Let’s look at CuraLeaf fundamental financial metrics for their December 31, 2020 earnings release, financial statements and MDA.

Cura has some of the better disclosure of US MSO’s.  They have QoQ section and some segmentation.  They do not have existing stores versus new store breakouts, which would be helpful.

During the year Cura had nine acquisitions.  As they are in F2020 we get a last look at these acquisitions’ individual revenue and net income contributions for the year before they get put in the disclosure dustbin. It is kind of funny that disclosure runs this way.  I would much rather see the second-year contribution than a partial first year.

In addition to Revenue and Net Income contribution since acquisition, Cura provides a proforma of what they would have looked like for the full fiscal year.  They also provide this caveat:

• These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2020 or of the future consolidated operating results.

All told the nine acquisitions cost $1,029 million and contributed $276 million in sales (47% of Cura’s F2020 total) and negative $61 million in Net Income during F2020.  Eight of nine acquisitions evidenced negative Income for F2020, with ATG being the only profitable acquisition in F2020.

The two biggest acquisitions by purchase price are GrassRoots at $526 million (closed July 23, 2020) and Cura Partners (Select) for $324 million (closed in February 2020). Note: Pallatech was Cura acquiring the non-controlling interest, so Revenue and Net Income would have rolled into Cura on consolidation.

The proforma’s, highlighted in yellow above, have me scratching body parts. The revenue line scales in reasonably well based on acquisition dates, but for the life of me I cannot figure out why the Proforma Net Income is so much better than the actual Income from the acquisition.

Cura Partners also did not meet their payout criteria for additional contingent consideration, resulting in a gain on contingent consideration of $28 million in F2020.   GrassRoots closing adjustments will not be completed until Q3 F2021.

One thing we have repeated in our podcast is that US MSO’s likely have “LATAM type” acquisitions.  This is a nod, not in a flattering way, to Canadian LP’s purchasing LATAM assets only to have to write them down when the purchase assumptions were later tested and found to be too rich, giving way to impairments. Canadian companies were compelled to disclose their international operations in their financial statements, providing investors a look into how these geographic regions were playing out.  Not so for MSO’s purchasing with in the USA.  Disclosure is very weak as to how acquisitions played out. 

TheCannalysts keep an eye out for these types of things.  We found that Cura impaired Eureka 2019 acquisition this year.  They purchased Eureka in April 2019 for $36 million of which $35 million was valued in Licenses. The purchase had some fanfare:

• “The Eureka transaction represents a significant milestone for Curaleaf, enabling us to enter the highly attractive California market with a cultivation platform that we intend to use for state-wide product distribution,” said Joseph Lusardi, CEO of Curaleaf. “The planned launch of three dispensaries is a platform investment for Curaleaf’s retail expansion strategy to eventually cover the state, which is the largest market for cannabis consumption in the country.  With established vertically integrated operations, Curaleaf is ready to capitalize on the considerable market opportunity in California.”

Alas, the impairment had very little fanfare. If you dug through the financials you would find the Eureka impairment, but the narrative in MDA and earnings release never mentioned the amount.  The impairment was $24 million and all to licenses.  They impaired 63% of the $36 million purchase price.

California is not an attractive market for MSO’s. Why?  Competition is fierce and also by January 2026 the state wants separation of each of manufacturing, distribution and retail. Very similar to Federal Alcohol Administration Act which we have provided a thesis.  Under an FAA styled doctrine for cannabis, we have mentioned that Intangibles (licenses) and Goodwill could see significant pressure.  As could PPE in less cultivation friendly or renowned states.

Cura has $1,267 million in G/I compared with $243 million in PPE.  G/I values are built off of future cash flow benefits.  Should increase competition from state-to-state imports occur those licenses and goodwill will be under scrutiny.  Something for the investors to keep in mind.

Sure impairments are non-cash items, but now you have the share base that was used to purchase the asset that needs to now be carried by the remaining operations. 

Open the fins and MDA and let’s dive in.

