Let’s look at CuraLeaf fundamental financial metrics for their September 30, 2021 earnings release, financial statements and MDA.

A couple things I am watching in this Q across all MSOs:

1. Sales increase relative to market increases. This is tough to tell with the weak disclosure not only by MSOs but also getting data for each market/state. But companies with good BRANDS should outperform the market.  That’s what BRANDS are for: to help a company gain market share.  So, if markets are flat, good BRANDS should lift the respective company above market increase.
2. GM in $’s.  With markets starting to get increasingly competitive, sales may still increase but that might come at a lower GM in % and $’s.  And with vertical MSO’s more retail stores loads in more SGA$s.  As such, a company outperforming peers should be able to increase GM$’s even if GM% slides.

Cura had a +2% revenue increase or $4.9 million, which on their conference call they say is organic. That is kind of true. EMACC had a $7.4 million sales in the Q or a $2.1 million QoQ increase. They bought EMMAC a week into last quarter and I am not questioning that they had increased sales from a full Q of Europe that was not attributable to adding one week to last Q. US sales were +$2.8 million or 1% QoQ.

On the GM$ front, CURA backtracked $10 million to $145 million or 46% of sales from 50%. They did impair inventory of $5.9 million, but they still would have backtracked $4.1 million without same. The one thing to keep in mind is that 23 states require 23 silos. Increasing GM% would require many states to cooperate in the Q with increased GM%, or at least the revenue dominant states. That has not happened. Cura is 10^th ranked by GM in our US MSO peer group.  They have guided they will get to 52-54%. I admit that I am skeptical they can get there.  They do have some cultivation assets coming online in various states (as evidenced in strong Gain on Bio increases) and they impaired their Eureka California operation.  I guess we will see if they get there in 2022, as it sounds like Q4 is more of the same.

The above are small criticisms in the grand scheme of the present operations, but they are items for investors to watch, especially relative to peers. I consider GM% to be a good indicator of asset quality in an environment where there are not a lot of signposts for asset quality.  GM% can be overcome by shear sales growth and that’s where GM$’s comes in to play.

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 109 retail dispensaries (+2 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 2%, an increase of $5 million to $317 million with the only non-organic addition being an extra week from their new European acquisition this Q.  This is the lowest growth Q since I started spreading Cura in March 2019.

Retail cannabis increased +1% to $225 million, W/S cannabis increased 3% to $92 million, while Management fee income decreased to $0.5 million.

Retail remains 71% of mix and Wholesale is 29%, with the balance Management Fees. No change QoQ despite adding 2 more stores.   

Retail Sales: Peer and Trend

Cura has 109 dispensaries up from 107 at last Q end with operations in 23 states.  They added in NJ and ME.  They closed the Los Suenos acquisition post Q on November 8, 2021 and will be adding stores in CO (+2), cultivation 2.5 million sq ft, and wholesale next Q.

They have also agreed to acquire Tryke for $286 million whom has six stores and wholesale in AZ (4), NV (2) and UT. This is not expected to close until mid to late f2022 as Nevada is not known for expedient transfer of ownership.

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) decrease 2% QoQ after a very healthy increase last Q.

We had the various states that we collect data at roughly flat to 2% increase QoQ, so the increase is inline.

Wholesale: Peer and Trend

Note: We backed out EMMAC revenue out of the above of $7.4 million for this Q and $5.3 million for Q2F21.

CuraLeaf evidences a 3% QoQ increase in Wholesale revenue or +$2.7million to $92 million, of which $7.4 million was EMMAC.

Without EMMAC wholesale revenue increases 1% QoQ to $85 million.  Again, this is a tea leaf speaking to BRANDS. If BRANDS were strong, they should see an increase relative to market growth.  Wholesale revenues are flat QoQ.

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 $22 million (despite $7.4 million impairment) to $328 million, ROU decreased -$3.5 million to $282 million, while G/I decreased $74 million (Licenses were impaired $5.7 million and usual amortization) to $1.6 billion. The metric increased QoQ to $0.57 from $0.54 due to the reduction in G/I.

Cura remains 6^th in this efficiency metric.  

Income Statement Drivers & Breakeven Sales: Peer

CURA remains into top spot in sales which will be challenged by TRUL who closed on Harvest.

Gross Margin: Trend & Peer

GM% decreased to 46% from 50% QoQ, this is their lowest GM% since I commenced spreading. The previous low was 49% two Qs ago.   GM in absolute dollars was $145 million, a decrease of $10 million QoQ of which $5.9 million is impairment of Eureka inventory.   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% GM 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 dispos are in gross margin rich limited license vertical states.

The contribution from IFRS voodoo increased by $9 million to $38 million this Q, as Cura realized an increase on FVI of inventory sold of -$113 million versus -$82 million the previous Q (odd given the small increase in sales.  They may have had more Gain on Bios embedded as a percentage of cost), while Gain on Bios was +$40 million to $151 million as new cultivation starts ramping. This is the biggest increase in the last five Qs. Their projected yield increased by 59% QoQ to 34,737 KGs which is contributing to the latter figure’s growth.  Their projected yield has doubled in past three Qs.   

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 $0.47 from the previous Q of $0.52. This is the $10 million drop in GM$s overpowering the reduction in the denominator.

Cura is 2nd out of the per group in this efficiency metric.  But keep in mind, that Cura has a large retail store count and SGA impact that, as we will see in the EBITDA version of this graph.

Gross Margin: USA Peer

Cura is 10th highest in this peer group. If they reach their 52-54% guidance in F22 they would be in 6^th place.

