April 18, 2019

Cresco Labs Inc (CNSX:CL) CEO on Transformational Acquisition of Origin House (CNSX:OH)

Midas Letter
Midas Letter
Cresco Labs Inc (CNSX:CL) CEO on Transformational Acquisition of Origin House (CNSX:OH)

Cresco Labs Inc (CNSX:CL) (OTCMKTS:CRLBF) CEO Charlie Bachtell discusses the company’s focus on branding and distribution as well as its recent acquisition of Origin House (CNSX:OH) (OTCMKTS:ORHOF) (FRA:CY4). Bachtell reveals that the company’s focus on the middle verticals of the cannabis value chain made it a perfect fit with California-based Origin House. Bachtell sees the acquisition as highly accretive for both companies and emphasizes the combined entity’s distribution footprint in the country’s largest cannabis market. He describes the deal as the next generation of US M&A activity because it was M&A activity designed to ensure success, not simply expansion. Cresco is currently in 11 states and the company’s geographic expansion has been strategic. The company prioritizes expanding into states with regulatory frameworks designed to eliminate the illicit market. Cresco has operations in states with the largest populations or that are home to key markets like Phoenix and Las Vegas. Cresco has the highest market share in Illinois and Pennsylvania as well as the largest distribution network in California. With top tier markets secured, Bachtell anticipates focusing on executing on recent M&A activity.


Narrator:        Cresco Labs Inc is a Chicago-based grower, processor, brand manufacturer, and retailer of cannabis. The company develops and distributes precision-dosed, medical-grade cannabis, in both medical and adult use markets across the United States. Cresco Labs recently acquired Origin House for $1.1 billion. With their recent acquisitions, Cresco Labs will have operations in 11 states.

The company has 21.9 million issued and outstanding shares with management and insider ownership at just under 50 percent. Cresco Labs Inc is listed on the Canadian Securities Exchange under the symbol CL.

[stock_chart symbol=”CL:CNX” align=”left” range=”5D”]

James West:   Charlie Bachtell joins me now. He’s the CEO of Cresco Labs trading on the CSE under the symbol CL. Charlie, welcome.

Charlie Bachtell:        Thank you for having us.

James West:   Charlie, let’s start with a discussion about your recent acquisition or merger with Origin House. How did that complement what you’ve got going on now? And what was the motivating logic behind that?

Charlie Bachtell:        You know, I think, I’ll get a little bit into the back story of Cresco and explain why the Origin House transaction was so accretive, I think, to both companies. We got into the space to normalize and professionalize cannabis. That was the opportunity that we saw. One of the other first initial reactions we had when our home state of Illinois decided to change the way that cannabis was going to be done and really introduced highly-regulated, compliance-focused, cannabis programs to the industry. Cannabis was a consumer packaged good, whether cannabis realized it at the time or not, this was going to go the traditional path of CPG.

We really, from inception, focused on being a vertically-integrated operator. So we do cultivate, we manufacture, but we definitely create branded products. We focus on distributing those branded products into stores that we don’t own and then we also have brick-and-mortar retail. And so the focus being on the middle two verticals in that value chain are very similar to Origin House. Origin House, you know, has created a footprint that makes it the largest distribution company in the largest cannabis market in the world. So thinking about brands and the distribution of brands the same way. We really started to see a lot of synergies when we started, you know, getting to know Mark and talking about the business. There’s a lot more that sort of beneath the surface too. There’s a lot of just similarities in thought process and in ways that Origin House could solve some potential problems that Cresco Labs would have and we could also offer some solutions to problems that Origin House is going to have and together we could offer some solutions to problems that a lot of companies, especially in that market in California, are going to have when it comes to distribution and also getting out of the state of California.

James West:   So currently you’ve got at least 11 operational states, 15 production facilities, and 51 retail licenses. That’s a big a big asset package. Is your ambition to essentially dominate in every state where recreational cannabis is legal?

