Cresco Labs

Multi-state Cannabis Operator (MSO)

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Volume | Market Cap | Shares | PEG Ratio | EPS

Fundamentals.

CRESCO LABS (CRLBF:OTC)

profile

HQ: 520 W Erie St #220, Chicago, IL 60654

Founded: 1990

Facilities: Chicago, Joliet, Kankakee, Lincoln, Brookville, Yellow Springs, Fall River, Phoenix, Salome, Las Vegas, San Luis Obispo, Mendota

focus

As a top-quality cannabis producer, processor, and retailer operating in seven US states, the company focuses on entering highly regulated markets with excessive demand potential and high barriers to entry. Cresco plans to leverage the success in Illinois, Pennsylvania, Ohio, Nevada, California, and Arizona 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. Currently in the process of completing the application process for new states beginning or expanding medical cannabis programs such as Florida, Michigan, and New Jersey, etc. They are also creating licensing and/or distribution partnerships to expand Mindy Segal edible products into growing markets such as Colorado, Oregon, Washington, etc.

size

Enterprise Value: $2.29 billion

Size within Cannabis Industry: roughly 3rd of 200+

Size among Cultivators: 7th of 40

# of Employees: 550

markets: strong

Primary: Operations in seven states (Illinois, Ohio, Pennsylvania, Nevada, California, Arizona and Massachusetts)

Secondary: Approval pending in two more states (New York and Maryland). Recently listed on Canadian Securities Exchange

Subsidiaries, Interests:

Majority Subsidiaries: FloraMedex, LLC, Arizona Facilities Supply LLC, SLO Cultivation, Inc., Diadem Mineraco Ltda.

Minority Interests: NA

operations: strong

Cultivation: strong

Current Production: 113,560 lbs/yr (Feb 2019)

Future Capacity: Dec 2019: 447,539 lbs/yr

It is expected that 40-50% of the raw cannabis produced at Cresco’s production facilities (except for raw cannabis produced in Pennsylvania and New York) will be used at Cresco’s kitchens and laboratories to make the vaporizable, oral and topical and edible products sold under the Cresco, ‘Reserve’, ‘Remedi’, and ‘Mindy’s’ brands.

Distribution: Direct sales: no

Store Networks: 21 retail licenses, medical marijuana dispensary in Elmwood Park, opened two dispensaries in New York and first legal sale of medical marijuana in the state of Ohio in Jan 2019

Supply Agreements: On December 6th, 2018, Cresco Labs announced a definitive agreement to acquire 100% membership interests of Hope Heal Health, based in Massachusetts with licenses for cultivation, processing, and the ability to obtain up to three medical marijuana dispensary licenses and three adult-use dispensary licenses.

On December 20th, 2018, Cresco Labs announced that they had signed dual definitive agreements to acquire licensed Illinois medical cannabis dispensaries MedMar Rockford and MedMar Lakeview bringing our total number of dispensaries in Illinois to five.

Registered Patients: 404,000 at Feb. 2019

Integration/Diversification:

Vertically Integrated: one of the largest vertically integrated multistate cannabis operators in US

Horizontally Diversified: no

financials: strong

Stock Symbol CRLBF
Recent Price 11.20
Shares Outstanding 294
Market Cap ($ mil) 1600
Revenue (MRQ) 12.7
Revenue Rank 13
Gross Margin 42%
Income (MRQ) 2.9
EPS 0.01
Price/Sales 6

management: strong

CEO: Charlie Bachtell

CFO: Ken Amann

Company management looks to have a focus on growth in new markets. They claim to be fully financed for future expansions through listing on security exchange. CEO Bachtell is an attorney with deep legal expertise in regulatory compliance, a founding member of the Illinois Cannabis Bar Association and an Adjunct Professor at the Northwestern University Pritzker School of Law teaching a course on legal and regulatory matters in the cannabis industry. Recent additions to the Cresco team include professionals in the areas of design and marketing, product development, manufacturing, finance, and market development.

branding

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.

financings

Series D funding round securing $100 million (US). Successfully raised $205 million in growth capital through three capital raises in 2018.

valuation

Price to Book: 4.9

EV / Revenue: 6

recommendation: strong

As a differentiated grower, processor, and retailer of premium cannabis with operations in six states (Illinois, Ohio, Pennsylvania, Nevada, California and Arizona) and approval pending for acquisitions in three more states (New York, Massachusetts, Maryland), the company focuses on entering markets with outsized demand potential, significant supply constraints, and high barriers to entry. Cresco Labs is on track to become one of the largest major producers of cannabis very soon with their aggressive growth strategy. They focus on entering highly regulated markets with excessive demand potential and high barriers to entry. They also have plans to expand internationally.

We believe the company has strong management, based on experience in cannabis, compliance and market growth. Cresco is one of a very small group of operators to successfully obtain cultivation licenses in more than one of the modern, limited license, merit-based application state programs.

We think their cultivation capacity is very impressive. Their production capacity is expected to grow three times by end of this year while seeking distribution license in key US States. However, with aggressive growth in production, they need to increase distribution channels to avoid buildup of large inventories.

Their growth strategy is based on targeting expansion in states like Florida, New Jersey, Virginia, and Connecticut. For building brands, they are following CPG approach, which helped them increase sales substantially.

Cresco Labs showed exceptional growth with Year-to-date revenue of $25.1 million (up 248% from the prior year) and third quarter net income of $3.9 million, compared to net loss

of $0.2 million in the prior-year period. We would like to see their gross margin increase from 40% to the above 50% level we have seen in other producers. Management is pursuing growth by increasing market share and entering new markets.

Will their stock price improve in the long term? We think so.

Based on the most recent quarter revenue, Cresco Labs’ price to sales (P/S) is 9.5 which is common for this industry. Cannabis stock prices usually reflect expected future revenue, not current revenue. The tobacco industry P/S average is 5 and other industries are as low as P/S=1.

Cresco Labs will have an additional production and distribution capacity this year, after their new cultivation and distribution facilities will be operational. Due to this favorable timing, ahead of many competitors, we think they have a good chance of selling the capacity and capturing the market share for future sales.

With $93.9 million cash in hand, they have sufficient financial base to do more acquisitions to expand to new markets and add new distribution channels. That being said, with total liabilities of $9.3 million and total assets of $149.4 million, they are ideal target of acquisition by larger company. At the same time, it has highest market cap/revenue multiple among all of the U.S. cannabis stocks.

For these reasons, we think Cresco Labs, at or near its current price of $8.26 a share, is still a very good investment opportunity—though as the price rises this opportunity will eventually disappear.

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