (3) medical/adult-use cannabis cultivation and manufacturing centers in Illinois, owns five (5) medical/adult-use dispensary locations in Illinois, and owns four (4) adult-use dispensary locations in Illinois. Licenses were awarded based on merit in a highly competitive application process to applicants who demonstrated strong operational expertise and financial backing.

sell, and purchase marijuana pursuant to the terms of the licenses, which are issued by the Department of Agriculture and the Department of Financial and Professional Regulation under the provisions of the Illinois Revised Statutes 410 ILCS 130. All licenses are, as of the date hereof, active with the State of Illinois. There are two categories of licenses in Illinois: (i) cultivation/processing; and (ii) dispensary. The licenses are independently issued for each approved activity.

All cultivation/processing establishments must register with the Illinois Department of Agriculture. All dispensaries must register with the Illinois Department of Financial and Professional Regulation. 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 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 Department of Agriculture or Illinois Department of Financial and Professional Regulation and include a renewal form. While Cresco’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Illinois cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Illinois cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The retail dispensary licenses held by Phoenix, PDI, FloraMedex, MedMar Lakeview, and MedMar Rockford permit the Company to purchase marijuana and marijuana products from cultivation/processing facilities and allows the sale of marijuana and marijuana products to registered patients and adult-use customers. The initial five dispensary locations were approved on October 16, 2019 to begin dispensing adult-use cannabis on January 1, 2020 and were also approved to open secondary site adult-use dispensaries by the Illinois Department of Financial and Professional Regulation. Two of the five additional dispensaries will be located within the City of Chicago. In May 2020, the Company announced the opening of the sixth and seventh Sunnyside* locations in Danville and Chicago-River North, respectively. In July 2020, the Company announced the opening of an eighth Sunnyside* location in South Beloit. In August 2020, the Company announced the opening of a ninth Sunnyside* location in Schaumburg.

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, including epilepsy, cancer, chronic pain, and PTSD. 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, Yeltrah was awarded one (1) medical cannabis cultivation and manufacturing center in Pennsylvania, and three (3) dispensary locations in Pennsylvania.

All cultivation/processing establishments must register with the Pennsylvania Department of Health. All dispensaries must register with the Pennsylvania Department of Health. 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 Cresco’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 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 sixty-six thousand (66,000) square feet of indoor and greenhouse cultivation area, bringing the total cultivation space in the facility to eighty-eight thousand (88,000) square feet.

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 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. The qualifying conditions in Ohio as a part of MMCP, include but are not limited to: cancer, epilepsy or other seizure disorder, inflammatory bowel disease, pain (either chronic, severe, or intractable) and PTSD. In order for a patient to be eligible to obtain medical marijuana, a physician must make a diagnosis of one of the qualifying conditions. 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.

The Company has certain agreements with Verdant Creations, LLC and its affiliates (“Verdant”) that will give the Company the option to purchase four additional Ohio dispensaries currently operated by Verdant. Completion of the transaction is subject to approval by the Ohio Board of Pharmacy and, upon closing, Cresco will have a total of five dispensaries in Ohio, the maximum allowed by the state. Cresco agreed to provide certain consulting services and financing to Verdant for the development and operation of the dispensaries in consideration of Verdant’s grant to Cresco of an option to acquire the dispensaries when permissible under Ohio regulations.

On June 8, 2020, Cresco Ohio was granted a provisional processing license by the state of Ohio. This license allows Cresco 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 forty-five days prior to the date the existing certificate expires. If the dispensary is operated in compliance with Ohio dispensary regulations, and the renewal fee is paid, the state board of pharmacy shall renew the certificate of operation within forty-five days after the renewal application is received. While Cresco’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.

One January 28, 2020, the Company announced that it had completed the sale of its Yellow Springs, OH property to Innovative Industrial Properties, Inc. (“IIP”). The previously announced sale was for consideration equal to approximately $10,500 thousand, 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 property represents approximately 50,000 square feet of industrial space in aggregate. This sale marks Cresco’s fourth completed sale-and-leaseback transaction, the third with IIP.

California Operations

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. The four agencies that regulate 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”).

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.

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 CDFA, CDPH, and BCC under the provision of MAUCRSA and California Assembly Bill No. 133. In California, licenses are independently issued by the respective agency.

California state and local licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by BCC, CDFA, and CDPH. 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 Resulting Issuer and have a material adverse effect on its business, financial condition, results of operations or prospects.

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

Mendota (Fresno County)

•

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

•

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

•

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

Carpinteria (SB County)

•

SLO has been issued provisional licenses for Cultivation: Small Mixed-Light Tier 1. Additionally, SLO has been issued provisional licenses in:

•

Nursery, allowing for the planting and cultivation of medical cannabis from seeds, clones, and immature plants.

•

Processor Type, allowing for the harvesting, drying, curing, grading or tanning of cannabis as well as the packaging and labelling of certain non-manufactured cannabis.

•

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

Origin House

On January 8, 2020, Cresco acquired CannaRoyalty Corp. d/b/a Origin House, pursuant to which Cresco acquired all issued and outstanding shares of Origin House. Under the terms of the Origin House Agreement and subsequent amendments, holders of common shares of Origin House received 0.7031 subordinate voting shares of Cresco Labs for each Origin House share (the “Transaction”). The Company acquired 100% of all equity interests of Origin House for 66,482 thousand Cresco shares and 5,961 thousand replacement equity awards, valued at $428,246 thousand.

The 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 has become a leading distributor and provider of brand support services in California, the world’s largest regulated cannabis market. 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 has access to several additional licenses for cultivation, manufacturing and distribution of cannabis within the state of California.

Oakland (Alameda County)

•

Origin House has been issued a provisional license for Type 6 (Manufacturing – Non-Volatile Solvent Extraction) A&M.

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Origin House has been issued a provisional license for Type 11 (Distribution), Adult-Use.

•

Origin House submitted annual applications for the two listed license types to the state regulator and is awaiting approval for these annual applications.

West Sacramento (Yolo County)

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

•

Origin House submitted annual applications for the two listed license types to the state regulator and is awaiting approval for these annual applications.

La Habra (Orange County)

•

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

•

Origin House submitted annual applications for the two listed license types to the state regulator and is awaiting approval for these annual applications.

Unincorporated Sonoma (Sonoma County)

•

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

•

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

•

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

•

Origin House submitted annual applications for the two listed license types to the state regulator and is awaiting approval for these annual applications.

Santa Rosa (Sonoma County)

•

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

•

Origin House submitted annual applications for the two listed license types to the state regulator and is awaiting approval for these annual applications.

In addition to the eight active licenses listed above, Origin House continues to pursue new state license opportunities and recently applied for a Type 11 (Distribution) license for the Santa Rosa (Sonoma County) location.

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. (the “AMMA”). The AMMA is codified in Arizona Revised Statutes (“ARS”) § 36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (the “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 (“AAC”) Title 9 Chapter 17 (the “Rules”).

to renew with the ADHS on an annual 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.

In order to qualify to use medical marijuana under the AMMA, a patient is required to have a “debilitating medical condition.” Valid medical conditions include: HIV, cancer, glaucoma, immune deficiency syndrome, hepatitis C, Crohn’s disease, agitation of Alzheimer’s disease, ALS, cachexia/wasting syndrome, muscle spasms, nausea, seizures, severe and chronic pain or another chronic or debilitating condition.

In order for an applicant to receive a Dispensary Registration Certificate (a “Certificate”) they must: (i) fill out an application on the form proscribed by ADHS, (ii) submit the applying entity’s articles of incorporation and by-laws, (iii) submit fingerprints for each principal officer or board member of the applicant for a background check to exclude felonies, (iv) submit a business plan and policies and procedures for inventory control, security, patient education, and patient recordkeeping that are consistent with the AMMA and the Rules to ensure that the dispensary will operate in compliance and (v) designate an Arizona licensed physician as the Medical Director for the dispensary. Certificates are renewed annually so long as the dispensary is in good standing with ADHS and pays the renewal fee and submits an independent third-party financial audit.

On October 24, 2018, Cresco obtained a 100% 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 would expect to receive the applicable renewed license in the ordinary course of business. While Cresco’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.

Voters in Arizona will decide this November on a statewide measure legalizing adult-use marijuana. The Arizona Secretary of State recently reported that the Smart and Safe Arizona Act gathered the required number of signatures from registered voters to qualify for inclusion on the ballot.

Nevada Operations

Medical marijuana use was legalized in Nevada by a ballot initiative in 2000. In November 2016, voters in Nevada passed an adult use marijuana measure to allow for the sale of recreational marijuana in the state. The first dispensaries to sell adult-use marijuana began sales in July 2017. The Nevada Department of Taxation (“DOT”) is the regulatory agency overseeing the medical and adult-use cannabis programs. Similar to California, cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue.

New York Operations

In November 2017, Governor Cuomo signed a bill to add PTSD as a qualifying condition, and, 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. During Governor Cuomo’s January 2019 State of the State Address, he announced the proposal of the governmental agency, The Office of Cannabis Management. This agency would regulate and oversee the state’s medical marijuana program, adult-use program and hemp program. The executive director of this agency would have the authority to grant ROs currently registered and in good standing with the NYSDOH, the ability to be licensed to cultivate, process or sell adult-use cannabis and cannabis products.

Each RO license allows for the cultivation, processing, and dispensing of medical cannabis products. Each RO is permitted to open four dispensaries in NYSDOH-designated regions throughout the state, and one 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 six and four 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 Cresco’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 GSC, the parent entity of Valley Ag, for consideration consistent of cash, deferred consideration, equity and contingent consideration based upon the achievement or occurrence of certain milestones or events, all totaling $129,574 thousand. 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. To date, Valley Ag has four (4) dispensaries and a processing facility open. Valley Ag has successfully renewed their initial licenses and all licenses are, as of the date hereof, active with the State of New York.

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% 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% 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 had 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 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 nonpatients 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 or about November 19, 2018, Cresco entered into a definitive agreement to acquire 100% of the shares and membership interests, as applicable, of HHH and an affiliated real estate entity for consideration consisting of cash and the assumption of certain indebtedness. HHH holds a final certificate of registration from the State of Massachusetts Department of Health that allows for cultivation, manufacturing and processing, and the establishment and operation of a medical cannabis dispensary in Fall River, Massachusetts. The final certificate of registration allows HHH the ability to apply for up to two additional such licenses. HHH holds a final license from the Massachusetts Cannabis Control Commission that allows for cultivation, manufacturing and processing, and the establishment and operation of an adult-use cannabis dispensary in Fall River, Massachusetts. On October 1, 2019, Cresco Labs, LLC acquired 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 $27,500 thousand. 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 Cresco’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.

One July 1, 2020, the Company announced that it had completed the sale of its Falls River, MA property to IIP. The sale was for consideration equal to approximately $29,000 thousand, which includes $21,000 thousand 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 property represents approximately 50,000 square feet of industrial space in aggregate.

Michigan Operations

On March 16, 2020, the Company’s affiliate received pre-qualification to operate in the adult-use market and received an adult-use processor license on June 22, 2020. 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 fees are to be determined by the amount of gross weight of marijuana product transferred during the past year. While Cresco’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 Cresco’s related parties’ ownership from 50% to 85% in exchange for a capital commitment of $25,000 thousand. According to IFRS 10, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. 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.

One April 23, 2020, the Company announced that it had completed the sale of its Marshall, MI property to IIP. The previously announced sale was for consideration equal to approximately $16,000 thousand, which included $11,000 thousand 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 marks Cresco’s fifth completed sale-and-leaseback transaction, the fourth with IIP.

Components of Our Results of Operations

Revenue

We derive the majority of our revenue from wholesale of cannabis products to dispensary locations which, for both the three and six months ended June 30, 2020, represents approximately 58% of our revenue. Revenue from company-owned retail dispensary locations, for both the three and six months ended June 30, 2020 represents the remaining 42%. Retail revenue includes medical and adult-use cannabis sales in the United States along with nicotine vape sales in Canada.

Gross Profit

•

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

•

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

•

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

•

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

Cultivation costs of biological assets are comprised of cannabis plant costs and are immediately expensed in cost of sales – production costs in the period in which they are incurred.

Selling, General and Administrative Expenses (“SG&A”)

SG&A expenses consist mainly of salary and benefits costs of executive and back office staff, retail personnel and ancillary costs, consulting and professional fees such as legal and accounting, office, advertising and marketing, excise taxes, travel and entertainment and share-based compensation. 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 six months ended June 30, 2020 and 2019, SG&A was comprised of the following:


	Three months ended June 30,					Six months ended June 30,
($ in thousands)	2020			2019		2020		2019
Salaries and related	$	19,034		$	5,517	$	37,310	$	9,768
Share-based compensation		6,689			2,973		8,076		5,850
Consulting and professional fees		5,625			4,245		16,777		7,613
Office		3,225			762		7,294		1,359
Advertising and marketing		2,780			2,352		6,764		4,642
Excise taxes		2,347			761		4,215		1,490
Technology		1,919			—		3,153		—
Business expansion costs		1,413			243		1,540		764
Travel, entertainment and delivery costs		1,066			925		2,632		1,445
Insurance		1,066			448		2,059		972
Intangible asset impairment		(1,194	)		—		—		—
Other		1,216			1,479		2,019		2,575

Total Selling, general and administrative expenses	$	45,186		$	19,705	$	91,839	$	36,478

Income Taxes

The Company, which is a Canadian corporation, is classified for U.S. federal income tax purposes as a United States corporation under Section 7874 of the Code. 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 legal cannabis industry, the Company is subject to the limits of the Internal Revenue Code (“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.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS and may not be comparable to similar measures presented by other issuers. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein.

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 other arrangements which 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 June 30, 2020 Compared to Three Months Ended June 30, 2019

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 IFRS.

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


	Three months ended June 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	94,256		$	29,890		$	64,366			215	%
Cost of sales - production costs		(60,835	)		(17,145	)		(43,690	)		255	%
Realized changes in fair value of inventory sold		(41,774	)		(17,620	)		(24,154	)		137	%
Unrealized gain on changes in fair value of biological assets		77,822			29,814			48,008			161	%
Gross profit		69,469			24,939			44,530			179	%
Total expenses		50,544			20,599			29,945			145	%
Total other expense, net		(10,313	)		(2,672	)		(7,641	)		286	%
Income tax expense		(13,312	)		(5,586	)		(7,726	)		138	%
Net loss		(4,700	)		(3,918	)		(782	)		20	%
Net loss attributable to Cresco Labs Inc.		(18,897	)		(2,026	)		(16,871	)		nm	%

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Three months ended June 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	94,256		$	29,890		$	64,366			215	%
Cost of sales - production costs¹		(60,835	)		(17,145	)		(43,690	)		255	%
Realized changes in fair value of inventory sold		(41,774	)		(17,620	)		(24,154	)		137	%
Unrealized gain on changes in fair value of biological assets		77,822			29,814			48,008			161	%

Gross profit		69,469			24,939			44,530			179	%

Cultivation costs expensed under IAS 41²		3,951			912			3,039			333	%
Net impact of fair value of biological assets		(36,048	)		(12,194	)		(23,854	)		196	%
Expansion, relaunch and rebranding costs³		4,616			722			3,894			nm	%
COVID-19 related expenses		1,887			—			1,887			100	%
Fair value mark-up for acquired inventory		331			—			331			100	%

Operational gross profit (Non-IFRS)	$	44,206		$	14,379		$	29,827			207	%

Operational gross profit % (Non-IFRS)		46.9	%		48.1	%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net loss to adjusted EBITDA (non-IFRS):


	Three months ended June 30,
($ in thousands)	2020			2019			$ Change			% Change
Net loss¹	$	(4,700	)	$	(3,918	)	$	(782	)		20	%
Depreciation and amortization		9,626			2,075			7,551			364	%
Interest expense, net		9,597			2,087			7,510			360	%
Income tax expense		13,312			5,586			7,726			138	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	27,835		$	5,830		$	22,005			377	%

Expansion, relaunch and rebranding costs²		4,616			722			3,894			nm	%
COVID-19 related expenses		2,648			—			2,648			100	%
Other expense, net		740			621			119			19	%
Gain from investment in associate		(24	)		(36	)		12			(33	)%
Fair value mark-up for acquired inventory		331			—			331			100	%
Cultivation costs expensed under IAS 41³		3,951			912			3,039			333	%
Adjustments for acquisition and other non-core costs		5,205			3,203			2,002			63	%
Management incentive compensation (share-based)		7,207			3,210			3,997			125	%

Adjusted EBITDA (Non-IFRS)	$	52,509		$	14,462		$	38,047			263	%

Net impact of fair value of biological assets		(36,048	)		(12,194	)		(23,854	)		196	%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	16,461		$	2,268		$	14,193			nm	%

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

²	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Revenue

Revenue for the three months ended June 30, 2020 was $94,256 thousand, an increase of $64,366 thousand, or 215%, compared to revenue of $29,890 thousand for the three months ended June 30, 2019. The increase in revenue was driven by the acquisitions of Origin House, Valley Ag and HHH, as well as continued growth in the states where the Company operates, primarily attributable to increased cultivation capacity and states with recently adopted adult-use laws such as Illinois.

Cost of Sales – Production Costs, Gross Profit, and Operational Gross Profit (non-IFRS)

Cost of sales – production costs for the three months ended June 30, 2020 was $60,835 thousand, an increase of $43,690 thousand compared to cost of sales – production costs of $17,145 thousand for the three months ended June 30, 2019. The increase was primarily attributable to the Origin House, Valley Ag and HHH acquisitions, increased cultivation capacity in Illinois and Pennsylvania, and other organic growth. This also included net cultivation costs which were immediately expensed under the Company’s accounting policy for biological assets of $3,951 thousand and $912 thousand in the three months ended June 30, 2020 and 2019, respectively.

Gross profit increased primarily due to the increase in revenue from the prior-year quarter. Operational gross profit for the second quarter of 2020, a non-IFRS measure which excludes the impact of biological assets accounting, cultivation costs immediately expensed, expansion, relaunch and rebranding costs, COVID-19 related expenses and the fair value mark-up for acquired inventory, as discussed above, was $44,206 thousand, compared to an operational gross profit of $14,379 thousand for the prior year. Operational gross profit reflects revenue less costs related to products sold in the period. The increase of $29,827 thousand from the prior year was primarily driven by the addition of Origin House, Valley Ag and HHH, greater scale in the Company’s established Illinois and Pennsylvania markets, and other organic growth. Operational gross profit percentage of approximately 47% was lower when compared with the prior year due to increased operating costs related to expansion of certain of its cultivation facilities. The Company expects margin expansion as these operations scale and it receives the full benefit of its capacity expansions in the second half of 2020.

Total Expenses

Total expenses for the three months ended June 30, 2020 were $50,544 thousand, an increase of $29,945 thousand compared to total expenses of $20,599 thousand for the three months ended June 30, 2019. The increase in total expenses was attributable to the acquisition of Origin House, Valley Ag, and HHH, acquisition and other non-core costs, depreciation and amortization associated with facilities and licensing in new markets, as well as significant investments in our team and operational infrastructure to drive strategic initiatives that better position the Company for future growth. Total expenses as a percentage of revenue are expected to decline as the Company gains efficiencies with the growth of the business.

Total Other (Expense) Income

Total other expense for the three months ended June 30, 2020 was $10,313 thousand, a change of $7,641 thousand compared to other expense of $2,672 thousand for the three months ended June 30, 2019. The increase in total other expense was primarily due to higher interest expense resulting from the loan agreements the Company entered and assumed during 2020. Further, interest expense associated with leases was higher in the current period as a result of newly entered agreements, including sale leasebacks of previously owned facilities, in 2020. See Notes 14 and 17 in the unaudited condensed interim consolidated financial statements for the periods ended June 30, 2020 and 2019 for more information.

Provision for Income Taxes

Income tax expense for the three months ended June 30, 2020 was $13,312 thousand compared to $5,586 thousand in the prior period. The change was 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.

Net Loss and Adjusted EBITDA (non-IFRS)

Net loss for the three months ended June 30, 2020 was $4,700 thousand, compared to $3,918 thousand for the three months ended June 30, 2019. Higher gross profit in the current period, driven by increased revenue and unrealized gains on the fair value of biological assets, was more than offset by higher operating expenses and current period income tax expense.

Adjusted EBITDA, a non-IFRS measure which excludes depreciation and amortization, net interest expense, income taxes, other expense, share-based compensation, acquisition and other non-core costs, gain from investment in associate, cultivation costs immediately expensed, expansion, relaunch and rebranding costs, COVID-19 related expenses and the fair value mark-up on acquired inventory, was $52,509 thousand and $14,462 thousand for the three months ended June 30, 2020 and 2019, respectively. Excluding the impact of biological assets, adjusted EBITDA was $16,461 thousand and $2,268 thousand for the three months ended June 30, 2020 and 2019, respectively. The increase in adjusted EBITDA is due to higher operational gross profit partially offset by higher operating expenses.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

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


	Six months ended June 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	160,636		$	50,945		$	109,691			215	%
Cost of sales - production costs		(107,035	)		(31,859	)		(75,176	)		236	%
Realized changes in fair value of inventory sold		(66,358	)		(33,515	)		(32,843	)		98	%
Unrealized gain on changes in fair value of biological assets		116,366			50,020			66,346			133	%
Gross profit		103,609			35,591			68,018			191	%
Total expenses		101,816			38,345			63,471			166	%
Total other expense, net		(3,150	)		(3,189	)		39			(1	)%
Income tax expense		(16,774	)		(5,549	)		(11,225	)		202	%
Net loss		(18,131	)		(11,492	)		(6,639	)		58	%
Net loss attributable to Cresco Labs Inc.		(26,286	)		(8,253	)		(18,033	)		219	%

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Six months ended June 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	160,636		$	50,945		$	109,691			215	%
Cost of sales - production costs¹		(107,035	)		(31,859	)		(75,176	)		236	%
Realized changes in fair value of inventory sold		(66,358	)		(33,515	)		(32,843	)		98	%
Unrealized gain on changes in fair value of biological assets		116,366			50,020			66,346			133	%

Gross profit		103,609			35,591			68,018			191	%

Cultivation costs expensed under IAS 41²		10,001			3,955			6,046			153	%
Net impact of fair value of biological assets		(50,008	)		(16,505	)		(33,503	)		203	%
Expansion, relaunch and rebranding costs³		8,497			722			7,775			nm	%
COVID-19 related expenses		1,887			—			1,887			100	%
Fair value mark-up for acquired inventory		2,220			—			2,220			100	%

Operational gross profit (Non-IFRS)	$	76,206		$	23,763		$	52,443			221	%

Operational gross profit % (Non-IFRS)		47.4	%		46.6	%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net loss to adjusted EBITDA (non-IFRS):


	Six months ended June 30,
($ in thousands)	2020			2019			$ Change			% Change
Net loss¹	$	(18,131	)	$	(11,492	)	$	(6,639	)		58	%
Depreciation and amortization		17,994			4,834			13,160			272	%
Interest expense, net		17,813			2,506			15,307			nm
Income tax expense		16,774			5,549			11,225			202	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	34,450		$	1,397		$	33,053			nm	%

Expansion, relaunch and rebranding costs²		8,497			722			7,775			nm	%
COVID-19 related expenses		2,648			—			2,648			100	%
Other (income) expense, net		(14,783	)		755			(15,538	)		nm	%
Loss (gain) from investment in associate		120			(72	)		192			nm	%
Fair value mark-up for acquired inventory		2,220			—			2,220			100	%
Cultivation costs expensed under IAS 41³		10,001			3,955			6,046			153	%
Adjustments for acquisition and other non-core costs		17,048			5,661			11,387			201	%
Management incentive compensation (share-based)		9,442			6,218			3,224			52	%

Adjusted EBITDA (Non-IFRS)	$	69,643		$	18,636		$	51,007			274	%

Net impact of fair value of biological assets		(50,008	)		(16,505	)		(33,503	)		203	%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	19,635		$	2,131		$	17,504			nm	%

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

²	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Revenue

Revenue for the six months ended June 30, 2020 was $160,636 thousand, an increase of $109,691 thousand, or 215%, compared to revenue of $50,945 thousand for the six months ended June 30, 2019. The increase in revenue was driven by the acquisitions of Origin House, Valley Ag and HHH as well as continued growth in the states where the Company operates, primarily attributable to increased cultivation capacity and states with recently adopted adult-use laws such as Illinois.

Cost of Sales – Production Costs, Gross Profit, and Operational Gross Profit (non-IFRS)

Cost of sales – production costs for the six months ended June 30, 2020 was $107,035 thousand, an increase of $75,176 thousand compared to cost of sales – production costs of $31,859 thousand for the six months ended June 30, 2019. The increase was primarily attributable to the Origin House, Valley Ag and HHH acquisitions, increased cultivation capacity in Illinois and Pennsylvania, and other organic growth. This also included net cultivation costs which were immediately expensed under the Company’s accounting policy for biological assets of $10,001 thousand and $3,955 thousand in the six months ended June 30, 2020 and 2019, respectively.

Gross profit increased primarily due to the increase in revenue from the prior-year. Operational gross profit for the first half of 2020, a non-IFRS measure which excludes the impact of biological assets accounting, cultivation costs immediately expensed, expansion, relaunch and rebranding costs, COVID-19 related expenses and the fair value mark-up for acquired inventory, as discussed above, was $76,206 thousand, compared to an operational gross profit of $23,763 thousand for the prior year. Operational gross profit reflects revenue less costs related to products sold in the period. The increase of $52,443 thousand from the prior year was primarily driven by the addition of Origin House, Valley Ag and HHH, greater scale in the Company’s established Illinois and Pennsylvania markets, and other organic growth. Operational gross profit percentage of approximately 47% was higher when compared with the prior year, as the benefit of operational efficiencies in the Company’s more established markets exceeded the impact of emerging and recently acquired business, where the Company is focused on footprint expansion and relaunching Cresco-branded products, and increased operating costs related to expansion of certain of its cultivation facilities. The Company expects margin expansion as these operations scale and it receives the full benefit of its capacity expansions in the second half of 2020.

Total Expenses

Total expenses for the six months ended June 30, 2020 were $101,816 thousand, an increase of $63,471 thousand compared to total expenses of $38,345 thousand for the six months ended June 30, 2019. The increase in total expenses was attributable to the acquisition of Origin House, Valley Ag, and HHH, acquisition and other non-core costs, depreciation and amortization associated with facilities and licensing in new markets, as well as significant investments in our personnel and operational infrastructure to drive strategic initiatives that better position the Company for future growth. Total expenses as a percentage of revenue are expected to decline as the Company gains efficiencies with the growth of the business.

Total Other (Expense) Income

Total other expense for the six months ended June 30, 2020 was $3,150 thousand, a decrease of $39 thousand compared to other expense of $3,189 thousand for the six months ended June 30, 2019. The decrease in total other expense was primarily due to an increase in unrealized gains recognized on financial instruments carried at fair value due to changes in the Company’s share price and other market factors. The increase in unrealized gains was offset by higher interest expense resulting from the loan agreements the Company entered and assumed during the period as well as newly entered lease agreements, including sale leasebacks of previously owned facilities, in 2020. See Notes 14, 17, and 20 in the unaudited condensed interim consolidated financial statements for the periods ended June 30, 2020 and 2019 for more information.

Provision for Income Taxes

Income tax expense for the six months ended June 30, 2020 was $16,774 thousand compared to $5,549 thousand in the prior period. The change was 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.

Net Loss and Adjusted EBITDA (non-IFRS)

Net loss for the six months ended June 30, 2020 was $18,131 thousand, compared to $11,492 thousand for the six months ended June 30, 2019. Higher gross profit in the current year, generated by increased revenue and unrealized gains on fair value of biological assets, was more than offset by higher operating expenses and current period income tax expense.

Adjusted EBITDA, a non-IFRS measure which excludes depreciation and amortization, net interest expense, income taxes, other income and expense, share-based compensation, acquisition and other non-core costs, loss or gain from investment in associate, cultivation costs immediately expensed, expansion, relaunch and rebranding costs, COVID-19 related expenses and the fair value mark-up on acquired inventory, was $69,643 thousand and $18,636 thousand for the six months ended June 30, 2020 and 2019, respectively. Excluding the impact of biological assets, adjusted EBITDA was $19,635 thousand and $2,131 thousand for the six months ended June 30, 2020 and 2019, respectively. The increase in adjusted EBITDA is due to higher operational gross profit partially offset by higher operating expense.

LIQUIDITY AND CAPITAL RESOURCES

Overview

As of June 30, 2020, the Company held $70,994 thousand in cash and cash equivalents, $2,874 thousand in restricted cash and $93,330 thousand of working capital compared to December 31, 2019, where we held $49,102 thousand in cash and cash equivalents, $5,050 thousand in restricted cash and $9,169 thousand of working capital. The increase of $84,161 thousand in working capital was primarily due to an increase in inventory, biological assets and cash and cash equivalents. A decrease in deferred consideration, contingent consideration and other payables was offset by increased short term borrowings between periods.

Cash Flows

Operating Activities

Net cash used in operating activities was $49,982 thousand for the six months ended June 30, 2020, an increase of $37,504 thousand compared to net cash used in operating activities of $12,478 thousand for the six months ended June 30, 2019. The increase in net cash used in operating activities was primarily due to timing of working capital requirements in the current period driven by increased costs associated with our expansion in new and existing markets as well as higher non-core, acquisition and integration-related costs.

Investing Activities

Net cash used in investing activities was $23,753 thousand for the six months June 30, 2020, a decrease of cash used of $28,593 thousand compared to $52,346 thousand used in investing for the six months ended June 30, 2019. The decrease in net cash used in investing activities was primarily due to proceeds received from sale and leaseback transactions, which partially offset an increase in purchase of property and equipment as the Company continues to expand its operations.

Financing Activities

Net cash provided by financing activities was $92,793 thousand for the six months ended June 30, 2020, an increase of $97,303 thousand compared to $4,510 thousand of cash used in financing activities for the six months ended June 30, 2019. The increase in net cash provided by financing activities was primarily due to proceeds from the issuance of long-term debt during the period.

CONTRACTUAL OBLIGATIONS

As of June 30, 2020, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	15,991
2021		32,122
2022		32,866
2023		34,035
2024		34,863
Thereafter		428,950

Total lease payments		578,827

Less: interest		(358,226	)
Less: tenant improvement allowance		(54,589	)

Present value of lease liabilities		166,012

Less: short-term lease liabilities		(26,036	)

Present value of long-term lease liabilities	$	139,976

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 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

RELATED PARTY TRANSACTIONS

The Company’s key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company’s executive management team and management directors. Aside from key management personnel compensation and the lease and lending arrangements described below for the six months ended June 30, 2020, there were no material transactions with or changes to other related party balances relative to the period ended December 31, 2019. Key management personnel compensation for the three and six months ended June 30, 2020 and 2019 are as follows:


	Three months ended June 30,				Six months ended June 30,
($ in thousands)	2020		2019		2020		2019
Management compensation	$	1,556	$	603	$	2,966	$	1,063
Share-based compensation expense		4,697		954		5,869		1,937

Total	$	6,253	$	1,557	$	8,835	$	3,000

As of June 30, 2020 and December 31, 2019, the Company had receivables of $204 thousand and $712 thousand, respectively, with key management personnel.

As of June 30, 2020 and December 31, 2019, the Company had payables of $553 thousand and $113 thousand, respectively, with key management personnel.

Key management personnel hold 84,550 thousand redeemable units of Cresco Labs, LLC, which is equal to $74,624 thousand of Non-controlling interests as of June 30, 2020.

As of June 30, 2020, the Company had borrowings with related parties of $8,250 thousand related to the Company’s Term Loan. See Note 14 for additional details.

The Company has lease liabilities for real estate lease agreements in which the lessor is a member of key management personnel. The lease liabilities were incurred during sale and leaseback transactions executed during the six months ended June 30, 2020 and will expire in 2030. For the three and six months ended June 30, 2020, the sale and leaseback transactions resulted in net funding of $7,405 thousand and $8,809 thousand, respectively. During the three months ended June 30, 2020, the Company received tenant improvement allowances of $789 thousand related to these lease agreements and expect to receive further reimbursements of $1,711 thousand as of June 30, 2020.

Below is a summary of the expense resulting from the related party lease liabilities for the periods ended June 30, 2020 and 2019.


	Three months ended June 30, 2020				Three months ended June 30, 2019
($ in thousands)	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	80	$	413	$	99	$	422
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		15		22		16		23
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		22		22		23		22
Finance lease liability; lessor is a member of key management personnel		55		93		—		—


	Six months ended June 30, 2020				Six months ended June 30, 2019
	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	162	$	816	$	198	$	832
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		31		43		31		45
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		44		44		46		45
Finance lease liability; lessor is a member of key management personnel		79		122		—		—

Additionally, below is a summary of the right-of-use (“ROU”) assets and lease liabilities attributable to related party lease arrangements. The ROU asset and lease liability for SLO’s lease assumes all lease extension options are exercised.


	As of June 30, 2020				As of December 31, 2019
($ in thousands)	ROU asset		Lease liability		ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	9,547	$	12,195	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar Rockford, LLC		618		683		649		694
Finance lease liability; lessor has minority interest MedMar Lakeview, LLC		659		720		643		686
Finance lease liability; lessor is a member of key management personnel		8,067		6,442		—		—

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 through profit or loss (“FVTPL”). The carrying values of financial instruments held at amortized cost approximate their fair values as of June 30, 2020 and December 31, 2019 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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

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

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

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

Unless otherwise noted, the Company considers all financial instruments measured at FVTPL to be Level 1 instruments.

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

The following table summarizes the Company’s financial instruments as of June 30, 2020 and December 31, 2019:


($ in thousands)	June 30, 2020		December 31, 2019
Financial Assets:
Cash and cash equivalents	$	70,994	$	49,102
Restricted cash		2,874		5,050
Accounts receivable, net		16,889		16,455
Loans receivable, short-term		2,400		644
Loans receivable, long-term		19,289		18,633
Security deposits		3,612		1,084
Financial Liabilities:
Accounts payable and other accrued expenses	$	66,915	$	62,834
Short-term borrowings and current portion of long-term debt		23,922		—
Current portion of lease liabilities		26,036		12,019
Deferred consideration, contingent consideration and other payables		11,317		59,940
Derivative liabilities		11		178
Derivative liabilities - long-term		8,605		15,243
Lease liabilities		139,976		82,856
Deferred consideration and contingent consideration		13,120		21,901
Long-term notes payable and loans payable		95,584		550

Financial Risk Management

Credit and Banking Risk

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at June 30, 2020 and December 31, 2019 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 primarily on cannabis industry growth in our 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 House of Representatives, but has not yet been voted on within the 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 and deposit funds from businesses involved with the cannabis industry.

ii.

Asset Forfeiture Risk

iii.

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 manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. In December 2019, the Company entered into the At-the-market Program for subordinated voting shares in the Company to be issued at the discretion of Management to raise up to CAD$55,000 thousand to fund corporate operations. In February 2020, the Company entered into a non-brokered credit agreement for a senior secured term loan with an initial principal balance of $100,000 thousand. The Company will continue to raise capital as needed to fund operations and expansion. The maturity analysis for lease obligations is located at Note 7 of the Company’s unaudited condensed interim consolidated financial statements.

iv.

Market Risk

a. Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of June 30, 2020 and December 31, 2019, 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 record a $178 thousand foreign exchange gain and a $422 thousand foreign exchange loss during the three and six months ended June 30, 2020, respectively. The Company recorded an immaterial amount of foreign exchange losses in the three and six months ended June 30, 2019.

b. 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. The Company calculates an incremental borrowing rate to use in the valuation of its financial instruments. The Company’s effective interest rates for its Term Loan range from 16.1% to 17.0% and the stated interest rate ranges from 12.7% to 13.2% based on the term elected by the lender. The Company’s weighted average effective interest rate for its Opaskwayak Cree Nation loan is 27.14% and its stated interest rate is 10%. See Note 14 of the Company’s unaudited condensed interim consolidated financial statements for further information.

c. 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, contingent consideration and liability classified restricted stock units 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 in fair value and total other expense, net of $3,119 thousand.

d. 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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 24 of the Company’s unaudited condensed interim consolidated financial statements for the Company’s disclosure of uncertain tax positions.

e. Regulatory Risk

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 that unforeseen regulatory changes can have a material impact on the goals and operations of the business as a whole.

EX-99.37 38 d945319dex9937.htm EX-99.37 EX-99.37

Exhibit 99.37

FORM 52-109FV2

CERTIFICATION OF INTERIM FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Charles Bachtell, Chief Executive Officer of Cresco Labs Inc., certify the following:

1.	Review: I have reviewed the interim financial statements and interim MD&A (together, the “interim filings”) of Cresco Labs Inc. (the “issuer”) for the interim period ended June 30, 2020.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

Date: August 20, 2020

/s/ Charles Bachtell

Charles Bachtell

Chief Executive Officer

NOTE TO READER

In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.38 39 d945319dex9938.htm EX-99.38 EX-99.38

Exhibit 99.38

FORM 52-109FV2

CERTIFICATION OF INTERIM FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Dennis Olis, Chief Financial Officer of Cresco Labs Inc., certify the following:

1.	Review: I have reviewed the interim financial statements and interim MD&A (together, the “interim filings”) of Cresco Labs Inc. (the “issuer”) for the interim period ended June 30, 2020.

Date: August 20, 2020

/s/ Dennis Olis

Dennis Olis

Chief Financial Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.39 40 d945319dex9939.htm EX-99.39 EX-99.39

Exhibit 99.39

Cresco Labs Announces Record Revenue of $153.3 Million, Growth of $59 Million or 63% QoQ,

and Adjusted EBITDA¹ of $46.4 Million

Company affirms position as the largest wholesaler of branded products in the industry with $90.5 million in wholesale revenue

•

Record revenue of $153.3 million, 63% growth QoQ, an absolute increase of $59 million

•

Record adjusted EBITDA¹ of $46.4 million, 182% growth QoQ

•

Record cashflow from operations of $17.8 million

•

Retail revenue growth of 60% QoQ to $62.8 million

•

Third consecutive quarter with over 40% revenue growth

CHICAGO—(BUSINESS WIRE)—November 18, 2020—Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) (FSE: 6CQ) (“Cresco Labs” or the “Company”), one of the largest vertically integrated multi-state cannabis operators in the United States, today released its unaudited financial results for the third quarter ended September 30, 2020. All financial information presented in this release is in U.S. dollars, unless otherwise noted.

Management Commentary

“Cresco Labs entered the third quarter firing on all cylinders achieving record levels of revenue, profitability, and cash flow. We remain the number one operator in the industry focused on, and delivering results in, the wholesale distribution of branded products. Our retail is outperforming, and we are generating substantial operating leverage,” said Charles Bachtell, Co-founder and CEO of Cresco Labs. “Comparing Q1 to Q3, we increased revenue by $87 million while keeping SG&A flat. The investments we made to support growth are paying off, and as a result our profitability has grown dollar for dollar with gross profit. Because of the decisions we’ve made, the changes we’ve managed through and the hard work devoted by our team over the last 12 months, Cresco Labs has substantiated itself within the very top tier of the industry and confirmed the value that is driven by our differentiated strategy. This is a unique story of strategic breadth, depth and execution. As we look toward our next phase of growth, it’s rinse and repeat – the playbook will be applied to more states and, again, we will achieve meaningful, material market positions.”

Third Quarter 2020 Financial Highlights

Operating Results

•

Revenue for the third quarter of 2020 was $153.3 million, an absolute increase of over $59.0 million or a 63% increase over Q2’20 revenue. Wholesale growth was driven by an increase in harvests from expanded capacity in Illinois and Pennsylvania with strong growth in California. Retail growth was driven by strong sequential same-store growth and two new store openings in Illinois.

•

Operational Gross Profit¹ as a Percentage of Revenue was 53% in the quarter as compared to 47% in the prior quarter driven by increased efficiency in our expanded Illinois and Pennsylvania facilities.

•

Adjusted EBITDA¹ was $46.4 million, an increase of 182% sequentially driven primarily from higher revenue, increased operational gross profit across our largest markets and strong SG&A control which dropped dramatically as a percentage of revenue.

•

Net Income² was $4.9 million, which includes unrealized gains and losses on mark-to-market instruments that fluctuate until obligations are settled, changes in fair value of biological assets, interest expense and tax expense.

•

Net Cash Provided by Operating Activities was $17.8 million, compared to $9.9 million used in Q2. The increase in cash provided by operating activities was driven by increased operating leverage across the business as the Company scales.

Shares Outstanding

Total shares on a fully converted basis were 380,035,735 as of September 30, 2020.

Conference Call and Webcast

The Company will host a conference call and webcast to discuss its financial results and provide investors with key business highlights on Wednesday, November 18, 2020, at 8:30am Eastern Time (7:30am Central Time). The conference call may be accessed via webcast or by dialing 866-688-4235 (409-216-0711 for international callers) and providing conference ID 9237505. Archived access to the webcast will be available for one year on the Cresco Labs’ investor relations website.

Consolidated Financial Statements

The financial information reported in this press release is based on unaudited management prepared financial statements for the three months ended September 30, 2020. The Company expects to file its unaudited interim consolidated financial statements on SEDAR by November 18, 2020. All financial information contained in this press release is qualified in its entirety with reference to such financial statements. While the Company does not expect there to be any material changes between the information contained in this press release and the unaudited interim consolidated financial statements it files on SEDAR, to the extent that the financial information contained in this press release is inconsistent with the information contained in the Company’s financial statements, the financial information contained in this press release shall be deemed to be modified or superseded by the Company’s filed financial statements. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation for purposes of applicable securities laws. Further, the reader should refer to the additional disclosures in the Company’s audited financial statements for the year ended December 31, 2019, previously filed on SEDAR.

About Cresco Labs Inc.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA, net of impact of biological assets, are non-IFRS measures and do not have standardized definitions under IFRS. The Company has provided these non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believes that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein. Accordingly, the Company has included below reconciliations of the supplemental non-IFRS financial measures to the most directly comparable financial measures calculated and presented in accordance with IFRS.

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the Company’s Annual Information Form dated April 28, 2020, and other documents filed by the Company with Canadian securities regulatory authorities; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco Labs’ shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

1	See “Non-IFRS Financial Measures” at the end of this press release for more information regarding the Company’s use of non-IFRS financial measures. Adjusted EBITDA is presented net of impact of biological assets.

2	Net income includes amounts attributable to non-controlling interests.

Cresco Labs Inc.

Unaudited Financial Information and Non-IFRS Reconciliations

(All amounts expressed in thousands of U.S. Dollars)

Unaudited Consolidated Statements of Operations

For the Three Months Ended September 30, 2020, June 30, 2020 and September 30, 2019


	For the Three Months Ended
($ in thousands)	9/30/2020			6/30/2020			9/30/2019
Revenue	$	153,298		$	94,256		$	36,207
Cost of sales - production costs		(74,148	)		(60,835	)		(23,369	)

Gross profit before fair value adjustments		79,150			33,421			12,838
Realized changes in fair value of inventory sold		(72,560	)		(41,774	)		(22,908	)
Unrealized gain on changes in fair value of biological assets		78,041			77,822			30,910

Gross profit		84,631			69,469			20,840
GP%		55.2	%		73.7	%		57.6	%
Expenses:
Selling, general and administrative		46,763			45,186			25,474
Depreciation and amortization		5,800			5,358			991

Total expenses		52,563			50,544			26,465
Gain (loss) from operations		32,068			18,925			(5,625	)

Other (expense) income:
Interest expense, net		(11,319	)		(9,597	)		(1,094	)
Other (expense) income, net		(2,983	)		(740	)		2,714
Income from investment in associate		(134	)		24			35

Total other expense (income), net		(14,436	)		(10,313	)		1,655

Income (loss) before income taxes		17,632			8,612			(3,970	)
Income tax expense		(12,690	)		(13,312	)		(4,624	)

Net income (loss) ¹	$	4,942		$	(4,700	)	$	(8,594	)

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

Cresco Labs Inc.

Summarized Consolidated Statements of Financial Position

As of September 30, 2020 and December 31, 2019


	September 30, 2020		December 31, 2019
($ in thousands)	(Unaudited)		(Audited)
Cash and cash equivalents	$	57,689	$	49,102
Other current assets		199,405		110,236
Property and equipment, net		180,649		155,839
Intangible assets, net		195,953		94,206
Goodwill		451,632		137,719
Other non-current assets		121,321		69,452

Total assets	$	1,206,649	$	616,554

Total current liabilities		243,731		150,169
Total long-term liabilities		221,294		143,762
Total shareholders’ equity		741,624		322,623

Total liabilities and shareholders’ equity	$	1,206,649	$	616,554

Cresco Labs Inc.

Unaudited Revenue and Gross Profit Metrics

For the Three Months Ended, September 30, 2020, June 30, 2020 and September 30, 2019


	For the Three Months Ended
($ in thousands)	9/30/2020			6/30/2020			9/30/2019
Revenue	$	153,298		$	94,256		$	36,207
Cost of sales – production costs¹		(74,148	)		(60,835	)		(23,369	)
Realized changes in fair value of inventory sold		(72,560	)		(41,774	)		(22,908	)
Unrealized gain on changes in fair value of biological assets		78,041			77,822			30,910

Gross profit	$	84,631		$	69,469		$	20,840

Cultivation costs expensed under IAS 41²		(3,934	)		3,951			2,075
Net impact of fair value of biological assets		(5,481	)		(36,048	)		(8,002	)
Expansion, relaunch and rebranding costs³		2,693			4,616			2,157
COVID-19 related expenses		846			1,887			—
Fair value markup for acquired inventory		1,843			331			—

Operational gross profit (Non-IFRS)	$	80,598		$	44,206		$	17,070

Operational GP%		52.6	%		46.9	%		47.1	%

1	Production (cultivation, manufacturing, and processing) costs related to products sold during the period.

2	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

3	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

Cresco Labs Inc.

Unaudited Reconciliation of Net Income to Adjusted EBITDA

For the Three Months Ended, September 30, 2020, June 30, 2020 and September 30, 2019


	For the Three Months Ended
($ in thousands)	9/30/2020			6/30/2020			9/30/2019
Net income (loss)¹	$	4,942		$	(4,700	)	$	(8,594	)
Depreciation and amortization		10,831			9,626			3,287
Interest expense, net		11,319			9,597			1,094
Income tax expense		12,690			13,312			4,624

Earnings before interest, taxes, depreciation and amortization (EBITDA) (Non-IFRS)	$	39,782		$	27,835		$	411

Expansion, relaunch and rebranding costs²		2,693			4,616			2,157
COVID-19 related expenses		956			2,648			—
Other expense (income), net		2,983			740			(2,714	)
(Loss) gain from investment in associate		134			(24	)		(35	)
Fair value markup for acquired inventory		1,843			331			—
Cultivation costs expensed under IAS 41³		(3,934	)		3,951			2,075
Adjustments for acquisition and other non-core costs		4,424			5,205			4,709
Management incentive compensation (share-based)		3,033			7,207			4,487

Adjusted EBITDA (Non-IFRS)	$	51,914		$	52,509		$	11,090

Net impact of fair value of biological assets		(5,481	)		(36,048	)		(8,002	)

Adjusted EBITDA (non-IFRS), net of impact of biological assets	$	46,433		$	16,461		$	3,088

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

2	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

3	Costs would be capitalized under IAS 2 and do not reflect cost of inventory sold in the period.

Cresco Labs Inc.

Unaudited Summarized Consolidated Statements of Cash Flows

For the Three Months Ended, September 30, 2020, June 30, 2020 and September 30, 2019


	For the Three Months Ended
($ in thousands)	9/30/2020 6/30/2020 9/30/2019
Net provided by (used in) operating activities	$	17,770		$	(9,881	)	$	(6,160	)
Net cash (used in) provided by investing activities		(12,147	)		14,888			(33,556	)
Net cash (used in) provided by financing activities		(18,869	)		(2,227	)		52,774
Effect of foreign currency exchange rate changes on cash		(1,005	)		(288	)		—

Net (decrease) increase in cash and cash equivalents		(14,251	)		2,492			13,058

Cash and cash equivalents and restricted cash, beginning of period		73,868			71,376			68,694

Cash and cash equivalents and restricted cash, end of period	$	59,617		$	73,868		$	81,752

Contacts

Media

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

312-953-2767

Investors

Jake Graves, Cresco Labs

Investor Relations Senior Analyst

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.40 41 d945319dex9940.htm EX-99.40 EX-99.40

Exhibit 99.40

CRESCO LABS INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2020 AND 2019

(Expressed in United States Dollars)

Cresco Labs Inc.

INDEX TO UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:

Condensed Interim Consolidated Statements of Financial Position			2

Condensed Interim Consolidated Statements of Operations			3

Condensed Interim Consolidated Statements of Comprehensive Income (Loss)			4

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity			5

Condensed Interim Consolidated Statements of Cash Flows			6

Notes to the Condensed Interim Consolidated Financial Statements			7

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Financial Position

As of September 30, 2020 and December 31, 2019

(In thousands of United States Dollars)


		(Unaudited) September 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	57,689		$	49,102
Restricted cash			1,928			5,050
Accounts receivable, net	Note 3		27,548			16,455
Biological assets	Note 4		53,130			31,791
Inventory, net	Note 5		107,845			49,555
Loans receivable, short-term	Note 20		2,701			644
Other current assets			6,253			6,741

Total current assets			257,094			159,338
Non-current assets:
Property and equipment, net	Note 6		180,649			155,839
Right-of-use assets	Note 7		88,778			46,696
Intangible assets, net	Note 9		195,953			94,206
Loans receivable, long-term	Note 20		20,137			18,633
Investments	Note 8		5,102			1,278
Goodwill	Note 9		451,632			137,719
Deferred tax asset	Note 24		3,554			1,761
Other non-current assets			3,750			1,084

Total non-current assets			949,555			457,216

TOTAL ASSETS		$	1,206,649		$	616,554

LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES:
Current liabilities:
Accounts payable and other accrued expenses	Note 10	$	62,103		$	62,834
Short-term borrowings	Note 14		111,532			—
Income tax payable			35,499			15,198
Current portion of lease liabilities	Note 7		24,794			12,019
Deferred consideration, contingent consideration and other payables	Note 13		9,777			59,940
Derivative liabilities, short-term	Note 20		26			178

Total current liabilities			243,731			150,169
Long-term liabilities:
Long-term notes payable and loans payable	Note 14		7,366			550
Derivative liabilities, long-term	Note 20		14,209			15,243
Lease liabilities	Note 7		135,204			82,856
Deferred tax liability	Note 24		52,877			23,212
Deferred consideration and contingent consideration	Note 13		11,638			21,901

Total long-term liabilities			221,294			143,762

TOTAL LIABILITIES			465,025			293,931

SHAREHOLDERS’ EQUITY:
Share capital			763,733			275,851
Contributed surplus			53,121			25,863
Accumulated other comprehensive income			(567	)		—
Accumulated deficit			(204,460	)		(114,632	)

Equity of Cresco Labs Inc.			611,827			187,082
Non-controlling interests	Note 11		129,797			135,541

TOTAL SHAREHOLDERS’ EQUITY			741,624			322,623

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,206,649		$	616,554


Nature of Operations (Note 1)
Commitments and Contingencies (Note 19)
Subsequent Events (Note 25)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited—In thousands of United States Dollars, except per share data)


		(Unaudited) Three months ended September 30,						(Unaudited) Nine months ended September 30,
		2020			2019			2020			2019
Revenue, net	Note 15	$	153,298		$	36,207		$	313,934		$	87,152

Costs of sales—production costs	Note 5		(74,148	)		(23,369	)		(181,183	)		(55,228	)

Gross profit before fair value adjustments			79,150			12,838			132,751			31,924

Realized changes in fair value of inventory sold	Note 5		(72,560	)		(22,908	)		(138,918	)		(56,423	)
Unrealized gain on changes in fair value of biological assets	Note 4		78,041			30,910			194,407			80,930

Gross profit			84,631			20,840			188,240			56,431


Expenses:
Selling, general and administrative	Note 16		46,763			25,474			138,602			61,952
Depreciation and amortization	Note 6, 7, 9		5,800			991			15,777			2,858

Total expenses			52,563			26,465			154,379			64,810

Gain (loss) before other (expense) income and income taxes			32,068			(5,625	)		33,861			(8,379	)

Other (expense) income:
Interest expense, net	Note 23		(11,319	)		(1,094	)		(29,132	)		(3,600	)
Other (expense) income, net	Note 17		(2,983	)		2,714			11,800			1,959
(Loss) income from investment in associates	Note 8		(134	)		35			(254	)		107

Total other (expense) income, net			(14,436	)		1,655			(17,586	)		(1,534	)

Income (loss) before income taxes			17,632			(3,970	)		16,275			(9,913	)
Income tax expense	Note 24		(12,690	)		(4,624	)		(29,464	)		(10,173	)

Net income (loss)		$	4,942		$	(8,594	)	$	(13,189	)	$	(20,086	)
Net income (loss) attributable to non-controlling interests, net of tax	Note 11		12,401			(1,634	)		20,556			(4,873	)

Net loss attributable to Cresco Labs Inc.		$	(7,459	)	$	(6,960	)	$	(33,745	)	$	(15,213	)


Net loss per share—attributable to Cresco Labs Inc. shareholders

Loss per share—basic	Note 22	$	(0.03	)	$	(0.06	)	$	(0.16	)	$	(0.13	)
Loss per share—diluted	Note 22	$	(0.03	)	$	(0.06	)	$	(0.16	)	$	(0.13	)

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited—In thousands of United States Dollars)


	(Unaudited) Three months ended September 30,						(Unaudited) Nine months ended September 30,
	2020			2019			2020			2019
Net income (loss) for the period	$	4,942		$	(8,594	)	$	(13,189	)	$	(20,086	)

Other comprehensive loss for the period
Foreign currency translation differences, net of tax		(160	)		—			(567	)		—

Total comprehensive income (loss) for the period	$	4,782		$	(8,594	)	$	(13,756	)	$	(20,086	)

Comprehensive income (loss) attributable to non-controlling interests, net of tax		12,401			(1,634	)		20,556			(4,873	)

Total comprehensive loss attributable to Cresco Labs Inc.	$	(7,619	)	$	(6,960	)	$	(34,312	)	$	(15,213	)

See accompanying notes to unaudited condensed interim consolidated financial statements

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2020 and 2019

(Unaudited—In thousands of United States Dollars)


			$ Amount
	Notes		Share capital		Shares to be issued			Contributed surplus			Accumulated deficit			Accumulated other comprehensive loss			Non-controlling interests			Total
Balance as of January 1, 2019			$	142,118	$	20,064		$	11,594		$	(52,745	)	$	—		$	161,950		$	282,981
Cumulative effect of adoption of new accounting pronouncement IFRS 16 Leases				—		—			—			(1,466	)		—			(1,526	)		(2,992	)
Exercise of options				883		—			(239	)		—			—			—			644
Exercise of warrants				1,674		—			(429	)		—			—			—			1,245
Equity-based compensation expense		Note 12		—		—			12,128			—			—			—			12,128
Change in ownership interest		Note 11(e)		—		—			—			(438	)		—			(395	)		(833	)
Income tax reserve				—		—			(35	)		320			—			—			285
Issuance of shares related to MedMar				19,497		(19,497	)		—			—			—			—			—
Distributions to limited liability company unit holders		Note 11(d)		—		—			—			(2,942	)		—			(688	)		(3,630	)
Shares issued through equity raise, net of costs				46,076		—			—			—			—			—			46,076
Cresco LLC shares redeemed				14,722		—			—			(13,195	)		—			(1,527	)		—
Cancellation of shares				—		(567	)		—			—			—			—			(567	)
Net loss				—		—			—			(15,213	)		—			(4,873	)		(20,086	)

Ending Balance as of September 30, 2019			$	224,970	$	—		$	23,019		$	(85,679	)	$	—		$	152,941		$	315,251

Balance as of January 1, 2020			$	275,851	$	—		$	25,863		$	(114,632	)	$	—		$	135,541		$	322,623
Exercise of options and warrants		Note 11(c), 12		3,640		—			(2,234	)		—			—			—			1,406
Equity-based compensation				4,806		—			3,922			—			—			—			8,728
Income tax reserve				—		—			(167	)		(326	)		—			—			(493	)
Employee taxes on certain share-based payment arrangements				3,694		—			(1,622	)		—			—			—			2,072
Equity issued related to acquisitions		Note 11(b)(ii-v)		407,086		—			27,995			—			—			—			435,081
Equity issuances		Note 11(b)(i)		3,554		—			—			—			—			—			3,554
Distributions to limited liability company unit holders		Note 11(d)		—		—			(636	)		(162	)		—			(16,793	)		(17,591	)
Cresco LLC shares redeemed and other adjustments		Note 11(e)		65,102		—			—			(55,595	)		—			(9,507	)		—
Foreign currency translation				—		—			—			—			(567	)		—			(567	)
Net loss				—		—			—			(33,745	)		—			20,556			(13,189	)

Ending Balance as of September 30, 2020			$	763,733	$	—		$	53,121		$	(204,460	)	$	(567	)	$	129,797		$	741,624

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Condensed Interim Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2020 and 2019

(Unaudited—In thousands of United States Dollars)


	(Unaudited)
	Nine months ended September 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(13,189	)	$	(20,086	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		28,824			7,486
Provision for expected credit loss		1,216			261
Share-based compensation expense		12,475			10,697
Loss (gain) on investments		959			(690	)
(Gain) loss on changes in fair value of deferred and contingent consideration		(9,493	)		815
Gain on derivative instruments and warrants		(1,176	)		(503	)
(Gain), net of losses, on loans receivable		(431	)		—
Accrued interest expense, net of income		4,967			—
Realized changes in fair value of inventory sold		132,921			54,160
Loss on inventory write-offs and provision		5,997			2,263
Unrealized (gain), net of losses, on changes in fair value of biological assets		(194,407	)		(80,930	)
Change in deferred taxes		(2,820	)		1,851
Accretion of discount and deferred financing costs on debt arrangements		4,624			—
Foreign currency loss		183			5
Acquisition termination charges settled in equity		1,279			—
Gain on debt modification		(1,045	)		—
Loss, net of (gains), on other adjustments to net income		130			—
Changes in operating assets and liabilities:
Accounts receivable		(3,987	)		(11,620	)
Inventory		(182,503	)		(77,724	)
Biological assets		175,071			71,518
Other current assets		340			(2,278	)
Deposits and other assets		(1,320	)		(102	)
Accounts payable and other accrued expenses		(10,401	)		16,995
Other current liabilities		(724	)		1,146
Deferred rent		—			—
Income tax payable		20,300			8,098

NET CASH USED IN OPERATING ACTIVITIES		(32,210	)		(18,638	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(63,328	)		(50,614	)
Purchases of intangibles		(1,481	)		(3,262	)
Proceeds from sale and leaseback transactions and lease tenant incentives		51,102			—
Payment of acquisition consideration, net of cash acquired		(16,327	)		(14,707	)
Loans receivable for entities to be acquired		(5,865	)		(17,319	)

NET CASH USED IN INVESTING ACTIVITIES		(35,899	)		(85,902	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options, warrants and share issuances		3,476			56,992
Proceeds from at-the-market offering		3,521			—
Proceeds from the issuance of long-term debt		100,000			—
Payment of debt and financing issuance costs		(4,260	)		(3,094	)
Repayment of debt		(3,922	)		—
Acquisition of non-controlling interests		(203	)		(833	)
Distributions to non-controlling interest redeemable unit holders		(16,955	)		(3,630	)
Payments for taxes related to net share settlements of restricted stock units		(2,819	)		—
Principal payments of leases		(4,916	)		(1,171	)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		73,922			48,264

Effect of foreign currency exchange rate changes on cash		(348	)		—

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH		5,465			(56,276	)
Cash and cash equivalents and restricted cash, beginning of period		54,152			138,028

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	59,617		$	81,752

CASH PAID DURING THE PERIOD FOR:
Interest	$	19,711		$	3,588
Income tax, net		11,575			15

NON-CASH TRANSACTIONS:
Equity issued for acquisitions and escrows	$	434,618		$	—
Increase to net lease liability		47,643			41,937
Conversion of loan to investment in associate		—			6,783
Liability incurred to purchase property and equipment		3,508			—
Cashless exercise of stock options		1,597			—

See accompanying notes to unaudited condensed interim consolidated financial statements.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

1.	NATURE OF OPERATIONS

On December 3, 2018, the Company began trading on the Canadian Securities Exchange (“CSE”) under the ticker symbol “CL.” On March 6, 2019, Cresco shares were approved to be quoted on the Over-the-Counter Market (“OTC”) and is traded under the ticker symbol “CRLBF.” On August 13, 2019, the Company began trading its Euro-dominated shares on the Frankfurt Stock Exchange (“FSE”) and is trading under the symbol “6CQ.”

The Company is licensed to cultivate, manufacture and sell retail and medical cannabis as well as retail and medical cannabis products in certain states. The Company also operates a retail, wholesale and online nicotine vape business in Canada. The Company operates in and/or has ownership interests in Illinois, Pennsylvania, Ohio, California, Maryland, Nevada, Arizona, New York, Massachusetts, Michigan and Canada, 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 Nevada Revised Statutes section 453A, the Arizona Medical Marijuana Act, the New York Compassionate Care Act, the Massachusetts Cannabis Control Commission, the Michigan Medical Marihuana Act and the Canada Tobacco and Vaping Products Act, respectively.

The Company’s head office is located at Suite 110, 400 W Erie St, Chicago, IL 60654 and the registered office is located at Suite 2200, 1055 West Hastings Street, Vancouver, BC V6E 2E9.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Basis of Preparation

The unaudited condensed interim consolidated financial statements of the Company have been prepared under International Financial Reporting Standards (“IFRS”) in accordance with International Accounting Standards 34 Interim Financial Reporting, which was adopted by the International Accounting Standards Board (“IASB”).

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

These unaudited condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on November 18, 2020.

(b)

Basis of Measurement

Management has applied judgment in concluding that there remain no material uncertainties related to events or conditions that may cast doubt upon the entity’s ability to continue as a going concern, which includes judgment of the effects of subsequent events, if applicable (see Note 25); and the Company’s ability to realize its assets and settle its obligations in the normal course of operations for at least twelve months from the date of the financial statements.

(c)

Functional and Presentation Currency

The Company’s functional currency and that of the majority of its subsidiaries, as determined by management, is the United States (“U.S.”) dollar. The Company’s presentation currency is the U.S. dollar. As such, the accompanying consolidated financial statements are presented in U.S. dollars. 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.

(d)

Basis of Consolidation

The unaudited condensed interim consolidated financial statements include the accounts of the Company and its subsidiaries with intercompany balances and transactions eliminated on 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’s wholly owned or effectively controlled subsidiaries and entities over which the Company has control as of September 30, 2020:

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)


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		48.2	%
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—Lakeview and Sunnyside—River North)	Illinois	Dispensary		87.6	%
MedMar Rockford, LLC (Sunnyside—Rockford and Sunnyside—South Beloit)	Illinois	Dispensary		75	%
CannaRoyalty Corp. (Origin House)	Ontario, Canada	Holding Company		100	%
Cali-AntiFragile Corp.	California	Holding Company		100	%
Alta Supply Inc.	California	Distribution		100	%
Kaya Management Inc.	California	Production		100	%
RPE Inc.	California	Distribution		100	%
FloraCal	California	Cultivation		100	%
Cub City, LLC	California	Distribution		100	%
CRHC Holdings Corp.	Ontario, Canada	Holding Company		100	%
2360149 Ontario Inc. (180 Smoke)	Ontario, Canada	Nicotine Vape Company		100	%
Cresco Labs Michigan, LLC^(a)	Michigan	Cultivation and Production Facility		85	%
^(a) Cresco Labs Michigan, LLC is 85% owned by related parties within management of the Company.
Entity	Location	Purpose	Percentage Held
Cresco Labs Notes Issuer, LLC	Illinois	Holding Company
Cresco Labs Ohio, LLC	Ohio	Cultivation, Production and Dispensary Facility		99	%
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	%
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 (Sunnyside—Buffalo Grove)	Illinois	Dispensary		100	%
Cresco Labs Phoenix Farms, LLC	Illinois	Holding Company		100	%
Phoenix Farms of Illinois, LLC (Sunnyside—Champaign and Sunnyside—Danville)	Illinois	Dispensary		100	%
JDC Elmwood, LLC	Illinois	Holding Company		100	%
FloraMedex, LLC (Sunnyside—Elmwood Park)	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 Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

condensed interim consolidated statements of financial position, and the share of income (loss) attributable to NCI is shown as a component of net loss in the unaudited Condensed Interim Consolidated Statements of Operations and in the unaudited Condensed Interim Consolidated Statement of Comprehensive Income (Loss). Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.

(e)

Intangible Assets


Market Related Intangibles			12 – 18 months
Customer Relationships			7 – 19 years
Non-Compete Agreements			4 – 5 years
Internally Developed Software			10 years
Trade Names			10 years
Permit Application Fees			1 – 2 years

(f)

Significant Accounting Judgments, Estimates, and Assumptions

The preparation of the Company’s unaudited condensed interim consolidated financial statements under IFRS requires management to make judgments, estimates, and assumptions about the carrying amounts of certain assets and liabilities. Estimates and related assumptions are based on historical experience and other relevant factors. Actual results may differ from these estimates.

Significant judgments, estimates, and assumptions within these unaudited condensed interim consolidated financial statements, unless stated herein, are consistent with the significant judgments, estimates, and assumptions applied within the annual consolidated financial statements for the years ended December 31, 2019 and 2018.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

(g)

Recently Issued Accounting Standards

The Company does not believe any recently issued, but not yet effective IFRS standards that have been issued by the IASB will have a material impact on the Company’s financial statements.

3.	ACCOUNTS RECEIVABLE

As of September 30, 2020 and December 31, 2019, Accounts receivable consisted of the following:


($ in thousands)	September 30, 2020			December 31, 2019
Accounts receivable, gross	$	28,088		$	16,726
Allowance for doubtful accounts		(540	)		(271	)

Total Accounts receivable, net	$	27,548		$	16,455

See Note 20 for the analysis of accounts receivable aging and disclosure of bad debt expense.

4.	BIOLOGICAL ASSETS

The Company’s biological assets consist of cannabis plants. The changes in the carrying value of biological assets to September 30, 2020 from December 31, 2019, consisted of the following:


($ in thousands)
Biological assets at January 1, 2020	$	31,791
Biological assets acquired (Note 13)		2,002
Transferred to inventory upon harvest		(175,070	)
Changes in fair value of biological assets		194,407

Biological assets at September 30, 2020	$	53,130

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

This model utilizes the following significant assumptions:


Inputs and assumptions	Calculation method	Effect changes of unobservable inputs has on fair value
Selling price per gram, less cost to sell	Based on observable market data or calculated wholesale prices with reasonable margins.	An increase in selling price per gram would increase the fair value of biological assets.

Attrition rate	Based on weighted average number of plants lost during each stage of production.	An increase in attrition rate would result in a decrease to the fair value of biological assets.

Average yield per plant	Based on the average number of grams of dried cannabis inventory expected to be harvested from each cannabis plant.	An increase to the average yield per plant would result in an increase to the fair value of biological assets.

Cumulative stage of completion in the production process	Based on an average number of days in production over a total average grow cycle of between 12 and 18 weeks.	An increase to the average stage of completion of the plants would result in an increase to the fair value of biological assets.

The Company estimates the harvest yields for cannabis at various stages of growth. As of September 30, 2020 and December 31, 2019, it was expected that the Company’s biological assets would yield approximately 21.0 million and 13.1 million grams, respectively.

The Company has quantified the sensitivity of the inputs in relation to biological assets as of September 30, 2020 and 2019 and expects the following effect on fair value as shown in the table below:


($ in thousands, except inputs)	Range of inputs (by weighted average growth stage)		Effect on fair value September 30,
Significant inputs & assumptions	Range of inputs (by weighted average growth stage)	Sensitivity	2020			2019
Selling price per gram, less cost to sell	$1.72 to $6.15	Increase 5%	$	11,310		$	4,930
		Decrease 5%		(11,310	)		(4,930	)
Attrition rate	7% to 19%	Increase 5%		(2,280	)		(1,472	)
		Decrease 5%		2,538			1,472
Average yield per plant	53 grams to 149 grams	Increase 5%		2,656			1,354
		Decrease 5%		(2,656	)		(1,354	)
Cumulative stage of completion	35% to 60% complete	Increase 5%		5,437			2,611
		Decrease 5%		(5,294	)		(2,611	)

5.	INVENTORY

As of September 30, 2020 and December 31, 2019, inventory was comprised primarily of cannabis and cannabis-related products. The Company wrote off $1.5 million and $nil of inventory during the three months ended September 30, 2020 and 2019, respectively, primarily related to work-in-process inventory with a lower than

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

expected exit price in its Arizona operations. The Company wrote off $3.4 million and $2.3 million of inventory during the nine months ended September 30, 2020 and 2019, respectively, primarily related to the damaged work-in-process inventory in Ohio and work-in-process inventory with a lower than expected exit price in its Arizona operations. This write-off is included in the fair value of inventory sold presented on the unaudited Condensed Interim Consolidated Statements of Operations.

Previous reserves of $1.2 million were relieved through the sale and disposal of inventory within Cost of sales—production costs during the three months ended September 30, 2020, resulting in net inventory write-offs of $0.3 million. The Company recorded $2.6 million of inventory reserves in Costs of sales—production costs for the nine months ended September 30, 2020. The Company recorded $nil expense for inventory reserves during the three and nine months ended September 30, 2019. As of September 30, 2020 and December 31, 2019, the Company had inventory reserves of $2.8 million and $0.2 million, respectively.

Inventory as of September 30, 2020 and December 31, 2019, consisted of the following:


($ in thousands)	September 30, 2020		December 31, 2019
Raw materials	$	41,384	$	16,521
Raw materials—non-cannabis		16,120		5,820
Work-in-process		18,343		14,100
Finished goods		31,998		13,114

Total Inventory	$	107,845	$	49,555

During the three months ended September 30, 2020 and 2019, the Company recognized $146.7 million and $46.3 million, respectively, of inventory expensed in the unaudited Condensed Interim Consolidated Statements of Operations, which includes $74.1 million and $23.4 million, respectively, of Cost of sales—production costs and $72.6 million and $22.9 million, respectively, of non-cash expense relating to the changes in fair value of inventory sold.

During the nine months ended September 30, 2020 and 2019, the Company recognized $320.1 million and $111.6 million, respectively, of inventory expensed in the unaudited Condensed Interim Consolidated Statements of Operations, which includes $181.2 million and $55.2 million, respectively, of Cost of sales—production costs and $138.9 million and $56.4 million, respectively, of non-cash expense relating to the changes in fair value of inventory sold.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

6.	PROPERTY AND EQUIPMENT

As of September 30, 2020 and December 31, 2019, property and equipment consisted of the following:


($ in thousands)	Land and Buildings			Machinery and Equipment			Furniture and Fixtures			Leasehold Improvements			Website, Computer Equipment, and Software			Vehicles			Construction In Progress			Total
Cost
As of January 1, 2020	$	28,007		$	15,650		$	10,458		$	62,965		$	2,715		$	715		$	42,048		$	162,558

Additions		1,053			5,422			4,442			15,703			1,975			672			21,844			51,111
Transfers		1,728			281			87			39,527			23			13			(41,659	)		—
Disposals		—			(110	)		(33	)		(214	)		(21	)		—			—			(378	)
Sale related to sale-leaseback transactions		(22,083	)		—			—			—			—			—			(11,403	)		(33,486	)
Additions from acquisition		—			455			473			11,615			585			331			5,166			18,625
Effect of foreign exchange and other adjustments		—			(8	)		(225	)		(91	)		(8	)		—			—			(332	)

As of September 30, 2020	$	8,705		$	21,690		$	15,202		$	129,505		$	5,269		$	1,731		$	15,996		$	198,098

Accumulated depreciation
As of January 1, 2020	$	(432	)	$	(1,248	)	$	(994	)	$	(3,142	)	$	(743	)	$	(160	)	$	—		$	(6,719	)
Depreciation		(262	)		(988	)		(1,532	)		(7,397	)		(787	)		(221	)		—			(11,187	)
Sale related to sale-leaseback transactions		—			—			—			457			—			—			—			457

As of September 30, 2020	$	(694	)	$	(2,236	)	$	(2,526	)	$	(10,082	)	$	(1,530	)	$	(381	)	$	—		$	(17,449	)

Net book value

As of September 30, 2020	$	8,011		$	19,454		$	12,676		$	119,423		$	3,739		$	1,350		$	15,996		$	180,649

As of December 31, 2019	$	27,575		$	14,402		$	9,464		$	59,823		$	1,972		$	555		$	42,048		$	155,839

As of September 30, 2020 and December 31, 2019, costs related to construction at the Company’s facilities were capitalized in construction in progress and not depreciated. Depreciation will commence when construction is completed and the facility is available for its intended use.

Depreciation of $4.2 million and $1.3 million was incurred during the three months ended September 30, 2020 and 2019, respectively, of which $1.2 million and $0.3 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales—production costs and ending inventory.

Depreciation of $11.2 million and $3.3 million was incurred during the nine months ended September 30, 2020 and 2019, respectively, of which $3.1 million and $0.8 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales—production costs and ending inventory.

As of September 30, 2020, ending inventory includes $0.8 million of capitalized depreciation. For the three months ended September 30, 2020 and 2019, $3.3 million and $1.0 million, respectively, of depreciation was recorded to Cost of sales—production costs, which includes $0.7 million and $0.1 million, respectively, related to depreciation capitalized to inventory in prior quarters. For the nine months ended September 30, 2020 and 2019, $8.3 million and $2.3 million, respectively, of depreciation was recorded to Cost of sales—production costs, which includes $0.4 million and $0.1 million, respectively, related to depreciation capitalized to inventory in prior quarters.

7.	LEASES

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

As of September 30, 2020 and December 31, 2019, the Company’s leases include the following Right-of-use (“ROU”) assets:


($ in thousands)	September 30, 2020		December 31, 2019
Real estate	$	88,751	$	46,696
Vehicles		27		—

Total ROU assets	$	88,778	$	46,696

Included in the ROU assets balance is $18.0 million of additions resulting from the acquisition of CannaRoyalty Corp. (“Origin House”) and $32.8 million of additions related to new leases, partially offset by $0.1 million of terminations for the nine months ended September 30, 2020.

Total interest expense of $5.5 million and $1.6 million was recorded for the three months ended September 30, 2020 and 2019, respectively, and $14.7 million and $4.9 million for the nine months ended September 30, 2020 and 2019, respectively.

Total leasing depreciation of $2.4 million and $1.0 million was recorded for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, $1.3 million and $0.4 million, respectively, of leasing depreciation is included in Selling, general and administrative expense with the remainder in Cost of sales – production costs and ending inventory.

Total leasing depreciation of $6.3 million and $3.0 million was recorded for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, $3.4 million and $1.1 million, respectively, of leasing depreciation is included in Selling, general and administrative expense with the remainder in Cost of sales – production costs and ending inventory.

As of September 30, 2020, ending inventory includes $0.3 million of capitalized depreciation. For the three months ended September 30, 2020 and 2019, $1.1 million and $0.6 million, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $0.2 million for both periods presented related to depreciation capitalized to inventory in prior quarters. For the nine months ended September 30, 2020 and 2019, $2.8 million and $2.0 million, respectively, of depreciation was recorded to Cost of sales – production costs, which includes $0.1 million and $0.3 million, respectively, related to depreciation capitalized to inventory in prior quarters.

For short-term leases with durations of twelve months or less, the Company recorded $0.2 million and $15 thousand for the three months ended September 30, 2020 and 2019, respectively, and $0.8 million and $0.2 million for the nine months ended September 30, 2020 and 2019, respectively, in rent expense within Selling, general and administrative expenses. The Company recognizes this expense on a straight-line basis over the lease term.