Gross Margin: North American Peer

Cura is 10th highest on a North American basis.

One thing I want to point out… Village Farms, a Canadian LP, pulled down a 44% GM on their cannabis business this past Q (their low margin Tomato business pulls down their overall GM% to 25%).  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 $11 million for the Q and represents 3% of sales, an increase of $0.8 million and from 3%, respectively QoQ.   

G&A was $91 million for the Q and represents 29% of sales, an increase of $13 million and increase from 25%, respectively QoQ.  Salaries and benefits increased $4.1 million likley due to new stores and Professional fees were up $4.6 million to $12.5 million QoQ, as they indcate some costs in closing Eureka and severance.  Office supplies and services increased $3.5 million to $10.7 million a sharp increase, and easily the higest on record.

SGA on whole increased by $13.8 million to $102 million from $88 million QoQ and increased to 32% of sales from 28%. This is the highest in five Qs. This will be a number to focus on going forward to see if they are hitting inflection point.

SBC decreased by $5.2 million to $13.2 million from last Q as stock price slumped late in Q.  

Depreciation increased by $2 million to $28 million from last Q, rounds out Opex.

Opex increased by $9 million to $143 million and increased to 45% of sales from 43% last Q. This is the third highest in the five Q’s under review.

SGA & SBC as % of Sales: Peer

Cura is 6th best in this metric, trailing TRUL, GTII, VRNO, TER and CL. 

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

Net Operating Profit before IFRS voodoo was + $2 million versus + $23 last Q.  The decrease in absolute GM by $10 million and the $10 million in increased Opex expenses the reasons.

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $39 million versus negative $19 million last Q, which was largely comprised of

• Interest items netting -$25 million versus -$24 million last Q.
• Impairment of $5.7 million on Eureka PPE vs nil last Q
• -$8.3 million in Other Expenses this Q versus +$2.3 million last Q. The slide is largely $5.6 million loss on disposal of assets and $2.3 loss on investment.

Taxes were $60 million an increase from $43 million last Q.  Given NOP with IFRS voodoo was $40 million, that is quite the 280e special.

Net Income after Non-Controlling Interest and before IFRS Voodoo was negative $94 million versus negative $36 million last Q.   

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

In the North American Peer group Cura ranks 8th best.

+EBITDA: Trend & Peer

Cura adj EBITDA recorded its 9th consecutive positive Q with $68 million for the Q, a decrease from last Q’s $76 million. The decrease in GM (net of impairment) and the increase in cash SGA the reason.

Cura records aEBITDA of $71 million.  They have some undisclosed “one time” professional fees and severance removed that I cannot track back to and I have not reversed.

Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles):

We have added this metric to look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.

This metric showed a minor decrease QoQ as the annualized EBITDA decrease of -$7.6 million this Q on an annualized basis overpowered the decrease in the denominator of -$36 million.  The MSOS with large store footprints need not only a decent GM% but also tight SGA control.

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

As Cura is +EBITDA and they need only 53% 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 metric introduced a few Qs ago. 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 $17 million deficit after tax and interest service are removed from EBITDA, down from a surplus of $12 million the preceding Q. The decrease in EBITDA and a $4 million increase in interest expense and $17 million increase in taxes in the Q are the reasons for the $29 million swing.

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

This metric was positive last Qat +4% but with the decrease in EBITDA, coupled with a large increase in taxes this Q of $17 million and a $4 million increase in interest paid, this has reverted to negative -5%. 

Cura is last in this metric.

Cura has $130 in current taxes owing (+$67 million QoQ) versus a cash balance of $317 million.  

Balance Sheet Items of Note:

Cash position $317 million a decrease of $17 million QoQ.  They have indicated they are looking to refinance debt at a lower interest rate in F2022. They will likely increase the facility at the same time.

“Waterfall” Trend

Inventory increased by $41 million to $346 million.  New cultivation is likely driving that figure. Quarterly Inventory to Sales ratio is 1.09:1.

Finished Goods Delta was $0.6 million and is at $92 million on a cost basis.

“Waterfall” Peer

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. Their $235 million cost base inventory is double that of TRUL GAAP $112 million.

• PPE increase $21 million to $328 million (buildings being $25 million of the increase)  
• Assets held for sale increased $46 million to $78 million as GrassRoots assets for sale increased by $49 million.
• G/I decrease $74 million to $1.6 million. 

On Liability and Equity side:

• Taxes due increased $67 million and are now $130 million. Over a third of present cash.
• Deferred tax liability decreases $37 million to $303 million as deferred taxes are paid along with current taxes.
• Non Controlling interest redemption liability decreases $16 to $113 million due to EMACC.  This is due in 1-3 years.

Last Q:

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.

This Q:

Sales were flat QoQ with the smallest Cura increase since we have been since spreading.  GM% and $ went south even after impairments are backed out, and they are not an industry leader in GM%. SGA went up. They did hang onto a small $2.2 million NOP but below the NOP line they have interest and taxes totaling $85 million.   

This does not make for a progress quarter for the industry leader.

The refinancing will be interesting.  They have $328 million in fixed assets.  Term debt is usually loaned against fixed assets.  Term debt right now is $340 million.  While aEBITDA positive they do have $25 million in interest due each Q, and after paying taxes they are in a deficit position this Q.

The market has reacted with a 4-5% drop in share price after a strong rally the last two days on sentiment improvement with GOP drafting a competing bill to the draft CAOA.

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.