et’s look at CuraLeaf fundamental financial metrics for their September 30, 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.

This Q’s results are dominated by two core acquisitions.

Grassroots & CuraLeaf NJ Acquisition:

Below are three of the biggest acquisitions from Notes, two of which occurred in the September 2020 Q and the other in Q1F2020:

Grassroots: Closed July 23, 2020. “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.”

CuraLeaf NJ: Closed July 2020. “Revenue and net income from CLNJ included in the consolidated statement of profits and losses for the nine months ended September 30, 2020 was $17,028 and $10,384, respectively.”

Cura Partners (“Select”): Completed February 2020. “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.”  The incremental for September 2020 Q Revenue and net loss from Cura Partners included in the consolidated statement of profits and losses was $20,162 and $12,216, respectively.

There are also Contingent Considerations for hitting milestones left to be paid. “There is an additional 40,555,556 SVS payable to former Select equity holders contingent upon Curaleaf achieving certain calendar year 2020 revenue targets based on Select-branded extract sales beginning at a target of $130,000 with maximum achievement at $250,000. In addition, Select equity holders will also be eligible to receive an earn-out of up to $200,000 from the issuance of additional SVS, contingent upon Curaleaf exceeding $300,000 in calendar year 2020 revenue for Select-branded extract sales. The total contingent consideration related to Cura had a fair value of $28,445.”

All this to say… that these two acquisitions from this Q accounted for $63 million in sales and $9 million in net income. Incremental sales growth was $65 million in sales growth for the Q.  With the Cura New Jersey acquisition they swapped management fees in prior Q’s for full revenue, so the math is not perfect, but it is telling.  Grassroots alone accounted for 71% of the QoQ increase.   These two acquisitions have had consideration to date paid of $752 million.  

And the three major acquisitions for the year aggregated for the Q $83 million in sales with a net loss of $3 million.  This while packing Goodwill and Intangibles aggregating $991 million (Goodwill of $370 million and Intangibles of $621 million) against consideration paid of $1,076 million.  PPE of those three acquisitions aggregated $46 million.

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

Income Statement Drivers & Breakeven Sales: Trend

Cura operates in 23 states (+6 QoQ) with 92 retail dispensaries (+35 QoQ), and 30 processing facilities (+6 QoQ).

States Operating or in process: AZ, AK, 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 55%, an increase of $65 million (after a $21 million increase last Q) to USD $182 million.  Retail cannabis increased +104% to $135 million, W/S cannabis increased 35% to $45 million, while Management fee income decreased -88% to $2 million.

As per above the two acquisitions for the Q added between 71%- 97% of the incremental revenue in the Q.  Meaning, existing operations added 3% to 29% in the Q or $19 million at the highest end of range. A $19 million increase on last Q’s sales would have meant a maximum increase of 16% in revenue from operations existing at June 30, 2020. Again, this is the high end of the range.

The sales mix for Cura changed mostly as a result of the reduction in management fees with the acquisition of Cura NJ. The Cura NJ revenue would have moved from management fees (which are not fully loaded for full revenue, cost of goods sold and Opex) into Retail on the Q. 

Retail is now 74% of mix and Wholesale is 25%, with the balance Management Fees.

From MDA:

• Retail and wholesale revenue for the three months ended September 30, 2020 was $180,302, an increase of $80,723 or 81% compared to $99,579 for the three months ended June 30, 2020. The increase in retail and wholesale revenue was primarily due to the acquisitions of Select, Arrow, Grassroots, and Curaleaf NJ, as well as organic growth in Florida, Arizona, and Maryland.

• The decrease in management fee revenue was primarily due to decreases in management fee income of $15,795. The decrease is primarily due to the acquisition of Curaleaf NJ, the managed not-for-profit in New Jersey in July 2020, offset by increased management fees generated from ATG resulting from recovery of sales after COVID-19 related closures during the quarter ended June 30, 2020.

Retail Sales: Peer and Trend

Cura is rivaling Trulieve for highest retail revenue volume.

