During a time when every dollar became a prisoner for many struggling cannabis businesses that were forced to halt strategic expansion, Curaleaf Holdings managed to generate $46 million in operating cash flow in 2022.
The largest publicly traded, plant-touching cannabis company in the world (by market cap), Curaleaf boasted more than $1.3 billion in net revenue in 2022—a 12% year-over-year increase—with a gross profit of $579 million and gross margin of 43%, according to its 2022 financial results released May 1. In addition, Curaleaf ended the year with $163 million in cash and cash-equivalent assets on its balance sheet.
But not even the biggest of industry bigwigs was immune to the macroeconomic challenges of 2022. Curaleaf exited the year with $370 million in net losses attributable to the company, which included $225 million of noncash goodwill impairment charges and inventory write-downs primarily related to state exits in California, Colorado and Oregon, Chief Financial Officer Ed Kremer told listeners on an earnings call Monday.
The multistate operator, whose footprint shrank to 19 states, did not announce those market departures until Jan. 26, 2023.
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“In November, we began implementing our cost-reduction plan by reducing labor and overhead expenses across the organization,” Kremer said. “These actions continued into January, largely driven by a decision to cease operations in unprofitable states and further reduce our corporate overhead.”
In aggregate, Curaleaf has reduced payroll by approximately 10% and, coupled with other expense reductions across the company, exceeded $60 million in gross annualized expense savings, the CFO said.
The decision to exit three state markets came after Curaleaf’s executive team had initiated a thorough strategic review of all aspects of their business in October 2022, Executive Chairman Boris Jordan said during Monday’s earnings call.
“We ultimately decided to exit unprofitable states in the West and focus our resources on high-margin, high-return opportunities such as Florida and Arizona, as well as on markets like Germany and the U.K. that are earlier in their growth trajectory and largely untapped,” he said.
“Given the substantial price compression and continued lack of illicit market enforcement in Colorado and California, we could not justify investing more capital and time to build the more meaningful vertical presence that would be required to compete effectively in such an environment,” Jordan said.
Based on estimates of total cannabis consumption in California, the illicit market accounts for roughly 65% to 75% of cannabis purchases in the state, according to a May 2022 Reason Foundation study. But Colorado, which has one of the highest retail rates in the nation at 18.2 dispensaries per 100,000 people, has been more successful at displacing the illicit market.
In addition to price compression and the illicit market, Jordan pointed to a non-SAFE Banking environment as a key factor in Curaleaf’s decision making. Despite industry optimists high on hopes that legislation to provide traditional banking services to the federally illegal cannabis sector would be attached to a defense spending bill or an omnibus spending bill in December 2022, it failed to gain traction from party leadership in Washington.
Jordan pointed to brighter outlooks for the SAFE Banking Act in 2023. The latest version was reintroduced by both the House and Senate in a bicameral, bipartisan approach on April 26.
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Jordan called the reintroduction “a symbolic and important gesture that to me shows a willingness and a commitment to getting much needed federal reform across the finish line.”
He also revealed that there will be unprecedented financial clout behind SAFE Banking this year, notably from industry advocacy organization US Cannabis Council (USCC), which announced April 27 it had named Ed Conklin as executive director. Conklin spent four years as Curaleaf’s senior vice president of government relations. Prior to that, he spent two decades as the chief of staff for global government relations at McDonalds Corp.
Behind Conklin’s “strong management,” Jordan told investors Monday that the USCC is setting up a super PAC that will raise “substantial funds in the U.S. in preparation for lobbying for SAFE Banking and other legislative interests of the industry.”
The USCC, whose membership includes many of the largest cannabis companies in the U.S., has not publicly announced a super PAC, but Jordan said the organization will issue a release soon.
Differing from a political action committee, a super PAC may raise and spend unlimited amounts of money, including from corporations, unions, individuals and everyday cannabis consumers. Jordan said he anticipates the USCC’s super PAC to be very powerful given the popularity of legalization.
“We think [a super PAC] will put us on even par with some of the biggest operators in Washington in terms of having the money in order to be able to lobby,” Jordan said. “However, we are out of the business of predicting anything in Washington. We learned our lesson last year. We really thought we had it over the line here in December of last year. We worked so hard on it, all of us, and it didn’t happen. So, we’re not going to make any predictions.”
