Let’s look at CuraLeaf fundamental financial metrics for their June 30, 2021 earnings release, financial statements and MDA.
Plain and simple… a 20% QoQ increase in largely organic sales is always very good. You keep that up for four quarters and you grow 100% YoY. The effort to increase 20% QoQ, especially at Cura’s scale, is not as easy as many think. The sheer increase and mechanism to support the increase have to be working well to achieve same. The only non-organic revenue QoQ is the $5 million revenue from EMMAC (which lost $8 million in Net Income), which would reduce sales growth to +18%, which is still very good.
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.
Open the fins and MDA and let’s dive in.
Income Statement Drivers & Breakeven Sales: Trend
Cura operates in 23 states (+0 QoQ) with 107 retail dispensaries (+5 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 increased sequentially by 20%, an increase of $52 million with the only non-organic addition being $5 million from their new European acquisition, EMMAC, to USD $312 million. Retail cannabis increased +18% to $222 million, W/S cannabis increased 24% to $89 million (or net of EMMAC +16%), while Management fee income increased to $0.3 million.
Retail is now 71% of mix and Wholesale is 29%, with the balance Management Fees. No change QoQ despite adding 5 more stores.
Retail Sales: Peer and Trend
Cura has 107 dispensaries up from 102 at last Q end with operations in 23 states. They added in PA, NJ IL and ME.
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) increase 12% QoQ, a very healthy increase.
We had the various states that we collect data at roughly 14% increase QoQ, so the increase is inline.
Wholesale: Peer and Trend
CuraLeaf evidences a 24% QoQ increase in Wholesale revenue or +$17 million to $89 million, of which $5 million was EMMAC. We are waiting on TRUL, GTII and CL December 2020 figures. They cite “organic growth in dispensaries (served)” as reason in MDA.
Annualized Sales $ per (PPE + ROU + Goodwill/Intangibles)
What I have done above is annualize the last Q’s sales and divided it by the aggregate of PPE +ROU + G/I (UPDATED to include ROU) to see how much sales are being generated and what the trend is. I added PPE + ROU + 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 $47 million to $306 million, ROU increased +$20 million to $285, while G/I increased $449 million to $1.7 billion on the acquisition of EMMAC. The metric decreased QoQ to $0.55from $0.59 largely due to the EMMAC G/I.
Cura is 6th in this efficiency metric.
Income Statement Drivers & Breakeven Sales: Peer
CURA remains into top spot in sales.
Gross Margin: Trend & Peer
GM% reversed its trend in the prior Q but increased to 50% from 49% this Q. GM in absolute dollars was $155 million, an increase of $27 million QoQ. It is a bit if a tractor pull moving GM when you have 23 siloed states contributing. They indicate they hope to be at 52-54% as new and more efficient cultivation comes online later in the year and into F2022. That will also depend on no price erosion in the lucrative limited license markets where demand far outstrips supply.
Given Retail and Wholesale sales mix was flat it is difficult to trace improvement without segmentation.
37 of CURA dispensaries are in FLA, while 10 and 14 are in IL and PA, respectively. MA, NY and NJ are also markets with demand outstripping supply and also should lead to better GM%. 67% of total CURA dipos are in gross margin rich limited license vertical states.
The contribution from IFRS voodoo increased by $17 million to $29 million this Q, as Cura realized an increase on FVI of inventory sold of -$82 million versus -$69 million the previous Q (commensurate with increase in sales), while Gain on Bios was +$30 million to $111 million as new cultivation starts ramping. Their projected yield increased by 20% QoQ which could be contributing to the latter figure’s growth.
We will see if the finished product when harvested drives the GM% improvement in subsequent Q’s.
Annualized Gross Margin $ per (PPE + ROU + 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 + ROU + G&I.
This metric also decreases to $0.31 from the previous Q of $0.34. Degradation is due to EMMAC weighing in on G/I.
Cura is 6th out of the per group in this efficiency metric.
Gross Margin: USA Peer
Cura is tied for 7th highest in this peer group.
Gross Margin: North American Peer
Cura is 7th highest on a North American basis.
One thing I want to point out… Village Farms, a Canadian LP, pulled down a 40% GM on their cannabis business this past Q (their negative margin Tomato business pulls down their overall GM%). This is in Canada, where we have national pricing, competition is fierce and there is no verticality.
A concern we share is that the margins of US MSO’s should be much better than Canadian LP’s given their lack of competition, no national pricing and verticality. The MSOs are certainly better, but it will be interesting to see if they can continue this level if/when competition and national pricing is in the mix.
We get the argument that costs will also come down with interstate, but in order to generate the same level of GM$’s (to pay your bills) with say a 50% cut in retail prices (which we have seen and more in Canada), the company will need to work that much harder to maintain that GM$ level. Production costs might go down, but SGA will likely need to increase.
SGA & SBC as % of Sales: Trend
Selling was $10.1 million for the Q and represents 3% of sales, decrease of $0.3 million and from 4%, respectively QoQ. That is very impressive given the sales increase.
G&A was $78 million for the Q and represents 25% of sales, an increase of $8 million and decrease from 27%, respectively QoQ. Salaries and benefits increased $6 million likley due to new stores and largerly EMMAC would be my guess, given EMMAC loss is $8 million. Travel and professional fees were both up $1.1 million.
