MJBizDaily Investor Intelligence

1 MJBiz Daily | Investor Intelligence mjbizdaily.com/investing W hether you’re invested in an infused product maker, ancillary firm or multistate operator, you’ve likely heard loud and clear from your portfolio companies that the key metric to watch now, given the industry's startup nature, is revenue. Profitability will come with execution and time, according to analyst and operator forecasts.But among the growing pool of public cannabis firms, there are a few that have a jump on profitability—and their early success is worth watching from an investment standpoint. Among them is Chicago-based Cresco Labs, a vertically integrated multistate operator that’s forecast by analysts to pump out $213 million in earnings by the end of the year with $308 million in revenue. Last year, the firm raised $200 million through three funding rounds. Beyond Illinois, it now operates in six other states, including Arizona, California, Maryland, Nevada, Ohio and Pennsylvania. Ahead of going public on the Canadian Securities Exchange (ticker symbol CL) in November, Cresco closed a $100 million private placement that drew institutional investors from Europe, Canada and the U.S.—including large capital funds set up for cannabis and foreign investment banks. The move was the second largest in the industry in 2018, just behind Acreage Holding’s $119 million raise earlier in the year. Cresco CEO Charlie Bachtell said the firm’s “track record of execution and consumer packaged goods approach” were among the top qualities that attracted and stood out to investors. With earnings season just ahead for dozens of newly public U.S. cannabis, Investor Intelligence examines what is fueling the company’s early success, the firm’s strategy as 2019 unfolds and which metrics investors should be watching as they size up leading industry players. ‘BRICK AND MORTAR RETAIL WILL CHANGE DRAMATICALLY’ Cresco is pursuing a strategy focused on wholesale distribution of its branded products—an approach that’s proving to be a key differentiator. Rather than focusing solely on expanding the company’s retail footprint—an expensive and time-intensive undertaking that many of the firm’s peers are pursuing—Cresco sets out to get its products on the shelves of as many dispensaries as possible within the states it operates. It’s a model well established by traditional consumer packaged good firms such as Procter & Gamble and Coca-Cola. Like those CPG titans, Cresco uses product displays and merchandising education as it works closely with its third-party retail partners to boost in-store sales. “This approach is really what allows us to estab- lish disproportionate, dominant market share in the core states we’re operating in,” Bachtell said. In Illinois, Ohio and Pennsylvania, Cresco’s products are now sold in 100% of operating dispensaries, giving the company leading market share positions in each of those states. “Among the largest multistate operators, if you had to pick one that has a longer-term strategy, they are definitely it,” said Andrew Kessner, an analyst at New York-based investment advising firmWilliam O’Neil and Co. “Longer term, they believe the money isn’t going to be in the retail side but (in) the brands—which reflects their broader view for how the market will evolve.” Over time, as more states move frommedical to recreational markets, Bachtell predicts the “brick- and-mortar retail market will change dramati- cally,” he said. “The revenue pool associated with being on all store shelves will dwarf that of owning a whole lot of retail stores.” CRESCO LABS Headquarters Chicago Q3 Revenue $12.7 million Q3 Earnings $3.9 million Ticker CSE: CL, OTC: CRLBF 52-Week High $9.99 (CAD) 52-Week Low $5.29 • Cresco Labs CEO Charlie Bachtell shares why market penetration—not retail footprint— matters in cannabis • How a rapid speed-to-market & a wholesale branding strategy is differentiating Cresco, and producing profits • Top metrics investors should watch as earnings season approaches for Cresco and dozens of newly public cannabis firms Charting a Path to Profitability Digging into Cresco's wholesale branding play By Lisa Bernard-Kuhn continued on page 2 March 1, 2019 IN THIS ISSUE Spotlight: Cresco Labs 3 Due Diligence Steps Subsector Snapshot: Retail Webcast Q&A highlights Cresco Labs CEO Charlie Bachtell Mark your calendar for our next executive webcast on March 13 at 2 p.m. ET/11 a.m. PT featuring Charlie Bachtell, CEO of Cresco Labs. Send your questions ahead of time directly to Investor Intelligence Editor Lisa Bernard-Kuhn at LisaBK@MJBizDaily.com .