Income Statement Drivers & Breakeven Sales: Trend

Cura operates in 23 states (+0 QoQ) with 96 retail dispensaries (+4 QoQ), and 30 processing facilities (+0 QoQ).

States Operating or in process: AZ, AR, CA, CO, CT, FL, IL, KY, ME, MD, MA, MI, MO, NV, NJ, NY, ND, OH, OK, OR, PA, UT, VT.

Sales Table:

Sales increased sequentially by 26%, an increase of $48 million (after a $64 million increase in the preceding Q) to USD $230 million.  Retail cannabis increased +22% to $165 million, W/S cannabis increased 43% to $64 million, while Management fee income decreased to $1 million.

The GrassRoots acquisition occurred July 23, 2020.  This Q gets the benefit of 23 more days plus the November acquisition of ATG which brought in $4 million in revenue.

GrassRoots is interesting. Notes from financials:

• Q3: Revenue and net loss from Grassroots included in the consolidated statement of profits and losses for the nine months ended September 30, 2020 was $45,718 and $1,119, respectively.
• Q4: Revenue and net loss from Grassroots included in the consolidated statement of profits and losses for the year ended December 31, 2020 was $125,177 and $7,744, respectively.

GR added $46 million ($0.6 million/day) of Cura’s $64 million Q3 increase to revenue in Q3, and $80 million in revenue in Q4 ($0.9 million/day), or an increase of $34 million for an extra 23 days in Q4. Or on a daily basis +33%/day. As they integrate operations and expand the GR footprint, it should be expected that sales per day increases as points of sale would increase.

Aggregating ATG and Q4 GR revenue increase we get $38 million.  This is compared with a total increase in the Q4 of $48 million, meaning all the other assets that generated $137 million in sales in Q3 generated $146 million in sales in Q4 a 6.6% increase in revenue. I am not impressed with that figure, especially in a holiday Q.

Retail is now 72% of mix and Wholesale is 28%, with the balance Management Fees, as compared to 74-25-1 last Q.

From MDA:

• The decrease in management fee income of $1,136 was primarily due to acquisitions of Curaleaf NJ, the formerly managed not-for-profit in New Jersey, in July 2020 and ATG in November 2020, for which the Company previously provided management services.

Retail Sales: Peer and Trend

Cura surpassed Trulieve for highest retail revenue volume. (We are waiting for TRUL Dec 2020 figures still)

Cura has 96 dispensaries up from 92 at last Q end with operations in 22 states. As per above table, Revenue per average stores opened in the Quarter (which takes the average of stores opened at the end of each quarter and divided by 2 to get average retail stores opened in Q) decreased 4% QoQ.

Wholesale: Peer and Trend

CuraLeaf evidences a 43% QoQ increase in Wholesale revenue or +$19 million to $64 million.  We are waiting on GTII and CL December 2020 figures.

Since Select was the big wholesale purchase, let’s do what we did with GR to see how Select did in the Q.

• Revenue and net loss from Cura Partners included in the consolidated statement of profits and losses for the three months ended March 31, 2020 was $12,988 and $3,998, respectively.
• Revenue and net loss from Cura Partners included in the consolidated statement of profits and losses for the six months ended June 30, 2020 was $38,303 and $12,039, respectively.
• Revenue and net loss from Cura Partners included in the consolidated statement of profits and losses for the nine months ended September 30, 2020 was $58,465 and $24,255, respectively.
• Revenue and net loss from Cura included in the consolidated statement of profits and losses for the year ended December 31, 2020 was $81,837 and $34,276, respectively.

This means Select added revenue:

• Q1 partial Q: $13 million
• Q2 $25 million
• Q3 $20 million
• Q4 $23 million

So only $3 million in the past Q’s growth is Select driven (PP $324 million).  Select did not hit target for contingent consideration payments in F2020.  GrassRoots could have been responsible for the bulk of the wholesale increase of $19 million but disclosure is not available via segmentation.   