Charlie Bachtell:        So I think, one of the things about us is, while 11 states is a lot of states, we were very strategic in how we decided to expand our geographic footprint. Of those 11 states, they are also 7 of the 10 most populated states in the US. The only 3 that were missing don’t have legal cannabis programs. And then even the other 4 states that aren’t in the top 10 from a population standpoint, they’re strategic in nature. Arizona’s not in the top 10, but Phoenix is the sixth-most populous city. Nevada is not in the top 10, but Las Vegas is arguably the most visited, per square foot, city in the country. Massachusetts is not in the top 10, but is the only real adult use program in the Northeast. So very strategic in the way that we wanted to build out our geographic footprint and for us, we really pride ourselves on execution. So we like having the highest market share in Illinois, highest market share in Pennsylvania, largest distribution network in California. So I think for the, you know, for the immediate future, you’re going to see us focus more on executing on the M&A that we’ve recently pulled off and making sure that we establish those really meaningful positions in every market that we’re in. We feel like we’ve got the top tier markets and the geographic footprint already now, we just want to have these material positions within them.

James West:   One of the problems that we are experiencing in Canada, and I know is also being experienced in the United States, I’m curious to hear what your view is on this and how you’re going to approach it. Is the fact that in Canada, at least, we are seeing 80 percent of cannabis consumed by consumers still being sourced from illegitimate sources which puts pressure on the legitimate license sources to make money and also inculcates a sort of culture or lack of market trade, which is sort of why we got to legalization in the first place was tried to try to eliminate that. And so operating in 11 states, is that a problem for you guys going forward and if so, how are you going to deal with it?

Charlie Bachtell:        I think this goes back to the strategic nature of our expansion. The first thing that we look at in any market is the regulatory structure of it. It just speaks to our backgrounds, for those that aren’t familiar, you know, the founders of Cresco Labs. We all, the main three original founders, we all worked together in the mortgage banking space prior to doing this so experienced in a highly regulated industry that went from relatively unregulated to hyper-regulated in a very short period of time. That’s our background, scaling a company in those environments on a state-by-state basis is our background. So the first thing that we look in any market when we’re deciding whether or not it’s the right market for us, is the regulatory structure and the framework of it, to make sure that that program can be a success. We think pretty broadly, and what the definition of success is, and that’s making sure that the program is structured in a way that that the pricing and the taxing structure allow for a legalized market that directly speaks to eliminating the illicit market or I guess materially impacting the illicit market. We look for that in the markets that we go into.

James West:   Okay. So you’re basically expecting this to just be an evolutionary pathway that evolves in the right direction over time?

Charlie Bachtell:        Agreed.

James West:   Yeah, okay, now the excitement from the investor space has moved almost uniformly from the Canada, which is now mature relative to the rest of the rest of North America, into the idea of the United States multi-state operator as being the best opportunity for investors to see their capital perform well. Is that going to change anytime soon? I mean, it strikes me that with several of these large multi-state operators consolidating these states and these industries vertically and horizontally, that at some point there’s going to be a saturation in the valuation of these companies will be more or less reflective on a fully valued basis. Do you think that time has happened now? And if not, how soon until it is?

Charlie Bachtell:        I think we’re pretty far from it, because I think there’s still so many significant catalysts that are still in the forefront for US operators, including the change of federal law or some modification to federal law to allow access to the US Capital markets for these US operators, traditional institutional investors, and the US retail investor coming into the US operators and that marketplace. So I think all of those catalysts are still out in front of us, I think we’re pretty far from being saturated, you know having plenty of runway and exciting things ahead. So sure, good position.

James West:   Cool, so if you were to identify the most compelling milestones for an investor considering an investment in Cresco at this point, what would they be for 2019?

Charlie Bachtell:        You know, I think, not to go back to the Origin House acquisition, but I really think that this is one of the reasons we like that acquisition so much is it really is? This is Gen 2 of what M&A is going to look like in the US cannabis space. This wasn’t M&A to expand geographic footprint or plant a new flag in a new state. This is now graduated into M&A for channel purposes, for increasing the likelihood of success, for establishing a distribution model in the largest state cannabis market in the world, you know, it’s a very strategic M&A structure. So I think that would be something that the investors should note is it’s a transformative type of M&A, one that hasn’t been seen yet. So that’s exciting. And then I think you’re also going to see continued performance, as these, as MSOs like Cresco Labs continue to go forward, you’re going to really start to see that revenue generation that EBITDA get created and continue to grow , and I think all of that is still in front of us. So it’s very exciting time.

James West:   All right, Charlie. Well, I really appreciate your participation today. We’ll come back to the next time you’re in town or via Skype from Chicago anytime. Thanks for joining me today.

Charlie Bachtell:        Thank you very much.

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