The Company is the lessor in three real estate operating leasing arrangements and one equipment finance leasing arrangement. For the three and nine months ended September 30, 2020, the Company recorded rental income in Other (expense) income, net of $0.2 million and $0.5 million, respectively, in relation to the operating leases. At September 30, 2020, the Company recorded deferred rent receivable for operating leases of $0.1 million, deferred rent receivable for finance lease of $0.1 million, and a sublease receivable balance of $2 thousand.

During the nine months ended September 30, 2020 the Company entered into and amended certain sale and leaseback agreements whereby the Company sold properties with a total net book value of $33.0 million and recorded a $22 thousand loss on asset sale recorded in Selling, general, and administrative expense in the unaudited Condensed Interim Consolidated Statement of Operations. The new and amended 2020 sale and leaseback transactions resulted in net funding of $29.9 million, a net increase to ROU assets of $25.2 million, a net increase

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

to lease liability of $24.5 million and expected additional tenant improvement allowance reimbursements of $52.9 million, with the remaining impact related to settlement of security deposits, the Hope Heal Health (“HHH”) Loan (“HHH Loan”), and prepaid expenses. The Company had no new sale leaseback transactions during the three months ended September 30, 2020.

The Company has received tenant improvement allowance reimbursements of $20.7 million across all leasing arrangements for the nine months ended September 30, 2020 and expects to receive an additional $54.3 million for these arrangements.

As of September 30, 2020, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	8,051
2021		32,248
2022		32,876
2023		33,437
2024		34,424
Thereafter		383,148

Total lease payments	$	524,184

Less: interest		(309,923	)
Less: tenant improvement allowance		(54,263	)

Present value of lease liabilities		159,998

Less: short-term lease liabilities		(24,794	)

Present value of long-term lease liabilities	$	135,204

8.	INVESTMENTS

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

(a)

Investments at Fair Value

The Company has investments in three entities: 420 Capital Management, LLC (“420 Capital”), a cannabis investment company; Lighthouse Strategies, LLC (“Lighthouse”), a diversified cannabis investment company; and Fleurish Cannabis, Inc. (“Fleurish”), an entity that focuses on cannabis production licenses. The 420 Capital, Lighthouse and Fleurish investments are accounted for at fair value. On August 12, 2019, the Company settled its outstanding loan receivable with Lighthouse of $3.3 million through receipt of Lighthouse membership units approximating 1.2% ownership of the parent company, with a fair value of $1.0 million as of September 30, 2020. See Note 20 for additional details. Upon the acquisition of Origin House on January 8, 2020, the Company obtained a 1.3% ownership stake in Fleurish with a fair value of $0.1 million as of the acquisition date. See Note 13 for additional details.

The Company previously had an investment in MassRoots, Inc. (“MassRoots”), a publicly traded cannabis company, with an ownership stake of less than 1%. However, the Company elected to write off the investment during the three months ended March 31, 2020 as the investment was determined to not have any value.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The following is a summary of the investments at fair value held as of September 30, 2020 and December 31, 2019:


($ in thousands)	September 30, 2020		December 31, 2019
($ in thousands)	September 30, 2020		December 31, 2019
420 Capital	$	68	$	68
Lighthouse		1,049		1,209
Fleurish		48		—
MassRoots		—		1

Total Investments	$	1,165	$	1,278

The Company recorded a mark-to-market gain of $0.1 million and a mark-to-market loss of $2 thousand for the three months ended September 30, 2020 and 2019, respectively, and a mark-to-market loss of $0.2 million and $11 thousand for the nine months ended September 30, 2020 and 2019, respectively.

(b)

Investment in Associates

As part of the Origin House acquisition on January 8, 2020, the Company obtained 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 Trichome investment was valued at $4.3 million. The Company’s ownership stake in Trichome upon acquisition and as of September 30, 2020 is approximately 23%.

The following is a summary of the investment in associates accounted for as an equity method investment and held as of September 30, 2020 and December 31, 2019:


($ in thousands)	September 30, 2020		December 31, 2019
($ in thousands)	September 30, 2020		December 31, 2019
Trichome	$	3,937	$	—

Total Investment	$	3,937	$	—

The Company recorded a loss on investment of $0.1 million and $0.2 million for the three and nine months ended September 30, 2020, respectively. During the three and nine months ended September 30, 2020, no distributions were made related to investments. For the three and nine months ended September 30, 2019, the Company recorded investment income of $35 thousand and $0.1 million, respectively, and distributions of $39 thousand and $0.1 million, respectively. Prior year investment income and distributions were related to a previously held equity method investment, which was dissolved in the fourth quarter of 2019.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

9.	INTANGIBLE ASSETS AND GOODWILL

The following is a reconciliation of the balances of intangible assets and goodwill from the beginning balances at December 31, 2019 to the ending balances on September 30, 2020:


($ in thousands)	Customer Relationships			Trade Names			Permit Application Costs			Licenses		Other Intangibles^(a)			Goodwill			Total
Cost
Balance at January 1, 2020	$	6,929		$	—		$	6,842		$	83,447	$	2,133		$	137,719		$	237,070

Additions		—			—			1,418			—		63			—			1,481
Additions from acquisitions		52,200			41,800			—			5,900		2,865			320,322			423,087
Foreign exchange		—			—			—			—		18			5			23
Measurement period adjustments		11,400			(2,100	)		—			—		(111	)		(6,414	)		2,775

Balance at September 30, 2020	$	70,529		$	39,700		$	8,260		$	89,347	$	4,968		$	451,632		$	664,436

Accumulated amortization
Balance at January 1, 2020	$	(858	)	$	—		$	(3,265	)	$	—	$	(1,022	)	$	—		$	(5,145	)

Amortization		(3,202	)		(2,978	)		(2,628	)		—		(2,898	)		—			(11,706	)

Balance at September 30, 2020	$	(4,060	)	$	(2,978	)	$	(5,893	)	$	—	$	(3,920	)	$	—		$	(16,851	)

Net book value
September 30, 2020	$	66,469		$	36,722		$	2,367		$	89,347	$	1,048		$	451,632		$	647,585

December 31, 2019	$	6,071		$	—		$	3,577		$	83,447	$	1,111		$	137,719		$	231,925

(a)

Other Intangibles includes market-related, non-compete agreements and internally developed software

During the three months ended March 31, 2020, the Company recorded an impairment charge of $1.2 million on a market-related intangible due to changing market conditions. During the three months ended June 30, 2020, the Company fully recovered the value of this intangible asset and recorded an impairment reversal of $1.2 million.

Amortization of $4.2 million and $0.6 million was recorded for the three months ended September 30, 2020 and 2019, respectively, of which $3.3 million and $0.3 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales—production costs and ending inventory.

Amortization of $11.7 million and $1.9 million was recorded for the nine months ended September 30, 2020 and 2019, respectively, of which $9.3 million and $0.9 million, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales—production costs and ending inventory.

As of September 30, 2020, ending inventory includes $0.3 million of capitalized amortization. For the three months ended September 30, 2020 and 2019, $0.7 million and $0.3 million, respectively, of amortization expense was recorded to Cost of sales—production costs, which includes $0.2 million and $0.1 million, respectively, related to amortization capitalized to inventory in prior quarters. For the nine months ended September 30, 2020 and 2019, $1.9 million and $0.8 million, respectively, of amortization expense was recorded to Cost of sales—production costs, which includes $0.2 million and $0.1 million, respectively, related to amortization capitalized to inventory in prior quarters.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

10.

ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES

As of September 30, 2020 and December 31, 2019, Accounts payable and other accrued expenses were comprised of the following:


($ in thousands)	September 30, 2020		December 31, 2019
Accounts payable	$	28,808	$	32,463
Accrued expenses		12,638		24,133
Payroll liabilities		11,185		5,195
Excise taxes payable		7,868		540
Contract liability		1,058		—
Tax penalty		526		455
Property taxes payable		20		48

Total Accounts payable and other accrued expenses	$	62,103	$	62,834

11.

SHARE CAPITAL

(a)

Authorized

The authorized share capital of the Company is comprised of the following:

Unlimited Number of Subordinate Voting Shares

ii.

Unlimited Number of Proportionate Voting Shares

During the nine months ended September 30, 2020 and 2019, 0.1 million and 0.2 million PVS, respectively, were exchanged for 18.7 million and 31.7 million SVS, respectively, at a rate of 1 PVS for 200 SVS.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

iii.

500,000 Super Voting Shares

iv.

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

(b)

Issued and Outstanding

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units for the nine months ended September 30, 2020 is as follows:


(in thousands)		Redeemable Units			Subordinate Voting Shares (SVS)		Super Voting Shares(MVS)		Proportionate Voting Shares (PVS)*			Special Subordinate Voting Shares (SSVS)**		Shares to be Cancelled
Beginning balance, January 1, 2020			142,172			73,600		500		57,937			—		—

Options and warrants exercised	Note 11(c), 12		—			1,239		—		12			—		—
RSUs issued	Note 12		—			1,415		—		—			—		—
Issuance of shares related to acquisitions	Note 11(b)(ii-v)		—			69,484		—		242			—		(155	)
Cresco LLC redemption	Note 11(d)		(11,224	)		11,224		—		—			—		—
PVS converted to SVS	Note 11(a)		—			18,671		—		(18,671	)		—		—
Employee taxes on certain share-based payment arrangements	Note 12		—			779		—		—			—		—
Share issuances	Note 11(b)(i)		—			792		—		—			1		—

Ending balance, September 30, 2020			130,948			177,204		500		39,520			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)

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

A reconciliation of the beginning and ending balances of the issued and outstanding shares and units for the nine months ended September 30, 2019 is as follows:


(in thousands)		Redeemable Units			Subordinate Voting Shares (SVS)		Super Voting Shares (MVS)		Proportionate Voting Shares (PVS)*			Shares to be Issued
Beginning balance, January 1, 2019			143,844			26,711		500		82,803			3,020

Stock options exercised			—			151		—		440			—
Warrants exercised			—			170		—		—			—
Issuance of MedMar shares			—			—		—		3,020			(3,020	)
PVS converted to SVS	Note 11(a)		—			31,676		—		(31,676	)		—
Cresco LLC redemption			(1,456	)		1,456		—		—			—
Share issuance from equity raise			—			7,350		—		—			—

Ending balance, September 30, 2019			142,388			67,514		500		54,587			—

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

(i)

Share Issuances

In December 2019, the Company entered an agreement (“ATM Offering”) with Canaccord Genuity Corp to sell up to C$55 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. During the nine months ended September 30, 2020, the Company issued 44 thousand SVS, valued at $0.2 million. 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.

The Company issued 1 thousand SSVS (as-converted), valued at $3 thousand during the nine months ended September 30, 2020. No SSVS were issued during the three months ended September 30, 2020.

(ii)

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 thousand 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 (“Cub City”). See Note 13 for further details.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

During the three months ended September 30, 2020 the Company cancelled 0.2 million shares in connection with the settlement of the previously disclosed contingent liability related to the Origin House acquisition. See Note 19 for further details.

(iii)

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

(iv)

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

During the nine months ended September 30, 2020, the Company issued a total of 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 Note 13 and Note 20 for further details.

(v)

Issuance of Shares—Tryke

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.

(c)

Stock Purchase Warrants

Each whole warrant entitles the holder to purchase one PVS of the Company. A summary of the status of the warrants outstanding is as follows:


	Number of warrants*			Weighted- average exercise price


Balance as of January 1, 2020		6,453,784		$	7.73
Exercised		(12,000	)		4.24

Balance as of September 30, 2020		6,441,784		$	7.73

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

During the nine months ended September 30, 2020, the Company recorded $0.1 million of warrant exercises into share capital. Of the 6.4 million warrants outstanding, 6.2 million warrants are from issuances to underwriters associated with the September 2019 financing, sellers from the Valley Ag acquisition and previous holders of Randsburg warrants. The warrants associated with the September 2019 financing and the Valley Ag acquisition are classified as long-term derivative liabilities, and the Randsburg warrants are classified as short-term derivative liabilities. See Note 20 for information about valuation of liability-classified warrants.

No equity-classified warrants were issued during the nine months ended September 30, 2020 and 2019.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

(d)

Distribution to Non-controlling Interest Holders

During the three months ended June 30, 2020, in accordance with the underlying operating agreements, the Company declared required tax distribution amounts to 2019 unit holders of Cresco Labs, LLC and other minority holders of $9.5 million, and made related payments of $0.5 million. During the three months ended September 30, 2020, the remaining $9.0 million was paid to the 2019 unit holders.

During the three and nine months ended September 30, 2020, the Company declared and made additional tax-related distributions to 2020 unit holders of Cresco Labs, LLC and other minority interest holders of $7.2 million. These distributions reduced non-controlling interest upon payment.

During the second quarter of 2019, in accordance with the operating agreement of Cresco Labs LLC, the Company declared a distribution of profits to holders of Cresco Labs, LLC units during 2018. During the nine months ended September 30, 2019 the Company made distributions of $3.6 million, reducing non-controlling interest of Cresco Labs, LLC by $0.7 million for distributions to members who hold Redeemable Units. The remaining $2.9 million distribution was recorded as an increase to accumulated deficit.

During the three months ended September 30, 2020, in accordance with the underlying operating agreements, the company declared required cash distributions to the minority interest holders of MedMar Rockford, LLC. The total declared distribution was $0.6 million, which will reduce non-controlling interest upon payment. During the nine months ended September 30,2020, $nil was paid, and the $0.6 million liability was recorded in contributed surplus.

(e)

Changes in Ownership and Non-controlling Interests

In the nine months ended September 30, 2020, redemptions of 11.2 million redeemable units occurred which were converted into an equivalent number of SVS. This redemption resulted in a decrease of 4.4% in non-controlling interest in Cresco Labs, LLC, an increase to accumulated deficit of $55.7 million, and a decrease of $9.4 million in non-controlling interest.

In February 2019, the Company acquired an additional 1% of Phoenix Farms of Illinois, LLC decreasing non-controlling interest from 11% to 10%. The consideration paid was $0.2 million. This resulted in a $0.2 million increase in accumulated deficit and a $34 thousand decrease in non-controlling interest.

In May 2019, the Company acquired the remaining 10% of non-controlling interest from Phoenix Farms of Illinois, LLC. The consideration paid was $0.6 million, which resulted in a $0.3 million increase in accumulated deficit and a $0.4 million decrease in non-controlling interest.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

As of and for the nine months ended September 30, 2020, non-controlling interest included the following amounts before intercompany eliminations:


($ in thousands) September 30, 2020	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other entities including Cresco Labs, LLC¹			Eliminations			Total
($ in thousands) September 30, 2020	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other entities including Cresco Labs, LLC¹			Eliminations			Total

Non-current assets		3,504			32,094			20,987			10,801			18,817			863,352			—			949,555
Current assets		28,221			17,502			24,065			38,597			73,618			203,842			(128,751	)		257,094
Non-current liabilities		—			(11,505	)		(2,222	)		(7,179	)		(9,101	)		(191,287	)		—			(221,294	)
Current liabilities		(22,179	)		(23,805	)		(16,238	)		(42,292	)		(109,955	)		(167,941	)		138,679			(243,731	)

Net assets		9,546			14,286			26,592			(73	)		(26,621	)		707,966			9,928			741,624

Net assets attributable to NCI		3,207			3,183			3,237			92			(4,833	)		124,911	³		—			129,797


Revenue		12,565			21,290			22,390			10,611			13,609			255,385			(21,916	)		313,934
Gross profit		7,625			11,420			12,102			2,519			(4,335	)		159,147			(238	)		188,240

Total comprehensive income (loss)		8,481			2,904			5,811			(5,823	)		(9,466	)		(15,096	)		—			(13,189	)

Comprehensive income (loss) allocated to NCI		2,120			360			1,453			(58	)		(1,893	)		18,574			—			20,556

NCI percentage at September 30, 2020		25	%¹		12.4	%²		25	%²		1.0	%¹		20.0	%¹		51.8	%

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 51.8% NCI related to NCI for Cresco Labs Inc.

²	The NCI percentage reflects the NCI that exists at Cresco Labs Inc.

³	Includes the effect of LLC unit redemptions and other adjustments

As of and for the twelve months ended December 31, 2019, non-controlling interest included the following amounts after intercompany eliminations:


($ in thousands) December 31, 2019	TSC Cresco, LLC			MedMar Inc. (Lakeview)			MedMar Inc. (Rockford)			Cresco Labs Ohio, LLC			SLO Cultivation Inc.			Other Entities including Cresco Labs, LLC¹			Total


Non-current assets		3,185			20,231			17,855			12,575			23,317			380,053			457,216
Current assets		3,075			1,037			1,356			5,186			15,579			133,105			159,338
Non-current liabilities		—			(1,803	)		(1,824	)		(95	)		(13,940	)		(126,100	)		(143,762	)
Current liabilities		(907	)		(718	)		(955	)		(1,061	)		(4,669	)		(141,859	)		(150,169	)

Net assets		5,353			18,747			16,432			16,605			20,287			245,199			322,623

Net assets attributable to NCI		1,567			2,658			2,330			150			(2,940	)		131,776			135,541

Revenue		5,593			4,088			5,310			2,212			12,042			99,289			128,534
Gross profit		6,303			1,999			2,564			(1,972	)		(6,749	)		61,936			64,081

Total comprehensive income (loss)		5,747			(981	)		(556	)		(6,278	)		(15,308	)		(47,926	)		(65,302	)

Comprehensive income (loss) allocated to NCI		1,437			(122	)		(139	)		(63	)		(3,062	)		(20,152	)		(22,101	)

NCI percentage at December 31, 2019		25.0	%¹		12.4	%²		25.0	%²		1.0	%¹		20.0	%¹		56.2	%

¹	The NCI percentage reflects the NCI that exists at Cresco Labs, LLC. There is a further 56.2% NCI related to NCI for Cresco Labs Inc.

²	The NCI percentage reflects the NCI that exists at Cresco Labs Inc.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

12.

SHARE-BASED COMPENSATION

The Company has a share-based compensation plan (the “Plan”) for key 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.

A summary of the status of the options outstanding consisted of the following:


	Number of stock options outstanding			Weighted- average exercise price
Outstanding—January 1, 2020		22,370,168		$	3.19
Granted		6,276,009			4.47
Exercised		(1,618,243	)		1.76
Origin House replacement awards		629,275			4.24
Forfeited		(5,296,250	)		2.70


Outstanding—September 30, 2020		22,360,959		$	3.75

Exercisable—September 30, 2020		8,477,031		$	2.79

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The following table summarizes the stock options outstanding as of September 30, 2020:


	Stock				Stock
	options		Exercise		options
Expiration date	outstanding		price		exercisable
October 2022		17,578	$	2.99		17,578
February 2023		14,062		4.56		14,062
April 2025		1,758		4.29		1,758
May 2025		17,577		5.74		17,577
June 2025		205,273		0.50 - 5.53		205,273
July 2025		3,516		5.18		3,516
August 2025		5,273		5.29		5,273
September 2025		125,000		1.00		125,000
January - March 2026		75,000		1.00		75,000
May - June 2026		600,000		1.00		600,000
November - December 2026		20,000		1.00		11,250
January 2027		5,000		1.00		3,750
September 2027		2,222		1.00		2,222
October 2027		200,000		1.00		132,600
November 2027		250,000		1.00 - 1.14		75,000
December 2027		468,740		1.14 - 3.98		343,740
March 2028		260,972		1.14 - 2.25		122,638
May - June 2028		710,000		2.25		335,000
July 2028		235,000		2.25 - 3.75		123,056
August 2028		409,370		3.75 - 6.02		246,870
September 2028		7,264,374		1.13 - 3.75		3,969,874
October - November 2028		1,988,750		3.75		443,750
December 2028		220,000		6.50		55,000
February 2029		85,000		1.00 - 6.50		21,250
March 2029		272,000		11.25		68,000
June 2029		1,240,000		10.28		310,000
September 2029		1,190,000		5.90		297,500
December 2029		582,000		6.86		—
March 2030		597,000		2.99		—
May 2030		3,828,950		4.56		828,950
June 2030		885,000		4.11		—
July 2030		21,544		5.39		21,544
September 2030		560,000		6.00		—

		22,360,959				8,477,031

Weighted average stock price of options on the dates on which options were exercised during the nine months ended September 30, 2020 and 2019 was $5.35 and $8.04 per option, respectively.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The fair value of stock options granted under the Plan during the nine months ended September 30, 2020 was determined using the Black-Scholes option-pricing model with the following range of assumptions at the time of the grant:


		September 30, 2020
Risk-free annual interest rate		0.63% to 1.79%
Expected annual dividend yield		0%
Expected stock price volatility		65% to 81%
Expected life of stock options		5 to 7 years
Forfeiture rate		5% to 15%
Fair value at grant date		$ 1.84 to $3.75
Stock price at grant date		$2.99 to $6.00
Exercise price range		$2.99 to $6.55

During the three and nine months ended September 30, 2020, the weighted-average fair value of stock options granted was $3.75 and $2.66 per option, respectively. During the three and nine months ended September 30, 2019, the weighted-average fair value of stock options granted was $5.71 and $4.08 per option, respectively. As of September 30, 2020, stock options outstanding have a weighted-average remaining contractual life of 8.4 years.

In the nine months ended September 30, 2020, the Company issued 0.6 million replacement options with a weighted average exercise price of $4.24 per option in connection with the Origin House acquisition. The replacement options have expiration dates ranging between October 2022 and August 2028. As of September 30, 2020, 0.5 million options with a weighted average exercise price of $4.65 per option are exercisable.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

Restricted Stock Units (“RSUs”)

During 2019, the Company established 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 the date of grant. A number of RSUs granted have the ability to settle in cash. These awards have been determined to be liability-classified awards and are required to be marked-to-market as of the end of each reporting period. As of September 30, 2020 and December 31, 2019, the Company recorded $32 thousand and $0.3 million, respectively, in Deferred consideration, contingent consideration and other payables on the unaudited Condensed Interim Consolidated Statements of Financial Position related to these awards.

A summary of outstanding RSUs is provided below:


	Number of			Weighted
	RSUs			average
	outstanding			fair value
Outstanding—January 1, 2020		404,215		$	8.58
Granted		661,190			6.00
Origin House replacement awards		3,430,456			5.96
Vested and settled		(2,207,627	)		4.84
Forfeited		(48,198	)		9.37

Outstanding—September 30, 2020		2,240,036		$	7.47


Liability classified as of September 30, 2020		7,813		$	4.11

Of the liability classified awards above, 8 thousand awards vested in July 2020 pending issuance into shares. In the nine months ended September 30, 2020, the Company issued 3.4 million replacement RSUs with a weighted average fair value of $5.96 per share in connection with the Origin House acquisition. As a result of the acquisition, the vesting of the replacement RSUs was accelerated, with Canadian participants having the option to defer settlement. As such, there is no post-acquisition compensation expense required for these awards.

Deferred Share Awards

In the nine months ended September 30, 2020, the Company issued 1.6 million replacement deferred share awards in connection with the Origin House acquisition. The awards have a fair value of $5.96 per share, which is based on the Company’s share price as of the acquisition date. The award issuances were deferred through September and October 2020 as part of Origin House’s acquisition of RVR Distribution in 2018. Awards are considered to be fully vested as of the acquisition date and therefore require no post-acquisition compensation expense. During the nine months ended September 30, 2020, 1.1 million shares settled into share capital. The remaining 0.5 million shares are pending issuance into shares as of September 30, 2020.

Expense Attribution

The Company recorded compensation expense for option awards in the amount of $2.8 million and $5.5 million for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, the Company expensed $2.8 million and $4.0 million, respectively, to Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory.

The Company recorded compensation expense for option awards in the amount of $10.8 million and $12.1 million for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the Company expensed $10.6 million and $9.8 million, respectively, to Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. Unrecognized compensation expense as of September 30, 2020 for option awards is $17.7 million and will be recorded over the course of the next four years.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The Company recorded compensation expense for RSU awards in the amount of $0.1 million and $nil for the three months ended September 30, 2020 and 2019, respectively, of which $26 thousand and $nil, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. The Company recorded compensation expense for RSU awards in the amount of $0.5 million and $nil for the nine months ended September 30, 2020 and 2019, respectively, of which $0.1 million and $nil, respectively, is included in Selling, general and administrative expenses, with the remainder in Cost of sales – production costs and ending inventory. Unrecognized compensation expense as of September 30, 2020 is $4.4 million and will be recognized over the course of the next three years.

The Company recorded post-acquisition compensation expense for replacement options in the amount of $36 thousand and $44 thousand for the three and nine months ended September 30, 2020, respectively, in Selling, general and administrative expenses. Unrecognized compensation for replacement options was $16 thousand as of September 30, 2020 and will be recognized through the third quarter of 2021.

As of September 30, 2020, ending inventory includes $41 thousand of capitalized compensation expense related to both options and RSUs. For the three months ended September 30, 2020 and 2019, $0.2 million and $0.5 million, respectively, of compensation expense was recorded to Cost of sales – production costs, which includes $0.2 million and $0.3 million, respectively, related to compensation expense capitalized to inventory in prior quarters. For the nine months ended September 30, 2020 and 2019, $1.6 million and $0.9 million, respectively, of compensation expense was recorded to Cost of sales – production costs, which includes $0.9 million and $0.1 million, respectively, related to compensation expense capitalized to inventory in prior quarters.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

13.

ACQUISITIONS

(a)

Business Combinations

The table below summarizes business combinations completed during the nine months ended September 30, 2020:


Completed during the nine months ended September 30, 2020	Origin House
($ in thousands)

Total consideration
Common shares issued	$	396,575
Replacement awards		31,671

Total consideration	$	428,246


Net identifiable assets (liabilities) acquired
Cash	$	32,984
Accounts receivable		7,565
Inventory		14,658
Biological assets		2,002
Other current assets		2,197
Property and equipment		18,625
Right-of-use assets		17,984
Loans receivable, long-term		331
Investment in associate		4,302
Investments		139
Customer relationships		63,600
Trade names		39,700
Licenses		5,900
Market related intangibles		2,374
Internally developed software		380

Total identifiable assets acquired	$	212,741


Short-term liabilities	$	(24,349	)
Lease liabilities		(18,002	)
Deferred and contingent consideration		(3,807	)
Notes payable		(22,045	)
Deferred tax liabilities		(30,200	)

Net identifiable assets acquired	$	114,338


Purchase price allocation
Net identifiable assets acquired	$	114,338
Goodwill		313,908

Total consideration	$	428,246

Under IFRS 3, the Company will retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of the acquisition date. During the measurement period, the Company will also recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date. During the nine months ended September 30, 2020, the Company updated its valuation of Origin House intangible assets acquired, which resulted in an increase of $9.2 million to the acquisition date value of intangible assets and an associated increase of $2.8 million to the acquisition date value of the deferred tax liability, resulting in

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

an offsetting reduction in goodwill. The Condensed Interim Consolidated Financial Statements and the above purchase price allocation schedule have been retrospectively adjusted for this measurement period adjustment. The purchase price allocation for the Origin House transaction is substantially complete, with the exception of certain amounts related to income taxes.

(i)

Origin House

On January 8, 2020, the Company announced that it had closed its acquisition of 100% of the membership interests of Origin House. As a result of this acquisition, the Company now holds additional licenses to cultivate and process medical and adult-use marijuana and new licenses to distribute medical and adult-use cannabis in the State of California. Additionally, the Company now holds licenses to operate a nicotine vape business in Canada with retail, online and wholesale revenues, as well as franchise locations.

Total consideration for the acquisition was $428.2 million and consisted of 66.5 million SVS issued as of the acquisition date, valued at $396.6 million, and 5.7 million replacement awards, valued at $31.7 million, which is comprised of 3.4 million replacement RSUs, 1.6 million deferred share awards and 0.6 million replacement options. The Company recorded an increase of $36 thousand and $44 thousand of post- acquisition share-based compensation expense related to the replacement options for the three and nine months ended September 30, 2020, respectively. See Note 12 for additional details.

As part of the acquisition, the Company recorded reserves of $0.1 million for potential payments contingent on future events. The matter was settled during the three months ended September 30, 2020 and is recorded within Accounts payable and other accrued expenses.

Total pro forma Revenue and Net loss for the combined company for the nine months ended September 30, 2020 was $314.6 million and $13.6 million, respectively.

Contributed revenue and Net loss from the Origin House acquisition for the three months ended September 30, 2020 was $28.4 million and $6.1 million, respectively, and $61.7 million and $24.8 million, respectively for the nine months ended September 30, 2020.

Since the first quarter of 2019, the Company has recorded transaction costs of $5.5 million in connection with the Origin House acquisition as Selling, general and administrative expenses in the unaudited Condensed Interim Consolidated Statements of Operations.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

(b)

Deferred Consideration, Contingent Consideration and Other Payables

The following is a summary of deferred consideration and other payables balances as of September 30, 2020 and December 31, 2019, which are classified as short term:


($ in thousands)	IFRS 9 classification		September 30, 2020		December 31, 2019
MedMar contingent consideration liability for tax payments		FVTPL	$	2,000	$	2,000
MedMar contingent consideration liability		FVTPL		—		1,927
Interest payable—short term		Amortized Cost		—		1,464
HHH deferred consideration		FVTPL		—		27,237
Valley Ag deferred consideration		Amortized Cost		—		18,750
Valley Ag operating cash flows consideration		FVTPL		7,745		7,423
Valley Ag make-whole liability		FVTPL		—		800
Liability-classified equity awards		FVTPL		32		339

Total Deferred consideration, contingent consideration and other payables			$	9,777	$	59,940

Decreases in deferred consideration between December 31, 2019 and September 30, 2020 are due to fair value adjustments and payments of deferred consideration related to acquisitions of MedMar, HHH and Valley Ag.

For the three and nine months ended September 30, 2020, the Company recognized a mark-to-market loss of $16 thousand and $73 thousand, respectively, on MedMar’s contingent consideration liability. During the nine months ended September 30, 2020, the Company settled the contingent consideration liability with the issuance of 0.1 million SVS, valued at $0.5 million, and a cash payment of $1.5 million. As of September 30, 2020, the Company still retains the $2.0 million contingent consideration liability for tax payments which is based on the counterparty’s expected tax liability for total consideration transferred for the acquisition. The Company expects to settle the remaining contingent consideration liability during the fourth quarter of 2020.

During the nine months ended September 30, 2020, the Company paid $27.5 million to settle the HHH deferred consideration and recorded $0.3 million in interest expense.

During the nine months ended September 30, 2020, the Company paid $18.8 million and issued 0.3 million PVS (as-converted), valued at $1.3 million, to settle the Valley Ag deferred consideration and corresponding interest payable.

During the three and nine months ended September 30, 2020, the Company recorded $0.6 million and $0.3 million in interest expense, respectively, related to Valley Ag operating cash flows consideration. As of September 30, 2020, the estimated liability of $7.7 million is based on the present value of expected payments associated with future cashflows of the acquired business.

During the three months ended September 30, 2020, due to changes in the Company’s stock price, the Company is no longer required to make additional payments in relation to the make-whole adjustment liability related to its Valley Ag acquisition. As a result, the Company recognized a mark-to-market gain of $1.1 million during the three months ended September 30, 2020 bringing the total mark-to-market loss for the year-to-date period to $0.7 million. During the nine months ended September 30, 2020 the Company made payments 0.5 million SVS valued at $1.5 million. The net effect of payments made and mark-to-market adjustments recognized brings the make-whole adjustment liability related to the Valley Ag acquisition to $nil as of September 30, 2020.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The Company’s liability related to liability-classified equity awards decreased to $32 thousand as of September 30, 2020 due to changes in the Company’s share price and settlement of vested awards. See Note 12 for further details.

In connection with the Origin House acquisition, the Company acquired deferred consideration liabilities valued at $3.8 million, primarily related to $3.7 million of deferred consideration associated with Origin House’s previous acquisition of Cub City. In May 2020, the Company settled these obligations through issuance of 0.8 million SVS, valued at $2.2 million and cash payment of $1.5 million. In May 2020, the Company issued 0.3 million shares, valued at $1.0 million, in accordance with the post combination remuneration agreement with FloraCal.

The Company holds various real estate property approximating $10.0 million in fair value as collateral for certain deferred payment obligations.

(c)

Long-term Contingent Consideration

The following is a summary of the long-term contingent consideration as of September 30, 2020 and December 31, 2019:


($ in thousands)	IFRS 9 classification		September 30, 2020		December 31, 2019
Valley Ag contingent consideration		FVTPL	$	11,638	$	21,901

Total Long-term contingent consideration			$	11,638	$	21,901

During the three and nine months ended September 30, 2020, the Company recorded a mark-to-market fair value gain of $1.5 million and $10.3 million, respectively, related to contingent equity consideration for its Valley Ag acquisition. As of September 30, 2020, the estimated liability of $11.6 million is based on the present value of potential payments associated with market conditions and changes in the Company’s stock price.

14.

LONG-TERM NOTES AND LOANS PAYABLE

The following table represents the Company’s loans payable balances as of September 30, 2020 and December 31, 2019:


($ in thousands)	September 30, 2020			December 31, 2019
OCN Loan	$	18,652		$	—
HHH Loan		—			550
Term Loan		96,531			—
Interest payable		3,715			—

Total borrowings and interest payable		118,898			550

Less Short-term borrowings and interest payable		(111,532	)		—

Total Long-term notes and loans payable	$	7,366		$	550

(a)

Senior Secured 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 million, with the option to increase the principal amount to $200 million. Of the $100 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”).

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The Tranche A Commitment accrues interest at a rate of 12.7% per annum, payable in cash quarterly, and has a stated maturity of July 2021. The Tranche B Commitment accrues interest at a rate of 13.2% per annum, payable in cash quarterly, and has 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 are 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.

The Term 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 Term 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.

For the three and nine months ended September 30, 2020, the Company recognized interest expense of $4.1 million and $11.0 million, respectively, including interest expense related to the amortization of the debt issuance costs of $0.9 million and $2.4 million, respectively.

As of September 30, 2020, the Company is in compliance with all covenants related to the Term Loan.

(b)

Other Loans

In conjunction with its October 1, 2019 acquisition of HHH, the Company recorded a long-term liability for the HHH Loan for an aggregate balance of $0.6 million with a stated maturity of June 2021. During the three months ended June 30, 2020, the Company paid off the $0.6 million outstanding principal balance as part of a sale-leaseback transaction. See Note 7 for additional details on the transaction.

In conjunction with its January 8, 2020 acquisition of Origin House, the Company recorded a short-term liability with Opaskwayak Cree Nation (the “OCN Loan”) for an aggregate balance of $22.0 million as of the acquisition date, subject to a 10% interest rate and a stated maturity of June 2020. The weighted average effective interest rate of the OCN Loan was 23.8%.

On June 30, 2020, the OCN Loan was amended to extend the maturity date from June 30, 2020 to June 30, 2021 for an extension fee of $0.6 million which is recorded within Accounts payable and other accrued expenses and is amortized over the extended term. Fees, interest and principal payments are made in regular monthly installments through the maturity date. As a result of the non-substantial debt modification, the effective interest rate increased to 27.1% and a gain on debt modification of $1.1 million was recognized.

On September 29, 2020, the OCN Loan was amended to restate the principal repayment terms for an extension fee of $0.1 million which is recorded within Accounts payable and other accrued expenses. Fees, interest and principal payments will be made in regular monthly installments through the maturity date. As a result of the non-substantial debt modification, the effective interest rate decreased to 18.8% and a loss on debt modification of $40 thousand was recognized.

For the three and nine months ended September 30, 2020, the Company recognized interest expense of $1.3 million and $3.8 million, respectively, including interest expense related to the accretion of discount on the OCN Loan of $0.8 million and $2.2 million, respectively.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

15.

REVENUE AND LOYALTY PROGRAMS

(a)

Revenue

The following table represents the Company’s disaggregated revenue by source, primarily due to the Company’s contracts with its customers, for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
($ in thousands)	2020		2019		2020		2019
Wholesale	$	90,470	$	23,585	$	183,550	$	53,650
Dispensary		62,828		12,622		130,384		33,502

Total Revenue	$	153,298	$	36,207	$	313,934	$	87,152

(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 and vape products as part of an in-store sales transaction. In addition, the Company records a performance obligation as a reduction of revenue based on the estimated probability of point obligation incurred, which is calculated based on a standalone selling price that ranges between $0.025 and $0.10 per loyalty point. Upon redemption, the loyalty program obligation is relieved and the offset is recorded as revenue. As of September 30, 2020, there were 54 million points outstanding, with an approximate value of $0.7 million. The Company expects the outstanding loyalty points will be redeemed within one year.

16.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

For the three and nine months ended September 30, 2020 and 2019, Selling, general and administrative expenses consisted of the following:


	Three months ended September 30,				Nine months ended September 30,
($ in thousands)	2020		2019		2020		2019
Salaries and related	$	21,434	$	7,333	$	58,744		17,101
Office and other facility expenses		4,826		628		12,120		1,576
Excise taxes		4,311		1,286		8,526		2,776
Advertising and marketing		4,166		2,709		10,930		7,351
Consulting and professional fees		3,907		6,063		20,684		13,676
Share-based compensation		2,839		3,991		10,915		9,841
Technology		2,274		483		5,427		1,014
Insurance		1,068		413		3,127		1,385
Travel and entertainment		658		912		3,290		2,357
Business expansion costs		26		77		1,566		841
Other		1,254		1,579		3,273		4,034

Total Selling, general and administrative expenses	$	46,763	$	25,474	$	138,602	$	61,952

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

17.

OTHER (EXPENSE) INCOME, NET

For the three and nine months ended September 30, 2020 and 2019, Other income (expense), net consisted of the following:


	Three months ended September 30,						Nine months ended September 30,
($ in thousands)	2020			2019			2020			2019
(Loss) gain on derivative instruments (Note 20)	$	(4,122	)	$	1,459		$	2,265		$	1,233
Gain (loss) on changes in fair value of deferred and contingent consideration (Note 13)		1,465			(93	)		8,425			(815	)
(Loss) gain on debt modification (Note 14)		(40	)		—			1,044			—
Gain on changes in fair value of loans receivable (Note 20)		139			1,288			431			1,288
Impairment on loan receivable (Note 20)		(307	)		—			(420	)		—
Dividend income		—			10			—			97
Unrealized gain (loss) on investments held at fair value (Note 8)		71			(2	)		(246	)		(11	)
Loss on foreign currency		(313	)		(18	)		(135	)		(28	)
Other income		124			70			436			195

Total Other (expense) income, net	$	(2,983	)	$	2,714		$	11,800		$	1,959

18.

RELATED PARTY TRANSACTIONS

(a)

Compensation of 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. Other than the lease and lending arrangements described below, for the nine months ended September 30, 2020, there were no material changes to other related party transactions disclosed in the annual consolidated financial statements for the years ended December 31, 2019 and 2018.

Key management personnel compensation for the three and nine months ended September 30, 2020 and 2019 was as follows:


	Three months ended September 30,				Nine months ended September 30,
($ in thousands)	2020		2019		2020		2019
Management compensation	$	1,769	$	907	$	4,735	$	1,970
Share-based compensation expense		1,304		981		7,173		2,918

Total	$	3,073	$	1,888	$	11,908	$	4,888

As of September 30, 2020 and December 31, 2019, the Company had receivables of $0.2 million and $0.7 million, respectively, with key management personnel.

As of September 30, 2020 and December 31, 2019, the Company had payables of $1.7 million and $0.1 million, respectively, with key management personnel.

Key management personnel hold 112.7 million redeemable units of Cresco Labs, LLC, which is equal to $122.5 million of Non-controlling interests as of September 30, 2020.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

(b)

Related Parties—Debt

As of September 30, 2020, the Company had borrowings with related parties of $15.0 million related to the Company’s Term Loan. See Note 14 for additional details.

(c)

Related Parties—Leases

The Company has lease liabilities for real estate lease agreements in which the lessor is a member of key management personnel. The lease liabilities were incurred during sale and leaseback transactions executed during the nine months ended September 30, 2020 and will expire in 2030. For the three and nine months ended September 30, 2020, the sale and leaseback transactions resulted in net funding of $nil and $8.8 million, respectively. During the three and nine months ended September 30, 2020, the Company received tenant improvement allowance reimbursements of $nil and $0.8 million related to these lease agreements and expects to receive further reimbursements of $1.7 million as of September 30, 2020.

Below is a summary of the expense resulting from the related party lease liabilities for the three and nine months ended September 30, 2020 and 2019.


	Three months ended September 30, 2020				Three months ended September 30, 2019
($ in thousands)	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	62	$	360	$	98	$	430
Finance lease liability; lessor has minority interest in MedMar		68		107		39		45
Finance lease liability; lessor is a member of key management personnel		250		240		—		—


	Nine months ended September 30, 2020				Nine months ended September 30, 2019
	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	224	$	1,176	$	296	$	1,262
Finance lease liability; lessor has minority interest in MedMar		143		194		116		135
Finance lease liability; lessor is a member of key management personnel		329		362		—		—

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)


	As of September 30, 2020				As of December 31, 2019
($ in thousands)	ROU asset		Lease liability		ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	3,677	$	6,684	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar		2,234		2,473		1,292		1,380
Finance lease liability; lessor is a member of key management personnel		8,541		7,028		—		—

19.

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, 2020, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers, or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

(b)

Contingencies

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management believes that the Company is in substantial compliance with applicable local and state regulations as of September 30, 2020, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future. During the nine months ended September 30, 2020, the Company recorded a contingent liability of $0.1 million related to the Origin House acquisition. During the three months ended September 30, 2020, the Company reached an agreement to settle the previously recorded $0.1 million contingent liability related to the Origin House acquisition. The payment to settle the liability will be made during Q4 and the balance due is recorded within Accounts payable and other accrued expenses.

20.

FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

Financial Instruments

The Company’s financial instruments are held at amortized cost (adjusted for impairments or expected credit losses, as applicable) or FVTPL. The carrying values of financial instruments held at amortized cost approximate their fair values as of September 30, 2020 and December 31, 2019 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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;

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

•

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

•

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

There have been no transfers between fair value levels valuing these assets during the year. The following table summarizes the Company’s financial instruments as of September 30, 2020 and December 31, 2019:


	September 30, 2020
($ in thousands)	Amortized Cost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	57,689	$	—	$	—	$	—	$	57,689
Restricted cash¹		1,928		—		—		—		1,928
Accounts receivable, net		27,548		—		—		—		27,548
Loans receivable, short-term		624		—		2,077		—		2,701
Loans receivable, long-term		1,409		—		18,728		—		20,137
Security deposits		3,610		—		—		—		3,610

Financial Liabilities:
Accounts payable and other accrued expenses	$	62,103	$	—	$	—	$	—	$	62,103
Short-term borrowings		111,532		—		—		—		111,532
Current portion of lease liabilities		24,794		—		—		—		24,794
Deferred consideration, contingent consideration and other payables		—		—		—		9,777		9,777
Derivative liabilities, short-term		—		—		26		—		26
Derivative liabilities, long-term		—		—		14,209		—		14,209
Lease liabilities		135,204		—		—		—		135,204
Deferred consideration and contingent consideration		—		—		—		11,638		11,638
Long-term notes payable and loans payable		7,366		—		—		—		7,366

	December 31, 2019
($ in thousands)	Amortized Cost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	49,102	$	—	$	—	$	—	$	49,102
Restricted cash¹		5,050		—		—		—		5,050
Accounts receivable, net		16,455		—		—		—		16,455
Loans receivable, short-term		644		—		—		—		644
Loans receivable, long-term		390		—		18,243		—		18,633
Security deposits		1,084		—		—		—		1,084

Financial Liabilities:
Accounts payable and other accrued expenses	$	62,834	$	—	$	—	$	—	$	62,834
Current portion of lease liabilities		12,019		—		—		—		12,019
Deferred consideration, contingent consideration and other payables		20,214		—		28,037		11,689		59,940
Derivative liabilities, short-term		—		—		178		—		178
Derivative liabilities, long-term		—		—		15,243		—		15,243
Lease liabilities		82,856		—		—		—		82,856
Deferred consideration and contingent consideration		—		—		—		21,901		21,901
Long-term notes payable and loans payable		550		—		—		—		550

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

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

(a)

Loans receivable, short-term

The following is a summary of Loans receivable, short-term balances and IFRS 9 classifications (discussed further below) as of September 30, 2020 and December 31, 2019:


($ in thousands)	IFRS 9 classification		September 30, 2020		December 31, 2019
Short-term loans receivable—Lighthouse		FVTPL	$	2,077	$	—
Interest receivable—Short-term loans		Amortized cost		356		121
Current portion of Interest receivable—Long-term loans		Amortized cost		268		523

Total Loans receivable, short-term			$	2,701	$	644

(b)

Loans receivable, short-term with Derivative Features

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 includes an option for the Company to convert into additional membership units. As of September 30, 2020, this loan had a fair value of $2.1 million. As of December 31, 2019, this loan had a fair value of $2.2 million and was classified as a Loans receivable, long-term. This loan is measured at FVTPL and transferred classification from a long-term loan receivable to a short-term loan receivable in the current year. See Note 8 for discussion of the Company’s investment in Lighthouse.

Expected Credit Loss (“ECL”)

The Company calculates ECLs for short-term loan receivables and restricted cash by considering cash shortfalls on a discounted basis it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring, which is determined through the exercise of judgment. The Company recognized impairment losses of $46 thousand and $0.2 million during the three and nine months ended September 30, 2020, respectively, and $nil during both the three and nine months ended September 30, 2019 on Loans receivable, short-term.

(c)

Loans Receivable, Long-Term

The Company entered into certain loan arrangements with Verdant Creations, LLC that contained embedded derivatives comprising of a call and put option and a stated interest rate of 5.25%. Settlement of the instruments varies based on contingent events and returns are not fixed. As such, the Company records this loan receivable at FVTPL. Each period, the loan is measured using a probability-weighting analysis of expected outcomes, which utilizes Level 3 inputs. The inputs included market rates ranging from 3.2% to 17.0%, a risk-free rate of 0.1% and expected settlement timing of 0.25 years. Changes in Level 3 inputs and assumptions utilized resulted in a fair value gain of $0.1 million and $0.4 million for the three and nine months ended September 30, 2020, respectively, and $1.3 million for both the three and nine months ended September 30, 2019. The loan had a fair value of $18.7 million and $16.0 million as of September 30, 2020 and December 31, 2019, respectively. Interest receivable attributable to the loan was $0.8 million as of September 30, 2020 and $nil as of December 31, 2019. During the three months ended September 30, 2020, an amendment to the loan agreement increased the maximum loan commitment by $1.4 million from $15.5 million to $16.9 million. At September 30, 2020 and December 31, 2019, of the maximum loan commitment, $16.2 million and $10.7 million, respectively, had been drawn on these loans.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

In connection with the acquisition of Origin House, the Company assumed a loan receivable with a fair value of $0.3 million at both the acquisition date and September 30, 2020.

As of September 30, 2020 and December 31, 2019, the Company had additional loan receivables of $0.3 million and $0.4 million, respectively. The Company records this loan receivable at amortized cost and has a stated interest rate of 10.0%.

Expected Credit Loss (“ECL”)

The Company calculates ECLs for long-term loan receivables and restricted cash by considering cash shortfalls on a discounted basis it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring, which is determined through the exercise of judgment. The Company recognized impairment losses of $0.3 million during both the three and nine months ended September 30, 2020 and $nil during both the three and nine months ended September 30, 2019 on Loans receivable, long-term.

(d)

Derivative Liability

In conjunction with its acquisition of PDI, the Company recorded a derivative liability of $0.2 million at the acquisition date for an NCI put option, by which the remaining NCI holders could put their shares for a fixed amount of cash within one year of the acquisition legal close/funding date. The derivative was valued using a discount rate of 9.0%. In April 2020, these holders exercised their put option which resulted in the Company paying $0.2 million to purchase the unowned interest of PDI. As a result, during Q2 2020, the Company recorded a $25 thousand mark-to-market loss to match the settlement value.

(e)

Share Purchase Warrants

At September 30, 2020, the Company had 6.4 million warrants outstanding. Of the outstanding warrants, 6.2 million warrants issued to underwriters associated with September 2019 financing, sellers from the Valley Ag acquisition and previous holders of Randsburg warrants were classified as long-term derivative liabilities. In the nine months ended September 30, 2020, 12 thousand Valley Ag warrants were exercised for $0.1 million, resulting in a realized loss of $6 thousand and an increase to share capital of $0.1 million. In the nine months ended September 30, 2019, 35 thousand broker warrants were exercised for $0.2 million, resulting in a realized gain of $35 thousand and an increase to share capital of $0.4 million.

For the three months ended September 30, 2020, the Company recorded a mark-to-market loss, due to changes in the Company’s share price and other market factors, of $5.2 million and an unrealized foreign exchange loss of $0.4 million. For the three months ended September 30, 2019, the Company recorded a mark-to-market gain of $0.7 million and an unrealized foreign exchange gain of $1 thousand.

For the nine months ended September 30, 2020, the Company recorded a mark-to-market gain, due to changes in the Company’s share price and other market factors, of $1.2 million and an unrealized foreign exchange loss of $0.2 million. For the nine months ended September 30, 2019, the Company recorded a mark-to-market gain, due to changes in the Company’s share price and other market factors, of $0.5 million and an unrealized foreign exchange loss of $5 thousand.

All warrants classified as long-term derivative liabilities are measured at FVTPL.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

As of September 30, 2020 and December 31, 2019, the fair value of liability-classified warrants was determined using the Black-Scholes option-pricing model utilizing the following assumptions:


	September 30, 2020	December 31, 2019
Risk-free annual interest rate	0.09% - 0.14%	1.58% - 1.61%
Expected annual dividend yield	0%	0%
Expected stock price volatility	81%	81%
Expected life of stock warrants	0.03 - 2.08 years	0.4 - 1.4 years
Forfeiture rate	0%	0%
Share price at period end	$6.00	$6.86

Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies.

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, 2020 and December 31, 2019 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 House of Representatives but have not yet been voted on within the 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.

The Company’s aging of Accounts receivables as of September 30, 2020 and December 31, 2019 was approximately as follows:


($ in thousands)	September 30, 2020		December 31, 2019
0 to 60 days	$	26,715	$	10,276
61 to 120 days		657		5,551
120 days +		716		899

Total accounts receivable, gross	$	28,088	$	16,726

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

For the three months ended September 30, 2020 and 2019, the Company recorded bad debt expense of $0.1 million and $nil, respectively, to account for expected credit loss and recorded an additional $0.4 million and $0.1 million, respectively, in bad debt related to invoice write-offs. For the nine months ended September 30, 2020 and 2019, the Company recorded bad debt expense of $0.4 million and $0.1 million, respectively, to account for expected credit loss and recorded an additional $0.5 million and $0.1 million, respectively, in bad debt related to invoice write-offs.

(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

The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. As of September 30, 2020, the Company had working capital (defined as current assets less current liabilities) of $13.4 million, which reflects the Term Loan and OCN Loan contractual repayment dates less than twelve months from the balance sheet date. Unless refinanced or restructured, this debt will mature and require repayment, which could have a material effect on the Company’s financial position and cash flows. Management is evaluating debt repayment or refinancing options, including but not limited to, evaluating the cost of capital and terms, regulatory changes and market conditions, but there is no assurance that the Company will be able to obtain financing or on terms favorable to us. The accompanying financial statements do not include any adjustments that may arise from this or the resulting effects of this matter.

As included in our unaudited condensed interim consolidated financial statements, our revenues, results of operations and operating cash flows have improved. The Company is currently in discussions to restructure the Term Loan and has the ability to increase the principal amount to $200 million with mutual agreement from lenders. In December 2019, the Company entered into the ATM Offering for subordinated voting shares in the Company to be issued at the discretion of management to raise up to C$55 million to fund corporate operations. See Note 11 for further information. Additionally, the Company expects to receive tenant improvement allowances of $54.3 million to fund further expansion. Information about tenant improvement allowances and the maturity analysis for lease obligations is located in Note 7. The Company will continue to raise capital as needed to fund operations and expansion.

In addition to the commitments outlined in Note 7, the Company has the following contractual obligations as of September 30, 2020:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable & other accrued expenses	$	62,103	$	—	$	—	$	62,103
Deferred consideration, contingent consideration and other payables		9,777		—		—		9,777
Deferred consideration and contingent consideration		—		11,638		—		11,638
Long-term notes payable and loans payable and Short-term borrowings		111,532		7,366		—		118,898

Total obligation as of September 30, 2020	$	183,412	$	19,004	$	—	$	202,416

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

In addition to the commitments outlined in Note 7, the Company has the following contractual obligations as of December 31, 2019:


($ in thousands)	< 1 Year		1 to 3 Years		3 to 5 Years		Total
Accounts payable and other accrued expenses	$	62,834	$	—	$	—	$	62,834
Deferred consideration, contingent consideration and other payables		59,940		—		—		59,940
Deferred consideration and contingent consideration		—		21,901		—		21,901
Other long-term liabilities		—		550		—		550

Total obligation as of December 31, 2019	$	122,774	$	22,451	$	—	$	145,225

(d)

Market Risk

Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of September 30, 2020 and December 31, 2019, 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 a $0.3 million and a $0.1 million foreign exchange loss during the three and nine months ended September 30, 2020, respectively. The Company recorded an $18 thousand and a $28 thousand foreign exchange loss during the three and nine months ended September 30, 2019. See Note 17 for additional detail.

As of September 30, 2020 and December 31, 2019, 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.

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 $0.2 million. The Company’s effective interest rates for its Term Loan range from 16.1% to 17.0% and the stated interest rate varies from 12.7% to 13.2% based on the term elected by the lender. The Company’s weighted average effective interest rate for its OCN Loan is 18.8% and its stated interest rate is 10.0%. See Note 14 for further information.

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 in fair value and Other (expense) income, net of $3.6 million.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 24 for the Company’s disclosure of uncertain tax positions.

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.

21.

SEGMENT INFORMATION

The Company operates in one segment, the cultivation, manufacturing, distribution, and sale of cannabis.

For both the three and nine months ended September 30, 2020, the Company generated 98% of its revenue in the United States with the remainder generated in Canada. For the three and nine months ended September 30, 2019, all revenues were generated in the United States.

22.

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.

Potentially dilutive securities of approximately 150.5 million and 145.3 million for the three and nine months ended September 30, 2020, respectively, and 152.3 million for both the three and nine months ended September 30, 2019 were excluded in the calculation of diluted EPS for these periods as their impact would have been anti-dilutive due to net losses in the periods.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

The following is a reconciliation for the calculation of basic and diluted loss per share for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,						Nine months ended September 30,
(in thousands, except per share data)	2020			2019			2020			2019
Basic and diluted loss per share
Net loss attributable to Cresco Labs Inc. shareholders	$	(7,459	)	$	(6,960	)	$	(33,745	)	$	(15,213	)
Weighted-average number of shares outstanding		213,754			115,511			207,273			114,071

Loss per share—basic and diluted	$	(0.03	)	$	(0.06	)	$	(0.16	)	$	(0.13	)

23.

INTEREST EXPENSE, NET

Interest expense, net consisted of the following for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,						Nine months ended September 30,
($ in thousands)	2020			2019			2020			2019
Interest expense—leases	$	(5,543	)	$	(1,625	)	$	(14,732	)	$	(4,850	)
Interest expense—notes and loans payable		(3,766	)		—			(10,196	)		—
Accretion of debt discount and amortization of deferred financing fees		(1,756	)		—			(4,624	)		—
Other interest expense		(583	)		—			(479	)		(10	)
Interest income		329			531			899			1,260

Total Interest expense, net	$	(11,319	)	$	(1,094	)	$	(29,132	)	$	(3,600	)

See Note 7 for additional information regarding Interest expense—leases and Note 14 for additional information on Interest expense—notes and loans payable and accretion of debt discount and amortization of deferred financing fees.

24.

PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES

The Company’s effective tax rate was 72% and (116)% with tax expense of $12.7 million and of $4.6 million, respectively, for the three months ended September 30, 2020 and 2019. The Company’s effective tax rate was 181% and (103)% with tax expense of $29.5 million and of $10.2 million, respectively, for the nine months ended September 30, 2020 and 2019.

Income tax expense is recognized based on the effective income tax rate for the nine months ended September 30, 2020, including discrete one-time events.

Cresco Labs Inc.

Notes to the Condensed Interim Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

Deferred tax liabilities and deferred tax assets were primarily comprised of the following:


($ in thousands)	September 30, 2020			December 31, 2019
Deferred tax assets
Share-based compensation	$	995		$	1,177
Net operating losses		8,530			1,285
Lease liabilities		19,375			13,202
Inventory		—			188
Other		1,191			425

Total deferred tax assets	$	30,091		$	16,277

Deferred tax liabilities
ROU assets	$	8,548		$	6,488
Biological assets		8,297			4,213
Inventory		5,841			—
Property and equipment		7,894			7,923
Intangible assets		48,665			18,877
Other		169			227

Total deferred tax liabilities	$	79,414		$	37,728

Net deferred tax liabilities	$	(49,323	)	$	(21,451	)

No tax expense or benefit was recognized for financial losses of $2.6 million and $3.2 million for the three months ended September 30, 2020 and 2019, respectively, and $11.2 million and $8.8 million for the nine months ended September 30, 2020 and 2019, respectively.

The Company determined that the tax impact of certain arrangements between its management companies and operating companies is not probable that it would be sustained under IFRIC 23 due to the evolving interpretations of Section 280E. As a result, the Company recorded a reserve for uncertain tax positions of $12.4 million as of September 30, 2020, an increase during the nine months ended September 30, 2020 of $4.9 million. Interest and penalties associated with the reserve are $1.0 million, an increase of $0.3 million for the nine months ended September 30, 2020.

25.

SUBSEQUENT EVENTS

The Company has evaluated subsequent events through November 18, 2020, which is the date on which these financial statements were issued, and concluded there were no material subsequent events for the period ended September 30, 2020.

EX-99.41 42 d945319dex9941.htm EX-99.41 EX-99.41

Exhibit 99.41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019.

This management discussion and analysis (“MD&A”) of the financial condition and results of operations of Cresco Labs Inc. (the “Company” or “Cresco”) is for the three and nine months ended September 30, 2020 and 2019. It is supplemental to, and should be read in conjunction with, the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2019, and the Company’s unaudited condensed interim consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2020 and 2019. The Company’s financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). Financial information presented in this MD&A is presented in United States dollars (“$”), unless otherwise indicated.

The Company has provided certain supplemental non-IFRS financial measures in this MD&A. Where the Company has provided such non-IFRS financial measures, we have also provided a reconciliation to the most comparable IFRS financial measure. These supplemental non-IFRS 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 IFRS financial measures presented herein. Please see the information under the header “Non-IFRS Financial Measures” for additional information on the Company’s use of non-IFRS financial measures and the reasons therefore.

This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable United States securities laws and Canadian securities laws. Please refer to the discussion of forward-looking statements and information set out under the heading “Cautionary Note Regarding Forward Looking Information,” located at the beginning of the Company’s Annual Information Form for the year ended December 31, 2019, filed on SEDAR. As a result of many factors, the Company’s actual results may differ materially from those anticipated in these forward-looking statements and information. Please refer to the discussion of risks and uncertainties set out under the heading “Risk Factors,” located within the Company’s Annual Information Form for the year ended December 31, 2019, filed on SEDAR.

OVERVIEW OF THE COMPANY

•

Cresco Labs, LLC (“Cresco IL”), of which the Company owns 48.2%.

•

Cresco Labs Notes Issuer, LLC (“Cresco Notes”), of which Cresco IL owns 100%.

•

Cresco Labs PA, LLC (“Cresco PA”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Cresco Yeltrah, LLC (“Yeltrah”).

•

Cresco Labs Ohio, LLC (“Cresco Ohio”), of which Cresco Notes holds a 99% interest.

•

Cresco Edibles, LLC, wholly-owned by Cresco Notes, which holds a 75% interest in an operating company, TSC Cresco, LLC (“TSC”).

•

Cresco Labs SLO, LLC (“California”), wholly-owned by Cresco Notes, which holds an 80% interest in an operating company, SLO Cultivation, Inc. (“SLO”)

•

Cresco Labs TINAD, LLC (“TINAD”), wholly-owned by Cresco Notes, which holds a 100% interest in an operating entity, PDI Medical III, LLC—Sunnyside—Buffalo Grove (“PDI”).

•

Cresco Labs Phoenix Farms, LLC, wholly-owned by Cresco Notes, which holds an 100% interest in an operating company, Phoenix Farms of Illinois, LLC—Sunnyside—Champaign and Sunnyside—Danville (“Phoenix”).

•

Cresco Labs Arizona, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, Arizona Facilities Supply, LLC (“Arizona”).

•

MedMar Inc., wholly-owned by Cresco, which holds an 87.6% interest in MedMar Lakeview, LLC—Sunnyside—Lakeview and Sunnyside—River North (“Medmar Lakeview”) and a 75% interest in MedMar Rockford, LLC—Sunnyside—Rockford and Sunnyside—South Beloit (“Medmar Rockford”).

•

JDC Elmwood, LLC, wholly-owned by Cresco Notes, which holds a 100% interest in an operating company, FloraMedex, LLC—Sunnyside—Elmwood Park and Sunnyside—Schaumburg (“FloraMedex”).

•

Gloucester Street Capital, LLC (“GSC”), wholly-owned by Cresco, which holds a 100% interest in an operating company, Valley Agriceuticals, LLC (“Valley Ag”).

•

CannaRoyalty Corp., wholly-owned by Cresco, which holds a 100% interest in Cali-AntiFragile Corp., a California corporation, which holds a 100% interest in operating companies: Kaya Management Inc., Alta Supply Inc., FloraCal, Cub City, LLC and RPE Inc., (collectively referred to as the operating company “Origin House”). The Origin House acquisition closed on January 8, 2020.

•

Cresco Labs, Michigan, LLC (“Cresco Michigan”) which is 85% owned by related parties within management of the Company.

In Illinois, Cresco’s dispensary applications received the highest, second highest and third highest scores, respectively, of all applications reviewed by the State of Illinois. Subsequently, the Company was the first cultivator to receive approvals to grow adult-use cannabis; all three cultivation facilities were granted approvals in that state. Additionally, the Company’s five (5) dispensary locations were approved for dispensing adult-use cannabis in that state upon legalization, effective January 1, 2020. Secondary sites corresponding to the five (5) current dispensary licenses were also awarded, allowing for up to ten (10) dispensary locations upon zoning approval by local jurisdictions. The zoning for the first such secondary site dispensary located in Chicago’s River North neighborhood was approved by the City of Chicago on March 6, 2020. On May 28, 2020, the Company began adult-use cannabis sales at this location. The Company began adult-use cannabis sales at the Danville, South Beloit, and Schaumburg locations on May 27, 2020, July 13, 2020, and August 6, 2020, respectively. On September 22, 2020, the Company announced approval for its tenth (10) adult-use dispensary located in Naperville. In Pennsylvania, Cresco was awarded the highest score during the application process and had the second highest overall score, making it one of only five cultivators that was also awarded a dispensary license which allows for up to three (3) dispensaries. The Company was subsequently awarded a second dispensary license allowing an additional three (3) dispensaries for a total of six (6) locations across the state. During 2019, the Company announced a new dispensary brand, Sunnyside*, 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 trail and marketing approach. Five (5) Sunnyside* dispensaries opened on January 1, 2020 in the Illinois market and four (4) additional locations began operations in May, July, and August 2020. Four (4) New York locations were rebranded as Sunnyside* dispensaries in February 2020. One (1) Arizona location was rebranded as a Sunnyside* dispensary in June 2020. One (1) Massachusetts location and three (3) Pennsylvania locations were rebranded as Sunnyside* dispensaries in July 2020. Cresco’s portfolio of owned cannabis consumer packaged goods includes Cresco, Reserve, Remedi, Mindy’s, Good News and High Supply. The Company distributes and markets these products primarily to third-party licensed retail cannabis stores across the United States as well as to Cresco-owned retail stores.

Cresco is currently located at Suite 110, 400 W. Erie St, Chicago, IL 60654 and employs approximately 2,000 people, while being named one of the “Best Places to Work” by Crain’s Chicago Business in 2019.

Issuing IPO, Reverse Takeover & Corporate Structure

The Company (then Randsburg Gold Corporation) was incorporated in the Province of British Columbia under the Company Act (British Columbia) on July 6, 1990. On December 30, 1997, the Company changed its name from Randsburg Gold Corporation to Randsburg International Gold Corp. (“Randsburg”) and consolidated its common shares on a five (5) old for one (1) new basis. On November 30, 2018, in connection with the Reverse Takeover, 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 class of common shares, redesignate such class as the class of Subordinate Voting Shares (“SVS”) and create the Proportionate Voting Shares and the Super Voting Shares.

Set forth below is the organization chart of the Company.

LOGO

Recent Developments

On April 26, 2019, the Company announced that it filed and received a receipt for a preliminary short form base shelf prospectus (the “Shelf Prospectus”) with the securities commissions in each of the provinces of Canada, except Québec. The Shelf Prospectus allows the Company to offer up to C$500 million SVS, debt securities, subscription receipts, warrants, and units, or any combination thereof, from time to time during the 25-month period that the final Shelf Prospectus is effective. The Company filed this Shelf Prospectus in order to maintain financial strength and flexibility going forward; the final version of the Shelf Prospectus was filed and accepted on July 26, 2019. The specific terms of any future offering of securities, including the use of proceeds from any offering, will be established in prospectus supplements to the Shelf Prospectus, which will be filed with the applicable Canadian securities regulatory authorities.

On May 28, 2019, the Company announced that shareholders representing 205,172,192 common shares (the “Shareholders”) have entered into voluntary lock-up agreements with the Company (the “Agreements”), representing 97% of the shares subject to an initial lock-up and 80% of total issued SVS (on an as-if converted basis). Included among the Shareholders are all of the Company’s founders, its entire executive management team and board of directors, as well as several of the largest outside investors in Cresco. The voluntary lock-up Agreements stipulate that these shareholders will not, subject to limited exception, offer to sell, contract to sell, lend, pledge or otherwise dispose of any Cresco securities, or enter into any transaction to such effect, directly or indirectly, in addition to other restrictions until December 3, 2019, when a portion of the shares will be released followed by the remainder of the shares being released by June 3, 2020. This lock-up expired in June 2020.

price of C$10.00 per Offered Unit (the “Offering Price”) pursuant to an amended and restated underwriting agreement (the “Underwriting Agreement”) dated as of September 16, 2019 between Cresco and Canaccord Genuity Corp., Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P. (collectively, the “Underwriters”). Each Offered Unit was comprised of one SVS of Cresco (each, a “Unit Share”) and one-half of one SVS purchase warrant of Cresco (each whole SVS purchase warrant, a “Warrant”). Each Warrant is exercisable into one SVS of Cresco (each, a “Warrant Share”) at an exercise price of C$12.50 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on the date that is 36 months following the closing of the Offering. The Offered Units immediately separate into Unit Shares and Warrants upon issuance. Pursuant to the Underwriting Agreement, Cresco agreed to pay to the Underwriter a fee representing 5.0% of the aggregate gross proceeds of the Offering.

On December 3, 2019, the Company entered into an equity distribution agreement (“EDA”) with Canaccord Genuity Corp. pursuant to which the Company may, from time to time, sell up to C$55 million of SVS (the “ATM Offering”). The Company intends to use the net proceeds of the ATM Offering principally for general corporate purposes, including repaying indebtedness outstanding from time to time, funding ongoing discretionary capital programs and potential future acquisitions. The volume and timing of sales, if any, will be determined at the sole discretion of the Company’s management and in accordance with the terms of the EDA.

On February 2, 2020, the Company closed on a senior secured term loan agreement (the “Term Loan”) for an aggregate principal amount of $100 million, with the mutual option to increase the principal amount to $200 million. The Tranche A and Tranche B Commitments have a stated maturity of July 2021 and January 2022, respectively.

In conjunction with its January 8, 2020 acquisition of Origin House, the Company recorded a short-term liability with Opaskwayak Cree Nation (the “OCN Loan”) with an aggregate balance of $22.0 million as of the acquisition date, subject to a 10% interest rate and a stated maturity of June 2020. During the nine months ended September 30, 2020, the OCN Loan was amended to extend the maturity date to June 30, 2021.

Federal Regulatory Environment

Cresco 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, 2020, the Company is directly involved (through licensed subsidiaries) in both the adult-use and medical cannabis industry in the states of Illinois, Pennsylvania, Ohio, Arizona, Maryland, California, Michigan, New York and Massachusetts as permitted within such states under applicable state law which states have regulated such industries.

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 (as defined herein). With the Cole 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 Justice Department from spending funds to interfere with the implementation of state medical cannabis laws. It first passed the House in May becoming 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.

Despite the current state of the federal law and the CSA, the states of Arizona, California, Nevada, Massachusetts, Maine, Michigan, New Jersey, Illinois, South Dakota, Montana, Washington, Oregon, Colorado, Vermont and Alaska, and the District of Columbia, have legalized recreational use of cannabis. Maine has not yet begun recreational cannabis commercial operations as of September 30, 2020. During the November 2020 election, voters in Arizona, New Jersey, South Dakota, and Montana passed an adult use marijuana measure to allow for the sale of recreational marijuana in the state. South Dakota and Mississippi voters passed initiatives to allow medical marijuana. In early 2018, Vermont became the first state to legalize recreational cannabis by passage in a state legislature but does not allow commercial sales of recreational cannabis. 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.

For these reasons, the Company’s investments in the United States cannabis market may subject the Company to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian authorities. There are a number of risks associated with the business of the Company. See section entitled “Financial Risk Management” and see sections “Risk Factors,” “General Development of the Business” and “Description of the Business” in the Annual Information Form dated April 28, 2020.

On September 25, 2019, the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”) was passed by the U.S. House of Representatives in a 321 to 103 vote. The SAFE Banking Act would permanently protect state-chartered banks and credit unions that service state-legal cannabis companies from being penalized by federal regulators. On May 17, 2020, the legislative language of the SAFE Banking Act was included in a stimulus bill known as The Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act”). The HEROES Act was passed by the U.S. House of Representatives in a 208 to 199 vote. A negotiated version of the fourth COVID-19 package is expected to be up for vote in the Senate in the future. SAFE Banking was included in the COVID-19 relief bill introduced by Minority Leader Charles Schumer in October. Management believes, based on currently available information, that the likelihood of SAFE Banking’s passage is high, however the particular timing and legislative vehicle is unknown.

On November 20, 2019, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (“MORE Act”) in a 24 to 10 vote. The MORE Act would decriminalize and remove Cannabis as a Schedule I substance. The MORE Act may be readdressed by the Democratic-controlled House of Representatives before the end of 2020.

The States In Which We Operate, Their Legal Framework and How It Affects Our Business

Illinois Operations

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 JB Pritzker.

Illinois’ retail market for the first nine calendar months of 2020 was $699 million, representing a 305% year-over-year increase.

All cultivation/processing establishments and all dispensaries must register with the Illinois Department of Agriculture. 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 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 Department of Agriculture or Illinois Department of Financial and Professional Regulation and include a renewal form. While Cresco’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that Illinois cannabis licenses will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of Illinois cannabis and could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The retail dispensary licenses held by Phoenix, PDI, FloraMedex, MedMar Lakeview, and MedMar Rockford permit the Company to purchase marijuana and marijuana products from cultivation/processing facilities and allows the sale of marijuana and marijuana products to registered patients and adult-use customers. The initial five (5) dispensary locations were approved on October 16, 2019 to begin dispensing adult-use cannabis on January 1, 2020 and were also approved to open secondary site adult-use dispensaries by the Illinois Department of Financial and Professional Regulation. Two (2) of the five (5) additional dispensaries will be located within the City of Chicago. In May 2020, the Company announced the opening of the sixth (6^th) and seventh (7^th) Sunnyside* locations in Danville and Chicago-River North, respectively. In July 2020, the Company announced the opening of an eighth (8^th) Sunnyside* location in South Beloit. In August 2020, the Company announced the opening of a ninth (9^th) Sunnyside* location in Schaumburg. In September 2020, the Company announced the approval of a tenth (10^th) Sunnyside* location in Naperville.

The three medical cultivation licenses held by Cresco 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 cultivation facilities were approved for growing adult-use cannabis by the Illinois Department of Agriculture, for a total cultivation capacity of 0.6 million square feet, the maximum allowed by law.

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, including epilepsy, cancer, chronic pain, and PTSD. 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, Yeltrah was awarded one (1) medical cannabis cultivation and processing center in Pennsylvania, and three (3) dispensary locations in Pennsylvania.

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 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 Pennsylvania Department of Health. 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 Cresco’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.

On September 25, 2019, Pennsylvania’s Governor held a press conference to announce 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 13th, 2020, the Governor reaffirmed his support for adult-use and discussed the economic growth potential and restorative justice benefits of legalizing adult-use cannabis.

Ohio Operations

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 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. The qualifying conditions in Ohio as a part of MMCP, include but are not limited to: cancer, epilepsy or other seizure disorder, inflammatory bowel disease, pain (either chronic, severe, or intractable) and PTSD. In order for a patient to be eligible to obtain medical marijuana, a physician must make a diagnosis of one of the qualifying conditions.

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

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

The Company has certain agreements with Verdant Creations, LLC and its affiliates (“Verdant”) that will give the Company the option to purchase four (4) additional Ohio dispensaries currently operated by Verdant. Completion of the transaction is subject to approval by the Ohio Board of Pharmacy and, upon closing, Cresco will have a total of five (5) dispensaries in Ohio, the maximum allowed by the state. Cresco agreed to provide certain consulting services and financing to Verdant for the development and operation of the dispensaries in consideration of Verdant’s grant to Cresco of an option to acquire the dispensaries when permissible under Ohio regulations.

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 forty-five days prior to the date the existing certificate expires. If the dispensary is operated in compliance with Ohio dispensary regulations, and the renewal fee is paid, the state board of pharmacy shall renew the certificate of operation within 45 days after the renewal application is received. While Cresco’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 property to Innovative Industrial Properties, Inc. (“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 property represents approximately 50,000 square feet of industrial space in aggregate. This sale marks Cresco’s fourth completed sale-and-leaseback transaction, the third with IIP.

California Operations

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. The four agencies that regulate 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 June 7, 2018, Cresco acquired a 60% 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 acquired a further 20% ownership interest to bring the total ownership to 80%. The cultivation facility has a capacity of up to 650,000 square feet of greenhouse production space.

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 CDFA, CDPH, CDTFA, and BCC under the provision of MAUCRSA and California Assembly Bill No. 133. In California, licenses are independently issued by the respective agency.

California state and local licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by BCC, CDFA, CDTFA, and CDPH. 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 Resulting Issuer and have a material adverse effect on its business, financial condition, results of operations or prospects.

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

Mendota (Fresno County)

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

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

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

Carpinteria (SB County)

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SLO has been issued provisional licenses for Cultivation: Small Mixed-Light Tier 1. Additionally, SLO has been issued provisional licenses in:

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Nursery, allowing for the planting and cultivation of medical cannabis from seeds, clones, and immature plants.

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Processor Type, allowing for the harvesting, drying, curing, grading or tanning of cannabis as well as the packaging and labelling of certain non-manufactured cannabis.

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

Origin House

On January 8, 2020, Cresco acquired Origin House, pursuant to which Cresco acquired all issued and outstanding shares of Origin House. Under the terms of the Origin House Agreement and subsequent amendments, holders of common shares of Origin House received 0.7031 SVS of Cresco Labs for each Origin House share (the “Transaction”). The Company acquired 100% of all equity interests of Origin House for 66.5 million Cresco shares and 6.0 million replacement equity awards, valued at $428.2 million.

The 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.

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 has access to several additional licenses for cultivation, manufacturing and distribution of cannabis within the state of California.

Oakland (Alameda County)

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Origin House has been issued a provisional license for Type 11 (Distribution), Adult-Use.