Annualized Sales $ per (PPE + Goodwill/Intangibles)

What I have done above is annualize the last Q’s sales and divided it by the aggerate of PPE and G/I to see how much sales are being generated and what the trend is. I added PPE and G/I to try to normalize the companies that have gone an organic path (TRUL and CWEB until their new acquisition) versus the more acquisitive (Cura and GTII)

This Q PPE increased $42 million to $243 million while G/I increased $21 million to $1.3 billion. The metric increased QoQ to $0.61 from $0.50 as the full Q of GrassRoots was rolled in increasing sales. Q4 is a slightly below Q2 $0.62 metric. Cura is 4^th in this efficiency metric.  

Income Statement Drivers & Breakeven Sales: Peer

CURA moves into top spot in sales.

Gross Margin: Trend & Peer

GM% continued its trend and decreased to 48% from 50% last Q.  This is due to the Mgmt Fee income, which has no associated CoGS, decreasing to $1 million and wholesale increasing in sales mix by 3%.

GM in absolute dollars was $111 million an increase of $19 million QoQ.   

The contribution from IFRS voodoo decreased by $10 million to $14 million this Q, as Cura realized an increase on FVI of inventory sold of -$57 million versus -$49 million the previous Q (commensurate with increase in sales), while Gain on Bios was flat $72 million.

Annualized Gross Margin $ per (PPE + Goodwill/Intangibles)

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the gross margin and divided that by aggregate of PPE + G&I.

This metric also increases to $0.29 from the previous Q of $0.25 due to full Q Grassroots PPE and G/I.  Cura is 5^th out of the per group in this efficiency metric.

If you compare the trend for Cura and GTII and Cresco, Cura really has not seen efficiency gains.  Investors will want to see this improve going forward.

Gross Margin: USA Peer

Cura is 9th highest in this peer group.

Gross Margin: North American Peer

Cura is 9th highest on a North American basis.

SGA & SBC as % of Sales: Trend

Selling was $9.1 million for the Q and represents 4% of sales, increase of $3.5 million and from 4%, respectively QoQ.  

From MDA:

• Sales and marketing expenses totaled $9,057 for the three months ended December 31, 2020, compared to $5,598 for the three months ended September 30, 2020, which represents an increase of $3,459. The increase was largely due to marketing campaigns throughout the Company during the holiday season, with significant costs incurred with the Select brand, to drive an increase in sales.

G&A was $59 million for the Q and represents 26% of sales, a decrease of $8 million and from 37%, respectively QoQ.  Professional fees saw a significant increase of $15 million in Q3 and reduced $11 million QoQ in Q4. This was partially offset by a $4.3 million increase in salaries and benefits. The balance of changes QoQ were not material.

From MDA:

• Salaries and benefits were $33,469 for the three months ended December 31, 2020, compared to $29,130 for the three months ended September 30, 2020, which represents an increase of $4,339. This was due to an increase in headcount at the corporate level as well as headcount from operating markets from organic growth in Florida and Illinois and both organic and acquired growth in Ohio.
• Professional fees were $8,419 for the three months ended December 31, 2020 compared to $20,231 for the three months ended September 30, 2020, which represents a decrease of $11,812. This decrease was primarily due to decreased legal and consulting fees with reduced acquisition activity during the three months ended December 31, 2020. The Company finalized a few significant acquisitions during the three months ended September 30, 2020, including Grassroots and Curaleaf New Jersey, which ultimately resulted in significant legal and consulting fees incurred.

SGA on whole decreased by $4.4 million to $68 million from $73 million QoQ and improved to 30% of sales from 40%.

SBC increased by $11 million to $16 million from last Q.

Depreciation of $20 million, a decrease from $21 million last Q, rounds out Opex.

Opex increased by $5 million to $105 million and decreased to 46% of sales from 55% last Q.

SGA & SBC as % of Sales: Peer

Cura is fourth best in this metric, trailing TRUL, GTII and CL.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer

Net Operating Profit before IFRS voodoo was + $5.8 million versus negative $7.6 million last Q.  The increase in absolute GM by $19 million was offset by $5 million in increased Opex expenses.

