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Cresco Labs: CRLBF (OTC); CL (CSE)

Should You Invest in Cresco Labs?

Recommendation: See Below

Should You Invest in Cresco Labs?

Cresco Labs Inc. engages in the business of cultivating medical-grade cannabis, manufacturing medical products derived from cannabis cultivation, and distributing such products to medical or adult-use consumers.

Cresco focuses on regulatory compliance while working to develop condition-specific strains of cannabis and non-invasive delivery methods. The company was founded by Charles Bachtel, Joseph Caltabiano, Dominic Sergi, Rob Sampson, and Brian McCormack on July 6, 1990 and is headquartered in Chicago, IL.

Fundamentals
Profile:
HQ: Chicago, IL, USA
Founded: 1990
Facilities: Chicago, Joliet, Lincoln, Fall River, Salome, Las Vegas, San Luis Obispo, Mendota, others
Symbol: CRLBF (OTC); CL (CSE)

Focus: Strong
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 has elevated everyday cannabis through its THC-forward products available in flower, vape pens, and multiple forms of extracts.

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 process to complete application process for new states beginning or expanding medical cannabis programs such as Florida, Michigan, and New Jersey, etc.

Size:
Market Cap: US $835.41 mil
Enterprise value: $882.35 mil
Size among cultivators: 7th of approximately 40
Number of Employees: 550

Markets: Strong
Primary: Operations in 7 states (Illinois, Ohio, Penn., Nevada, California, Arizona, and MA)
Secondary: Approval pending in 3 additional states (NY, MA, and Maryland).

Operations: Strong
Cultivation:
Current production: 113,500 pounds per year (as of Feb. 2019)
Future production: 520,500 pounds per year

Their current facility features a 23,294-square-foot, state-of-the-art greenhouse separate from the 26,445-square-foot area where the marijuana is processed. Their expansion in Lincoln, brings nearly 140,000 square feet of total cultivation at the three Illinois facilities, tripling their previous capacity.

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.

Direct sales: No
Store networks: 21 retail licenses, a 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 it 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 reported

Integration/Diversification: Neutral
Vertically integrated: Yes.
Horizontally diversified: Not yet.

Financials: Strong
Previous Year Revenue: $56.2 mil
Outstanding shares (diluted): 46.72 mil
Total Cash: $61 mil
EPS: $-0.014

Management: Strong
CEO & Director: Charlie Bachtell
CFO: Ken Amann
President and Director: Joseph Stevens Caltabiano
Vice-Chairman: Brian Thomas McCormack

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. “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.

Valuation: Strong
Current share price: US $6.50
Price to Sales: 10.72 (Tobacco industry = 5)
52 week low/high: US $0.81 to $40.63
EV/Revenue: 11.32
Price/Book: 6.35

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

Risks: Neutral
The risks of investing in any cannabis company are currently high given the newness of the market. The risks of investing in this company are less so given their multi-state presence and strong focus.

Should you invest in Cresco Labs?

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 its aggressive growth strategy. They focus on entering highly regulated markets with excessive demand potential and high barriers to entry. It also has 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. The production capacity is expected to grow three times by the end of this year while seeking distribution licenses in key US states. However, with aggressive growth in production, they need to increase distribution channels to avoid a buildup of large inventories. Their growth strategy is based on targeting expansion in states like Florida, New Jersey, Virginia, and Connecticut.

Management is pursuing growth by increasing market share and entering new markets. Will its stock price improve in the long term? We think so. Cannabis stock prices usually reflect expected future revenue, not current revenue.

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 a net loss of $0.2 million in the prior-year period. We would like to see their gross margins increase from 40% to above 50% (a level many of their competitors have achieved).

With $93.9 million cash in hand, they have sufficient financial bases 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 an ideal target of acquisition by larger companies. At the same time, they have one of the highest market cap/revenue ratios among all of the U.S. cannabis companies.

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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