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

West Sacramento (Yolo County)

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

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

La Habra (Orange County)

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

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

Unincorporated Sonoma (Sonoma County)

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

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

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

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Origin House submitted annual applications for the three (3) listed license types to the state regulator and is awaiting approval for these annual applications.

Santa Rosa (Sonoma County)

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

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

In addition to the seven (7) active licenses listed above, Origin House continues to pursue new state license opportunities and recently applied for a Type 11 (Distribution) license for the Santa Rosa (Sonoma County) location.

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. (the “AMMA”). The AMMA is codified in Arizona Revised Statutes §36-2801 et. seq. The AMMA also appointed the Arizona Department of Health Services (the “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”).

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 on-site cultivation facility, and one 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 an annual 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.

In order to qualify to use medical marijuana under the AMMA, a patient is required to have a “debilitating medical condition.” Valid medical conditions include: HIV, cancer, glaucoma, immune deficiency syndrome, hepatitis C, Crohn’s disease, agitation of Alzheimer’s disease, ALS, cachexia/wasting syndrome, muscle spasms, nausea, seizures, severe and chronic pain or another chronic or debilitating condition.

Once an applicant has been issued 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. This approval to operate requires: (i) an application on the ADHS form, (ii) demonstration of compliance with local zoning regulations, (iii) a site plan and floor plan for the applicable property, and (iv) an in-person inspection by ADHS of the applicable location to ensure compliance with the Rules and consistency with the dispensary’s applicable policies and procedures.

On October 24, 2018, Cresco obtained a 100% 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 would expect to receive the applicable renewed license in the ordinary course of business. While Cresco’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.

Nevada Operations

Medical marijuana use was legalized in Nevada by a ballot initiative in 2000. In November 2016, voters in Nevada passed an adult use marijuana measure to allow for the sale of recreational marijuana in the state. The first dispensaries to sell adult-use marijuana began sales in July 2017. The Nevada Department of Taxation (“DOT”) is the regulatory agency overseeing the medical and adult-use cannabis programs. Similar to California, cities and counties in Nevada are allowed to determine the number of local marijuana licenses they will issue.

is considered provisional until the local government has issued a business license for operation and the establishment is in compliance with all applicable local governmental ordinances. Final 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. The renewal periods serve as an update for DOT on the licensee’s status toward active licensure. It is important to note provisional licenses do not permit the operation of any commercial or medical cannabis activity. Only after a provisional licensee has gone through necessary state and local inspections, if applicable, and has received a final registration certificate from DOT may an entity engage in cannabis business operation.

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 registered organizations.

In November 2017, Governor Cuomo signed a bill to add PTSD as a qualifying condition, and, 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. During Governor Cuomo’s January 2019 State of the State Address, he announced the proposal of the governmental agency, The Office of Cannabis Management. This agency would regulate and oversee the state’s medical marijuana program, adult-use program and hemp program. The executive director of this agency would have the authority to grant ROs currently registered and in good standing with the NYSDOH, the ability to be licensed to cultivate, process or sell adult-use cannabis and cannabis products.

Each RO 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 Cresco’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 GSC, the parent entity of 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 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.

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% 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% 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 had 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 nonpatients 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 or about November 19, 2018, Cresco entered into a definitive agreement to acquire 100% of the shares and membership interests, as applicable, of HHH and an affiliated real estate entity for consideration consisting of cash and the assumption of certain indebtedness. HHH holds a final certificate of registration from the State of Massachusetts Department of Health that allows for cultivation, manufacturing and processing, and the establishment and operation of a medical cannabis dispensary in Fall River, Massachusetts. The final certificate of registration allows HHH the ability to apply for up to two (2) additional such licenses. HHH holds a final license from the Massachusetts Cannabis Control Commission that allows for cultivation, manufacturing and processing, and the establishment and operation of an adult-use cannabis dispensary in Fall River, Massachusetts. On October 1, 2019, Cresco Labs, LLC acquired 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.

On July 1, 2020, the Company announced that it had completed the sale of its Falls River, MA property to IIP. The sale was for consideration equal to approximately $29 million, which includes $21 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 property represents approximately 50,000 square feet of industrial space in aggregate.

Michigan Operations

In November 2008, Michigan residents approved the Michigan Medical Marihuana Act (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide 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: (a) a “grower” license, (b) a “processor” license, (c) a “secure transporter” license, (d) 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 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, the Company’s affiliate 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 (4th) largest medical marijuana patient base in the United States.

On March 16, 2020, the Company’s affiliate received pre-qualification to operate in the adult-use market and received an adult-use processor license on June 22, 2020. 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 Cresco’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.

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 property to IIP. The previously announced sale was for consideration equal to approximately $16 million, which included $11 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 marks Cresco’s fifth (5^th) completed sale-and-leaseback transaction, the fourth (4^th) with IIP.

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, 2020, represents approximately 59% and 58% of our revenue, respectively. Revenue from company-owned retail dispensary locations, for the three and nine months ended September 30, 2020 represents the remaining 41% and 42%, respectively. Retail revenue includes medical and adult-use cannabis sales in the United States, along with nicotine vape sales in Canada.

Gross Profit

Gross profit is calculated as revenue less cost of sales—production costs, which includes cultivation costs of biological assets; realized changes in fair value of inventory sold; and unrealized gain on changes in fair value of biological assets. Cost of sales—production costs includes the direct costs attributable to the production of the products sold and is comprised of the following:

•

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

•

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

•

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

•

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

Cultivation costs of biological assets are comprised of cannabis plant costs and are immediately expensed in cost of sales—production costs in the period in which they are incurred.

Selling, General and Administrative Expenses (“SG&A”)

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

For the three and nine months ended September 30, 2020 and 2019, SG&A was comprised of the following:


	Three months ended September 30,				Nine months ended September 30,
($ in thousands)	2020		2019		2020		2019

Salaries and related	$	21,434	$	7,333	$	58,744		17,101
Office and other facility expenses		4,826		628		12,120		1,576
Excise taxes		4,311		1,286		8,526		2,776
Advertising and marketing		4,166		2,709		10,930		7,351
Consulting and professional fees		3,907		6,063		20,684		13,676
Share-based compensation		2,839		3,991		10,915		9,841
Technology		2,274		483		5,427		1,014
Insurance		1,068		413		3,127		1,385
Travel and entertainment		658		912		3,290		2,357
Business expansion costs		26		77		1,566		841
Other		1,254		1,579		3,273		4,034

Total Selling, general and administrative expenses	$	46,763	$	25,474	$	138,602	$	61,952

Income Taxes

The Company, which is a Canadian corporation, 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 legal 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.

Non-IFRS Financial Measures

Operational gross profit, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS and may not be comparable to similar measures presented by other issuers. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspectives and insights when analyzing the core operating performance of the business. These supplemental non-IFRS 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 IFRS financial measures presented herein.

SELECTED FINANCIAL INFORMATION

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

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)	2020			2019			$ Change			% Change
Revenue	$	153,298		$	36,207		$	117,091			323	%
Cost of sales—production costs		(74,148	)		(23,369	)		(50,779	)		217	%
Realized changes in fair value of inventory sold		(72,560	)		(22,908	)		(49,652	)		217	%
Unrealized gain on changes in fair value of biological assets		78,041			30,910			47,131			152	%
Gross profit		84,631			20,840			63,791			306	%
Total expenses		52,563			26,465			26,098			99	%
Total other (expense) income, net		(14,436	)		1,655			(16,091	)		nm	%
Income tax expense		(12,690	)		(4,624	)		(8,066	)		174	%
Net income (loss)¹		4,942			(8,594	)		13,536			(158	)%
Net loss attributable to Cresco Labs Inc.		(7,459	)		(6,960	)		(499	)		7	%

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

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Three months ended September 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	153,298		$	36,207		$	117,091			323	%
Cost of sales—production costs¹		(74,148	)		(23,369	)		(50,779	)		217	%
Realized changes in fair value of inventory sold		(72,560	)		(22,908	)		(49,652	)		217	%
Unrealized gain on changes in fair value of biological assets		78,041			30,910			47,131			152	%

Gross profit		84,631			20,840			63,791			306	%

Cultivation costs expensed under IAS 41²		(3,934	)		2,075			(6,009	)		(290	)%
Net impact of fair value of biological assets		(5,481	)		(8,002	)		2,521			(32	)%
Expansion, relaunch and rebranding costs³		2,693			2,157			536			25	%
COVID-19 related expenses		846			—			846			100	%
Fair value mark-up for acquired inventory		1,843			—			1,843			100	%

Operational gross profit (Non-IFRS)	$	80,598		$	17,070		$	63,528			372	%

Operational gross profit % (Non-IFRS)		52.6	%		47.1	%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net income (loss) to adjusted EBITDA (non-IFRS):


	Three months ended September 30,
($ in thousands)	2020			2019			$ Change			% Change
Net income (loss)¹	$	4,942		$	(8,594	)	$	13,536			(158	)%
Depreciation and amortization		10,831			3,287			7,544			230	%
Interest expense, net		11,319			1,094			10,225			nm	%
Income tax expense		12,690			4,624			8,066			174	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	39,782		$	411			$39,371			nm	%


Expansion, relaunch and rebranding costs²		2,693			2,157			536			25	%
COVID-19 related expenses		956			—			956			100	%
Other expense (income), net		2,983			(2,714	)		5,697			(210	)%
Income from investment in associate		134			(35	)		169			nm	%
Fair value mark-up for acquired inventory		1,843			—			1,843			100	%
Cultivation costs expensed under IAS 41³		(3,934	)		2,075			(6,009	)		(290	)%
Adjustments for acquisition and other non-core costs		4,424			4,709			(285	)		(6	)%
Management incentive compensation (share-based)		3,033			4,487			(1,454	)		(32	)%

Adjusted EBITDA (Non-IFRS)	$	51,914		$	11,090			$40,824			368	%

Net impact of fair value of biological assets		(5,481	)		(8,002	)		2,521			(32	)%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	46,433		$	3,088			$43,345			nm	%

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

²	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Revenue

Revenue for the three months ended September 30, 2020 was $153.3 million, an increase of $117.1 million, or 323%, compared to revenue of $36.2 million for the three months ended September 30, 2019. The increase in revenue was driven by the acquisitions of Origin House, Valley Ag and HHH, as well as continued growth in the states where the Company operates. Organic growth was primarily attributable to increased cultivation capacity and states with recently adopted adult-use laws, such as Illinois, as well as the benefit of additional dispensary locations.

Cost of Sales—Production Costs, Gross Profit, and Operational Gross Profit (non-IFRS)

Cost of sales—production costs for the three months ended September 30, 2020 was $74.1 million, an increase of $50.7 million compared to cost of sales—production costs of $23.4 million for the three months ended September 30, 2019. The increase was primarily attributable to the Origin House, Valley Ag and HHH acquisitions, increased cultivation capacity in Illinois and Pennsylvania, and other organic growth.

Gross profit increased primarily due to the increase in revenue from the prior-year quarter. Operational gross profit is a non-IFRS measure that reflects revenue less costs related to products sold in the period, by excluding the net impact of the fair value of biological assets; cultivation costs immediately expensed under IAS 41; the fair value mark-up for acquired inventory; and other non-core items. Operational gross profit for the third quarter of 2020 was $80.6 million, compared to an operational gross profit of $17.1 million for the prior year. The increase of $63.5 million from the prior year was primarily driven by the addition of Origin House, Valley Ag and HHH, greater scale in the Company’s established Illinois and California markets, and other organic growth. Operational gross profit percentage of approximately 52.6% was higher when compared with the prior year as the benefit of operational efficiencies in the Company’s more established markets exceeded the impact of emerging and recently acquired business, where the Company is focused on footprint expansion and launching of Cresco-branded products.

Total Expenses

Total expenses for the three months ended September 30, 2020 were $52.6 million, an increase of $26.1 million compared to total expenses of $26.5 million for the three months ended September 30, 2019. The increase in total expenses was attributable to the acquisition of Origin House, Valley Ag, and HHH, depreciation and amortization associated with facilities and licensing in new markets and intangible assets, as well as significant investments in our team and operational infrastructure to drive strategic initiatives that better position the Company for future growth. Total expenses as a percentage of revenue have declined as the Company has gained efficiencies with the growth of the business.

Total Other (Expense) Income

Total other expense for the three months ended September 30, 2020 was $14.4 million, a change of $16.1 million compared to other income of $1.7 million for the three months ended September 30, 2019. The increase in total other (expense) income was primarily due to higher interest expense, which resulted from the loan agreements the Company entered into and assumed during 2020 as well as higher interest expense for leases, including several sale-leaseback transactions enacted in late 2019 and the first nine months of 2020. The Company also realized mark-to-market losses on certain long-term derivative liabilities due to changes in the Company’s share price and other market factors. See Notes 14 and 17 in the unaudited condensed interim consolidated financial statements for the periods ended September 30, 2020 and 2019 for more information.

Provision for Income Taxes

Income tax expense for the three months ended September 30, 2020 was $12.7 million compared to $4.6 million in the prior period. The change was 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.

Net Income (Loss) and Adjusted EBITDA (non-IFRS)

Net income for the three months ended September 30, 2020 was $4.9 million, compared to a loss of $8.6 million for the three months ended September 30, 2019. Higher gross profit in the current period, driven by increased revenue and operational efficiencies, was partially offset by higher operating expenses, interest expense, and current period income tax expense.

Adjusted EBITDA, a non-IFRS measure which excludes depreciation and amortization, net interest expense, income taxes, other expense, share-based compensation, immediately expensed cultivation costs, and other non-core items, was $51.9 million and $11.1 million for the three months ended September 30, 2020 and 2019, respectively. Excluding the impact of biological assets, adjusted EBITDA was $46.4 million and $3.1 million for the three months ended September 30, 2020 and 2019, respectively. The increase in adjusted EBITDA is due to higher operational gross profit partially offset by higher operating expenses.

Nine months Ended September 30, 2020 Compared to Nine months Ended September 30, 2019

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


	Nine months ended September 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	313,934		$	87,152		$	226,782			260	%
Cost of sales—production costs		(181,183	)		(55,228	)		(125,955	)		228	%
Realized changes in fair value of inventory sold		(138,918	)		(56,423	)		(82,495	)		146	%
Unrealized gain on changes in fair value of biological assets		194,407			80,930			113,477			140	%
Gross profit		188,240			56,431			131,809			234	%
Total expenses		154,379			64,810			89,569			138	%
Total other expense, net		(17,586	)		(1,534	)		(16,052	)		nm	%
Income tax expense		(29,464	)		(10,173	)		(19,291	)		190	%
Net loss¹		(13,189	)		(20,086	)		6,897			(34	)%
Net loss attributable to Cresco Labs Inc.		(33,745	)		(15,213	)		(18,532	)		122	%

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

The following table provides a reconciliation of the Company’s gross profit to operational gross profit (non-IFRS):


	Nine months ended September 30,
($ in thousands)	2020			2019			$ Change			% Change
Revenue	$	313,934		$	87,152		$	226,782			260	%
Cost of sales—production costs¹		(181,183	)		(55,228	)		(125,955	)		228	%
Realized changes in fair value of inventory sold		(138,918	)		(56,423	)		(82,495	)		146	%
Unrealized gain on changes in fair value of biological assets		194,407			80,930			113,477			140	%

Gross profit		188,240			56,431			131,809			234	%

Cultivation costs expensed under IAS 41²		6,067			6,030			37			1	%
Net impact of fair value of biological assets		(55,489	)		(24,507	)		(30,982	)		126	%
Expansion, relaunch and rebranding costs³		11,190			2,879			8,311			289	%
COVID-19 related expenses		2,733			—			2,733			100	%
Fair value mark-up for acquired inventory		4,063			—			4,063			100	%

Operational gross profit (Non-IFRS)	$	156,804		$	40,833		$	115,971			284	%

Operational gross profit % (Non-IFRS)		49.9	%		46.9	%

¹	Production (cultivation, manufacturing and processing) costs related to products sold during the period.

²	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

³	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

The following table provides a reconciliation of the Company’s net loss to adjusted EBITDA (non-IFRS):


	Nine months ended September 30,
($ in thousands)	2020			2019			$ Change			% Change
Net loss¹	$	(13,189	)	$	(20,086	)	$	6,897			(34	)%
Depreciation and amortization		28,824			7,986			20,838			261	%
Interest expense, net		29,132			3,600			25,532			nm
Income tax expense		29,464			10,173			19,291			190	%

Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Non-IFRS)	$	74,231		$	1,673		$	72,558			nm	%


Expansion, relaunch and rebranding costs²		11,190			2,879			8,311			289	%
COVID-19 related expenses		3,604			—			3,604			100	%
Other income, net		(11,800	)		(1,959	)		(9,841	)		nm	%
Income from investment in associate		254			(107	)		361			(337	)%
Fair value mark-up for acquired inventory		4,063			—			4,063			100	%
Cultivation costs expensed under IAS 41³		6,067			6,030			37			1	%
Adjustments for acquisition and other non-core costs		21,472			10,370			11,102			107	%
Management incentive compensation (share-based)		12,475			10,745			1,730			16	%

Adjusted EBITDA (Non-IFRS)	$	121,556		$	29,631		$	91,925			310	%


Net impact of fair value of biological assets		(55,489	)		(24,507	)		(30,982)			126	%

Adjusted EBITDA (Non-IFRS), net of impact of biological assets	$	66,067		$	5,124		$	60,943			nm	%

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

²	Costs related to non-recurring third-party product costs, start-up costs, and samples/discounts to expand footprint and relaunch in certain markets.

³	Costs would be capitalized under IAS 2 and do not relate to costs of inventory sold in the period.

Revenue

Revenue for the nine months ended September 30, 2020 was $313.9 million, an increase of $226.7 million, or 260%, compared to revenue of $87.2 million for the nine months ended September 30, 2019. The increase in revenue was driven by the acquisitions of Origin House, Valley Ag and HHH as well as continued growth in the states where the Company operates. Organic growth was primarily attributable to increased cultivation capacity and states with recently adopted adult-use laws, as well as continued retail expansion.

Cost of Sales—Production Costs, Gross Profit, and Operational Gross Profit (non-IFRS)

Cost of sales—production costs for the nine months ended September 30, 2020 was $181.2 million, an increase of $126.0 million compared to cost of sales—production costs of $55.2 million for the nine months ended September 30, 2019. The increase was primarily attributable to the Origin House, Valley Ag and HHH acquisitions, increased cultivation capacity in Illinois and Pennsylvania, and other organic growth.

Gross profit increased primarily due to the increase in revenue from the prior year as well as unrealized gains on biological assets. Operational gross profit for the first nine months of 2020, a non-IFRS measure which excludes the impact of cultivation costs immediately expensed; biological assets accounting; expansion, relaunch and rebranding costs; COVID-19 related expenses; and the fair value mark-up for acquired inventory was $156.8 million, compared to an operational gross profit of $40.8 million for the prior year. Operational gross profit reflects revenue less costs related to products sold in the period. The increase of $116.0 million from the prior year was primarily driven by the addition of Origin House, Valley Ag and HHH, greater scale in the Company’s established Illinois and California markets, and other organic growth. Operational gross profit percentage of approximately 49.9% was higher when compared with the prior year, as the benefit of operational efficiencies in the Company’s more established markets exceeded the impact of emerging and recently acquired business, where the Company is focused on footprint expansion and launching of Cresco-branded products. The Company expects margin expansion to continue as these operations scale and it receives the full benefit of its capacity expansions in the fourth quarter of 2020.

Total Expenses

Total expenses for the nine months ended September 30, 2020 were $154.4 million, an increase of $89.6 million compared to total expenses of $64.8 million for the nine months ended September 30, 2019. The increase in total expenses was attributable to the acquisition of Origin House, Valley Ag, and HHH, acquisition and other non-core costs, as well as significant investments in our team and operational infrastructure to drive strategic initiatives that better position the Company for future growth. Total expenses as a percentage of revenue have declined as the Company has gained efficiencies with the growth of the business.

Total Other Expense

Total other expense for the nine months ended September 30, 2020 was $17.6 million, an increase of $16.1 million compared to other expense of $1.5 million for the nine months ended September 30, 2019. The increase in total other expense was primarily due to higher interest expense resulting from the loan agreements the Company entered into and assumed during 2020, and higher interest expense associated with newly entered lease agreements in 2020 which includes sale and leaseback of previously owned buildings and facilities, partially offset by unrealized gains recognized on financial instruments carried at fair value due to changes in the Company’s share price and other market factors. See Notes 14, 17, and 20 in the unaudited condensed interim consolidated financial statements for the periods ended September 30, 2020 and 2019 for more information.

Provision for Income Taxes

Income tax expense for the nine months ended September 30, 2020 was $29.5 million compared to $10.2 million in the prior period. The change was 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.

Net Loss and Adjusted EBITDA (non-IFRS)

Net loss for the nine months ended September 30, 2020 was $13.2 million, compared to $20.1 million for the nine months ended September 30, 2019. Higher gross profit in the current year, generated by increased revenue, operational efficiencies, and unrealized gains on fair value of biological assets, was partially offset by higher operating expenses and current period income tax expense. Adjusted EBITDA, a non-IFRS measure which excludes depreciation and amortization, net interest expense, income taxes, other expense, share-based compensation, immediately expensed cultivation costs, and other non-core items, was $121.6 million and $29.6 million for the nine months ended September 30, 2020 and 2019, respectively. Excluding the impact of biological assets, adjusted EBITDA was $66.1 million and $5.1 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in adjusted EBITDA is due to higher operational gross profit partially offset by higher operating expense.

LIQUIDITY AND CAPITAL RESOURCES

Overview

As of September 30, 2020, the Company held $57.7 million in cash and cash equivalents, $1.9 million in restricted cash and $13.4 million of working capital compared to December 31, 2019, where we held $49.1 million in cash and cash equivalents, $5.1 million in restricted cash and $9.2 million of working capital. The increase of $4.2 million in working capital was primarily due to an increase in inventory, biological assets, accounts receivable and cash and cash equivalents. A decrease in short-term deferred consideration, contingent consideration and other payables was offset by increased short-term borrowings, the current portion of lease liabilities and income tax payable between periods. During the three months ended September 30, 2020, the $92.4 million balance of Tranche A of the Term Loan was reclassified to short-term borrowings. The Company is currently in discussions to restructure the Term Loan and has the ability to increase the principal amount to $200 million.

Cash Flows

Operating Activities

Net cash used in operating activities was $32.2 million for the nine months ended September 30, 2020, an increase of $13.6 million compared to net cash used in operating activities of $18.6 million for the nine months ended September 30, 2019. The increase in net cash used in operating activities was primarily due to timing of working capital requirements in the current period as well as higher non-core, acquisition and integration-related costs.

Investing Activities

Net cash used in investing activities was $35.9 million for the nine months September 30, 2020, a decrease of cash used of $50.0 million compared to $85.9 million used in investing for the nine months ended September 30, 2019. The decrease in net cash used in investing activities was primarily due to proceeds received from sale and leaseback transactions in the current year and a reduction in loans made to pending acquisitions, partially offset by an increase in capital expenditures as the Company continues to expand its operations.

Financing Activities

Net cash provided by financing activities was $73.9 million for the nine months ended September 30, 2020, an increase of $25.6 million compared to $48.3 million of cash provided by financing activities for the nine months ended September 30, 2019. The increase in net cash provided by financing activities was primarily due to net proceeds from the issuance of long-term debt during the period partially offset by a reduction in funds from equity raises and higher distributions to non-controlling interests.

CONTRACTUAL OBLIGATIONS

As of September 30, 2020, maturities of lease liabilities were as follows:


($ in thousands)
2020	$	8,051
2021		32,248
2022		32,876
2023		33,437
2024		34,424
Thereafter		383,148

Total lease payments		524,184

Less: interest		(309,923	)
Less: tenant improvement allowance		(54,263	)

Present value of lease liabilities		159,998

Less: short-term lease liabilities		(24,794	)

Present value of long-term lease liabilities	$	135,204

OFF-BALANCE SHEET ARRANGEMENTS AND PROPOSED TRANSACTIONS

RELATED PARTY TRANSACTIONS

The Company’s key management personnel, consisting of the executive management team and management directors, have the authority and responsibility for planning, directing, and controlling the activities of the Company. Aside from key management personnel compensation and the lease and lending arrangements described below for the nine months ended September 30, 2020, there were no material transactions with or changes to other related party balances relative to the period ended December 31, 2019. Key management personnel compensation for the three and nine months ended September 30, 2020 and 2019 are as follows:


	Three months ended September 30,				Nine months ended September 30,
($in thousands)	2020		2019		2020		2019

Management compensation	$	1,769	$	907	$	4,735	$	1,970
Share-based compensation expense		1,304		981		7,173		2,918

Total	$	3,073	$	1,888	$	11,908	$	4,888

As of September 30, 2020 and December 31, 2019, the Company had receivables of $0.2 million and $0.7 million, respectively, with key management personnel.

As of September 30, 2020 and December 31, 2019, the Company had payables of $1.7 million and $0.1 million, respectively, with key management personnel.

Key management personnel hold 112.7 million redeemable units of Cresco Labs, LLC, which is equal to $122.5 million of Non-controlling interests as of September 30, 2020.

As of September 30, 2020, the Company had borrowings with related parties of $15.0 million related to the Company’s Term Loan.

The Company has lease liabilities for real estate lease agreements in which the lessor is a member of key management personnel. The lease liabilities were incurred during sale and leaseback transactions executed during the nine months ended September 30, 2020 and will expire in 2030. For the three and nine months ended September 30, 2020, the sale and leaseback transactions resulted in net funding of $nil and $8.8 million, respectively. During the three and nine months ended September 30, 2020, the Company received tenant improvement allowances of $nil and $0.8 million related to these lease agreements and expect to receive further reimbursements of $1.7 million as of September 30, 2020.

Below is a summary of the expense resulting from the related party lease liabilities for the periods ended September 30, 2020 and 2019.


	Three months ended September 30, 2020				Three months ended September 30, 2019
($ in thousands)	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	62	$	360	$	98	$	430
Finance lease liability; lessor has minority interest in MedMar		68		107		39		45
Finance lease liability; lessor is a member of key management personnel		250		240		—		—

	Nine months ended September 30, 2020				Nine months ended September 30, 2019
	Depreciation expense		Interest expense		Depreciation expense		Interest expense
Finance lease liability; lessor has minority interest in SLO	$	224	$	1,176	$	296	$	1,262
Finance lease liability; lessor has minority interest in MedMar		143		194		116		135
Finance lease liability; lessor is a member of key management personnel		329		362		—		—

Additionally, below is a summary of the right-of-use (“ROU”) assets and lease liabilities attributable to related party lease arrangements. The ROU asset and lease liability for SLO’s lease assumes all lease extension options are exercised.


	As of September 30, 2020				As of December 31, 2019
($ in thousands)	ROU asset		Lease liability		ROU asset		Lease liability
Finance lease liability; lessor has minority interest in SLO	$	3,677	$	6,684	$	9,930	$	11,727
Finance lease liability; lessor has minority interest in MedMar		2,234		2,473		1,292		1,380
Finance lease liability; lessor is a member of key management personnel		8,541		7,028		—		—

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 through profit or loss (“FVTPL”). The carrying values of financial instruments held at amortized cost approximate their fair values as of September 30, 2020 and December 31, 2019 due to their nature and relatively short maturity date. Financial assets and liabilities with embedded derivative features are carried at FVTPL.

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


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

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

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

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

The following table summarizes the Company’s financial instruments as of September 30, 2020 and December 31, 2019:


	September 30, 2020
($ in thousands)	Amortized Cost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	57,689	$	—	$	—	$	—	$	57,689
Restricted cash¹		1,928		—		—		—		1,928
Accounts receivable, net		27,548		—		—		—		27,548
Loans receivable, short-term		624		—		2,077		—		2,701
Loans receivable, long-term		1,409		—		18,728		—		20,137
Security deposits		3,610		—		—		—		3,610

Financial Liabilities:
Accounts payable and other accrued expenses	$	62,103	$	—	$	—	$	—	$	62,103
Short-term borrowings		111,532		—		—		—		111,532
Current portion of lease liabilities		24,794		—		—		—		24,794
Deferred consideration, contingent consideration and other payables		—		—		—		9,777		9,777
Derivative liabilities, short-term		—		—		26		—		26
Derivative liabilities, long-term		—		—		14,209		—		14,209
Lease liabilities		135,204		—		—		—		135,204
Deferred consideration and contingent consideration		—		—		—		11,638		11,638
Long-term notes payable and loans payable		7,366		—		—		—		7,366

	December 31, 2019
($ in thousands)	Amortized Cost		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and cash equivalents	$	49,102	$	—	$	—	$	—	$	49,102
Restricted cash¹		5,050		—		—		—		5,050
Accounts receivable, net		16,455		—		—		—		16,455
Loans receivable, short-term		644		—		—		—		644
Loans receivable, long-term		390		—		18,243		—		18,633
Security deposits		1,084		—		—		—		1,084

Financial Liabilities:
Accounts payable and other accrued expenses	$	62,834	$	—	$	—	$	—	$	62,834
Current portion of lease liabilities		12,019		—		—		—		12,019
Deferred consideration, contingent consideration and other payables		20,214		—		28,037		11,689		59,940
Derivative liabilities, short-term		—		—		178		—		178
Derivative liabilities, long-term		—		—		15,243		—		15,243
Lease liabilities		82,856		—		—		—		82,856
Deferred consideration and contingent consideration		—		—		—		21,901		21,901
Long-term notes payable and loans payable		550		—		—		—		550

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

Financial Risk Management

Credit and Banking Risk

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at September 30, 2020 and December 31, 2019 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 primarily on cannabis industry growth in our 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 House of Representatives, but has not yet been voted on within the 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 and deposit funds from businesses involved with the cannabis industry.

The novel coronavirus, COVID-19, was declared a pandemic by the World Health Organization on March 12, 2020 and has caused significant economic uncertainty and consequently it is difficult to reliably measure the potential impact of this uncertainty on our future financial results.

ii.

Asset Forfeiture Risk

iii.

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 manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. As of September 30, 2020, the Company had working capital (defined as current assets less current liabilities) of $13.4 million, which reflects the Term Loan and OCN Loan contractual repayment dates less than twelve months from the balance sheet date. Unless refinanced or restructured, this debt will mature and require repayment, which could have a material effect on the Company’s financial position and cash flows. Management is evaluating debt repayment or refinancing options, including but not limited to, evaluating the cost of capital and terms, regulatory changes and market conditions, but there is no assurance that the Company will be able to obtain financing or on terms favorable to us. The accompanying financial statements do not include any adjustments that may arise from this or the resulting effects of this matter.

As included in our unaudited condensed interim consolidated financial statements, our revenues, results of operations and operating cash flows have improved. The Company is currently in discussions to restructure the Term Loan and has the ability to increase the principal amount to $200 million with mutual agreement from lenders. In December 2019, the Company entered into the ATM Offering for subordinated voting shares in the Company to be issued at the discretion of management to raise up to C$55 million to fund corporate operations. See Note 11 in the unaudited condensed interim consolidated financial statements for the period ended September 30, 2020 for further information. Additionally, the Company expects to receive tenant improvement allowances of $54.3 million to fund further expansion.

Information about tenant improvement allowances and the maturity analysis for lease obligations is located in Note 7 in the unaudited condensed interim consolidated financial statements for the period ended September 30, 2020. The Company will continue to raise capital as needed to fund operations and expansion.

iv.

Market Risk

Currency Risk

The operating results and financial position of the Company are reported in U.S. dollars. As of September 30, 2020 and December 31, 2019, 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 a $0.3 million and a $0.1 million foreign exchange loss during the three and nine months ended September 30, 2020, respectively. The Company recorded an $18 thousand and a $28 thousand foreign exchange loss during the three and nine months ended September 30, 2019. See Note 17 for additional detail.

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 $0.2 million. The Company’s effective interest rates for its Term Loan range from 16.1% to 17.0% and the stated interest rate ranges from 12.7% to 13.2% based on the term elected by the lender. The Company’s weighted average effective interest rate for its Opaskwayak Cree Nation loan is 18.8% and its stated interest rate is 10.0%. See Note 14 of the Company’s unaudited condensed interim consolidated financial statements for further information.

Price Risk

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 section 280E, which bars businesses from deducting all expenses except their cost of sales 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 24 of the Company’s unaudited condensed interim consolidated financial statements for the Company’s disclosure of uncertain tax positions.

Regulatory Risk

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 operations 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 that unforeseen regulatory changes can have a material impact on the goals and operations of the business as a whole.

EX-99.42 43 d945319dex9942.htm EX-99.42 EX-99.42

Exhibit 99.42

FORM 52-109FV2

CERTIFICATION OF INTERIM FILINGS
VENTURE ISSUER BASIC CERTIFICATE

I, Dennis Olis, Chief Financial Officer of Cresco Labs Inc., certify the following:

1.	Review: I have reviewed the interim financial statements and interim MD&A (together, the “interim filings”) of Cresco Labs Inc. (the “issuer”) for the interim period ended September 30, 2020.

Date: November 18, 2020


/s/ Dennis Olis
Dennis Olis
Chief Financial Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.43 44 d945319dex9943.htm EX-99.43 EX-99.43

Exhibit 99.43

FORM 52-109FV2

CERTIFICATION OF INTERIM FILINGS

VENTURE ISSUER BASIC CERTIFICATE

I, Charles Bachtell, Chief Executive Officer of Cresco Labs Inc., certify the following:

1.	Review: I have reviewed the interim financial statements and interim MD&A (together, the “interim filings”) of Cresco Labs Inc. (the “issuer”) for the interim period ended September 30, 2020.

Date: November 18, 2020


/s/ Charles Bachtell
Charles Bachtell
Chief Executive Officer

NOTE TO READER

ii)

a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

EX-99.44 45 d945319dex9944.htm EX-99.44 EX-99.44

Exhibit 99.44

LOGO

CRESCO LABS CLOSES FINANCING WITH LENDERS TO EXTEND MATURITY OF SENIOR SECURED

TERM LOAN AND INCREASE FACILITY TO $200 MILLION

CHICAGO—December 14th, 2020—Cresco Labs (CSE:CL) (OTCQX:CRLBF) (“Cresco” or the “Company”), one of the largest vertically integrated multistate cannabis operators in the United States, announced today the closing of the agreement with lenders to extend the maturity of its senior secured term loan (the “Senior Loan”) and exercise of the mutual option to increase the loan size to US$200 million. All lenders have agreed to extend the Senior Loan maturity to January 23th, 2023 at a reduced interest rate of 12% per annum. Additionally, under the terms of the new agreement, Cresco Labs is provided with greater prepayment optionality.

The increased Senior Loan proceeds will be used to fund the expansion of Cresco Labs’ operations in its strategic 9-state footprint and capitalize on other targeted growth initiatives in key markets. Of the US$100 million increase to the Senior Loan, US$85 million has been provided by existing lenders, as well as several new, large institutional investors to the Company. Additionally, US$15 million of the short-term liability with Opaskwayak Cree Nation was consolidated into the Senior Loan under the terms of the new agreement.

“As a company, we continue to display our responsible capital agenda,” said Charlie Bachtell, CEO and Co-Founder of Cresco Labs. “Today we have secured funding to take advantage of the growth opportunities in front of us, improved our cost of capital in a non-dilutive manner, and given ourselves enhanced flexibility in a dynamic capital environment. This agreement to extend and increase the Senior Loan reflects the strong growth and profitability that Cresco Labs has demonstrated and the confidence our investors have in our differentiated strategy. We too believe in the tremendous value of our organization and our ability to raise the standard of execution for this industry.”

About Cresco Labs

Cresco Labs is one of the largest vertically-integrated multi-state cannabis operators in the United States. Cresco is built to become the most important company in the cannabis industry by combining the most strategic geographic footprint with one of the leading distribution platforms in North America. Employing a consumer-packaged goods (“CPG”) approach to cannabis, Cresco’s 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, Remedi, High Supply, Reserve, Good News and Mindy’s Chef Led Artisanal Edibles created by James Beard Award-winning chef Mindy Segal. Sunnyside, Cresco’s national dispensary brand, is a wellness-focused retailer designed to build trust, education and convenience for both existing and new cannabis consumers. Recognizing that the cannabis industry is poised to become one of the leading job creators in the country, Cresco provides the industry’s first national comprehensive Social Equity and Educational Development (SEED) program designed to ensure that all members of society have the skills, knowledge and opportunity to work in and own businesses in the cannabis industry. Learn more about Cresco Labs at www.crescolabs.com.

Cresco Labs

Page 2 of 2

Forward Looking Statements

This press release contains “forward-looking information” within the meaning of applicable Canadian securities legislation and may also contain statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Such forward-looking information and forward-looking statements are not representative of historical facts or information or current condition, but instead represent only the Company’s beliefs regarding future events, plans or objectives, many of which, by their nature, are inherently uncertain and outside of the Company’s control. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology such as, ‘may,’ ‘will,’ ‘should,’ ‘could,’ ‘would,’ ‘expects,’ ‘plans,’ ‘anticipates,’ ‘believes,’ ‘estimates,’ ‘projects,’ ‘predicts,’ ‘potential’ or ‘continue’ or the negative of those forms or other comparable terms. The Company’s forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including but not limited to those risks discussed under “Risk Factors” in the company’s Annual Information Form dated April 28, 2020, and other documents filed by the Company with Canadian securities regulatory authorities; and other factors, many of which are beyond the control of the Company. Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, you should not place undue reliance on the Company’s forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco’s shares, nor as to the Company’s financial performance in future financial periods. The Company does not intend to update any of these factors or to publicly announce the result of any revisions to any of the Company’s forward-looking statements contained herein, whether as a result of new information, any future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change in the affairs of the Company after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.

Contacts:

Media:

Jason Erkes, Cresco Labs

Chief Communications Officer

press@crescolabs.com

Investors:

Jake Graves, Cresco Labs

Investor Relations

investors@crescolabs.com

For general Cresco Labs inquiries:

312-929-0993

info@crescolabs.com

EX-99.45 46 d945319dex9945.htm EX-99.45 EX-99.45

Exhibit 99.45

Execution Version

SUPPORT AGREEMENT

THIS AGREEMENT made as of the 30th day of November, 2018.

BETWEEN:

CRESCO LABS, INC., a company organized under the laws of the Province of British Columbia, Canada (“Pubco”)

and

CRESCO U.S. CORP., a corporation incorporated under the laws of the State of Illinois (“Cresco US Corp”)

and

CRESCO LABS, LLC, a limited liability company organized under the laws of the State of Illinois (the “LLC”)

RECITALS:

A.	Prior to the Effective Time of this Agreement, Pubco:

(i)

changed its name from Randsburg International Gold Corp. to Cresco Labs Inc.;

(ii)

effected a share consolidation whereby each holder of pre-consolidation shares of Pubco’s issued and outstanding common shares surrendered 812.63 pre-consolidation shares of Pubco common stock to Pubco in exchange for one (1) post-consolidation share of Pubco’s common shares, which such common shares were immediately redesignated as subordinate voting shares (the “Pubco Subordinate Voting Shares”);

(iii)

authorized a new class of non-participating super voting shares (the “Pubco Super Voting Shares”);

(iv)

authorized a new class of proportionate voting shares (the “Pubco Proportionate Voting Shares”); and

(v)

subscribed for stock of Cresco US Corp. pursuant to which Pubco became the sole holder of all of the issued and outstanding voting stock of Cresco US Corp.

B.	Pursuant to a series of transactions that were effective prior to the Effective Time of this Agreement, all members of the LLC (other than Pubco, Cresco US Corp. or their affiliates):

(i)

retained their membership interests in the LLC, which were recapitalized into Redeemable LLC Units (as defined below) (collectively, the “LLC Recapitalization”); and/or

(ii)

transferred their membership interests in the LLC to Pubco for Pubco Proportionate Voting Shares and/or Super Voting Shares (the “Pubco Exchange”).

Following the transactions described in Recital B above and prior to the Effective Time of this Agreement, Pubco transferred to Cresco US Corp. all membership interests in the LLC held by Pubco and such cash amounts received by Pubco on the windups of two Pubco subsidiaries in exchange for the issuance by Cresco US Corp. to Pubco of additional voting shares (the “Voting Shares”) of Cresco US Corp.

D.	Following the transactions described in Recital C above, the sole members of the LLC were Cresco US Corp. and the members who retained membership interests in the LLC pursuant to the LLC Recapitalization.

E.	Following the transactions described in Recital C above, the members of the LLC adopted an amended and restated limited liability company agreement of the LLC (the “A&R LLC Agreement”), pursuant to which:

(i)

the outstanding membership interests in the LLC were reorganized into common units (the “Common Units”), which (other than with respect to any Common Units held by Cresco US Corp.) have certain exchange and redemption rights (including rights to be redeemed or otherwise exchanged for Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares) as provided in, and subject to the limitations of, the A&R LLC Agreement (the “Recapitalization”); and

(ii)

the issuance of long-term incentive plan units (“LTIP Units”) by the LLC was authorized (such units being convertible into Common Units having substantially similar exchange and redemption rights applicable to all Common Units described above).

F.	Following the Recapitalization, the outstanding securities that are redeemable or otherwise exchangeable pursuant to their terms for Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares consist of the Common Units (other than any units held by Cresco US Corp. or its affiliates).

G.	Following the Recapitalization:

(i)

Pubco owns all of the issued and outstanding Voting Shares of Cresco US Corp.;

(ii)

Cresco US Corp. owns all of the Common Units of the LLC that are not redeemable or exchangeable;

(iii)

Cresco US Corp. is the sole manager of the LLC.

Concurrently with the transactions described in Recital E above, the LLC, Cresco US Corp. and the other members of the LLC entered into a tax receivable agreement dated as of even date herewith (the “Tax Receivable Agreement”) pursuant to which Cresco US Corp. undertook certain obligations to pay certain sums to the other members of the LLC which are party to such Tax Receivable Agreement upon the occurrence of certain events as stated therein.

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For greater certainty the option exists for members of the LLC who hold Common Units to exchange such Common Units for Redeemable Corporation Shares (as defined below), which Redeemable Corporation Shares have certain exchange and redemption rights (including rights to be redeemed or otherwise exchanged for Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares).

J.	Pubco, Cresco US Corp. and the LLC have agreed to execute a support agreement substantially in the form of this Agreement evidencing the manner in which the Parties shall support each other’s obligations under the transactions and documents described above.

NOW THEREFORE, the parties agree as follows:

ARTICLE 1

DEFINITIONS AND INTERPRETATION

1.1

Defined Terms

“Agreement” means this Support Agreement, including all recitals and schedules, as it may be amended, supplemented and/or restated in accordance with its terms. Each term denoted herein by initial capital letters and not otherwise defined in this Agreement has the respective meaning given to it in the A&R LLC Agreement, unless the context requires otherwise.

“Effective Time” means the time that is concurrent with the adoption of the A&R LLC Agreement and the Tax Receivable Agreement.

1.2

Interpretation Not Affected by Headings

The division of this Agreement into Articles, Sections, subsections and paragraphs and the insertion of headings are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. Unless the contrary intention appears, references in this Agreement to an Article, Section, subsection, paragraph or Schedule by number or letter or both refer to the Article, Section, subsection, paragraph or Schedule, respectively, bearing that designation in this Agreement.

1.3

Including

Where the word “including” or “includes” is used in this Agreement, it means “including (or includes) without limitation”.

1.4

No Strict Construction

The language used in this Agreement is the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party.

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1.5

Number and Gender

In this Agreement, unless the contrary intention appears, words importing the singular include the plural and vice versa, and words importing gender include all genders.

1.6

Statutory References

A reference to a statute includes all registrations and rules made pursuant to such statute and, unless otherwise specified, the provisions of any statute, regulation or rule which amends, supplements or supersedes any such statute, regulation or rule.

1.7

Date for Any Action

If the date on which any action is required to be taken hereunder by any Person is not a Business Day, such action shall be required to be taken on the next succeeding day which is a Business Day.

1.8

Accounting Matters

Unless otherwise stated, all accounting terms used in this Agreement shall have the meanings attributable thereto under U.S. GAAP and all determinations of an accounting nature required to be made shall be made in accordance with U.S. GAAP consistently applied.

ARTICLE 2

COVENANTS OF PUBCO, CRESCO US CORP. AND THE LLC

2.1

Covenants Regarding Common Units Exchangeable or Redeemable for Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares

1.	So long as any Common Units not owned by Cresco US Corp. or its affiliates are outstanding or Common Units are issuable pursuant to the exercise, conversion or exchange of any outstanding securities of the LLC, Pubco will:

(a)

take all such actions and do all such things as are reasonably necessary or desirable to enable and permit the LLC, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of a redemption of Common Units by a holder thereof (a “Unitholder”) in respect of each issued and outstanding Common Unit upon a redemption of such Common Units by the LLC and, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to enable and permit the LLC to cause to be delivered Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Common Units in accordance with the provisions of the A&R LLC Agreement, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Common Units (if any);

(b)

take all such actions and do all such things as are reasonably necessary or desirable to enable and permit Cresco US Corp., if it elects to effect an exchange of Common

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Units directly with the holder thereof, in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of the exchange of the Common Units by the Unitholder, and, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to enable and permit Cresco US Corp. to cause to be delivered Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and/or amounts in cash, as applicable, to the Unitholder in accordance with the provisions of the A&R LLC Agreement, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Common Units (if any);

(c)

upon the election of Cresco US Corp. for Pubco to effect an exchange directly with a Unitholder, take all such actions and do all things as are reasonably necessary or desirable to effect the exchange of Common Units directly with the holder thereof, in accordance with applicable law, including, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to cause to be delivered directly Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and/or amounts in cash, as applicable, to the Unitholder in accordance with the provisions of the A&R LLC Agreement, together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Common Units (if any); and

(d)

ensure that Cresco US Corp. does not exercise its vote as the Manager of the LLC to initiate the voluntary liquidation, dissolution or winding up of the LLC nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of the LLC.

2.	For greater certainty, and unless otherwise indicated by Pubco, Cresco US Corp. or the LLC (as applicable), the Parties shall satisfy their obligations under Section 2.1(1) above as follows:

(a)

upon notification of any redemption of Common Units by a Unitholder, Cresco US Corp. hereby elects to satisfy each such redemption pursuant to a Direct Exchange (as defined in the A&R LLC Agreement), pursuant to which Cresco US Corp. will acquire such Common Units from a unitholder in exchange for the delivery of the corresponding number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares;

(b)

Pubco will subscribe for additional Voting Shares of Cresco US Corp. for an aggregate subscription price equal to the fair market value of the Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares required to be delivered to such Unitholder (the “Cresco US Corp. Internal Share Subscription for LLC Redemption”);

(c)

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deliver such Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares to the Unitholder; and (ii) Pubco’s obligation to pay to Cresco US Corp. the subscription price for the Cresco US Corp. Internal Share Subscription for LLC Redemption; and

(d)

upon delivery by Pubco of the Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares pursuant to the direction described above:

(i)

Cresco US Corp. will issue the additional Cresco US Corp. Voting Shares to Pubco as fully-paid; and

(ii)

Pubco shall add an amount to the capital account maintained in respect of the Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, as applicable, an amount equal to the fair market value of the consideration received by Pubco for the issuance of such Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, as applicable, delivered to the Unitholder (being the Cresco US Corp. Voting Shares issued to Pubco pursuant to the Cresco US Corp. Internal Share Subscription for LLC Redemption).

2.2

Covenants Regarding Cresco US Corp. Shares Exchangeable or Redeemable for Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares

So long as any shares of stock of Cresco US Corp. not owned by Pubco or its affiliates which are redeemable or exchangeable for Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares (“Redeemable Corporation Shares” and together with the Voting Shares, the “Cresco US Corp. Shares”) are outstanding or any Redeemable Corporation Shares are issuable pursuant to the exercise, conversion or exchange of any outstanding securities of Cresco US Corp., Pubco will:

(a)

take all such actions and do all such things as are reasonably necessary or desirable to enable and permit Cresco US Corp., in accordance with applicable law, to pay and otherwise perform its obligations with respect to the satisfaction of a redemption of Redeemable Corporation Shares by a holder thereof (a “Redeemable Share Shareholder”) in respect of each issued and outstanding Redeemable Corporation Share upon a redemption of such Redeemable Corporation Shares by Cresco US Corp. and, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to enable and permit Cresco US Corp. to cause to be delivered Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and/or amounts in cash, as applicable, to the holders of Redeemable Corporation Shares in accordance with the articles of incorporation of Cresco US Corp., together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Redeemable Corporation Shares (if any);

(b)

upon the election of Cresco US Corp. for Pubco to effect an exchange directly with a Redeemable Share Shareholder, take all such actions and do all things as are

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reasonably necessary or desirable to effect the exchange of Redeemable Corporation Shares directly with the holder thereof, in accordance with applicable law, including, without limiting the generality of the foregoing, take all such actions and do all such things as are necessary or desirable to cause to be delivered directly Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and/or amounts in cash, as applicable, to the Redeemable Share Shareholder in accordance with the provisions of the articles of incorporation of Cresco US Corp., together with an amount in cash sufficient to pay any amount to be paid in respect of unpaid distributions with respect to such Redeemable Corporation Shares (if any); and

(c)

ensure that Cresco US Corp. is not voluntarily liquidated, dissolved or wound up nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of Cresco US Corp.

2.	For greater certainty, and unless otherwise indicated by Pubco or Cresco US Corp. (as applicable), the Parties shall satisfy their obligations under Section 2.2(1) above as follows:

(a)

upon notification of any redemption of Redeemable Corporation Shares by a Redeemable Share Shareholder, Cresco US Corp. hereby elects to redeem such Redeemable Corporation Shares in exchange for the delivery of the corresponding number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares;

(b)

Pubco will subscribe for additional Voting Shares of Cresco US Corp. for an aggregate subscription price equal to the fair market value of the Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares required to be delivered to such Redeemable Share Shareholder (the “Cresco US Corp. Internal Share Subscription for Cresco US Corp. Redemption”);

(c)

Cresco US Corp. will direct Pubco to deliver, on behalf of Cresco US Corp., the number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares owing by Cresco US Corp. to the Redeemable Share Shareholder as fully-paid shares, which delivery shall be in full satisfaction of both (i) the obligation of Cresco US Corp. to deliver such Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares to the Redeemable Share Shareholder; and (ii) Pubco’s obligation to pay to Cresco US Corp. the subscription price for the Cresco US Corp. Internal Share Subscription for Cresco US Corp. Redemption; and

(d)

upon delivery by Pubco of the Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares pursuant to the direction described above:

(i)

Cresco US Corp. will issue the additional Cresco US Corp. voting stock to Pubco as fully-paid shares; and

(ii)

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Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, as applicable, delivered to the Redeemable Share Shareholder (being the Cresco US Corp. Voting Shares issued to Pubco pursuant to the Cresco US Corp. Internal Share Subscription for Cresco US Corp. Redemption).

2.3

Reservation of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares

Pubco hereby represents, warrants and covenants in favour of the LLC and Cresco US Corp. that Pubco will, at all times while any Common Units (or other rights pursuant to which Common Units may be acquired upon the exercise, conversion or exchange thereof) other than Common Units held by Cresco US Corp. or its affiliates are outstanding, and at all times while any Redeemable Corporation Shares (or other rights pursuant to which Redeemable Corporation Shares may be acquired upon the exercise, conversion or exchange thereof) other than Redeemable Corporation Shares held by Pubco or its affiliates are outstanding, authorize for issuance such number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares (or other shares or securities into which Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares may be reclassified or changed) without duplication: (a) as is equal to the sum of (i) the number of Common Units issued and outstanding from time to time; (ii) the number of Common Units issuable upon the exercise, conversion or exchange of all rights to acquire Common Units outstanding from time to time; (iii) the number of Redeemable Corporation Shares issued and outstanding from time to time; and (iv) the number of Redeemable Corporation Shares issuable upon the exercise, conversion or exchange of all rights to acquire Redeemable Corporation Shares outstanding from time to time, in each case, excluding such Common Units, Redeemable Corporation Shares and rights held by Pubco or any of its affiliates; and (b) as are now and may hereafter be required to enable and permit Pubco and its affiliates to meet their respective obligations under the A&R LLC Agreement and the Tax Receivable Agreement, to enable and permit Cresco US Corp. to meet its obligations under each of the A&R LLC Agreement and the Tax Receivable Agreement with respect to the delivery of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and cash payments contemplated under the Tax Receivable Agreement and to enable and permit the LLC to meet its obligations under the A&R LLC Agreement. Nothing contained herein shall be construed to preclude Pubco from satisfying its obligations in respect of any redemption or exchange contemplated in Sections 2.1 and 2.2 herein by delivery of purchased Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares (which may or may not be held in the treasury of Pubco) or the delivery of cash pursuant to a redemption or exchange of Common Units or Redeemable Corporation Shares. Pubco covenants that all Subordinated Voting Shares issued upon such a redemption or exchange will, upon issuance, be validly issued, fully paid and non-assessable.

2.4

Stock Exchange Listing

Pubco covenants and agrees in favour of the LLC and Cresco US Corp. that, as long as any outstanding Common Units (or other rights pursuant to which Common Units may be acquired) are owned by any Person other than Cresco US Corp. or any of its affiliates, and as long as any Redeemable Corporation Shares (or other rights pursuant to which Redeemable Corporation Shares may be acquired) are owned by any Person other than Pubco or any of its affiliates, Pubco will use its reasonable efforts to maintain a listing for Pubco Proportionate Voting Shares and/or

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Pubco Subordinate Voting Shares on a stock exchange which is a designated stock exchange within the meaning of the Income Tax Act (Canada) and to ensure that Pubco is a “public corporation” within the meaning of the Income Tax Act (Canada).

2.5

Notification by Pubco of Certain Events

In order to assist Cresco US Corp. and the LLC in complying with their respective obligations hereunder, Pubco will notify the LLC and Cresco US Corp. of each of the following events at the time set forth below:

(a)

promptly, upon the earlier of receipt by Pubco of notice of and Pubco otherwise becoming aware of any threatened or instituted claim, suit, petition or other proceedings; and

(b)

as soon as practicable upon the split, consolidation, reclassification, recapitalization or other change in the outstanding securities of Pubco and the issuance by Pubco of any Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares or rights to acquire Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares (other than the issuance of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares and rights to acquire Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares contemplated in connection with the Letter Agreement).

2.6

Notification by the LLC of Certain Events

In order to assist Pubco in complying with its obligations hereunder and to permit Cresco US Corp. and/or Pubco to exercise a direct exchange of Common Units pursuant to the terms of the A&R LLC Agreement, the LLC will notify Pubco and Cresco US Corp. of each of the following events at the time set forth below:

(a)

promptly, upon the earlier of receipt by the LLC of notice of and the LLC otherwise becoming aware of any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of the LLC or to effect any other distribution of the assets of the LLC among its members for the purpose of winding up its affairs;

(b)

immediately, upon receipt by the LLC of a request by a Unitholder to redeem such Unitholder’s Common Units, as contemplated in the A&R LLC Agreement; and

(c)

as soon as practicable upon the split, consolidation, reclassification, recapitalization or other change in the outstanding securities of the LLC and the issuance by the LLC of any Common Units or rights to acquire Common Units (other than the issuance of Common Units and rights to acquire Common Units contemplated in connection with the Letter Agreement).

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2.7

Notification by Cresco US Corp. of Certain Events

In order to assist Pubco in complying with its obligations hereunder and to permit Pubco to exercise a direct exchange of Redeemable Corporation Shares pursuant to the terms of the articles of incorporation of Cresco US Corp., Cresco US Corp. will notify Pubco of each of the following events at the time set forth below:

(a)

promptly, upon the earlier of receipt by Cresco US Corp. of notice of and Cresco US Corp. otherwise becoming aware of any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of Cresco US Corp. or to effect any other distribution of the assets of Cresco US Corp. among its members for the purpose of winding up its affairs;

(b)

immediately, upon receipt by Cresco US Corp. of a request by a Redeemable Share Shareholder to redeem such shareholder’s Redeemable Corporation Shares, as contemplated in the articles of incorporation of Cresco US Corp.; and

(c)

as soon as practicable upon the split, consolidation, reclassification, recapitalization or other change in the outstanding securities of Cresco US Corp. and the issuance by Cresco US Corp. of any Redeemable Corporation Shares or rights to acquire Redeemable Corporation Shares (other than the issuance of Redeemable Corporation Shares and rights to acquire Redeemable Corporation Shares contemplated in connection with the Letter Agreement).

2.8

Delivery of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares

In furtherance of its obligations hereunder, upon notice from the LLC or Cresco US Corp. of any event that requires the LLC or Cresco US Corp. to cause to be delivered Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares to any holder of Common Units or Redeemable Corporation Shares, as applicable, Pubco shall forthwith deliver, or cause to be delivered through its transfer agent or otherwise, as the LLC or Cresco US Corp. may direct, the requisite number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares to be received by, or to the order of, the former holder of the surrendered Common Units or Redeemable Corporation Shares, as applicable, as the LLC or Cresco US Corp. shall direct, and shall if necessary, and subject to obtaining all necessary shareholder approvals (if any), issue new Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares for such purpose. All such Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares shall be duly authorized and validly issued as fully paid and non-assessable and shall be free and clear of any lien, claim and encumbrance.

2.9

Listing of Pubco Subordinate Voting Shares

Pubco will in good faith take all such reasonable actions and do all such things as are reasonably necessary or desirable to cause all Pubco Subordinate Voting Shares to be delivered hereunder to be listed, quoted or posted for trading on the CSE and any other stock exchanges and quotation systems on which outstanding Pubco Subordinate Voting Shares have been listed by Pubco and remain listed and are quoted or posted for trading at such time (it being understood that

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any such Pubco Subordinate Voting Shares may be subject to transfer restrictions under applicable securities laws). Nothing in this Agreement shall require Pubco to register any securities pursuant to the United States Securities Exchange Act of 1933, as amended, or the United States Securities Exchange Act of 1934, as amended, or to register or qualify any securities for distribution under a prospectus pursuant to any applicable Canadian securities laws or United States federal securities or state “blue sky” laws.

2.10

Proceeds from Public Issuance of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares

(a)

Except with respect to the issuance of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares pursuant to a redemption or exchange contemplated herein, the net proceeds received by Pubco from the issuance of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares may be contributed by Pubco to Cresco US Corp. in exchange for a number of Voting Shares equal to the number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares issued by Pubco. In the event that only a portion of the net proceeds received by Pubco from the issuance of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares are contributed by Pubco to Cresco US Corp. in exchange for Voting Shares, the number of Voting Shares issued to Pubco pursuant its contribution of a portion of such net proceeds shall be equal to the product of: (i) the number of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares issued by Pubco; and (ii) the percentage of net proceeds received by Pubco in exchange therefor which are contributed by Pubco to Cresco US Corp.

(b)

Following an issuance of Voting Shares pursuant to Section 2.10(a) above, the net proceeds received by Cresco US Corp. from the issuance of Voting Shares may be contributed by Cresco US Corp. to the LLC in exchange for a number of Common Units equal to the number of Voting Shares issued by Cresco US Corp. In the event that only a portion of the net proceeds received by Cresco US Corp. from the issuance of Voting Shares are contributed by Cresco US Corp. to the LLC in exchange for Common Units, the number of Common Units issued to Cresco US Corp. pursuant its contribution of a portion of such net proceeds shall be equal to the product of: (i) the number of Voting Shares issued by Cresco US Corp.; and (ii) the percentage of net proceeds received by Cresco US Corp. in exchange therefor which are contributed by Cresco US Corp to the LLC.

2.11

Reimbursement of Expenses

The parties hereto agree that certain actions taken by Pubco will inure to the benefit of Cresco US Corp., the LLC, shareholders of Cresco US Corp. and the members of the LLC. Therefore, Cresco US Corp. (and, to the extent provided in the A&R LLC Agreement, the LLC) will reimburse Pubco for any reasonable out-of-pocket expenses incurred on behalf of Cresco US Corp. or the LLC, including all fees, expenses and costs of becoming and being a public company (including expenses incurred in connection with public reporting obligations, information circulars, shareholder meetings, stock exchange fees, transfer agent fees, securities commission filing fees and offering expenses, including investment banking, brokerage or finder’s fees) and maintaining its corporate existence.

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2.12

Tender Offers

So long as any Common Units not owned by Cresco US Corp. or its affiliates are outstanding or any Redeemable Corporation Shares not owned by Pubco or its affiliates are outstanding, in the event that a tender offer, share exchange offer, issuer bid, take-over bid, arrangement, business combination or similar transaction with respect to Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares (an “Offer”) is proposed by Pubco or is proposed to Pubco or its shareholders and is recommended by the board of directors of Pubco, or is otherwise effected or to be effected with the consent or approval of the board of directors of Pubco, and the Common Units are not redeemed by the LLC or purchased by Cresco US Corp. or Pubco pursuant to the terms of the A&R LLC Agreement or the Redeemable Corporation Shares are not redeemed by Cresco US Corp. or purchased by Pubco pursuant to the terms of the articles of incorporation of Cresco US Corp., Pubco will use its reasonable efforts in good faith to take all such actions and do all such things as are necessary or desirable to enable and permit holders of Common Units (other than Cresco US Corp. and its affiliates) and Redeemable Corporation Shares (other than Pubco and its affiliates) to participate in such Offer to the same extent and on an economically equivalent basis as the holders of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, without discrimination. Without limiting the generality of the foregoing, Pubco will use its reasonable efforts in good faith to ensure that holders of Common Units and Redeemable Corporation Shares may participate in each such Offer without being required to redeem Common Units as against the LLC and Redeemable Corporation Shares against Cresco US Corp. (or, if so required, to ensure that any such redemption, shall be effective only upon, and shall be conditional upon, the closing of such Offer and only to the extent necessary to tender or deposit to the Offer).

2.13

Ordinary Market Purchases

For greater certainty, nothing contained in this Agreement shall limit the ability of Pubco (or any of its subsidiaries, including without limitation, Cresco US Corp. or the LLC) to make ordinary market purchases of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares in accordance with applicable laws and regulatory and stock exchange requirements.

ARTICLE 3

PUBCO SUCCESSORS

3.1

Certain Requirements in Respect of Combination, etc.

As long as any outstanding Common Units are owned by any Person other than Cresco US Corp. or any of its affiliates or any outstanding Redeemable Corporation Shares are owned by any Person other than Pubco or any of its affiliates, Pubco shall not consummate any transaction (whether by way of reconstruction, recapitalization, reorganization, consolidation, arrangement, merger, amalgamation, transfer, sale, lease or otherwise) whereby all or substantially all of its

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undertaking, property and assets would become the property of any other Person or of the continuing corporation resulting therefrom unless:

(a)

such other Person or continuing corporation (the “Pubco Successor”) by operation of law, becomes, without more, bound by the terms and provisions of this Agreement or, if not so bound, executes, before or contemporaneously with the consummation of such transaction, an agreement supplemental hereto and such other instruments (if any) as are reasonably necessary or advisable to evidence the assumption by Pubco Successor of liability for all moneys payable and property deliverable hereunder and the covenant of such Pubco Successor to pay and deliver or cause to be paid and delivered the same and its agreement to observe and perform all the covenants and obligations of Pubco under this Agreement; and

(b)

such transaction shall be upon such terms and conditions as to substantially preserve and not to impair in any material respect any of the rights, duties, powers and authorities of the other parties hereunder or the holders of the Common Units and Redeemable Corporation Shares.

3.2

Vesting of Powers in Successor

Whenever the conditions of Section 3.1 have been duly observed and performed, the parties, if required by Section 3.1, shall execute and deliver the supplemental agreement provided for in Section 3.1(a) and thereupon Pubco Successor shall possess and from time to time may exercise each and every right and power of Pubco under this Agreement in the name of Pubco or otherwise and any act or proceeding by any provision of this Agreement required to be done or performed by the board of directors of Pubco or any officers of Pubco may and shall be done and performed with like force and effect by the directors or officers of such Pubco Successor.

3.3 Wholly-Owned Subsidiaries

Nothing herein shall be construed as preventing the amalgamation or merger of any wholly-owned direct or indirect subsidiary of Pubco (other than Cresco US Corp. and the LLC) with or into Pubco or the winding-up, liquidation or dissolution of any wholly-owned direct or indirect subsidiary of Pubco (other than Cresco US Corp. and the LLC) (provided that all of the assets of such subsidiary are transferred to Pubco or another wholly-owned direct or indirect subsidiary of Pubco) or any other distribution of the assets of any wholly-owned direct or indirect subsidiary (other than Cresco US Corp. and the LLC) of Pubco among the shareholders or members of such subsidiary for the purpose of winding up its affairs, and any such transactions are expressly permitted by this Article 3.

ARTICLE 4

GENERAL

4.1

Term

This Agreement shall come into force and be effective as of the date hereof and shall terminate and be of no further force and effect at such time as no Common Units (or securities or rights convertible into or exchangeable for or carrying rights to acquire Common Units) are held

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by any Person other than Cresco US Corp. and any of its affiliates and no Redeemable Corporation Shares (or securities or rights convertible into or exchangeable for or carrying rights to acquire Redeemable Corporation Shares) are held by any Person other than Pubco and any of its affiliates.

4.2 Changes in Capital of Pubco, Cresco US Corp. and the LLC

(a)

In the event of a reclassification, consolidation, split, dividend of securities or other recapitalization of Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, Cresco US Corp. Shares or Common Units, Pubco, Cresco US Corp. and the LLC, as applicable, shall undertake all actions necessary and appropriate to maintain the same ratios between the number Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, the number of Cresco US Corp. Shares and the number Common Units issued and outstanding immediately prior to any such reclassification, consolidation, split, dividend of securities or other recapitalization, including, without limitation, also effecting a reclassification, consolidation, split, dividend of securities or other recapitalization with respect to, as applicable, the Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, Cresco US Corp. Shares and Common Units.

(b)

At all times after the occurrence of any event as a result of which Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, Cresco US Corp. Shares or Common Units (or any combination of the foregoing) are in any way changed, this Agreement shall forthwith be amended and modified as necessary in order that it shall apply with full force and effect, mutatis mutandis, to all new securities into which Pubco Proportionate Voting Shares and/or Pubco Subordinate Voting Shares, Cresco US Corp. Shares or Common Units (or any combination of the foregoing) are so changed and the parties hereto shall execute and deliver an agreement in writing evidencing such necessary amendments and modifications.

4.3

Severability

If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule or law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible.

4.4

Amendments, Modifications

(a)

Subject to Sections 4.2, 4.3 and 4.5, this Agreement may not be amended or modified except by an agreement in writing executed by the LLC, Cresco US Corp. and Pubco and approved by the holders of a majority of the outstanding Common Units in accordance with the terms of the A&R LLC Agreement and the holders of a majority of the outstanding Cresco US Corp. Shares in accordance with the terms of the articles of incorporation of Cresco US Corp.

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(b)

No amendment or modification or waiver of any of the provisions of this Agreement otherwise permitted hereunder shall be effective unless made in writing and signed by all of the parties hereto.

4.5

Ministerial Amendments

Notwithstanding the provisions of Section 4.4, the parties to this Agreement may in writing at any time and from time to time, without the approval of the holders of the Common Units or the Cresco US Corp. Shares, amend or modify this Agreement for the purposes of:

(a)

adding to the covenants of any or all parties if the manager of the LLC, the board of directors of Cresco US Corp. and the board of directors of Pubco shall be of the good faith opinion that such additions will not be prejudicial to the rights or interests of the holders of the Common Units or the Redeemable Corporation Shares, in both cases as a whole other than Pubco and its affiliates;

(b)

making such amendments or modifications not inconsistent with this Agreement as may be necessary or desirable with respect to matters or questions which, in the good faith opinion of the manager of the LLC, the board of directors of Cresco US Corp. and the board of directors of Pubco, it may be expedient to make, provided that each such manager or board of directors, as the case may be, shall be of the good faith opinion that such amendments or modifications will not be prejudicial to the interests of the holders of the Common Units or Redeemable Corporation Shares, in both cases as a whole other than Pubco and its affiliates; or

(c)

making such changes or corrections which, on the advice of counsel to the LLC, Cresco US Corp. and Pubco, are required for the purpose of curing or correcting any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error, provided that the manager of the LLC, the board of directors of Cresco US Corp. and the board of directors of Pubco shall be of the good faith opinion that such changes or corrections will not be prejudicial to the interests of the holders of the Common Units or Redeemable Corporation Shares, in both cases as a whole other than Pubco and its affiliates.

4.6 Meeting to Consider Amendments

The LLC, at the request of Pubco, shall submit to the holders of the Common Units a written consent or otherwise call a meeting of the holders of Common Units, and Cresco US Corp., at the request of Pubco, shall submit to the holders of the Cresco US Corp. Shares a written consent or otherwise call a meeting of the holders of Cresco US Corp. Shares, for the purpose of considering any proposed amendment or modification requiring approval under Section 4.4. Any such meeting or meetings shall be called and held in accordance with the A&R LLC Agreement of the LLC or the articles of incorporation of Cresco US Corp., as applicable, and all applicable laws.

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4.7

Affiliates

It is hereby acknowledged by the parties that references herein to affiliates of Pubco, Cresco US Corp. or the LLC shall not include for the purpose of such references holders of Pubco Super Voting Shares of Pubco.

4.8

Enurement & Assignment

This Agreement shall be binding upon and enure to the benefit of the parties hereto and their respective successors and permitted assigns; provided that any attempted assignment of the rights and obligations of this Agreement by any party hereto to a third-party shall be null and void ab initio unless the requirements of Article 3 are satisfied in connection with such assignment.

4.9

Notices to Parties

All notices and other communications between the parties to this Agreement shall be in writing and shall be deemed to have been given if delivered personally or by electronic communication to the parties at the following addresses (or at such other address for any such party as shall be specified in like notice):

(a)

if to Pubco, at:

520 W Erie St #220,

Chicago, IL 60654

Attention: John Schetz

Email: john.schetz@crescolabs.com

(b)

if to the LLC, at:

520 W Erie St #220,

Chicago, IL 60654

Attention: John Schetz

Email: john.schetz@crescolabs.com

(c)

if to Cresco US Corp., at:

520 W Erie St #220,

Chicago, IL 60654

Attention: John Schetz

Email: john.schetz@crescolabs.com

Any notice or other communication given personally shall be deemed to have been given and received upon delivery thereof and if given by electronic communication shall be deemed to have been given and received on the date of receipt thereof unless such day is not a Business Day or the notice or other communication was sent after 5:00 p.m. (Central Standard Time), in which case it shall be deemed to have been given and received upon the immediately following Business Day.

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4.10

Counterparts

This Agreement, may be executed in counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument.

4.11

Jurisdiction

This Agreement shall be construed and enforced in accordance with the laws of the Province of British Columbia and the laws of Canada applicable therein.

4.12

Attornment

Each of the parties hereto agrees that any action or proceeding arising out of or relating to this Agreement may be instituted in the courts of British Columbia, waives any objection which it may have now or hereafter to the venue of any such action or proceeding, irrevocably submits to the jurisdiction of the said courts in any such action or proceeding, agrees to be bound by any judgment of the said courts and not to seek, and hereby waives, any review of the merits of any such judgment by the courts of any other jurisdiction and each of the LLC and Cresco US Corp. hereby appoints Pubco at its registered office in the Province of British Columbia as attorney for service of process.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.


CRESCO LABS INC.

By:		/s/ Charles Bachtell
		Name: Charles Bachtell
		Title: Co-Founder & CEO

CRESCO U.S. CORP.

By:		/s/ Charles Bachtell
		Name: Charles Bachtell
		Title: Co-Founder & CEO

CRESCO LABS, LLC
by, CRESCO U.S. CORP., its sole Manager

By:		/s/ Charles Bachtell
		Name: Charles Bachtell
		Title: Co-Founder & CEO

Signature Page—Support Agreement

EX-99.46 47 d945319dex9946.htm EX-99.46 EX-99.46

Exhibit 99.46

Execution Version

TAX RECEIVABLE AGREEMENT

by and among

Cresco U.S. Corp.,

Cresco Labs, LLC

and

each of the Members from time to time party hereto

Dated as of November 30, 2018

CONTENTS


		Page
ARTICLE I. DEFINITIONS			2
Section 1.1	Definitions		2
Section 1.2	Rules of Construction		9

ARTICLE II. DETERMINATION OF REALIZED TAX BENEFIT			9
Section 2.1	Basis Adjustments; Section 754 Election		9
Section 2.2	Basis Schedules		10
Section 2.3	Tax Benefit Schedules		10
Section 2.4	Procedures; Amendments		11

ARTICLE III. TAX BENEFIT PAYMENTS			12
Section 3.1	Timing and Amount of Tax Benefit Payments		12
Section 3.2	No Duplicative Payments		14
Section 3.3	Pro-Ration of Payments as Between the Members		14

ARTICLE IV. TERMINATION			15
Section 4.1	Early Termination of Agreement; Breach of Agreement		15
Section 4.2	Early Termination Notice		16
Section 4.3	Payment upon Early Termination		17

ARTICLE V. SUBORDINATION AND LATE PAYMENTS			17
Section 5.1	Subordination		17
Section 5.2	Late Payments by PC Corp		18

ARTICLE VI. TAX MATTERS; CONSISTENCY; COOPERATION			18
Section 6.1	Participation in PC Corp’s and the Company’s Tax Matters		18
Section 6.2	Consistency		18
Section 6.3	Cooperation		18

ARTICLE VII. MISCELLANEOUS			19
Section 7.1	Notices		19
Section 7.2	Counterparts		19
Section 7.3	Entire Agreement; No Third Party Beneficiaries		20
Section 7.4	Governing Law		20
Section 7.5	Severability		20
Section 7.6	Assignments; Amendments; Successors; No Waiver		20
Section 7.7	Titles and Subtitles		21
Section 7.8	Resolution of Disputes		21
Section 7.9	Reconciliation		22
Section 7.10	Withholding		23
Section 7.11	Admission of PC Corp into a Consolidated Group; Transfers of Corporate Assets		23
Section 7.12	Confidentiality		23
Section 7.13	Change in Law		24
Section 7.14	Interest Rate Limitation		24
Section 7.15	Independent Nature of Rights and Obligations		24

TAX RECEIVABLE AGREEMENT

This TAX RECEIVABLE AGREEMENT (this “Agreement”), dated as of November 30, 2018, is hereby entered into by and among Cresco U.S. Corp., an Illinois corporation (“PC Corp”), Cresco Labs, LLC, an Illinois limited liability company (the “Company”) and each of the Members from time to time party hereto. Capitalized terms used but not otherwise defined herein have the respective meanings set forth in Section 1.1.

RECITALS

WHEREAS, the Company is classified as a partnership for U.S. federal income tax purposes;

WHEREAS, each of the members of the Company as of the date hereof (such members other than PC Corp, together with each other Person who becomes party hereto by satisfying the Joinder Requirement, the “Members”) owns common units in the Company (the “Common Units”) or LTIP Units in the Company (the “LTIP Units”, and collectively, the “Units”);

WHEREAS, PC Corp is the sole manager of the Company;

WHEREAS, on or prior to the date hereof, Cresco Labs Inc. (f/k/a Randsburg International Gold Corp.), a corporation formed under the laws of the Province of British Columbia (“Pubco”), subscribed for stock of PC Corp and therefore became an indirect member of the Company;

WHEREAS, it is anticipated that at the effective time of this Agreement (or as soon as practicable thereafter), shares of Pubco’s subordinate voting shares (“Pubco Subordinate Voting Shares”) shall have been approved for listing on the Canadian Securities Exchange (the “Public Listing”) and Pubco shall have created and issued proportionate voting shares convertible (“Pubco Proportionate Voting Shares”) each convertible under their terms into 200 Pubco Subordinate Voting Shares;

WHEREAS, on and after the date hereof, pursuant to and in accordance with the terms and restrictions of Article XI of the LLC Agreement, each Member has the right, from time to time to have all or a portion its Common Units redeemed by the Company for, at PC Corp’s election, cash or shares of Pubco (a “Redemption”); provided that, pursuant to Article XI of the LLC Agreement, PC Corp may effect Redemptions using cash or Pubco for such Common Units directly (a “Direct Exchange”), and may also assign its rights and obligations with respect to Direct Exchanges to Pubco such that Pubco may effect Redemptions using cash or shares of Pubco for such Common Units (a “Pubco Direct Exchange”);

WHEREAS, the Company will have in effect an election under Section 754 of the Code, as provided under Section 9.02 of the LLC Agreement and Section 2.1(b) hereof, for the Taxable Year in which any Exchange occurs, which election will result in an adjustment to PC Corp’s share of the tax basis of the assets owned by the Company and its relevant subsidiaries (including any subsidiaries that are classified as partnerships for U.S. federal income tax purposes and have made an election under Section 754 of the Code) (the Company and its relevant subsidiaries, the “Company Group”), as of the date of the Exchange, with a consequent result on the taxable income subsequently derived therefrom; and

WHEREAS, the parties to this Agreement desire to provide for certain payments and make certain arrangements with respect to any tax benefits to be derived by PC Corp as the result of Exchanges and making payments under this Agreement.