Jordan did, however, lay out a potential 2023 timeline for SAFE Banking’s passage, beginning with the Senate’s passage in July, the House’s passage in the fourth quarter and a signature from President Joe Biden in December. “That’s the target,” he said.
Not willing to bank on SAFE Banking, Curaleaf’s immediate focus is capitalizing on its brand portfolio to help continued revenue growth and free cash flow generation, CEO Matt Darin told investors Monday.
In the fourth quarter of 2022, Curaleaf completed 3 million transactions while serving nearly 850,000 customers who bought 9.8 million units at its 144 dispensaries nationwide, Darin said. For the year, Curaleaf’s retail revenue of $1 billion increased 18% while wholesale revenue of $316 million decreased 6% versus the prior year.
Darin pointed to Select, the company’s No. 1 selling vape brand, as a backbone of increasing retail revenues.
“We plan to leverage this brand portfolio and strength of distribution to go deeper in our core markets and further extend our leading position through innovation across other categories, like edibles, while doubling down on our strain diversity to increase our flower position,” he said.
While Curaleaf executives made decisions in the fourth quarter of 2022 and first quarter of 2023 to slim down its organization for greater efficiency, including streamlining cultivation operations in New Jersey, the company is continuing to run at full speed, Darin said.
“We believe 2023 will present challenges to many in the industry as capital remains scarce and 280E will prohibit most of our competitors from generating positive free cash flow,” he said. “We are not in that position.”
Notably, Curaleaf is already taking advantage of Connecticut’s adult-use program that launched in January. The company was first out of the gate with wholesale sales and currently has two of its four dispensaries open for adult use.
And in Maryland, Curaleaf executives said they were encouraged by the Legislature’s intent of launching adult-use sales by July 1. With four dispensaries and a “robust” wholesale presence in Maryland, Jordan said the forthcoming adult-use retail program should represent a solid near-term catalyst for growth for the company.
But the executive chairman wasn’t so optimistic about New York’s program, calling the state’s adult-use launch a rocky start that provides uncertainty as to when it will open to existing medical operators. While Curaleaf has four dispensaries in New York, cannabis regulators rolled out an adult-use program that’s intended to keep larger companies out of the market for three years in order to create equitable opportunities.
In the first four months, New York’s adult-use program has had eight adult-use dispensaries open. This rollout comes as the New York City Police Department estimates 1,300 unlicensed cannabis establishments are operating in the Big Apple alone.
“In response, Curaleaf in concert with other market participants have launched a lawsuit against the state for its unconstitutional actions that are intentionally holding back the free market development of the program,” Jordan said. “We look forward to a speedy resolution and continue to believe New York ultimately will represent one of the strongest legal cannabis markets in the U.S.”
In addition, Curaleaf is committed to increasing its vertical mix in “battleground” states like Arizona, Illinois and Pennsylvania, Darin said.
In more mature markets like Massachusetts, Jordan said Curaleaf is now taking advantage of a market “shakeout” that involves “weaker undercapitalized players” closing down and exiting the space. As a result, Curaleaf’s supply is moving more rapidly into the hands of consumers, Jordan said.
And Curaleaf remains open to consolidation in developing markets in 2023, such as Utah, where the company recently closed a $20-million deal to acquire three dispensaries from Deseret Wellness.
“Consolation is going to be a major, major theme,” Jordan said. “The only reason it slowed down recently has nothing to do with the fundamentals of the industry. It has to do with this unique situation where you’re basically without custody. You have a very small pool of investors who can buy in this sector.
“Obviously retail is a very volatile sector. It’s gotten burned very badly. And so, the capital structures are not very stable, and therefore you’ve seen this 96 to 98 percent volatility in the stock. And it’s very difficult to use equity as currency in the current environment.”
An uptick in consolidations will allow cannabis companies to return strength to their margins because there will be fewer players in various markets, Jordan said.
While cannabis is a unique industry with regard to regulatory challenges, the business cycles are ultimately no different than other industries, Jordan said, adding that Curaleaf will be on offense while others play defense in the months ahead.
“Make no mistake,” he said. “We enter 2023 with a cleaner inventory position, ample cash on hand, and we’ll be investing in our business, setting us up for years of market share expansion.”
