Cresco beats on sales and margin, focuses on brands and distribution
The main earnings news for the week was Cresco Labs’ (CSE: CL) second-quarter beat on sales and margin – and its surprise positive EBITDA.
Sales of $29.9 million were 8% ahead of the consensus estimate of $27.8 million, as the Illinois-based company noted revenue pro forma for pending acquisitions increased 55% year-over-year.
But what’s more impressive was the 72% flowthrough of the revenue beat to the operating gross profit line, leading to a gross margin of 48.1% versus expectations of 46.3%.
On the analyst call to discuss results, Cresco noted this was driven by increased automation and lowered packaging costs.
SG&A was lower than expected, leading to positive EBITDA of $2.3 million, ahead of consensus expectations of a $1.8 million loss. Even deducting the California expansion costs of $722,000 and cultivation costs of $922,000, adjusted EBITDA was still a positive $700,000.
The company expects SG&A costs as a percent of revenue will decline with higher sales, given that they plan to go deeper in existing states rather than expanding into new ones.
Longer term, the company plans to follow the consumer packaged goods (CPG) model and focus on building brands and distribution to third-party retailers. CEO Charlie Bachtell said on the call:
“From a long-term perspective, we focused our efforts on becoming dominant in the middle two verticals of the value chain, the creation of the consumer-branded products and the distribution of those brands in the third-party dispensary shelves. It is our strong belief that based on the proven models of other global CPG companies that this is where the sustainable competitive advantage and the bulk of the margins in the industry will reside.”
Though many companies are vertically integrated now, longer term we at Investor Intelligence expect value to accrue to different sections of the value chain.
KushCo secures credit facility from traditional lender despite negative EBITDA
California-based KushCo (OTC: KSHB) secured a $50 million line of credit from Monroe Capital, a deal that departs from the private credit asset management firm’s typical rules.
Monroe just established a new lending vertical for cannabis but only for “non-leaf-touching” cannabis companies.
The firm’s typical customer has a minimum of $5 million of EBITDA, while consensus expectations for KushCo is expected to generate an EBITDA loss of $31 million in the fiscal year ending August 2019 and $5.3 million in fiscal year 2020.
Consensus expectations have KushCo turning EBITDA positive only at the quarter-end, August 2020, generating $16.1 million in year-end August 2021.
KushCo did generate $816,000 in EBITDA in 2017, so it has proved it can be profitable. Thus the question really is: Is Monroe bending its rules to gain share in a new rapidly growing market, or does it believe KushCo will be more profitable than consensus expects?
Schottensteins boost investment in Green Growth Brands
Billionaire retail investors the Schottensteins continue to fund Green Growth Brands (CSE: GGB) and its national CBD retail strategy.
Green Growth Brands completed its CA$50 million offering of equity and warrants, selling 20.5 million units at CA$2.45 that include one share of GGB (closed on Aug. 22 at CA$1.84) and a warrant to buy half a share at CA$3.50.
With the close of the offering, Green Growth will also raise up to another CA$153 million from insiders, as announced last week in a deal that was contingent on the public raise. The capital is via a CA$70 million convertible debenture with a strike at CA$2.45 that can expand to CA$102 million, as well as a letter of intent for CA$50 million of debt.
As detailed in our discussion of contingent equity (warrants, options and converts), this will add 20.5 million shares, potentially another 28.4 million-42.0 million above CA$2.45 from the converts, and potentially another 10.3 million shares via the warrants above CA$3.50.
Including our current best estimate of existing warrants and convertibles, and using the March 31, 2019, share count of 188.2 million as a base, we get the following shares at different prices for GGB, which closed at CA$1.75 on Friday, Aug. 23:
| Shares at March 31, 2019 | 188.2 |
| New Equity offered 8/22/19 | 20.5 |
| PF Shares Under CA$1.87 | 208.7 |
| Shares Between CA$1.87-CA$2.45 | 225.6 |
| Shares Between CA$2.46-CA$3.16 | 254.0 |
| Potential Shares Between CA$2.45-CA$3.16 | 267.6 |
| Shares Between CA$3.17-CA$3.50 | 275.2 |
| Shares Between CA$3.51-CA$5.85 | 285.5 |
| Shares above CA$5.86 | 286.5 |
Green Growth has an experienced management and ownership team culled from traditional retailers, so we look forward to seeing the value created and whether these contingent shares get issued.
Terra Tech earns 19% in two months on Reno dispensary bought in settlement
Terra Tech announced that it sold its Reno dispensary for $15 million, $13.5 million for the business and $1.5 million for the building.
This comes only two months after Terra Tech paid $6.3 million for a 50% interest in the dispensary as well as a 15% interest in another asset.
Paying $6.3 million for 50% yields a valuation of the dispensary of, at most, $12.6 million for the dispensary (assuming the 15% interest in the other asset is worth zero; any value here lowers the purchase price of the dispensary and increases the return).
Thus, Terra Tech seems to have earned at least a 19% return in only two months on half of the dispensary.
Terra Tech and its Reno dispensary were the subject of litigation earlier this year. Though the case was settled, it may have had a residual effect on this transaction.
As a result, it is unclear if this is a good comparable transaction for any other dispensaries, and we do not have any revenue or profit figures to calculate any multiples.
Mike Regan can be reached at miker@mjbizdaily.com.