WHEREAS, pursuant to Section 13.01 of that certain Amended and Restated Limited Liability Company Agreement of the Company, dated as of July 1, 2018 (the “Prior Agreement”), the undersigned member of the Board of Directors of the Company is acting as attorney-in-fact hereunder for each of the Members party hereto;

NOW, THEREFORE, in consideration of the foregoing and the respective covenants and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I.

DEFINITIONS

Section 1.1 Definitions. As used in this Agreement, the terms set forth in this Article I shall have the following meanings (such meanings to be equally applicable to both (i) the singular and plural and (ii) the active and passive forms of the terms defined).

“10% Member” is defined in Section 6.1 of this Agreement.

“Actual Interest Amount” is defined in Section 3.1(b)(vii) of this Agreement.

“Actual Tax Liability” means, with respect to any Taxable Year, the liability for Covered Taxes of PC Corp (a) appearing on Tax Returns of PC Corp for such Taxable Year and (b) if applicable, determined in accordance with a Determination (including interest imposed in respect thereof under applicable law).

“Advisory Firm” means an accounting firm that is internationally recognized as being expert in Covered Tax matters, selected by PC Corp.

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person.

“Agreed Rate” means LIBOR plus 100 basis points.

“Agreement” is defined in the preamble.

“Amended Schedule” is defined in Section 2.4(b) of this Agreement.

“Attributable” is defined in Section 3.1(b)(i) of this Agreement.

“Basis Adjustment” means the increase or decrease to, or PC Corp’s share of, the tax basis of the Reference Assets (i) under Section 734(b), 743(b), 754 and 755 of the Code and, in each case, the comparable sections of U.S. state and local tax law (in situations where, following an Exchange, the Company remains in existence as an entity for tax purposes) and (ii) under Sections 732 and 1012 of the Code and, in each case, the comparable sections of U.S. state and local tax law (in situations where, as a result of one or more Exchanges, the Company becomes an entity that is disregarded as separate from its owner for tax purposes), in each case, as a result of any Exchange and any payments made under this Agreement. Notwithstanding any other provision of this Agreement, the amount of any Basis Adjustment resulting from an Exchange of one or more Common Units shall be determined without regard to any Pre-Exchange Transfer of such Common Units and as if any such Pre-Exchange Transfer had not occurred.

“Basis Schedule” is defined in Section 2.2 of this Agreement.

“Beneficial Owner” means, with respect to any security, a Person who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares: (i) voting power, which includes the power to vote, or to direct the voting of, with respect to such security and/or (ii) investment power, which includes the power to dispose of, or to direct the disposition of, such security.

“Board” means the Board of Directors of Pubco.

“Business Day” means any day other than a Saturday or a Sunday or a day on which the principal securities exchange on which Pubco Subordinate Voting Shares are traded or quoted is closed or banks located in Toronto, Ontario, Canada or Chicago, Illinois generally are authorized or required by law to close.

“Change of Control” means the occurrence of any of the following events:

(1) any “person” or “group” (within the meaning of Sections 13(d) and 14(d) of the Exchange Act (excluding any “person” or “group” who, on the effective date of the Public Listing, is the Beneficial Owner of securities of Pubco representing more than fifty percent (50%) of the combined voting power of Pubco’s then outstanding voting securities)) becomes the Beneficial Owner of securities of Pubco representing more than fifty percent (50%) of the combined voting power of Pubco’s then outstanding voting securities;

(2) the shareholders of Pubco approve a plan of complete liquidation or dissolution of Pubco or there is consummated an agreement or series of related agreements for the sale or other disposition, directly, or indirectly, by Pubco of all or substantially all of Pubco’s assets (including a sale of assets of PC Corp or the Company), other than such sale or other disposition by Pubco of all or substantially all of Pubco’s assets to an entity at least fifty percent (50%) of the combined voting power of the voting securities of which are owned by shareholders of Pubco in substantially the same proportions as their ownership of Pubco immediately prior to such sale;

(3) there is consummated a merger or consolidation of Pubco or any direct or indirect subsidiary of Pubco (including the Company) with any other Pubco or other entity, and, immediately after the consummation of such merger or consolidation, either (x) the Board immediately prior to the merger or consolidation does not constitute at least a majority of the board of directors of the company surviving the merger or, if the surviving company is a subsidiary, the ultimate Pubco thereof, or (y) all of the Persons who were the respective Beneficial Owners of the voting securities of Pubco immediately prior to such merger or consolidation do not Beneficially Own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities of the Person resulting from such merger or consolidation; or

(4) the following individuals cease for any reason to constitute a majority of the number of directors of Pubco then serving: individuals who were directors of Pubco on the effective date of the Public Listing and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Pubco) whose appointment or election by the board of directors of Pubco or nomination for election by Pubco’s shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors of Pubco on the effective date of the Public Listing or whose appointment, election or nomination forelection was previously so approved or recommended by the directors referred to in this clause 4.

Notwithstanding the foregoing, a “Change of Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of Pubco Subordinate Voting Shares immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in and voting control over, and own substantially all of the shares of, an entity which owns all or substantially all of the assets of Pubco immediately following such transaction or series of transactions.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Common Unit” is defined in the recitals to this Agreement.

“Company” is defined in the recitals to this Agreement.

“Company Group” is defined in the recitals to this Agreement.

“Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.

“Covered Taxes” means any and all U.S. federal, state, local and foreign taxes, assessments or similar charges that are based on or measured with respect to net income or profits, whether as an exclusive or an alternative basis (including for the avoidance of doubt, franchise taxes), and any interest imposed in respect thereof under applicable law.

“Cumulative Net Realized Tax Benefit” is defined in Section 3.1(b)(iii) of this Agreement.

“Default Rate” means LIBOR plus 500 basis points.

“Default Rate Interest” is defined in Section 3.1(b)(ix) of this Agreement.

“Determination” shall have the meaning ascribed to such term in Section 1313(a) of the Code or similar provision of U.S. state, local or non-U.S. tax law, as applicable, or any other event (including the execution of IRS Form 870-AD) that finally and conclusively establishes the amount of any liability for tax.

“Direct Exchange” is defined in the recitals to this Agreement.

“Dispute” is defined in Section 7.8(a) of this Agreement.

“Early Termination Effective Date” means the date of an Early Termination Notice for purposes of determining the Early Termination Payment.

“Early Termination Notice” is defined in Section 4.2 of this Agreement.

“Early Termination Payment” is defined in Section 4.3(b) of this Agreement.

“Early Termination Rate” means the Agreed Rate.

“Early Termination Reference Date” is defined in Section 4.2 of this Agreement.

“Early Termination Schedule” is defined in Section 4.2 of this Agreement.

“Exchange” means any (i) Pubco Direct Exchange, (ii) Direct Exchange, (iii) Redemption or (iv) any transaction between PC Corp and the Company that in any case results in an adjustment under Section 743(b) of the Code with respect to the Company Group.

“Exchange Act” means the Securities and Exchange Act of 1934, as amended, or any successor provisions thereto.

“Exchange Date” means the date of any Exchange.

“Expert” is defined in Section 7.9 of this Agreement.

“Extension Rate Interest” is defined in Section 3.1(b)(viii) of this Agreement.

“Final Payment Date” means any date on which a payment is required to be made pursuant to this Agreement. For the avoidance of doubt, the Final Payment Date in respect of a Tax Benefit Payment is determined pursuant to Section 3.1(a) of this Agreement.

“Hypothetical Tax Liability” means, with respect to any Taxable Year, the hypothetical liability of PC Corp that would arise in respect of Covered Taxes, using the same methods, elections, conventions and similar practices used on the actual relevant Tax Returns of PC Corp but (i) calculating depreciation, amortization, or other similar deductions, or otherwise calculating any items of income, gain, or loss, using PC Corp’s share of the Non-Adjusted Tax Basis as reflected on the Basis Schedule, including amendments thereto for such Taxable Year and (ii) excluding any deduction attributable to Imputed Interest for such Taxable Year. For the avoidance of doubt, the Hypothetical Tax Liability shall be determined without taking into account the carryover or carryback of any tax item (or portions thereof) that is attributable to any of the items described in clauses (i) and (ii) of the previous sentence.

“Imputed Interest” is defined in Section 3.1(b)(vi) of this Agreement.

“IRS” means the U.S. Internal Revenue Service.

“Joinder” means a joinder to this Agreement, in form and substance substantially similar to Exhibit A to this Agreement.

“Joinder Requirement” is defined in Section 7.6(a) of this Agreement.

“LIBOR” means during any period, an interest rate per annum equal to the one-year LIBOR rate reported, on the date two (2) calendar days prior to the first day of such period, on the Telerate Page 3750 (or if such screen shall cease to be publicly available, as reported on Reuters Screen page “LIBOR01” or by any other publicly available source of such market rate) for London interbank offered rates for United States dollar deposits for such period.

“LLC Agreement” means that certain Second Amended and Restated LLC Agreement of the Company, dated as of the date hereof, as such agreement may be further amended, restated, supplemented and/or otherwise modified from time to time.

“LTIP Units” is defined in the recitals to this Agreement.

“Market Value” shall mean the Common Unit Redemption Price, as defined in the LLC Agreement.

“Member Advisory Firm” means an accounting firm that is nationally recognized as being expert in Covered Tax matters, selected by the applicable Member; provided that such accounting firm shall be different from the accounting firm serving as the Advisory Firm.

“Members” is defined in the recitals to this Agreement.

“Net Tax Benefit” is defined in Section 3.1(b)(ii) of this Agreement.

“Non-Adjusted Tax Basis” means, with respect to any Reference Asset at any time, the tax basis that such asset would have had at such time if no Basis Adjustments had been made.

“Objection Notice” is defined in Section 2.4(a)(i) of this Agreement.

“Parties” means the parties named on the signature pages to this agreement and each additional party that satisfies the Joinder Requirement, in each case with their respective successors and assigns.

“Person” means any individual, corporation, firm, partnership, joint venture, limited liability company, estate, trust, business association, organization, governmental entity or other entity.

“PC Corp” is defined in the preamble to this Agreement.

“PC Corp Letter” means a letter prepared by PC Corp in connection with the performance of its obligations under this Agreement, which states that the relevant Schedules, notices or other information to be provided by PC Corp to the Members, along with all supporting schedules and work papers, were prepared in a manner that is consistent with the terms of this Agreement and, to the extent not expressly provided in this Agreement, on a reasonable basis in light of the facts and law in existence on the date such Schedules, notices or other information were delivered by PC Corp to the Members.

“Pre-Exchange Transfer” means any transfer of one or more Common Units (including upon the death of a Member or upon the issuance of Common Units resulting from the exercise of an option to acquire such Common Units) (i) that occurs after the Public Listing but prior to an Exchange of such Common Units and (ii) to which Section 743(b) of the Code applies.

“Pubco” is defined in the preamble to this Agreement.

“Pubco Direct Exchange” is defined in the recitals to this Agreement.

“Pubco Proportionate Voting Shares” is defined in the recitals to this Agreement.

“Pubco Subordinate Voting Shares” is defined in the recitals to this Agreement.

“Public Listing” is defined in the recitals to this Agreement.

“Realized Tax Benefit” is defined in Section 3.1(b)(iv) of this Agreement.

“Realized Tax Detriment” is defined in Section 3.1(b)(v) of this Agreement.

“Reconciliation Dispute” is defined in Section 7.9 of this Agreement.

“Reconciliation Procedures” is defined in Section 2.4(a) of this Agreement.

“Redemption” has the meaning in the recitals to this Agreement.

“Reference Asset” means any asset of the Company or any of its successors or assigns, and whether held directly by the Company or indirectly by the Company through a member of the Company Group, at the time of an Exchange. A Reference Asset also includes any asset the tax basis of which is determined, in whole or in part, by reference to the tax basis of an asset that is described in the preceding sentence, including “substituted basis property” within the meaning of Section 7701(a)(42) of the Code.

“Schedule” means any of the following: (i) a Basis Schedule, (ii) a Tax Benefit Schedule, or (iii) the Early Termination Schedule, and, in each case, any amendments thereto.

“Senior Obligations” is defined in Section 5.1 of this Agreement.

“Subsidiary” means, with respect to any Person and as of any determination date, any other Person as to which such first Person (i) owns, directly or indirectly, or otherwise controls, more than 50% of the voting power or other similar interests of such other Person or (ii) is the sole general partner interest, or managing member or similar interest, of such Person.

“Subsidiary Stock” means any stock or other equity interest in any subsidiary entity of PC Corp that is treated as a corporation for U.S. federal income tax purposes.

“Supermajority Member Approval” means written approval by Members whose rights under this Agreement are attributable to at least seventy percent (70%) of the Units outstanding (and not held by PC Corp) immediately after the effective date of the Public Listing (as appropriately adjusted for any subsequent changes to the number of outstanding Units). For purposes of this definition, a Member’s rights under this Agreement shall be attributed to Units as of the time of a determination of Supermajority Member Approval. For the avoidance of doubt, (i) an Exchanged Unit (or, with respect to an LTIP Unit, an LTIP Unit converted pursuant to the terms of the LLC Agreement) shall be attributed only to the Member entitled to receive Tax Benefit Payments with respect to such Exchanged (or converted) Unit (i.e., the Exchangor or the assignee of its rights hereunder) and (ii) an outstanding Unit that has not yet been Exchanged (or converted) shall be attributed only to the Member entitled to receive Tax Benefit Payments upon the Exchange (or conversion) of such Unit (i.e., the Member or the assignee of its rights hereunder).

“Tax Benefit Payment” is defined in Section 3.1(b) of this Agreement.

“Tax Benefit Schedule” is defined in Section 2.3(a) of this Agreement.

“Tax Return” means any return, declaration, report or similar statement required to be filed with respect to taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated tax.

“Taxable Year” means a taxable year of PC Corp as defined in Section 441(b) of the Code or comparable section of U.S. state or local tax law, as applicable (and, therefore, for the avoidance of doubt, may include a period of less than 12 months for which a Tax Return is made), ending on or after the effective date of the Public Listing.

“Taxing Authority” shall mean any national, federal, state, county, municipal, or local government, or any subdivision, agency, commission or authority thereof, or any quasi-governmental body, or any other authority of any kind, exercising regulatory or other authority in relation to tax matters.

“Termination Objection Notice” is defined in Section 4.2 of this Agreement.

“Treasury Regulations” means the final, temporary, and (to the extent they can be relied upon) proposed regulations under the Code, as promulgated from time to time (including corresponding provisions and succeeding provisions) as in effect for the relevant taxable period.

“U.S.” means the United States of America.

“Units” is defined in the recitals to this Agreement.

“Valuation Assumptions” shall mean, as of an Early Termination Effective Date, the assumptions that:

(1) in each Taxable Year ending on or after such Early Termination Effective Date, PC Corp will have taxable income sufficient to fully use the deductions arising from the Basis Adjustments and the Imputed Interest during such Taxable Year or future Taxable Years (including, for the avoidance of doubt, Basis Adjustments and Imputed Interest that would result from future Tax Benefit Payments that would be paid in accordance with the Valuation Assumptions) in which such deductions would become available;

(2) the U.S. federal, state and local income tax rates that will be in effect for each such Taxable Year will be those specified for each such Taxable Year by the Code and other law as in effect on the Early Termination Effective Date, except to the extent any change to such tax rates for such Taxable Year have already been enacted into law;

(3) all taxable income of PC Corp will be subject to the maximum applicable tax rates for each Covered Tax throughout the relevant period;

(4) any loss carryovers or carrybacks generated by any Basis Adjustment or Imputed Interest (including such Basis Adjustment and Imputed Interest generated as a result of payments under this Agreement) and available as of the date of the Early Termination Schedule will be used by PC Corp ratably in each Taxable Year from the date of the Early Termination Schedule through the scheduled expiration date of such loss carryovers or carrybacks or, if no expiration date applies, based upon PC Corp’s projected taxable income and ability to utilize such carryovers to reduce its tax liability; by way of example, if on the date of the Early Termination Schedule PC Corp had $200 of net operating losses with a carryforward period of ten (10) years, $20 of such net operating losses would be used in each of the ten (10) consecutive Taxable Years beginning in the Taxable Year of such Early Termination Schedule;

(5) any non-amortizable assets (other than Subsidiary Stock) will be disposed of on the fifteenth anniversary of the earlier of (i) the applicable Basis Adjustment and (ii) the Early Termination Effective Date;

(6) any Subsidiary Stock will be deemed never to be disposed of except if Subsidiary Stock is directly disposed of in the Change of Control;

(7) if, on the Early Termination Effective Date, any Member has Units that have not been Exchanged (or, with respect to LTIP Units, converted to Common Units), then, with respect to LTIP Units, such LTIP Units shall be deemed to be converted to Common Units, and all Common Units, including the LTIP Units deemed converted therefor shall be deemed to be Exchanged for the Market Value of Pubco Subordinate Voting Shares that would be received by such Member if such Common Units had been Exchanged on the Early Termination Effective Date, and such Member shall be deemed to receive the amount of cash such Member would have been entitled to pursuant to Section 4.3(a) had such LTIP Units actually been converted to Common Units and had all such Common Units actually been Exchanged on the Early Termination Effective Date; and

(8) any payment obligations pursuant to this Agreement will be satisfied on the date that any Tax Return to which such payment obligation relates is required to be filed excluding any extensions.

Section 1.2 Rules of Construction. Unless otherwise specified herein:

(a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(b) For purposes of interpretation of this Agreement:

(i) The words “herein,” “hereto,” “hereof” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision thereof.

(ii) Unless otherwise provided, references in this Agreement to a Schedule, Article, Section, clause or sub-clause refer to the appropriate Schedule to, or Article, Section, clause or subclause in, this Agreement.

(iii) References in this Agreement to dollars or “$” refer to the lawful currency of the United States of America.

(iv) The term “including” is by way of example and not limitation.

(v) The term “documents” includes any and all instruments, documents, agreements, certificates, notices, reports, financial statements and other writings, however evidenced, whether in physical or electronic form.

(c) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including;” the words “to” and “until” each mean “to but excluding;” and the word “through” means “to and including.”

(d) Section headings herein are included for convenience of reference only and shall not affect the interpretation of this Agreement.

(e) Unless otherwise expressly provided herein, (a) references to organization documents (including the LLC Agreement), agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are permitted hereby; and (b) references to any law (including the Code and the Treasury Regulations) shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Law.

ARTICLE II.

DETERMINATION OF REALIZED TAX BENEFIT

Section 2.1 Basis Adjustments; Section 754 Election.

(a) Basis Adjustments. The Parties acknowledge and agree that (A) each Redemption shall be treated for U.S. federal income tax purposes as a direct purchase of Common Units by the Company (or PC Corp followed by a corresponding contribution to the Company by PC Corp) from the applicable Member pursuant to Section 707(a)(2)(B) of the Code and (B) each Exchange will give rise to Basis Adjustments. In connection with any Exchange, the Parties acknowledge and agree that pursuant to applicable law PC Corp’s share

of the tax basis in the Reference Assets shall be increased (or decreased) by the excess (or deficiency), if any, of (A) the sum of (x) the Market Value of Pubco Subordinate Voting Shares or the cash transferred to a Member pursuant to an Exchange as payment for the Units, (y) the amount of payments made pursuant to this Agreement with respect to such Exchange and (z) the amount of liabilities allocated to the Common Units acquired pursuant to the Exchange, over (B) PC Corp’s proportionate share of the tax basis of the Reference Assets immediately after the Exchange attributable to the Common Units exchanged, determined as if each relevant member of the Company Group (including, for the avoidance of doubt, the Company) remains in existence as an entity for tax purposes and no member of the Company Group (including, for the avoidance of doubt, the Company) made the election provided by Section 754 of the Code. For the avoidance of doubt, payments made under this Agreement shall not be treated as resulting in a Basis Adjustment to the extent such payments are treated as Imputed Interest or Default Rate Interest. Further, the Parties intend that Basis Adjustments be calculated in accordance with Treasury Regulations Section 1.743-1.

(b) Section 754 Election. In its capacity as the sole manager of the Company, PC Corp will ensure that, on and after the date hereof and continuing throughout the term of this Agreement, the Company (including any successors to the Company as a result of terminations occurring pursuant to Section 708(b)(1)(B) of the Code) will have in effect an election under Section 754 of the Code (and under any similar provisions of applicable U.S. state or local law) for each Taxable Year.

Section 2.2 Basis Schedules. Within one hundred fifty (150) calendar days after the filing of the U.S. federal income Tax Return of PC Corp for each relevant Taxable Year, PC Corp shall deliver to the Members a schedule (the “Basis Schedule”) that shows, in reasonable detail as necessary in order to understand the calculations performed under this Agreement: (a) the Non-Adjusted Tax Basis of the Reference Assets as of each applicable Exchange Date; (b) the Basis Adjustments with respect to the Reference Assets as a result of the relevant Exchanges effected in such Taxable Year, calculated (I) in the aggregate (including, for the avoidance of doubt, Exchanges by all Members) and (II) solely with respect to Exchanges by the applicable Member; (c) the period (or periods) over which the Reference Assets are amortizable and/or depreciable; and (d) the period (or periods) over which each Basis Adjustment is amortizable and/or depreciable. The Basis Schedule will become final and binding on the Parties pursuant to the procedures set forth in Section 2.4(a) and may be amended by the Parties pursuant to the procedures set forth in Section 2.4(b).

Section 2.3 Tax Benefit Schedules.

(a) Tax Benefit Schedule. Within one hundred fifty (150) calendar days after the filing of the U.S. federal income Tax Return of PC Corp for any Taxable Year in which there is a Realized Tax Benefit or Realized Tax Detriment, PC Corp shall provide to the Members a schedule showing, in reasonable detail, the calculation of the Realized Tax Benefit or Realized Tax Detriment for such Taxable Year (a “Tax Benefit Schedule”). The Tax Benefit Schedule will become final and binding on the Parties pursuant to the procedures set forth in Section 2.4(a), and may be amended by the Parties pursuant to the procedures set forth in Section 2.4(b).

(b) Applicable Principles. Subject to the provisions of this Agreement, the Realized Tax Benefit or Realized Tax Detriment for each Taxable Year is intended to measure the decrease or increase in the Actual Tax Liability of PC Corp for such Taxable Year attributable to the Basis Adjustments and Imputed Interest, as determined using a “with and without” methodology described in Section 2.4(a). Carryovers or carrybacks of any tax item attributable to any Basis Adjustment or Imputed Interest shall be considered to be subject to the rules of the

Code and the Treasury Regulations or the appropriate provisions of U.S. state and local tax law, as applicable, governing the use, limitation and expiration of carryovers or carrybacks of the relevant type. If a carryover or carryback of any tax item includes a portion that is attributable to a Basis Adjustment or Imputed Interest (a “TRA Portion”) and another portion that is not (a “Non-TRA Portion”), such portions shall be considered to be used in accordance with the “with and without” methodology so that: (i) the amount of any Non-TRA Portion is deemed utilized first, followed by the amount of any TRA Portion (with the TRA Portion being applied on a proportionate basis consistent with the provisions of Section 3.3(a)); and (ii) in the case of a carryback of a Non-TRA Portion, such carryback shall not affect the original “with and without” calculation made in the prior Taxable Year. The Parties agree that, subject to the second to last sentence of Section 2.1(a), all Tax Benefit Payments attributable to an Exchange will be treated as subsequent upward purchase price adjustments that give rise to further Basis Adjustments for PC Corp beginning in the Taxable Year of payment, and as a result, such additional Basis Adjustments will be incorporated into such Taxable Year continuing for future Taxable Years until any incremental Basis Adjustment benefits with respect to a Tax Benefit Payment equals an immaterial amount.

Section 2.4 Procedures; Amendments.

(a) Procedures. Each time PC Corp delivers an applicable Schedule to the Members under this Agreement, including any Amended Schedule delivered pursuant to Section 2.4(b), but excluding any Early Termination Schedule or amended Early Termination Schedule delivered pursuant to the procedures set forth in Section 4.2, PC Corp shall also: (x) deliver supporting schedules and work papers, as determined by PC Corp or as reasonably requested by any Member, that provide a reasonable level of detail regarding the data and calculations that were relevant for purposes of preparing the Schedule; (y) deliver a PC Corp Letter supporting such Schedule; and (z) allow the Members and their advisors to have reasonable access to the appropriate representatives, as determined by PC Corp or as reasonably requested by the Members, at PC Corp and the Advisory Firm in connection with a review of such Schedule. Without limiting the generality of the preceding sentence, PC Corp shall ensure that any Tax Benefit Schedule that is delivered to the Members, along with any supporting schedules and work papers, provides a reasonably detailed presentation of the calculation of the Actual Tax Liability of PC Corp for the relevant Taxable Year (the “with” calculation) and the Hypothetical Tax Liability of PC Corp for such Taxable Year (the “without” calculation), and identifies any material assumptions or operating procedures or principles that were used for purposes of such calculations. An applicable Schedule or amendment thereto shall become final and binding on the Parties thirty (30) calendar days from the date on which the Members first received the applicable Schedule or amendment thereto unless:

(i) a Member, within thirty (30) calendar days after receiving the applicable Schedule or amendment thereto, provides PC Corp with (A) written notice of a material objection to such Schedule that is made in good faith and that sets forth in reasonable detail such Member’s material objection (an “Objection Notice”) and (B) a letter from a Member Advisory Firm in support of such Objection Notice; or

(ii) each Member provides a written waiver of its right to deliver an Objection Notice within the time period described in clause (i) above, in which case such Schedule or amendment thereto becomes binding on the date the waiver from all Members is received by PC Corp.

In the event that a Member timely delivers an Objection Notice pursuant to clause (i) above, and if the Parties, for any reason, are unable to successfully resolve the issues raised in the Objection

Notice within thirty (30) calendar days after receipt by PC Corp of the Objection Notice, PC Corp and the Member shall employ the reconciliation procedures as described in Section 7.9 of this Agreement (the “Reconciliation Procedures”). For the avoidance of doubt, and notwithstanding anything to the contrary herein, the expense of preparing and obtaining the letter from a Member Advisory Firm referenced in clause (i) above shall be borne solely by the relevant Member and neither PC Corp nor the Company shall have any liability with respect to such letter or any of the expenses associated with its preparation and delivery.

(b) Amended Schedule. The applicable Schedule for any Taxable Year may be amended from time to time by PC Corp: (i) in connection with a Determination affecting such Schedule; (ii) to correct inaccuracies in the Schedule identified as a result of the receipt of additional factual information relating to a Taxable Year after the date the Schedule was originally provided to the Member; (iii) to comply with an Expert’s determination under the Reconciliation Procedures applicable to this Agreement; (iv) to reflect a change in the Realized Tax Benefit or Realized Tax Detriment for such Taxable Year attributable to a carryback or carryforward of a loss or other Tax item to such Taxable Year; (v) to reflect a change in the Realized Tax Benefit or Realized Tax Detriment for such Taxable Year attributable to an amended Tax Return filed for such Taxable Year; or (vi) to adjust a Basis Schedule to take into account any Tax Benefit Payments made pursuant to this Agreement (any such Schedule, an “Amended Schedule”).

ARTICLE III.

TAX BENEFIT PAYMENTS

Section 3.1 Timing and Amount of Tax Benefit Payments.

(a) Timing of Payments. Subject to Sections 3.2 and 3.3, within three (3) Business Days following the date on which each Tax Benefit Schedule that is required to be delivered by PC Corp to the Members pursuant to Section 2.3(a) of this Agreement becomes final in accordance with Section 2.4(a) of this Agreement (such date, the “Final Payment Date” in respect of any Tax Benefit Payment), PC Corp shall pay to each relevant Member the Tax Benefit Payment as determined pursuant to Section 3.1(b). Each such Tax Benefit Payment shall be made by wire transfer of immediately available funds to the bank account previously designated by such Members or as otherwise agreed by PC Corp and such Members. For the avoidance of doubt, the Members shall not be required under any circumstances to return any portion of any Tax Benefit Payment previously paid by PC Corp to the Members (including any portion of any Early Termination Payment).

(b) Amount of Payments. For purposes of this Agreement, a “Tax Benefit Payment” with respect to any Member means an amount, not less than zero, equal to the sum of: (i) the Net Tax Benefit that is Attributable to such Member and (ii) the Actual Interest Amount.

(i) Attributable. A Net Tax Benefit is “Attributable” to a Member to the extent that it is derived from any Basis Adjustment or Imputed Interest that is attributable to an Exchange undertaken by or with respect to such Member.

(ii) Net Tax Benefit. The “Net Tax Benefit” for a Taxable Year equals the amount of the excess, if any, of (x) 85% of the Cumulative Net Realized Tax Benefit Attributable to such Member as of the end of such Taxable Year over (y) the aggregate amount of all Tax Benefit Payments previously made to such Member under this Section 3.1. For the avoidance of doubt, if the Cumulative Net Realized Tax Benefit as of the end of any Taxable Year is less than the aggregate amount of all Tax Benefit Payments previously made to a Member, such Member shall not be required to return any portion of any Tax Benefit Payment previously made by PC Corp to such Member.

(iii) Cumulative Net Realized Tax Benefit. The “Cumulative Net Realized Tax Benefit” for a Taxable Year equals the cumulative amount of Realized Tax Benefits for all Taxable Years of PC Corp, up to and including such Taxable Year, net of the cumulative amount of Realized Tax Detriments for the same period. The Realized Tax Benefit and Realized Tax Detriment for each Taxable Year shall be determined based on the most recent Tax Benefit Schedule or Amended Schedule, if any, in existence at the time of such determination.

(iv) Realized Tax Benefit. The “Realized Tax Benefit” for a Taxable Year equals the excess, if any, of the Hypothetical Tax Liability over the Actual Tax Liability for such Taxable Year. If all or a portion of the Actual Tax Liability for such Taxable Year arises as a result of an audit or similar proceeding by a Taxing Authority of any Taxable Year, such liability shall not be included in determining the Realized Tax Benefit unless and until there has been a Determination.

(v) Realized Tax Detriment. The “Realized Tax Detriment” for a Taxable Year equals the excess, if any, of the Actual Tax Liability over the Hypothetical Tax Liability for such Taxable Year. If all or a portion of the Actual Tax Liability for such Taxable Year arises as a result of an audit or similar proceeding by a Taxing Authority of any Taxable Year, such liability shall not be included in determining the Realized Tax Detriment unless and until there has been a Determination.

(vi) Imputed Interest. The principles of Sections 1272, 1274, or 483 of the Code, as applicable, and the principles of any similar provision of U.S. state and local law, will apply to cause a portion of any Net Tax Benefit payable by PC Corp to a Member under this Agreement to be treated as imputed interest (“Imputed Interest”). For the avoidance of doubt, the deduction for the amount of Imputed Interest as determined with respect to any Net Tax Benefit payable by PC Corp to a Member shall be excluded in determining the Hypothetical Tax Liability of PC Corp for purposes of calculating Realized Tax Benefits and Realized Tax Detriments pursuant to this Agreement.

(vii) Actual Interest Amount. The “Actual Interest Amount” calculated in respect of the Net Tax Benefit for a Taxable Year will equal the amount of any Extension Rate Interest.

(viii) Extension Rate Interest. The amount of “Extension Rate Interest” calculated in respect of the Net Tax Benefit (including previously accrued Imputed Interest) for a Taxable Year will equal interest calculated at the Agreed Rate from the due date (without extensions) for filing the U.S. federal income Tax Return of PC Corp for such Taxable Year until the date on which PC Corp makes a timely Tax Benefit Payment to the Member on or before the Final Payment Date as determined pursuant to Section 3.1(a).

(ix) Default Rate Interest. In the event that PC Corp does not make timely payment of all or any portion of a Tax Benefit Payment to a Member on or before the Final Payment Date as determined pursuant to Section 3.1(a), the amount of “Default Rate Interest” calculated in respect of the Net Tax Benefit (including previously accrued Imputed Interest and Extension Rate Interest) for a Taxable Year will equal interest calculated at the Default Rate from the Final Payment Date for a Tax Benefit Payment as determined pursuant to Section 3.1(a) until the date on which PC Corp makes such

Tax Benefit Payment to such Member. For the avoidance of doubt, any deduction for any Default Rate Interest as determined with respect to any Net Tax Benefit payable by PC Corp to a Member shall be included in the Hypothetical Tax Liability of PC Corp for purposes of calculating Realized Tax Benefits and Realized Tax Detriments pursuant to this Agreement.

(x) PC Corp and the Members hereby acknowledge and agree that, as of the date of this Agreement and as of the date of any future Exchange that may be subject to this Agreement, the aggregate value of the Tax Benefit Payments cannot be reasonably ascertained for U.S. federal income or other applicable tax purposes.

(c) Interest. The provisions of Section 3.1(b) are intended to operate so that interest will effectively accrue in respect of the Net Tax Benefit for any Taxable Year as follows:

(i) first, at the applicable rate used to determine the amount of Imputed Interest under the Code (from the relevant Exchange Date until the due date (without extensions) for filing the U.S. federal income Tax Return of PC Corp for such Taxable Year);

(ii) second, at the Agreed Rate in respect of any Extension Rate Interest (from the due date (without extensions) for filing the U.S. federal income Tax Return of PC Corp for such Taxable Year until the Final Payment Date for a Tax Benefit Payment as determined pursuant to Section 3.1(a)); and

(iii) third, at the Default Rate in respect of any Default Rate Interest (from the Final Payment Date for a Tax Benefit Payment as determined pursuant to Section 3.1(a) until the date on which PC Corp makes the relevant Tax Benefit Payment to a Member).

Section 3.2 No Duplicative Payments. It is intended that the provisions of this Agreement will not result in the duplicative payment of any amount (including interest) that may be required under this Agreement, and the provisions of this Agreement shall be consistently interpreted and applied in accordance with that intent. For purposes of this Agreement, and also for the avoidance of doubt, no Tax Benefit Payment shall be calculated or made in respect of any estimated tax payments, including, without limitation, any estimated U.S. federal income tax payments.

Section 3.3 Pro-Ration of Payments as Between the Members.

(a) Insufficient Taxable Income. Notwithstanding anything in Section 3.1(b) to the contrary, if the aggregate potential Covered Tax benefit of PC Corp as calculated with respect to the Basis Adjustments and Imputed Interest (in each case, without regard to the Taxable Year of origination) is limited in a particular Taxable Year because PC Corp does not have sufficient actual taxable income, then the available Covered Tax benefit for PC Corp shall be allocated among the Members in proportion to the respective Tax Benefit Payment that would have been payable if PC Corp had in fact had sufficient taxable income so that there had been no such limitation. As an illustration of the intended operation of this Section 3.3(a), if PC Corp had $400 of aggregate potential Covered Tax benefits with respect to the Basis Adjustments and Imputed Interest in a particular Taxable Year (with $100 of such Covered Tax benefits being attributable to Member 1 and $300 of such Covered Tax benefits being attributable to Member 2), such that Member 1 would have potentially been entitled to a Tax Benefit Payment of $85.00 and Member 2 would have been entitled to a Tax Benefit Payment of $255.00 if PC Corp had $400 of taxable income, and if at the same time PC Corp only had $200 of actual taxable income in such Taxable Year, then $50 of the aggregate $200 actual Covered Tax benefit for PC Corp for such

Taxable Year would be allocated to Member 1 and $150 of the aggregate $200 actual Covered Tax benefit for PC Corp would be allocated to Member 2, such that Member 1 would receive a Tax Benefit Payment of $42.50 and Member 2 would receive a Tax Benefit Payment of $127.50.

(b) Late Payments. If for any reason PC Corp is not able to timely and fully satisfy its payment obligations under this Agreement in respect of a particular Taxable Year, then Default Rate Interest will begin to accrue pursuant to Section 5.2 and PC Corp and other Parties agree that (i) PC Corp shall pay the Tax Benefit Payments due in respect of such Taxable Year to each Member pro rata in accordance with the principles of Section 3.3(a) and (ii) no Tax Benefit Payment shall be made in respect of any Taxable Year until all Tax Benefit Payments to all Members in respect of all prior Taxable Years have been made in full.

ARTICLE IV.

TERMINATION

Section 4.1 Early Termination of Agreement; Breach of Agreement.

(a) PC Corp’s Early Termination Right. PC Corp may completely terminate this Agreement, as and to the extent provided herein, with respect to all amounts payable to the Members pursuant to this Agreement by paying to the Members the Early Termination Payment; provided that Early Termination Payments may be made pursuant to this Section 4.1(a) only if made to all Members that are entitled to such a payment simultaneously, and provided further, that PC Corp may withdraw any notice to execute its termination rights under this Section 4.1(a) prior to the time at which any Early Termination Payment has been paid. Upon PC Corp’s payment of the Early Termination Payment, PC Corp shall not have any further payment obligations under this Agreement, other than with respect to any: (i) prior Tax Benefit Payments that are due and payable under this Agreement but that still remain unpaid as of the date of the Early Termination Notice; and (ii) current Tax Benefit Payment due for the Taxable Year ending on or including the date of the Early Termination Notice (except to the extent that the amount described in clause (ii) is included in the calculation of the Early Termination Payment). If an Exchange subsequently occurs with respect to Common Units for which PC Corp has exercised its termination rights under this Section 4.1(a), PC Corp shall have no obligations under this Agreement with respect to such Exchange.

(b) Acceleration upon Change of Control. In the event of a Change of Control, all obligations hereunder shall be accelerated and such obligations shall be calculated pursuant to this Article IV as if an Early Termination Notice had been delivered on the closing date of the Change of Control and utilizing the Valuation Assumptions by substituting the phrase “the closing date of a Change of Control” in each place where the phrase “Early Termination Effective Date” appears. Such obligations shall include, but not be limited to, (1) the Early Termination Payment calculated as if an Early Termination Notice had been delivered on the closing date of the Change of Control, (2) any Tax Benefit Payments agreed to by PC Corp and the Members as due and payable but unpaid as of the Early Termination Notice and (3) any Tax Benefit Payments due for any Taxable Year ending prior to, with or including the closing date of a Change of Control (except to the extent that any amounts described in clauses (2) or (3) are included in the Early Termination Payment). For the avoidance of doubt, Sections 4.2 and 4.3 shall apply to a Change of Control, mutadis mutandi.

(c) Acceleration upon Breach of Agreement. In the event that PC Corp materially breaches any of its material obligations under this Agreement, whether as a result of failure to make any payment when due, failure to honor any other material obligation required hereunder, or by operation of law as a result of the rejection of this Agreement in a case commenced under

bankruptcy laws or otherwise, then all obligations hereunder shall be accelerated and become immediately due and payable upon notice of acceleration from such Member (provided that in the case of any proceeding under bankruptcy laws or other insolvency statute, such acceleration shall be automatic without any such notice), and such obligations shall be calculated as if an Early Termination Notice had been delivered on the date of such notice of acceleration (or, in the case of any proceeding under bankruptcy laws or any other insolvency statute, on the date of such breach) and shall include, but not be limited to: (i) the Early Termination Payment calculated as if an Early Termination Notice had been delivered on the date of such acceleration; (ii) any prior Tax Benefit Payments that are due and payable under this Agreement but that still remain unpaid as of the date of such acceleration; and (iii) any current Tax Benefit Payment due for the Taxable Year ending with or including the date of such acceleration. Notwithstanding the foregoing, in the event that PC Corp breaches this Agreement and such breach is not a material breach of a material obligation, a Member shall still be entitled to enforce all of its rights otherwise available under this Agreement, including potentially seeking an acceleration of amounts payable under this Agreement. For purposes of this Section 4.1(c), and subject to the following sentence, the Parties agree that the failure to make any payment due pursuant to this Agreement within thirty (30) days of the relevant Final Payment Date shall be deemed to be a material breach of a material obligation under this Agreement for all purposes of this Agreement, and that it will not be considered to be a material breach of a material obligation under this Agreement to make a payment due pursuant to this Agreement within thirty (30) days of the relevant Final Payment Date. Notwithstanding anything in this Agreement to the contrary, it shall not be a material breach of a material obligation of this Agreement if PC Corp fails to make any Tax Benefit Payment within thirty (30) days of the relevant Final Payment Date to the extent that PC Corp has insufficient funds, or cannot take commercially reasonable actions to obtain sufficient funds, to make such payment; provided that the interest provisions of Section 5.2 shall apply to such late payment (unless PC Corp does not have sufficient funds to make such payment as a result of limitations imposed by any Senior Obligations, in which case Section 5.2 shall apply, but the Default Rate shall be replaced by the Agreed Rate).

Section 4.2 Early Termination Notice. If PC Corp chooses to exercise its right of early termination under Section 4.1 above, PC Corp shall deliver to the Members a notice of PC Corp’s decision to exercise such right (an “Early Termination Notice”) and a schedule (the “Early Termination Schedule”) showing in reasonable detail the calculation of the Early Termination Payment. PC Corp shall also (x) deliver supporting schedules and work papers, as determined by PC Corp or as reasonably requested by a Member, that provide a reasonable level of detail regarding the data and calculations that were relevant for purposes of preparing the Early Termination Schedule; (y) deliver a PC Corp Letter supporting such Early Termination Schedule; and (z) allow the Members and their advisors to have reasonable access to the appropriate representatives, as determined by PC Corp or as reasonably requested by the Members, at PC Corp and the Advisory Firm in connection with a review of such Early Termination Schedule. The Early Termination Schedule shall become final and binding on each Party thirty (30) calendar days from the first date on which the Members received such Early Termination Schedule unless:

(i) a Member within thirty (30) calendar days after receiving the Early Termination Schedule, provides PC Corp with (A) notice of a material objection to such Early Termination Schedule made in good faith and setting forth in reasonable detail such Member’s material objection (a “Termination Objection Notice”) and (B) a letter from a Member Advisory Firm in support of such Termination Objection Notice; or

(ii) each Member provides a written waiver of such right of a Termination Objection Notice within the period described in clause (i) above, in which case such Early Termination Schedule becomes binding on the date the waiver from all Members is received by PC Corp.

In the event that a Member timely delivers a Termination Objection Notice pursuant to clause (i) above, and if the Parties, for any reason, are unable to successfully resolve the issues raised in the Termination Objection Notice within thirty (30) calendar days after receipt by PC Corp of the Termination Objection Notice, PC Corp and such Member shall employ the Reconciliation Procedures. For the avoidance of doubt, and notwithstanding anything to the contrary herein, the expense of preparing and obtaining the letter from a Member Advisory Firm referenced in clause (i) above shall be borne solely by such Member and the neither PC Corp nor the Company shall have any liability with respect to such letter or any of the expenses associated with its preparation and delivery. The date on which the Early Termination Schedule becomes final in accordance with this Section 4.2 shall be the “Early Termination Reference Date.”

Section 4.3 Payment upon Early Termination.

(a) Timing of Payment. Within three (3) Business Days after the Early Termination Reference Date, PC Corp shall pay to each Member an amount equal to the Early Termination Payment for such Member. Such Early Termination Payment shall be made by PC Corp by wire transfer of immediately available funds to a bank account or accounts designated by the Members or as otherwise agreed by PC Corp and the Members.

(b) Amount of Payment. The “Early Termination Payment” payable to a Member pursuant to Section 4.3(a) shall equal the present value, discounted at the Early Termination Rate as determined as of the Early Termination Reference Date, of all Tax Benefit Payments that would be required to be paid by PC Corp to such Member, whether payable with respect to LTIP Units that were converted to Common Units, or Common Units that were Exchanged, prior to the Early Termination Effective Date or on or after the Early Termination Effective Date, beginning from the Early Termination Effective Date and using the Valuation Assumptions. For the avoidance of doubt, an Early Termination Payment shall be made to each Member, regardless of whether such Member has converted all of such Member’s LTIP Units to Common Units, if applicable, and otherwise Exchanged all of its Common Units as of the Early Termination Effective Date.

ARTICLE V.

SUBORDINATION AND LATE PAYMENTS

Section 5.1 Subordination. Notwithstanding any other provision of this Agreement to the contrary, any Tax Benefit Payment or Early Termination Payment required to be made by PC Corp to the Members under this Agreement shall rank subordinate and junior in right of payment to any principal, interest, or other amounts due and payable in respect of any obligations owed in respect of secured indebtedness for borrowed money of PC Corp and its Subsidiaries (“Senior Obligations”) and shall rank pari passu in right of payment with all current or future unsecured obligations of PC Corp that are not Senior Obligations. To the extent that any payment under this Agreement is not permitted to be made at the time payment is due as a result of this Section 5.1 and the terms of the agreements governing Senior Obligations, such payment obligation nevertheless shall accrue for the benefit of the Members and PC Corp shall make such payments at the first opportunity that such payments are permitted to be made in accordance with the terms of the Senior Obligations.

Section 5.2 Late Payments by PC Corp. The amount of all or any portion of any Tax Benefit Payment or Early Termination Payment not made to the Members when due under the terms of this Agreement, whether as a result of Section 5.1 and the terms of the Senior Obligations or otherwise, shall be payable together with Default Rate Interest, which shall accrue beginning on the Final Payment Date and be computed as provided in Section 3.1(b)(ix).

ARTICLE VI.

TAX MATTERS; CONSISTENCY; COOPERATION

Section 6.1 Participation in PC Corp’s and the Company’s Tax Matters. Except as otherwise provided herein, and except as provided in Article IX of the LLC Agreement, PC Corp shall have full responsibility for, and sole discretion over, all tax matters concerning the Company, including without limitation in each case, the preparation, filing or amending of any Tax Return and defending, contesting or settling any issue pertaining to taxes. Notwithstanding the foregoing, PC Corp shall notify the Members of, and keep them reasonably informed with respect to, the portion of any tax audit of PC Corp or the Company, or any of the Company’s Subsidiaries, the outcome of which is reasonably expected to materially affect the Tax Benefit Payments payable to such Members under this Agreement, and any Member holding directly and/or indirectly at least ten percent (10%) of the outstanding Units, provided that the Company has knowledge that such Member holds directly and/or indirectly at least ten percent (10%) of the outstanding Units (a “10% Member”), shall have the right to participate in and to monitor at their own expense (but, for the avoidance of doubt, not to control) any such portion of any such Tax audit; provided that PC Corp shall not settle or fail to contest any issue pertaining to Covered Taxes that is reasonably expected to materially adversely affect the Members’ rights and obligations under this Agreement without the consent of each 10% Member, such consent not to be unreasonably withheld or delayed.

Section 6.2 Consistency. All calculations and determinations made hereunder, including, without limitation, any Basis Adjustments, the Schedules, and the determination of any Realized Tax Benefits or Realized Tax Detriments, shall be made in accordance with the elections, methodologies or positions taken by PC Corp and the Company on their respective Tax Returns. Each Member shall prepare its Tax Returns in a manner that is consistent with the terms of this Agreement, and any related calculations or determinations that are made hereunder, including, without limitation, the terms of Section 2.1 of this Agreement and the Schedules provided to the Members under this Agreement. In the event that an Advisory Firm is replaced with another Advisory Firm, such replacement Advisory Firm shall perform its services under this Agreement using procedures and methodologies consistent with the previous Advisory Firm, unless otherwise required by law or unless PC Corp and all of the Members agree to the use of other procedures and methodologies.

Section 6.3 Cooperation.

(a) Each Member shall (i) furnish to PC Corp in a timely manner such information, documents and other materials as PC Corp may reasonably request for purposes of making any determination or computation necessary or appropriate under this Agreement, preparing any Tax Return or contesting or defending any audit, examination or controversy with any Taxing Authority, (ii) make itself available to PC Corp and its representatives to provide explanations of documents and materials and such other information as PC Corp or its representatives may reasonably request in connection with any of the matters described in clause (i) above, and (iii) reasonably cooperate in connection with any such matter.

(b) PC Corp shall reimburse the Members for any reasonable and documented out-of-pocket costs and expenses incurred pursuant to Section 6.3(a).

ARTICLE VII.

MISCELLANEOUS

Section 7.1 Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by courier service, by fax, by electronic mail (delivery receipt requested) or by certified or registered mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be as specified in a notice given in accordance with this Section 7.1). All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the Party to receive such notice:

If to PC Corp, to:

Cresco U.S. Corp.

520 W. Erie

Suite 220

Chicago, IL 60654

Attn: John Schetz

E-Mail: john.schetz@crescolabs.com

with a copy (which shall not constitute notice to PC Corp) to:

Jenner & Block LLP

919 Third Avenue

New York, NY 10022

Attn: Martin Glass

E-Mail: MGlass@jenner.com

and

Bennett Jones LLP

3400 One First Canadian Place

P.O. Box 130

Toronto, ON, M5X 1A4

Attn: Aaron Sonshine

E-mail: sonshinea@bennettjones.com

If to a Member, the address, facsimile number and e-mail address specified on such Member’s signature page to this Agreement

Any Party may change its address, fax number or e-mail address by giving each of the other Parties written notice thereof in the manner set forth above.

Section 7.2 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Parties, it being understood that all Parties need not sign the same counterpart. Delivery of an executed signature page to this Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement.

Section 7.3 Entire Agreement; No Third Party Beneficiaries. This Agreement constitutes the entire agreement and supersedes any and all prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof. This Agreement shall be binding upon and inure solely to the benefit of each Party hereto and their respective successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

Section 7.4 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of Delaware, without regard to the conflicts of laws principles thereof that would mandate the application of the laws of another jurisdiction.

Section 7.5 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.

Section 7.6 Assignments; Amendments; Successors; No Waiver.

(a) Assignment. No Member may assign, sell, pledge, or otherwise alienate or transfer any interest in this Agreement, including the right to receive any Tax Benefit Payments under this Agreement, to any Person without the prior written consent of PC Corp, which consent shall not be unreasonably withheld, conditioned, or delayed, and without such Person executing and delivering a Joinder agreeing to succeed to the applicable portion of such Member’s interest in this Agreement and to become a Party for all purposes of this Agreement (the “Joinder Requirement”); provided, however, that to the extent any Member sells, exchanges, distributes, or otherwise transfers Units to any Person (PC Corp or any of its Affiliates) in accordance with the terms of the LLC Agreement, the Members shall have the option to assign to the transferee of such Units its rights under this Agreement with respect to such transferred Units, provided that such transferee has satisfied the Joinder Requirement. For the avoidance of doubt, if a Member transfers Units in accordance with the terms of the LLC Agreement but does not assign to the transferee of such Units its rights under this Agreement with respect to such transferred Units, such Member shall continue to be entitled to receive the Tax Benefit Payments arising in respect of a subsequent Exchange of such Units. PC Corp may not assign any of its rights or obligations under this Agreement to any Person without Supermajority Member Approval (and any purported assignment without such approval shall be null and void).

(b) Amendments. No provision of this Agreement may be amended unless such amendment is approved in writing by PC Corp and made with Supermajority Member Approval. No provision of this Agreement may be waived unless such waiver is in writing and signed by the Party against whom the waiver is to be effective.

(c) Successors. All of the terms and provisions of this Agreement shall be binding upon, and shall inure to the benefit of and be enforceable by, the Parties hereto and their respective successors, assigns, heirs, executors, administrators and legal representatives. PC Corp shall require and cause any direct or indirect successor (whether by purchase, merger,

consolidation or otherwise) to all or substantially all of the business or assets of PC Corp, by written agreement, expressly, to assume and agree to perform this Agreement in the same manner and to the same extent that PC Corp would be required to perform if no such succession had taken place.

(d) Waiver. No failure by any Party to insist upon the strict performance of any covenant, duty, agreement, or condition of this Agreement, or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach or any other covenant, duty, agreement, or condition.

Section 7.7 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

Section 7.8 Resolution of Disputes.

(a) Except for Reconciliation Disputes subject to Section 7.9, any and all disputes which cannot be settled after substantial good-faith negotiation, including any ancillary claims of any Party, arising out of, relating to or in connection with the validity, negotiation, execution, interpretation, performance or non-performance of this Agreement (including the validity, scope and enforceability of this arbitration provision) (each a “Dispute”) shall be finally resolved by arbitration in accordance with the International Institute for Conflict Prevention and Resolution Rules for Non-Administered Arbitration by a panel of three arbitrators, of which PC Corp shall designate one arbitrator and the Members party to such Dispute shall designate one arbitrator in accordance with the “screened” appointment procedure provided in Resolution Rule 5.4. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of the arbitration shall be Chicago, Illinois.

(b) Notwithstanding the provisions of paragraph (a), any Party may bring an action or special proceeding in any court of competent jurisdiction for the purpose of compelling another Party to arbitrate, seeking temporary or preliminary relief in aid of an arbitration hereunder, and/or enforcing an arbitration award and, for the purposes of this paragraph (b), each Party (i) expressly consents to the application of paragraph (c) of this Section 7.8 to any such action or proceeding, and (ii) agrees that proof shall not be required that monetary damages for breach of the provisions of this Agreement would be difficult to calculate and that remedies at law would be inadequate. For the avoidance of doubt, this Section 7.8 shall not apply to Reconciliation Disputes to be settled in accordance with the procedures set forth in Section 7.9.

(c) This Agreement shall be governed in all respects, including as to validity, interpretation and effect, by the internal laws of the State of Delaware, without giving effect to the conflict of laws rules thereof. The Parties agree that any suit or proceeding in connection with, arising out of, or relating to this Agreement shall be instituted only in a court (whether federal or Delaware) located in Cook County, Illinois, and the Parties, for the purpose of any such suit or proceeding, irrevocably consent and submit to the personal and subject matter jurisdiction and venue of any such court in any such suit or proceeding. Each Party agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

(d) Each Party irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in Section 7.8(c). Each Party irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of any such suit, action or proceeding in any such court.

(e) Each Party irrevocably consents to service of process by means of notice in the manner provided for in Section 7.1. Nothing in this Agreement shall affect the right of any Party to serve process in any other manner permitted by law.

(f) WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).

(g) Any dispute as to whether a dispute is a Reconciliation Dispute within the meaning of Section 7.9, or a Dispute within the meaning of this Section 7.8, shall be decided and resolved as a Dispute subject to the procedures set forth in this Section 7.8.

Section 7.9 Reconciliation. In the event that PC Corp and any Member are unable to resolve a disagreement with respect to a Schedule (other than an Early Termination Schedule) prepared in accordance with the procedures set forth in Section 2.4, or with respect to an Early Termination Schedule prepared in accordance with the procedures set forth in Section 4.2, within the relevant time period designated in this Agreement (a “Reconciliation Dispute”), the Reconciliation Dispute shall be submitted for determination to a nationally recognized expert (the “Expert”) in the particular area of disagreement mutually acceptable to both Parties. The Expert shall be a partner or principal in a nationally recognized accounting firm, and unless PC Corp and such Member agree otherwise, the Expert shall not, and the firm that employs the Expert shall not, have any material relationship with PC Corp or such Member or other actual or potential conflict of interest. If the Parties are unable to agree on an Expert within fifteen (15) calendar days of receipt by the respondent(s) of written notice of a Reconciliation Dispute, the selection of an Expert shall be treated as a Dispute subject to Section 7.8 and an arbitration panel shall pick an Expert from a nationally recognized accounting firm that does not have any material relationship with PC Corp or such Member or other actual or potential conflict of interest. The Expert shall resolve any matter relating to the Basis Schedule or an amendment thereto, or the Early Termination Schedule or an amendment thereto within thirty (30) calendar days and shall resolve any matter relating to a Tax Benefit Schedule or an amendment thereto within fifteen (15) calendar days or as soon thereafter as is reasonably practicable, in each case after the matter has been submitted to the Expert for resolution. Notwithstanding the preceding sentence, if the matter is not resolved before any payment that is the subject of a disagreement would be due (in the absence of such disagreement) or any Tax Return reflecting the subject of a disagreement is due, the undisputed amount shall be paid on the date prescribed by this Agreement and such Tax Return may be filed as prepared by PC Corp, subject to adjustment or amendment upon resolution. The costs and expenses relating to the engagement of such Expert or amending any Tax Return shall be borne by PC Corp except as provided in the next sentence. PC Corp and the Members shall bear their own costs and expenses of such proceeding, unless (i) the Expert adopts the Member’s position, in which case PC Corp shall reimburse the Member for any reasonable and documented out-of-pocket costs and expenses in such proceeding, or (ii) the Expert adopts PC Corp’s position, in which case the Member shall reimburse PC Corp for any reasonable and documented out-of-pocket costs and expenses in such proceeding. The Expert shall finally determine any Reconciliation Dispute and the determinations of the Expert pursuant to this Section 7.9 shall be binding on PC Corp and the Members and may be entered and enforced in any court having competent jurisdiction.

Section 7.10 Withholding. PC Corp shall be entitled to deduct and withhold from any payment that is payable to any Member pursuant to this Agreement such amounts as PC Corp is required to deduct and withhold with respect to the making of such payment under the Code or any provision of U.S. federal, state or local or non-U.S. tax law. To the extent that amounts are so withheld and paid over to the appropriate Taxing Authority by PC Corp, such withheld amounts shall be treated for all purposes of this Agreement as having been paid by PC Corp to the relevant Member. Each Member shall promptly provide PC Corp with any applicable tax forms and certifications reasonably requested by PC Corp in connection with determining whether any such deductions and withholdings are required under the Code or any provision of U.S. federal, state or local or non-U.S. tax law.

Section 7.11 Admission of PC Corp into a Consolidated Group; Transfers of Corporate Assets.

(a) If PC Corp is or becomes a member of an affiliated or consolidated group of corporations that files a consolidated income Tax Return pursuant to Section 1501 or other applicable Sections of the Code governing affiliated or consolidated groups, or any corresponding provisions of U.S. state or local law, then: (i) the provisions of this Agreement shall be applied with respect to the group as a whole; and (ii) Tax Benefit Payments, Early Termination Payments, and other applicable items hereunder shall be computed with reference to the consolidated taxable income of the group as a whole.

(b) If any entity that is obligated to make a Tax Benefit Payment or Early Termination Payment hereunder transfers one or more assets to a corporation (or a Person classified as a corporation for U.S. income tax purposes) with which such entity does not file a consolidated Tax Return pursuant to Section 1501 of the Code, such entity, for purposes of calculating the amount of any Tax Benefit Payment or Early Termination Payment due hereunder, shall be treated as having disposed of such asset in a fully taxable transaction on the date of such contribution. The consideration deemed to be received by such entity shall be equal to the fair market value of the contributed asset. For purposes of this Section 7.11, a transfer of a partnership interest shall be treated as a transfer of the transferring partner’s share of each of the assets and liabilities of that partnership.

Section 7.12 Confidentiality. Each Member and its assignees acknowledges and agrees that the information of PC Corp is confidential and, except in the course of performing any duties as necessary for PC Corp and its Affiliates, as required by law or legal process or to enforce the terms of this Agreement, such Person shall keep and retain in the strictest confidence and not disclose to any Person any confidential matters, acquired pursuant to this Agreement, of PC Corp and its Affiliates and successors, learned by any Member heretofore or hereafter. This Section 7.12 shall not apply to (i) any information that has been made publicly available by PC Corp or any of its Affiliates, becomes public knowledge (except as a result of an act of any Member in violation of this Agreement) or is generally known to the business community, (ii) the disclosure of information to the extent necessary for a Member to prosecute or defend claims arising under or relating to this Agreement, and (iii) the disclosure of information to the extent necessary for a Member to prepare and file its Tax Returns, to respond to any inquiries regarding the same from any Taxing Authority or to prosecute or defend any action, proceeding or audit by any Taxing Authority with respect to such Tax Returns. Notwithstanding anything to the contrary herein, the Members and each of their assignees (and each employee, representative or other agent of the Members or their assignees, as applicable) may disclose at their discretion to any and all Persons, without limitation of any kind, the tax treatment and tax structure of PC Corp, the Members and any of their transactions, and all materials of any kind (including tax opinions or other tax analyses) that are provided to the

Members relating to such tax treatment and tax structure. If a Member or an assignee commits a breach, or threatens to commit a breach, of any of the provisions of this Section 7.12, PC Corp shall have the right and remedy to have the provisions of this Section 7.12 specifically enforced by injunctive relief or otherwise by any court of competent jurisdiction without the need to post any bond or other security, it being acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to PC Corp (or any of their respective Subsidiaries) and that money damages alone shall not provide an adequate remedy to such Persons. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available at law or in equity.

Section 7.13 Change in Law. Notwithstanding anything herein to the contrary, if, in connection with an actual or proposed change in law, a Member reasonably believes that the existence of this Agreement could cause income (other than income arising from receipt of a payment under this Agreement) recognized by such Member (or direct or indirect equity holders in such Member) in connection with any Exchange to be treated as ordinary income rather than capital gain (or otherwise taxed at ordinary income rates) for U.S. federal income tax purposes or would have other material adverse tax consequences to such Member or any direct or indirect owner of such Member, then at the written election of such Member in its sole discretion (in an instrument signed by such Member and delivered to PC Corp) and to the extent specified therein by such Member, this Agreement shall cease to have further effect and shall not apply to an Exchange occurring after a date specified by such Member, or may be amended by in a manner reasonably determined by such Member, provided that such amendment shall not result in an increase in any payments owed by PC Corp under this Agreement at any time as compared to the amounts and times of payments that would have been due in the absence of such amendment.

Section 7.14 Interest Rate Limitation. Notwithstanding anything to the contrary contained herein, the interest paid or agreed to be paid hereunder with respect to amounts due to any Member hereunder shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the “Maximum Rate”). If any Member shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the Tax Benefit Payment or Early Termination Payment, as applicable (but in each case exclusive of any component thereof comprising interest) or, if it exceeds such unpaid non-interest amount, refunded to PC Corp. In determining whether the interest contracted for, charged, or received by any Member exceeds the Maximum Rate, such Member may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the payment obligations owed by PC Corp to such Member hereunder. Notwithstanding the foregoing, it is the intention of the Parties to conform strictly to any applicable usury laws.

Section 7.15 Independent Nature of Rights and Obligations. The rights and obligations of each Member hereunder are several and not joint with the rights and obligations of any other Person. A Member shall not be responsible in any way for the performance of the obligations of any other Person hereunder, nor shall a Member have the right to enforce the rights or obligations of any other Person hereunder (other than PC Corp). The obligations of a Member hereunder are solely for the benefit of, and shall be enforceable solely by, PC Corp. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Member pursuant hereto or thereto, shall be deemed to constitute the Members acting as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Members are in any way acting in concert or as a group with respect to

such rights or obligations or the transactions contemplated hereby, and PC Corp acknowledges that the Members are not acting in concert or as a group and will not assert any such claim with respect to such rights or obligations or the transactions contemplated hereby.

[Signature Page Follows This Page]

IN WITNESS WHEREOF, the undersigned have executed or caused to be executed on their behalf this Agreement as of the date first written above.


CRESCO U.S. CORP.

By:	/s/ Charles Bachtell
	Name:	Charles Bachtell
	Title:	Co-Founder & CEO

CRESCO LABS, LLC
By: Cresco U.S. Corp., its Manager

By:	/s/ Charles Bachtell
	Name:	Charles Bachtell
	Title:	Co-Founder & CEO

MEMBERS

By:	/s/ Charles Bachtell
	Name:	Charles Bachtell
	Title:	Director of Cresco Labs, LLC,
		acting as attorney-in-fact for the Members

SIGNATURE PAGE

TAX RECEIVABLE AGREEMENT

Exhibit A

FORM OF JOINDER AGREEMENT

This JOINDER AGREEMENT, dated as of , 20 (this “Joinder”), is delivered pursuant to that certain Tax Receivable Agreement, dated as of [●] 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Tax Receivable Agreement”) by and among Cresco U.S. Corp., an Illinois corporation (“PC Corp”), Cresco Labs, LLC, an Illinois limited liability company (“The Company”), and each of the Members from time to time party thereto. Capitalized terms used but not otherwise defined herein have the respective meanings set forth in the Tax Receivable Agreement.

Joinder to the Tax Receivable Agreement. The undersigned hereby represents and warrants to PC Corp that, as of the date hereof, the undersigned has been assigned an interest in the Tax Receivable Agreement from a Member and [●]¹.

Joinder to the Tax Receivable Agreement. Upon the execution of this Joinder by the undersigned and delivery hereof to PC Corp, the undersigned hereby is and hereafter will be a Member under the Tax Receivable Agreement and a Party thereto, with all the rights, privileges and responsibilities of a Member thereunder. The undersigned hereby agrees that it shall comply with and be fully bound by the terms of the Tax Receivable Agreement as if it had been a signatory thereto as of the date thereof.

Incorporation by Reference. All terms and conditions of the Tax Receivable Agreement are hereby incorporated by reference in this Joinder as if set forth herein in full.

Address. All notices under the Tax Receivable Agreement to the undersigned shall be direct to:

[Name]

[Address]

[City, State, Zip Code]

Attn:

Facsimile:

E-mail:

IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Joinder as of the day and year first above written.


[NAME OF NEW PARTY]

By:
		Name:
		Title:

¹	NTD: Language to be added as applicable.


Acknowledged and agreed as of the date first set forth above:

[●]

By:
		Name:
		Title:

EX-99.47 48 d945319dex9947.htm EX-99.47 EX-99.47

Exhibit 99.47

Execution Version

SECOND AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

CRESCO LABS, LLC

an Illinois limited liability company

Dated as of November 30, 2018

THE SECURITIES REPRESENTED BY THIS LIMITED LIABILITY COMPANY AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY OTHER APPLICABLE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED OR OTHERWISE DISPOSED OF AT ANY TIME WITHOUT EFFECTIVE REGISTRATION UNDER SUCH ACT AND LAWS OR EXEMPTION THEREFROM, AND COMPLIANCE WITH THE OTHER RESTRICTIONS ON TRANSFERABILITY SET FORTH HEREIN.

TABLE OF CONTENTS


ARTICLE I. DEFINITIONS		3

ARTICLE II. ORGANIZATION AND POWERS		16

Section 2.01	Organization	16

Section 2.02	Second Amended and Restated Limited Liability Company Agreement	16

Section 2.03	Name	16

Section 2.04	Purpose	17

Section 2.05	Principal Office; Registered Agent	17

Section 2.06	Term	17

Section 2.07	No State-Law Partnership	17

ARTICLE III. MEMBERS; UNITS; CAPITALIZATION		17

Section 3.01	Members	17

Section 3.02	Units	18

Section 3.03	Recapitalization; Capital Contributions	19

Section 3.04	Issuance of Additional Units in Conformance with Support Agreement	19

Section 3.05	Repurchase or Redemption of Pubco Subordinate Voting Shares, Pubco Proportionate Voting Shares or PC Corp Redeemable Shares	19

Section 3.06	Certificates Representing Units; Lost, Stolen or Destroyed Certificates; Registration and Transfer of Units	20

Section 3.07	Negative Capital Accounts	21

Section 3.08	No Withdrawal	21

Section 3.09	Loans From Members	21

Section 3.10	Pubco Equity Incentive Plans	21



Section 3.11	Dividend Reinvestment Plan, Cash Option Purchase Plan, Stock Incentive Plan or Other Plan	21

Section 3.12	Acquisitions	22

ARTICLE IV. DISTRIBUTIONS		22

Section 4.01	Distributions	22

Section 4.02	Restricted Distributions	23

ARTICLE V. CAPITAL ACCOUNTS; ALLOCATIONS; TAX MATTERS		24

Section 5.01	Capital Accounts	24

Section 5.02	Allocations	24

Section 5.03	Regulatory Allocations	27

Section 5.04	Tax Allocations	28

Section 5.05	Indemnification and Reimbursement for Payments on Behalf of a Member	29

ARTICLE VI. MANAGEMENT		30

Section 6.01	Authority of the Manager	30

Section 6.02	Actions of the Manager	30

Section 6.03	Resignation; No Removal	30

Section 6.04	Vacancies	31

Section 6.05	Transactions between the Company and the Manager	31

Section 6.06	Reimbursement for Expenses	31

Section 6.07	Delegation of Authority	32

Section 6.08	Limitation of Liability of Manager	32

Section 6.09	Investment Company Act	33

Section 6.10	Outside Activities of the Manager	33

ARTICLE VII. RIGHTS AND OBLIGATIONS OF MEMBERS		33

Section 7.01	Limitation of Liability and Duties of Members	33



Section 7.02	Lack of Authority	34

Section 7.03	No Right of Partition	34

Section 7.04	Indemnification	34

Section 7.05	Members Right to Act	36

ARTICLE VIII. BOOKS, RECORDS, ACCOUNTING AND REPORTS, AFFIRMATIVE COVENANTS		37

Section 8.01	Records and Accounting	37

Section 8.02	Fiscal Year	37

Section 8.03	Reports	37

ARTICLE IX. TAX MATTERS		37

Section 9.01	Preparation of Tax Returns	37

Section 9.02	Tax Elections	37

Section 9.03	Tax Controversies	38

Section 9.04	Withholding	38

ARTICLE X. RESTRICTIONS ON TRANSFER OF UNITS		39

Section 10.01	Transfers by Members	39

Section 10.02	Permitted Transfers	39

Section 10.03	Restricted Units Legend	40

Section 10.04	Transfer	40

Section 10.05	Assignee’s Rights	40

Section 10.06	Assignor’s Rights and Obligations	41

Section 10.07	Overriding Provisions	41

ARTICLE XI. REDEMPTION AND EXCHANGE RIGHTS		42

Section 11.01	Redemption Right of a Member	42

Section 11.02	Election of the PC Corp and Redemption of Redeemed Units	45

Section 11.03	Exchange Right of the PC Corp	45

iii



Section 11.04	Effect of Exercise of Redemption or Exchange Right	46

Section 11.05	Tax Treatment	46

ARTICLE XII. ADMISSION OF MEMBERS		46

Section 12.01	Substituted Members	46

Section 12.02	Additional Members	46

ARTICLE XIII. WITHDRAWAL AND RESIGNATION; TERMINATION OF RIGHTS		46

Section 13.01	Withdrawal and Resignation of Members	46

ARTICLE XIV. DISSOLUTION AND LIQUIDATION		47

Section 14.01	Dissolution	47

Section 14.02	Liquidation and Termination	47

Section 14.03	Deferment; Distribution in Kind	48

Section 14.04	Cancellation of Certificate	48

Section 14.05	Reasonable Time for Winding Up	48

Section 14.06	Return of Capital	48

ARTICLE XV. VALUATION		48

Section 15.01	Determination	48

Section 15.02	Dispute Resolution	49

ARTICLE XVI. GENERAL PROVISIONS		49

Section 16.01	Power of Attorney	49

Section 16.02	Confidentiality	50

Section 16.03	Amendments	50

Section 16.04	Title to Company Assets	50

Section 16.05	Addresses and Notices	51

Section 16.06	Binding Effect; Intended Beneficiaries	51

Section 16.07	Creditors	52



Section 16.08	Waiver	52

Section 16.09	Counterparts	52

Section 16.10	Applicable Law	52

Section 16.11	Disputes	52

Section 16.12	Severability	53

Section 16.13	Further Action	53

Section 16.14	Delivery by Electronic Transmission	53

Section 16.15	Right of Offset	53

Section 16.16	Effectiveness	53

Section 16.17	Entire Agreement	54

Section 16.18	Remedies	54

Section 16.19	Descriptive Headings; Interpretation	54

SECOND AMENDED AND RESTATED

LIMITED LIABILITY COMPANY AGREEMENT

CRESCO LABS, LLC

This SECOND AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this “Agreement”), dated as of November 30, 2018, is entered into by and among Cresco Labs, LLC, an Illinois limited liability company (the “Company”) and its Members (as defined herein).

WHEREAS, the Company was formed by the filing of the Articles (as defined herein) with the Secretary of State of the State of Illinois pursuant to the Act (as defined herein) on October 8, 2013;

WHEREAS, certain of the Members (including pursuant to consents and joinders thereto) (collectively, the “Original Members”) and the Company entered into that certain Amended and Restated Limited Liability Company Agreement of the Company, dated as of July 1, 2018 (as may be further amended, restated, amended and restated, supplemented or otherwise modified from time to time to but excluding the date hereof, together with all schedules, exhibits and annexes thereto, the “Prior LLC Agreement”);

WHEREAS, the Original Members hold Founders Units, Class A Units, Class B Units, Class C Units, Class D Units, Class E Units and Class F Units (each having the meaning as defined in the Prior LLC Agreement, and together, the “Cresco Units”) of the Company;

WHEREAS, prior to the Effective Time (as defined herein), Cresco Labs Inc., a corporation organized under the laws of the Province of British Columbia (“Pubco”): (i) changed its name from Randsburg International Gold Corp. to Cresco Labs Inc.; (ii) effected a share consolidation whereby each holder of pre-consolidation shares of Pubco’s issued and outstanding common shares surrendered 1,004 pre-consolidation shares of Pubco common stock to Pubco in exchange for one (1) post-consolidation share of Pubco’s common shares, which such common shares were immediately redesignated as subordinate voting shares (the “Pubco Subordinate Voting Shares”); (iii) authorized a new class of non-participating super voting shares (the “Pubco Super Voting Shares”); (iv) authorized a new class of proportionate voting shares (the “Pubco Proportionate Voting Shares”); and (v) subscribed for stock of Cresco U.S. Corp., an Illinois corporation and a Member of the Company (the “PC Corp”) pursuant to which Pubco became an indirect member of the Company;

WHEREAS, prior to the Effective Time, Cresco Labs SPV Inc., a company existing under the laws of the Province of British Columbia (“Cresco Blocker Corp.”), previously completed a private placement of common shares (“Cresco Blocker Common Shares”) in exchange for C$26,705,625 (the “Cresco Blocker Proceeds”) which were used to subscribe for 7,121,500 Class F Units of the Company (the “Blocker Units”);

WHEREAS, pursuant to the terms of the Letter Agreement, Cresco Blocker Corp. was, prior to the Effective Time, party to a three-cornered amalgamation (the “First Amalgamation”) with a corporation newly-formed under the laws of British Columbia, the outstanding shares of

which were wholly-owned by Pubco (the “First Amalgamation Sub”) pursuant to which the resulting entity constituted a continuation of each of Cresco Blocker Corp. and the First Amalgamation Sub (“Amalco 1”);

WHEREAS, prior to the Effective Time, Cresco Labs Finco Ltd., a company existing under the laws of the Province of British Columbia (“Cresco Acquisition Corp.”), previously completed a private placement of subscription receipts (“Cresco Acquisition Subscription Receipts”) in exchange for C$100,865,624.40 (the “Cresco Acquisition Subscription Receipt Proceeds”), which Cresco Acquisition Subscription Receipts shall be, pursuant to the terms of the Letter Agreement (as defined herein) and immediately following the Effective Time, automatically converted (the “Cresco Acquisition Subscription Receipt Conversion”) to shares of Cresco Acquisition Corp. stock (“Cresco Acquisition Shares”);

WHEREAS, immediately following the Cresco Acquisition Subscription Receipt Conversion and pursuant to the terms of the Letter Agreement, Cresco Acquisition Corp. was, prior to the Effective Time, party to a three-cornered amalgamation (the “Second Amalgamation” and together with the “First Amalgamation” the “Amalgamations”) with a corporation newly-formed under the laws of British Columbia, the outstanding shares of which were wholly-owned by Pubco (“Second Amalgamation Sub”) pursuant to which the resulting entity constituted a continuation of each of Cresco Acquisition Corp. and Second Amalgamation Sub (“Amalco 2”);

WHEREAS, in connection with the First Amalgamation, the former shareholders of Cresco Blocker Corp. received one Pubco Subordinate Voting Share as consideration for each Cresco Blocker Share surrendered in the First Amalgamation;

WHEREAS, in connection with the Second Amalgamation, the former shareholders of Cresco Acquisition Corp. received one Pubco Subordinate Voting Share as consideration for each Cresco Acquisition Share surrendered in the Second Amalgamation;

WHEREAS, immediately following the Amalgamations, but prior to the Effective Time, Amalco 1 and Amalco 2 were wound up and dissolved pursuant to which Pubco received the Cresco Acquisition Subscription Receipt Proceeds and the Blocker Units;

WHEREAS, subsequent to the winding up of Amalco 1 and Amalco 2, but prior to the Effective Time, Pubco contributed the Cresco Acquisition Subscription Receipt Proceeds (the “PC Corp Cash Contribution”) and the Blocker Units (together with the Cresco Units contributed to PubCo in the PubCo Exchange described below) to PC Corp (together, collectively referred to as the “PC Corp Contributions”) in exchange for voting shares of PC Corp (the “PC Corp Voting Shares”) pursuant to that certain Contribution Agreement between the Company, Pubco and PC Corp (the “Contribution Agreement”);

WHEREAS, certain of the Original Members (“Retained Members”) will retain some or all of their interest in the Company and such Units will be Recapitalized as set out herein;

WHEREAS, certain of the Original Members have, immediately prior to the Effective Time, exchanged some or all of their Cresco Units for Pubco Proportionate Voting Shares and Pubco Super Voting Shares (the “Pubco Exchange”);

WHEREAS, concurrent with the PC Corp Unit Contribution, PC Corp contributed the PC Corp Cash Contribution to the Company in exchange for additional Cresco Units pursuant to the Contribution Agreement (the “PC Corp Subscription”);

WHEREAS, in connection with the foregoing transactions by Pubco, PC Corp and the Company, and Pubco having become an indirect member of the Company pursuant to the PC Corp Subscription, certain Original Members and PC Corp, being the remaining Members, hereby desire to amend and restate the Prior LLC Agreement as of the Effective Time to reflect (a) a recapitalization of the Company (as set forth in Section 3.03 hereof) (the “Recapitalization”), (b) the appointment of the PC Corp as the Manager of the Company, (c) the admission of certain other Persons as Members of the Company from time to time, and (d) the rights and obligations of the Members of the Company that are enumerated and agreed upon in the terms of this Agreement effective as of the Effective Time, at which time the Prior LLC Agreement shall be superseded entirely by this Agreement;

WHEREAS, in connection with the Recapitalization and as of the Effective Time, the Cresco Units held by the remaining Members will be canceled and Common Units (as defined herein) will be issued to each such remaining Member as contemplated by this Agreement;

WHEREAS, it is anticipated that as of the Effective Time (or as soon as practicable thereafter) the Pubco Subordinate Voting Shares shall have been approved for listing on the CSE (as defined herein) (the “Public Listing”).

NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, the Manager and the Members, intending to be legally bound, hereby agree as follows:

ARTICLE I.

DEFINITIONS

The following definitions shall be applied to the terms used in this Agreement for all purposes, unless otherwise clearly indicated to the contrary.

“Act” means the Illinois Limited Liability Company Act, as amended from time to time, or any corresponding provision or provisions of any succeeding or successor law of the State of Illinois; provided, however, that any amendment to the Act, or any succeeding or successor law, is applicable to the Company only if the Company has elected to be governed by the Act as so amended or by such succeeding or successor law, as the case may be. The term “Act” shall refer to the Act as so amended or to such succeeding or successor law only after the appropriate election by the Company, if made, has become effective.

“Additional Member” has the meaning set forth in Section 12.02.

“Adjusted Capital Account Deficit” means with respect to the Capital Account of any Member as of the end of any Taxable Year, the amount by which the balance in such Capital Account is less than zero. For this purpose, such Member’s Capital Account balance shall be:

(a)

reduced for any items described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6); and

(b)

increased for any amount such Member is obligated to contribute or is treated as being obligated to contribute to the Company pursuant to Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (relating to partner liabilities to a partnership) or 1.704-2(g)(1) and 1.704-2(i) (relating to minimum gain).

“Admission Date” has the meaning set forth in Section 10.06.

“Affiliate” (and, with a correlative meaning, “Affiliated”) means, with respect to a specified Person, each other Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the Person specified. As used in this definition, “control” (including with correlative meanings, “controlled by” and “under common control with”) means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities or by contract or other agreement).

“Agreement” has the meaning set forth in the preamble to this Agreement.

“Amalco 1” has the meaning set forth in the recitals to this Agreement.

“Amalco 2” has the meaning set forth in the recitals to this Agreement.

“Amalgamations” has the meaning set forth in the recitals to this Agreement.

“AO LTIP Fraction” means, with respect to an AO LTIP Unit that is issued, the fraction designated in the relevant Vesting Agreement or other documentation pursuant to which such AO LTIP Unit is granted as the AO LTIP Fraction for such AO LTIP Unit.

“AO LTIP Unit” means a Unit which is designated as an Appreciation Only LTIP Unit in the relevant Vesting Agreement or other documentation pursuant to which such LITP Unit is granted or issued, having the rights, powers, privileges, restrictions, qualifications and limitations set forth in Exhibit A hereto or in this Agreement in respect of the holder thereof, as well as the relevant Vesting Agreement or other documentation pursuant to which such AO LTIP Unit is granted or issued.

“Appraisers” has the meaning set forth in Section 15.02.

“Articles” has the meaning set forth in Section 2.01.

“Assignee” means a Person to whom a Company Interest has been transferred but who has not become a Member pursuant to ARTICLE XII.

“Assumed Tax Liability” means, with respect to a Member, an amount equal to the Distribution Tax Rate multiplied by the estimated or actual taxable income of the Company, as determined for federal income tax purposes, allocated to such Member pursuant to Section 5.05 for the period to which the Assumed Tax Liability relates as determined for U.S. federal income

tax purposes to the extent not previously taken into account in determining the Assumed Tax Liability of such Member, as reasonably determined by the Manager; provided that, in the case of PC Corp, such Assumed Tax Liability (i) shall be computed without regard to any increases to the tax basis of the Company’s property pursuant to Section 743(b) of the Code and (ii) shall in no event be less than an amount that will enable PC Corp to meet its tax obligations, including its obligations pursuant to the Tax Receivable Agreement, for the relevant taxable year.

“Base Rate” means, on any date, a variable rate per annum equal to the rate of interest most recently published by The Wall Street Journal as the “prime rate” at large U.S. money center banks.

“Black-Out Period” means any “black-out” or similar period under Pubco’s policies covering trading in Pubco’s securities to which the applicable Redeeming Member is subject, which period restricts the ability of such Redeeming Member to immediately resell shares of Pubco Subordinate Voting Shares to be delivered to such Redeeming Member in connection with a Share Settlement.

“Blocker Units” has the meaning set forth in the recitals to this Agreement.

“Book Value” means, with respect to any Company property, the Company’s adjusted basis for U.S. federal income tax purposes, adjusted from time to time to reflect the adjustments required or permitted by Treasury Regulation Section 1.704-1(b)(2)(iv)(d)-(g).

“Booked-up Target” for an LTIP Unit means (i) initially, the Common Unit Economic Balance as determined on the date such LTIP was granted assuming the Gross Asset Value of the Company’s assets are adjusted pursuant to subsection (b) of the definition of Gross Asset Value at such time, and (ii) thereafter, as of any determination date, the remaining amount required to be allocated to such LTIP Unit for the Economic Capital Account Balance, to the extent attributable to such LTIP Unit, to be equal to the Common Unit Economic Balance as of such date. Notwithstanding the foregoing, the Booked-Up Target shall be zero for any LTIP Unit for which the Economic Capital Account Balance attributable to such LTIP Unit has at any time reached an amount equal to the Common Unit Economic Balance determined as of such time.

“Business Day” means any day other than a Saturday or a Sunday or a day on which the principal securities exchange on which the Pubco Subordinate Voting Shares are traded or quoted is closed or banks located in Toronto, Ontario, Canada or Chicago, Illinois generally are authorized or required by Law to close.

“Capital Account” means the capital account maintained for a Member in accordance with Section 5.01.

“Capital Contribution” means, with respect to any Member, the amount of any cash, cash equivalents, promissory obligations or the Fair Market Value of other property that such Member contributes (or is deemed to contribute) to the Company pursuant to ARTICLE III hereof.

“Cash Settlement” means immediately available funds in U.S. dollars in an amount equal to the Redeemed Units Equivalent.

“Code” means the United States Internal Revenue Code of 1986, as amended.

“Common Unit” means a Unit representing a fractional part of the Company Interests of the Members and having the rights and obligations specified with respect to the Common Units in this Agreement other than, for the avoidance of doubt, LTIP Units.

“Common Unit Economic Balance” means (i) the Capital Account balance of the Company Group, plus the amount of the Company Group’s share of any Minimum Gain attributable to partner nonrecourse debt or Minimum Gain, in either case to the extent attributable to the Company Group’s ownership of Common Units and computed on a hypothetical basis after taking into account all allocations through the date on which any allocation is made under Section 5.02(b) of this Agreement, divided by (ii) the number of Company Group’s Common Units.

“Common Unit Redemption” has the meaning set forth in Section 11.01(a)(i).

“Common Unitholder” means a Member who is the registered holder of Common Units.

“Company” has the meaning set forth in the preamble to this Agreement.

“Company Group” means the Company and its direct and indirect subsidiaries.

“Company Interest” means the interest of a Member in Profits, Losses and Distributions.

“Compensation Committee” means the compensation committee as designated or otherwise appointed by the board of directors of Pubco.

“Confidential Information” has the meaning set forth in Section 16.02.

“Contribution Notice” has the meaning set forth in Section 11.01(b).

“Corp Members” has the meaning set forth in the recitals to this Agreement.

“Corporate Incentive Award Plan” means the 2018 Equity Incentive Plan of Pubco, as approved by the shareholders of Pubco on November 14, 2018, as the same may be amended, restated, amended and restated, supplemented or otherwise modified from time to time.

“Cresco Acquisition Corp.” has the meaning set forth in the recitals to this Agreement.

“Cresco Acquisition Shares” has the meaning set forth in the recitals to this Agreement.

“Cresco Acquisition Subscription Receipt Conversion” has the meaning set forth in the recitals to this Agreement.

“Cresco Acquisition Subscription Receipt Proceeds” has the meaning set forth in the recitals to this Agreement.

“Cresco Acquisition Subscription Receipts” has the meaning set forth in the recitals to this Agreement.

“Cresco Blocker Common Shares” has the meaning set forth in the recitals to this Agreement.

“Cresco Blocker Corp.” has the meaning set forth in the recitals to this Agreement.

“Cresco Blocker Proceeds” has the meaning set forth in the recitals to this Agreement.

“Cresco Units” has the meaning set forth in the recitals to this Agreement.

“CSE” means the Canadian Securities Exchange, including any governmental body or agency succeeding to the functions thereof.

“Direct Exchange” has the meaning set forth in Section 11.03(a).

“Discount” has the meaning set forth in Section 6.06.

“Distributable Cash” shall mean, as of any relevant date on which a determination is being made by the Manager regarding a potential distribution pursuant to Section 4.01(a), the amount of cash and cash equivalents held by the Company, less such cash reserves as the Manager determines are necessary to pay on a timely basis Company costs and expenses, including operating costs and expenses, taxes, debt service, capital expenditures and other obligations of the Company, taking into account the anticipated revenues of the Company.

“Distribution” (and, with a correlative meaning, “Distribute”) means each distribution made by the Company to a Member with respect to such Member’s Units, whether in cash, property or securities of the Company and whether by liquidating distribution or otherwise; provided, however, that none of the following shall be a Distribution: (a) any recapitalization that does not result in the distribution of cash or property to Members or any exchange of securities of the Company, and any subdivision (by Unit split or otherwise) or any combination (by reverse Unit split or otherwise) of any outstanding Units or (b) any other payment made by the Company to a Member that is not properly treated as a “distribution” for purposes of Sections 731, 732, or 733 or other applicable provisions of the Code.

“Distribution Tax Rate” shall mean the tax rate determined in the sole discretion of the Manager and calculated taking into account the character of items of income, gains, loss, deduction and credit recognized at the Company level.

“Economic Capital Account Balance” with respect to Member means an amount equal to its Capital Account balance, plus the amount of its share of any Minimum Gain attributable to partner nonrecourse debt or Minimum Gain.

“Effective Time” has the meaning set forth in Section 16.17.

“Eligible AO LTIP Unit” means, as of the date any Liquidating Gain is being allocated, an AO LTIP Unit if the Common Unit Economic Balance as of such date (taking into account allocations to be made on such date) exceeds the Common Unit Economic Balance as of the date of issuance of the AO LTIP Unit, as adjusted for any LTIP Unit Adjustment Events, as defined in Section 1.5 of Exhibit A.

“Eligible FV LTIP Unit” means an FV LTIP Unit that has a Booked-up Target of zero (0).

“Equity Plan” means any option, stock, unit, stock unit, appreciation right, phantom equity or other incentive equity or equity-based compensation plan or program, in each case, now or hereafter adopted by Pubco, including the Corporate Incentive Award Plan.

“Equity Securities” means (a) Units or other equity interests in the Company or any Subsidiary of the Company (including other classes or groups thereof having such relative rights, powers and duties as may from time to time be established by the Manager pursuant to the provisions of this Agreement, including rights, powers and/or duties senior to existing classes and groups of Units and other equity interests in the Company or any Subsidiary of the Company), (b) obligations, evidences of indebtedness or other securities or interests convertible or exchangeable into Units or other equity interests in the Company or any Subsidiary of the Company, and (c) warrants, options or other rights to purchase or otherwise acquire Units or other equity interests in the Company or any Subsidiary of the Company.

“Event of Withdrawal” means the expulsion, bankruptcy or dissolution of a Member or the occurrence of any other event that terminates the continued membership of a Member in the Company. “Event of Withdrawal” shall not include an event that (a) terminates the existence of a Member for income tax purposes (including (i) a change in entity classification of a Member under Treasury Regulations Section 301.7701-3, (ii) termination of a partnership pursuant to Code Section 708(b)(1)(B), (iii) a sale of assets by, or liquidation of, a Member pursuant to an election under Code Sections 336 or 338, or (iv) merger, severance, or allocation within a trust or among sub-trusts of a trust that is a Member) but that (b) does not terminate the existence of such Member under applicable state law (or, in the case of a trust that is a Member, does not terminate the trusteeship of the fiduciaries under such trust with respect to all the Company Interests of such trust that is a Member).

“Exchange Act” means the Securities and Exchange Act of 1934, as may be amended from time to time.

“Exchange Election Notice” has the meaning set forth in Section 11.03(b).

“Fair Market Value” means, with respect to any asset, its fair market value determined according to Article XV.

“First Amalgamation” has the meaning set forth in the recitals to this Agreement.

“First Amalgamation Sub” has the meaning set forth in the recitals to this Agreement.

“Fiscal Period” means any interim accounting period within a Taxable Year established by the Company and which is permitted or required by Section 706 of the Code.

“Fiscal Year” means the Company’s annual accounting period established pursuant to Section 8.02.

“FV LTIP Fraction” means, with respect to an FV LTIP Unit that is issued, one (1) unless a fraction is specifically designated in the relevant Vesting Agreement or other documentation pursuant to which such FV LTIP Unit is granted or issued.

“FV LTIP Full Participation Date” means, for an FV LTIP Unit that is issued, such date as is specified in the relevant Vesting Agreement or other documentation pursuant to which such FV LTIP Unit is granted as the FV LTIP Full Participation Date for such LTIP Unit or, if no such date is so specified, the date of issuance of such FV LTIP Unit.

“FV LTIP Unit” means a Unit which is designated as a Full Value LTIP Unit in the relevant Vesting Agreement or other documentation pursuant to which such LTIP Unit is granted or issued, having the rights, powers, privileges, restrictions, qualifications and limitations set forth in Exhibit A hereto or in this Agreement in respect of the holder thereof, as well as the relevant Vesting Agreement or other documentation pursuant to which such FV LTIP Unit is granted or issued.

“Governmental Entity” means (a) the United States of America, (b) any other sovereign nation, (c) any state, province, district, territory or other political subdivision of (a) or (b) of this definition, including any county, municipal or other local subdivision of the foregoing, or (d) any entity exercising executive, legislative, judicial, regulatory or administrative functions of government on behalf of (a), (b) or (c) of this definition.

“Gross Asset Value” means, with respect to any asset of the Company, such asset’s adjusted basis for federal income tax purposes except as follows:

(a) the initial Gross Asset Value of (i) the assets contributed by each Member to the Company prior to the date hereof is the gross fair market value (as defined in Treasury Regulation section 1.704-1(b)(2)(iv)(h)) of such contributed assets as indicated in the books and records of the Company as of the date hereof; and (ii) any asset hereafter contributed by a Member, other than money, is the gross fair market value (as defined in Treasury Regulation section 1.704-1(b)(2)(iv)(h)) thereof as agreed to by the Manager and the contributing party;

(b) if the Manager reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Members, the Gross Asset Values of the Company assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Manager, as of the following times:

(i) a Capital Contribution (other than a de minimis Capital Contribution) to the Company by a new or existing Member as consideration for Units;

(ii) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for the redemption of Units;

(iii) the liquidation of the Company within the meaning of Treasury Regulation section 1.704-1(b)(2)(ii)(g);

(iv) the issuance of any interests in the Company as consideration for the provision of services to or for the benefit of the Company; and

(v) the issuance by the Company of a non-compensatory option (other than an option for a de minimis membership interest);

(c) the Gross Asset Values of the Company assets distributed to any Member shall be the gross fair market value (as defined in Treasury Regulation section 1.704-1(b)(2)(iv)(h)) of such assets (taking Code Section 7701(g) into account) as reasonably determined by the Manager as of the date of distribution; and

(d) the Gross Asset Values of the Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Sections 734(b) or 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulation section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this paragraph (d) to the extent that the Manager reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d).

At all times, the Gross Asset Values shall be adjusted by any depreciation taken into account with respect to the Company’s assets for purposes of computing Net Profit and Net Loss. Any adjustment to the Gross Asset Value of Company property shall require an adjustment in the Company’s Capital Accounts, which shall be allocated in accordance with the provisions of this Agreement.

“Illinois Uniform Arbitration Act” has the meaning set forth in Section 16.11.

“Indemnified Person” has the meaning set forth in Section 7.04(a).

“Investment Company Act” means the U.S. Investment Company Act of 1940, as amended from time to time.

“Law” means all laws, statutes, ordinances, rules and regulations of the United States, any foreign country and each state, commonwealth, city, county, municipality, regulatory body, agency or other political subdivision thereof.

“Letter Agreement” means that certain letter agreement entered into by Pubco and the Company dated as of October 9, 2018.

“Liquidating Gains” means any Net Profit realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Company (including upon the occurrence of any event of liquidation of the Company), including, but not limited to, Net Profit realized in connection with an adjustment to the book value of Company assets under class (b) of the definition of Gross Asset Value.

“Liquidating Losses” means any Net Loss realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Company (including upon the occurrence of any event of liquidation of the Company), including, but not limited to, Net Loss realized in connection with an adjustment to the book value of the Company assets under clause (b) of the definition of Gross Asset Value.

“Losses” means items of Company loss or deduction determined according to Section 5.01(b).

“LTIP Unit” means any AO LTIP Units, FV LTIP Units, or other class or series of Units issued in accordance with Exhibit A that is designated as “LTIP Units”, in each case having the rights, powers, privileges, restrictions, qualifications and limitations set forth in Exhibit A hereto or in this Agreement in respect of an LTIP Unit Member, as well as the relevant Vesting Agreement or other documentation pursuant to which such LTIP Unit is granted or otherwise issued.

“LTIP Unit Member” means any Person that holds LTIP Units or Common Units resulting from a conversion of LTIP Units that is named as an LTIP Unit Member in the Schedule of Members, as such Schedule of Members may be amended from time to time, to the extent applicable to the holding of such LTIP Units.

“Manager” has the meaning set forth in Section 6.01(a).

“Material Subsidiary” means any direct or indirect Subsidiary of the Company that, as of any date of determination, represents more than 50% of the consolidated net tangible assets of the Company or (b) 50% of the consolidated net income of the Company before interest, taxes, depreciation and amortization (calculated in a manner substantially consistent with U.S. GAAP).

“Member” means, as of any date of determination, (a) each Person named on the Schedule of Members and (b) any Person admitted to the Company as a Substituted Member or Additional Member in accordance with ARTICLE XII, but in each case only so long as such Person is shown on the Company’s books and records as the owner of one or more Units.

“Minimum Gain” means “partnership minimum gain” determined pursuant to Treasury Regulation Section 1.704-2(d).

“Net Loss” means, with respect to a Fiscal Year, the excess if any, of Losses for such Fiscal Year over Profits for such Fiscal Year (excluding Profits and Losses specially allocated pursuant to Section 5.03 and Section 5.04).

“Net Profit” means, with respect to a Fiscal Year, the excess if any, of Profits for such Fiscal Year over Losses for such Fiscal Year (excluding Profits and Losses specially allocated pursuant to Section 5.03 and Section 5.04).

“Officer” has the meaning set forth in Section 6.01(b).

“Operating Income” means Net Profit determined without taking into account Liquidating Gains and Liquidating Losses.

“Operating Loss” means Net Loss determined without taking into account Liquidating Gains and Liquidating Losses.

“Original Members” has the meaning set forth in the recitals to this Agreement.

“Other Agreements” has the meaning set forth in Section 10.04.

“Partnership Representative” has the meaning set forth in Section 9.03.

“PC Corp” has the meaning set forth in the recitals to this Agreement.

“PC Corp Cash Contribution” has the meaning set forth in the recitals to this Agreement.

“PC Corp Redeemable Shares” has the meaning set forth in the recitals to this Agreement.

“PC Corp Subscription” has the meaning set forth in the recitals to this Agreement.

“PC Corp Unit Contribution” has the meaning set forth in the recitals to this Agreement.

“PC Corp Voting Shares” has the meaning set forth in the recitals to this Agreement.

“Percentage Interest” means the fraction, expressed as a percentage, the numerator of which is the sum of such Member’s Common Units, FV LTIP Units and AO LTIP Units, and the denominator of which is the sum of the total number of Common Units, FV LTIP Units and AO LTIP Units issued and outstanding at such time, provided that (i) each AO LTIP Unit prior to conversion into a Common Unit shall be treated as a fraction of an AO LTIP Unit equal to the AO LTIP Fraction for that AO LTIP Unit for purposes of both the numerator and the denominator, and (ii) prior to the earlier to occur of (a) the FV LTIP Full Participation Date of an FV LTIP Unit or (b) the date of conversion of an FV LTIP Unit into a Common Unit, each FV LTIP Unit shall be treated as a fraction of an LTIP Unit equal to the FV LTIP Fraction for that FV LTIP Unit for purposes of both the numerator and the denominator.

“Permitted Transfer” has the meaning set forth in Section 10.02.

“Person” means an individual or any corporation, partnership, limited liability company, trust, unincorporated organization, association, joint venture or any other organization or entity, whether or not a legal entity.

“Prior LLC Agreement” has the meaning set forth in the recitals to this Agreement.

“Pro rata,” “pro rata portion,” “according to their interests,” “ratably,” “proportionately,” “proportional,” “in proportion to,” “based on the number of Units held,” “based upon the percentage of Units held,” “based upon the number of Units outstanding,” and other terms with similar meanings, when used in the context of a number of Units of the Company relative to other Units, means as amongst an individual class of Units, pro rata based upon the number of such Units within such class of Units.

“Profits” means items of Company income and gain determined according to Section 5.01(b) assigns.

“Pubco” has the meaning set forth in the recitals to this Agreement, together with its successors and assigns.

“Pubco Exchange” has the meaning set forth in the recitals to this Agreement.

“Pubco Proportionate Voting Share Redemption Price” means the price of a Pubco Proportionate Voting Share as determined by the Manager in good faith.

“Pubco Proportionate Voting Shares” has the meaning set forth in the recitals to this Agreement.

“Pubco Subordinate Voting Share Redemption Price” means the volume weighted average price for a Pubco Subordinate Voting Share on the principal securities exchange on which the Pubco Subordinate Voting Shares are traded or quoted, as reported by Bloomberg, L.P., or its successor, for each of the five (5) consecutive full Trading Days ending on and including the last full Trading Day immediately prior to the Redemption Date, subject to appropriate and equitable adjustment for any stock splits, reverse splits, stock dividends or similar events affecting the Pubco Subordinate Voting Shares. If the Pubco Subordinate Voting Shares no longer trade on a securities exchange or automated or electronic quotation system at the time that any Pubco Subordinate Voting Share Redemption Price is calculated, then the Manager shall determine the Pubco Subordinate Voting Share Redemption Price in good faith.

“Pubco Subordinate Voting Shares” has the meaning set forth in the recitals to this Agreement.

“Pubco Super Voting Shares” has the meaning set forth in the recitals to this Agreement.

“Public Listing” has the meaning set forth in the recitals to this Agreement.

“Quarterly Redemption Date” means, for each quarter beginning with the quarter ended March 31, 2019, the latest to occur of either: (a) the second Business Day after the date on which Pubco makes a public news release of its quarterly earnings for the prior quarter, (b) the first day of each quarter on which directors and executive officers of Pubco are permitted to trade under the applicable policies of Pubco related to trading by directors and executive officers, or (c) such other date as Pubco shall determine in its sole discretion. Pubco will deliver notice of the Quarterly Exchange Date to each Member (other than Pubco) at least seventy-five (75) days prior to each Quarterly Redemption Date.

“Recapitalization” has the meaning set forth in the recitals to this Agreement.

“Redeemed Units” has the meaning set forth in Section 11.01(a)(i).

“Redeemed Units Equivalent” means (1) the product of (a) the number of Settlement Shares that are Pubco Subordinate Voting Shares and (b) the Pubco Subordinate Voting Share Redemption Price plus (2) the product of (a) the number of Settlement Shares that are Pubco Proportionate Voting Shares and (b) the Pubco Proportionate Voting Share Redemption Price.

“Redeeming Member” has the meaning set forth in Section 11.01(a)(i).

“Redemption” has the meaning set forth in Section 11.01(a)(i).

“Redemption Date” has the meaning set forth in Section 11.01(a)(i).

“Redemption Notice” has the meaning set forth in Section 11.01(a)(i).

“Redemption Right” has the meaning set forth in Section 11.01(a)(i).

“Regulatory Allocations” has the meaning set forth in Section 5.03(f).

“Restricted Taxable Year” shall mean any of (i) the Taxable Year of the Company ending December 31, 2018, unless the Manager determines otherwise and notifies the Members prior to December 31, 2018, and any Taxable Year during which the Manager determines the Company does not satisfy the private placement safe harbor of Treasury Regulations Section 1.7704-1(h). Unless the Manager otherwise notifies the Members prior to the commencement of a Taxable Year, each Taxable Year of the Company shall be a Restricted Taxable Year. For the avoidance of doubt, the provisions herein referencing, or otherwise becoming effective during, a Restricted Taxable Year shall be for purposes of avoiding the classification of the Company for U.S. federal income tax purposes as a “publicly traded partnership” within the meaning of Section 7704(b) of the Code.

“Retained Members” has the meaning set forth in the recitals to this Agreement.

“Schedule of Members” has the meaning set forth in Section 3.01(b).

“Second Amalgamation” has the meaning set forth in the recitals to this Agreement.

“Second Amalgamation Sub” has the meaning set forth in the recitals to this Agreement.

“Securities Act” means the U.S. Securities Act of 1933, as amended, and applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the Securities Act shall be deemed to include any corresponding provisions of future Law.

“Settlement Shares” has the meaning set forth in Section 11.01(b).

“Share Settlement” means a number of Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares (on an as converted to Subordinate Voting Shares basis) or a combination thereof, as determined by the Manager in its sole discretion, that is equal to the number of Redeemed Units.

“Sponsor Person” has the meaning set forth in Section 7.04(d).

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership, association or business entity of which (a) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (b) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of the voting interests thereof are at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, references to a “Subsidiary” of the Company shall be given effect only at such times that the Company has one or more Subsidiaries, and, unless otherwise indicated, the term “Subsidiary” refers to a Subsidiary of the Company.

“Substituted Member” means a Person that is admitted as a Member to the Company pursuant to Section 12.01.

“Support Agreement” means that certain support agreement by and between Pubco, the PC Corp and the Company dated as of the date of the Effective Time.

“Target Balance” has the meaning set forth in Section 5.02(c)(i).

“Tax Distribution Date” has the meaning set forth in Section 4.01(b)(i).

“Tax Distributions” has the meaning set forth in Section 4.01(b)(i).

“Tax Receivable Agreement” means that certain Tax Receivable Agreement, dated as the date hereof, by and among the PC Corp, the Company, and those certain Original Members which are party thereto (including pursuant to consent or joinder thereto).

“Taxable Year” means the Company’s accounting period for U.S. federal income tax purposes determined pursuant to Section 9.02.

“Trading Day” means a day on which the principal securities exchange on which the Pubco Subordinate Voting Shares are traded or quoted is open for the transaction of business (unless such trading shall have been suspended for the entire day).

“Transfer” (and, with a correlative meaning, “Transferring”) means any sale, transfer, assignment, pledge, encumbrance or other disposition of (whether directly or indirectly, whether with or without consideration and whether voluntarily or involuntarily or by operation of Law) (a) any interest (legal or beneficial) in any Equity Securities or (b) any equity or other interest (legal or beneficial) in any Member if substantially all of the assets of such Member consist solely of Units.

“Treasury Regulations” means the income tax regulations promulgated under the Code and any corresponding provisions of succeeding regulations.

“Unit” means a Company Interest of a Member or a permitted Assignee in the Company representing a fractional part of the Company Interests of all Members and Assignees as may be established by the Manager from time to time in accordance with Section 3.02; provided, however, that any class or group of Units issued shall have the relative rights, powers and duties set forth in this Agreement, and the Company Interest represented by such class or group of Units shall be determined in accordance with such relative rights, powers and duties.

“Unitholder” means a Common Unitholder and any Member who is the registered holder of any other class of Units, if any.

“Unvested Corporate Shares” means Pubco Subordinate Voting Shares issued pursuant to an Equity Plan that are not Vested Corporate Shares.

“Unvested LTIP Units” means LTIP Units that have not vested and are subject to forfeiture under the terms of a Vesting Agreement.

“U.S. GAAP” means United States generally accepted accounting practices and principles.

“Vested Corporate Shares” means the Pubco Subordinate Voting Shares issued pursuant to an Equity Plan that are vested pursuant to the terms thereof or any award or similar agreement relating thereto.

“Vested LTIP Units” means LTIP Units that have vested and are no longer subject to forfeiture under the terms of a Vesting Agreement.

“Vesting Agreement” means an award, vesting or other similar agreement setting forth the terms under which any number of LTIP Units are subject to vesting, forfeiture and additional restrictions on transfer. The terms of any Vesting Agreement may be modified by the Manager from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the terms of any plan pursuant to which the LTIP Units are issued, if applicable.

ARTICLE II.

ORGANIZATION AND POWERS

Section 2.01 Organization. The Company was formed by the filing of its Articles of Organization with the Secretary of State of the State of Illinois (as amended from time to time, the “Articles”) on October 8, 2013 pursuant to the Act. The registered agent and registered office of the Company in Illinois is Dominic A. Sergi, 520 W. Erie St., Suite 220, Chicago, Illinois 60654.

Section 2.02 Second Amended and Restated Limited Liability Company Agreement. The Members and the Manager hereby execute this Agreement, effective as of the Effective Time, for the purpose of establishing the affairs of the Company and the conduct of its business in accordance with the provisions of the Act. The Members hereby agree that during the term of the Company set forth in Section 2.06, the rights and obligations of the Members with respect to the Company will be determined in accordance with the terms and conditions of this Agreement and the Act. On any matter upon which this Agreement is silent, the Act shall control. No provision of this Agreement shall be in violation of the Act and to the extent any provision of this Agreement is in violation of the Act, such provision shall be void and of no effect to the extent of such violation without affecting the validity of the other provisions of this Agreement; provided, however, that where the Act provides that a provision of the Act shall apply “unless otherwise provided in the limited liability company agreement” or words of similar effect, the provisions of this Agreement shall in each instance control.

Section 2.03 Name. The name of the Company is “Cresco Labs, LLC”. The Manager in its sole discretion may change the name of the Company at any time and from time to time. Notification of any such change shall be given to all of the Members and, to the extent practicable, to all of the holders of any Equity Securities then outstanding. The Company’s business may be conducted under its name and/or any other name or names deemed advisable by the Manager.

Section 2.04 Purpose. The purpose of the Company is the transaction of any or all lawful business for which limited liability companies may be organized under the Act and to conduct such other activities as may be necessary, advisable, convenient or appropriate to promote or conduct the business of the Company as set forth herein, including, but not limited to, entering into partnership agreements in the capacity of a general or a limited partner, becoming a member of a joint venture or a limited liability company, participating in forms of syndication for investment, owning stock in corporations and the incurring of indebtedness and the granting of liens and security interests on the real and personal property of the Company; it being agreed that each of the foregoing is an ordinary part of the Company’s business.

Section 2.05 Principal Office; Registered Agent. The principal office and place of business of the Company shall be Chicago, Illinois. The Manager may change the principal office or place of business of the Company at any time and may cause the Company to establish other offices or places of business in various jurisdictions and appoint agents for service of process in such jurisdictions. The Manager may from time to time change the Company’s registered agent in the State of Illinois.

Section 2.06 Term. The term of the Company commenced upon the filing of the Articles in accordance with the Act and shall continue in existence in perpetuity until termination and dissolution of the Company in accordance with this Agreement and the Act.

Section 2.07 No State-Law Partnership. The Members intend that the Company not be a partnership (including a limited partnership) or joint venture, and that no Member be a partner or joint venturer of any other Member by virtue of this Agreement, for any purposes other than as set forth in the last sentence of this Section 2.07, and neither this Agreement nor any other document entered into by the Company or any Member relating to the subject matter hereof shall be construed to suggest otherwise. The Members intend that the Company shall be treated as a partnership for U.S. federal and, if applicable, state or local income tax purposes, and that each Member and the Company shall file all tax returns and shall otherwise take all tax and financial reporting positions in a manner consistent with such treatment.

ARTICLE III.

MEMBERS; UNITS; CAPITALIZATION

Section 3.01 Members.

(a) Each Original Member, and each other Common Unitholder, previously was admitted as a Member of the Company and, except to the extent such Members have contributed their Units to PC Corp pursuant to the PC Corp Unit Contribution or exchanged their Units pursuant to the Pubco Exchange, shall remain a Member of the Company upon the Effective Time. Each Person executing this Agreement as a Member shall be admitted as a Member of the Company upon the Effective Time. Each Person which participated in the PC Corp Unit Contribution or exchanged their Units pursuant to the Pubco Exchange which, immediately after the effective time of such PC Corp Unit Contribution or such Pubco Exchange, did not hold any interest in the capital or profits of the Company ceased to be a Member of the Company as of the effective time of the PC Corp Unit Contribution or the Pubco Exchange as the case may be.

(b) The Company shall maintain a schedule setting forth: (i) the name and address of each Member; (ii) the date on which each Member became a Member; (iii) the aggregate number of outstanding Units and the number and class of Units held by each Member; (iv) the aggregate amount of cash Capital Contributions that has been made by the Members with respect to their Units; and (v) the Fair Market Value of any property other than cash contributed by the Members with respect to their Units (including, if applicable, a description and the amount of any liability assumed by the Company or to which contributed property is subject) (such schedule, the “Schedule of Members”). Upon any change in the number or ownership of outstanding Units (whether upon an issuance of Units, a Transfer of Units, a redemption or exchange of Units or otherwise), the Manager is authorized to amend and update the Schedule of Members. The Schedule of Members shall be the definitive record of ownership of each Unit of the Company and all relevant information with respect to each Member. Any reference in this Agreement to the Schedule of Members shall be deemed a reference to the Schedule of Members as amended and as in effect from time to time. The Company shall be entitled to recognize the exclusive right of a Person registered on its records as the owner of Units for all purposes and shall not be bound to recognize any equitable or other claim to or interest in Units on the part of any other Person, whether or not it shall have express or other notice thereof, except as otherwise provided by the Act.

(c) No Member shall be required or, except as approved by the Manager pursuant to Section 6.01 and in accordance with the other provisions of this Agreement, permitted to loan any money or property to the Company or borrow any money or property from the Company.

Section 3.02 Units.

(a) Interests in the Company shall be represented by Units, or such other securities of the Company, in each case as the Manager may establish in its discretion in accordance with the terms and subject to the restrictions hereof. Immediately after the Effective Time, the Units will be comprised of three classes of Units, including Common Units and AO LTIP Units and FV LTIP Units. To the extent required pursuant to Section 3.04, and except in connection with the issuance of Units pursuant to an acquisition pursuant to Section 3.12 (pursuant to which the Manager shall be authorized to create any additional classes or series of Common Units or preferred Units), the Manager may create one or more classes or series of Common Units or preferred Units solely to the extent they are in the aggregate substantially equivalent to a class of common shares of Pubco or class or series of preferred shares of Pubco.

(b) The Manager is hereby authorized without the approval of the Members to issue to any Person providing services to or for the benefit of the Company, which may include Members, LTIP Units in one or more classes, or one or more series of any of such classes, with such designations, preferences, and relative, participating, optional or other special rights, powers and duties as shall be determined by the Manager subject to the prior written approval of the Compensation Committee and further subject to the Act and Illinois law, including, without limitation, (i) the rights of each such class or series of Units to an allocation of Net Profit or Net Loss (or items thereof) to each such class or series of Units; (ii) the rights of each such class or series of Units to share in Company distributions; (iii) the rights of each such class or series of Units upon dissolution and liquidation of the Company; and (iv) the right to vote, if any, of each such class or series of Units; provided that (a) LTIP Units of any series (other than “Appreciation

Only Long Term Incentive Plan Units” or “AO LTIP Units” and “Full Value Long Term Incentive Plan Units” or “FV LTIP Units”, the rights, powers, privileges, restrictions, qualifications and limitation of which are set forth in Schedule A hereto) shall not disproportionately affect any one Common Unitholder or group of Common Unitholders, and (b) no such additional Units or other membership interests shall be issued to the Manager unless, in the case of clause (b), the additional membership interests are issued in connection with the grant, award or issuance of new interests in the Company that have designations, preferences and other rights such that the economic interests attributable to such new interests are substantially similar to the designations, preferences and other rights of the additional membership interests issued to other Members. The Manager’s determination that the consideration is adequate shall be conclusive insofar as the adequacy of consideration relates to whether the membership interests are validly issued and paid. The Manager shall be authorized on behalf of each of the Members to amend this Agreement to reflect the admission of any Member in accordance the provisions of this Agreement, in the event that the Manager deems such amendment advisable.

Section 3.03 Recapitalization; Capital Contributions.

(a) Recapitalization. In connection with the Recapitalization, as of the Effective Time, the aggregate Cresco Units that in each case were issued and outstanding and held by the Members prior to the execution and effectiveness of this Agreement are hereby canceled and the Common Units are hereby issued and outstanding as of the Effective Time in replacement thereof. The outstanding Common Units after giving effect to the Recapitalization, and the respective holders thereof as of the Effective Time, are reflected on the Schedule of Members.

(b) Member Capital Contributions. The Members’ Capital Contributions shall be reflected on the Schedule of Members. For the avoidance of doubt, the Members shall be admitted as Members with respect to all Common Units they hold from time to time. The parties hereto acknowledge and agree that Capital Contributions made or to be made to the Company by such Members will result in a “reevaluation of partnership property” and corresponding adjustments to Capital Account balances as described in Treasury Regulations section 1.704-1(b)(2)(iv)(f).

Section 3.04 Issuance of Additional Units in Conformance with Support Agreement. The Manager shall be authorized to cause the Company to undertake all actions necessary or required by the Company under the Support Agreement including without limitation any reclassification, consolidation, split, distribution, or recapitalization, with respect to the Common Units, to maintain the same ratios between the number of outstanding Pubco Subordinate Voting Shares, the number of outstanding PC Corp shares (consisting of the PC Corp Redeemable Shares and the PC Corp Voting Shares) and the number of Common Units issued and outstanding immediately prior to any such reclassification, consolidation, split, distribution, or recapitalization of shares at PC Corp or Pubco.

Section 3.05 Repurchase or Redemption of Pubco Subordinate Voting Shares, Pubco Proportionate Voting Shares or PC Corp Redeemable Shares.

(a) If, at any time, any Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares are repurchased or redeemed (whether by exercise of a put or call, automatically or by means of another arrangement) by Pubco for cash, then the PC Corp shall, immediately prior

to such repurchase or redemption of Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, redeem a number of shares of stock of the PC Corp held by Pubco at an aggregate redemption price equal to the aggregate purchase or redemption price of the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares being repurchased or redeemed by Pubco (plus any expenses related thereto) and upon such other terms as are the same for the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares being repurchased or redeemed by Pubco; provided that, immediately prior to such redemption by the PC Corp of such shares of stock of the PC Corp, the Manager shall cause the Company to redeem a number of Common Units held by the PC Corp at an aggregate redemption price equal to the aggregate purchase or redemption price of the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares being repurchased or redeemed by Pubco (plus any expenses related thereto) and upon such other terms as are the same for the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares being repurchased or redeemed by Pubco.

(b) If, at any time, any PC Corp Redeemable Shares are repurchased or redeemed (whether by exercise of a put or call, automatically or by means of another arrangement) by PC Corp for cash, then the Manager shall cause the Company to redeem a number of Common Units held by the PC Corp at an aggregate redemption price equal to the aggregate purchase or redemption price of the PC Corp Redeemable Shares being repurchased or redeemed by the PC Corp (plus any expenses related thereto) and upon such other terms as are the same for the PC Corp Redeemable Shares being repurchased or redeemed by PC Corp.

(c) Notwithstanding any provision to the contrary in this Agreement, each of the Company, the PC Corp and Pubco shall not make any repurchase or redemption if such repurchase or redemption would violate any applicable Law.

Section 3.06 Certificates Representing Units; Lost, Stolen or Destroyed Certificates; Registration and Transfer of Units.

(a) Units shall not be certificated unless otherwise determined by the Manager. If the Manager determines that one or more Units shall be certificated, each such certificate shall be signed by or in the name of the Company, by the Chief Executive Officer and any other officer designated by the Manager, representing the number of Units held by such holder. Such certificate shall be in such form (and shall contain such legends) as the Manager may determine. Any or all of such signatures on any certificate representing one or more Units may be a facsimile, engraved or printed, to the extent permitted by applicable Law. The Manager agrees that it shall not elect to treat any Unit as a “security” within the meaning of Article 8 of the Uniform Commercial Code of any applicable jurisdiction unless thereafter all Units then outstanding are represented by one or more certificates.

(b) If Units are certificated, the Manager may direct that a new certificate representing one or more Units be issued in place of any certificate theretofore issued by the Company alleged to have been lost, stolen or destroyed, upon delivery to the Manager of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Manager may require the owner of such lost, stolen or destroyed certificate, or such owner’s legal representative, to give the Company a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate.

(c) Upon surrender to the Company or the transfer agent of the Company, if any, of a certificate for one or more Units, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, in compliance with the provisions hereof, the Company shall issue a new certificate representing one or more Units to the Person entitled thereto, cancel the old certificate and record the transaction upon its books. Subject to the provisions of this Agreement, the Manager may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, Transfer and registration of Units.

Section 3.07 Negative Capital Accounts. No Member shall be required to pay to any other Member or the Company any deficit or negative balance which may exist from time to time in such Member’s Capital Account (including upon and after dissolution of the Company).

Section 3.08 No Withdrawal. No Person shall be entitled to withdraw any part of such Person’s Capital Contribution or Capital Account or to receive any Distribution from the Company, except as expressly provided in this Agreement.

Section 3.09 Loans From Members. Loans by Members to the Company shall not be considered Capital Contributions. Subject to the provisions of Section 3.01(c), the amount of any such advances shall be a debt of the Company to such Member and shall be payable or collectible in accordance with the terms and conditions upon which such advances are made.

Section 3.10 Pubco Equity Incentive Plans. Nothing in this Agreement shall be construed or applied to preclude or restrain Pubco from adopting, modifying or terminating an Equity Plan or from issuing Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares pursuant to any such Equity Plans. Pubco may implement such Equity Plans and any actions taken under such Equity Plans (such as the grant or exercise of options to acquire Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, or the issuance of Unvested Corporate Shares), whether taken with respect to or by an employee or other service provider of Pubco, PC Corp, the Company or its Subsidiaries, in a manner determined by Pubco in its sole discretion. The Manager may amend this Agreement as necessary or advisable in its sole discretion in connection with the adoption, implementation, modification or termination of an Equity Plan by Pubco. In the event of such an amendment by the Manager, the Company will provide notice of such amendment to the Members. For the avoidance of doubt, the Company shall be expressly authorized to issue Units (i) in accordance with the terms of any such Equity Plan, or (ii) in an amount equal to the number of Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares issued pursuant to any such Equity Plan, without any further act, approval or vote of any Member or any other Persons.

Section 3.11 Dividend Reinvestment Plan, Cash Option Purchase Plan, Stock Incentive Plan or Other Plan. Except as may otherwise be provided in this ARTICLE III, all amounts received or deemed received by Pubco in respect of any dividend reinvestment plan, cash option purchase plan, stock incentive or other stock or subscription plan or agreement, either shall be utilized by Pubco to effect open market purchases of shares of Pubco Subordinate Voting Shares, or (b) if Pubco elects instead, or is obligated, to issue new Pubco Subordinate Voting Shares with

respect to such amounts, such amounts shall be contributed by Pubco to the PC Corp in exchange for additional shares of stock of the PC Corp and further contributed by the PC Corp to the Company in exchange for additional Common Units. Upon such contribution, the Company will issue to the PC Corp Common Units.

Section 3.12 Acquisitions. The Manager may cause the Company from time to time to issue Common Units or other Equity Securities to Persons for the purpose of acquiring additional assets or equity interests in corporations, partnerships, limited liability companies and other entities, on the terms as determined by the Manager in its sole and absolute discretion. The terms of any such acquisition, including price, shall be negotiated and determined by the Manager in its sole and absolute discretion.

ARTICLE IV.

DISTRIBUTIONS

Section 4.01 Distributions.

(a) Distributable Cash; Other Distributions. To the extent permitted by applicable Law and hereunder, Distributions to Members (for the avoidance of doubt including holders of FV LTIP Units and AO LTIP Units) may be declared by the Manager out of Distributable Cash or other funds or property legally available therefor in such amounts and on such terms (including the payment dates of such Distributions) as the Manager shall determine using such record date as the Manager may designate; such Distributions shall be made to the Members as of the close of business on such record date on a pro rata basis in accordance with each Member’s Percentage Interest as of the close of business on such record date; provided, however, that the Manager shall have the obligation to make Distributions as set forth in Sections 4.01(b) and 14.02; and, provided further, that, notwithstanding any other provision herein to the contrary, no Distributions shall be made to any Member to the extent such Distribution would render the Company insolvent. For purposes of the foregoing sentence, insolvency means either (i) the inability of the Company to pay its debts as they come due in the usual course of business, or (ii) the total assets of the Company being less than the sum of its total liabilities. Promptly following the designation of a record date and the declaration of a Distribution pursuant to this Section 4.01(a), the Manager shall give notice to each Member of the record date, the amount and the terms of the Distribution and the payment date thereof. In furtherance of the foregoing, it is intended that the Manager shall, to the extent permitted by applicable Law and hereunder, have the right in its sole discretion to make Distributions to the Members pursuant to this Section 4.01(a) in such amounts as shall enable the PC Corp to pay dividends or to meet its obligations, including its obligations pursuant to the Tax Receivable Agreement (to the extent such obligations are not otherwise able to be satisfied as a result of Tax Distributions required to be made pursuant to Section 4.01(b)).

(b) Tax Distributions.

(i) On or about each date (a “Tax Distribution Date”) that is five (5) Business Days prior to each due date for the U.S. federal income tax return of an individual calendar year taxpayer (without regard to extensions) (or, if earlier, the due date for the U.S. federal income tax return of PC Corp, as determined without regard to extensions), the Company shall, to the extent of Distributable Cash as determined by the Manager in its sole

discretion, be required to make a Distribution to each Member of cash in an amount equal to the excess of such Member’s Assumed Tax Liability, if any, for such taxable period over the Distributions previously made to such Member pursuant to this Section 4.01(b) with respect to such taxable period (the “Tax Distributions”). Notwithstanding the foregoing, the Manager may, in its discretion, make such Tax Distributions on a quarterly basis, and any date on which such Tax Distributions are made will be considered a Tax Distribution Date for purposes hereof.

(ii) To the extent a Member otherwise would be entitled to receive less than its Percentage Interest of the aggregate Tax Distributions to be paid pursuant to this Section 4.01(b) on any given date, the Tax Distributions to such Member shall be increased to ensure that all Distributions made pursuant to this Section 4.01(b) are made pro rata in accordance with such Member’s Percentage Interest. If, on a Tax Distribution Date, there are insufficient funds on hand to distribute to the Members the full amount of the Tax Distributions to which such Members are otherwise entitled, Distributions pursuant to this Section 4.01(b) shall be made to the Members only to the extent of available funds in accordance with their Percentage Interests and the Company shall make future Tax Distributions as soon as the Manager determines in its sole discretion that funds have become available sufficient to pay the remaining portion of the Tax Distributions to which such Members are otherwise entitled.

(iii) In the event of any audit by, or similar event with, a taxing authority that affects the calculation of any Member’s Assumed Tax Liability for any Taxable Year, or in the event the Company files an amended tax return, each Member’s Assumed Tax Liability with respect to such year shall be recalculated by giving effect to such event (for the avoidance of doubt, taking into account interest or penalties). Any shortfall in the amount of Tax Distributions the Members and former Members received for the relevant Taxable Years based on such recalculated Assumed Tax Liability shall, to the extent of Distributable Cash available therefor as determined by the Manager in its sole discretion, promptly be distributed to such Members and the successors of such former Members, except, for the avoidance of doubt, to the extent Distributions were made to such Members and former Members pursuant to Section 4.01(a) and this Section 4.01(b) in the relevant Taxable Years sufficient to cover such shortfall.

(iv) Notwithstanding the foregoing, Distributions pursuant to this Section 4.01(b), if any, shall be made to a Member (or its predecessor in interest) only to the extent all previous Distributions to such Member pursuant to Section 4.01(a) with respect to the Fiscal Year are less than the Distributions such Member (and its predecessor in interest) otherwise would have been entitled to receive with respect to such Fiscal Year pursuant to this Section 4.01(b).

Section 4.02 Restricted Distributions. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make any Distribution to any Member on account of any Company Interest if such Distribution would violate any applicable Law or the terms of any other agreement to which the Company is a party.

ARTICLE V.

CAPITAL ACCOUNTS; ALLOCATIONS; TAX MATTERS

Section 5.01 Capital Accounts.

(a) The Company shall maintain a separate Capital Account for each Member according to the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). For this purpose, the Company may (in the discretion of the Manager), upon the occurrence of the events specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(f), increase or decrease the Capital Accounts in accordance with the rules of such Treasury Regulation and Treasury Regulation Section 1.704-1(b)(2)(iv)(g) to reflect a revaluation of Company property.

(b) For purposes of computing the amount of any item of Company income, gain, loss or deduction to be allocated pursuant to this Article V and to be reflected in the Capital Accounts of the Members, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for U.S. federal income tax purposes (including any method of depreciation, cost recovery or amortization used for this purpose); provided, however, that:

(i) The computation of all items of income, gain, loss and deduction shall include those items described in Code Section 705(a)(l)(B) or Code Section 705(a)(2)(B) and Treasury Regulation Section 1.704-1(b)(2)(iv)(i), without regard to the fact that such items are not includable in gross income or are not deductible for U.S. federal income tax purposes.

(ii) If the Book Value of any Company property is adjusted pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(f), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such property.

(iii) Items of income, gain, loss or deduction attributable to the disposition of Company property having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the Book Value of such property.

(iv) Items of depreciation, amortization and other cost recovery deductions with respect to Company property having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the property’s Book Value in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(g).

(v) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Sections 732(d), 734(b) or 743(b) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis).

Section 5.02 Allocations.

(a) Except as otherwise provided in Section 5.02(b), Section 5.02(c), Section 5.03 and Section 5.04, Net Profits and Net Losses for any Fiscal Year or Fiscal Period shall be allocated among the Capital Accounts of the Members pro rata in accordance with their respective Percentage Interests.

(b) Unless otherwise provided in this Agreement, every item of income, gain, loss and deduction entering into the computation of Net Profits or Net Losses will be allocated to the Members in the same proportion as the allocation of Net Profits or Net Losses for that period.

(i) Liquidating Gains shall first be allocated to the Members holding FV LTIP Units until the Economic Capital Account Balances of such Members, to the extent attributable to their ownership of FV LTIP Units, are equal to (1) the Common Unit Economic Balance, multiplied by (2) the number of their FV LTIP Units (with respect to each Member holding FV LTIP Units, the “Target Balance”). For the avoidance of doubt, Liquidating Gains allocated with respect to a FV LTIP Unit pursuant to this subparagraph shall reduce (but not below zero) the Booked-Up Target for such FV LTIP Unit. Any such allocations shall be made among the holders of FV LTIP Units in proportion to the aggregate amounts required to be allocated to each under this subparagraph.

(ii) Liquidating Gain allocated to a Member under this subparagraph will be attributed to specific FV LTIP Units of such Member for purposes of determining (1) allocations under this section, (2) the effect of the forfeiture or conversion of specific LTIP Units on such Member’s Capital Account and (3) the ability of such Member to convert specific LTIP Units into Common Units. Such Liquidating Gain will generally be attributed in the following order: (1) first, to Vested FV LTIP Units held for more than two years, (2) second, to Vested FV LTIP Units held for two years or less, (3) third, to Unvested FV LTIP Units that have remaining vesting conditions that only require continued employment or service to the Company, the Company, the Manager or an Affiliate of either for a certain period of time (with such Liquidating Gains being attributed in order of vesting from soonest vesting to latest vesting), and (4) fourth, to other Unvested FV LTIP Units (with such Liquidating Gains being attributed in order of issuance from earliest issued to latest issued). Within each category, Liquidating Gain will be allocated seriatim (i.e., entirely to the first unit in a set, then entirely to the next unit in the set, and so on, until a full allocation is made to the last unit in the set) in the order of smallest Booked-Up Target to largest Booked-Up Target.

(iii) After giving effect to the special allocations set forth above, if, due to distributions with respect to Common Units in which the FV LTIP Units do not participate, forfeitures or otherwise, the Economic Capital Account Balance of any Member attributable to such Member’s FV LTIP Units, exceeds the Target Balance, then Liquidating Losses shall be allocated to such Member to eliminate the disparity; provided, however, that if Liquidating Losses are insufficient to completely eliminate all such disparities, such losses shall be allocated among FV LTIP Units in a manner reasonably determined by the Manager.

(iv) The Members agree that the intent of this Section 5.02(c) is (1) to the extent possible to make the liquidation value associated with each FV LTIP Unit the same as the liquidation value of a Common Unit, and (2) to allow conversion of a FV LTIP Unit (assuming it is a Vested LTIP Unit) when sufficient Liquidating Gains have been allocated to such FV LTIP Unit pursuant to Section 5.02(c)(i) above or Net Loss, Operating Loss and/or Liquidating Loss have been allocated to Common Units so that either a FV LTIP Unit’s initial Booked-Up Target has been reduced to zero or the parity described in subclause (1) above has been achieved. The Manager shall be permitted to interpret this Section and to amend this Agreement to the extent necessary and consistent with this intention.

(v) If a Member forfeits any FV LTIP Units to which Liquidating Gain has previously been allocated under Section 5.02(c)(i) above, (1) the portion of such Member’s Capital Account attributable to such Liquidating Gain allocated to such forfeited LTIP Units will be re-allocated to that Member’s remaining FV LTIP Units that were outstanding on the date of the initial allocation of such Liquidating Gain, using a methodology similar to that described in Section 5.02(c)(ii) above as reasonably determined by the Manager, to the extent necessary to cause such Member’s Economic Capital Account Balance attributable to each such FV LTIP Unit to equal the Common Unit Economic Balance and (2) such Member’s Capital Account will be reduced by the amount of any such Liquidating Gain not re-allocated pursuant to the foregoing subclause (1) above. Any such reductions in Capital Accounts pursuant to the foregoing subclause (2) shall be reallocated to the Common Units and LTIP Units pro rata, provided that the Manager shall have the discretion to limit reallocations to LTIP Units in any manner the Manager reasonably determines is necessary to prevent such LTIP Units from participating in Liquidating Gains realized prior to the issuance of such LTIP Units.

(d) In the event an allocation of Net Loss in respect of an LTIP Unit would cause the holder of such LTIP Unit to have an Adjusted Capital Account Deficit, the Net Loss allocable to the LTIP Unit shall first be made out of Operating Loss to the extent the cumulative Operating Income in excess of cumulative Operating Loss allocated to that LTIP Unit exceeds cumulative distributions in respect of that LTIP Unit, and any remaining allocation of Net Loss to that LTIP Unit shall be made proportionately out of Operating Loss and Liquidating Loss

(e) In the event an allocation of Net Loss in respect of a Common Unit would cause the holder of such Common Unit to have an Adjusted Capital Account Deficit, the Net Loss allocable to the Common Unit shall be made proportionately out of Operating Loss and Liquidating Loss remaining after the allocation of Net Loss in respect of LTIP Units as provided in Section 5.02(d) above.

(f) Special Allocation to LTIP Units. Items of gross income of the Company shall be specially allocated to a Member in an amount necessary to eliminate any Adjusted Capital Account Deficit attributable to an LTIP Unit of such Member. Any such allocations shall be made first from items of income constituting Operating Income or Operating Loss, and only thereafter from items of income constituting Liquidating Gains or Liquidating Losses. For purposes of determining the amount of gross income that must be specially allocated under this Section 5.02(f), the Company shall initially allocate all items amongst the Members in accordance with the

provisions of this Agreement, and only if a Member has an Adjusted Capital Account Deficit after such initial allocation shall a special allocation be made pursuant to this Section and only in an amount equal to the excess gross income allocation needed to eliminate such Adjusted Capital Account Deficit taking into account the remaining Net Income that will be allocated to such Member after applying the other provisions of this section.

(g) Special Allocation upon Conversion of FV LTIP Units or AO LTIP Units. After a Member’s conversion of an AO LTIP Unit into a fraction of a Common Unit, the Company will specially allocate Liquidating Gain and Liquidating Loss to the Members until and in a manner that causes, as promptly as practicable, the portion of the Economic Capital Account Balance of the Member converting the AO LTIP Unit that is attributable to the fraction of a Common Unit received upon the conversion to equal the Common Unit Economic Balance multiplied by a fraction equal to the fraction of the Common Unit issued in the conversion. After the conversion of an FV LTIP Unit into a Common Unit (or fraction thereof), the Company will specially allocate Liquidating Gain and Liquidating Loss to the Members until and in a manner that causes, as promptly as practicable, the portion of such Member’s Economic Capital Account Balance attributable to the Common Unit (or fraction thereof) received upon conversion to equal the Common Unit Economic Balance (or in the case where a fractional Common Unit is received on conversion, the Common Unit Economic Balance multiplied by a fraction equal to the fraction of the Common Unit issued in the conversion).

Section 5.03 Regulatory Allocations.

(a) Losses attributable to partner nonrecourse debt (as defined in Treasury Regulation Section 1.704-2(b)(4)) shall be allocated in the manner required by Treasury Regulation Section 1.704-2(i). If there is a net decrease during a Taxable Year in partner nonrecourse debt minimum gain (as defined in Treasury Regulation Section 1.704-2(i)(3)), Profits for such Taxable Year (and, if necessary, for subsequent Taxable Years) shall be allocated to the Members in the amounts and of such character as determined according to Treasury Regulation Section 1.704-2(i)(4).

(b) Nonrecourse deductions (as determined according to Treasury Regulation Section 1.704-2(b)(1)) for any Taxable Year shall be allocated pro rata among the Members in accordance with their Percentage Interests. Except as otherwise provided in Section 4.03(a), if there is a net decrease in the Minimum Gain during any Taxable Year, each Member shall be allocated Profits for such Taxable Year (and, if necessary, for subsequent Taxable Years) in the amounts and of such character as determined according to Treasury Regulation Section 1.704-2(f). This Section 5.03(b) is intended to be a minimum gain chargeback provision that complies with the requirements of Treasury Regulation Section 1.704-2(f), and shall be interpreted in a manner consistent therewith.

(c) If any Member that unexpectedly receives an adjustment, allocation or Distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) has an Adjusted Capital Account Deficit as of the end of any Taxable Year, computed after the application of Sections 5.03(a) and 5.03(b) but before the application of any other provision of this Article V, then Profits for such Taxable Year shall be allocated to such Member in proportion to, and to the extent of, such Adjusted Capital Account Deficit. This Section 5.03(c) is intended to be a qualified income offset provision as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted in a manner consistent therewith.

(d) If the allocation of Net Losses to a Member as provided in Section 5.02 would create or increase an Adjusted Capital Account Deficit, there shall be allocated to such Member only that amount of Losses as will not create or increase an Adjusted Capital Account Deficit. The Net Losses that would, absent the application of the preceding sentence, otherwise be allocated to such Member shall be allocated to the other Members in accordance with their relative Percentage Interests, subject to this Section 5.03(d).

(e) Profits and Losses described in Section 5.01(b)(v) shall be allocated in a manner consistent with the manner that the adjustments to the Capital Accounts are required to be made pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(j), (k) and (m).

(f) The allocations set forth in Section 5.03(a) through and including Section 5.03(e) (the “Regulatory Allocations”) are intended to comply with certain requirements of Sections 1.704-1(b) and 1.704-2 of the Treasury Regulations. The Regulatory Allocations may not be consistent with the manner in which the Members intend to allocate Profit and Loss of the Company or make Distributions. Accordingly, notwithstanding the other provisions of this ARTICLE V, but subject to the Regulatory Allocations, income, gain, deduction and loss shall be reallocated among the Members so as to eliminate the effect of the Regulatory Allocations and thereby cause the respective Capital Accounts of the Members to be in the amounts (or as close thereto as possible) they would have been if Profits and Losses (and such other items of income, gain, deduction and loss) had been allocated without reference to the Regulatory Allocations. In general, the Members anticipate that this will be accomplished by specially allocating other Profit and Loss (and such other items of income, gain, deduction and loss) among the Members so that the net amount of the Regulatory Allocations and such special allocations to each such Member is zero. In addition, if in any Fiscal Year or Fiscal Period there is a decrease in partnership minimum gain, or in partner nonrecourse debt minimum gain, and application of the minimum gain chargeback requirements set forth in Section 5.03(a) or Section 5.03(b) would cause a distortion in the economic arrangement among the Members, the Members may, if they do not expect that the Company will have sufficient other income to correct such distortion, request the Internal Revenue Service to waive either or both of such minimum gain chargeback requirements. If such request is granted, this Agreement shall be applied in such instance as if it did not contain such minimum gain chargeback requirement.

Section 5.04 Tax Allocations.

(a) The income, gains, losses, deductions and credits of the Company will be allocated, for U.S. federal, state and local income tax purposes, among the Members in accordance with the allocation of such income, gains, losses, deductions and credits among the Members for computing their Capital Accounts; provided that if any such allocation is not permitted by the Code or other applicable Law, the Company’s subsequent income, gains, losses, deductions and credits will be allocated among the Members so as to reflect as nearly as possible the allocation set forth herein in computing their Capital Accounts.

(b) Items of Company taxable income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall be allocated among the Members in accordance with Code Section 704(c) so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Book Value using any reasonable method as determined in the sole discretion of the Manager taking into account the principles of Treasury Regulations Section 1.704-3(b).

(c) If the Book Value of any Company asset is adjusted pursuant to Section 5.01(b), subsequent allocations of items of taxable income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Book Value in the same manner as under Code Section 704(c) using any reasonable method as determined in the sole discretion of the Manager taking into account the principles of Treasury Regulations Section 1.704-3(b).

(d) Allocations of tax credits, tax credit recapture, and any items related thereto shall be allocated to the Members pro rata as determined by the Manager taking into account the principles of Treasury Regulations Section 1.704-1(b)(4)(ii).

(e) Allocations pursuant to this Section 5.04 are solely for purposes of U.S. federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Profits, Losses, Distributions or other Company items pursuant to any provision of this Agreement.

Section 5.05 Indemnification and Reimbursement for Payments on Behalf of a Member. If the Company is obligated to pay any amount to a Governmental Entity (or otherwise makes a payment to a Governmental Entity) that is specifically attributable to a Member or a Member’s status as such (including U.S. federal withholding or other taxes, state personal property taxes and state unincorporated business taxes, but excluding payments such as professional association fees and the like made voluntarily by the Company on behalf of any Member based upon such Member’s status as an employee of the Company), then such Person shall indemnify the Company in full for the entire amount paid (including interest, penalties and related expenses). The Manager may offset Distributions to which a Person is otherwise entitled under this Agreement against such Person’s obligation to indemnify the Company under this Section 5.05. A Member’s obligation to make contributions to the Company under this Section 5.05 shall survive the termination, dissolution, liquidation and winding up of the Company, and for purposes of this Section 5.05, the Company shall be treated as continuing in existence. The Company may pursue and enforce all rights and remedies it may have against each Member under this Section 5.05, including instituting a lawsuit to collect such contribution with interest calculated at a rate per annum equal to the sum of the Base Rate plus 300 basis points (but not in excess of the highest rate per annum permitted by Law). Each Member hereby agrees to furnish to the Company such information and forms as required or reasonably requested in order to comply with any laws and regulations governing withholding of tax or in order to claim any reduced rate of, or exemption from, withholding to which the Member is legally entitled.

ARTICLE VI.

MANAGEMENT

Section 6.01 Authority of the Manager.

(a) Except for situations in which the approval of any Member(s) is specifically required by this Agreement, (i) all management powers over the business and affairs of the Company shall be exclusively vested in the sole manager of the Company (the “Manager”) and (ii) the Manager shall conduct, direct and exercise full control over all activities of the Company. The PC Corp shall serve as the Manager of the Company. The Manager shall be the “manager” of the Company for the purposes of the Act. Except as otherwise expressly provided for herein and subject to the other provisions of this Agreement, the Members hereby consent to the exercise by the Manager of all such powers and rights conferred on the Members by the Act with respect to the management and control of the Company. Any vacancies in the position of Manager shall be filled in accordance with Section 6.04.

(b) The day-to-day business and operations of the Company shall be overseen and implemented by officers of the Company (each, an “Officer” and collectively, the “Officers”), subject to the limitations imposed by the Manager. An Officer may, but need not, be a Member. Each Officer shall be appointed by the Manager and shall hold office until his or her successor shall be duly designated and shall qualify or until his or her death or until he or she shall resign or shall have been removed in the manner hereinafter provided. Any one Person may hold more than one office. Subject to the other provisions in this Agreement (including in Section 6.07 below), the salaries or other compensation, if any, of the Officers of the Company shall be fixed from time to time by the Manager. The authority and responsibility of the Officers shall include, but not be limited to, such duties as the Manager may, from time to time, delegate to them and the carrying out of the Company’s business and affairs on a day-to-day basis. The existing Officers of the Company as of the Effective Time shall remain in their respective positions and shall be deemed to have been appointed by the Manager. All Officers shall be, and shall be deemed to be, officers and employees of the Company. An Officer may also perform one or more roles as an officer of the Manager.

(c) The Manager shall have the power and authority to effectuate the sale, lease, transfer, exchange or other disposition of any, all or substantially all of the assets of the Company (including the exercise or grant of any conversion, option, privilege or subscription right or any other right available in connection with any assets at any time held by the Company) or the merger, consolidation, reorganization or other combination of the Company with or into another entity.

Section 6.02 Actions of the Manager. The Manager may act through any Officer or through any other Person or Persons to whom authority and duties have been delegated pursuant to Section 6.07.

Section 6.03 Resignation; No Removal. The Manager may resign at any time by giving written notice to the Members. Unless otherwise specified in the notice, the resignation shall take effect upon receipt thereof by the Members, and the acceptance of the resignation shall not be necessary to make it effective. The Members have no right under this Agreement to remove or replace the Manager.

Section 6.04 Vacancies. Vacancies in the position of Manager occurring for any reason shall be filled by the PC Corp (or, if the PC Corp has ceased to exist without any successor or assign, then by the holders of a majority in interest of the voting capital stock of the PC Corp immediately prior to such cessation). The Members have no right under this Agreement to fill any vacancy in the position of Manager.

Section 6.05 Transactions between the Company and the Manager. The Manager may cause the Company to contract and deal with the Manager, or any Affiliate of the Manager, provided such contracts and dealings are on terms comparable to and competitive with those available to the Company from others dealing with the Company at arm’s length or are approved by the Members. The Members hereby approve the PC Corp Contribution pursuant to the terms as determined by the Manager, acting reasonably, and the grant or other issuance of LTIP Units to Cresco executives or other Members and any compensation plans, incentive award plans or similar plans associated therewith.

Section 6.06 Reimbursement for Expenses. The Manager shall not be compensated for its services as Manager of the Company except as expressly provided in this Agreement. The Members acknowledge and agree that the Manager shall be reimbursed by the Company for any reasonable out-of-pocket expenses incurred on behalf of the Company including, without limitation, fees incurred in connection with transfer agent services provided to PC Corp and the Company. The Members further acknowledge and agree that certain actions taken by PC Corp and Pubco will inure to the benefit of the Company and all Members; therefore, the Company shall reimburse PC Corp for any reasonable out-of-pocket expenses incurred by PC Corp or Pubco on behalf of the Company, including all fees, expenses and costs associated with the Public Listing and all fees, expenses and costs of Pubco being a public company (including expenses incurred in connection with public reporting obligations, information circulars, shareholder meetings, stock exchange fees, transfer agent fees, securities commission and stock exchange filing fees and offering expenses) and maintaining the corporate existence of each of PC Corp and Pubco. In the event that Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares are sold to underwriters in any subsequent public offering at a price per share that is lower than the price per share for which such Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares are sold to the public in such subsequent public offering after taking into account underwriters’ discounts or commissions and brokers’ fees or commissions (such difference, the “Discount”), (i) the Pubco shall be deemed to have contributed to the PC Corp in exchange for newly issued PC Corp shares the full amount for which such Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares were sold to the public; (ii) the Manager shall be deemed to have contributed to the Company in exchange for newly issued Common Units the full amount for which such Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares were sold to the public and (iii) the Company shall be deemed to have paid the Discount as an expense. To the extent practicable, expenses incurred by the Manager on behalf of or for the benefit of the Company shall be billed directly to and paid by the Company and, if and to the extent any reimbursements to the Manager or any of its Affiliates by the Company pursuant to this Section 6.06 constitute gross income to such Person (as opposed to the repayment of advances made by such Person on behalf of the Company), such amounts shall be treated as “guaranteed payments” within the meaning of Code Section 707(c) and shall not be treated as distributions for purposes of computing the Members’ Capital Accounts.

Section 6.07 Delegation of Authority. The Manager (a) may, from time to time, delegate to one or more Persons such authority and duties as the Manager may deem advisable, and (b) may assign titles (including chief executive officer, president, chief financial officer, chief operating officer, chief strategy officer, vice president, secretary, assistant secretary, treasurer or assistant treasurer) and delegate certain authority and duties to such Persons as the same may be amended, restated or otherwise modified from time to time. Any number of titles may be held by the same individual. The salaries or other compensation, if any, of such agents of the Company shall be fixed from time to time by the Manager, subject to the other provisions in this Agreement.

Section 6.08 Limitation of Liability of Manager.

(a) Except as otherwise provided herein or in an agreement entered into by such Person and the Company, neither the Manager nor any of the Manager’s Affiliates shall be liable to the Company or to any Member that is not the Manager for any act or omission performed or omitted by the Manager in its capacity as the sole Manager of the Company pursuant to authority granted to the Manager by this Agreement, to the fullest extent permitted by applicable Law; provided, however, that, except as otherwise provided herein, such limitation of liability shall not apply to the extent the act or omission was attributable to the Manager’s fraud, intentional misconduct or knowing violation of Law or for any present or future breaches of any representations, warranties or covenants by the Manager or its Affiliates contained herein or in the other agreements with the Company, in each case as determined by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected. The Manager may exercise any of the powers granted to it by this Agreement and shall perform any of the duties imposed upon it hereunder either directly or by or through its agents, and shall not be responsible for any misconduct or negligence on the part of any such agent (so long as such agent was selected in good faith and with reasonable care). The Manager shall be entitled to rely in good faith on the provisions of this Agreement and on information, opinions, reports or statements (including financial statements and information, opinions, reports or statements as to the value or amount of the assets, liabilities, Profits or Losses of the Company or any facts pertinent to the existence and amount of assets from which Distributions to Members might properly be paid) of the following other Persons or groups: one or more Officers or employees of the Company or the Manager; any attorney, independent accountant, appraiser or other expert or professional employed or engaged by or on behalf of the Company or the Manager; or any other Person who has been selected with reasonable care by or on behalf of the Company, or the Manager, in each case as to matters which the Manager reasonably believes to be within such other Person’s competence, and any act of or failure to act by the Manager in good faith reliance on such advice shall in no event subject the Manager to liability to the Company or any Member that is not the Manager.

(b) Whenever this Agreement or any other agreement contemplated herein provides that the Manager shall act in a manner which is, or provide terms which are, “fair and reasonable” to the Company or any Member that is not the Manager, the Manager shall determine such appropriate action or provide such terms considering, in each case, the relative interests of each party to such agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable U.S. GAAP.

(c) Whenever in this Agreement or any other agreement contemplated herein, the Manager is permitted or required to take any action or to make a decision in its “sole discretion” or “discretion,” with “complete discretion” or under a grant of similar authority or latitude, the Manager shall be entitled to consider such interests and factors as it desires, including its own interests, and shall, to the fullest extent permitted by applicable Law, have no duty or obligation to give any consideration to any interest of or factors affecting the Company or other Members.

(d) Whenever in this Agreement the Manager is permitted or required to take any action or to make a decision in its “good faith” or under another express standard, the Manager shall act under such express standard and, to the extent permitted by applicable Law, shall not be subject to any other or different standards imposed by this Agreement or any other agreement contemplated herein, and, notwithstanding anything contained herein to the contrary, so long as the Manager acts in good faith or such other express standard permitted or required hereunder, the resolution, action or terms so made, taken or provided by the Manager shall not constitute a breach of this Agreement or any other agreement contemplated herein or impose liability upon the Manager or any of the Manager’s Affiliates.

Section 6.09 Investment Company Act. The Manager shall use its best efforts to ensure that the Company shall not be subject to registration as an investment company pursuant to the Investment Company Act.

