Cresco Labs Q3 Results: Investors Should Feel Cash Flow Positive

Cresco Labs Inc. (CSE:CL), one of the U.S. marijuana stocks, reported third-quarter 2019 financial results on November 26, 2019

SmallCapPower | December 2, 2019: Cresco Labs Inc. (CSE:CL) (OTCQX:CRLBF), one of the U.S. cannabis stocks and a multi-state operator (MSO), reported Q3/19 financial results on November 26, 2019, after markets closed. Results were highlighted by a net loss of $8.5M on net revenue of $36.2M, with adjusted EBITDA of $3.1M.

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Mixed results with revenue growth of 21% quarter over quarter. Revenue of $36.2M missed the Street’s estimate of ~$38M. Revenue growth was due primarily to increased sales in California, where wholesale revenues doubled, as well as solid growth from Pennsylvania and Illinois. Its net loss of $8.5M also missed the Street’s estimate of a $6.9M loss, while adj. EBITDA of $3.1M beat estimates of $2.5M.

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Gross margins contracted by 7.5%, to 35.5%. Gross margins were 35.5%, which missed consensus estimates of 45% and decreased by 7.5% from Q2/19 (was 43%). During the call, management attributed lower gross margins to a ramp-up in sales in California. Cresco Labs introduced recently its own in-house brand of dried flower in the market as it attempts to create a brand presence.

Termination of VidaCann acquisition boosts liquidity. With the termination, Cresco Labs strengthens its balance sheet by ~120M, and focuses on capital allocation with the best return on investment. In our view, VidaCann has a decent number of dispensaries open (currently 13, with plans to have 20 by Q1/20) but has a smaller market share per dispensary compared with its peers. Of note, Trulieve has 40 dispensaries and sold ~40M mgs of THC for the week of November 15-21, or ~1M per store. While VidaCann has 13 dispensaries and sold ~2.4M mgs THC during the same week, or 186K mgs per store. VidaCann also lacks a significant presence in selling dried flower (high-growth segment in the Florida market) compared with its peers. Cresco Labs would have likely had to invest additional capex into VidaCann to ramp up cultivation.

CL announces $38M sale-lease-back agreement. The sale-lease-back agreement is signed with Innovative Industrial Properties (NYSE:IIPR) for Cresco’s facilities in Michigan and Ohio. With VidaCann cancelled, the sale-lease back, and the $30M in cash Cresco is expected to receive from the closing of the Origin House acquisition, we estimate Cresco Labs balance sheet to have about ~130M in liquidity. We view this as favorable compared with ~$60M cash gap, before the VidaCann termination and sale-lease back.

Key takeaways. Overall, it was a neutral quarter for Cresco Labs. Revenue growth increased although at a decelerating pace over the previous quarter. However, we estimate Cresco Labs now has sufficient cash to last six quarters, which should bring it to a cash-flow positive position without having to do an additional financing. Cresco Labs is expected to report Q4/20 results on or about ~April 30, 2019, and analyst are estimating ~46.1M in revenue for Q4/20.

Shares of Cresco Labs closed Thursday’s trading session down 3% to C$7.23. Cresco Labs stock trades at a market cap of C$879.1 million.

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