SGA on whole increased by $7.9 million to $88 million from $80 million QoQ and slid marginally to 28% of sales from 31%. This will be a number to focus on going forward to see if they are hitting inflection point.
SBC increased by $13 million to $18 million from last Q as stock price slumped late in Q. With decline in stock price, IFRS versus GAAP treatment, the increase is likely for the EMMAC executives on boarded.
- The increase was primarily due to the annual compensation cycle and the recognition of share-based compensation expense related to the EMMAC acquisition in the current quarter.
Depreciation of $4 million, an increase to $26 million from last Q, rounds out Opex.
Opex increased by $26 million to $133 million and increased to 43% of sales from 41% last Q.
SGA & SBC as % of Sales: Peer
Cura is fifth best in this metric, trailing TRUL, GTII, AYR and CL.
+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer
Net Operating Profit before IFRS voodoo was + $23 million versus + $21million last Q. The increase in absolute GM by $27 million was offset by $26 million in increased Opex expenses.
Other Income (Expenses) and Taxes:
Other Income for the Q was negative $19 million versus negative $20 million last Q, which was largely comprised of
- Interest items netting -$21 million versus -$21 million last Q.
- +$2.3 million in Other Expenses previous Q and +$0.4 million last Q. The increase is a gain on investments.
Taxes were $42 million an increase from $31 million last Q. Given NOP with IFRS voodoo was $52 million, that is quite the 280e special.
Net Income after Non-Controlling Interest and before IFRS Voodoo was negative $36 million versus negative $30 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 8th consecutive positive Q with $76 million for the Q, an improvement from last Q’s $20 million. Of the GM improvement of $27 million $20 million translating into EBITDA is a very good increment. The GM improvement offset noncash SGA increases were the reason.
Cura backed out equity and transaction fees of $8 million but there was no mention in the MDA. In fact, only the presser mentions EBITDA. I did not back them out because of the inability to track back to the income statement.
Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)
We have added this new metric to now look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.
This metric actually stayed stable QoQ, despite adding EMMAC, at $0.13 as EBITDA added 35% QoQ outstripping the pro rata QoQ add to the denominator.
Cura is 5th in this metric trailing CL, GTII, TER and TRUL.
+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer
As Cura is +EBITDA and they need only 56% of current sales at current GM% and Opex$’s to achieve +EBITDA. No change QoQ.
+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 metric introduced last Q. 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 moves into a $12 million surplus after tax and interest service are removed from EBITDA up from $5 million the preceding Q. Encouraging.
Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales
Only Acreage is negative in this metric.
Cura is 7th in this metric. Their debt interest service and tax bill likely the reasons.
Balance Sheet Items of Note:
Cash position $333 million an increase of $19 million QoQ. My guess is the ROU and leases, and they indicate EMMAC had cash on hand at acquisition from CURA International.
Inventory increased by $70 million to $308 million. New cultivation is likely driving that figure. Quarterly Inventory to Sales ratio is 0.98:1.
Finished Goods Delta was $22 million, a nice increase after $13 and $2 million in the preceding two quarters.
Cura has the most inventory compared to US MSO Peers. Keep in mind Cura still is using IFRS and includes Gain on Biologicals in inventory.
- PPE increase $47 million to $306 million (buildings being $32 million of the increase) and ROU increases $20 million to $285 million
- G/I increase 4448 million with the add of EMMAC
- The prepaid acquisition costs of $132 million was absorbed in the Q and is now $0
On Liability and Equity side:
- Taxes were paid down by $47 million and are now $63 million
- Deferred tax liability increases $118 million to $340 million as result of the Goodwill added by EMMAC
- Non Controlling interest redemption liability jumps $126 to $129 million due to EMACC. This is due in 1-3 years.
- Contingent consideration increases $27 million to $29 million as EMACC had a $9 million contingency on their books for the Terre Verde acquisition. The balance is earn outs.
- Share capital increases $245 million as shares went out for the acquisition.
Another nice progress Q. Organic sales growth at 13% after last Q’s 7% is good to see, as is the 9% increase in revenue per average stores opened in the Q.
Cura’s has the highest debt load of the large MSOs but is now capable of servicing both interest and taxes from operational EBITDA.
Cash of $314 million against taxes owing of $110 million takes some firepower away from them should they need cash for acquisitions. I would not be surprised to see a raise in Q3 or Q4.
Boris is portending an acquisition soon that will change their cost foot print in cultivation.
Strong sales increase that kept up, and maybe a little ahead, of the growth in the markets they are in. Gross Margin is stubborn at 50%, especially given how many margin-rich vertical markets they are in, but let’s see of the narrative of getting to 52-54% can be achieved.
Expense control was good and the incremental GM to EBITDA conversion was very good.
Cash is ample, and they indicate they will look to refinance debt in early 2022 at better rates in the structures they are allowed to refinance. I don’t think any MSO wants to do an equity raise right now, and CURA has enough cash to and should start generating free cash flow in the back half of F2021, so there is no pressing need… unless they go shopping.
While they trail TRUL, GTII and CL in some of our efficiency metrics, they make up for that to a degree in sheer size.
The market today is really shrugging at the results so far today, with CURA bouncing into and out of daily gains. This seems to reinforce that the market is waiting for regulatory change or a catalyst before the doldrums will be shaken off. We will see if their peers can shake the doldrums from the market.
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.