Section 6.10 Outside Activities of the Manager. The Manager shall not, directly or indirectly, enter into or conduct any business or operations, other than in connection with (a) the ownership, acquisition and disposition of Common Units, (b) the management of the business and affairs of the Company and its Subsidiaries, (c) financing or refinancing of any type related to the Company, its Subsidiaries or their assets or activities, and (d) such activities as are incidental to the foregoing; provided, however, that the Manager may, in its sole and absolute discretion, from time to time hold or acquire assets in its own name or otherwise other than through the Company and its Subsidiaries so long as the Manager takes commercially reasonable measures to ensure that the economic benefits and burdens of such assets are otherwise vested in the Company or its Subsidiaries, through assignment, mortgage loan or otherwise or, if it is not commercially reasonable to vest such economic interests in the Company or any of its Subsidiaries, the Members shall negotiate in good faith to amend this Agreement to reflect such activities and the direct ownership of assets by the Manager. Nothing contained herein shall be deemed to prohibit the Manager from executing any guarantee of indebtedness of the Company or its Subsidiaries.

ARTICLE VII.

RIGHTS AND OBLIGATIONS OF MEMBERS

Section 7.01 Limitation of Liability and Duties of Members.

(a) Except as provided in this Agreement or in the Act, no Member (including the Manager) shall be obligated personally for any debt, obligation or liability solely by reason of being a Member. Notwithstanding anything contained herein to the contrary, the failure of the Company to observe any formalities or requirements relating to the exercise of its powers or management of its business and affairs under this Agreement or the Act shall not be grounds for imposing personal liability on the Members for liabilities of the Company.

(b) In accordance with the Act and the laws of the State of Illinois, a Member may, under certain circumstances, be required to return amounts previously distributed to such Member. It is the intent of the Members that no Distribution to any Member pursuant to ARTICLE IV shall be deemed a return of money or other property paid or distributed in violation of the Act. To the fullest extent permitted by Law, any Member receiving any such money or property shall not be required to return any such money or property to the Company or any other Person. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Member is obligated to make any such payment, such obligation shall be the obligation of such Member and not of any other Member.

(c) Notwithstanding any other provision of this Agreement (subject to Section 6.08 with respect to the Manager), to the extent that, at law or in equity, any Member (or any Member’s Affiliate or any manager, managing member, general partner, director, officer, employee, agent, fiduciary or trustee of any Member or of any Affiliate of a Member) has duties (including fiduciary duties) to the Company, to the Manager, to another Member, to any Person who acquires an interest in a Company Interest or to any other Person bound by this Agreement, all such duties (including fiduciary duties) are hereby eliminated, to the fullest extent permitted by law, and replaced with the duties or standards expressly set forth herein, if any. The elimination of duties (including fiduciary duties) to the Company, the Manager, each of the Members, each other Person who acquires an interest in a Company Interest and each other Person bound by this Agreement and replacement thereof with the duties or standards expressly set forth herein, if any, are approved by the Company, the Manager, each of the Members, each other Person who acquires an interest in a Company Interest and each other Person bound by this Agreement.

Section 7.02 Lack of Authority. No Member, other than the Manager or a duly appointed Officer, in each case in its capacity as such, has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company or to make any expenditure on behalf of the Company. The Members hereby consent to the exercise by the Manager of the powers conferred on them by Law and this Agreement.

Section 7.03 No Right of Partition. No Member, other than the Manager, shall have the right to seek or obtain partition by court decree or operation of Law of any Company property, or the right to own or use particular or individual assets of the Company.

Section 7.04 Indemnification.

(a) Subject to Section 5.05, the Company hereby agrees to indemnify and hold harmless any Person (each an “Indemnified Person”) to the fullest extent permitted under the Act, as the same now exists or may hereafter be amended, substituted or replaced (but, in the case of any such amendment, substitution or replacement only to the extent that such amendment, substitution or replacement permits the Company to provide broader indemnification rights than the Company is providing immediately prior to such amendment), against all expenses, liabilities and losses (including attorneys’ fees, judgments, fines, excise taxes or penalties) reasonably incurred or suffered by such Person (or one or more of such Person’s Affiliates) by reason of the fact that such Person is or was a Member or is or was serving at the request of the Company as the Manager, an Officer, an employee or another agent of the Company or is or was serving at the request of the Company as a manager, member, employee or agent of another limited liability

company, corporation, partnership, joint venture, trust or other enterprise; provided, however, that no Indemnified Person shall be indemnified for actions against the Company, the Manager or Managers, or any other Members or which are not made in good faith and not or in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding other than by or in the right of the Company, had reasonable cause to believe the conduct was unlawful, or for any present or future breaches of any representations, warranties or covenants by such Indemnified Person or its Affiliates contained herein or in the other agreements with the Company. Expenses, including attorneys’ fees, incurred by any such Indemnified Person in defending a proceeding shall be paid by the Company as they are incurred and in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by or on behalf of such Indemnified Person to repay such amount if it shall ultimately be determined by a court of competent jurisdiction that such Indemnified Person is not entitled to be indemnified by the Company.

(b) The right to indemnification and the advancement of expenses conferred in this Section 7.04 shall not be exclusive of any other right which any Person may have or hereafter acquire under any statute, agreement, bylaw, action by the Manager or otherwise.

(c) The Company shall maintain directors’ and officers’ liability insurance, or make other financial arrangements, at its expense, to protect any Indemnified Person (and the investment funds, if any, they represent) against any expense, liability or loss described in Section 7.04(a) whether or not the Company would have the power to indemnify such Indemnified Person against such expense, liability or loss under the provisions of this Section 7.04. The Company shall use its commercially reasonable efforts to purchase directors’ and officers’ liability insurance (including employment practices coverage) with a carrier and in an amount determined necessary or desirable as determined in good faith by the Manager.

(d) Notwithstanding anything contained herein to the contrary (including in this Section 7.04), the Company agrees that any indemnification and advancement of expenses available to any current or former Indemnified Person from any investment fund that is an Affiliate of the Company who served as a director of the Company or as a Member of the Company by virtue of such Person’s service as a member, director, partner or employee of any such fund prior to or following the Effective Time (any such Person, a “Sponsor Person”) shall be secondary to the indemnification and advancement of expenses to be provided by the Company pursuant to this Section 7.04 which shall be provided out of and to the extent of Company assets only and no Member (unless such Member otherwise agrees in writing or is found in a final decision by a court of competent jurisdiction to have personal liability on account thereof) shall have personal liability on account thereof or shall be required to make additional Capital Contributions to help satisfy such indemnity of the Company and the Company (i) shall be the primary indemnitor of first resort for such Sponsor Person pursuant to this Section 7.04 and (ii) shall be fully responsible for the advancement of all expenses and the payment of all damages or liabilities with respect to such Sponsor Person which are addressed by this Section 7.04.

(e) If this Section 7.04 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless each Indemnified Person pursuant to this Section 7.04 to the fullest extent permitted by any applicable portion of this Section 7.04 that shall not have been invalidated and to the fullest extent permitted by applicable Law.

Section 7.05 Members Right to Act. For matters that require the approval of the Members, the Members shall act through meetings and written consents as described in paragraphs (a) and (b) below:

(a) Except as otherwise expressly provided by this Agreement, acts by the Members holding a majority of the Common Units, voting together as a single class, shall be the acts of the Members. Any Member entitled to vote at a meeting of Members or to express consent or dissent to Company action in writing without a meeting may authorize another person or persons to act for it by proxy. An electronic mail or similar transmission by the Member, or a photographic, photostatic, facsimile or similar reproduction of a writing executed by the Member shall (if stated thereon) be treated as a proxy executed in writing for purposes of this Section 7.05(a). No proxy shall be voted or acted upon after eleven months from the date thereof, unless the proxy provides for a longer period. A proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and that the proxy is coupled with an interest. Should a proxy designate two or more Persons to act as proxies, unless that instrument shall provide to the contrary, a majority of such Persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting or giving consents thereby conferred, or, if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, the Company shall not be required to recognize such proxy with respect to such issue if such proxy does not specify how the votes that are the subject of such proxy are to be voted with respect to such issue.

(b) The actions by the Members permitted hereunder may be taken at a meeting called by the Manager or by the Members holding a majority of the Units entitled to vote on such matter on at least 48 hours’ prior written notice to the other Members entitled to vote, which notice shall state the purpose or purposes for which such meeting is being called. The actions taken by the Members entitled to vote or consent at any meeting (as opposed to by written consent), however called and noticed, shall be as valid as though taken at a meeting duly held after regular call and notice if (but not until), either before, at or after the meeting, the Members entitled to vote or consent as to whom it was improperly held signs a written waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. The actions by the Members entitled to vote or consent may be taken by vote of the Members entitled to vote or consent at a meeting or by written consent, so long as such consent is signed by Members having not less than the minimum number of Units that would be necessary to authorize or take such action at a meeting at which all Members entitled to vote thereon were present and voted. Prompt notice of the action so taken, which shall state the purpose or purposes for which such consent is required and may be delivered via email, without a meeting shall be given to those Members entitled to vote or consent who have not consented in writing; provided, however, that the failure to give any such notice shall not affect the validity of the action taken by such written consent. Any action taken pursuant to such written consent of the Members shall have the same force and effect as if taken by the Members at a meeting thereof.

ARTICLE VIII.

BOOKS, RECORDS, ACCOUNTING AND REPORTS, AFFIRMATIVE COVENANTS

Section 8.01 Records and Accounting. The Company shall keep, or cause to be kept, appropriate books and records with respect to the Company’s business, including all books and records necessary to provide any information, lists and copies of documents required to be provided pursuant to Section 8.03 or pursuant to applicable Law. All matters concerning (a) the determination of the relative amount of allocations and Distributions among the Members pursuant to Articles III and IV and (b) accounting procedures and determinations, and other determinations not specifically and expressly provided for by the terms of this Agreement, shall be determined by the Manager, whose determination shall be final and conclusive as to all of the Members absent manifest clerical error.

Section 8.02 Fiscal Year. The “Fiscal Year” of the Company shall begin on the first day of January and end on the last day of December each year or such other date as may be established by the Manager.

Section 8.03 Reports. The Company shall deliver or cause to be delivered, within ninety (90) days after the end of each Fiscal Year or as soon as practicable thereafter, to each Person who was a Member at any time during such Fiscal Year, all information reasonably necessary for the preparation of such Person’s United States federal and applicable state income tax returns.

ARTICLE IX.

TAX MATTERS

Section 9.01 Preparation of Tax Returns. The Manager shall arrange for the preparation and timely filing of all tax returns required to be filed by the Company. No later than the later of (i) March 15 following the end of the prior Fiscal Year or as soon as practicable thereafter, and (ii) 30 Business Days after the issuance of the final financial statement report for a Fiscal Year by the Company’s auditors, or as soon as practical there after, the Company shall send to each Person who was a Member at any time during such Fiscal Year, a statement showing such Member’s final state tax apportionment information and allocations to the Members of taxable income, gains, losses, deductions and credits for such Fiscal Year and a completed IRS Schedule K-1. Each Member shall notify the other Members upon receipt of any notice of tax examination of the Company by federal, state or local authorities. Subject to the terms and conditions of this Agreement, in its capacity as Partnership Representative, the PC Corp shall have the authority to prepare the tax returns of the Company using such permissible methods and elections as it determines in its reasonable discretion, including the use of any permissible method under Section 706 of the Code for purposes of determining the varying Company Interests of its Members.

Section 9.02 Tax Elections. Unless otherwise determined by the Manager in its sole discretion, the Taxable Year shall be the Fiscal Year set forth in Section 8.02. The Company and any eligible Subsidiary shall make an election pursuant to Section 754 of the Code, shall not thereafter revoke such election and shall make a new election pursuant to Section 754 to the extent necessary following any “termination” of the Company or the Subsidiary under Section 708 of the Code. Each Member will upon request supply any information reasonably necessary to give proper effect to any such elections.

Section 9.03 Tax Controversies. Pursuant to the Revised Partnership Audit Provisions, the PC Corp shall be designated and may, on behalf of the Company, at any time, and without further notice to or consent from any Member, act as the “partnership representative” of the Company (within the meaning given to such term in Section 6223 of the Code) (the “Partnership Representative”) for purposes of the Code. The Partnership Representative shall have the right and obligation to take all actions authorized and required, respectively, by the Code for the Partnership Representative and is authorized and required to represent the Company (at the Company’s expense) in connection with all examinations of the Company’s affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Company funds for professional services reasonably incurred in connection therewith. Each Member agrees to cooperate with the Company and to do or refrain from doing any or all things reasonably requested by the Company with respect to the conduct of such proceedings. The Partnership Representative shall keep all Members fully advised on a current basis of any contacts by or discussions with the tax authorities, and the Members shall have the right to observe and participate through representatives of their own choosing (at their sole expense) in any tax proceedings. Nothing herein shall diminish, limit or restrict the rights of any Member under the Revised Partnership Audit Provisions.

Section 9.04 Withholding.

(a) To the extent the Company is required by applicable Laws or any tax treaty to withhold or to otherwise make tax payments on behalf of or with respect to any Member or affiliate of such Member, the Company shall withhold and make such tax payments as so required. To the extent that any distributions that would otherwise be made to such Member at or about the time when the Company will make such tax payment equal or exceed the amount of such tax payments, the amount of such tax payments shall constitute an advance by the Company to such Member and shall be repaid to the Company by reducing the amount of the current distributions that would otherwise have been made to such Member. To the extent that such tax payments exceed the distributions that would otherwise be made to such Member at or about the time when the Company will make the tax payments, such Member shall make a Capital Contribution equal to the difference between the amount of the tax payment and the amount of such Member’s distribution at such time and the difference shall be deemed a “cash call” with respect to such Member. If such Member fails to pay such “cash call” within the later of five (5) days prior to the date that such tax payment by the Company will be made or fifteen (15) days from notice from the Company that a tax payment will be made on behalf of such Member, in order to permit the Company to make the relevant tax payment, any other Member may elect to make a Capital Contribution equal to the “cash call” that the owing Member failed to make or to reduce the distributions that would otherwise be made to such other Member at or about the time when the Company will make the tax payment in a similar amount.

(b) If such other Member, by reason of such a payment (or deemed payment) on behalf of an owing Member made pursuant to Section 9.04(a), is required by applicable Laws or any tax treaty to withhold or to make tax payments on behalf of or with respect to the owing Member, any such tax payments by such other Member shall be treated for purposes of this Agreement only as if such tax payments had been Capital Contributions and had been tax payments made by the Company pursuant to Section 9.04(a).

(c) In the event any Member transfers or otherwise disposes of an interest in the Company and otherwise fails to deliver an IRS Form W-9 or another validly executed and timely provided certificate as provided in Code Section 1446(f) or Treasury Regulations to be promulgated thereunder, such Person shall either: (i) deliver to the Company, not less than three (3) Business Days prior to the effective time of any transfer or other disposition, cash constituting 10% of the total consideration price to be received by such Person pursuant to such transfer or other disposition; or (ii) deliver to the Company, not less than three (3) Business Days prior to the effective time of any transfer or other disposition, adequate security with a fair market value equal to, or exceeding, 10% of the total consideration price to be received by such Person pursuant to such transfer or other disposition, which cash or security may be used by the Company to satisfy any withholding taxes applicable to such transfer or other disposition in accordance with applicable Law.

ARTICLE X.

RESTRICTIONS ON TRANSFER OF UNITS

Section 10.01 Transfers by Members. No holder of Units may Transfer any interest in any Units, except Transfers (a) pursuant to and in accordance with Section 10.02 or (b) approved in writing by the Manager; provided that holders of LTIP Units shall not be permitted to Transfer such LTIP Units until the later of (i) the two-year anniversary of the date of grant thereof; or (ii) the date on which such LTIP Units are fully vested. Notwithstanding the foregoing, “Transfer” shall not include an event that terminates the existence of a Member for income tax purposes (including a change in entity classification of a Member under Treasury Regulations Section 301.7701-3, termination of a partnership pursuant to Code Section 708(b)(1)(B), a sale of assets by, or liquidation of, a Member pursuant to an election under Code Sections 336 or 338, or merger, severance, or allocation within a trust or among sub-trusts of a trust that is a Member), but that does not terminate the existence of such Member under applicable state law (or, in the case of a trust that is a Member, does not terminate the trusteeship of the fiduciaries under such trust with respect to all the Company Interests of such trust that is a Member).

Section 10.02 Permitted Transfers. Except with respect to the Transfer restrictions specific to LTIP Units, the restrictions contained in Section 10.01 shall not apply to any Transfer (each, a “Permitted Transfer”) pursuant to (i)(A) a Redemption or Exchange in accordance with Article XI hereof or (B) a Transfer by a Member to Pubco or any of its Subsidiaries including the PC Corp; (ii) a Transfer by any Member to such Member’s spouse, any lineal ascendants or descendants or trusts or other entities in which such Member or Member’s spouse, lineal ascendants or descendants hold (and continue to hold while such trusts or other entities hold Units) 50% or more of such entity’s beneficial interests; (iii) the laws of descent and distribution and (iv) a Transfer to a partner, shareholder, unitholder, member or Affiliated investment fund of such Member; provided, however, that (A) the restrictions contained in this Agreement will continue to apply to Units after any Permitted Transfer of such Units, and (B) in the case of the foregoing clauses (ii), (iii) and (iv), the transferees of the Units so Transferred shall agree in writing to be bound by the provisions of this Agreement and, the transferor will deliver a written notice to the Company, which notice will disclose in reasonable detail the identity of the proposed transferee. All Permitted Transfers are subject to the additional limitations set forth in Section 10.07(b).

Section 10.03 Restricted Units Legend. The Units have not been registered under the Securities Act and, therefore, in addition to the other restrictions on Transfer contained in this Agreement, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is then available. To the extent such Units have been certificated, each certificate evidencing Units and each certificate issued in exchange for or upon the Transfer of any Units (if such securities remain Units as defined herein after such Transfer) shall be stamped or otherwise imprinted with a legend in substantially the following form:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER SPECIFIED IN THE SECOND AMENDED AND RESTATED LLC AGREEMENT OF CRESCO LABS, LLC, AS MAY BE AMENDED AND MODIFIED FROM TIME TO TIME, AND CRESCO LABS, LLC RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO ANY TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY CRESCO LABS, LLC TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE.”

The Company shall imprint such legend on certificates (if any) evidencing Units. The legend set forth above shall be removed from the certificates (if any) evidencing any units which cease to be Units in accordance with the definition thereof.

Section 10.04 Transfer. Prior to Transferring any Units, the Transferring holder of Units shall cause the prospective transferee to be bound by this Agreement as provided in Section 10.02 and any other agreements executed by the holders of Units and relating to such Units in the aggregate (collectively, the “Other Agreements”), and shall cause the prospective transferee to execute and deliver to the Company and the other holders of Units counterparts of this Agreement and any applicable Other Agreements. Any Transfer or attempted Transfer of any Units in violation of any provision of this Agreement (including any prohibited indirect Transfers) shall be void, and in the event of any such Transfer or attempted Transfer, the Company shall not record such Transfer on its books or treat any purported transferee of such Units as the owner of such securities for any purpose.

Section 10.05 Assignee’s Rights.

(a) The Transfer of a Company Interest in accordance with this Agreement shall be effective as of the date of its assignment (assuming compliance with all of the conditions to such Transfer set forth herein), and such Transfer shall be shown on the books and records of the Company. Profits, Losses and other Company items shall be allocated between the transferor and the Assignee according to Code Section 706, using any permissible method as determined in the reasonable discretion of the Manager. Distributions made before the effective date of such Transfer shall be paid to the transferor, and Distributions made after such date shall be paid to the Assignee.

(b) Unless and until an Assignee becomes a Member pursuant to ARTICLE XII, the Assignee shall not be entitled to any of the rights granted to a Member hereunder or under applicable Law, other than the rights granted specifically to Assignees pursuant to this Agreement; provided, however, that, without relieving the transferring Member from any such limitations or obligations as more fully described in Section 10.06, such Assignee shall be bound by any limitations and obligations of a Member contained herein that a Member would be bound on account of the Assignee’s Company Interest (including the obligation to make Capital Contributions on account of such Company Interest).

Section 10.06 Assignor’s Rights and Obligations. Any Member who shall Transfer any Company Interest in a manner in accordance with this Agreement shall cease to be a Member with respect to such Units or other interest and shall no longer have any rights or privileges, or, except as set forth in this Section 10.06, duties, liabilities or obligations, of a Member with respect to such Units or other interest (it being understood, however, that the applicable provisions of Sections 6.08 and 7.04 shall continue to inure to such Person’s benefit), except that unless and until the Assignee (if not already a Member) is admitted as a Substituted Member in accordance with the provisions of ARTICLE XII (the “Admission Date”), such assigning Member shall retain all of the duties, liabilities and obligations of a Member with respect to such Units or other interest, and the Manager may, in its sole discretion, reinstate all or any portion of the rights and privileges of such Member with respect to such Units or other interest for any period of time prior to the Admission Date. Nothing contained herein shall relieve any Member who Transfers any Units or other interest in the Company from any liability of such Member to the Company with respect to such Company Interest that may exist on the Admission Date or that is otherwise specified in the Act and incorporated into this Agreement or for any liability to the Company or any other Person for any materially false statement made by such Member (in its capacity as such) or for any present or future breaches of any representations, warranties or covenants by such Member (in its capacity as such) contained herein or in the other agreements with the Company.

Section 10.07 Overriding Provisions.

(a) Any Transfer in violation of this Article X shall be null and void ab initio, and the provisions of Sections 10.05 and 10.06 shall not apply to any such Transfers. For the avoidance of doubt, any Person to whom a Transfer is made or attempted in violation of this Article X shall not become a Member, shall not be entitled to vote on any matters coming before the Members and shall not have any other rights in or with respect to any rights of a Member of the Company. The approval of any Transfer in any one or more instances shall not limit or waive the requirement for such approval in any other or future instance. The Manager shall promptly amend the Schedule of Members to reflect any Permitted Transfer pursuant to this Article X.

(b) Notwithstanding anything contained herein to the contrary (including, for the avoidance of doubt, the provisions of Section 10.01 and Article XI and Article XII), in no event shall any Member Transfer any Units to the extent such Transfer could, in the reasonable determination of the Manager:

(i) result in a violation of the Securities Act, or any other applicable federal, state or foreign Laws;

(ii) cause an assignment under the Investment Company Act;

(iii) be a violation of or a default (or an event that, with notice or the lapse of time or both, would constitute a default) under, or result in an acceleration of any indebtedness under, any promissory note, mortgage, loan agreement, indenture or similar instrument or agreement to which the Company or the Manager is a party; provided that the payee or creditor to whom the Company or the Manager owes such obligation is not an Affiliate of the Company or the Manager;

(iv) cause the Company to lose its status as a partnership for federal income tax purposes or, without limiting the generality of the foregoing, such Transfer was effected on or through an “established securities market” or a “secondary market or the substantial equivalent thereof,” as such terms are used in Section 1.7704-1 of the Treasury Regulations;

(v) be a Transfer to a Person who is not legally competent or who has not achieved his or her majority under applicable Law (excluding trusts for the benefit of minors);

(vi) cause the Company or any Member or the Manager to be treated as a fiduciary under the Employee Retirement Income Security Act of 1974, as amended;

(vii) cause the Company (as determined by the Manager in its sole discretion) to be treated as a “publicly traded partnership” or to be taxed as a corporation pursuant to Section 7704 of the Code or successor provision of the Code; or

(viii) result in the Company having more than one hundred (100) “partners”, within the meaning of Treasury Regulations Section 1.7704-1(h)(1) (determined pursuant to the rules of Treasury Regulations Section 1.7704-1(h)(3)) in any Taxable Year that is not a Restricted Taxable Year.

ARTICLE XI.

REDEMPTION AND EXCHANGE RIGHTS

Section 11.01 Redemption Right of a Member.

(a) Redemption Notice.

(i) Subject to the provisions set forth in this Section 11.01, each Member holding Common Units (other than the PC Corp) shall be entitled to cause the Company to redeem (a “Common Unit Redemption”) its Common Units unless such Member has entered into a contractual lock-up agreement in connection with the Public Listing and relating to the shares of Pubco that may be applicable to such Member, and then beginning on the date such lock-up agreement has been waived or terminated as it applies to such Member. A Member desiring to exercise its Redemption Right (the “Redeeming Member”) shall exercise such right by giving written notice (the “Redemption Notice”) to the Company with a copy to the Manager and to PC Corp. The Redemption Notice shall specify the number of Common Units (the “Redeemed Units”), that the Redeeming

Member intends to have the Company redeem and a date (unless and to the extent that the Manager in its sole discretion agrees in writing to waive such time periods) on which exercise of the Redemption Right shall be completed, which complies with the requirements set forth in Section 11.01(a)(ii) (the “Redemption Date”); provided that (x) if the Redemption Date occurs in a Restricted Taxable Year, the Redemption Date must be a date that satisfies the conditions of Section 11.01(a)(ii), and (y) the Company, the Manager, PC Corp and the Redeeming Member may change the number of Redeemed Units and/or the Redemption Date specified in such Redemption Notice to another number and/or date by mutual agreement signed in writing by each of them. Unless the Redeeming Member has delayed a Redemption as provided in Section 11.01(c), on the Redemption Date (to be effective immediately prior to the close of business on the Redemption Date) (A) the Redeeming Member shall transfer and surrender the Redeemed Units to the Company, free and clear of all liens and encumbrances, and (B) the Company shall transfer to the Redeeming Member the consideration to which the Redeeming Member is entitled under Section 11.01(b), provided that, if such Units are certificated, the Company shall issue to the Redeeming Member a certificate for a number of Common Units equal to the difference (if any) between the number of Common Units evidenced by the certificate surrendered by the Redeeming Member pursuant to clause (B) of this Section 11.01(a)(i) and the Redeemed Units.

(ii) Any Redemption Date that occurs in a Restricted Taxable Year must be a Quarterly Redemption Date not less than sixty (60) days after delivery of the applicable Redemption Notice. Any Redemption Date that occurs in a year that is not a Restricted Taxable Year must be not less than seven (7) Business Days nor more than ten (10) Business Days after delivery of the applicable Redemption Notice.

(b) In exercising its Redemption Right, a Redeeming Member shall be entitled to receive the Share Settlement or the Cash Settlement; provided that the Manager shall have the option as provided in Section 11.02 and subject to Section 11.01(d) to select whether the redemption payment is made by means of a Share Settlement or a Cash Settlement. Within three (3) Business Days of delivery of the Redemption Notice, the Manager shall give written notice (the “Contribution Notice”) to the Company (with a copy to the Redeeming Member) of its intended settlement method and the amount of the Cash Settlement or the number and class of shares of the Share Settlement (such shares, the “Settlement Shares”), as applicable; provided that if the Manager does not timely deliver a Contribution Notice, the Manager shall be deemed to have elected the Share Settlement method.

(c) In the event the Manager elects a Share Settlement in connection with a Redemption, a Redeeming Member shall be entitled to revoke its Redemption Notice or delay the consummation of a Redemption if any of the following conditions exists: (i) any registration statement pursuant to which the resale of the Settlement Shares to be registered for such Redeeming Member at or immediately following the consummation of the Redemption shall have ceased to be effective pursuant to any action or inaction by the CSE or any other Governmental Entity having jurisdiction over the Settlement Shares or no such resale registration statement has yet become effective; (ii) if the Redemption is conditional on the resulting Settlement Shares being qualified for distribution under a prospectus on terms which Pubco has agreed to, Pubco shall have failed to cause such a prospectus to be filed and receipted by the applicable securities regulatory

authorities in accordance with the conditions to the Redemption; (iii) Pubco shall have exercised its right to defer, delay or suspend the filing or effectiveness of a registration statement and such deferral, delay or suspension shall affect the ability of such Redeeming Member to have its Settlement Shares registered at or immediately following the consummation of the Redemption; (iv) Pubco shall have disclosed to such Redeeming Member any material non-public information concerning Pubco, the receipt of which could reasonably be determined to result in such Redeeming Member being prohibited or restricted from selling Settlement Shares at or immediately following the Redemption without disclosure of such information (and Pubco does not permit disclosure); (v) any stop order or cease trade order relating to the Settlement Shares was to be registered by such Redeeming Member at or immediately following the Redemption shall have been issued by the CSE or any other applicable exchange or an applicable securities regulatory authority; (vi) there shall have occurred a material disruption in the securities markets generally or in the market or markets in which the Settlement Shares is then traded; (vii) there shall be in effect an injunction, a restraining order or a decree of any nature of any Governmental Entity that restrains or prohibits the Redemption; (viii) the Redemption Date would occur three (3) Business Days or less prior to, or during, a Black-Out Period; provided further, that in no event shall the Redeeming Member seeking to revoke its Redemption Notice or delay the consummation of such Redemption and relying on any of the matters contemplated in clauses (i) through (viii) above have controlled or intentionally materially influenced any facts, circumstances, or Persons in connection therewith (except in the good faith performance of his or her duties as an officer or director of Pubco) in order to provide such Redeeming Member with a basis for such delay or revocation. If a Redeeming Member delays the consummation of a Redemption pursuant to this Section 11.01(c), the Redemption Date shall occur on the fifth Business Day following the date on which the conditions giving rise to such delay cease to exist (or such earlier day as the Manager, Pubco, the Company and such Redeeming Member may agree in writing).

(d) The number of Settlement Shares or the Redeemed Units Equivalent that a Redeeming Member is entitled to receive under Section 11.01(b) (through a Share Settlement or Cash Settlement, as applicable) shall not be adjusted on account of any Distributions previously made with respect to the Redeemed Units or dividends previously paid with respect to Settlement Shares; provided, however, that if a Redeeming Member causes the Company to redeem Redeemed Units and the Redemption Date occurs subsequent to the record date for any Distribution with respect to the Redeemed Units but prior to payment of such Distribution, the Redeeming Member shall be entitled to receive such Distribution with respect to the Redeemed Units on the date that it is made notwithstanding that the Redeeming Member transferred and surrendered the Redeemed Units to the Company prior to such date.

(e) In the event of a reclassification or other similar transaction as a result of which the Settlement Shares are converted into another security, then in exercising its Redemption Right a Redeeming Member shall be entitled to receive the amount of such security that the Redeeming Member would have received if such Redemption Right had been exercised and the Redemption Date had occurred immediately prior to the record date (or effective date in the event that there is no associated record date) of such reclassification or other similar transaction.

(f) Notwithstanding anything to the contrary contained herein, each of the Company, the Manager, PC Corp and Pubco shall not be obligated to effectuate a Redemption if such Redemption (in the sole discretion of the Manager) could cause the Company to be treated as a “publicly traded partnership” or to be taxed as a corporation pursuant Section 7704 of the Code or successor provisions of the Code.

Section 11.02 Election of the PC Corp and Redemption of Redeemed Units. In connection with the exercise of a Redeeming Member’s Redemption Rights under Section 11.01(a), PC Corp shall contribute to the Company the consideration the Redeeming Member is entitled to receive under Section 11.01(b). The PC Corp, at its option, shall determine whether to contribute, pursuant to Section 11.01(b), the Share Settlement or the Cash Settlement. Unless the Redeeming Member has revoked or delayed a Redemption as provided in Section 11.01(c), on the Redemption Date (to be effective immediately prior to the close of business on the Redemption Date) (i) the PC Corp shall make its Capital Contribution to the Company (in the form of the Share Settlement or the Cash Settlement) required under this Section 11.02, and (ii) the Company shall issue to the PC Corp a number of Common Units equal to the number of Redeemed Units surrendered by the Redeeming Member. Notwithstanding any other provisions of this Agreement to the contrary, in the event that the PC Corp elects a Cash Settlement, the PC Corp shall only be obligated to contribute to the Company an amount in respect of such Cash Settlement equal to the net proceeds from the sale by Pubco of a number of Settlement Shares equal to the number of Redeemed Units to be redeemed with such Cash Settlement provided that the PC Corp’s Capital Account shall be increased by an amount equal to any Discount relating to such sale of Settlement Shares in accordance with Section 6.06.

Section 11.03 Exchange Right of the PC Corp.

(a) Notwithstanding anything to the contrary in this Article XI, the PC Corp may, in its sole and absolute discretion, elect to effect on the Redemption Date the exchange of Redeemed Units for the Share Settlement or Cash Settlement, as the case may be, through a direct exchange of such Redeemed Units and such consideration between the Redeeming Member and the PC Corp (a “Direct Exchange”). Upon such Direct Exchange pursuant to this Section 11.03, the PC Corp shall acquire the Redeemed Units and shall be treated for all purposes of this Agreement as the owner of such Redeemed Units.

(b) The PC Corp may, at any time prior to a Redemption Date, deliver written notice (an “Exchange Election Notice”) to the Company and the Redeeming Member setting forth its election to exercise its right to consummate a Direct Exchange; provided that such election does not prejudice the ability of the parties to consummate a Redemption or Direct Exchange on the Redemption Date. An Exchange Election Notice may be revoked by the PC Corp at any time; provided that any such revocation does not prejudice the ability of the parties to consummate a Redemption or Direct Exchange on the Redemption Date. The right to consummate a Direct Exchange in all events shall be exercisable for all the Redeemed Units that would have otherwise been subject to a Redemption. Except as otherwise provided by this Section 11.03, a Direct Exchange shall be consummated pursuant to the same timeframe and in the same manner as the relevant Redemption would have been consummated if the PC Corp had not delivered an Exchange Election Notice.

(c) Notwithstanding the foregoing, the PC Corp may, in its sole and absolute discretion, assign to Pubco its rights and obligations under this Section 11.03 to consummate a Direct Exchange with the Redeeming Member.

Section 11.04 Effect of Exercise of Redemption or Exchange Right. This Agreement shall continue notwithstanding the consummation of a Redemption or Direct Exchange and all governance or other rights set forth herein shall be exercised by the remaining Members and the Redeeming Member (to the extent of such Redeeming Member’s remaining interest in the Company). No Redemption or Direct Exchange shall relieve such Redeeming Member of any prior breach of this Agreement.

Section 11.05 Tax Treatment. Unless otherwise required by applicable Law, the parties hereto acknowledge and agree a Redemption or a Direct Exchange, as the case may be, shall be treated as a direct exchange between PC Corp or Pubco, as applicable, and the Redeeming Member for U.S. federal and applicable state and local income tax purposes.

ARTICLE XII.

ADMISSION OF MEMBERS

Section 12.01 Substituted Members. Subject to the provisions of ARTICLE X hereof, in connection with the Permitted Transfer of a Company Interest hereunder, the transferee shall become a substituted Member (“Substituted Member”) on the effective date of such Permitted Transfer, which effective date shall not be earlier than the date of compliance with the conditions to such Transfer, and such admission shall be shown on the books and records of the Company.

Section 12.02 Additional Members. Subject to the provisions of ARTICLE X hereof, any Person that is not an Original Member may be admitted to the Company as an additional Member (any such Person, an “Additional Member”) only upon furnishing to the Manager (a) counterparts of this Agreement and any applicable Other Agreements and (b) such other documents or instruments as may be reasonably necessary or appropriate to effect such Person’s admission as a Member (including entering into such documents as the Manager may deem appropriate in its reasonable discretion). Such admission shall become effective on the date on which the Manager determines in its reasonable discretion that such conditions have been satisfied and when any such admission is shown on the books and records of the Company.

ARTICLE XIII.

WITHDRAWAL AND RESIGNATION; TERMINATION OF RIGHTS

Section 13.01 Withdrawal and Resignation of Members. No Member shall have the power or right to withdraw or otherwise resign as a Member from the Company prior to the dissolution and winding up of the Company pursuant to ARTICLE XIV. Any Member, however, that attempts to withdraw or otherwise resign as a Member from the Company without the prior written consent of the Manager upon or following the dissolution and winding up of the Company pursuant to ARTICLE XIV, but prior to such Member receiving the full amount of Distributions from the Company to which such Member is entitled pursuant to ARTICLE XIV, shall be liable to the Company for all damages (including all lost profits and special, indirect and consequential damages) directly or indirectly caused by the withdrawal or resignation of such Member. Upon a Transfer of all of a Member’s Units in a Transfer permitted by this Agreement, subject to the provisions of Section 10.06, such Member shall cease to be a Member.

ARTICLE XIV.

DISSOLUTION AND LIQUIDATION

Section 14.01 Dissolution. The Company shall not be dissolved by the admission of Additional Members or Substituted Members or the attempted withdrawal or resignation of a Member. The Company shall dissolve, and its affairs shall be wound up, upon:

(a) the decision of the Manager together with the holders of a majority of the then-outstanding Common Units entitled to vote to dissolve the Company;

(b) a dissolution of the Company under the Act; or

Except as otherwise set forth in this ARTICLE XIV, the Company is intended to have perpetual existence. An Event of Withdrawal shall not cause a dissolution of the Company and the Company shall continue in existence subject to the terms and conditions of this Agreement.

Section 14.02 Liquidation and Termination. On dissolution of the Company, the Manager shall act as liquidator or may appoint one or more Persons as liquidator. The liquidators shall proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Act. The costs of liquidation shall be borne as a Company expense. Until final distribution, the liquidators shall continue to operate the Company properties with all of the power and authority of the Manager. The steps to be accomplished by the liquidators are as follows:

(a) as promptly as possible after dissolution and again after final liquidation, the liquidators shall cause a proper accounting to be made by a recognized firm of certified public accountants of the Company’s assets, liabilities and operations through the last day of the calendar month in which the dissolution occurs or the final liquidation is completed, as applicable;

(b) the liquidators shall cause the notice described in the Act to be mailed to each known creditor of and claimant against the Company in the manner described thereunder;

(c) the liquidators shall pay, satisfy or discharge from Company funds, or otherwise make adequate provision for payment and discharge thereof (including the establishment of a cash fund for contingent liabilities in such amount and for such term as the liquidators may reasonably determine): first, all expenses incurred in liquidation; and second, all of the debts, liabilities and obligations of the Company; and

(d) all remaining assets of the Company shall be distributed to the Members in accordance with ARTICLE IV by the end of the Taxable Year during which the liquidation of the Company occurs (or, if later, by ninety (90) days after the date of the liquidation). The distribution of cash and/or property to the Members in accordance with the provisions of this Section 14.02 and Section 14.03 below constitutes a complete return to the Members of their Capital Contributions and a complete distribution to the Members of their interest in the Company and all the Company’s property. To the extent that a Member returns funds to the Company, such returning Member has no claim against any other Member for those funds.

Section 14.03 Deferment; Distribution in Kind. Notwithstanding the provisions of Section 14.02, but subject to the order of priorities set forth therein, if upon dissolution of the Company the liquidators determine that an immediate sale of part or all of the Company’s assets would be impractical or would cause undue loss (or would otherwise not be beneficial) to the Members, the liquidators may, in their sole discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy Company liabilities (other than loans to the Company by Members) and reserves. Subject to the order of priorities set forth in Section 14.02, the liquidators may, in their sole discretion, distribute to the Members, in lieu of cash, either (a) all or any portion of such remaining Company assets in-kind in accordance with the provisions of Section 14.02(d), (b) as tenants in common and in accordance with the provisions of Section 14.02(d), undivided interests in all or any portion of such Company assets or (c) a combination of the foregoing. Any such Distributions in kind shall be subject to (y) such conditions relating to the disposition and management of such assets as the liquidators deem reasonable and equitable and (z) the terms and conditions of any agreements governing such assets (or the operation thereof or the holders thereof) at such time. Any Company assets distributed in kind will first be written up or down to their Fair Market Value, thus creating Profit or Loss (if any), which shall be allocated in accordance with ARTICLE V. The liquidators shall determine the Fair Market Value of any property distributed in accordance with the valuation procedures set forth in ARTICLE XV.

Section 14.04 Cancellation of Certificate. On completion of the distribution of Company assets as provided herein, the Company is terminated (and the Company shall not be terminated prior to such time), and the Manager (or such other Person or Persons as the Act may require or permit) shall file a certificate of cancellation with the Secretary of State of Illinois, cancel any other filings made pursuant to this Agreement that are or should be canceled and take such other actions as may be necessary to terminate the Company. The Company shall be deemed to continue in existence for all purposes of this Agreement until it is terminated pursuant to this Section 14.04.

Section 14.05 Reasonable Time for Winding Up. A reasonable time shall be allowed for the orderly winding up of the business and affairs of the Company and the liquidation of its assets pursuant to Sections 14.02 and 14.03 in order to minimize any losses otherwise attendant upon such winding up.

Section 14.06 Return of Capital. The liquidators shall not be personally liable for the return of Capital Contributions or any portion thereof to the Members (it being understood that any such return shall be made solely from Company assets).

ARTICLE XV.

VALUATION

Section 15.01 Determination. “Fair Market Value” of a specific Company asset will mean the amount which the Company would receive in an all-cash sale of such asset in an arms-length transaction with a willing unaffiliated third party, with neither party having any compulsion to buy or sell, consummated on the day immediately preceding the date on which the event occurred which necessitated the determination of the Fair Market Value (and after giving effect to any transfer taxes payable in connection with such sale), as such amount is determined by the Manager (or, if pursuant to Section 14.02, the liquidators) in its good faith judgment using all factors, information and data it deems to be pertinent.

Section 15.02 Dispute Resolution. If any Member or Members dispute the accuracy of any determination of Fair Market Value in accordance with Section 15.01, and the Manager and such Member(s) are unable to agree on the determination of the Fair Market Value of any asset of the Company, the Manager and such Member(s) shall each select a nationally recognized investment banking firm experienced in valuing securities of closely-held companies such as the Company in the Company’s industry (the “Appraisers”), who shall each determine the Fair Market Value of the asset or the Company (as applicable) in accordance with the provisions of Section 15.01. The Appraisers shall be instructed to give written notice of their determination of the Fair Market Value of the asset or the Company (as applicable) within thirty (30) days of their appointment as Appraisers. If Fair Market Value as determined by an Appraiser is higher than Fair Market Value as determined by the other Appraiser by 10% or more, and the Manager and such Member(s) do not otherwise agree on a Fair Market Value, the original Appraisers shall designate a third Appraiser meeting the same criteria used to select the original two. If Fair Market Value as determined by an Appraiser is within 10% of the Fair Market Value as determined by the other Appraiser (but not identical), and the Manager and such Member(s) do not otherwise agree on a Fair Market Value, the Manager shall select the Fair Market Value of one of the Appraisers. The fees and expenses of the Appraisers shall be borne by the Company; provided, however, that if the Fair Market Value as determined through the appraisal method in this Section 15.02, is within 10% of the Fair Market Value originally determined by the Company under Section 15.01, the Member(s) electing to exercise their rights under this Section 15.02 shall bear all of the fees and expenses of the Appraisers.

ARTICLE XVI.

GENERAL PROVISIONS

Section 16.01 Power of Attorney.

(a) Each Member who is an individual hereby constitutes and appoints the Manager (or the liquidator, if applicable) with full power of substitution, as his or her true and lawful agent and attorney-in-fact, with full power and authority in his, her or its name, place and stead, to:

(i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices (A) this Agreement, all certificates and other instruments and all amendments thereof which the Manager deems appropriate or necessary to form, qualify, or continue the qualification of, the Company as a limited liability company in the State of Illinois and in all other jurisdictions in which the Company may conduct business or own property; (B) all instruments which the Manager deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (C) all conveyances and other instruments or documents which the Manager deems appropriate or necessary to reflect the dissolution and liquidation of the Company pursuant to the terms of this Agreement, including a certificate of cancellation; and (D) all instruments relating to the admission, withdrawal or substitution of any Member pursuant to ARTICLE XII or ARTICLE XIII; and

(ii) sign, execute, swear to and acknowledge all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the reasonable judgment of the Manager, to evidence, confirm or ratify any vote, consent, approval,

agreement or other action which is made or given by the Members hereunder or is consistent with the terms of this Agreement, in the reasonable judgment of the Manager, necessary or appropriate to effectuate the terms of this Agreement.

(b) The foregoing power of attorney is irrevocable and coupled with an interest, and shall survive the death, disability, incapacity, dissolution, bankruptcy, insolvency or termination of any Member who is an individual and the transfer of all or any portion of his, her or its Company Interest and shall extend to such Member’s heirs, successors, assigns and personal representatives.

Section 16.02 Confidentiality. The Manager and each of the Members agree to hold the Company’s Confidential Information in confidence and may not use such information except (i) in furtherance of the business of the Company, (ii) as reasonably necessary for compliance with applicable law, including compliance with disclosure requirements under the Securities Act and the Exchange Act, and securities laws of other jurisdictions, or (iii) as otherwise authorized separately in writing by the Manager. “Confidential Information” as used herein includes, but is not limited to, ideas, financial product structuring, business strategies, innovations and materials, all aspects of the Company’s business plan, proposed operation and products, corporate structure, financial and organizational information, analyses, proposed partners, software code and system and product designs, employees and their identities, equity ownership, the methods and means by which the Company plans to conduct its business, all trade secrets, trademarks, tradenames and all intellectual property associated with the Company’s business. With respect to the Manager and each Member, Confidential Information does not include information or material that: (a) is rightfully in the possession of the Manager or each Member at the time of disclosure by the Company; (b) before or after it has been disclosed to the Manager or each Member by the Company, becomes part of public knowledge, not as a result of any action or inaction of the Manager or such Member, respectively, in violation of this Agreement; (c) is approved for release by written authorization of the Chief Executive Officer of the Company or of the PC Corp; (d) is disclosed to the Manager or such Member or their representatives by a third party not, to the knowledge of the Manager or such Member, respectively, in violation of any obligation of confidentiality owed to the Company with respect to such information; or (e) is or becomes independently developed by the Manager or such Member or their respective representatives without use or reference to the Confidential Information.

Section 16.03 Amendments. This Agreement may be amended or modified (a) by the Manager, as provided in Section 3.10 of this Agreement or (b) upon the consent of the Manager and Members holding a majority of the Common Units outstanding. Notwithstanding the foregoing, no amendment or modification (x) to this Section 16.03 may be made without the prior written consent of the Manager and Members holding a majority of the Common Units outstanding, and (y) to any of the terms and conditions of this Agreement which terms and conditions expressly require the approval or action of certain Persons may be made without obtaining the consent of the requisite number or specified percentage of such Persons who are entitled to approve or take action on such matter.

Section 16.04 Title to Company Assets. Company assets shall be deemed to be owned by the Company as an entity, and no Member, individually or collectively, shall have any ownership interest in such Company assets or any portion thereof. The Company shall hold title to all of its property in the name of the Company and not in the name of any Member. All Company assets

shall be recorded as the property of the Company on its books and records, irrespective of the name in which legal title to such Company assets is held. The Company’s credit and assets shall be used solely for the benefit of the Company, and no asset of the Company shall be transferred or encumbered for, or in payment of, any individual obligation of any Member.

Section 16.05 Addresses and Notices. Any notice provided for in this Agreement will be in writing and will be either personally delivered, or received by electronic mail or certified mail, return receipt requested, sent by reputable overnight courier service (charges prepaid) to the Company or sent by email at the address set forth below and to any other recipient and to any Member at such address as indicated by the Company’s records, or at such address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notices will be deemed to have been given hereunder when delivered personally, three (3) days after deposit in the U.S. mail and one (1) day after deposit with a reputable overnight courier service or transmission via e-mail (provided confirmation of transmission is received). The Company’s address is:

to the Company:

Cresco Labs, LLC

520 W. Erie

Suite 220

Chicago, IL 60654

Attn: John Schetz

E-Mail: john.schetz@crescolabs.com

with a copy (which copy shall not constitute notice) to:

Jenner & Block LLP

919 Third Avenue

New York, NY 10022

Attn: Martin Glass

E-Mail: MGlass@jenner.com

and

Bennett Jones LLP

3400 One First Canadian Place

P.O. Box 130

Toronto, ON, M5X 1A4

Attn: Aaron Sonshine

E-mail: sonshinea@bennettjones.com

Section 16.06 Binding Effect; Intended Beneficiaries. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 16.07 Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company or any of its Affiliates, and no creditor who makes a loan to the Company or any of its Affiliates may have or acquire at any time as a result of making the loan any direct or indirect interest in Company Profits, Losses, Distributions, capital or property, other than as a secured creditor.

Section 16.08 Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement or condition.

Section 16.09 Counterparts. This Agreement may be executed in separate counterparts, each of which will be an original and all of which together shall constitute one and the same agreement binding on all the parties hereto.

Section 16.10 Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Illinois or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Illinois.

Section 16.11 Disputes. Any claim or controversy between the parties arising out of or relating to this Agreement or any breach hereof shall be submitted to FINAL AND BINDING ARBITRATION BEFORE JAMS IN THE STATE OF ILLINOIS, COUNTY COOK AND CITY OF CHICAGO, PURSUANT TO THE JAMS COMPREHENSIVE ARBITRATION RULES AND PROCEDURES. ALL PARTIES FURTHER AGREE THAT THE ARBITRATION SHALL BE CONDUCTED BEFORE A SINGLE JAMS ARBITRATOR WHO IS A RETIRED ILLINOIS OR FEDERAL JUDGE OR JUSTICE. The parties shall mutually agree on one arbitrator from the list provided by the arbitrating organization; provided that if the parties cannot agree, then each party shall select one arbitrator from the list, and the two (2) arbitrators so selected shall agree upon a third (3rd) arbitrator chosen from the same list, which third (3rd) arbitrator shall determine the dispute. The arbitrator shall, to the fullest extent permitted by law, have the power to grant all legal and equitable remedies including provisional remedies and award compensatory damages provided by law; however, the arbitrator shall not have authority to award punitive or exemplary damages. The cost of the arbitration shall initially be borne equally among the parties; provided, however the arbitrator shall award costs and attorneys’ fees in accordance with the terms and conditions of this Agreement. The prevailing party in any arbitration or litigation shall be reimbursed for its arbitration costs (including attorneys’ fees) by the non-prevailing party. The parties further agree that, upon application of the prevailing party, any Judge of a court located in Cook County in the State of Illinois may enter a judgment based on the final arbitration award issued by the JAMS arbitrator, and the parties expressly agree to submit to the jurisdiction of this Court for such a purpose. No action at law or in equity based upon any claim arising out of or related to this Agreement shall be instituted in any court by any party (or their respective equity holders) except (A) an action to compel arbitration pursuant to this Section 16.11; or (B) an action to enforce an award obtained in an arbitration proceeding in accordance with this Section 16.11.

THE PARTIES UNDERSTAND THAT BY AGREEMENT TO BINDING ARBITRATION THEY ARE GIVING UP THE RIGHTS THEY MAY OTHERWISE HAVE TO TRIAL BY A

COURT OR A JURY AND ALL RIGHTS OF APPEAL AND TO AN AWARD OF PUNITIVE OR EXEMPLARY DAMAGES. Notwithstanding any provision of the Agreement to the contrary, this Section 16.11 shall be construed to the maximum extent possible to comply with the laws of the State of Illinois, including the Uniform Arbitration Act (710 ILCS 5/1 et seq.) (the “Illinois Uniform Arbitration Act”). If, nevertheless, it shall be determined by a court of competent jurisdiction that any provision or wording of this Section 16.11, including any rules of JAMS, shall be invalid or unenforceable under the Illinois Arbitration Act, or other applicable law, such invalidity shall not invalidate all of this Section 16.11. In that case, this Section 16.11 shall be construed so as to limit any term or provision so as to make it valid or enforceable within the requirements of the Illinois Arbitration Act or other applicable law, and, in the event such term or provision cannot be so limited, this Section 16.11 shall be construed to omit such invalid or unenforceable provision.

Section 16.12 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable Law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable Law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or the effectiveness or validity of any provision in any other jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

Section 16.13 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking such actions as may be reasonably necessary or appropriate to achieve the purposes of this Agreement.

Section 16.14 Delivery by Electronic Transmission. This Agreement and any signed agreement or instrument entered into in connection with this Agreement or contemplated hereby, and any amendments hereto or thereto, to the extent signed and delivered by means of an electronic transmission, including by a facsimile machine or via email, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto shall re-execute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument shall raise the use of electronic transmission by a facsimile machine or via email to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through such electronic transmission as a defense to the formation of a contract and each such party forever waives any such defense.

Section 16.15 Right of Offset. Whenever the Company is to pay any sum (other than pursuant to Article IV) to any Member, any amounts that such Member owes to the Company which are not the subject of a good faith dispute may be deducted from that sum before payment. For the avoidance of doubt, the distribution of Units to the PC Corp shall not be subject to this Section 16.15.

Section 16.16 Effectiveness. This Agreement shall be effective immediately after the time at which the later of the PC Corp Unit Contribution and the PC Corp Subscription became effective (the “Effective Time”). The Prior LLC Agreement shall govern the rights and obligations of the Company and the other parties to this Agreement in their capacity as Unitholders prior to the Effective Time.

Section 16.17 Entire Agreement. This Agreement, those documents expressly referred to herein (including the Support Agreement and the Tax Receivable Agreement), any indemnity agreements entered into in connection with the Prior LLC Agreement with the manager at that time and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. For the avoidance of doubt, the Prior LLC Agreement is superseded by this Agreement as of the Effective Time and shall be of no further force and effect thereafter.

Section 16.18 Remedies. Each Member shall have all rights and remedies set forth in this Agreement and all rights and remedies which such Person has been granted at any time under any other agreement or contract and all of the rights which such Person has under any Law. Any Person having any rights under any provision of this Agreement or any other agreements contemplated hereby shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by Law.

Section 16.19 Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. The use of the word “including” in this Agreement shall be by way of example rather than by limitation and shall mean, “including, without limitation”. Reference to any agreement, document or instrument means such agreement, document or instrument as amended or otherwise modified from time to time in accordance with the terms thereof, and if applicable hereof. Without limiting the generality of the immediately preceding sentence, no amendment or other modification to any agreement, document or instrument that requires the consent of any Person pursuant to the terms of this Agreement or any other agreement will be given effect hereunder unless such Person has consented in writing to such amendment or modification. Wherever required by the context, references to a Fiscal Year shall refer to a portion thereof. The use of the words “or,” “either” and “any” shall not be exclusive. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Wherever a conflict exists between this Agreement and any other agreement, this Agreement shall control but solely to the extent of such conflict.

The undersigned hereby agree(s) to be bound by all of the terms and provisions of the Second Amended and Restated LLC Agreement of Cresco Labs, LLC as of the date first set forth above.


CRESCO LABS, LLC,
an Illinois limited liability company

By:		Cresco U.S. Corp.,
		an Illinois corporation
		its Manager



By:		/s/ Charles Bachtell


Name:		Charles Bachtell

[Signatures continue on following page]

SIGNATURE PAGE TO SECOND AMENDED AND RESTATED LLC AGREEMENT OF CRESCO LABS, LLC

MEMBERS:


By:		/s/ Charles Bachtell


Name:		Charles Bachtell

CB2 INITIATIVE, LLC



By:		/s/ Charles Bachtell


Name:		Charles Bachtell


Title:		Co-Founder & CEO

[Signatures continue on following page]

[Signature Page to Joint Consent of the Board of Directors and Members of Cresco Labs, LLC]


By:		/s/ Joseph Caltabiano


Name: Joseph Caltabiano

JOSEPH S. CALTABIANO TRUST
DATED 9/11/15



By:		/s/ Joseph Caltabiano


Name:		Joseph Caltabiano


Title:		Joseph caltabiano



JOSEPH A. CALTABIANO TRUST



By:		/s/ Joseph Caltabiano


Name:		Joseph Caltabiano


Title:		Joseph caltabiano



LUCY G. CALTABIANO TRUST



By:		/s/ Joseph Caltabiano


Name:		Joseph Caltabiano


Title:		Joseph caltabiano



BETTER ODDS, LLC



By:		/s/ Joseph Caltabiano


Name:		Joseph Caltabiano


Title:		Joseph caltabiano

[Signatures continue on following page]

[Signature Page to Joint Consent of the Board of Directors and Members of Cresco Labs, LLC]


MCCORMACK CAPITAL, LLC



By:		/s/ Brian McCormack


Name:		Brian McCormack


Title:		Founder

[Signatures continue on following page]

[Signature Page to Joint Consent of the Board of Directors and Members of Cresco Labs, LLC]


By:		/s/ Robert Sampson


Name:		Robert Sampson



RMS MED GROUP, LLC



By:		/s/ Robert Sampson


Name:		Robert Sampson


Title:		Manager

[Signatures continue on following page]

[Signature Page to Joint Consent of the Board of Directors and Members of Cresco Labs, LLC]


By:		/s/ Dominic Sergi


Name:		Dominic Sergi



DOMJON, LLC



By:		/s/ Dominic Sergi


Name:		Dominic Sergi


Title:		Dominic Sergi



SERGI VENTURES, LLC



By:		/s/ Dominic Sergi


Name:		Dominic Sergi


Title:		Dominic Sergi

[Signature Page to Joint Consent of the Board of Directors and Members of Cresco Labs, LLC]

Exhibit A

LTIP UNITS

1.1 Designation. A class of Membership Units in the Company designated as “LTIP Units” is hereby established. LTIP Units are intended to qualify as “profits interests” in the Company. Two initial series of LTIP Units designated as “AO LTIP Units” and “FV LTIP Units,” respectively, are hereby established. The number of LTIP Units, AO LTIP Units and FV LTIP Units that may be issued by the Company shall not be limited.

1.2 Vesting. LTIP Units may, in the sole discretion of the Compensation Committee, be issued subject to vesting, forfeiture and additional restrictions on transfer pursuant to the terms of an award, vesting or other similar agreement (a “Vesting Agreement”). The terms of any Vesting Agreement may be modified by the Compensation Committee from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the terms of any plan pursuant to which the LTIP Units are issued, if applicable. However, any such modification may not lengthen the term of vesting, or otherwise disadvantage the holder of such LTIP Units, unless the holder agrees to such modification. LTIP Units that have vested and are no longer subject to forfeiture under the terms of a Vesting Agreement are referred to as “Vested LTIP Units;” all other LTIP Units are referred to as “Unvested LTIP Units.”

1.3 Forfeiture or Transfer of Unvested LTIP Units. Unless otherwise specified in the relevant Vesting Agreement, upon the occurrence of any event specified in a Vesting Agreement resulting in either the forfeiture of any LTIP Units or the repurchase thereof by the Company at a specified purchase price, then, upon the occurrence of the circumstances resulting in such forfeiture or repurchase by the Company, the relevant LTIP Units shall immediately, and without any further action, be treated as cancelled and no longer outstanding for any purpose or as transferred to the Company. Unless otherwise specified in the relevant Vesting Agreement, no consideration or other payment shall be due with respect to any LTIP Units that have been forfeited, other than any distributions declared with a record date prior to the effective date of the forfeiture.

1.4 Legend. Any certificate evidencing an LTIP Unit shall bear an appropriate legend indicating that additional terms, conditions and restrictions on transfer, including without limitation provisions set forth in the Vesting Agreement, apply to the LTIP Unit.

1.5 Adjustments. If an LTIP Unit Adjustment Event (as defined below) occurs, then the Manager shall make a corresponding adjustment to the LTIP Units to maintain the same correspondence between Common Units and LTIP Units as existed prior to such LTIP Unit Adjustment Event. The following shall be “LTIP Unit Adjustment Events” (A) the Company makes a distribution on all outstanding Common Units in Units, (B) the Company subdivides the outstanding Common Units into a greater number of Units or combines the outstanding Common Units into a smaller number of Units, or (C) the Company issues any Units in exchange for its outstanding Common Units by way of a reclassification or recapitalization. If more than one LTIP Unit Adjustment Event occurs, the adjustment to the LTIP Units need be made only once using a single formula that takes into account each and every LTIP Unit Adjustment Event as if all LTIP Unit Adjustment Events occurred simultaneously. If the Company takes an action affecting the Common Units other than actions specifically described above as LTIP Unit Adjustment Events

and in the opinion of the Manager such action would require an adjustment to the LTIP Units to maintain the correspondence between Common Units and LTIP Units as it existed prior to such action, the Manager shall make such adjustment to the LTIP Units, to the extent permitted by law and by the terms of any Vesting Agreement or plan pursuant to which the LTIP Units have been issued, in such manner and at such time as the Manager, in its sole discretion, may determine to be appropriate under the circumstances to maintain such correspondence. If an adjustment is made to the LTIP Units as herein provided, the Company shall promptly file in the books and records of the Company an officer’s certificate setting forth such adjustment and a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after filing such certificate, the Company shall mail a notice to each holder of LTIP Units setting forth the adjustment to his or her LTIP Units and the effective date of such adjustment.

1.6 Conversion of LTIP Units into Common Units. A holder’s Vested LTIP Units shall convert into Common Units (the “LTIP Unit Conversion Date” as follows:

(1)

an AO LTIP Unit that that has become a Vested LTIP Unit shall be converted into a number (or fraction thereof) of fully paid and non-assessable Common Units, giving effect to all adjustments (if any) made pursuant to Section 1.7 equal to the AO LTIP Conversion Factor (as defined below); and

(2)

a FV LTIP Unit that that has become a Vested LTIP Unit shall be converted into a number (or fraction thereof) of fully paid and non-assessable Common Units, giving effect to all adjustments (if any) made to the FV LTIP Conversion Factor (as defined below);

“AO LTIP Conversion Factor” shall mean the quotient of (i) the excess of the Common Unit Economic Balance as of the date of conversion (assuming for this purpose the Gross Asset Values of the Company’s assets are adjusted pursuant to subsection (b) of the definition of Gross Asset Value as of the conversion date) over the AO LTIP Unit Participation Threshold (as defined below) for such Vested AO LTIP Unit, divided by (ii) the Common Unit Economic Balance as of the date of conversion (assuming for this purpose the Gross Asset Values of the Company’s assets are adjusted pursuant to subsection (b) of the definition of Gross Asset Value as of the conversion date).

“AO LTIP Unit Participation Threshold” shall mean, for each AO LTIP Unit, the amount specified as such in the relevant Vesting Agreement or other documentation pursuant to which such AO LTIP Unit is granted. The AO LTIP Unit Participation Threshold of an AO LTIP Unit is intended to be the Common Unit Economic Balance as of the date of issuance of such AO LTIP Unit, assuming the Gross Asset Values of the Company’s assets are adjusted pursuant to subsection (b) of the definition of Gross Asset Value at such time. Holders of LTIP Units shall not have the right to have Unvested LTIP Units convert into Common Units until they become Vested LTIP Units.

“FV LTIP Conversion Factor” shall mean the quotient of (i) the Economic Capital Account Balance attributable to the FV LTIP Unit being converted as of the date of conversion, divided by (ii) the Common Unit Economic Balance as of the date of conversion, provided that if the Economic Capital Account Balance attributable to an FV LTIP Unit has at any time reached an amount equal to the Common Unit Economic Balance determined as of such time, the FV LTIP Conversion Factor for such FV LTIP Unit shall never exceed one (1).

1.7 Conversion Procedures. Subject to any redemption of Common Units to be received upon the conversion of Vested LTIP Units pursuant to Section 1.11, a conversion of Vested LTIP Units occur automatically after the close of business on the applicable LTIP Unit Conversion Date without any action on the part of such holder of LTIP Units, as of which time such holder of LTIP Units shall be credited on the books and records of the Company with the issuance as of the opening of business on the next day of the number of Common Units issuable upon such conversion. After the conversion of LTIP Units as aforesaid, the Company shall deliver to such holder of LTIP Units, upon his or her written request, a certificate of the Manager certifying the number of Common Units and remaining LTIP Units, if any, held by such Person immediately after such conversion.

1.8 Treatment of Capital Account. For purposes of making future allocations under this Agreement, reference to a Member’s portion of its Economic Capital Account Balance attributable to his or her LTIP Units shall exclude, after the date of conversion of any of its LTIP Units, the portion of such Member’s Economic Capital Account Balance attributable to the converted LTIP Units.

1.9 Mandatory Conversion in Connection with a Capital Transaction.

(a)

If the Company or the Manager shall be a party to any transaction (including without limitation a merger, consolidation, unit exchange, self tender offer for all or substantially all Common Units or other business combination or reorganization, or sale of all or substantially all of the Company’s assets, but excluding any transaction which constitutes an LTIP Unit Adjustment Event) as a result of which Common Units shall be exchanged for or converted into the right, or the holders of Common Units shall otherwise be entitled, to receive cash, securities or other property or any combination thereof (any such transaction being referred to herein as a “Capital Transaction”), then the Manager shall, immediately prior to the Capital Transaction, insure the conversion of the maximum number of LTIP Units then eligible for conversion, taking into account any allocations that occur in connection with the Capital Transaction or that would occur in connection with the Capital Transaction if the assets of the Company were sold at the Capital Transaction price or, if applicable, at a value determined by the Manager in good faith using the value attributed to the Common Units in the context of the Capital Transaction (in which case the LTIP Unit Conversion Date shall be the effective date of the Capital Transaction and the conversion shall occur immediately prior to the effectiveness of the Capital Transaction).

(b)

In anticipation of such Capital Transaction, the Company shall use commercially reasonable efforts to cause each holder of LTIP Units to be afforded the right to receive in connection with such Capital Transaction in consideration for the Common Units into which his or her LTIP Units will be converted the same kind and amount of cash, securities and other property (or any combination thereof) receivable upon the consummation of such Capital Transaction by a holder of the same number of Common Units, assuming such holder of Common Units is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be (a “Constituent Person”), or an Affiliate of a Constituent Person. In the event that holders of Common Units have the opportunity to elect the form or type of consideration to be received upon consummation of the Capital Transaction, prior to such Capital Transaction the Manager shall give prompt written notice to each holder of LTIP Units of such election, and shall use commercially reasonable efforts to afford such holders the right to elect, by written notice to the Manager, the form or type of consideration to be received upon conversion of each LTIP Unit held by such holder into Common Units in connection with such Capital Transaction. If a holder of LTIP Units fails to make such an election, such holder (and any of its transferees) shall receive upon conversion of each LTIP Unit held by him or her (or by any of his or her transferees) the same kind and amount of consideration that a holder of a Common Unit would receive if such holder of Common Units failed to make such an election.

(c)

Subject to the rights of the Company and the Manager under the relevant Vesting Agreement and the terms of any Stock Plan under which LTIP Units are issued, the Company shall use commercially reasonable efforts to (i) cause the terms of any Capital Transaction to be consistent with the provisions of this Section 1.10, and (ii) in the event LTIP Units are not converted into Common Units in connection with the Capital Transaction (including pursuant to Section 1.10(a) above), but subject to the rights of the Manager and the Company set forth in Section 1.13(b)(ii) below to the extent that they can act without the consent of holders of LTIP Units, enter into an agreement with the successor or purchasing entity, as the case may be, for the benefit of those holders of LTIP Units whose LTIP Units will not be converted into Common Units in connection with the Capital Transaction that, to the extent compatible with the interests of the Common Unitholders, (A) contains reasonable provisions designed to allow such holders to subsequently convert their LTIP Units, if and when eligible for conversion, into securities as comparable as reasonably possible under the circumstances to the Common Units, and (B) preserves as far as reasonably possible under the circumstances the distribution, special allocation, conversion, and other rights of such holders.

1.10 Redemption Right of LTIP Unit Members.

(a)

LTIP Units will not be redeemable at the option of the Company; provided, however, that the foregoing shall not prohibit the Company from repurchasing LTIP Units from the holder thereof if and to the extent that such holder agrees to sell such LTIP Units.

(b)

Except as otherwise set forth in the relevant Vesting Agreement or other separate agreement entered into between the Company and a LTIP Unit Member, and subject to the terms and conditions set forth herein or in this Agreement, on or at any time after the applicable LTIP Unit Conversion Date each LTIP Unit Member will have the right (the “LTIP Unit Redemption Right”) to require the Company to redeem all or a portion of the Common Units into which such LTIP Unit Member’s LTIP Units were converted (such Common Units being hereafter referred to as “Tendered Units”) in exchange for the Cash Amount (as defined below), unless the terms of this Agreement, the relevant Vesting Agreement or other separate agreement entered into between the Company and the LTIP Unit Member expressly provide that such Common Units are not entitled to the LTIP Unit Redemption Right. The term “Cash Amount” shall mean, with respect to Tendered Units, an amount of cash equal to the product of (i) the Current Per Share Market Price as of the date on which the Company receives the applicable LTIP Unit Redemption Notice (as defined below) multiplied by (ii) the number of Tendered Units. Any LTIP Unit Redemption Right shall be exercised pursuant to a LTIP Unit Redemption Notice (as defined below) delivered to the Manager by the LTIP Unit Member who is exercising the right (the “Tendering Member”). Any Common Units redeemed by the Company pursuant to this Section 1.11 shall be cancelled upon such redemption.

(c)

In order to exercise his or her LTIP Unit Redemption Right, a Tendering Member shall deliver a notice (an “LTIP Unit Redemption Notice”) to the Company in the form specified by the Company. Redemption and payment of the Cash Amount will occur within 30 days after receipt by the Manager of a LTIP Unit Redemption Notice (the “Specified LTIP Unit Redemption Date”).

(d)

Notwithstanding the provisions of Section 1.11(c) above, if a holder of LTIP Units has delivered to the Manager a LTIP Unit Redemption Notice then PC Corp or Pubco may, in their sole and absolute discretion, elect to assume and satisfy the Company’s redemption obligation and acquire some or all of the Tendered Units from the Tendering Member in exchange for the Pubco Subordinate Voting Shares Amount (as defined below) or the equivalent value of Pubco Proportionate Voting Shares, and, if Pubco or PC Corp so elects, the Tendering Member shall sell such number of Tendered Units to Pubco or Cresco U.S. Corp, as the case may be, in exchange for the such shares. In such event, the Tendering Member shall have no right to cause the Company to redeem such Tendered Units for the Cash Amount. The term “Pubco Subordinate Voting Shares Amount” shall mean, with respect to Tendered Units as of a particular date, a number of Pubco Subordinate Voting Shares equal to the number of Tendered Units. If Proportionate Voting Shares of

Pubco are elected to be tendered, Proportionate Voting Shares of Pubco equal in value (solely based on the conversion rate of Proportionate Voting Shares into Subordinate Voting Shares) to the Pubco Subordinate Voting Shares Amount shall be tendered in redemption of Tendered Units. The Tendering Member shall submit (i) such information, certification or affidavit as Pubco or PC Corp may reasonably require in connection with the application of any applicable ownership limit with respect to Pubco Subordinate Voting Shares to any such acquisition and (ii) such written representations, investment letters, legal opinions or other instruments necessary, in Pubco’s or PC Corp’s view, to effect compliance with the Securities Act. The Pubco Subordinate Voting Shares Amount, if applicable, shall be delivered as duly authorized, validly issued, fully paid and nonassessable Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, and free of any pledge, lien, encumbrance or restriction, other than those provided in the Charter, the Securities Act, relevant state securities or blue sky laws and any applicable agreements with respect to such shares entered into by the Tendering Member. Notwithstanding any delay in such delivery (but subject to Section 1.11(e)), the Tendering Member shall be deemed the owner of such Pubco Subordinate Voting Shares for all purposes, including without limitation, rights to vote or consent, and receive dividends, as of the Specified LTIP Unit Redemption Date. In addition, the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, for which the Tendered Units might be exchanged shall also bear all legends deemed necessary or appropriate by the Pubco. Neither any Tendering Member whose Tendered Units are acquired by Pubco or PC Corp pursuant to this Section 1.11(d), any Member, any assignee or permitted transferee nor any other interested Person shall have any right to require or cause Pubco to register, qualify or list any Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, owned or held by such Person with the Commission, with any state securities commissioner, department or agency, under the Securities Act or with any stock exchange, unless subject to a separate written agreement pursuant to which Pubco has granted registration or similar rights to any such Person.

(e)

Each Tendering Member covenants and agrees with the Manager that all Tendered Units shall be delivered to the Manager free and clear of all liens, claims and encumbrances whatsoever and should any such liens, claims and/or encumbrances exist or arise with respect to such Tendered Units, the Manager shall be under no obligation to acquire the same. Each Tendering Member further agrees that, in the event any state or local property transfer tax is payable as a result of the transfer of its Tendered Units to the Manager (or its designee), such Tendering Member shall assume and pay such transfer tax.

(f)

Notwithstanding any provision of the Agreement to contrary or any other provision of this Exhibit A, a Member (i) shall not be entitled to effect the LTIP Unit Redemption Right for cash or in exchange for Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, to the extent the ownership of or right to acquire Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, pursuant to such exchange by such Member on

the Specified Redemption Date could cause such Member or any other Person to violate any of the restrictions on ownership and transfer of Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, set forth in the Charter and shall have no rights under this Agreement to acquire Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares which would otherwise be prohibited under the Charter. To the extent any attempted redemption or exchange for Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, would be in violation of this Section 1.11(f), it shall be null and void ab initio and such Member shall not acquire any rights or economic interest in the cash otherwise payable upon such redemption or the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, otherwise issuable upon such exchange.

(g)

Notwithstanding anything herein to the contrary (but subject to Section 1.11(f) hereof), with respect to any redemption or exchange for Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, pursuant to this Section 1.11: (i) without the consent of the Manager otherwise, each Tendering Member may effect the Redemption Right only one time in each fiscal quarter; (ii) without the consent of the Manager otherwise, each Tendering Member may not effect the Redemption Right for fewer than 1,000 Common Units or, if the Tendering Member holds fewer than 1,000 Common Units, all of the Common Units held by such Tendering Member; (iii) without the consent of the Manager otherwise, each Member may not effect the Redemption Right during the period after the record date established in accordance with this Agreement for the distribution of cash to Common Unitholders with respect to a distribution and before the record date established by Pubco for a distribution to its common stockholders of some or all of its portion of such distribution; (iv) the consummation of any redemption or exchange for Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (v) each Tendering Member shall continue to own all Common Units subject to any redemption or exchange for Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, and be treated as a Member with respect to such Common Units for all purposes of this Agreement, until such Common Units are either paid for by the Company pursuant to Section 1.13(b) or transferred to Pubco or PC Corp and paid for by the issuance of the Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, pursuant to Section 1.13(d) on the Specified Redemption Date. Until a Specified Redemption Date, the Tendering Member shall have no rights as a stockholder of Pubco with respect to such Tendering Member’s Common Units.

(h)

Notwithstanding anything herein to the contrary (but subject to Section 1.8), a holder of LTIP Units may deliver a LTIP Unit Redemption Notice relating to Common Units that will be issued to such holder upon conversion of LTIP Units into Common Units pursuant to Section 1.6 in advance of the LTIP Unit Conversion Date; provided, however, that the redemption of such Common Units by the

Company shall in no event take place until the LTIP Unit Conversion Date. For clarity, it is noted that the objective of this Section 1.11(h) is to put a holder of LTIP Units in a position where, if he or she so wishes, the Common Units into which his or her Vested LTIP Units will be converted can be redeemed by the Company simultaneously with such conversion, with the further consequence that, if Pubco or PC Corp elects to assume the Company’s redemption obligation with respect to such Common Units under Section 1.11(d) by delivering to such holder Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, rather than cash, then such holder can have such Pubco Subordinate Voting Shares or Pubco Proportionate Voting Shares, as the case may be, issued to him or her simultaneously with the conversion of his or her Vested LTIP Units into Common Units. The Manager shall cooperate with a holder of LTIP Units to coordinate the timing of the different events described in the foregoing sentence.

1.11 Voting Rights. Except as provided in Section 1.13, holders of LTIP Units shall not have the right to vote on any matters submitted to a vote of the Members.