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $18 million versus negative $7 million last Q, which was largely comprised of

• Interest items netting -$25 million versus -$17 million last Q.
• Cura also evidenced a $27 million Gain on Investment ($11 last Q) in the Q. This appears to be a gain resulting from Select not hitting contingent consideration milestones.
• -$19 million in Other Expenses (nil last Q) largely comprised of aforementioned $23 million impairment of Eureka acquisition.

Taxes were $38 million an increase from $19 million last Q.  Given NOP with IFRS voodoo was $21 million, that is quite the 280e special.

Net Income after Non-Controlling Interest and before IFRS Voodoo was negative $50 million versus negative $33 million last Q.   

+Net Operating Profit Sales Breakeven divided by Current Q Sales: North American Peer

In the North American Peer group Cura ranks 7th best.

+EBITDA: Trend & Peer

Cura adj EBITDA recorded its sixth consecutive positive Q with $51 million for the Q, an improvement from last Q’s $22 million. The GM improvement offset noncash SGA (reduction in Prof Fees) were the reason.

Eight of 10 US companies are now in the positive range.

Interest payments of $25 million are less than EBITDA.  But…. $37 million in taxes have to be serviced too.

+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer

As Cura is +EBITDA and they need only 54% of current sales at current GM% and Opex$’s to achieve +EBITDA.

+EBITDA Sales Breakeven divided by Current Q Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

Here is our new metric.  It is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced.  Essentially EBITDA without the I + T added back. 

Cura is in a deficit which means their operations did not cover tax and interest costs that aggregated $63 million in the Q. 

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

Only Cura and Acreage are negative in this metric.

Balance Sheet Items of Note:

Cash position $74 million a decrease of $11 million QoQ.  Last Q we said “cash was getting tight”. Subsequent to Q end they received a $50 million bank loan and raised C$317 million in equity raise.

“Waterfall” Trend

Inventory increased by $15 million to $198 million.  

Finished Goods Delta was $2 million.  FG at $54 million might be light for next Q given wholesale alone was $64 million and that does not include what would be needed in their stores.

“Waterfall” Peer

Cura has the second most inventory compared to US MSO Peers.

Last Q:

A good sales increased largely the result of acquisition and resultant dilution.  Next Q will have 23 days more from Grassroots but sales increase % will likely be muted.

Opex control was negatively affected by the professional fee increase in the Q.  This should reverse next Q.

EBITDA increase on the GM$ increase offset by cash Opex.  This should see improvement next Q with professional fees decreasing.

Taxes in the US on cannabis companies are still taking a large portion of Net Operating Profit, and in Cura’s case over 100% of it.

Cura has the largest footprint in the USA.  They have largely bought their way there and have 625 million shares outstanding, an increase QoQ of 92 million. Execution on their acquisitions will be the key going forward.

It is concerning they are not as efficient as peers in how they generate sales and GM from PPE and G/I.  Not only does TRUL, GTII, and CL beat CURA in those metrics but also in GM% and SGA (adjusted for this Q’s Prof Fees) as a % of sales.  The dilution only works if synergies and addressable market increases from acquisitions starts showing up in Sales and GM.

This Q:

• While sales increased 23%, if you strip GrassRoots from Q3 and Q4 and ATG from Q4 the balance of operations had under 7% increase in sales in a holiday quarter. Not great for a growth industry.
• Select saw a $3 million increase in sales but is still below Q2 of $25 million.
• Gross Margin retreated for third straight Q and is lowest of the fiscal.  The switch of Cura NJ to ownership from management fee to revenue and more wholesale is likely the reason.
• SGA retreated by $8 million
• EBITDA improved by $29 million QoQ with less Prof fees and GrassRoots for the entire Q, but interest and taxes are $63 million, meaning cash from operations was not yet able to service these items.

Cura shows impressive revenue growth but so much of that growth is acquisition oriented.  They have a high amount of debt relative to peers. 

In 2021, they need to show synergies and expansion of the existing assets revenue and GM generation from those assets.  Operationally they trail their peers in several core operational metrics. 

They announced an acquisition in Europe which will likely have to be carried for several years by existing operations before contributing in a meaningful fashion.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in CURA and will not start one in the next five days.