Cura has 92 dispensaries up from 57 at last Q end with operations in 23 states. They have not attributed increase to acquisitions versus organic. They acquired Arrow in Connecticut in the June 2020 Q adding three retail locations and becoming vertically integrated within the state.  This Q the big add was Grassroots.

Cannabis Revenue per average dispensaries opened for the Q increased 52% to $1.8 million from $1.2 million in the previous Q.  As the majority of the new dispensaries were acquired 23 days into the Q the metric (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) is not perfect.  Let’s see where this lands next Q.

Wholesale: Peer and Trend

CuraLeaf evidences a 35% QoQ increase in Wholesale revenue or +$12 million to $45 million. Their wholesale is approximately half of industry leader Cresco Labs and similar to GTII.

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 $21 million while G/I increased $662 million to $1.2 billion. The metric, unsurprisingly, decreased QoQ to $0.50 from $0.62. Cura is 7^th in this efficiency metric. Next Q Grassroots will be on for a full Q of sales which should improve the metric.

Income Statement Drivers & Breakeven Sales: Peer

CURA moves into top spot in sales.

Gross Margin: Trend & Peer

Gross Margin Table:

GM% continued its trend and decreased to 52% from 50% last Q.  This is due to the Mgmt Fee income, which has no associated CoGS, decreasing by $16 million. Cannabis Only GM improved from 39% to 49%.  Some good margins coming with Grassroots.

GM in absolute dollars was $91 million an increase of $34 million QoQ.   

The contribution from IFRS voodoo increased by $3 million to $24 million this Q, as Cura realized an increase on FVI of inventory sold of -$49 million versus -$22 million the previous Q (commensurate with increase in sales), while Gain on Bios increased by $30 million to $73 million as cultivation footprint grows by 100,000 pounds to 1,700,000 annually. 

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 was in decline to $0.25 from the previous Q of $0.31 due to onboarding of Grassroots PPE and G/I.    This measure should increase slightly next Q with a full Q from Grassroots.  Cura is 7^th out of the per group in this efficiency metric a head of Harvest, Acreage and MedMen.

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 7th highest in this peer group but does benefit from Management Fees that do not have an accompanying CoGS element.  

Gross Margin: North American Peer

Cura is 7th highest on a North American basis.

SGA & SBC as % of Sales: Trend

Selling was $5.5 million for the Q and represents 3% of sales, increase of $0.6 million and from 4%, respectively QoQ.  

From MDA:

• Sales and marketing expenses totaled $5,598 for the three months ended September 30, 2020, compared to $5,010 for the three months ended June 30, 2020, which represents an increase of $588. The increase was largely due to marketing cost associated with the new Cannabis with Confidence campaign and other branding, lobbying, and public relations costs due to the inclusion of Grassroots and Curaleaf NJ expenses after completion of the acquisitions in July 2020.

G&A was $67 million for the Q and represents 37% of sales, increase of $32 million and from 30%, respectively QoQ.  Professional fees saw a signifcant increase of $15 million QoQ, while Salaries and Benfefits increase $7 million, and Rent and occupancy increased $4.5 million.  Professional fees are related largely to Grassroots and Cura NJ acquistions and sale lease back. Expect professional fees to reduce subsantailly next Q. 

From MDA:

• Salaries and benefits totaled $29,130 for the three months ended September 30, 2020, compared to $22,131 for the three months ended June 30, 2020, which represents an increase of $6,999. The expense growth was primarily due to an increase in headcount at the corporate level, inclusion of Grassroots and Curaleaf NJ headcount expenses after completion of the acquisition, as well as headcount additions to support operating market organic growth in Florida, Arizona, Massachusetts and New York.
• Occupancy expenses totaled $5,799 for the three months ended September 30, 2020, compared to $1,338 for the three months ended June 30, 2020. The increase of $4,461 was primarily due to increase facility expense associated with the increase of 57 to 93 dispensaries during the three months ended September 30, 2020.
•  Professional fees totaled $20,231 for the three months ended September 30, 2020 compared to $4,862 for the three months ended June 30, 2020, which represents an increase of $15,369. This increase was primarily due to increased legal and accounting fees associated with the acquisitions of Grassroots, Curaleaf NJ, and MEOT.