1.12 Special Approval Rights. Holders of LTIP Units shall only (a) have those voting rights required from time to time by non-waivable provisions of Illinois law, if any, and (b) have the limited voting rights expressly set forth in this Section 1.12. The Manager and/or the Company shall not, without the affirmative vote of holders of more than 50% of the then outstanding LTIP Units affected thereby, given in person or by proxy, either in writing or at a meeting (voting separately as a class), take any action that would materially and adversely alter, change, modify or amend, whether by merger, consolidation or otherwise, the rights, powers or privileges of such LTIP Units, subject to the following exceptions: (i) no separate consent of the holders of LTIP Units will be required if and to the extent that any such alteration, change, modification or amendment would, in a ratable and proportional manner, alter, change, modify or amend the rights, powers or privileges of the Common Units; (ii) a merger, consolidation or other business combination or reorganization of the Company, the Manager, Pubco or any of their Affiliates shall not be deemed to materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units so long as either: (w) the LTIP Units that are then eligible for conversion are converted into Common Units immediately prior to the effectiveness of the transaction; or (x) the holders of LTIP Units either will receive, or will have the right to elect to receive, for each LTIP Unit an amount of cash, securities, or other property equal to the amount of cash, securities or other property that would be paid in respect of such LTIP Unit had it been converted into a number of Common Units (or fraction of a Common Unit, as applicable under the terms of such LTIP Units) immediately prior to the transaction, but only if it was eligible to be so converted; (y) the LTIP Units remain outstanding with their terms materially unchanged; or (z) if the Company is not the surviving entity in such transaction, the LTIP Units are exchanged for a security of the surviving entity with terms that are materially the same with respect to rights to allocations, distributions, redemption, conversion and voting as the LTIP Units; (iii) any creation or issuance of Membership Units (whether ranking junior to, on a parity with or senior to the LTIP Units in any respect), which either (x) does not require the consent of the holders of Common Units or (y) is authorized by the holders of Common Units shall not be deemed to materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units; and (iv) any waiver by the Company of restrictions or limitations applicable to any outstanding LTIP Units with respect to any holder or holders thereof shall not be deemed to materially and adversely

alter, change, modify or amend the rights, powers or privileges of the LTIP Units with respect to other holders. The foregoing voting provisions will not apply if, as of or prior to the time when the action with respect to which such vote would otherwise be required will be taken or be effective, all outstanding LTIP Units shall have been converted and/or redeemed, or provision is made for such redemption and/or conversion to occur as of or prior to such time.

1.13 Members’ Rights to Transfer.

(a)

Subject to the terms of the relevant Vesting Agreement or other document pursuant to which LTIP Units are granted, except in connection with the exercise of a LTIP Unit Redemption Right pursuant to Section 1.11, a Member (other than the Company) may not transfer all or any portion of his or her LTIP Units without the prior written consent of the Manager, which consent may be given or withheld in the Manager’s sole and absolute discretion.

(b)

If a holder of LTIP Units is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Member’s estate shall have all of the rights of a Member, but not more rights than those enjoyed by other Members, for the purpose of settling or managing the estate and such power as the Incapacitated Member possessed to transfer all or any part of his, her or its membership interest in the Company. “Incapacity” or “Incapacitated” means, (i) as to any LTIP Unit Member who is an individual, death, total physical disability or entry by a court of competent jurisdiction of an order adjudicating him or her incompetent to manage his or her Person or estate; (ii) as to any Member that is an estate, the distribution by the fiduciary of the estate of its entire interest in the Company; (iii) as to any trustee of a trust which is a LTIP Unit Member, the termination of the trust (but not the substitution of a new trustee) or (iv) as to any LTIP Unit Member, the bankruptcy of such LTIP Unit Member.

EX-99.48 49 d945319dex9948.htm EX-99.48 EX-99.48

Exhibit 99.48

FORM 51-102F3

MATERIAL CHANGE REPORT

Item 1.

Name and Address of Company

Cresco Labs Inc. (formerly Randsburg International Gold Corp., the “Company”)

1055 West Hastings Street, Suite 2200

Vancouver, British Columbia

V6E 2E9, Canada

Item 2.

Date of Material Change

April 1, 2019

Item 3.

News Release

A news release with respect to the material change, a copy of which is attached hereto as Schedule “A”, was disseminated by the Company on April 1, 2019 through Business Wire and subsequently filed under the Company’s profile on SEDAR at www.sedar.com.

Item 4.

Summary of Material Change

On April 1, 2019, the Company entered into an arrangement agreement (the “Arrangement Agreement”) with CannaRoyalty Corp. d/b/a Origin House (“Origin House”) pursuant to which the Company has agreed to acquire all of the issued and outstanding shares of Origin House (the “Origin House Shares”) pursuant to a court-approved plan of arrangement (the “Arrangement”) under the Business Corporations Act (Ontario).

Item 5.1

Full Description of Material Change

On April 1, 2019, the Company and Origin House entered into the Arrangement Agreement. Under the terms of the Arrangement Agreement, holders of Origin House Shares will receive 0.8428 subordinate voting shares of the Company (the “Cresco Shares”) for each Origin House Share (the “Exchange Ratio”). The Arrangement represents a total consideration of approximately C$1.1 billion on a fully-diluted basis, or C$12.68 per Origin House Share (based on the Exchange Ratio and the closing price of Cresco Shares on March 29, 2019, the last trading day prior to the announcement of the Arrangement). After giving effect to the Arrangement, shareholders of Origin House (the “Origin House Shareholders”) will hold approximately 20% ownership in the pro forma entity (on a pro forma fully-diluted and as converted basis).

The Arrangement requires the approval of not less than two-thirds of the votes cast by Origin House Shareholders (voting as a single class) at a special meeting expected to be held in June 2019. Certain Origin House directors, officers and other significant shareholders have entered into irrevocable voting and support agreements to vote in favor of the Arrangement, and have also agreed for their resulting Cresco Shares to be deposited into escrow and released over a period of nine months following closing of the Arrangement.

In addition to the approval of Origin House Shareholders, the Arrangement is subject to approval of the Canadian Securities Exchange, the Ontario Superior Court of Justice (Commercial List), and certain other regulatory approvals. Subject to the receipt of all necessary approvals and the satisfaction or waiver of other closing conditions, the Arrangement is expected to be completed by the end of June 2019.

The Agreement contains customary representations, warranties and covenants for a transaction of this type, including a termination fee in the amount of C$45 million payable by Origin House in the event that the Arrangement is terminated in certain circumstances. The Arrangement Agreement also provides that, upon the completion of the Arrangement, Marc Lustig will be appointed to the executive management team of the Company and will also serve as a member of the Company’s Board of Directors.

A copy of the Arrangement Agreement and plan of arrangement relating thereto and other related documents will be filed with the Canadian securities regulatory authorities and will be available for viewing on the SEDAR website at www.sedar.com. Additional details of the Arrangement will be provided to Origin House Shareholders in an information circular expected to be mailed to Origin House Shareholders in the coming weeks and made available on Origin House’s profile on SEDAR at www.sedar.com.

Item 5.2.

Disclosure of Restructuring Arrangements

Not applicable.

Item 6.

Reliance on Subsection 7.1(2) of National Instrument 51-102

Not applicable.

Item 7.

Omitted Information

Not applicable.

Item 8.

Executive Officer

For further information, please contact:

John Schetz, General Counsel

Phone: (312) 929-0993

Email: john.schetz@crescolabs.com

Item 9.

Date of Report

April 11, 2019

Schedule “A”

See attached.

CRESCO LABS TO ACQUIRE ORIGIN HOUSE

IN LARGEST-EVER PUBLIC COMPANY ACQUISITION IN THE U.S. CANNABIS SECTOR

SOLIDIFIES A LEADING POSITION IN CALIFORNIA, THE WORLD’S LARGEST REGULATED CANNABIS MARKET

CREATES A CANNABIS INDUSTRY POWERHOUSE – COMBINED ENTITY WILL HAVE THE LEADING

DISTRIBUTION FOOTPRINT IN NORTH AMERICA

ADDITION OF CALIFORNIAN BRANDS AND EXPERTISE TO SUPPORT CONTINUED GLOBAL EXPANSION

April 1, 2019 – CHICAGO, IL & OTTAWA, CANADA – Cresco Labs Inc. (“Cresco Labs” or the “Company” – CSE: CL, OTCQX: CRLBF) and CannaRoyalty Corp. d/b/a Origin House (“Origin House” – CSE: OH, OTCQX: ORHOF) are pleased to announce today that they have entered into a definitive agreement (the “Agreement”) pursuant to which Cresco Labs will acquire all of the issued and outstanding shares of Origin House (the “Origin House Shares”) (the “Transaction”). Under the terms of the Agreement, holders of common shares of Origin House will receive 0.8428 subordinate voting shares of Cresco Labs (the “Cresco Labs Shares”) for each Origin House Share (the “Exchange Ratio”).

The Transaction represents a total consideration of approximately C$1.1 billion on a fully-diluted basis, or C$12.68 per Origin House Share (based on the Exchange Ratio and the closing price of Cresco Labs Shares on March 29, 2019, the last trading day prior to the announcement of the Transaction). The Transaction represents the largest public company acquisition in the history of the U.S. cannabis industry. The combined entity will be: 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.

KEY TRANSACTION HIGHLIGHTS & BENEFITS:

•

Combination of Cresco Labs and Origin House will result in the premier distribution company serving California, the largest cannabis market in the world;

•

Accelerates Cresco Labs’ entrance into the California market with the addition of Origin House’s vast distribution platform;

•

Establishes the cannabis industry’s first national “house of brands” with a growing multi-state footprint that includes leading distribution market share in some of the largest states in the country including California, Pennsylvania and Illinois;

•

Combines the expertise of two industry leaders in branded product development and distribution;

•

Positions Cresco Labs as the preferred partner for additional premier cannabis brands seeking distribution on the industry’s most expansive platform;

•

Enhances Cresco Labs’ capital markets presence by significantly increasing its scale and the liquidity in the Company’s stock, resulting in improved ability to attract institutional investment and lower its cost of capital;

•

Continued participation by Origin House shareholders who will hold approximately 20% of the issued and outstanding Cresco Labs Shares on a pro forma, fully-diluted and as converted basis, enabling Origin House Shareholders the opportunity to participate in the expected value created through the Transaction; and

•

Immediate premium to Origin House shareholders of approximately 26% over the 30-day volume weighted average price (“VWAP”) of the Origin House Shares on the Canadian Stock Exchange (“CSE”) ending March 29, 2019 (based on the Exchange Ratio and the closing price of Cresco Labs Shares on March 29, 2019).

¹	Based on the percentage of licensed cannabis micro-businesses and storefronts serviced over the past 9 months.

MANAGEMENT COMMENTARY

“The acquisition of Origin House is another example of our focused and disciplined approach to creating a meaningful presence in key cannabis markets through excellence in brand development and distribution,” said Cresco Labs CEO and Co-founder Charlie Bachtell. “It establishes Cresco Labs as the leading multi-state operator with one of the largest distribution platforms in California, which is projected to be a $7.7 billion cannabis market in 2022 by Arcview Market Research/BDS Analytics. Having a similar priority on consumers and consumer brands with the expertise of executives from the largest wine and liquor distribution company in the United States, the team at Origin House has established the premier cannabis distribution company in the largest cannabis market in the world. It’s an incredible platform for Cresco in California and the distribution infrastructure will provide a valuable framework to leverage as we scale our platforms in other states. Congratulations to Marc and the team at Origin House – through strategic M&A and purposeful investments, they’ve built something very special.”

Mr. Bachtell continued, “Following the closing of this acquisition, Cresco brands will be in over 725 dispensaries across the country, giving us the largest and most strategic distribution footprint of any cannabis company in the United States. This significantly accelerates our efforts to build the first national house of brands with broad and deep positions in the largest cannabis markets in the country. Cresco will have industry-leading brand development and distribution capabilities, which we believe will result in significant value creation for consumers and our shareholders alike as the market for medical-use and regulated adult-use cannabis continues to grow at a rapid pace.”

“We are excited to welcome the Origin House team to the Cresco family,” said Cresco Labs President and Co-founder Joe Caltabiano. “With the addition of Origin House and its vast distribution network in California, we will have access to incredibly valuable real-time market data and insight into consumer buying patterns that will inform our product development strategies and reinforce our brand strength. In addition to their brand building and distribution expertise, Origin House has a very experienced M&A, corporate development and capital markets team that will be extremely valuable as we continue to expand and add scale through additional transactions. With respect to the capital markets impact, with the equity issued through this transaction, we expect to have substantially more shares in our float, which we believe will provide ample liquidity for larger institutional investors looking to deploy capital into the cannabis space. We expect that our larger scale and improved liquidity following this acquisition will positively impact our ability to attract a larger universe of potential investors and reduce our cost of capital in the future.”

Marc Lustig, Chairman and CEO of Origin House commented, “From an Origin House perspective, this transaction is directly aligned with our strategy to build a leading portfolio of cannabis brands in California and to rapidly and accretively take those brands to the rest of the U.S. market, as well as the Canadian market. By partnering with one of the largest and most innovative U.S. multi-state operators in existence today, Origin House will supercharge its growth and be in a position to offer its brand partners access to 10 additional states, with licenses and supporting infrastructure already in place. Cresco shares Origin House’s resolute focus on the customer as the catalyst for all brand and business development efforts. This Transaction is not the first opportunity we have reviewed, but it has received the unanimous support of our board and large shareholders because we are confident that together we will be in a position to truly change the face of the global cannabis industry while continuing to create significant value for the shareholders of both companies.”

TERMS OF THE TRANSACTION

The Transaction will be effected by way of a plan of arrangement under the laws of the Province of Ontario. Under the terms of the Agreement, Cresco Labs will acquire all of the issued and outstanding Origin House Shares, with each holder of Origin House common shares receiving 0.8428 Cresco Labs Shares for each Origin House Share (and each holder of an Origin House proportionate voting share receiving 84.28 Cresco Labs Shares for each proportionate voting share held), which implies a price per Origin House Share of C$12.68 (on an as converted basis), representing a total consideration of approximately C$1.1 billion (on a fully-diluted). After giving effect to the Transaction, Origin House Shareholders will hold approximately 20% ownership in the pro forma entity (on a pro forma fully-diluted and as converted basis).

The Transaction has been unanimously approved by the Board of Directors of each of Cresco Labs and Origin House. Certain Origin House directors, officers and other significant shareholders have entered into irrevocable voting and support agreements to vote in favor of the Transaction, and have also agreed for their resulting Cresco Labs Shares to be deposited into escrow and released over a period of nine months following closing of the Transaction.

The Agreement contains customary representations, warranties and covenants for transactions of this type, including a termination fee in the amount of C$45 million payable by Origin House in the event that the Transaction is terminated in certain circumstances.

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The Transaction is subject to, among other things, CSE, Ontario court and certain other regulatory approvals and requires the approval of two-thirds of the votes cast by shareholders of Origin House at a special meeting expected to be held in June 2019, as well as other customary closing conditions. Approval of Cresco Labs Shareholders is not required. Additional details of the Transaction will be provided to Origin House Shareholders in an information circular expected to be mailed to shareholders in the coming weeks. The Transaction is expected to be completed by the end of June 2019, subject to the satisfaction or waiver of applicable closing conditions.

The Board of Directors of Origin House unanimously recommends that Origin House Shareholders vote in favor of the resolution to approve the Transaction.

Upon the completion of the Transaction, Marc Lustig will be appointed to the executive management team of Cresco Labs and will also serve as a member of the Company’s Board of Directors. Mr. Lustig has 16 years of healthcare and capital markets experience in North America and Europe. Mr. Lustig founded CannaRoyalty Corp (d/b/a Origin House) in early 2015.

CRESCO LABS PRO FORMA FOOTPRINT

Upon completion of the Transaction, as well as the receipt of licensure in Michigan and the closing of the Company’s pending acquisition in Florida, Cresco Labs will have operations in 11 states, 23 facilities, more than 1.5 million square feet of cultivation, and licenses to operate up to 51 retail dispensaries. Cresco Labs brands will be sold in over 725 dispensaries across the United States.

FINANCIAL AND LEGAL ADVISORS

Canaccord Genuity Corp. acted as financial advisor and Bennett Jones LLP acted as legal counsel to Cresco Labs.

Cormark Securities Inc. acted as financial advisor and Norton Rose Fulbright Canada LLP acted as legal counsel to Origin House.

Origin House has retained Kingsdale Advisors as its strategic shareholder and communications advisor. Shareholders with questions are advised to contact Kingsdale Advisors at 1-888-302-5677 or contactus@kingsdaleadvisors.com

CONFERENCE CALL AND INVESTOR PRESENTATION

Cresco Labs and Origin House will hold a conference call and webcast to discuss the acquisition on Tuesday April 2nd at 8:00 am ET. The conference call may be accessed via Cresco Labs investor website at investors.crescolabs.com or by dialing either (a) 1-866-688-4235 (Toll-Free) or (b) 1-409-216-0711 (International), in either case entering conference ID 3274836. Archived access to the webcast will be available for one year on Cresco’s investor website.

In addition, an investor presentation providing an overview of the transaction will be made available on the Events and Presentations page of the Cresco investor website.

ABOUT CRESCO LABS

Cresco Labs, based in Chicago, is a leading U.S. cannabis company with experienced management, access to capital and a demonstrated growth strategy. As a differentiated grower, processor and retailer of premium cannabis operating across the United States, the company focuses on entering highly regulated markets with outsized demand potential and strong regulatory structures. Its impressive speed-to-market gives Cresco a distinct competitive advantage as it replicates its model to expand its national footprint. Cresco’s proven ability to execute is complemented by a cutting-edge brand strategy spearheaded by several of the brightest minds in consumer marketing in the nation. Cresco’s products are tailored to all major consumer segments: everyday cannabis, medicinally focused, connoisseur grade, and chef inspired edibles by James Beard Award-winning pastry chef Mindy Segal. Learn more about Cresco Labs at www.crescolabs.com.

ABOUT ORIGIN HOUSE

Origin House is a growing cannabis brands and distribution company operating across key markets in the U.S. and Canada, with a strategic focus on becoming a preeminent global house of cannabis brands. Origin House’s foundation is in California, the world’s largest regulated cannabis market, where it delivers over 130 branded cannabis products from 50+ brands to the majority of licensed dispensaries. Origin House’s brand development platform is operated out of five licensed facilities located across California, and provides distribution, manufacturing, cultivation and marketing services for its brand partners.

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Origin House is actively developing infrastructure to support the proliferation of its brands internationally, initially through its acquisition of Canadian retailer 180 Smoke. Origin House’s shares trade on the CSE under the symbol “OH” and on the OTCQX under the symbol “ORHOF”. Origin House is the registered business name of CannaRoyalty Corp. For more information, visit www.originhouse.com.

FORWARD LOOKING STATEMENTS

Readers are cautioned that the foregoing list of factors is not exhaustive. Because of these uncertainties, readers should not place undue reliance on the forward-looking statements. No assurances are given as to the future trading price or trading volumes of Cresco Labs’ Shares, or Origin House Shares, nor as to the Cresco Labs’ and/or Origin House’s financial performance in future financial periods. Except to the extent required by applicable laws, Cresco Labs’ and/or Origin House does not intend to update any of these factors or any of the forward-looking statements contained herein, whether as a result of new information, future event or otherwise. Except as otherwise indicated, this press release speaks as of the date hereof. The distribution of this press release does not imply that there has been no change after the date hereof or create any duty or commitment to update or supplement any information provided in this press release or otherwise.


CONTACTS – Cresco Labs		CONTACTS – Origin House
Media:		Media:
Jason Erkes, Cresco Labs		Priyam Chakraborty, Origin House
Chief Communications Officer		Communications Manager
press@crescolabs.com		647-232-9287
		pchakraborty@originhouse.com
Investors:
Aaron Miles, Cresco Labs		Investors:
Vice President, Investor Relations		Kingsdale Advisors
investors@crescolabs.com		1-888-302-5677
		contactus@kingsdaleadvisors.com
For general Cresco Labs inquiries:
312-929-0993		Jonathan Ross
info@crescolabs.com		LodeRock Advisors Inc., Origin House Investor Relations
		416-283-0178
		jon.ross@loderockadvisors.com

EX-99.49 50 d945319dex9949.htm EX-99.49 EX-99.49

Exhibit 99.49

Execution Version

AMENDED AND RESTATED UNDERWRITING AGREEMENT

September 16, 2019

Cresco Labs Inc.

520 W Erie Street, Suite 220

Chicago, IL 60654

Attention: Charles Bachtell, Chief Executive Officer and Director

Dear Sir:

Canaccord Genuity Corp. (“Canaccord”), on its own behalf and on behalf of the Canaccord Genuity Group of companies, as lead underwriter, Beacon Securities Limited, Cormark Securities Inc., Eight Capital and GMP Securities L.P. (together with Canaccord, the “Underwriters” and, individually, an “Underwriter”) hereby severally, and not jointly and severally, offer and agree to purchase on an “underwritten” basis in the Qualifying Jurisdictions (as defined below) and the other jurisdictions contemplated herein, including the United States, from Cresco Labs Inc. (the “Company”), and the Company hereby agrees to issue and sell to the Underwriters, an aggregate of 7,350,000 units (each an “Initial Unit” and collectively, the “Initial Units”) of the Company, at the purchase price of $10.00 per Initial Unit (the “Issue Price”), for aggregate gross proceeds of $73,500,000, upon and subject to the terms and conditions contained herein (the “Offering”). Each Initial Unit shall consist of one subordinate voting share in the capital of the Company (each an “Initial Share” and collectively, the “Initial Shares”) and one-half of one subordinate voting share purchase warrant of the Company (each whole subordinate voting share purchase warrant being an “Initial Warrant” and collectively, the “Initial Warrants”). After a reasonable effort has been made to sell all of the Initial Units at the Issue Price, the Underwriters may subsequently reduce the selling price to investors from time to time, provided that any such reduction in the Issue Price shall not affect the aggregate gross proceeds less Underwriters Fees (as defined below) payable to the Company.

Upon and subject to the terms and conditions herein set forth and in reliance upon the representations and warranties herein contained, the Company hereby grants to the Underwriters, in the respective percentages set out in Section 19 of this Agreement, an option (the “Over-Allotment Option”) to purchase up to 1,102,500 additional units of the Company (each an “Additional Unit” and collectively, the “Additional Units”) at a price equal to the Issue Price, that is exercisable on or before 5:00 p.m. (Toronto time) on the date that is 30 days after the Closing Date (as defined below). Each Additional Unit shall consist of one subordinate voting share in the capital of the Company (each an “Additional Share” and collectively the “Additional Shares”) and one-half of one subordinate voting share purchase warrant of the Company (each whole subordinate voting share purchase warrant being an “Additional Warrant” and collectively the “Additional Warrants”). The Over-Allotment Option may be exercised by the Underwriters in respect of: (i) Additional Units at the Issue Price; or (ii) Additional Shares at a price of $8.92 per Additional Share; or (iii) Additional Warrants at a price of $2.16 per Additional Warrant; or (iv) any combination of Additional Shares and/or Additional Warrants so long as the aggregate number of Additional Shares and Additional Warrants that may be issued under the Over-Allotment Option does not exceed 1,102,500 Additional Shares and 551,250 Additional

Warrants. The Over-Allotment Option may be exercised in whole or in part at any time and from time to time prior to its expiry in accordance with the provisions of this Agreement. The Underwriters shall be under no obligation whatsoever to exercise the Over-Allotment Option in whole or in part.

Delivery of and payment for any Additional Units will be made at the time and on the date (each an “Option Closing Date”) as set out in a written notice of Canaccord, on behalf of the Underwriters, referred to below, which Option Closing Date may occur on the Closing Date but will in no event occur earlier than the Closing Date, nor earlier than two Business Days (as defined below) or later than seven Business Days after the date upon which the Company receives a written notice from Canaccord, on behalf of the Underwriters, setting out the number of Additional Units to be purchased by the Underwriters. Any such notice must be received by the Company not later than 5:00 p.m. (Toronto time) on the date that is 30 days after the Closing Date. Upon the furnishing of such a notice, the Underwriters will be committed to purchase, and the Company will be committed to sell and deliver to the Underwriters, in accordance with and subject to the provisions of this Agreement, the number of Additional Units indicated in such notice.

Unless the context otherwise requires or unless otherwise specifically stated, all references in this Agreement to (i) the “Offering” shall be deemed to include the Over-Allotment Option, (ii) the “Offered Units” shall mean, collectively, the Initial Units and the Additional Units, (iii) the “Shares” shall mean, collectively, the Initial Shares and the Additional Shares, and (iv) the “Warrants” shall mean, collectively, the Initial Warrants and the Additional Warrants.

The Underwriters understand that the Company intends to allocate $8.92 of the Issue Price as consideration for the issue of each Share and $1.08 of the Issue Price as consideration for the issue of each one-half Warrant.

The Warrants shall be created and issued pursuant to a warrant indenture (the “Warrant Indenture”) to be dated as of the Closing Date between the Company and Odyssey Trust Company, in its capacity as warrant agent thereunder. Each Warrant will entitle the holder thereof to acquire one subordinate voting share in the capital of the Company (each a “Warrant Share” and collectively the “Warrant Shares”) at a price of $12.50 per Warrant Share, for a period of 36 months from the Closing Date.

In consideration of the Underwriters’ services to be rendered in connection with the Offering, the Company agrees to pay to the Underwriters: (A) at or prior to the Closing Time (as defined below) on the Closing Date an aggregate cash fee equal to 5.0% of the gross proceeds from the sale of the Initial Units, and (B) at or prior to the Closing Time on each Option Closing Date an aggregate cash fee equal to 5.0% of the gross proceeds from the sale of the Additional Units at that time (the fees referred to in (A) and (B) are collectively the “Underwriters Fees”).

In accordance with the provisions of Section 4 hereof, the Company agrees that each of the Underwriters will be permitted to appoint, at the sole cost and expense of the Underwriter so appointing, other registered dealers (or other dealers duly qualified in their respective jurisdictions) as their agents to assist in the Offering, and that the Underwriters may determine the remuneration payable to such other dealers appointed by them; provided that, for certainty, the Company shall not have any liability for any such remuneration.

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The Company and the Underwriters agree that any offers to sell or sales of the Offered Units to purchasers that are in the United States (as defined below) or to or for the account or benefit of U.S. Persons (as defined below) will (i) be made in compliance with Schedule “A” attached hereto, which forms part of this Agreement, and allows for the Underwriters, acting through their U.S. Affiliates, to offer and re-sell the Offered Units in the United States or to or for the account or benefit of U.S. Persons that are Qualified Institutional Buyers (as defined below) in accordance with Rule 144A (as defined below); (ii) be conducted in such a manner so as not to require registration thereof or the filing of a registration statement or a prospectus with respect thereto under the U.S. Securities Act (as defined below) and (iii) be conducted through one or more duly registered U.S. Affiliates (as defined below) of the Underwriters in compliance with applicable federal and state securities laws of the United States.

The Offering is conditional upon and subject to the additional terms and conditions set forth below. The following are additional terms and conditions of the Agreement between the Company and the Underwriters:

Section 1

Interpretation

Definitions – In addition to the terms previously defined and terms defined elsewhere in this Agreement (as defined below) (including the Schedules hereto), where used in this Agreement or in any amendment hereto, the following terms shall have the following meanings, respectively:

“Agreement” means this underwriting agreement dated September 16, 2019 between the Company and the Underwriters, as the same may be supplemented, amended and/or restated from time to time;

“Amended & Restated Base Prospectus” has the meaning ascribed thereto in Section 3(1)of this Agreement;

“Ancillary Documents” means all agreements, indentures (including the Warrant Indenture), certificates (including the certificates, if any, representing the Shares, Warrants and Warrant Shares), officer’s certificates, notices and other documents executed and delivered, or to be executed and delivered, by the Company in connection with the Offering, whether pursuant to Applicable Securities Laws or otherwise;

“Anti-Money Laundering Laws” has the meaning ascribed thereto in Section 8(ss) of this Agreement;

“Applicable Laws” means, in relation to any person or persons, the Applicable Securities Laws and all other statutes, regulations, rules, orders, by-laws, codes, ordinances, decrees, the terms and conditions of any grant of approval, permission, authority or licence, or any judgment, order, decision, ruling, award, policy or guidance document that are applicable to such person or persons or its or their business, undertaking, property or securities and emanate from a Governmental Authority having jurisdiction over the person or persons or its or their business, undertaking, property or securities;

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“Applicable Securities Laws” means, collectively, (i) the applicable securities laws of each of the Qualifying Jurisdictions and their respective regulations, rulings, rules, blanket orders, instruments (including national and multinational instruments), fee schedules and prescribed forms thereunder, the applicable policy statements issued by the Securities Commissions and all rules, by-laws and regulations governing the CSE and (ii) all applicable securities laws in the United States, including without limitation, the U.S. Securities Act, the U.S. Exchange Act and the rules and regulations promulgated thereunder, and any applicable state securities laws;

“Assets and Properties” with respect to any person means all assets and properties of every kind, nature, character and description (whether real, personal or mixed, tangible or intangible, choate or inchoate, absolute, accrued, contingent, fixed or otherwise, and, in each case, wherever situated), including the goodwill related thereto, operated, owned, licensed or leased by or in the possession of such person;

“Base Prospectus” has the meaning ascribed thereto in Section 3(1) of this Agreement;

“Beneficiaries” has the meaning ascribed thereto in Section 13(3) of this Agreement;

“Business Day” means a day, other than a Saturday, a Sunday or a day on which chartered banks are not open for business in Toronto, Ontario;

“Canadian Shelf Procedures” have the meanings ascribed thereto in Section 3(1) of this Agreement;

“CDS” means CDS Clearing and Depository Services Inc.;

“Claims” and “Claim” have the meanings ascribed thereto in Section 13(1) of this Agreement;

“Closing” means the closing of the Offering;

“Closing Date” means September 24, 2019 or such earlier or later date as may be agreed to in writing by the Company and Canaccord on behalf of the Underwriters, each acting reasonably;

“Closing Time” means 8:00 a.m. (Toronto time) on the Closing Date or Option Closing Date, as applicable, or such other time on the Closing Date or Option Closing Date, as applicable, as may be agreed to by the Company and Canaccord on behalf of the Underwriters;

“Contract” means all agreements, contracts or commitments of any nature, written or oral, including, for greater certainty and without limitation, licenses, leases, loan documents and security documents;

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“Cresco Subsidiaries” means, the material subsidiaries of the Company, as set out in Schedule “B” of this Agreement;

“CSE” means the Canadian Securities Exchange;

“Decision Document” has the meaning ascribed thereto in Section 3(1) of this Agreement;

“Defaulted Units” has the meaning ascribed thereto in Section 19 of this Agreement;

“Disclosure Record” means the Company’s prospectuses, annual reports, annual and interim financial statements, annual information forms, business acquisition reports, management discussion and analysis of financial condition and results of operations, information circulars, material change reports, press releases and all other information or documents required to be filed or furnished by the Company under Applicable Securities Laws which have been publicly filed or otherwise publicly disseminated by the Company since January 1, 2018;

“distribution” means distribution or distribution to the public, as the case may be, for the purposes of the Applicable Securities Laws;

“Documents Incorporated by Reference” means the documents specified in the Prospectus or any Supplementary Material, as the case may be, as being incorporated therein by reference, together with such other documents which are deemed to be incorporated therein by reference pursuant to Applicable Securities Laws;

“Eligible Issuer” means an issuer which meets the criteria and has complied with the requirements of NI 44-101 so as to be qualified to offer securities by way of a short form prospectus under Applicable Securities Laws;

“Environmental Laws” means all Applicable Laws currently in existence in Canada and the United States (whether federal, provincial, state or municipal) relating to the protection and preservation of the environment, occupational health and safety, product safety, product liability or hazardous substances;

“FCPA” has the meaning ascribed thereto in Section 8(rr) of this Agreement;

“Financial Statements” means, collectively, the (i) audited consolidated financial statements of the Company incorporated by reference in the Offering Documents as at and for the financial year ended December 31, 2018 (together with the report of MNP LLP on those financial statements) and as at and for the financial year ended December 31, 2017 (together with the report of FGMK LLC on those financial statements), and including the notes with respect to those financial statements; and (ii) the unaudited condensed consolidated interim financial statements of the Company incorporated by reference in the Offering Documents as at and for the three and six months ended June 30, 2019 (which financial statements include comparative financial information for the comparable periods in 2018), and including the notes with respect to those financial statements;

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“Governmental Authority” means any governmental authority and includes, without limitation, any international, national, federal, state, provincial or municipal government or other political subdivision of any of the foregoing, any entity exercising executive, legislative, judicial, regulatory or administrative functions on behalf of a governmental authority or pertaining to government and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing;

“IFRS” means International Financial Reporting Standards as issued by the International Accounting Standards Board, which were adopted by the Canadian Accounting Standards Board as Canadian generally accepted accounting principles applicable to publicly accountable enterprises;

“Indemnified Parties” and “Indemnified Party” have the meanings ascribed thereto in Section 13(1) of this Agreement;

“Intellectual Property” means all of the following which is currently owned by, issued to or licensed to the Company or a Cresco Subsidiary, or other rights of the Company or a Cresco Subsidiary to use the following (i) patent rights, issued patents, patent applications, patent disclosures, and registrations, inventions, discoveries, developments, concepts, ideas, improvements, processes and methods, whether or not such inventions, discoveries, developments, concepts, ideas, improvements, processes, or methods are patentable or registrable, anywhere in the world, (ii) copyrights (including performance rights) to any original works of art or authorship, including source code and graphics, which are fixed in any medium of expression, including copyright registrations and applications therefor, anywhere in the world, whether or not registered or registrable, (iii) any and all common law or registered trade-mark rights, trade names, business names, trade-marks, proposed trade-marks, certification marks, service marks, distinguishing marks and guises, logos, slogans, goodwill, domain names and any registrations and applications therefor, anywhere in the world, whether or not registered or registrable, (iv) know-how, show-how, confidential information, trade secrets, (v) any and all industrial design rights, industrial designs, design patents, industrial design or design patent registrations and applications therefor, anywhere in the world, whether or not registered or registrable, (vi) any and all integrated circuit topography rights, integrated circuit topographies and integrated circuit topography applications, anywhere in the world, whether or not registered or registrable, (vii) any reissues, divisions, continuations, continuations-in-part, renewals, improvements, translations, derivatives, modifications and extensions of any of the foregoing, (viii) any other industrial, proprietary or intellectual property rights, anywhere in the world, and (ix) proprietary computer software (including but not limited to data, data bases and documentation);

“Investment Company Act” has the meaning given to it in Schedule “A” to this Agreement;

“Leased Premises” has the meaning ascribed thereto in Section 8(ff) of this Agreement;

“Losses” has the meaning ascribed thereto in Section 13(1) of this Agreement;

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“marketing materials” and “template version” shall have their respective meanings ascribed thereto in NI 41-101;

“Material Adverse Effect” means any change (including a decision to implement such a change made by the board of directors or by senior management who believe that confirmation of the decision by the board of directors is probable), event, violation, inaccuracy, circumstance or effect that (a) is materially adverse to the business, assets (including intangible assets), operations, liabilities (contingent or otherwise), capital, prospects relating to publicly announced acquisitions, financial condition or results of operations of the Company and the Subsidiaries, on a consolidated basis or (b) results or could reasonably be expected to result in the Prospectus containing a misrepresentation;

“material change” has the meaning ascribed thereto in the Applicable Securities Laws of the Qualifying Jurisdictions;

“material fact” has the meaning ascribed thereto in the Applicable Securities Laws of the Qualifying Jurisdictions;

“misrepresentation” has the meaning ascribed thereto in the Applicable Securities Laws of the Qualifying Jurisdictions;

“NI 41-101” means National Instrument 41-101 – General Prospectus Requirements;

“NI 44-101” means National Instrument 44-101 – Short Form Prospectus Distributions;

“NI 44-102” means National Instrument 44-102 – Shelf Distributions;

“NI 51-102” means National Instrument 51-102 – Continuous Disclosure Obligations;

“OFAC” has the meaning ascribed thereto in Section 8(tt) of this Agreement;

“Offering Documents” means, collectively, the Prospectus and the Supplementary Material, and also includes the U.S. Placement Memorandum;

“person” shall be broadly interpreted and shall include an individual, firm, corporation, syndicate, partnership, trust, association, unincorporated organization, joint venture, investment club, government or agency or political subdivision thereof and every other form of legal or business entity of whatsoever nature or kind;

“Passport System” means the passport system procedures provided for under National Policy 11-202 - Process for Prospectus Reviews in Multiple Jurisdictions of the Canadian Securities Administrators;

“Preliminary Base Prospectus” has the meaning ascribed thereto in Section 3(1) of this Agreement;

“Prospectus” has the meaning ascribed thereto in Section 3(2) of this Agreement;

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“Qualified Institutional Buyer” has the meaning given to it in Schedule “A” to this Agreement;

“Qualifying Jurisdictions” means all of the Provinces and Territories of Canada, except Quebec;

“Reviewing Authority” has the meaning ascribed thereto in Section 3(1) of this Agreement;

“Rule 144A” has the meaning given to it in Schedule “A” to this Agreement;

“SEDAR” means the System for Electronic Document Analysis and Retrieval;

“Securities Commission” has the meaning ascribed thereto in Section 3(1) of this Agreement;

“Selling Firm” has the meaning ascribed thereto in Section 4(1) of this Agreement;

“Shelf Securities” has the meaning ascribed thereto in Section 3(1) of this Agreement;

“Standard Listing Conditions” has the meaning ascribed thereto in Section 5(1)(e) of this Agreement;

“Subordinate Voting Shares” means the subordinate voting shares in the capital of the Company;

“Subsequent Disclosure Documents” means any annual and/or interim financial statements, management’s discussion and analysis of financial condition and results of operations, information circulars, annual information forms, material change reports or other documents issued by the Company after the date of this Agreement that are required by Applicable Securities Laws of the Qualifying Jurisdictions to be incorporated by reference into the Prospectus;

“Subsidiary” means those entities that would be considered a subsidiary of the Company pursuant to the Applicable Securities Laws of the Province of Ontario and includes the Cresco Subsidiaries, and “Subsidiaries” means all of them;

“Supplementary Material” has the meaning ascribed thereto in Section 3(2) of this Agreement;

“Taxes” has the meaning ascribed thereto in Section 8(s) of this Agreement;

“Underwriters’ Information” means the disclosure relating solely to the Underwriters provided to the Company by or on behalf of the Underwriters in writing for inclusion in any of the Offering Documents;

“United States” means the United States of America, its territories and possessions, any state of the United States, and the District of Columbia;

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“U.S. Affiliates” has the meaning given to it in Schedule “A” to this Agreement;

“U.S. Exchange Act” has the meaning given to it in Schedule “A” to this Agreement;

“U.S. Marijuana Laws” has the meaning ascribed thereto in Section 8(ss) of this Agreement

“U.S. Person” has the meaning given to it in Schedule “A” to this Agreement;

“U.S. Placement Memorandum” has the meaning given to it in Schedule “A” to this Agreement; and

“U.S. Securities Act” has the meaning given to it in Schedule “A” to this Agreement.

Other

(a)

Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus.

(b)

Any reference in this Agreement to a Section shall refer to a section of this Agreement.

(c)

All words and personal pronouns relating thereto shall be read and construed as the number and gender of the party or parties referred to in each case require and the verb shall be construed as agreeing with the required word and/or pronoun.

(d)

Any reference in this Agreement to “$” or to “dollars” shall refer to the lawful currency of Canada, unless otherwise specified.

(e)

The following are the schedules to this Agreement, which schedules (including the representations, warranties and covenants set out therein) are deemed to be a part hereof and are hereby incorporated by reference herein:

Schedule

“A” – Terms and Conditions for Compliance with U.S. Securities Laws

(f)

Where any representation or warranty contained in this Agreement or any Ancillary Document is expressly qualified by reference to the “knowledge” of the Company, or where any other reference is made herein or in any Ancillary Document to the “knowledge” of the Company, it shall be deemed to refer to the actual knowledge of (i) Charles Bachtell, Chief Executive Officer and Director, (ii) Joe Caltabiano, President and Director, and (iii) Ken Amann, Chief Financial Officer, after having made due enquiry.

Section 2

Nature of Transaction

Each purchaser who is resident in a Qualifying Jurisdiction shall purchase the Offered Units pursuant to the Prospectus. Each other purchaser not resident in a Qualifying Jurisdiction, or located outside of a Qualifying Jurisdiction, subject to any restrictions herein, shall purchase

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Offered Units, which have been qualified by the Prospectus in Canada, only on a private placement basis under the applicable securities laws of the jurisdiction in which the purchaser is resident or located, in accordance with such procedures as the Company and the Underwriters may mutually agree, acting reasonably, in order to fully comply with Applicable Laws and the terms of this Agreement (including Schedule “A” to this Agreement with respect to offers and sales of Offered Units in the United States or to or for the account or benefit of U.S. Persons), provided that the Underwriters further agree that no Offered Units will be marketed, offered, distributed or sold in Quebec or to any person resident of Quebec as determined under applicable securities laws. The Company hereby agrees to comply with all Applicable Securities Laws on a timely basis in connection with the distribution of the Offered Units and the Company shall execute and file with the Securities Commissions all forms, notices and certificates relating to the Offering required to be filed pursuant to Applicable Securities Laws in the Qualifying Jurisdictions within the time required, and in the form prescribed, by Applicable Securities Laws in the Qualifying Jurisdictions. The Company also agrees to file within the periods stipulated under Applicable Laws outside of Canada and at the Company’s expense all private placement forms required to be filed by the Company in connection with the Offering and pay all filing fees required to be paid in connection therewith so that the distribution of the Offered Units outside of Canada may lawfully occur without the necessity of filing a prospectus or any similar document under the Applicable Laws outside of Canada. The Underwriters agree to offer the Offered Units for sale only in the Qualifying Jurisdictions and to offer the Offered Units to purchasers in the United States or to or for the account or benefit of U.S. Persons only in compliance with Schedule “A” attached hereto, and, subject to the consent of the Company (acting reasonably), in such jurisdictions outside of the Qualifying Jurisdictions and the United States where permitted by and in accordance with Applicable Securities Laws and the applicable securities laws of such other jurisdictions, and provided that in the case of jurisdictions other than the Qualifying Jurisdictions, the Company shall not be required to become registered or file a prospectus or registration statement or similar document in such jurisdictions and the Company will not be subject to any continuous disclosure requirements in such jurisdictions.

Section 3

Filing of Prospectus

(1)

The Company has prepared and filed with the securities regulatory authorities in the Qualifying Jurisdictions (collectively, the “Securities Commissions”) a preliminary short form base shelf prospectus dated April 25, 2019, (the “Preliminary Base Prospectus”), an amended and restated short form base shelf prospectus dated July 17, 2019 (the “Amended & Restated Base Prospectus”) and a final short form base shelf prospectus dated July 25, 2019 in respect of up to $500,000,000 aggregate principal amount of subordinate voting shares, debt securities, subscription receipts, warrants, and units of the Company (collectively, the “Shelf Securities”) pursuant to Applicable Securities Laws in the Qualifying Jurisdictions. The Company selected the British Columbia Securities Commission (the “Reviewing Authority”) as its principal regulator in respect of the offering of the Shelf Securities, and the Reviewing Authority has issued a decision document (a “Decision Document”) under the Passport System on behalf of itself and the other Securities Commissions for each of the Preliminary Base Prospectus, the Amended & Restated Base Prospectus and the Base Prospectus. The term “Base Prospectus” means the final short form base shelf prospectus relating to the Shelf Securities, including any

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documents incorporated therein by reference and the documents otherwise deemed to be a part thereof or included therein pursuant to Applicable Securities Laws, at the time the Reviewing Authority issued a Decision Document with respect thereto in accordance with Applicable Securities Laws, including NI 44-101 and NI 44-102 (together, the “Canadian Shelf Procedures”).

(2)

In addition, the Company shall, not later than 4:00 p.m. (Toronto time) on the date that is two Business Days after the date hereof, prepare and file with the Securities Commissions a prospectus supplement relating to the Offered Units (together with the Base Prospectus, and including any documents incorporated therein by reference and the documents otherwise deemed to be a part thereof or included therein pursuant to Applicable Securities Laws, the “Prospectus”). Any amendment to the Prospectus, any amended or supplemental prospectus, any management information circular, financial statement, management’s discussion and analysis, annual information form, material change report, auxiliary material, information, evidence, return, report, application, statement or document that may be filed by or on behalf of the Company under any Applicable Securities Laws in the Qualifying Jurisdictions prior to the expiry of the period of distribution of the Offered Units, where such document is deemed to be incorporated by reference into the Prospectus, is referred to herein collectively as the “Supplementary Material.”

(3)

All references in this Agreement to financial statements and other information which is “contained,” “included” or “stated” in the Preliminary Base Prospectus, the Amended & Restated Base Prospectus, the Base Prospectus or the Prospectus (or other references of like import) shall be deemed to mean and include all such financial statements and other information which is incorporated by reference in or otherwise deemed by Applicable Securities Laws in the Qualifying Jurisdictions to be a part of or included in the Preliminary Base Prospectus, the Amended & Restated Base Prospectus, the Base Prospectus, or the Prospectus, as the case may be.

(4)

For purposes of this Agreement, all references to the Preliminary Base Prospectus, the Amended and Restated Base Prospectus, the Base Prospectus and the Prospectus, or any amendment or supplement to any of the foregoing (including any Supplementary Material), shall be deemed to include the copy filed with the Securities Commissions on SEDAR.

(5)

During the period of distribution of the Offered Units the Company will promptly take, or cause to be taken, any additional steps and proceedings that may from time to time be required under the Applicable Securities Laws in the Qualifying Jurisdictions, or be requested by Canaccord, acting reasonably, on behalf of the Underwriters, to continue to qualify the distribution of the Offered Units in the Qualifying Jurisdictions.

(6)

Prior to the filing of the Prospectus and thereafter, during the period of distribution of the Offered Units, including prior to the filing of any Supplementary Material, the Company shall have allowed the Underwriters to review and comment on such documents and shall have allowed the Underwriters to conduct all due diligence investigations (including through the conduct of oral due diligence sessions at which management of the Company,

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the chair of the Company’s audit committee, its auditors, legal counsel and other applicable experts) which they may reasonably require in order to fulfill their obligations as underwriters in order to enable them to execute the certificate required to be executed by them at the end of the Offering Documents. Without limiting the scope of the due diligence inquiry the Underwriters (or their counsel) may conduct, the Company shall use its commercially reasonable efforts to make available its directors, senior management, auditors and legal counsel, to answer any questions which the Underwriters may have and to participate in one or more due diligence sessions to be held prior to filing of each of the supplement relating to the Offered Units to and any Supplementary Material.

Section 4

Distribution and Certain Obligations of Underwriters

(1)

The Underwriters shall, and shall require any investment dealer (other than the Underwriters) with which the Underwriters have a contractual relationship in respect of the distribution of the Offered Units (each, a “Selling Firm”) to agree to, comply with the Applicable Securities Laws and any other applicable securities laws in connection with the distribution of the Offered Units and shall offer the Offered Units for sale to the public directly and through Selling Firms upon the terms and conditions set out in the Prospectus and this Agreement. The Underwriters shall, and shall require any Selling Firm to agree to, offer for sale to the public and sell the Offered Units only in those jurisdictions where they may be lawfully offered for sale or sold and shall seek the prior consent of the Company, such consent not to be unreasonably withheld, regarding the jurisdictions other than the Qualifying Jurisdictions and the United States where the Offered Units are to be offered and sold. Any Selling Firm shall agree with the Underwriters to comply with the covenants and obligations given by the Underwriters herein. The Underwriters shall: (i) use all commercially reasonable efforts to complete and cause each Selling Firm to complete the distribution of the Offered Units as soon as reasonably practicable; and (ii) as soon as practicable after the completion of the distribution of the Offered Units, and in any event within 30 days after the later of the Closing Date or the last Option Closing Date, notify the Company thereof and provide the Company with a breakdown of the number of Offered Units distributed in the Qualifying Jurisdictions.

(2)

The Underwriters and any Selling Firm shall be entitled to offer and sell the Offered Units to purchasers in the United States or to or for the account or benefit of U.S. Persons solely pursuant to an applicable exemption or exemptions from the registration requirements of the U.S. Securities Act and the registration or qualification requirements of applicable state securities laws, and in other jurisdictions in accordance with any applicable securities and other laws in the jurisdictions in which the Underwriters and/or Selling Firms offer the Offered Units. Any offer or sale of the Offered Units to purchasers in the United States or to or for the account or benefit of U.S. Persons will be made in accordance with Schedule “A” hereto.

(3)

For the purposes of this Section 4, the Underwriters shall be entitled to assume that the Offered Units are qualified for distribution in any Qualifying Jurisdiction where a Decision Document or similar document for the Base Prospectus shall have been obtained from or deemed issued by the applicable Securities Commission following the filing of the Prospectus, unless otherwise notified in writing by the Company.

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(4)

During the distribution of the Offered Units, other than the Offering Documents, the press release announcing the Offering dated September 16, 2019 and the term sheet dated September 16, 2019 (which term sheet the Company and the Underwriters agree is a “template version” within the meaning of NI 44-101 of such marketing materials), the Underwriters shall not provide any potential investor with any materials or written communication in relation to the distribution of the Offered Units. The Company, and the Underwriters, on a several basis, covenant and agree (i) not to provide any potential investor of Offered Units with any marketing materials unless a template version of such marketing materials has been filed by the Company with the Securities Commissions on or before the day such marketing materials are first provided to any potential investor of Offered Units, (ii) not to provide any potential investor in the Qualifying Jurisdictions with any materials or information in relation to the distribution of the Offered Units or the Company other than (a) such marketing materials that have been approved and filed in accordance with NI 44-101, (b) the Prospectus and any Supplementary Material, and (c) any “standard term sheets” (within the meaning of Applicable Securities Laws) approved in writing by the Company and Canaccord on behalf of the Underwriters, and (iii) that any marketing materials approved and filed in accordance with NI 44-101 and any standard term sheets approved in writing by the Company and Canaccord on behalf of the Underwriters, shall only be provided to potential investors in the Qualifying Jurisdictions.

(5)

Notwithstanding the foregoing provisions of this Section 4, an Underwriter will not be liable to the Company under this Section 4 or Schedule “A” with respect to a default under this Section 4 or Schedule “A” by another Underwriter or another Underwriter’s U.S. Affiliate or any Selling Firm appointed by another Underwriter. However, each Underwriter shall be liable to the Company under this Section 4 or Schedule “A” with respect to any breach by it, its U.S. Affiliate or any Selling Firm appointed by it of this Section 4 or of the selling restrictions set forth in Schedule “A”.

Section 5 Deliveries on Filing and Related Matters

(1)	The Company shall deliver, or cause to be delivered, to each of the Underwriters:

(a)

concurrently with the filing of the Prospectus, a copy of the Prospectus, signed by the Company as required by Applicable Securities Laws;

(b)

concurrently with the filing thereof, a copy of any Supplementary Material required to be filed by the Company in compliance with Applicable Securities Laws;

(c)

concurrently with the filing of the Prospectus with the Securities Commissions, one or more “long form” comfort letters dated the date of the Prospectus, in form and substance satisfactory to the Underwriters, acting reasonably, addressed to the Underwriters and the directors of the Company from the current auditor of the Company, Marcum LLP, from MNP LLP and from FGMK LLC with respect to the Financial Statements and other financial and accounting information relating to the Company, which letters shall be based on a review by such auditors within a

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cut-off date and based on a review of not more than two Business Days prior to the date of the letters, which letters shall be in addition to any auditors’ comfort and consent letters addressed to the Securities Commissions in the Qualifying Jurisdictions;

(d)

as soon as possible after the Prospectus and any Supplementary Material are prepared, copies of the U.S. Placement Memorandum;

(e)

prior to Closing, written evidence from the CSE that conditional approval of the listing of the Shares, the Warrants and the Warrant Shares issuable pursuant to the Offering has been granted by the CSE, subject to the satisfaction of certain usual and customary conditions (the “Standard Listing Conditions”); and

(f)

copies of all other documents resulting or related to the Company taking all other steps and proceedings that may be necessary in order to qualify the Offered Units for distribution in each of the Qualifying Jurisdictions by the Underwriters and other persons who are registered in a category permitting them to distribute the Offered Units under Applicable Securities Laws and who comply with such Applicable Securities Laws.

(2)	*Supplementary Material*

If applicable, the Company shall also prepare and deliver promptly to the Underwriters signed copies of all Supplementary Material. Concurrently with the delivery of any Supplementary Material or the incorporation or deemed incorporation by reference in the Prospectus of any Subsequent Disclosure Document, the Company shall deliver to the Underwriters, with respect to such Supplementary Material or Subsequent Disclosure Document and a comfort letter from each of the Company’s current auditor, Marcum LLP, from MNP LLP and from FGMK LLC, substantially similar to the letters referred to in Section 5(1)(c).

(3)	*Representations as to Prospectus and Supplementary Material*

Each delivery to any Underwriter of any Offering Document by the Company shall constitute the representation and warranty of the Company to the Underwriters that:

(a)

all information and statements (except for the Underwriters’ Information) contained and incorporated by reference in such Offering Documents, are, at their respective dates and, if applicable, the respective dates of filing, of such Offering Documents, true and correct in all material respects and contain no misrepresentation and, on the respective dates of such Offering Documents, constitute full, true and plain disclosure of all material facts relating to the Company and the Subsidiaries (on a consolidated basis) and the Offered Units, Shares, Warrants and Warrant Shares as required by Applicable Securities Laws of the Qualifying Jurisdictions;

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(b)

no material fact or information (except for the Underwriters’ Information) has been omitted from any Offering Document which is required to be stated therein or is necessary to make the statements therein not misleading in the light of the circumstances in which they were made; and

(c)

except with respect to the Underwriters’ Information, each of such Offering Documents complies with the requirements of the Applicable Securities Laws of the Qualifying Jurisdictions in all material respects.

Such deliveries shall also constitute the Company’s consent to the Underwriters’ and any Selling Firm’s use of the Offering Document in connection with the distribution of the Offered Units in compliance with this Agreement.

(4)	*Delivery of Prospectus and Related Matters*

The Company will cause to be delivered to the Underwriters, at those delivery points as the Underwriters request, acting reasonably, as soon as possible and in any event no later than 12:00 noon (Toronto time) on the next Business Day (or by 12:00 noon (Toronto time) on the second Business Day for deliveries outside of Toronto) following the day on which the Company has filed the prospectus supplement relating to the Offered Units, and thereafter from time to time during the distribution of the Offered Units, as many commercial copies of the Prospectus, any Supplementary Materials and/or the U.S. Placement Memorandum, as applicable, as the Underwriters may request, acting reasonably. Each delivery of any of the Offering Documents will have constituted or will constitute, as the case may be, consent of the Company to the use by the Underwriters and any Selling Firms of those documents in connection with the distribution and sale of the Offered Units in all of the Qualifying Jurisdictions and of the U.S. Placement Memorandum for the distribution of the Offered Units to purchasers in the United States or to or for the account or benefit of U.S. Persons in compliance with the provisions of Schedule “A”.

(5)	*Press Releases*

Neither the Company, nor the Underwriters or their U.S. Affiliates, shall make any public announcement in connection with the Offering, except if the other party has consented to such announcement or the announcement is required by Applicable Laws or stock exchange rules. For greater certainty, during the period commencing on the date hereof and until completion of the distribution of the Offered Units, the Company will promptly provide to the Underwriters drafts of any press releases of the Company for review and comment by the Underwriters and the Underwriters’ counsel prior to issuance, provided that any such review will be completed in a timely manner, and the Company will incorporate in such press releases all reasonable comments of the Underwriters. Any such press release shall contain substantially the following legend and comply with Rule 135e under the U.S. Securities Act: “NOT FOR DISTRIBUTION TO UNITED STATES NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.”

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Section 6 Material Change

(1)	The Company shall promptly inform the Underwriters (and promptly confirm such notification in writing) during the period prior to the Underwriters notifying the Company of the completion of the distribution of the Offered Units in accordance with Section 4(1) hereof of the full particulars of:

(a)

any material change whether actual, anticipated, contemplated, or to the knowledge of the Company, threatened or proposed, in the business, assets (including intangible assets), operations, liabilities (contingent or otherwise), capital, financial condition or results of operations of the Company and the Subsidiaries, on a consolidated basis;

(b)

any material fact which has arisen or has been discovered that would have been required to have been stated in the Offering Documents had that fact arisen or been discovered on or prior to the date of any of the Offering Documents;

(c)

any change in any material fact (which for the purposes of this Agreement shall be deemed to include the disclosure of any previously undisclosed material fact) contained or incorporated by reference in the Offering Documents which, in any case, is, or may be, of such a nature as to render any of the Offering Documents untrue or misleading in any material respect or to result in any misrepresentation in any of the Offering Documents, including as a result of any of the Offering Documents containing or incorporating by reference therein an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statement therein not false or not misleading in the light of the circumstances in which it was made, or which could result in any of the Offering Documents not complying with the Applicable Securities Laws of any Qualifying Jurisdiction; or

(d)

any notice by any governmental, judicial or regulatory authority requesting any material information, or meeting or hearing, relating to the Company or the Offering.

(2)

Subject to Section 6(4), the Company will prepare and file promptly (and, in any event, within the time prescribed by Applicable Securities Laws) any Supplementary Material which may be necessary under the Applicable Securities Laws, and the Company will prepare and file promptly at the request of the Underwriters any Supplementary Material which, in the opinion of the Underwriters, acting reasonably, may be necessary or advisable, and will otherwise comply with all legal requirements necessary, to continue to qualify the Offered Units for distribution in each of the Qualifying Jurisdictions.

(3)	During the period commencing on the date hereof until the Underwriters notify the Company of the completion of the distribution of the Offered Units, the Company will promptly inform the Underwriters in writing of the full particulars of:

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(a)

any request of any Securities Commission for any amendment to any Offering Document or for any additional information in respect of the Offering or the Company;

(b)

the receipt by the Company of any material communication, whether written or oral, from any Securities Commission, the CSE or any other competent authority, relating to the Prospectus, the distribution of the Offered Units or the Company;

(c)

any notice or other correspondence received by the Company from any Governmental Authority and any requests from such bodies for information, a meeting or a hearing relating to the Company, any Subsidiary, the Offering, the issue and sale of the Offered Units or any other event or state of affairs that could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; or

(d)

the issuance by any Securities Commission, the CSE or any other competent authority, including any other Governmental Authority, of any order to cease or suspend trading or distribution of any securities of the Company (including Offered Units, Shares, Warrants or Warrant Shares) or of the institution, threat of institution of any proceedings for that purpose or any notice of investigation that could potentially result in an order to cease or suspend trading or distribution of any securities of the Company (including Offered Units, Shares, Warrants or Warrant Shares).

(4)

In addition to the provisions of Sections 6(1), 6(2) and 6(3) hereof, the Company shall in good faith discuss with the Underwriters any circumstance, change, event or fact contemplated in Sections 6(1), 6(2) or 6(3) which is of such a nature that there is or could be reasonable doubt as to whether notice should be given to the Underwriters under Sections 6(1), 6(2) or 6(3) hereof and shall consult with the Underwriters with respect to the form and content of any Supplementary Material proposed to be filed by the Company, it being understood and agreed that any such Supplementary Material shall not be filed with any Securities Commission prior to the review and approval thereof by the Underwriters and their counsel, acting reasonably and in a timely manner.

Section 7 Regulatory Approvals

(1)

Prior to Closing, the Company shall file or cause to be filed with the CSE all necessary documents and shall take or cause to be taken all necessary steps to ensure that the Company has obtained all necessary approvals for the Shares, the Warrants and the Warrant Shares to be conditionally listed on the CSE subject only to the Standard Listing Conditions.

(2)	The Company will make all necessary filings and obtain all necessary regulatory consents and approvals (if any), and the Company will pay all filing, exemption and other fees required to be paid in connection with the transactions contemplated in this Agreement.

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Section 8 Representations and Warranties of the Company

The Company represents and warrants to the Underwriters and the U.S. Affiliates, and acknowledges that the Underwriters are relying on such representations and warranties in purchasing the Offered Units, that:

(a)

the Company is a corporation duly incorporated and organized and is a valid and subsisting corporation under the laws of British Columbia, and has all requisite power, capacity and authority to carry on its business as now conducted in each of the jurisdictions it carries on business and to own, lease or operate its Assets and Properties and to offer, issue and sell the Offered Units (including the Shares and Warrants comprising the Offered Units) and to issue and sell the Warrant Shares underlying the Warrants, and neither the Company nor, to the knowledge of the Company, any other person, has taken any steps or proceedings, voluntary or otherwise, requiring or authorizing the Company’s dissolution or winding up, and (ii) has full corporate right, power and authority to execute this Agreement, the Warrant Indenture and the Ancillary Documents and to carry out its obligations hereunder and thereunder;

(b)

the Company is the direct or indirect registered and beneficial owner of all of the issued and outstanding shares and other voting securities of each Cresco Subsidiary, in each case, except as disclosed or incorporated by reference in the Offering Documents, free and clear of all encumbrances, liens, mortgages, hypothecations, security interests, charges or adverse interests whatsoever, and no person, firm, corporation or entity has any agreement, option, right or privilege (whether pre-emptive or contractual) capable of becoming an agreement or option, for the purchase from the Company or any Cresco Subsidiary of any of the shares or other securities of any Cresco Subsidiary;

(c)

this Agreement, the Warrant Indenture and the Ancillary Documents have been or will be on the Closing Date duly authorized by all necessary corporate action on the part of the Company (to the extent it is a party to the particular document) and will constitute valid obligations of the Company (to the extent it is a party to the particular document) legally binding upon the Company, if and as applicable, and enforceable in accordance with their respective terms, subject to the fact that enforceability may be affected by bankruptcy, insolvency, arrangement, liquidation, moratorium, reorganization or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally , by general principles of equity, including, without limitation, the fact that equitable remedies (such as specific performance and injunctive relief) may only be awarded in the discretion of a court, applicable statutes of limitations and that the ability to sever unenforceable terms may be limited by Applicable Law;

(d)

each Cresco Subsidiary is a corporation incorporated, amalgamated, continued or organized and validly existing under the laws of its jurisdiction of incorporation, amalgamation, continuation or organization and has all requisite power, capacity and authority to carry on its business as now conducted in each of the jurisdictions

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it carries on business and to own, lease or operate its Assets and Properties and none of the Cresco Subsidiaries nor, to the knowledge of the Company, any other person, has taken any steps or proceedings, voluntary or otherwise, requiring or authorizing such Cresco Subsidiaries’ dissolution or winding up;

(e)

other than in respect of U.S. Marijuana Laws, the Company and each of the Cresco Subsidiaries (i) has conducted and is conducting its business in compliance with all Applicable Laws of each jurisdiction in which its business is carried on, other than acts of non-compliance that individually or in the aggregate would not have a Material Adverse Effect, and, to the knowledge of the Company, there are no facts that would give rise to a notice of material non-compliance with any such Applicable Laws, (ii) is duly licensed, registered or qualified in all jurisdictions in which it owns, leases or operates its property or carries on business where such license, registration or qualification is necessary to enable its business to be carried on as it is now conducted and Assets and Properties to be owned, leased or operated, except where the failure to be so licensed, registered or qualified would not have a Material Adverse Effect, and all such material licenses, registrations or qualifications are valid and existing and in good standing;

(f)

the Company is a reporting issuer in each of the Qualifying Jurisdictions, is not in default in any material respect of any requirement under the Applicable Securities Laws and is not on the list of defaulting issuers maintained by the Securities Commissions;

(g)

no approval, authorization, consent or other order of, and no filing, registration or recording with, any Governmental Authority, Securities Commission or lenders to the Company is required of the Company in connection with the execution and delivery of, or with the performance by the Company of its obligations under, this Agreement or the Warrant Indenture except (i) those which have been obtained or those which may be required and shall be obtained prior to the Closing Time under Applicable Securities Laws or the rules, by-laws and regulations of the CSE, and (ii) such post-Closing notice filings with Securities Commissions and the CSE as may be required in connection with the Offering, including under Applicable Securities Laws in the United States and related post-Closing notice filings as may be required in connection with the issue and sale of Offered Units in the United States or to or for the account or benefit of U.S. Persons;

(h)

each of the execution and delivery of this Agreement and the Warrant Indenture, the performance by the Company of its obligations hereunder and thereunder, including the offer, issue and sale of the Offered Units (including the Shares and Warrants comprising the Offered Units) and the issue and sale of the Warrant Shares underlying the Warrants, and the consummation of the transactions contemplated in this Agreement and the Warrant Indenture, do not and will not:

(i)

(i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, whether after notice or lapse of time or both, (i) any statute, rule or regulation applicable to the

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Company or any Cresco Subsidiary, including Applicable Securities Laws; (ii) the constating documents or resolutions of the Company or any Cresco Subsidiary; (iii) any material mortgage, note, indenture, contract, agreement, joint venture, partnership, instrument, lease or other document to which the Company or any Cresco Subsidiary is a party or by which it is bound; or (iv) any judgment, decree or order binding the Company or its Assets and Properties or any Cresco Subsidiary or its Assets and Properties; or except, in the case of clauses (iii) and (iv) above, for such breach, violation or default which has not had and would not reasonably be expected to have a Material Adverse Effect; affect the rights, duties and obligations of any parties to any material indenture, agreement or instrument to which the Company or any Subsidiary is a party, nor give a party the right to terminate any such indenture, agreement or instrument by virtue of the application of terms, provisions or conditions in such indenture, agreement or instrument, except as would not reasonably be expected to have a Material Adverse Effect;

(i)

the Warrant Indenture will at the Closing Time on the Closing Date be duly authorized and executed by the Company and will constitute a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting the rights of creditors generally and except as limited by the application of equitable principals when equitable remedies are sought, applicable statutes of limitations and by the fact that rights to indemnity, contribution and waiver, and the ability to sever unenforceable terms, may be limited by Applicable Law;

(j)

at the applicable Closing, the Shares and the Warrants will have been duly created, authorized, allotted and reserved for issuance and, at the applicable Closing Time, after payment of applicable consideration:

(i)

the Initial Shares and, if applicable, the Additional Shares will be duly and validly issued and outstanding as fully paid and non-assessable shares in the capital of the Company;

(ii)

the Initial Warrants and, if applicable, the Additional Warrants will be duly created and validly issued and outstanding as fully paid securities of the Company; and

(iii)

the Initial Shares and the Initial Warrants, and, if applicable, the Additional Shares and the Additional Warrants, will not have been issued in violation of or subject to any pre-emptive or contractual rights to purchase securities issued or granted by the Company;

(k)

at Closing, the Warrant Shares will have been duly authorized, allotted and reserved for issuance, and, upon the exercise of the Warrants and payment of the exercise price therefor, will be validly issued and outstanding as fully paid and

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non-assessable Subordinate Voting Shares in the capital of the Company. The Warrant Shares will not have been issued in violation of or subject to any preemptive or contractual rights to purchase securities issued or granted by the Company;

(l)

the Subordinate Voting Shares have and the Warrants will have, when issued, the attributes and characteristics and conform in all material respects with the descriptions thereof contained in the Offering Documents;

(m)

the Subordinate Voting Shares are listed and posted for trading on the CSE and, prior to the Closing Time, all necessary notices and filings will have been made with and all necessary consents, approvals, authorizations will have been obtained by the Company from the CSE to ensure that, subject to fulfilling the Standard Listing Conditions, the Shares, the Warrants and the Warrant Shares will be listed and posted for trading on the CSE upon their issuance;

(n)

(i) no default exists under and no event has occurred which, after notice or lapse of time or both, or otherwise, constitutes a default under or breach, by the Company, any Subsidiary, or any other person, of any material obligation, agreement, covenant or condition contained in any material Contract to which the Company or any Subsidiary is a party; and (ii) no order, ruling or determination having the effect of suspending the sale or ceasing the trading of the Offered Units, the Shares, the Warrants, the Warrant Shares, the Subordinate Voting Shares or any other security of the Company has been issued or made by any Securities Commission or stock exchange or any other regulatory authority and is continuing in effect and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated or threatened by any such authority or under any Applicable Securities Laws, or except, in the case of clause (i) which has not had and would not reasonably be expected to have a Material Adverse Effect;

(o)

except as disclosed or incorporated by reference in the Offering Documents in respect of the Company or disclosed in writing to Canaccord, the Company is not currently party to any agreement in respect of: (A) the purchase of any material Assets and Properties or any interest therein or the sale, transfer or other disposition of any material Assets and Properties or any interest therein currently owned, directly or indirectly, by the Company whether by asset sale, transfer of shares or otherwise; or (B) the change of control of the Company (whether by sale or transfer of shares or sale of all or substantially all of the Assets and Properties of the Company or otherwise);

(p)

the Financial Statements (i) have been prepared in accordance with IFRS consistently applied throughout the periods referred to therein, (ii) present fairly, in all material respects, the financial position (including the assets and liabilities, whether absolute, contingent or otherwise as required by IFRS) of the Company and the Subsidiaries on a consolidated basis as at such dates and the results of its operations and its cash flows for the periods then ended and contain and reflect

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adequate provisions or allowance for all reasonably anticipated liabilities, expenses and losses of the Company and the Subsidiaries on a consolidated basis in accordance with IFRS, and (iii) have been audited (in the case of the annual financial statements comprising the Financial Statements) or will have been reviewed by the time of the filing of the Prospectus (in the case of the interim financial statements comprising the Financial Statements) by independent public accountants within the meaning of Applicable Securities Laws and the rules of the Chartered Professional Accountants of Canada, and there has been no change in accounting policies or practices of the Company since January 1, 2019 except as disclosed in the Financial Statements. Except as set out in the Financial Statements or as incurred in the ordinary course of business since June 30, 2019 and as would not individually or on the aggregate have a Material Adverse Effect, the Company does not have any outstanding indebtedness or any liabilities or obligations including any unfunded obligation under any employee plan, whether accrued, absolute, contingent or otherwise as of the date of the applicable financial statements;

(q)

there are no off-balance sheet transactions, arrangements, obligations (including contingent obligations) or other relationships of the Company or the Subsidiaries with unconsolidated entities and there are no other material liabilities of the Company or the Subsidiaries (absolute, accrued, contingent or otherwise), except as disclosed in the Financial Statements or incurred in the ordinary course of business since the date of the last interim Financial Statements;

(r)

Cresco maintains a system of internal accounting controls sufficient to provide reasonable assurances that, (A) transactions are executed in accordance with management’s general or specific authorization, and (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with IFRS and to maintain accountability for assets;

(s)

all taxes (including income tax, sales tax, capital tax, payroll taxes, employer health tax, workers’ compensation payments, property taxes, custom and land transfer taxes), duties, royalties, levies, imposts, assessments, deductions, charges or withholdings and all liabilities with respect thereto including any penalty and interest payable with respect thereto (collectively, “Taxes”) due and payable by each of the Company and the Cresco Subsidiaries have been paid, other than any immaterial amounts as may have failed to have been remitted when due. All tax returns, declarations, remittances and filings required to be filed by each of the Company and the Cresco Subsidiaries have been filed with all appropriate Governmental Authorities and all such returns, declarations, remittances and filings are complete and accurate, in all material respects, and no material fact or facts have been omitted therefrom which would make any of them materially misleading. No examination of any tax return of the Company or any of the Cresco Subsidiaries is currently in progress to the knowledge of Company and there are no material issues or disputes outstanding with any Governmental Authority respecting any taxes that have been paid, or may be payable, by the Company. There are no agreements, waivers or other arrangements with any taxation authority providing for an extension of time for any assessment or reassessment of Taxes with respect to the Company or any Cresco Subsidiary;

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(t)

neither Company nor any of the Cresco Subsidiaries have (i) made an assignment in favour of its creditors nor a proposal in bankruptcy to their respective creditors or any class thereof, nor has any petition for a receiving order been presented in respect of them, or (ii) initiated proceedings with respect to a compromise or arrangement with their respective creditors or for their winding up, liquidation or dissolution. No receiver has been appointed in respect of the Company or any of their respective Assets and Properties and no execution or distress has been levied upon any of their Assets and Properties;

(u)

the Company and the Cresco Subsidiaries have each established on their books and records reserves that are adequate for the payment of all Taxes not yet due and payable and there are no liens for Taxes on the Assets and Properties of the Company or the Cresco Subsidiaries (other than liens for Taxes that are not yet due and payable or that are being contested in good faith), and, to the knowledge of the Company, there are no audits pending of the tax returns of the Company or any Cresco Subsidiary (whether federal, state, provincial, local or foreign) and there are no claims which have been asserted relating to any such tax returns, in each case which would reasonably be expected to have a Material Adverse Effect;

(v)

MNP LLP, who audited the audited consolidated financial statements of the Company for the financial year ended December 31, 2018, are independent public accountants and there has not been any “disagreement” or “reportable event” (within the respective meanings of NI 51-102) with the current auditors or any former auditors of the Company;

(w)

the audit committee’s responsibilities and composition comply with National Instrument 52-110 - Audit Committees of the Canadian Securities Administrators, as such instrument applies to “venture issuers”;

(x)

the authorized capital of the Company consists of an unlimited number of Subordinate Voting Shares, Super Voting Shares and Proportionate Voting Shares of which 59,093,847 Subordinate Voting Shares, 500,000 Super Voting Shares and 279,783.68 Proportionate Voting Shares are issued and outstanding as fully paid and non-assessable shares in the capital of the Company as of the date hereof;

(y)

no person has any agreement, option, right or privilege (whether pre-emptive, contractual or otherwise) capable of becoming an agreement for the purchase, acquisition, subscription for or issue of any of the unissued Subordinate Voting Shares or other securities of the Company or any Cresco Subsidiary or any other security convertible into or exchangeable for any such shares, or to require the Company or any Cresco Subsidiary to purchase, redeem or otherwise acquire any of the outstanding securities in the capital of the Company or any Cresco Subsidiary, except as disclosed or incorporated by reference in the Offering Documents in respect of the Company;

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(z)

except as disclosed or incorporated by reference in the Offering Documents, to the knowledge of the Company, no agreement is in force or effect which in any manner affects the voting or control of any of the securities of the Company or any Cresco Subsidiary;

(aa)

except as disclosed or incorporated by reference in the Offering Documents, no legal or governmental actions, suits, judgments, investigations or proceedings are pending to which the Company or any Subsidiary, or to the knowledge of the Company, the directors, officers or employees of the Company or a Subsidiary are a party or to which the Assets and Properties of the Company or a Subsidiary is subject and, to the knowledge of the Company, no such proceedings have been threatened against or are pending with respect to the Company or any Subsidiary, or with respect to their Assets and Properties and none of the Company or any Subsidiary is subject to any judgment, order, writ, injunction, decree or award of any Governmental Authority, which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect;

(bb)

neither the Company nor any Cresco Subsidiary is in violation of its constating documents;

(cc)

except as disclosed or incorporated by reference in the Offering Documents, other than liens arising in the ordinary course of business which, individually or in the aggregate, do not and will not have a Material Adverse Effect, the Company and each Cresco Subsidiary owns or has the right to full use of all Assets and Properties owned or used in its business free and clear of any actual, pending or, to the knowledge of the Company, threatened claims, liens, charges, options, set-offs, free-carried interests, royalties, encumbrances, security interests or other interests whatsoever;

(dd)

Except as would not reasonably be expected to have a Material Adverse Effect, all Contracts to which the Company and/or any Cresco Subsidiary is a party are, to the knowledge of the Company, in full force and effect and are valid and enforceable by and against the Company or the Cresco Subsidiary, as the case may be, in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting the rights of creditors generally, and except as limited by the application of equitable principals when equitable remedies are sought, applicable statutes of limitations and by the fact that the ability to sever unenforceable terms may be limited by Applicable Laws, and none of the Company or any Cresco Subsidiary is in material default or breach of any material Contract;

(ee)

to the knowledge of Cresco and other than certain restrictions on the registration of trademarks, patents and other Intellectual Property related to cannabis at the U.S. federal level, the Company and/or the Cresco Subsidiaries, as applicable, own or have obtained valid and enforceable licenses for, or other rights to use, the Intellectual Property material to its business as of the date hereof and the Company and each Cresco Subsidiary is not a party to or bound by any contract

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or any other obligation whatsoever that limits or impairs its ability to sell, transfer, assign or convey, or that otherwise affects, such Intellectual Property, except in each case that would not have a Material Adverse Effect. There is no pending action or proceeding, nor any action threatened in writing or proceeding, against any person by the Company and the Cresco Subsidiaries with respect to the use of the Intellectual Property material to its business, and there are no state of facts or circumstances which cast doubt on the validity or enforceability of such Intellectual Property, except for circumstances which would not have a Material Adverse Effect. To the knowledge of the Company, the conduct of the Company’s and the Cresco Subsidiaries’ respective businesses does not infringe upon the intellectual property rights, domestic or foreign, of any other person, except where such infringement would not have a Material Adverse Effect and the Company and the Cresco Subsidiaries have not received any claim or notice (written or otherwise) that the conduct of their respective businesses, including the use of the Intellectual Property, infringes upon or breaches any industrial or intellectual property rights of any other person, or the trade secrets, know-how or confidential or proprietary information of any other person, except where such infringement

(ff)

with respect to each premises of the Company and each of the Cresco Subsidiaries which is material to the business of the Company and which the Company or a Cresco Subsidiary occupies as tenant (each, a “Leased Premises”), the Company or a Cresco Subsidiary occupies such Leased Premises and has the exclusive right to occupy and use such Leased Premises and each of the leases pursuant to which the Company or a Cresco Subsidiary occupies such Leased Premises is, to the knowledge of the Company, in good standing and in full force and effect in all material respects under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or the Cresco Subsidiaries;

(gg)

neither the Company nor any Cresco Subsidiary is a party to or bound by any collective agreement and is not currently conducting negotiations with any labour union or employee association;

(hh)

the Company and each Cresco Subsidiary is in compliance in all material respects with all laws respecting employment and employment practices, terms and conditions of employment, pay equity and wages and has not and is not engaged in any unfair labour practice;

(ii)

each employee benefit plan that is maintained, administered or contributed to by the Company and the Cresco Subsidiaries for employees or former employees of the Company and the Cresco Subsidiaries has been maintained in all material respects in compliance with its terms and Applicable Laws. All material accruals for unpaid vacation pay, premiums for unemployment insurance, health premiums, federal or state pension plan premiums, accrued wages, salaries and commissions and employee benefit plan payments have been reflected in the books and records of the Company and the Cresco Subsidiaries, except as would not reasonably be expected to have a Material Adverse Effect.

