Trulieve Cannabis Has Lost Its Luster

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About: Trulieve Cannabis Corp. (TCNNF), Includes: ACRGF, CURLF, HRVSF, ITHUF, LHSIF, MMNFF
by: James V. Baker
Summary

Trulieve Cannabis reported a profit for its Fiscal 2018, but its Q4 net income was 39% below it Q3 result.

Trulieve reported positive operating free cash flow.

The number of open Trulieve dispensaries is 20% below its own plan.

The abrupt departure of Jordan Atkins, Head of Dispensary Operations, and the resignation of his father Ben Atkins, as a director, and the hiring of an in-house general counsel, when the CEO is a lawyer, casts a cloud od suspicion.

A shelf registration to raise $250 million raises questions.

Late Earnings Release Date

Unlike more mature public companies, Trulieve Cannabis Corporation (OTCPK:TCNNF) announced it would release its 2018 fourth quarter and year end financial results on Thursday, April 11, 2019 - a mere three trading days before the release date. In fact, it made the announcement of its forthcoming release at 7:00 AM on April 8th and actually released its earnings after the markets closed on April 10th. Attempts to get an earlier read on when Trulieve would release its earnings were to no avail. This type of action by a publicly traded company is unacceptable.

Revenue

Trulieve reported total revenue of $102.8 million for 2018. Of that revenue $28.3 million occurred in Q3 and $35.9 million in Q4. Revenue growth over the prior quarter was, therefore, at an annualized rate of 104%. That tremendous percentage growth in revenue is about the same as the percentage increase in the number of qualified medical marijuana users in Florida during the same period.

During its conference call, Trulieve CEO Kim Rivers stated that the company continues to account for about 62% of all medical cannabis sales in Florida. She noted that Trulieve has not experienced a decline in sales in areas of increased entrants. If fact, she stated increased competition seems to bring increased awareness and more business.

Profitability

Unlike its peers, Trulieve once again reported a net operating profit for its latest quarter and fiscal year. For the year Trulieve earned a net profit of $43.0 million or $0.42 per common share share based on average shares outstanding of 101.7 million.

Quarterly Profit Plummets

Trulieve Q4 net income was $10.7 million, which was down dramatically from its reported Q3 net profit of $17.5 million. The percentage decline in net income of Q4 over Q3 was a shocking 39%. The cause of this decline in net income was not addressed in either the company's press release or during its conference call.

Cash Flow

Trulieve operating free cash flow amounted to $25.0 million in Fiscal 2018. At the end of the year Trulieve had cash on its balance sheet of $24.4 million, but that was down $17.7 million or 42% from the $42.1 million it reported on September 30, 2018.

Competition

There is no question that Trulieve has had a bird nest on the ground since being selected as one of only five companies awarded a Florida license to cultivate, process and dispense medical marijuana in the state. They wisely took advantage of that and became the dominant player when medical marijuana was legalized statewide by establishing dispensaries throughout the Florida. At the same time their few competitors did little or nothing to capitalize on their being awarded membership in what Florida Governor DeSantis has labeled a Legislature-sponsored cartel.

The first mover advantage of Trulieve and its lack of competitors are evaporating quickly as multi-state-operators have set their sites on Florida as the Promised Land. Within the past few months Acreage Holdings (OTCQX:ACRGF), Curaleaf (OTCPK:CURLF), Harvest (OTCQX:HRVSF), Ianthus (OTCQX:ITHUF), Liberty Health (OTCQX:LHSIF) and MedMen (OTCQB:MMNFF) have all announced major expansion plans for Florida and are in the process of implementing them.

Trulieve won its lawsuit against the State of Florida and agreed to settle with its 14 dispensaries grand fathered. It can, therefore, have 49 dispensaries, while competitors can supposedly only have 35. The original law allowed a Medical Marijuana Treatment Center, MMTC, to have 25, but provided that an additional five would be allowed for every 100,000 registered users. On March 29, 2019 the number of qualified users registered in Florida reached 201,708; therefore, the number of allowed dispensaries per MMTC rose from 30 to 35. About 2,750 additional Floridians become qualified medical marijuana users each week.

Trulieve Responds

In the face of looming competition in arguably the most profitable medical cannabis market in the United States, Trulieve management decided to become a multi-state-operator and branch out to California and Massachusetts. The announced acquisitions of Leef Industries LLC in Palm Springs, California and Life Essence, Inc. in Massachusetts by Trulieve on November 8, 2018 was bizarre. It was akin to abandoning the fort in advance of a coming battle against hostile invading forces. Rather than dedicating 100% of its resources to protecting its home turf, Trulieve decided to remove provisions from its fort and send them about as far away as possible.

How is it possible that a Quincy, Florida cannabis company could end up buying a marijuana dispensary in Palm Springs, California? If something of value is for sale in the Coachella Valley and it's a good deal, the chance of it escaping the grasp of the super wealthy who inhabit that area of the world is zero! By the time Leef Industries reached Florida it had to be shop worn.

