Financials are going to be coming fast and furiously – the fast turn following from so many year ends, and COVID related delays from others.

MSO seasonality is also one of the reasons – and the titans of Fortress Florida™ (Curaleaf & Trulieve) have both released within a day of each other.

To the financials!

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• $77MM in cannabis sales, up from $57MM last quarter. Management fee income at $19MM – for total revenues of $96MM. Starting to roll. Previous quarter’s sales increase in retail was only $7MM though.
• 54% margin too, which looks great until one notes that 20% of their income was in fees. More below.
• And….they’ve begun splitting out revenues into ‘wholesale’ and ‘retail’, and have reported the previous quarter under it. Blue’s probably gonna like that. I’m happy with increased disclosure, especially after looking at $GTII.
• This quarter saw wholesale more than double QoQ (from $9MM to $20MM), with retail increasing from $48MM to $56MM.
• Still, with a $52MM gross margin, where SG&A ($46MM) & SBC ($5MM) are at……. they’re running a break even business.
• First direct mention of COVID having a negative impact on revenues, with Massachusetts and Nevada results specifically mentioned.
• 8 additional stores opened in FLA, 3 in ARIZ, and expansion of grows across multiple states.
• Salaries and wages up $8MM in the quarter, headcount up across the organization, and the Select deal specifically noted (having finally closed, and brought them into the fold). Big numbers attach to it. More below.
• They bought an edibles manufacturer in Denver: Blue Kudu – $CURA’s getting an 8,400 sqft facility for 322k shares and cash (or about $3.5MM).
• Interest expense of $10.4MM in the quarter. There’s an error in labelling Income Tax on the income statement as a ‘benefit’ (just a word transposition though. Hey, it’s fun finding errors in financials)
• The share structure is changing, as some holders are converting the multiple voting shares into simple subordinates. The changes appear orderly.

Ok.

That large raise they did is fuelling growth as are operations. And their share count is now over 500MM(!) fully diluted.

Although they’re a loooong ways off of their <ahem> optimistic guidance of $250MM/quarter in sales by now.

The Select acquisition (we looked at it briefly here) was a massive deal that $CURA paid 48MM shares for, has another 52MM shares possible to go out on it contingent on the Select brand generating $130MM-$250MM this year in sales. Another $200MM earn out to Select shareholders is possible if $CURA sells $300MM of that branded product this fiscal year.

The deal closed in February, and the amount of sales included in these financials from Select was $13MM, with a loss of $4MM reported in the segment. The contingent consideration uses some sort of mechanism to value (probablistic perhaps), and is carried at some $65MM in total. A pretty hard discount on a nominal value of some $500MM.

Fun thing about financials, they can include novel errata. In this case, there were 2 dissenting Select shareholders who didn’t want the deal to go ahead. They got paid $630k anyway, and their shares vaporized.

In our last structure, we noted inventory, and it’s skew towards extracts. This has magnified, presumeably with Select’s on-boarding:

For insight into how the US landscape is in terms of value for money, here’s a table that presents deals they have done and completed in this quarter alone. Select is by far and away is the bulk of the value, yet on the face of it, the price paid seems awfully high for $15MM in credit losses and $53MM in net liabilities:

We’re getting a better view into the company as time goes on – and they are growing at a fast clip as acquisitions continue. Grassroots is moving along, and by my trusty napkin, they’ve got about 300MM more shares planned to be printed for the acquisitions.

Curaleaf New Jersey makes up 20% of their total revenues. A not-for-profit set up, $CURA seeded the division with $45MM. That’s now been increased to $71MM, and the entire operating division is effectively presented in the financial statements as a one line ‘Note Receivable’. They report a net loss on NJ operations of $3MM in the MD&A, but the fees they take out are likely a plug that tries to estimate how to get close to break even. Little visibility into the deal, and probably constrained as well by the not-for-profit status.

While the increased disclosure is welcome on sales splits, we have no view into specific segments or regions. The ‘trend is your friend’ as the saying goes – so let’s hope they keep trending to increased discloure.

I’m becoming far more comfortable in what the assets are looking like, and how. I’m still a long ways off from happy, but, the risk I have spoken about in them is lowering as more information and operating performance is shown. That brings us to talk about valuation.

As is, they’re going to have around 800MM shares out soon. The operative question is: what does a company have to earn to support a $4B market cap? Margin is good here, but as is so well known, disparate (and often duplicated) operations in the US pound expenses onto the balance sheet.

COVID’s impact is too soon to tell, but in all likelihood, it’s not going to be positive, nor neutral.

We haven’t seen a company be successful across multiple states yet – as builds are still progressing. The pace is similar to the builds we saw in Canada for production space, but the texture of the US business is completely different.

$CURA stands apart in a few respects to other MSO’s. It’s got cash, breadth, and growing sales. It’s similar in that the cost of acquisitions are high. After hours on this release was largely negative, and one has to guess that they’re somewhat to blame for setting expectations so high around sales levels getting to that billion dollar level this year. It’s doubtful that could have ever happened, COVID or not.

I’m feeling a little repetitive in musing about where these things need to be…..to be viable, and accretive on capital deployed. We know that weed sells, and the US has the population and depth to exploit that. What we don’t know is is in the absence of a States Act – is whether or not expansive multi-state operations can deliver an RoR that makes sense. We’ve seen rationalizations and cost cutting in others around head-counts and salaries, and that’s where I look to on the balance sheet…. to see if margin creation can keep up with additions. In the case of $CURA, it’s not terribly promising at the moment.

Bottom line: they lost $15MM on $96MM in sales. Incremental store additions and some acquisitions (like Blackjack) are noted for being contributors to sales growth. More than half of that growth came from wholesale, which, could show good potential from things like that Select brand acquisition. Yet at $300MM cost (which could double), it’s not cheap.

Not much more to say about these financials. With little visibility into state specific performance – all we can do is hope management runs a tight ship. In a growth phase, it’s a race between which runs out first: cash, or the ability to issue shares of value to buy stuff. We’ve seen effects upon how acquisitions become increasingly dear to existing shareholders and capital structure as share price declines. And $CURA’s been firing the share cannon hard.

Cash is good, and they have runway. Given the loss of a quarter (or more) to negative effects from COVID, these guys are in far better position than peers to survive. A potential positive from COVID might be in creating distressed assets for one like $CURA to exploit. Until next financials……

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 holds no position in $CURA