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(jj)

no material labour dispute, disruption, grievance, arbitration or other conflict exists with the employees of the Company or the Cresco Subsidiaries, or, to the knowledge of the Company, is imminent or threatened;

(kk)

to the knowledge of the Company, since January 1, 2018, none of the directors, officers or employees of the Cresco Subsidiaries, any person who owns, directly or indirectly, an ownership interest in the Cresco Subsidiaries or any associate or affiliate of any of the foregoing, had or has any material interest, direct or indirect, in any transaction or any proposed transaction (including, without limitation, any loan made to or by any such person) with the Company or the Cresco Subsidiaries which, as the case may be, materially affects, is material to or will materially affect the Company or the Cresco Subsidiaries, except as disclosed or incorporated by reference in the Offering Documents;

(ll)

the Company and the Cresco Subsidiaries (i) have obtained insurance policies with responsible insurers as are appropriate to their respective Assets and Properties, are sufficient for all applicable requirements of Applicable Law and in such amounts and against such risks as are customarily carried and insured against by comparable businesses, and all such insurance policies are in full force and effect, except as would not reasonably be expected to have a Material Adverse Effect; (ii) are not in material default with respect to the payment of any premium or compliance with any of the provisions contained in such insurance policies and have not failed to give any notice or present any material claim under any such insurance policy in due and timely fashion. Except as would not reasonably be expected to have a Material Adverse Effect, neither the Company nor any Cresco Subsidiary has received notice from any of the insurers regarding cancellation of such insurance policy;

(mm)

the minute books, share certificate books, registers of securityholders, registers of transfers and registers of directors and partners and any similar corporate records of the Company and the Cresco Subsidiaries are complete and accurate in all material respects;

(nn)

other than in respect of the U.S. Marijuana Laws or as otherwise publicly announced, to its knowledge, neither the Company nor the Cresco Subsidiaries are aware of any Applicable Law or governmental position or change in Applicable Law or change in governmental position which it anticipates may have a Material Adverse Effect;

(oo)

except as would not have a Material Adverse Effect, each of the Company, the Cresco Subsidiaries and each of their respective Assets and Properties and the operation of their respective businesses, (i) are in compliance with any and all Environmental Laws, (ii) the Company and each of the Cresco Subsidiaries has complied in all respects with all reporting and monitoring requirements under all

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Environmental Laws), (iii) has received all material permits, licenses or other approvals required under applicable Environmental Laws to conduct their business, and (iv) is in compliance with all terms and conditions of any such permit, license or approval;

(pp)

except for the Underwriters, there is no person acting or purporting to act at the request of the Company, who is entitled to any brokerage or finder’s fee in connection with the transactions contemplated by this Agreement;

(qq)

except as disclosed or incorporated by reference in the Offering Documents, since June 30, 2019, there has not been any material change in the business, affairs, operations, revenues, capital, properties, assets or liabilities (absolute, accrued, contingent or otherwise), condition (financial or otherwise) or results of operations of the Company and the Subsidiaries (taken as a whole) which would have a Material Adverse Effect;

(rr)

neither the Company nor any of the Cresco Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of the Company or any of the Cresco Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of the Cresco Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any domestic government official, “foreign official” (as defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (collectively, the “FCPA”)) or employee from corporate funds; (iii) violated or is in violation of any provision of the FCPA or any other applicable anti-bribery statute or regulation; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any domestic government official, foreign official or employee; and the Company and the Cresco Subsidiaries have conducted their respective businesses, transactions, negotiations, discussions and dealings in compliance with applicable anti-bribery and anti-corruption statutes laws and regulations applicable in any jurisdiction in which they are located or conducting business

(ss)

other than in respect of certain United States federal laws relating to the cultivation, distribution or possession of marijuana in the United States and other related judgments, orders or decrees (collectively, the “U.S. Marijuana Laws”), the operations of the Company and the Cresco Subsidiaries are and have been conducted at all times in compliance with the anti-money laundering laws of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any Governmental Authority to which they are subject (collectively, the “Anti-Money Laundering Laws”) and no action, suit or proceeding by or before any Governmental Authority or any arbitrator involving the Company or the Cresco Subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Company, threatened;

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(tt)

neither the Company nor any of the Cresco Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee, affiliate or person acting on behalf of the Company or the Cresco Subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of this offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, or any joint venture partner or other person or entity, for the purpose of facilitating or financing the activities of or business with any person, or in any country or territory, that currently is the subject to any sanctions administered by OFAC;

(uu)

the Company has not filed any confidential material change report which remains confidential as at the date hereof;

(vv)

the Company has filed a current annual information form in the form prescribed by NI 51-102 in each of the Qualifying Jurisdictions prior to the date of this Agreement; the Company is as of the date hereof an Eligible Issuer in the Qualifying Jurisdictions and, on the dates of and upon filing of Prospectus, will be an Eligible Issuer in the Qualifying Jurisdictions and there will be no documents required to be filed under the Applicable Securities Laws of the Qualifying Jurisdictions in connection with the Offering of the Offered Units that will not have been filed as required as at those respective dates;

(ww)

the Company has filed all documents forming the Disclosure Record on a timely basis, except for any failure to file on a timely basis which is not material. As of their respective dates, the documents forming the Disclosure Record complied in all material respects with the requirements of the Applicable Securities Laws of the Qualifying Jurisdictions, and none of the documents forming the Disclosure Record, when filed, contained any misrepresentation or contained an untrue statement of a material fact, or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made, which has not been corrected by the filing on a public basis of a subsequent document which forms part of the Disclosure Record;

(xx)

the Shares, Warrants and Warrant Shares will at the Closing Time qualify as eligible investments as described in the Prospectus under the heading “Eligibility for Investment” and the Company will not take or permit any action within its control which would cause the Shares, Warrants or Warrant Shares to cease to be qualified, during the period of distribution of the Offered Units, as eligible investments to the extent so described in the Prospectus;

(yy)

the definitive form and terms of the certificate representing the Subordinate Voting Shares, if certificated, have, or will have at or prior to the Closing Time, been duly approved and adopted by the board of directors of the Company and the form and terms of the certificate representing the Subordinate Voting Shares do not and will not conflict with any Applicable Laws or rules, by-laws and regulations of the CSE;

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(zz)

the definitive form and terms of the certificate representing the Warrants, if certificated, have, or will have at or prior to the Closing Time, been approved and adopted by the board of directors of the Company and the form and terms of the certificate representing the Warrants do not and will not conflict with any Applicable Laws or the rules and by-laws of the CSE;

(aaa)

Odyssey Trust Company has been duly appointed as the registrar and transfer agent for the Subordinate Voting Shares at or prior to the Closing Time;

(bbb)

Odyssey Trust Company has been, or will prior to the Closing Time on the Closing Date be, duly appointed as the warrant agent and registrar and transfer agent for the Warrants;

(ccc)

all forward-looking information and statements of the Company contained in the Offering Documents and the assumptions underlying such information and statements, subject to any qualifications contained therein, including any forecasts and estimates, expressions of opinion, intention and expectation, as at the time they were or will be made, were or will be made on reasonable grounds after due and proper consideration and were or will be truly and honestly held and fairly based;

(ddd)

the statistical, industry and market related data included, or incorporated by reference, in the Offering Documents are derived from sources which the Company reasonably believes to be accurate, reasonable and reliable, and such data is consistent with the sources from which it was derived;

(eee)

other than in respect of U.S. Marijuana Laws, the acquisitions of the respective material businesses and/or companies disclosed in the Documents Incorporated by Reference were effected in compliance with all Applicable Laws, and no payments will accrue, be owing or be payable by, the Company or any Subsidiary to any person in connection with any such acquisition except (i) as and to the extent disclosed in the Documents Incorporated by Reference; or (ii) for any such payments as would not be material to the Company and the Subsidiaries (taken as a whole);

(fff)

other than in respect of U.S. Marijuana Laws and except as would not reasonably be expected to have a Material Adverse Effect: (i) the Cresco Subsidiaries have all licenses, permits, authorizations, certifications, consents and orders necessary for the conduct of its business as presently conducted, (ii) none of the Cresco Subsidiaries have received any penalty, enforcement action or public notice violation or notice thereof from any state, municipal or local government in respect of such licenses and/or permits, and (iii) each Cresco Subsidiary is in compliance in all material respects with each material license and permit held by it.

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(ggg)

other than as disclosed in or incorporated by reference in the Offering Documents, the Company has not completed or entered into an agreement to complete a “significant acquisition” nor is it proposing any “probable acquisitions” (as such terms are used in NI 44-101 and NI 51-102) that would require the inclusion of any additional financial statements (in addition to the Financial Statements incorporated by reference in the Offering Documents) or any pro forma financial statements pursuant to the Applicable Securities Laws of the Qualifying Jurisdictions, and for which a business acquisition report has not been filed under NI 51-102;

(hhh)

other than as disclosed in or incorporated by reference in the Offering Documents, the Company has not entered into any agreement or arrangement in respect of a transaction that would be a “significant acquisition” for the purposes of Part 8 of NI 51-102 and there are no proposed acquisitions by the Company that have progressed to the state where a reasonable person would believe that the likelihood of the Company completing the acquisition is high and would be a “significant acquisition” for the purposes of Part 8 of NI 51-102 if completed as of the date of the supplement relating to the Shares; and

(iii)

the Company is a “foreign private issuer” (as defined in Rule 405 under the U.S. Securities Act).

Section 9

Covenants of the Company

The Company covenants and agrees with the Underwriters that the Company:

(a)

will advise the Underwriters, promptly after receiving notice thereof, of the time when the Prospectus and any Supplementary Material has been filed and will provide evidence reasonably satisfactory to the Underwriters of each such filing;

(b)

will use its commercially reasonable efforts to maintain its status as a “reporting issuer” (or the equivalent thereof) not in default of the requirements of the Applicable Securities Laws of each of the Qualifying Jurisdictions which have such a concept and will comply with all of its obligations under Applicable Securities Laws for a period of 36 months following the Closing Date, provided that the Company shall not be required to comply with this Section 9(b) following the completion of a merger, amalgamation, arrangement, business combination or take-over bid pursuant to which the Company ceases to be a “reporting issuer”” (within the meaning of Applicable Securities Laws in Canada );

(c)

will use its commercially reasonable efforts (including, without limitation, making application to the Securities Commissions of each Qualifying Jurisdiction for all consents, orders and approvals necessary) to maintain the listing of the Subordinate Voting Shares and the Warrants on the CSE or such other recognized stock exchange or quotation system as Canaccord, on behalf of the Underwriters, may approve, acting reasonably, for a period of 36 months following the Closing Date, provided that the Company shall not be required to comply with this

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Section 9(c) following the completion of a merger, amalgamation, arrangement, business combination or take-over bid pursuant to which the Company ceases to be a “reporting issuer”” (within the meaning of Applicable Securities Laws in Canada;

(d)

will apply the net proceeds from the issue and sale of the Offered Units substantially in accordance with the disclosure set out under the heading “Use of Proceeds” in the Prospectus, subject to the qualifications therein;

(e)

will forthwith notify the Underwriters of any breach of any covenant of this Agreement or any Ancillary Documents by the Company, or upon the Company becoming aware that any representation or warranty of the Company contained in this Agreement or any Ancillary Document was untrue or inaccurate in any material respect at the time such representation or warranty was made;

(f)

will use commercially reasonable efforts to cause the directors and officers of the Company to deliver at the Closing Time on the Closing Date, or, as applicable, the Option Closing Date, the agreements contemplated by Section 10(k); and

(g)

subject to Applicable Securities Laws, prior to the earlier of: (i) the Option Closing Date pursuant to which the Over-Allotment Option has been exercised in full; or (ii) the expiry of the Over-Allotment Option, will make available management of the Company for meetings with investors as scheduled by Canaccord at the discretion of Canaccord, acting reasonably.

Section 10

Conditions of Closing

The obligation of the Underwriters to purchase the Initial Units at the Closing Time on the Closing Date and to purchase any Additional Units at the Closing Time on an Option Closing Date shall be subject to the following:

(a)

the Underwriters will receive at the Closing Time a legal opinion addressed to the Underwriters and their counsel dated and delivered on the Closing Date from the Company’s Canadian counsel, Bennett Jones LLP, and from local counsel (only in respect of matters governed by laws of the Qualifying Jurisdictions where the Company’s Canadian counsel is not qualified to practice), in each case in form and substance satisfactory to the Underwriters and their counsel, acting reasonably, with respect to the following matters, subject to such reasonable assumptions and qualifications customary with respect to transactions of this nature as may be accepted by Underwriters’ counsel:

(i)

the Company is a “reporting issuer”, or its equivalent, in each of the Qualifying Jurisdictions and it is not listed as in default of Applicable Securities Laws in any of the Qualifying Jurisdictions which maintain such a list;

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(ii)

the Company is a corporation duly incorporated and validly existing under the laws of the Province of British Columbia, and has all requisite corporate power, capacity and authority to carry on its business as now conducted and to own, lease and operate its property and assets as described in the Prospectus;

(iii)

as to the authorized and issued capital of the Company;

(iv)

the rights, privileges, restrictions and conditions attaching to the Shares, the Warrants and the Warrant Shares are accurately summarized in all material respects in the Prospectus;

(v)

the Initial Shares and Initial Warrants sold pursuant to the Offering have been duly and validly created and authorized and are issued and are outstanding as fully paid shares or securities (as the case may be) of the Company and, in the case of the Initial Shares, are non-assessable;

(vi)

the Over-Allotment Option has been duly and validly authorized and granted by the Company and the Additional Shares and Additional Warrants issuable upon the exercise of the Over-Allotment Option have been duly and validly created, allotted and reserved for issuance by the Company and, upon the exercise of the Over-Allotment Option including receipt by the Company of payment in full therefor, the Additional Shares and the Additional Warrants will be duly and validly created, authorized, issued and outstanding as fully paid shares or securities (as the case may be) and, in the case of the Additional Shares, are non- assessable;

(vii)

the Warrant Shares have been duly and validly allotted and reserved for issuance and upon the exercise of the Warrants in accordance with their terms, the Warrant Shares will be duly and validly issued as fully paid and non-assessable Subordinate Voting Shares;

(viii)

the Company has all necessary corporate power and capacity: (i) to execute and deliver this Agreement and the Warrant Indenture and to perform its obligations hereunder and thereunder; (ii) to offer, issue, sell and deliver the Initial Shares and the Initial Warrants comprising the Initial Units; (iii) to grant the Over- Allotment Option and offer, issue, sell and deliver the Additional Shares and Additional Warrants issuable upon exercise of the Over-Allotment Option; and (iv) to issue, sell and deliver the Warrant Shares upon the exercise of the Warrants;

(ix)

all necessary corporate action has been taken by the Company to authorize the execution and delivery of each of the Prospectus and any Supplementary Material and the filing thereof with the Securities Commissions;

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(x)

the Company has duly authorized, executed and delivered, this Agreement and the Warrant Indenture and authorized the performance of its obligations hereunder and thereunder, including the offering, creation (as applicable), issue, sale and delivery of the Initial Shares and the Initial Warrants comprising the Initial Units, the grant of the Over-Allotment Option, the offering, creation (as applicable) issue, sale and delivery of Additional Shares and Additional Warrants upon exercise of the Over- Allotment Option, and the issue, sale and delivery of the Warrant Shares upon the exercise of the Warrants, and each of this Agreement and the Warrant Indenture constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to appropriate qualifications that are customary of an offering of this nature;

(xi)

the execution and delivery of this Agreement and the Warrant Indenture and the fulfillment of the terms hereof and thereof, including the offering, creation (as applicable), issue, sale and delivery of the Initial Shares and the Initial Warrants comprising the Initial Units, the grant of the Over- Allotment Option, the offering, creation (as applicable) issue, sale and delivery of Additional Shares and Additional Warrants upon exercise of the Over- Allotment Option, and the issue, sale and delivery of the Warrant Shares upon the exercise of the Warrants, and the consummation of the transactions contemplated by this Agreement and the Warrant Indenture, do not result in a breach of (whether after notice or lapse of time or both) or constitute a default under (i) any of the terms, conditions or provisions of the articles of incorporation or amalgamation, as applicable, of the Company, or (ii) the laws of the Province of British Columbia and the federal laws of Canada applicable therein;

(xii)

if issued, the form and terms of the definitive certificate representing the Subordinate Voting Shares and the Warrants have been approved by the directors of the Company and comply in all material respects with the Business Corporations Act (British Columbia), constating documents of the Company and rules, by-laws and regulations of the CSE;

(xiii)

Odyssey Trust Company is the duly appointed registrar and transfer agent for the Subordinate Voting Shares and the duly appointed warrant agent and registrar and transfer agent for the Warrants;

(xiv)

all necessary documents have been filed, all requisite proceedings have been taken, all approvals, permits and consents of the appropriate regulatory authority in each Qualifying Jurisdiction have been obtained, and all necessary legal requirements have been fulfilled, in order to qualify the distribution of the Initial Shares and the Initial Warrants comprising the Initial Units, the Over-Allotment Option and the Additional Shares and the Additional Warrants upon exercise of the Over-Allotment Option in each of the Qualifying Jurisdictions through dealers who are registered under Applicable Securities Laws and who have complied with the relevant provisions of such Applicable Laws;

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(xv)

the issuance by the Company of the Warrant Shares in accordance with and pursuant to the terms and conditions of the Warrants and the Warrant Indenture is exempt from the prospectus requirements of the Applicable Securities Laws in the Qualifying Jurisdictions and no prospectus or other document is required to be filed, no proceeding is required to be taken and no approval, permit or consent of the Securities Commissions is required to be obtained by the Company under the Applicable Securities Laws in the Qualifying Jurisdictions to permit such issuance of the Warrant Shares;

(xvi)

the first trade in Warrant Shares underlying the Warrants is exempt from the prospectus requirements of the Applicable Securities Laws in the Qualifying Jurisdictions and no prospectus or other document is required to be filed, no proceeding is required to be taken and no approval, permit, consent or authorization of regulatory authorities is required to be obtained by the Company under Applicable Securities Laws of the Qualifying Jurisdictions to permit such trade through registrants registered under Applicable Securities Laws who have complied with such laws and the terms and conditions of their registration, provided that (i) such trade is not a “control distribution” as that term is defined in National Instrument 45-102 – Resale of Securities at the time of such trade, (ii) the Company is a reporting issuer (as defined under Applicable Securities Laws) at the time of such first trade, and (iii) such first trade is not a transaction or series of transactions involving a purchase and sale or a repurchase and resale in the course of or incidental to a distribution;

(xvii)

relying solely on the conditional approval letter (or equivalent) from the CSE, that the Shares and Warrants comprising the Initial Units and Additional Units and the Warrant Shares issuable upon the exercise of the Warrants and Additional Warrants have been conditionally approved for listing on the CSE, subject only to Standard Listing Conditions; and

(xviii)

confirming the statements under the heading “Eligibility for Investment” in the Prospectus, subject to the qualifications, assumptions and limitations set out under such heading.

In connection with such opinion, counsel to the Company may rely on the opinions of local counsel in the Qualifying Jurisdictions acceptable to counsel to the Underwriters, acting reasonably, as to the qualification for distribution of the Offered Units or opinions may be given directly by local counsel of the Company with respect to those items and as to other matters governed by the laws of jurisdictions other than the province or provinces in which the Company’s Canadian counsel are qualified to practice and may rely, to the extent appropriate in the circumstances but only as to matters of fact, on certificates of officers of the Company and others;

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(b)

the Underwriters shall have received a legal opinion from internal counsel of the Company, addressed to the Underwriters and legal counsel to the Underwriters with respect to: (i) the existence of each Cresco Subsidiary; (ii) the issued and outstanding securities of each Cresco Subsidiary and the securities thereof held by the Company or a Subsidiary; (iii) the corporate power and capacity of each Cresco Subsidiary to carry on its business and activities and to own and lease its property and assets; each such opinion to be in form and substance, acceptable to the Underwriters and their legal counsel, acting reasonably. In connection with such opinion, internal counsel of the Company may rely on, to the extent appropriate in the circumstances but only as to matters of fact, on certificates of officers of the Company, Cresco Subsidiaries and others;

(c)

the Underwriters shall have received a favourable legal opinion from Fox Rothschild LLP regarding certain U.S. state regulatory matters, in form and substance satisfactory to the Underwriters, acting reasonably, which opinion may be subject to usual and customary qualifications for opinions of this type, in form and content satisfactory to the Underwriters’ counsel, acting reasonably;

(d)

if any Initial Units or Additional Units are sold to purchasers in the United States or to or for the account or benefit of U.S. Persons, the Underwriters will receive, at the Closing Time, a favourable legal opinion dated the Closing Date from United States counsel to the Company, McDermott Will & Emery LLP, to the effect that no registration of the Initial Units and Additional Units offered and sold to purchasers in the United States or to or for the account or benefit of U.S. Persons will be required under the U.S. Securities Act, such opinion to be in form and substance, acceptable to the Underwriters and their legal counsel, acting reasonably, it being understood that such counsel need not express its opinion with respect to any subsequent re-sale of such Initial Units and Additional Units;

(e)

the Underwriters shall have received a certificate dated the Closing Date, signed by the Chief Executive Officer and the Chief Financial Officer of the Company or any other senior officer(s) of the Company as may be acceptable to the Underwriters, in form and content satisfactory to the Underwriters’ counsel, acting reasonably, with respect to:

(i)

the notice of articles and articles of the Company;

(ii)

resolutions of the Company’s board of directors relevant to, among other things, the issue and sale of the Shares and Warrants comprising the Offered Units to be issued and sold by the Company and the Warrant Shares issuable upon exercise of the Warrants, and the authorization of this Agreement and the other agreements and transactions contemplated herein; and

(iii)

the incumbency and signatures of signing officers of the Company;

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(f)

the Underwriters shall have received a certificate of status or the equivalent dated within one Business Day of the Closing Date, in respect of the Company and each Cresco Subsidiary;

(g)

the Company shall cause Marcum LLP, MNP LLP and FGMK LLC to deliver to the Underwriters a “bring down” comfort letter, addressed to the Underwriters and the board of directors of the Company, dated the Closing Date, in form and substance satisfactory to the Underwriters, acting reasonably, bringing forward to a date not more than two Business Days prior to the Closing Date the information contained in the comfort letters referred to in Section 5(1)(c) hereof;

(h)

prior to Closing, a “short form” comfort letter dated the Closing Date, in form and substance satisfactory to the Underwriters, acting reasonably, addressed to the Underwriters and the directors of the Company from the current auditor of CannaRoyalty Corp. with respect to (i) the unaudited condensed interim consolidated financial statements of CannaRoyalty Corp. incorporated by reference in the Offering Documents for the three months ended March 31, 2019 and March 31, 2019, together with the notes thereto; and (ii) the audited financial statements of CannaRoyalty Corp. incorporated by reference in the Offering Documents for the years ended December 31, 2018 and 2017, together with the notes thereto and the report of the auditor attached thereto, which letter shall be based on a review by such auditors within a cut-off date and based on a review of not more than two Business Days prior to the Closing Date, which letter shall be in addition to any auditors’ comfort and consent letters addressed to the Securities Commissions in the Qualifying Jurisdictions;

(i)

the Company shall deliver to the Underwriters, at the Closing Time, certificates dated the Closing Date or the Option Closing Date, as applicable, addressed to the Underwriters and signed by the Chief Executive Officer of the Company and the Chief Financial Officer of the Company, or such other senior officer(s) of the Company as may be acceptable to the Underwriters, certifying for and on behalf of the Company and without personal liability, to the effect that:

(i)

the Company has complied in all material respects with all the covenants and satisfied all the terms and conditions of this Agreement on its part to be complied with and satisfied at or prior to the Closing Time;

(ii)

the representations and warranties of the Company contained herein are true and correct in all material respects (except for those that are qualified by materiality or Material Adverse Effect which shall be true and correct in all respects) as at the Closing Time (except to the extent such representations and warranties speak as of a specific date or time in which case such as of that specific date or time only)

with the same force and effect as if made on and as at the Closing Time after giving effect to the transactions contemplated hereby;

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(iii)

the Decision Document has been issued by the Reviewing Authority for the Base Prospectus pursuant to the Passport System and, to the knowledge of such persons, no order, ruling or determination having the effect of ceasing the trading or suspending the sale of the Subordinate Voting Shares or other securities of the Company, or the Offered Units to be issued and sold by the Company has been issued and no proceedings for such purpose have been instituted or are pending or, to the knowledge of such officers, contemplated or threatened; and

(iv)

since the respective dates as of which information is given in the Prospectus or any Supplementary Material (A) there has been no material change (financial or otherwise) in the business, assets (including intangible assets), operations, liabilities (contingent or otherwise), capital, or results of operations or control of the Company and the Subsidiaries, on a consolidated basis, and (B) no transaction has been entered into by the Company or any Subsidiary which is material to the Company and the Subsidiaries, on a consolidated basis, other than as disclosed in the Prospectus or in any Supplementary Material; and

(v)

there has been no change in any material fact (which includes the disclosure of any previously undisclosed material fact) contained in the Prospectus which fact or change is, or may be, of such a nature as to render any statement in the Prospectus misleading or untrue in any material respect or which would result in a misrepresentation in the Prospectus or which would result in the Prospectus not complying with Applicable Securities Laws;

(j)

the Underwriters shall have received copies of correspondence indicating that the Company has obtained all necessary approvals for the issuance of the Shares, the Warrants and the Warrant Shares to be listed on the CSE, subject only to the Standard Listing Conditions;

(k)

the representations and warranties of the Company contained in this Agreement will be true and correct in all material respects (except for those that are qualified by materiality or Material Adverse Effect which shall be true and correct in all respects) at and as of the Closing Time on the Closing Date, and, if applicable, the Option Closing Date as if such representations and warranties were made at and as of such time and all agreements, covenants and conditions required by this Agreement to be performed, complied with or satisfied by the Company at or prior to the Closing Time on the Closing Date or the Option Closing Date, as applicable, will have been performed, complied with or satisfied prior to that time;

(l)

the absence of any misrepresentations in the Offering Documents;

(m)

the Company shall have received a Decision Document with respect to the Preliminary Base Prospectus, the Amended and Restated Base Prospectus and the Base Prospectus in the Qualifying Jurisdictions, and none of these Decision Documents shall be invalid or have been revoked or rescinded by any Securities Commission;

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(n)

all directors and executive officers of the Company and their respective associates will have entered into an agreement with, and in form and substance satisfactory to the Underwriters, acting reasonably, at the Closing Time on the Closing Date pursuant to which they will agree not to, for a period ending on the date that is 90 days following the Closing Date, directly or indirectly offer, sell, contract to sell, lend, swap or enter into any other agreement to transfer the economic consequences of, or otherwise dispose of or deal with, or publicly announce any intention to offer, sell, contract to sell, grant or sell any option to purchase, hypothecate, pledge, transfer, assign, purchase any option or contract to sell, lend, swap, or enter into any agreement to transfer the economic consequences of, or otherwise dispose of or deal with, whether through the facilities of a stock exchange, by private placement or otherwise, or announce any intention to do any of the foregoing, any Subordinate Voting Shares or other securities of the Company held by them, directly or indirectly, without the prior written consent of Canaccord on behalf of the Underwriters (such consent not to be unreasonably withheld or delayed), except in conjunction with the grant or exercise of stock options or pursuant to a takeover bid.

Section 11

Closing

(1)

The closing of the purchase and sale of the Offered Units shall be completed at the Closing Time at the offices of Bennett Jones LLP, 100 King Street West, Suite 3400, Toronto, Ontario, or at such other place as Canaccord, on behalf of the Underwriters, and the Company shall agree upon. At the Closing Time:

(a)

the Company will deliver to Canaccord, or as Canaccord may direct, (i) via electronic deposit or represented by one or more certificates in definitive form, the Shares and Warrants comprising the Offered Units, in each case registered in the name of “CDS & Co.” or in such other name or names as Canaccord may notify the Company in writing not less than two Business Days prior to the Closing Time or made and settled in CDS under the non- certificated inventory system, and (ii) all further documentation as may be contemplated in this Agreement or as counsel to the Underwriters may reasonably require; against payment by the Underwriters to the Company (in accordance with their respective entitlements) of the applicable purchase price for the Initial Units and any Additional Units being issued and sold under this Agreement, net of the Underwriters Fees and the Underwriters’ expenses contemplated in Section 15 of this Agreement, by certified cheque, bank draft or wire transfer payable to or as directed by the Company not less than two Business Days prior to the Closing Time; and

(b)

the obligation of the Underwriters to complete the purchase of any Additional Units, Additional Shares and/or Additional Warrants under this Agreement, upon the exercise of the Over-Allotment Option, is subject to the receipt by the Underwriters of those documents contemplated, and the satisfaction of those

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conditions set forth, in Section 10 as the Underwriters may request, acting reasonably. In the event that the Company shall subdivide, consolidate, reclassify or otherwise change its Subordinate Voting Shares during the period in which the Over-Allotment Option is exercisable, appropriate adjustments will be made to the exercise price and to the number of Additional Units, Additional Shares and/or Additional Warrants issuable on exercise thereof such that the Underwriters are entitled to arrange for the sale of the same number and type of securities that the Underwriters would have otherwise arranged for had they exercised such Over-Allotment Option immediately prior to such subdivision, consolidation, reclassification or change.

Section 12

Restrictions on Further Issues or Sales

During the period commencing on the date hereof and ending 90 days following the Closing Date, the Company will not, directly or indirectly, without the prior written consent of Canaccord (such consent not to be unreasonably withheld or delayed), issue, sell, offer, grant an option or right in respect of, or otherwise dispose of, or enter into any derivative transaction that has the effect of any of the foregoing, or agree to or announce any intention to issue, sell, offer, grant an option or right in respect of, or otherwise dispose of, or enter into any derivative transaction that has the effect of any of the foregoing, any additional units of the Company, Subordinate Voting Shares or any securities convertible into or exchangeable for Subordinate Voting Shares, other than issuances: (i) to satisfy rights or obligations under securities or other financial instruments of the Company existing and outstanding as of the date hereof; (ii) the issuance of securities in connection with arm’s length property or share acquisitions; or (iii) the grant of equity incentives in the normal course under existing equity incentive plans.

Section 13

Indemnification by the Company

(1)

The Company shall fully indemnify and save harmless each of the Underwriters and their respective affiliates and their respective directors, officers, employees, shareholders, partners, advisors and agents (collectively, the “Indemnified Parties” and individually an “Indemnified Party”) from and against any and all liabilities, claims (including securityholder actions, derivative or otherwise), actions, losses (other than a loss of profits in connection with the distribution of the Offered Units), costs, damages and expenses (including the aggregate amount paid in settlement of any action, suit, proceeding, investigation or claim) and the reasonable fees and expenses of their counsel (collectively, “Losses”) that may be incurred in advising with respect to and/or defending any action, suit, proceeding, investigation or claim that may be made or threatened against any Indemnified Party by any third party other than the Company or in enforcing this indemnity (collectively, the “Claims” and individually, a “Claim”) to which any Indemnified Party may become subject or otherwise involved in any capacity insofar as the Losses and/or Claims relate to, are caused by, result from, arise out of, or are in connection with, directly or indirectly:

(a)

the breach of any representation or warranty of the Company made in any Ancillary Document or the failure of the Company to comply with any of its obligations in any Ancillary Document or any omission or alleged omission to

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state in any Ancillary Document any fact required to be stated in such document or necessary to make any statement in such document not misleading in light of the circumstances under which it was made;

(b)

any information or statement (except any information or statement relating solely to the Underwriters or any of them and furnished in writing by the Underwriters or their legal counsel to the Company for use therein) in any of the Offering Documents (including, for greater certainty, the Documents Incorporated by Reference and any Subsequent Disclosure Documents) containing or being alleged to contain a misrepresentation or being or being alleged to be untrue, or based upon any omission or alleged omission to state in any of the Offering Documents any material fact (other than a material fact relating solely to the underwriters) required to be stated in those documents or necessary to make any of the statements therein not misleading in light of the circumstances in which they were made;

(c)

any order made or any inquiry, investigation or proceeding instituted, threatened or announced by any court, securities regulatory authority, stock exchange or by any other competent authority, based upon any untrue statement, omission or misrepresentation or alleged untrue statement, omission or misrepresentation (except a statement, omission or misrepresentation relating solely to the Underwriters or any of them and furnished in writing by the Underwriters or their legal counsel to the Company for use therein) contained in any of the Offering Documents or any other document or material filed or delivered on behalf of the Company pursuant to this Agreement, preventing or restricting the trading in or the sale or distribution of the Offered Units, Shares, Warrants, Warrant Shares or any other securities of the Company;

(d)

the non-compliance by the Company with any Applicable Securities Laws or other regulatory requirements or the rules, by-laws and regulations of the CSE including the Company’s non-compliance with any statutory requirement to make any document available for inspection;

(e)

any misrepresentation or alleged misrepresentation made by the Company in connection with the Offering, whether oral or written, where such misrepresentation gives rise to any liability under any statute in any jurisdiction which is in force on the date of this Agreement; or

(f)

any breach of any representation or warranty of the Company contained herein or the failure of the Company to comply with any of its covenants or other obligations contained herein or to satisfy any conditions contained herein required to be satisfied by the Company.

Any Underwriter shall not be entitled to the rights of indemnity contained in this Section 13 in connection with any Claim, if the Company has complied with the provisions of Sections 6 and, if applicable Section 5, and the person asserting such Claim for which indemnity would otherwise be available was not delivered a copy of the

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Prospectus or the U.S. Placement Memorandum or was not provided with a copy of any Supplementary Material (or in the case of the U.S. Placement Memorandum, such applicable supplementary materials) which corrects any misrepresentation contained in the Prospectus and/or the U.S. Placement Memorandum which is the basis for such Claim and which Prospectus, U.S. Placement Memorandum or Supplementary Material (or in the case of the U.S. Placement Memorandum, such applicable supplementary materials) is required under Applicable Securities Laws or this Agreement to be delivered to such person by such Underwriter or members of any Selling Firm appointed by such Underwriter.

(2)

If any Claim contemplated by this Section 13 shall be asserted against any of the Indemnified Parties, or if any potential Claim contemplated by this Section 13 shall come to the knowledge of any of the Indemnified Parties, the Indemnified Party concerned shall promptly notify in writing the Company of the nature of such Claim (provided that any failure to so notify in respect of any Claim or potential Claim shall affect the liability of the Company under this Section 13 only if and to the extent that the Company is materially and adversely prejudiced by such failure). The Company shall, subject as hereinafter provided, be entitled (but not required) to assume the defence on behalf of the Indemnified Party of any such Claim; provided that the defence shall be through legal counsel selected by the Company and acceptable to the Indemnified Party, acting reasonably. An Indemnified Party shall have the right to employ separate counsel in any such Claim and participate in the defence thereof but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless:

(i)

the Company fails to assume the defence of such Claim on behalf of the Indemnified Party within fourteen days of receiving notice of such suit;

(ii)

the employment of such counsel has been authorized by the Company; or

(iii)

the Indemnified Party shall have been advised in writing by counsel that representation of the Indemnified Party by counsel for the Company is inappropriate as a result of the potential or actual conflicting interests of those represented or that there may be legal defences available to the Indemnified Party or Indemnified Parties which are different from or in addition to those available to the Company or that the subject matter of the Claim may not fall within the foregoing indemnity or that there is a conflict of interest between the Company and the Indemnified Parties;

in which case, the Company shall not have the right to assume the defence of such Claim on behalf of the Indemnified Party and the Company shall be liable to pay the reasonable fees and disbursements of counsel for such Indemnified Parties as well as the reasonable costs and out-of-pocket expenses of the Indemnified Party (including an amount to reimburse the Underwriter or Underwriters at their normal per diem rates for time spent by their respective directors, officers or employees ). Notwithstanding anything set forth herein, in no event shall the Company be liable for the fees or disbursements of more than one firm of legal counsel to an Indemnified Party in a particular jurisdiction in respect of any particular Claim or related set of Claims.

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The Company will not, without each affected Indemnified Party’s prior written consent, such consent not to be unreasonably withheld, admit any liability, settle, compromise, consent to the entry of any judgment in or otherwise seek to terminate any action, suit, proceeding, investigation or claim in respect of which indemnification may be sought hereunder unless in connection with any settlement, compromise or consent by the Company, such settlement, compromise or consent (i) includes an unconditional release of each Indemnified Party from any liabilities arising out of such action, suit, proceeding, investigation or claim (if an Indemnified Party is a party to such action) and (ii) does not include a statement as to, or an admission of fault, culpability or a failure to act by or on behalf of an Indemnified Party.

(3)

The Company hereby acknowledges and agrees that, with respect to Sections 13 and 14 hereof, the Underwriters are contracting on their own behalf and as agents for their affiliates, and its and their respective directors, officers, employees, partners, advisors, agents (collectively, the “Beneficiaries”). In this regard, each of the Underwriters shall act as trustee for the Beneficiaries of the covenants of the Company under Sections 13 and 14 hereof with respect to the Beneficiaries and accepts these trusts and shall hold and enforce such covenants on behalf of the Beneficiaries.

(4)

The Company hereby waives any right it may have of first requiring an Indemnified Party to proceed against or enforce any other right, power, remedy or security or claim payment from any other person before claiming under this indemnity. The Company also agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company or any person asserting Claims on behalf of or in right of the Company for or in connection with the Offering except to the extent any Losses suffered by the Company are determined by a court of competent jurisdiction in a final judgment that has become non-appealable to have resulting from the gross negligence, fraud, illegal act or willful misconduct of such Indemnified Party.

(5)

Notwithstanding anything to the contrary contained herein, the foregoing indemnity shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that such Losses to which the Indemnified Party may be subject were caused by the gross negligence, fraud, illegal act or wilful misconduct of the Indemnified Party. For greater certainty, the Company and the Underwriters agree that they do not intend that any failure by the Underwriters to conduct such reasonable investigation as necessary to provide the Underwriters with reasonable grounds for believing the Offering Documents contained no misrepresentation shall constitute “fraud” or “gross negligence” or “wilful misconduct” for purposes of this Section 13 or otherwise disentitle the Underwriters from indemnification hereunder.

(6)

The Company agrees that in case any legal proceeding shall be brought against the Company and/or the Underwriters by any governmental commission or regulatory authority or any stock exchange or other entity having regulatory authority, either domestic or foreign, or if any such commission or authority shall investigate the Company and/or the Indemnified Parties and any Indemnified Parties shall be required to testify in connection therewith or shall be required to respond to procedures designed to discover information regarding, in connection with, or by reason of the performance of

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professional services rendered to the Company by the Underwriters, the Indemnified Parties shall have the right to employ their own counsel in connection therewith, and the reasonable fees and expenses of such counsel as well as the reasonable costs (including an amount to reimburse the Underwriters for time spent by the Indemnified Parties in connection therewith) and out-of-pocket expenses incurred by Indemnified Parties in connection therewith shall be paid by the Company as they occur. The Company agrees to reimburse the Underwriters for the time spent by their personnel in connection with any Claim at their normal per diem rates.

(7)	The rights to indemnification provided in this Section 13 shall be in addition to and not in derogation of any other rights which the Underwriters may have by statute or otherwise at law.

Section 14

Contribution

(1)

In order to provide for just and equitable contribution in circumstances in which the indemnity provided in Section 13 hereof would otherwise be available in accordance with its terms but is, for any reason held to be illegal, unavailable to or unenforceable by the Indemnified Parties or enforceable otherwise than in accordance with its terms, the Company and the Underwriters shall contribute to the aggregate of all Losses of the nature contemplated in Section 13 hereof and suffered or incurred by the Indemnified Parties (i) in such proportion as is appropriate to reflect not only the relative benefits received by the Company, on the one hand, and the Underwriters on the other hand, from the distribution of the Offered Units, or (ii) if the allocation provided by (i) is not permitted by Applicable Law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company, on the one hand, and the Underwriters, on the other hand, in respect of such Losses; provided that the Company shall in any event contribute to the amount paid or payable by the Indemnified Parties as a result of such Claim in excess of such amount over the amount actually received by the Underwriters or any other Indemnified Party under this Agreement and further provided that the Underwriters shall not in any event be liable to contribute, in the aggregate, any amount in excess of such total Underwriters Fees or any portion thereof actually received by the Underwriters. However, no party who has engaged in any fraud, fraudulent misrepresentation or wilful misconduct as determined by a court of competent jurisdiction in a final non-appealable judgment shall be entitled to claim contribution from any person who has not engaged in such fraud, fraudulent misrepresentation or wilful misconduct.

(2)

The relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same ratio as the total proceeds from the Offering of the Offered Units (net of the Underwriters Fees payable to the Underwriters but before deducting expenses) received by the Company is to the Underwriters Fees actually received by the Underwriters. The relative fault of the Company, on the one hand, and of the Underwriters, on the other hand, shall be determined by reference to, among other things, whether the matters or things referred to in Section 13 which resulted in such Claims and/or Losses relate to information supplied by or steps or actions taken or done or not taken or not done by or on behalf of the Company or to information supplied by or

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steps or actions taken or done or not taken or not done by or on behalf of the Underwriters and the relative intent, knowledge, access to information and opportunity to correct or prevent such statement, omission or misrepresentation, or other matter or thing referred to in Section 13. The amount paid or payable by an Indemnified Party as a result of the Claims and/or Losses referred to above shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such Claims and/or Losses, whether or not resulting in an action, suit, proceeding or claim. The parties to this Agreement agree that it would not be just and equitable if contribution pursuant to this Section 14 were determined by any method of allocation which does not take into account the equitable considerations referred to in this Section 14.

(3)	If the Company may be held to be entitled to contribution from the Underwriters under the provisions of any statute or at law, the Company shall be limited to contribution in an aggregate amount not exceeding the lesser of:

(a)

the portion of the full amount of the Losses giving rise to such contribution for which the Underwriters are responsible, as determined in Section 13(1); and

(b)

the amount of the aggregate Underwriters Fees actually received by the Underwriters from the Company under this Agreement.

(4)	The rights to contribution provided in this Section 14 shall be in addition to and not in derogation of any other right to contribution which the Indemnified Parties may have by statute or otherwise at law.

(5)

If an Indemnified Party has reason to believe that a claim for contribution may arise, the Indemnified Party shall give the Company notice thereof in writing, but failure to so notify shall not relieve the Company of any obligation which it may have to the Indemnified Party under this Section 14 provided that the Company is not materially and adversely prejudiced by such failure, and the right of the Company to assume the defence of such Indemnified Party shall apply as set out in Section 13 hereof, mutatis mutandis.

Section 15

Fees and Expenses

(1)

Whether or not the purchase and sale of the Offered Units shall be completed, all fees and expenses (including GST or HST, if applicable) of or incidental to the creation, issuance and delivery of the Offered Units and of or incidental to all matters in connection with the transactions herein set out shall be borne by the Company including, without limitation:

(a)

all expenses of or incidental to the creation, issue, sale or distribution of the Offered Units and the filing of the Prospectus and any Supplementary Material;

(b)

the fees and expenses of the auditors, counsel to the Company and all local counsel (including disbursements and non-creditable GST or HST, if and as applicable, on all of the foregoing);

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(c)

all costs incurred in connection with the preparation and printing of the Prospectus and any Supplementary Material contemplated hereunder and otherwise relating to the Offering; and

(d)

the reasonable out-of-pocket expenses and fees of the Underwriters, including the reasonable fees and expenses of the Underwriters’ Canadian and U.S. counsel (subject to a maximum of $125,000 plus disbursements and applicable taxes), with such expenses to be paid by the Company at the Closing Time or at any other time requested by the Underwriters, acting reasonably, provided that all fees and expenses incurred by the Underwriters, or on its behalf, pursuant to the Offering shall be payable by the Company promptly upon receiving an invoice therefor from the Underwriters.

Section 16

All Terms to be Conditions

The Company agrees that the conditions contained in Section 10 will be complied with insofar as the same relate to acts to be performed or caused to be performed by the Company and that it will use its commercially reasonable efforts to cause all such conditions to be complied with. Any breach or failure to comply with or satisfy any of the conditions set out in Section 10 shall entitle the Underwriters to terminate their obligation to purchase the Offered Units, by written notice to that effect given to the Company at or prior to the Closing Time. It is understood that the Underwriters may waive, in whole or in part, or extend the time for compliance with, any of such terms and conditions without prejudice to the rights of the Underwriters in respect of any such terms and conditions or any other or subsequent breach or non-compliance, provided that to be binding on the Underwriters any such waiver or extension must be in writing.

Section 17

Termination by Underwriters in Certain Events

(1)	Each Underwriter shall also be entitled to terminate its obligation to purchase the Offered Units by written notice to that effect given to the Company at or prior to the Closing Time if:

(a)

there is a material change or a change in a material fact or new material fact shall arise, or there should be discovered any previously undisclosed material fact required to be disclosed in the Prospectus or any amendment thereto, in each case, that has or would be expected to have, in the opinion of the Underwriters (or any of them), acting reasonably, a significant adverse change or effect on the business or affairs of the Company and the Subsidiaries (taken as a whole) or on the market price or the value of the Offered Units or Subordinate Voting Shares;

(b)

except in connection with U.S. Marijuana Laws, (i) any inquiry, action, suit, investigation or other proceeding (whether formal or informal) is commenced, announced or threatened or any order made by any federal, provincial, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality including, without limitation, the CSE or any securities regulatory authority (except for any inquiry, action, suit, proceeding, investigation or order based upon activities of the Underwriters and not upon activities of the

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Company) or any law or regulation is enacted or changed which in the opinion of the Underwriters (or any of them), acting reasonably, operates to prevent or materially restrict the trading of the Subordinate Voting Shares or any other securities of the Company or materially and adversely affects or might be expected to materially and adversely affect the market price or value of the Offered Units or Subordinate Voting Shares; or (ii) if there should develop, occur or come into effect or existence any event, action, state, condition (including without limitation, terrorism or accident) or major financial occurrence of national or international consequence or any new or change in any law or regulation which in the opinion of the Underwriters, acting reasonably, seriously adversely affects, or involves, or would reasonably be expected to seriously adversely affect, or involve, the financial markets in Canada and the United States or the business, operations or affairs of the Company and the Subsidiaries taken as a whole or the market price or value of the securities of the Company;

(c)

the Company is in breach of any material term, condition or covenant of this Agreement or any representation or warranty given by the Company in this Agreement is or becomes false in any material respect;

(d)

any order to cease or suspend trading in any securities of the Company or prohibiting or restricting the distribution of any securities of the Company, including the Offered Units, Shares, Warrants or Warrant Shares, is made, or proceedings are announced, commenced or threatened for the making of any such order, by any securities commission or similar regulatory authority, the CSE or any other competent authority, and has not been rescinded, revoked or withdrawn; or

(e)

any Underwriter and the Company agree in writing to terminate this Agreement in relation to such Underwriter.

(2)

If this Agreement is terminated by any of the Underwriters pursuant to Section 17(1), there shall be no further liability on the part of such Underwriter, or on the part of the Company to such Underwriter except in respect of any liability which may have arisen or may thereafter arise under Sections 13, 14 and 15.

(3)

The right of the Underwriters or any of them to terminate their respective obligations under this Agreement is in addition to such other remedies as they may have in respect of any default, act or failure to act of the Company in respect of any of the matters contemplated by this Agreement. A notice of termination given by one Underwriter under this Section 17 shall not be binding upon the other Underwriters.

Section 18

Allocation of Canaccord

The parties hereto acknowledge and agree that Canaccord shall, in its sole discretion and without notice or consent of the Company, be entitled to allocate its underwriting commitment under this Agreement to any of its affiliates within the Canaccord Genuity Group of Companies.

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Section 19

Obligations of the Underwriters

(1)

The obligations of the Underwriters under this Agreement shall be several in all respects and not joint or joint and several. For greater certainty, the obligations of the Underwriters to purchase the Offered Units shall be several and not joint or joint and several, and shall be limited to the percentages of the aggregate number of Offered Units to be purchased set out opposite the names of the Underwriters respectively below:


Canaccord Genuity Corp.	-	60%
Beacon Securities Limited	-	10%
Cormark Securities Inc.	-	10%
Eight Capital	-	10%
GMP Securities L.P.	-	10%

(2)

If an Underwriter does not complete the purchase and sale of the Offered Units which that Underwriter has agreed to purchase under this Agreement (other than in accordance with Section 17 of this Agreement) (the “Defaulted Units”), Canaccord may delay the Closing Date for not more than five days without the prior written consent of the Company, and the remaining Underwriters (the “Continuing Underwriters”) will be entitled, at their option, to purchase all but not less than all of the Defaulted Units, provided, however, that in the event that the percentage of the total number of Defaulted Units which one or more of the Underwriters has failed or refused to purchase is not more than 10% of the total number of the Offered Units which the Underwriters have agreed to purchase, the Continuing Underwriters shall be obligated severally to purchase on a pro rata basis (or such other basis as such other Underwriters may agree) all, but not less than all, of the Offered Units which would otherwise have been purchased by the one or more Underwriters which failed or refused to purchase. If the Continuing Underwriters are not required to and do not elect to purchase the Defaulted Units:

(a)

the Continuing Underwriters will not be obliged to purchase any of the Offered Units;

(b)

the Company will not be obliged to sell less than all of the Offered Units; and

(c)

the Company will be entitled to terminate its obligations under this Agreement, in which event there will be no further liability on the part of the Continuing Underwriters, or on the part of the Company except pursuant to the provisions of Sections 13, 14 and 15 of this Agreement.

Section 20

Over-Allotment

In connection with the distribution of the Offered Units, the Underwriters and members of their selling group (if any) may over-allot or effect transactions which stabilize or maintain the market price of the Subordinate Voting Shares at levels above those which might otherwise

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prevail in the open market, in compliance with Applicable Securities Laws (including, for greater certainty, Regulation M under the U.S. Exchange Act). Those stabilizing transactions, if any, may be discontinued at any time.

Section 21

Notices

Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be delivered to,

in the case of the Company, to:

Cresco Labs Inc.

520 W Erie Street, Suite 220

Chicago, IL 60654

Email:

charlesb@crescolabs.com

Attention:

Charles Bachtell, Chief Executive Officer and Director

with a copy of any such notice (which shall not constitute notice to the Company) to:

Bennett Jones LLP

100 King Street West, Suite 3400

Toronto, Ontario M5X 1A4

Fax:

(416) 863-1716

Email:

sonshinea@bennettjones.com

Attention:

Aaron Sonshine

in the case of the Underwriters, to:

Canaccord Genuity Corp.

Brookfield Place

161 Bay Street, Suite 3100

Toronto, Ontario M5J 2S1

Fax:

(416) 869-3876

Email:

swinokur@canaccordgenuity.com

Attention:

Steve Winokur, Managing Director, Investment Banking

Stikeman Elliott LLP

199 Bay Street, Suite 5300

Toronto, Ontario M5L 1B9

Fax:

(416) 947-0866

Email:

mlanglois@stikeman.com

Attention:

Martin Langlois

- 48 -

The Company and the Underwriters may change their respective addresses for notice by notice given in the manner aforesaid. Any such notice or other communication shall be in writing, and unless delivered personally to the addressee or to a responsible officer of the addressee, as applicable, shall be given by email or fax and shall be deemed to have been given when: (i) in the case of a notice delivered personally or by email to a responsible officer of the addressee, when so delivered; and (ii) in the case of a notice delivered or given by fax on the first Business Day following the day on which it is sent.

Section 22

Relationship between the Company and the Underwriters.

The Company hereby acknowledges that (i) the offer and sale of the Offered Units pursuant to this Agreement is an arm’s-length commercial transaction between the Company, on the one hand, and the Underwriters, on the other hand; (ii) each Underwriter is acting as principal and not as an agent or fiduciary of the Company; and (iii) the Company’s engagement of the Underwriters in connection with the Offering and the process leading up to the Offering is as independent contractors and not in any other capacity. Furthermore, the Company agrees that it is solely responsible for making its own judgments in connection with the Offering (irrespective of whether any of the Underwriters has advised or is currently advising the Company on related or other matters). The Company agrees that it will not claim that any Underwriter has rendered advisory services of any nature or respect, or owes an agency, fiduciary or similar duty to the Company in connection with such transaction or the process leading thereto.

Section 23

Miscellaneous

(1)

Except with respect to Sections 13, 14, 17 and 18, all transactions and notices on behalf of the Underwriters hereunder or contemplated hereby may be carried out or given on behalf of the Underwriters by Canaccord and Canaccord shall in good faith discuss with the other Underwriter the nature of any such transactions and notices prior to giving effect thereto or the delivery thereof, as the case may be.

(2)

This Agreement shall enure to the benefit of, and shall be binding upon, the Underwriters and the Company and their respective successors and legal representatives, provided that no party may assign this Agreement or any rights or obligations under this Agreement, in whole or in part, without the prior written consent of the other party (provided that Canaccord shall represent the Underwriters in this regard).

(3)

This Agreement, including all schedules to this Agreement, constitutes the entire agreement between the parties relating to its subject matter and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties with respect to such subject matter. This Agreement may only be amended, supplemented, or otherwise modified by written agreement signed by all of the parties.

(4)

Neither the Company nor any of the Underwriters shall make any public announcement in connection with the Offering, except if the other party (provided that Canaccord shall represent the Underwriters in this regard) has consented to such announcement or the announcement is required by Applicable Laws or stock exchange rules. In such event, the party proposing to make the announcement will provide the other party with a reasonable opportunity, in the circumstances, to review a draft of the proposed announcement and to provide comments thereon.

- 49 -

(5)

No waiver of any provision of this Agreement will constitute a waiver of any other provision (whether or not similar). No waiver will be binding unless executed in writing by the party to be bound by the waiver. A party’s failure or delay in exercising any right under this Agreement will not operate as a waiver of that right. A single or partial exercise of any right will not preclude a party from any other or further exercise of that right or the exercise of any other right it may have.

(6)

If any provision of this Agreement is determined to be illegal, invalid or unenforceable by an arbitrator or any court of competent jurisdiction from which no appeal exists or is taken, that provision will be severed from this Agreement and the remaining provisions will remain in full force and effect.

(7)	This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein and the parties submit to the non-exclusive jurisdiction of the courts of the Province of Ontario.

(8)	Time shall be of the essence hereof and, following any waiver or indulgence by any party, time shall again be of the essence hereof.

(9)	The words, “hereunder”, “hereof” and similar phrases mean and refer to the Agreement formed as a result of the acceptance by the Company of this offer by the Underwriters to purchase the Offered Units.

(10)

All warranties, representations, covenants (including indemnification obligations) and agreements of the Company herein contained or contained in any Ancillary Document shall survive the purchase by the Underwriters of the Offered Units and shall continue in full force and effect for the benefit of the Underwriters regardless of the Closing of the sale of the Offered Units, any subsequent disposition of the Shares or Warrants comprising the Offered Units by the Underwriters or the termination of the Underwriters’ obligations under this Agreement and shall not be limited or prejudiced by any investigation made by or on behalf of the Underwriters in accordance with the preparation of the Prospectus or any Supplementary Material or the distribution of the Offered Units or otherwise, and the Company agrees that the Underwriters shall not be presumed to know of the existence of a claim against the Company under this Agreement or any Ancillary Document or in connection with the purchase and sale of the Offered Units as a result of any investigation made by or on behalf of the Underwriters in accordance with the preparation of the Prospectus or any Supplementary Material or the distribution of the Offered Units or otherwise.

(11)

Each of the parties hereto shall be entitled to rely on delivery of a facsimile or portable document format copy of this Agreement and acceptance by each such party of any such facsimile or portable document format copy shall be legally effective to create a valid and binding agreement between the parties hereto in accordance with the terms hereof.

- 50 -

(12)	This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement.

[Remainder of page intentionally left blank]

- 51 -

If this letter accurately reflects the terms of the transactions which we are to enter into and are agreed to by you, please communicate your acceptance by executing the enclosed copies of this letter where indicated and returning them to us.

Yours very truly,


	CANACCORD GENUITY CORP.

By:		(Signed) Steve Winokur
Name:		Steve Winokur
Title:		Managing Director

	BEACON SECURITIES LIMITED

By:		(Signed) Mario Maruzzo
Name:		Mario Maruzzo
Title:		Managing Director

	CORMARK SECURITIES INC.

By:		(Signed) Alfred Avanessy
Name:		Alfred Avanessy
Title:		Managing Director

		EIGHT CAPITAL

By:		(Signed) Patrick McBride
Name:		Patrick McBride
Title:		Principal, Head of Origination

		GMP SECURITIES L.P.

By:		(Signed) Steve Ottaway
Name:		Steve Ottaway
Title:		Managing Director

[Amended and Restated Underwriting Agreement – Cresco Labs Inc.]

Accepted and agreed to by the undersigned as of the date of this letter first written above.


				CRESCO LABS INC.

By:				(Signed) Charles Bachtell
Name:				Charles Bachtell
Title:				Chief Executive Officer

[Amended and Restated Underwriting Agreement – Cresco Labs Inc.]

- 53 -

SCHEDULE “A”

TERMS AND CONDITIONS FOR

UNITED STATES OFFERS AND SALES

As used in this schedule, the following terms shall have the meanings indicated:


Affiliate		means an “affiliate” as that term is defined in Rule 405 under the U.S. Securities Act;

Directed Selling Efforts		means “directed selling efforts” as that term is defined in Rule 902 (c) of Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule, it means, subject to the exclusions from the definition of directed selling efforts contained in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Offered Units being offered pursuant to Regulation S, and includes the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of any of the securities;

Foreign Issuer		means a “foreign issuer” as that term is defined in Rule 902 (e) of Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule, it means any issuer which is: (a) the government of any foreign country or of any political subdivision of a foreign country; or (b) a corporation or other organization incorporated under the laws of any foreign country, except an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter: (1) more than 50 percent of the outstanding voting securities of such issuer are held of record either directly or indirectly by residents of the United States; and (2) any of the following: (i) the majority of the executive officers or directors of the issuer are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States;

General Solicitation or General Advertising		means “general solicitation or general advertising”, as used in Rule 502(c) under the U.S. Securities Act, including any advertisement, article, notice or other communication published in any newspaper, magazine, on the internet or similar media or broadcast over radio or television or on the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising;

Investment Company Act		means the U.S. Investment Company Act of 1940, as amended;

“A” - 1


Offshore Transaction		means “offshore transaction” as that term is defined in Rule 902(h) of Regulation S;

Qualified Institutional Buyer		means a “qualified institutional buyer” as that term is defined in Rule 144A;

Regulation S		means Regulation S adopted by the SEC under the U.S. Securities Act;

Rule 144A		means Rule 144A adopted by the SEC under the U.S. Securities Act;

SEC		means the United States Securities and Exchange Commission;

Substantial U.S. Market Interest		means “substantial U.S. market interest” as that term is defined in Rule 902(j) of Regulation S;

U.S. Affiliate		means a United States registered broker-dealer affiliate of an Underwriter;

U.S. Exchange Act		means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder;

U.S. Person		means a U.S. person as that term is defined in Rule 902(k) of Regulation S;

U.S. Placement Memorandum		means the final U.S. private placement memorandum, including a copy of the English language version of the Prospectus, prepared by the Company in connection with the offer and sale of the Offered Units in the United States, or to or for the account or benefit of U.S. Persons, and in which the Prospectus in incorporated by reference;

U.S. Securities Act		means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

All capitalized terms used herein without definition have the meanings ascribed thereto in the Underwriting Agreement to which this Schedule “A” is attached.

Representations, Warranties and Covenants of the Underwriters

Each Underwriter, on its own behalf and on behalf of its U.S. Affiliate, acknowledges that the Offered Units have not been and will not be registered under the U.S. Securities Act and may not be offered or sold within the United States or to or for the account or benefit of any U.S. Person, except pursuant to an exemption from the registration requirements of the U.S. Securities Act and applicable state securities laws. Accordingly, each of the Underwriters, on its own behalf and on behalf of its U.S. Affiliate, represents, warrants, covenants and agrees to and with the Company that:

“A” - 2

It has offered and sold, and will offer and sell, (a) the Offered Units forming part of its allotment only in Offshore Transactions in accordance with Rule 903 of Regulation S or (b) the Offered Units as provided in paragraphs 2 through 12 below. Accordingly, neither the Underwriter, its U.S. Affiliate nor any persons acting on its or their behalf, has made or will make (except as permitted in paragraphs 2 through 12 below): (i) any offer to sell or any solicitation of an offer to buy, any Offered Units to or for the account or benefit of any U.S. Person or any person in the United States; (ii) any sale of Offered Units to any purchaser unless, at the time the buy order was or will have been originated, the purchaser was outside the United States, or the Underwriter, its U.S. Affiliate or persons acting on its behalf reasonably believed that such purchaser was outside the United States; or (iii) any Directed Selling Efforts in the United States with respect to the Offered Units.

It will not offer or sell the Offered Units in the United States, or to for the account or benefit of any U.S. Person, except that it may offer and re-sell the Initial Units and Additional Units to Qualified Institutional Buyers in compliance with Rule 144A with whom the Underwriters have a pre-existing relationship. It shall inform, or cause its U.S. Affiliate to inform, each Qualified Institutional Buyer that the Initial Units and Additional Units are being sold to it in reliance upon exemptions from the registration requirements of the U.S. Securities Act and that they may not be transferred except in accordance with Regulation S.

It has not entered and will not enter into any contractual arrangement with respect to the distribution of the Initial Units and Additional Units, except with its U.S. Affiliate, any Selling Firms or with the prior written consent of the Company. It shall require each Selling Firm and U.S. Affiliate to agree in writing, for the benefit of the Company to comply with, and shall use its best efforts to ensure that each Selling Firm complies with, the same provisions of this Schedule “A” as apply to such Underwriter as if such provisions applied to such Selling Firm and/or U.S. Affiliate.

All offers and sales of Initial Units and Additional Units in the United States to Qualified Institutional Buyers have been and will be made by the Underwriter’s U.S. Affiliate and all sales of the Initial Units and Additional Units in the United States to Qualified Institutional Buyers have been and shall be made by the Underwriter’s U.S. Affiliate in compliance with Rule 144A and in transactions exempt from registration or qualification under any applicable state securities laws.

It and its Affiliates have not, either directly or through a person acting on its or their behalf, solicited and will not solicit offers to buy, and have not offered to sell and will not offer to sell, Initial Units and Additional Units in the United States by any form of General Solicitation or General Advertising or in any manner involving a public offering within the meaning of Section 4(a)(2) of the U.S. Securities Act.

It and its U.S. Affiliate are Qualified Institutional Buyers, and all offers and sales of Initial Units and Additional Units have been or will be made in the United States in accordance with any applicable U.S. federal or state laws or regulations governing the registration or conduct of securities brokers or dealers and applicable rules of the Financial Industry Regulatory Authority, Inc. Each U.S. Affiliate that makes offers and sales in the United

“A” - 3

States is on the date hereof, and will be on the date of each offer and sale of Initial Units and Additional Units in the United States, duly registered as a broker-dealer pursuant to Section 15(b) of the U.S. Exchange Act and the securities laws of each state in which such offer or sale is made (unless exempted from the respective state’s broker-dealer registration requirements) and a member in good standing with the Financial Industry Regulatory Authority, Inc.

Immediately prior to making an offer of Initial Units and Additional Units in the United States, the Underwriter and its U.S. Affiliate had reasonable grounds to believe and did believe that each such offeree was a Qualified Institutional Buyer. At the time of each sale of Initial Units and Additional Units to a person in the United States or to or for the account or benefit of a U.S. Person, the Underwriter, its U.S. Affiliate, and any person acting on its or their behalf will have reasonable grounds to believe and will believe, that each purchaser is a Qualified Institutional Buyer.

Prior to any sale of Initial Units and Additional Units in the United States each Qualified Institutional Buyer will be provided with the U.S. Placement Memorandum and will be required to execute the Qualified Institutional Buyer Letter in the form attached as Exhibit I to the U.S. Placement Memorandum.

Each offeree of Initial Units and Additional Units in the United States, or that is purchasing for the account or benefit of a U.S. Person, shall be provided with a copy of the U.S. Placement Memorandum. Each purchaser of Initial Units and Additional Units in the United States, or that is purchasing for the account or benefit of a U.S. Person, shall be provided, prior to time of purchase of any Initial Units and Additional Units, with a copy of the U.S. Placement Memorandum.

10.	At least one Business Day prior to the Closing Date, the Company and its transfer agent will be provided with a list of all purchasers of the Initial Units and Additional Units in the United States or that are purchasing for the account or benefit of a U.S. Person.

11.

At the Closing, and any closing in connection with the Over-Allotment Option, each Underwriter (together with its U.S. Affiliate) that participated in the offer of Initial Units and/or Additional Units, as applicable, in the United States or to or for the account or benefit of a U.S. Person, will either: (i) provide a certificate, substantially in the form of Exhibit A to this Schedule “A”, relating to the manner of the offer and sale of the Initial Units and/or Additional Units, as applicable, in the United States or to or for the account or benefit of a U.S. Person, or (ii) be deemed to have represented and warranted that neither it, its Affiliates nor any one acting on its or their behalf, has offered or sold any Initial Units and/or Additional Units in the United States or to or for the account or benefit of a U.S. Person.

12.

Neither the Underwriter, its U.S. Affiliate or any person acting on its behalf (other than the Company, its Affiliates and any person acting on their behalf, as to which no representation is made) has taken or will take, directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with the offer and sale of the Initial Units and Additional Units.

“A” - 4

Representations, Warranties and Covenants of the Company

The Company represents, warrants, covenants and agrees that:

1.	The Company is, and at the Closing will be, a Foreign Issuer and reasonably believes that there is no Substantial U.S. Market Interest in the Offered Units.

The Company is not, and as a result of the sale of the Offered Units contemplated hereby and the application of the proceeds of the Offering as set forth under the caption “Use of Proceeds” in the Prospectus, will not be, an open-end investment company, a unit investment trust or a face- amount certificate company registered or required to be registered or a closed-end investment company required to be registered, but not registered, under the Investment Company Act.

3.	Assuming compliance of the Underwriters and their Affiliates of the provisions set forth in this Schedule A, the Initial Units and Additional Units are eligible for the initial resale to Qualified Institutional Buyers purchasing in the Offering pursuant to Rule 144A(d)(3)(i).

4.	the Offered Units are not and no securities of the same class as the Offered Units are:

(a)

listed on a national securities exchange registered under Section 6 of the U.S. Exchange Act;

(b)

quoted in a “U.S. automated inter-dealer quotation system”, as such term is used in Rule 144A; or

(c)

convertible or exchangeable at an effective conversion premium or exercise premium (calculated as specified in paragraph (a)(6) and (a)(7) of Rule 144A) of less than 10% for securities so listed or quoted.

For so long as any Offered Units which have been sold in the United States in reliance upon Rule 144A are outstanding and are “restricted securities” within the meaning of Rule 144(a)(3) under the U.S. Securities Act, and if the Company, as the case may be, is not subject to and in compliance with the reporting requirements of Section 13 or 15(d) of, or exempt from reporting pursuant to Rule 12g3-2(b) under, the U.S. Exchange Act, the Company will provide to any holder of the Offered Units in the United States and any prospective purchaser of the Offered Units designated by such holder in the United States, upon request of such holder or prospective purchaser at or prior to the time of resale, the information required to be delivered pursuant to Rule 144A(d)(4) under the U.S. Securities Act (so long as such requirement is necessary in order to permit holders of the Offered Units to effect resales under Rule 144A).

Except with respect to offers and sales in accordance with this Schedule “A” to Qualified Institutional Buyers in reliance upon an exemption from registration under the U.S. Securities Act, neither the Company nor any of its Affiliates, nor any person acting on its or their behalf (other than the Underwriters, their respective U.S. Affiliates or any person

“A” - 5

acting on their behalf, in respect of which no representation is made), has made or will make: (A) any offer to sell, or any solicitation of an offer to buy, any Offered Units to a person in the United States or purchasing for the account or benefit of a U.S. Person; or (B) any sale of Offered Units unless, at the time the buy order was or will have been originated, the purchaser is not a U.S. Person or purchasing for the account or benefit of a U.S. Person, and is (i) outside the United States or (ii) the Company, its Affiliates, and any person acting on their behalf reasonably believe that the purchaser is outside the United States.

During the period in which the Offered Units are offered for sale, neither it nor any of its Affiliates, nor any person acting on its or their behalf (other than the Underwriters, their respective U.S. Affiliates or any person acting on their behalf, in respect of which no representation is made) has engaged in or will engage in any Directed Selling Efforts in the United States with respect to the Offered Units, or has taken or will take any action in violation of Regulation M under the U.S. Exchange Act or that would cause the exemption afforded by Rule 144A to be unavailable for offers and sales of Initial Units and Additional Units in the United States in accordance with this Schedule “A”, or the exclusion from registration afforded by Rule 903 of Regulation S to be unavailable for offers and sales of the Offered Units outside the United States in accordance with the Amended and Restated Underwriting Agreement.

None of the Company, any of its Affiliates or any person acting on its or their behalf (other than the Underwriters, their respective U.S. Affiliates or any person acting on their behalf, in respect of which no representation is made) has offered or will offer to sell, or has solicited or will solicit offers to buy, the Initial Units and Additional Units in the United States by means of any form of General Solicitation or General Advertising or in any manner involving a public offering within the meaning of Section 4(a)(2) of the U.S. Securities Act.

The U.S. Placement Memorandum (and any other material or document prepared or distributed by or on behalf of the Company used in connection with offers and sales of the Offered Units) include, or will include, statements to the effect that the Initial Units and Additional Units have not been registered under the U.S. Securities Act and may not be offered or sold in the United States unless an exemption from the registration requirements of the U.S. Securities Act and all applicable state securities laws is available. Such statements have appeared, or will appear, (i) on the cover page of the U.S. Placement Memorandum; (ii) in the “Plan of Distribution” section of the Prospectus; and (iii) in any press release related to the Offering made or issued by the Company or anyone acting on the Company’s behalf.

“A” - 6

EXHIBIT A TO SCHEDULE A

UNDERWRITER’S CERTIFICATE

In connection with the private placement in the United States (and to, or for the account or benefit of, U.S. Persons) of the Initial Units and Additional Units (the “Offered Units”) of Cresco Labs Inc. (the “Company”) pursuant to the amended and restated underwriting agreement dated as of September 16, 2019 between the Company and the Underwriters named therein (the “Amended and Restated Underwriting Agreement”), the undersigned does hereby certify as follows:

is, on the date hereof, and was at the time of each offer and sale of the Offered Units made by it, a duly registered broker or dealer with the United States Securities and Exchange Commission, and a member of and in good standing with the Financial Industry Regulatory Authority, Inc. and all offers and sales of Offered Units in the United States have been and will be effected by in accordance with all U.S. broker-dealer requirements;

prior to the sale of any Offered Units in the United States or to or for the account or benefit of an U.S. Person, each offeree in the United States was provided with a copy of the U.S. Placement Memorandum, and no other written material, other than any Supplementary Material approved by the Company for use in presentations to prospective purchasers, was used by us in connection with the Offering of the Offered Units in the United States or to or for the account or benefit of an U.S. Person;

immediately prior to transmitting such U.S. Placement Memorandum to such offerees, we had reasonable grounds to believe and did believe that each offeree purchasing Offered Units was a Qualified Institutional Buyer and, on the date hereof, we continue to believe that each person purchasing Offered Units in the United States is a Qualified Institutional Buyer;

no form of “general solicitation” or “general advertising” (as those terms are used in Regulation D under the U.S. Securities Act) or “directed selling efforts” (as such term is used in Regulation S under the U.S. Securities Act) was used by us, including advertisements, articles, notices or other communications published in any newspaper, magazine, on the internet or similar media or broadcast over radio, television or the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising, in connection with the offer or sale of the Offered Units in the United States;

4.	all offers and sales of the Offered Units have been conducted by us in accordance with the terms of the Amended and Restated Underwriting Agreement, including Schedule “A” thereto; and

5.	prior to any sale of the Offered Units in the United States, we caused each Qualified Institutional Buyer to execute a Qualified Institutional Buyer Letter in the form attached as Exhibit I to the U.S. Placement Memorandum and such letter has been delivered to the Company.

“A” - 7

Terms used in this certificate have the meanings given to them in the Amended and Restated Underwriting Agreement, including Schedule “A” thereto, unless otherwise defined herein.

DATED this day of , 2019.


Per:		Per:
	Authorized Signing Officer		Authorized Signing Officer

“A” - 8

SCHEDULE “B”

CRESCO SUBSIDIARIES


Name		Jurisdiction of Organization
Arizona Facilities Supply, LLC		Arizona
Cresco Labs, LLC		Illinois
Cresco Labs SLO, LLC		California
Cresco Labs Joliet, LLC		Illinois
Cresco Labs Kankakee, LLC		Illinois
Cresco Labs Logan, LLC		Illinois
MedMar, Inc.		Illinois
Cresco U.S. Corp.		Illinois
Cresco Yeltrah LLC		Pennsylvania
Strategic Property Concepts 4, LLC		Ohio
Strategic Property Concepts 5, LLC		Ohio
Strategic Property Concepts LLC		Ohio
FloraMedex, LLC		Illinois
7943 W. Grand LLC		Illinois
JDRC Managed Services, LLC		Illinois
Phoenix Farms of Illinois, LLC		Illinois

EX-99.50 51 d945319dex9950.htm EX-99.50 EX-99.50

Exhibit 99.50

LOGO

INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM’S CONSENT

We consent to the inclusion in this Registration Statement of Cresco Labs Inc. on Form 40-F of our report dated April 28, 2020, with respect to our audit of the consolidated financial statements of Cresco Labs Inc. and its subsidiaries as of December 31, 2019, and for the year ended December 31, 2019. Our report on the consolidated financial statements refers to a change in the method of accounting related to the adoption of IFRS 16, Leases, effective January 1, 2019.

LOGO

Marcum LLP

Chicago, IL

January 12, 2021

LOGO

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