A shareholder who owned a significant number of Trulieve shares, and frequented the Palm Springs area, could not believe the purchase of Leef Industries so he sent a person to investigate. That person reported Leef Industries is located in a strip shopping center with limited parking. Like other establishments in Palm Springs the dispensary becomes shaded about 2:30 PM when the sun sets behind the mountains. Such a sunset would be advantageous in June, July and August when temperatures are generally in the triple digits. Leef Industries in the past, however, has not had to worry about its utility bills, since a staff member said it normally closes during the summer months when business disappears along with customers.

The investigator was told by a staff member that the size of the average transaction was about $75 and on a busy day Leef would have about 100 customers. Extrapolating those facts suggests that in its nine months of operations the Leef dispensary would have total revenue of slightly more than $2 million or about 66% below the $6 million in revenue that the typical Trulieve Florida dispensary earns. Furthermore, Leef neither cultivates nor processes its own products; instead, it sells products produced by others, so its margins are not as great as Trulieve enjoys on its own seed to sale products.

The California cannabis market is among the most competitive in the United States. Palm Springs, California is separated from Quincy, Florida by far more than the 2,130 miles shown on Google Maps. Palm Springs is virtually uninhabitable in the summer and is one of few places where residents plant totally new yards twice a year, because their winter grass dies in the summer. The only positive thing to be said about Leef Industries is that right now Trulieve can write off this purchase and take a maximum hit of only about $4.0 million, which is the fair value of consideration paid for Trulieve as reported in the notes to Trulieve fiscal 2018 year end report. The acquisition of Leef Industries makes absolutely no sense. That money should have been spent defending its leadership position in Florida by establishing several more dispensaries.

On December 13, 2018 Trulieve announced it completed an agreement to acquire all of the issued and outstanding capital stock of Life Essence, Inc., a seed-to-sale cannabis company with multiple locations under development in the Commonwealth of Massachusetts. Trulieve paid $4.125 million cash and incurred transactions costs of $269,547 to complete its acquisition.

Trulieve management extolled this acquisition by stating Life Essence was recently awarded letters of support from the cities of Northampton (population 28,534), Cambridge (population 108,757 and Holyoke (population 40,280). Life Essence is applying for licenses to build and operate three Registered Medical Marijuana Dispensaries and a 126,000 square foot cultivation and processing facility. It is also applying for three recreational marijuana licenses. These initiatives are all designed to allow Life Essence to build out its infrastructure and engage in cannabis cultivation, processing and retailing. Massachusetts is a vertically integrated state which has over 50,000 registered medical patients and expected revenue from the cannabis business of more than $1 billion in 2020.

This acquisition is absolutely frightening and strongly suggests that the owners of Life Essence, Jeffrey Greenberg and Richard Tannenbaum, must have discovered how much money it was going to take to become operational and they decided to cash out. Finding a cannabis investor with $4.1 million in cash lying around to rescue them must have been a challenge. Fortunately for them, they found that investor in Quincy, Florida which is a long way from Cambridge, Massachusetts.

Trulieve needs to extricate itself from this acquisition ASAP, since this is nothing more than the purchase of someone’s dream. The Trulieve Board of Directors needs to immediately determine every aspect of how this deal originated and the internal decision making process. Any deal that makes it all the way to Quincy, Florida from Cambridge, Massachusetts has to raise questions. How did the Life Essence deal make it to Quincy, Florida?

Trulieve - A Misguided MSO Wannabe

The Leef Industries and Life Essence deals reveal that Trulieve is a cannabis MSO "wannabe." The strategy of multi-state expansion is either because the management and board of directors are smoking too much of their own product, hallucinating and experiencing delusions of grandeur or they are being pimped by investment bankers who see easy money.

Regarding the above two purchases, the CEO of Trulieve, said “These transactions mark an important milestone in the growth of the Trulieve brand and our goal of becoming a leading multi-state operator…We look forward to establishing the Trulieve brand and leveraging our proven business model to deliver a truly unique and full-service experience to customers in these booming markets."

It is far more likely that the aforementioned “milestone” will turn into a “millstone” around the neck of Trulieve. Massive amounts of cash will have to be shipped from Florida to fund the certain money guzzling at Life Essence in Massachusetts.

If the California and Massachusetts investments are any indication Trulieve management will flush millions of shareholder money down the toilet as they expand outside Florida. If management follows through on its stated strategic mission of establishing a multi-state presence, they will destroy Trulieve's pristine balance sheet, turn its positive operating free cash flow negative and wipe-out profits. Existing shareholders will be diluted as Trulieve management falls for the lure of the investment bankers pimping them to acquire other companies and issuing stock and debt to fund their folly.

Questions need to be asked and answered who brought the Leef and Life Essence deals to Trulieve and who benefitted? Were there conflicts of interest?

