Our last Structure on Curaleaf was prior to their year end, with Grassroots and Select coming fully online, along with Curaleaf Massachusetts also coming into the fold.

The sun is now setting on Chairman Boris Jordan’s multiple voting shares – their effect will be extinguished in less than 5 months presumeably. $CURA’s acquisition blitzkrieg continues, with their European entry underway, and another $52MM of deals signed but unexecuted (Ohio/Maryland). Simultaneously, $CURA’s re-entering Maryland – via a related party transaction that sees an inside director (a ‘Mr. Kahn’ and a company called ‘KDW’) take the prima-fascia-self-dealing reigns from ‘Big’ Joe Lusardi.

A few weeks ago, the Maryland Medical Cannabis Commission cited and fined both Grassroots and Mr. Kahn’s outfit (KDW) for breaching regulations. KDW is the vehicle that’s sleeving MCCW into $CURA. From what I gather, it looks like prior to the Grassroots transaction being signed, the MCCW Maryland asset was peeled off and sold/transferred to KDW, who, was planning to sell it to $CURA (it also could have been part of Grassroots trying to clean up ownership during negotiations). Either or, the Commission didn’t roll with that as it wasn’t reported, and now KDW gets to have a compliance director figuratively sitting at a TV tray in their office for the next 3 years…..and sharing a $300k fine with Grassroots.

Now that’s out of the way, the deal’s still on, with Mr. Kahn selling a purchase option to $CURA just a week ago. The price? Forgiveness of a $32MM note issued to him. The opacity of the transaction is not a good look at all.

Ugh.

I’m unsure of whether this reflects the mechanics of being in the broader regulatory/ownership labyrinth that exists right now, or simple self-dealing. Absent more information, being declarative isn’t possible. Either or, it does reflect a broader landscape of relative sausage making that’s been prevalent across legal cannabis in the US.

To the financials!

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• $1.3B in goodwill and intangibles. Given their hard asset to G&I ratio in the past, I’ve included $132MM in ‘prepaid acquisitions’.
• Operational metrics really no hell after a quick look. I’ll defer to GoBlue’s ‘Quarter in Pictures’ for the nuts and bolts.
• Despite a company of this size and scope, only $260MM in PP&E. Notable for its’ relative (small) presence on the balance sheet.
• $20MM in interest expense per quarter, or 20% of GM. It’s an improvement, as sales growth is able to (just) begin bearing the load.
• There’s also a relative lack of optionality within their debt. As a general rule, less is better. There are (very) few exceptions where shareholders will see the bulk of any forward value that accretes in any given equity if it’s packing a ton of external extrinsic exposure.
• 592.4MM shares now o/s. 25MM options at $6 sitting on the books, 2.5MM in RSU’s. If you recall, they have a regular grant of options to management on a rolling basis. Where the cost lays is within the 6 year tenors.
• 3.7MM options at $0.53 (!) were exercised during the period. Wow. They use a 76% volatility for valuation, which they claim represents the next 6 years of expected share price volatility. This is really (really) lame. Extrinsic value is also poorly understood by 99%+ of retail, so most won’t have a clue. Ignorance is bliss?
• Chairman Boris Jordan is spending about $400k/mo in travel and ‘business development’ costs, which is paid to him via his private company. Quite the number. $CURA’s also paying $20k/mo for his company’s offices. Not terribly material (hey, billionaires gotta live too), but I’ve seen many (repeated) claims by retail about how modest $CURA is in executive compensation and SBC. Their reporting of SBC is accounting (not economic), and that’s all fine and well. But it’s not anywhere near reality. Nor how management continues to sell assets (like PT Mass and Verdure and KDW and now EMMAC) to themselves.
• Just so you know.

Ok. Nothing much incrementally other than KDW domestically (at least materially). That can’t be said for ‘international’ plans, which have come into the picture via EMMAC, an acquisition announced in early March and completed in April.

There’s a few legs to this European entry:

1. EMMAC Life Sciences – touted as “the largest vertically integrated independent cannabis company in Europe” – was purchased for $50MM in cash, some ~$320MM in stock contingent upon milestones, and another $57MM in earn-outs.
2. Establishing a ‘Curaleaf International’ division, funded by a ‘strategic investor’ who seeded it with $130MM, and received 31% ownership of it in return.
3. Curaleaf International – with $50MM inserted by $CURA and an equivalent from the investor, will own EMMAC.
4. The $80MM remaining from that investor is slated to be used for hard asset formation and acquisitions.
5. The investor retains a call/put option to swap ownership from Cura International into $CURA equity beginning in 4 years.

Chairman Boris Johnson happened to be on the sell in the transaction, having owned convertible debentures of EMMAC in his ‘investment company’ Measure 8 (it doesn’t look like he owns all of Measure 8 though). With this transaction, Measure 8 will own 8% of EMMAC, and the convertibles that were in place triggered. $CURA’s avoiding an independent valuation of this transaction by relying on several modes of exemption. They’re in the press release if you are interested.

Sigh. It’s not like $CURA hasn’t done a deal with management before.

They claim $CURA’s now got an International division with a value of $400MM+, ready to take on the world. As it is, $CURA just announced they’re launching products (rapid product extension!) into Germany as I type this.

A close reading sees that German market worth up to $2B USD per year…..by 2025.

Well, I guess it’s in how one sees the opportunity. $CURA claims it will have 10 tons of production in place by 2022….and entirely focused on expanding existing cultivation to meet that.

I won’t mention $FLWR, nor a dozen others doing exactly the same in Malta, Spain, Portugal, Germany, et al. I’m also not going to go too deep on international legal cannabis analysis due to proximity and knowledge at this point in time. All I really know is that general consensus says its’ not happening soon. I point the interested reader Hanway Associates. I respect their output, they’re a research firm kinda/sorta similar to TheCannalysts (and I’m definitely looking to a London field trip in the future to connect with them more).

A funny kind of sidebar – those who read TheCannalysts will be familiar with 8 Capital – as we saw yesterday, they had lit up what I see as a desperate outfit in $GRIN.

$CURA went for a fairness opinion of EMMAC’s value (not the same as a formal valuation) – subject to qualifications, limitations, and assumptions $CURA put forward – they used 8 Capital – who stated they see the transaction as ‘fair’……from a financial point of view to $CURA. So there you go.

As to that SBC and key management compensation, if one were to rely on simply looking at their financials, this is what they’d see for this quarter:

Not much more to say.

I don’t like $CURA’s capital structure, their optionality, the opacity in asset valuation/transactions, nor market positioning . And that’s pretty unqualified. Relative to the operations and deal-making presented by $GTII and $TRUL….I like them even less.

Nothing much more to say. I’m interested in seeing how Cura International will end up looking like on their books, and my interest in $CURA pretty much stops at that for right now.

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