Cresco Labs Determines IRS Section 280E Not Applicable to its Business

CHICAGO, Aug. 8, 2024 – PRESS RELEASE – Cresco Labs Inc., an industry leader in branded cannabis products and the operator of Sunnyside dispensaries, released its financial and operating results for the second quarter ended June 30, 2024. All financial information presented in this release is reported in accordance with U.S. generally accepted accounting principles (GAAP) and in U.S. dollars, unless otherwise indicated, and is available on the company’s investor website, here.

Second Quarter 2024 Highlights

• Second quarter revenue of $184 million.
• Gross profit of $95 million. Adjusted gross profit¹ of $97 million up 4% year-over-year; and an adjusted gross margin¹ of 52% of revenue, a 570 basis points (bps) improvement.
• SG&A of $54 million. Reduced adjusted SG&A¹ by 14% year-over-year to $53 million, or 29% of revenue.
• Net loss of $51 million which includes a one-time $61 million charge in the quarter related to the company’s new tax position, as further described below. 
• Second quarter adjusted EBITDA¹ of $54 million, up 33% year-over-year; and adjusted EBITDA margin¹ of 29%, an 880 bps improvement.
• Second quarter operating cash flow of $17 million and free cash flow¹ of $11 million.
• Retained the No. 1 share position in Illinois, Pennsylvania and Massachusetts².

Management Commentary

“Our Q2 results demonstrate the sustainability of the improvements we’ve made to the business over the past year with $184 million in revenue at a 29% adjusted EBITDA margin,” Cresco Labs CEO Charles Bachtell said. “It is clear our strategy is working; we are creating the brands consumers love and delivering best-in-class retail operations through Sunnyside. So far this year we’ve generated over twice as much operating cash flow than the first half of last year and we are putting it to work strengthening our balance sheet, investing in our core growth states with adult-use optionality, and exploring accretive, incremental M&A and other business opportunities.

“We are seeing growing momentum in the industry. The DEA’s comment period on rescheduling recently closed, with 92% of over 40,000 comments submitted in overwhelming support for reclassifying cannabis as a Schedule III substance or declassifying cannabis entirely. Recent polls also show energy swelling around Florida’s Amendment 3 initiative to legalize adult-use.

“As the pace of reform challenges even the most patient of us, it’s important for all stakeholders to remember that cannabis reform consistently polls higher than any candidate in any election, and the public has made it clear that it’s time for change. Reform is imminent and we are ready.”

Balance Sheet, Liquidity and Other Financial Information

• As of June 30, 2024, current assets were $273 million, including cash, cash equivalents and restricted cash of $116 million. The company had senior secured term loan debt, net of discount and issuance costs, of $388 million and a mortgage loan, net of discount and issuance costs of $18 million.
• Total shares on a fully converted basis to subordinate voting shares were 476,491,770 as of June 30, 2024.
• The company, in consultation with its tax advisers, has determined that IRS Section 280E is not applicable to its business and intends to update its tax position going forward to file as a normal business. As a result of the revised tax position:
• The company expects to recognize an estimated cash savings of $65 million in 2024 with similar impacts on a percentage basis anticipated in future years.  A corresponding uncertain tax position will be booked to reflect the risk of a challenge to the tax savings generated by the change in filing position;
• The Company should recognize cash tax benefits over time, thereby reducing its tax liability and offsetting the $61 million charge. The company expects the cash savings to mirror the cash outlay for a net neutral impact in every period; and
• Upon the approval  of cannabis being moved to a Schedule III substance, the company expects a reduction in income tax expense and an increase in deferred tax asset, effectively offsetting the $61 million charge and tax receivable agreement liability.

Consolidated Financial Statements

The financial information reported in this press release is based on unaudited management prepared financial statements for the quarter ended June 30, 2024. These financial statements have been prepared in accordance with U.S. GAAP. The company expects to file its unaudited condensed interim consolidated financial statements for the quarter ended June 30, 2024, on SEDAR+ and EDGAR on or about Aug. 8, 2024. Accordingly, such financial information may be subject to change. All financial information contained in this press release is qualified in its entirety with reference to such financial statements. While the company does not expect there to be any material changes between the information contained in this press release and the consolidated financial statements it files on SEDAR+ and EDGAR, 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 Dec. 31, 2023, previously filed on SEDAR+ and EDGAR.

Cresco Labs references certain non-GAAP financial measures throughout this press release, which may not be comparable to similar measures presented by other issuers. See the “Non-GAAP Financial Measures” section below for more detailed information.

Non-GAAP Financial Measures

This release reports its financial results in accordance with U.S. GAAP and includes certain non-GAAP financial measures that do not have standardized definitions under U.S. GAAP. The non-GAAP measures include: Earnings before interest, taxes, depreciation and amortization (EBITDA); adjusted EBITDA; adjusted EBITDA margin; adjusted gross profit; adjusted gross profit margin; adjusted selling, general and administrative expenses (adjusted SG&A), adjusted SG&A margin; and free cash flow are non-GAAP financial measures and do not have standardized definitions under U.S. GAAP. The company defines these non-GAAP financial measures as follows: EBITDA as net loss (income) before interest, taxes, depreciation and amortization; adjusted EBITDA as EBITDA less other income, net, adjustments for acquisition and noncore costs, impairment and share-based compensation; adjusted EBITDA margin as adjusted EBITDA divided by revenues, net; adjusted gross profit as gross profit less adjustments for acquisition and noncore costs; adjusted gross profit margin as adjusted gross profit divided by revenues, net; adjusted SG&A as SG&A less adjustments for acquisition and noncore costs; adjusted SG&A margin as adjusted SG&A divided by revenues, net; and free cash flow as net cash (used in) provided by operating activities less purchases of property and equipment and proceeds from tenant improvement allowances. The company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with U.S. GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with U.S. GAAP and may not be comparable to similar measures presented by other issuers. These supplemental non-GAAP financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the U.S. GAAP financial measures presented herein. Accordingly, the company has included below reconciliations of the supplemental non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.