SGA on whole increased by $32 million to $73 million from $40 million QoQ and regressed to 40% of sales from 34%.

SBC increased by $0.6 million to $5.4 million from last Q.

Depreciation of $21 million, an increase from $14 million last Q as Grassroots is onboarded, rounds out Opex.

Opex increased by $39 million to $99 million and increased to 55% of sales from 51% last Q.

SGA & SBC as % of Sales: Peer

Cura is fourth highest in this metric.  If we back out the increase QoQ in Professional Fees this Q they are 5^th highest in this metric and they trail TRUL, GTII and CL.  

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

Net Operating Profit before IFRS voodoo was negative $7.6 million versus negative $1.1 million last Q.  The increase in absolute GM by $34 million was offset by increased G&A expenses.

Cura requires an incremental sales increase of 8% to achieve +NOP at current GM% and OPEX$.

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $7 million versus negative $10 million last Q, which was largely comprised of Interest items netting -$17 million versus -$13 million last Q. Cura also evidenced a $11 million Gain on Investment (nil last Q) in the Q. Deciphering its origins are not easy.  It appears to be a gain on contingent liability. Not sure which one.

Taxes were $18 million an increase from $14 million last Q.  Given NOP with IFRS voodoo was $16 million, that is quite the 280e special.

Net Income after Non-Controlling Interest and before IFRS Voodoo was negative $33 million versus negative $23 million last Q.   

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

In the North American Peer group Cura ranks 6th best.

+EBITDA: Trend & Peer

Cura adj EBITDA recorded its fifth consecutive positive Q with $37 million for the Q, an improvement from last Q’s $26 million. The GM improvement versus offset noncash SGA were the reason.

Cura’s Adj EBITDA differs from mine as I have a higher Depreciation add back (mine is if from Cash Flow Statement. I am likely adding back capital lease depreciation that might be captured elsewhere) and they add back “One Time Expenses” of $18 million that are not well articulated and are likely buried in G&A in professional fees. Interestingly, EBITDA does not appear in MDA and only in presser.

Cura had a Use of cash from operations of $25 million of which $3 million was Opex burn.  With Professional Fees decreasing next Q, this should bounce back into a positive/source next Q.

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

Interest payments of $17 million are less than EBITDA.  Next step Principle amortization.

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

As Cura is +EBITDA and they need only 59% of current sales at current GM% and Opex$’s to achieve +EBITDA.

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

Balance Sheet Items of Note:

Cash position $84 million a decrease of $38 million QoQ.  A/P and Accrued total $76 million and current taxes are $35 million. Current Portion of Leases and Debt aggregate $46 million.  Cash is getting tight.

With Grassroots we also saw

• PPE increase by $21 million to $200 million
• Right of Use Assets increase by $194 million to $275 million (as these are leased assets, they are pretty leveraged)
• Intangibles increased $402 million to $806 million
• Goodwill increased $259 million to $439 million
• Prepayment of acquisition consideration appeared at $160 million
• Lease liabilities (Current and Long Term) increased by $172 million to $294 million
• Contingent consideration liability decreased by $40 million to $41 million.
• Share capital increased by $737 million to $1,729 million

“Waterfall” Trend

Inventory increased by $53 million to $183 million. Grassroots and Cura NJ came in with $17 million in inventory.

Finished Goods Delta was $21 million.  FG at $53 million might be light for next Q given wholesale alone was $44 million and doesn’t include what would be needed in their stores.

“Waterfall” Peer

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

This Q:

A good sales increased largely the result of acquisition and resultant dilution. Cannabis GM% continues to improve as scale is reached.  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%, SGA (adjusted for this Q’s Prof Fees) as a % of sales and $ EBITDA generated.  The dilution only works if synergies and addressable market increases from acquisitions starts showing up in Sales and GM.

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.