$250 Million Shelf Registration

Interestingly, on February 14, 2019 Trulieve filed a Preliminary Short Form Base Shelf Prospectus with Canadian Securities regulators to raise C$250 million by issuing Subordinate Voting Shares, Debt Securities, Warrants and/or Subscription Receipts Units whenever it decides to do so within the following 25 months. The net proceeds of any offering under this prospectus can be used to fund ongoing operations, repay indebtedness, capital projects and acquisitions and to compensate selling shareholders via a secondary offering. Shareholders could be diluted at anytime during the next 25 months if Trulieve decided to sell stock and or convertible debentures.

The Internal Shakeup at Trulieve: What Really Happened?

Caesar was warned to beware the ides of March. By comparison there was no soothsayer warning Trulieve shareholders that March would bring big change and everything swept under the rug by March 15.

On March 8, 2019 Trulieve announced that Jordan Atkins, age 25 and head of dispensary operations, was leaving within a week. At the time Trulieve went public, he owned 43,160 multiple voting shares or 4,316,000 Subordinate Voting Shares. The closing price of TCNNF on March 8th was $11.57; therefore, his shares were worth about $49.9 million!

Interestingly, three days later on March 11th Jordan's father Ben Atkins resigned as a director "for personal reasons." Without doubt this had to be more than coincidence especially when on March 14th the company announced the hiring of an in-house general counsel, the retirement of Craig Kirkland its research and development manager, the promotion of Kevin Darmody from Director of Investor Relations to Chief Operating Officer, and the hiring of a new head of investor relations.

Kirkland owned 46,286 Super Voting Shares or 4,628,600 Subordinate Voting Shares when Trulieve went public. The March 14th closing price of TCNNF was $12.23, so his shares were worth $56.6 million. That kind of money will allow anyone to retire at 58 even if they are not eligible for social security. He was hired in November 2015, so he managed to capture a significant amount of wealth in less than 3.5 years.

Ben Atkins was reported to own 112,333 Super Voting Shares and 2,152 Multiple Voting Shares at the time Trulieve went public. Those shares equate to 11,448,500 shares of Subordinate Voting Shares. On the date of Ben Atkins resignation the closing price per share of Trulieve was $11.85; therefore, his holdings were worth $135.7 million. That is a bunch of money to a guy who was declared bankrupt under Chapter 13 of the United States Bankruptcy Code in 1998.

The likelihood is that Ben Atkins shares are no longer bound by any lockup. Trulieve in its Monthly Progress report to the Canadian Securities Exchange, CSE, since reported that 112,333 Super Voting Shares (exact number owned by Ben Atkins) and 20,052 Multiple Voting Shares were converted into 13,238,517 Subordinate Voting Shares between March 6, 2019 and April 4, 2019.

The 13.2 million in newly issued TCNNF shares is a huge amount of stock that is suddenly overhanging the thinly traded market for Trulieve shares. On March 6th there were 13.7 million shares of TCNNF stock outstanding and listed, but by April 4th there were 26.9 million shares. Ask yourself, if you had the opportunity to put $135.7 million in your pocket like Ben Atkins, would you take it? What if you were 25 years old like Jordan Atkins and had the opportunity to ring the bell and put $49.9 million in your checking account if you sold the stock in a company neither you nor your father worked for would sell your stock? What if you were 57 and retired like Craig Kirkland and had the opportunity to put $56.6 million in your checking account by selling your shares in your former employer, would you?

I think the answers to the above questions are pretty clear. Faced with such potentially huge sales of TCNNF shares held by former insiders, I would be a seller of Trulieve.

Where Are The Dispensaries?

In a July 18, 2018 Investor Presentation Trulieve management stated it would have 30 Florida dispensaries by January 2019. In fact, Trulieve only had 24 dispensaries as of February 11, 2019 and 26 as of April 4, 2019.

The failure of Trulieve to open the number of dispensaries it planned is a serious concern. Was the 20% shortfall a result of management attention being shifted to other states? Was it because of concern about possible conflicts of interest due to the fact that the landlord of most Trulieve dispensaries was not an independent third party? Was the shortfall due to a shortage of cannabis being cultivated and processed?

Conclusion

The initial optimism regarding Trulieve that was expressed in my January 17, 2019 article has been replaced by the serious concerns. As a result, I have liquidated my entire position, and actually tried to short the stock; however, neither Fidelity not TD Ameritrade allow TCNNF to be shorted, and there are no put options available.

  1. The sudden departures of Jordan Atkins, Ben Atkins and Craig Kirkland along with the appointment of an in-house counsel smells.
  2. The concurrent conversion of Super Voting Shares and Multiple Voting Shares into tradable, listed Subordinate Voting Shares basically doubling the number of shares available for sale weighs on the share price of TCNNF, which is thinly traded.
  3. The acquisitions in California and Massachusetts are real distractions that will require management time and massive amounts of money with no returns for the foreseeable future at the very time the lucrative Trulieve Florida franchise is under intense attack.
  4. MSO operators are focusing attention on Florida and are in the process of opening a huge number of stores throughout the state, while expanding their cultivation and processing facilities.
  5. Trulieve has failed to implement a tamper resistant product line.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.