Liberty Health Sciences Releases Q3 Earnings and Crushes Expectations

Liberty Health Sciences [stock_market_widget type="inline" template="generic" color="default" assets="LHS.CN" markup="(CSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] released Q3 financial results and blew our estimates out of the water — phenomenal numbers across the board.

Yesterday we released a quick primer on what to expect and now we’re breaking down the actual results to help investors understand the details.

Our Take

Starting from the top, Liberty Health grew revenues an impressive 52% to $16.2 million. With their marijuana extract sales increasing only 9%, this growth was largely driven by flower sales and substantially outpaces the broader marker.

Even more impressive was the growth in gross margins, which jumped from 47% to 61%. This was achieved despite yield per plant decreasing from 82 grams (6 months ended Aug. 31) to 69 grams (9 months ended Nov. 30).

It also brings them in line with Florida juggernaut Trulieve.

Quarter-over-Quarter Revenue Growth and Gross Margin

Source: Company Filings.

While it’s clear Liberty Health is making serious inroads in the market, investors should use any comparison with Trulieve for context only (TRUL grew sales $12.2 million in Q3 alone).

Further, Liberty Health was able to increase pricing slightly from $11.23 per gram to $11.29 per gram even as the market becomes more saturated.

The fact that they did this while still substantially growing revenues speaks to the quality of their product. Many investors talk about LHS’ cultivation prowess, but this is a definitive sign the claims may have merit.

As more Florida marijuana capacity is brought online, we expect pricing to become pressured in future quarters.

Notably, grams harvested was slightly lower than the previous quarter, suggesting they may be comfortable with their current production run rate. With a stated annual capacity of 19.500 kg, they have room to grow with current production run-rate sitting near only 14,000 kg.

The above performance was achieved on the back of a reasonable increase in operating expenses (37%), which was more than offset by the bottom-line benefits.

For the first time, LHS generated a positive EBITDA of $3.3 million, with cash flow from operations rocketing to $8.6 million. This led to a $4.6 million increase in their cash balance.

The following graph breaks down the price to sales for the main players in the Florida market on a run-rate basis. Overnight, LHS’ price to sales has “officially” dropped from 5.9x to 3.7x. We don’t expect it to stay here for long.

Price to Sales of Main Florida Players

Source: Company Filings, Capital 10X Estimates.

While history means little moving forward, in the past LHS price/sales between Q1 to Q2 dropped from 6.6x just before the release to 3.41x. The stock price subsequently jumped from $0.42 to $0.52 overnight (25%) and settled near $0.65 by the end of November (55%). Over this time, Price/Sales dropped from 6.6x just before the release of Q2, down to 5.28x by November.

Clearly good things are coming for Liberty Health.

Looking Forward for Liberty

Liberty is doing what marijuana companies are supposed to do, sell marijuana at a profit and pay down debt.

Subsequent to quarter-end, Liberty Health announced they paid down $6 million in convertible debt, which is 46% of their outstanding obligation.

With their current cash balance and positive cash flow from operations, they could pay down the remainder if needed. This is what marijuana companies are supposed to do, sell marijuana at a profit and pay down debt.

LHS has also announced they are currently selling $6.1 million per month, or $18.3 per quarter. As more dispensaries open, this will increase further.

They currently have 23 dispensaries open, with only 19 at the end of Q3. LHS expects to have a total of 29 dispensaries open by the end of 2020.

If Cresco Labs was looking to acquire a dominant Florida player, Liberty certainly has to be on their radar. However, the price just increased substantially.

Operational Review

The following table provides a summary of key financial metrics for Liberty Health over the last three quarters.

FY2020 Q1 (Ended May 31st) FY2020 Q2 (Ended Aug. 31st) FY2020 Q3 (Ended Nov. 30th)
Revenue $5,520 $10,628 $16,122
Gross Margin  40% 47% 61%
Operating Expenses  $7,719 $5,448 $7,449
EBITDA ($3,469) ($439) $3,329
CFO  ($5,635) $1,531 $8,634

These results were driven by the following marijuana production and sales metrics.

FY2020 Q1 (Ended May 31st) FY2020 Q2 (Ended Aug. 31st) FY2020 Q3 (Ended Nov. 30th)
Grams Harvested  532,445 3,426,432 3,212,517
Grams Sold  462,057 946,610 1,432,189
Equivalent Price (CAD/gram) $11.95 $11.23 $11.26

In total for Q3, they sold approximately 41.5 million mgTHC in extract form and 32,411 oz of flower.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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Gary Stern
Gary Stern
February 2, 2020 10:11 am

Ok, so where do you see the share price going?