Trulieve: Indictments And Acquisitions

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About: Trulieve Cannabis Corp. (TCNNF), Includes: ACRGF, CURLF, GTBIF, TLRY
by: Jonathan Cooper
Summary

The husband of Trulieve's CEO was indicted by the FBI on May 9th.

Trulieve is moving towards true MSO status by entering a fourth state.

Trulieve is profitable and has positive operating cash flow.

In my view, Trulieve is priced attractively despite risks from the FBI indictment.

All dollar figures are in U.S. dollars. Trulieve trades on a Canadian stock exchange but its filings are in USD.

Summary

Trulieve (OTCPK:TCNNF) shareholders should watch the trial of J.T. Burnette. The case appears to be completely unrelated to Trulieve, but he is the husband of Kim Rivers, Trulieve's CEO. Thus, there may be some risk that Rivers or Trulieve get pulled into the case or that local Florida media associates Trulieve with the case.

Trulieve is also quietly becoming a multi-state cannabis company ("MSO") with a third acquisition in the past six months. Trulieve is purchasing a medical cannabis dispensary in Connecticut for undisclosed terms. Based on Trulieve's past purchases and a couple comparable purchases from Acreage Holdings last fall, I speculate the company may be spending about $10 to $15 million on the deal.

Despite the potential risk from the Burnette trial, I added to my position in Trulieve during the declines on Monday. I remain bullish on the company's prospects and believe it represents a solid value. Trulieve's next earnings release is likely to be in late May or early June, covering the quarter ending March 31st.

Indictment

On May 9th, a wealthy Florida entrepreneur named John Thomas (J.T.) Burnette was indicted by the FBI as part of a long-running public corruption probe. Burnette faces federal charges including racketeering, extortion, mail fraud, and making false statements to a federal officer.

Burnette joins two other defendants who were charged in December 2018. The basics of the scheme are that the three defendants allegedly extorted money and accepted bribes to influence local government. One of the defendants allegedly agreed to vote on matters and exerted influence on city officials in Tallahassee to take options that benefited clients of the alleged conspiracy, among other charges including bank fraud.

This case is notable to Trulieve investors because Burnette is married to Kim Rivers, CEO of Trulieve. Kim Rivers has not been charged with any crimes, although she has previously been subpoenaed as part of the FBI investigation. If Rivers was charged with crimes here, it would harm Trulieve's share price and could potentially harm Trulieve's reputation if the public associates Trulieve with criminal corruption.

On May 15th, Trulieve updated their short-form base shelf prospectus, to potentially raise up to U$250 million, to reflect the risks from this ongoing criminal case. That disclosure reads, in part:

In 2015, the United States Grand Jury for the North District of Florida began an investigation in to alleged corruption by local officials in Tallahassee, Florida. In June 2017, the grand jury issued subpoenas to the City of Tallahassee and the Community Redevelopment Agency (the "Agency") for records of communications, bids for proposals, applications, and more from approximately two dozen business entities and individuals, including Ms. Rivers, the Chief Executive Officer of the Company, her husband, J.T. Burnette, and Inkbridge LLC, a business associated with Ms. Rivers. The grand jury also directly subpoenaed Ms. Rivers for information related to her involvement with the Agency, a specific commissioner of the Agency, and political contributions Ms. Rivers made through an associated business. Ms. Rivers timely complied with the subpoena. Ms. Rivers has not been charged with any crime. No information was requested of Ms. Rivers in her capacity as an officer, director or employee of the Company. Ms. Rivers promptly disclosed the subpoena to the Board and agreed to notify the Board of further developments. Upon disclosure, the Board met independently to consider the matter, the allegations raised thereunder and Ms. Rivers' response to same. In addition, a member of the Board retained counsel to investigate the matter. Based on such review, counsel to the Board member concluded Ms. Rivers was not a target of the investigation. The Board considered the impact of any potential liability in allowing Ms. Rivers to continue as Chief Executive Officer of the Company in the face of the investigation and determined that no independent, formal investigation or further action was warranted at the time based on its understanding of the facts as represented by Ms. Rivers. The Company remains confident the investigation does not relate to the Company or Ms. Rivers' conduct as a director, officer or employee thereof and believes that Ms. Rivers has complied with all requests made of her to date pursuant to the investigation."

Trulieve Final Short Form Prospectus, filed May 15th, at p. 51

Based on Trulieve's review, the Board believes that Kim Rivers is not a target of the investigation. The information requested from Ms. Rivers (by subpoena) was not related to her role as Trulieve's CEO and the underlying facts of Burnette's arrest are unrelated to Trulieve or its Florida medical cannabis business.

That said, investors should keep a watch on this investigation to make sure that Kim Rivers and/or Trulieve are not brought into it. The Tallahassee Democrat has been actively covering the case and investors may wish to follow reporter Jeff Burlew's coverage on Twitter to stay abreast of developments.

Acquisition

On May 16th, Trulieve took another step towards true multi-state status by announcing the acquisition of The Healing Center ("THC"). Trulieve will acquire 100% of THC under the deal. Prior to this acquisition, Trulieve operates in Florida and has made small acquisitions of a dispensary in California and a pending cannabis license in Massachusetts.

THC Operations: The Healing Corner is a medical cannabis dispensary in Bristol, Connecticut which was founded in 2014. Trulieve will acquire the dispensary subject to regulatory approval. Trulieve's press release does not disclose a cultivation license and Connecticut has separate dispensary licenses and producer licenses. Thus, it is likely that THC is a stand-alone dispensary without any attached cultivation capacity.

Source: Canna-Fill "medibles" menu.

THC also operates Canna-Fill, which is an online ordering system for medical marijuana in Connecticut. Canna-Fill's menu includes products from other cannabis producers including:

Canna-Fill's menu does not include any products from THC itself, again suggesting that THC does not have cultivation capacity or a cultivation license.

THC Price: Trulieve did not disclose a price for THC in their press release or even whether the deal will be paid in cash or stock. Given Trulieve's acquisition history and past Connecticut dispensary acquisitions, it is likely that this deal will cost perhaps $10 to $15 million and will be paid in cash.

Trulieve's past purchases suggest this deal will be inexpensive and paid in cash. Trulieve's previous purchases were a dispensary in California and a cannabis license in Massachusetts. Both those deals closed in the fourth quarter of 2018. In the financial statement from that quarter (note 3), Trulieve disclosed that they paid $4,394,547 for their Massachusetts license and they paid $4,024,799 for the California dispensary. Both deals were paid with cash and contingent consideration and no shares were issued. Trulieve also does not pay share-based compensation, which again suggests Trulieve is frugal when it comes to issuing shares.

Source: Author's coverage of Acreage Holdings on The Growth Operation based on Acreage Holdings filings.

Past purchases in Connecticut suggest a successful dispensary may be worth $10 to $15 million. In December 2018 coverage of Acreage Holdings (OTCQX:ACRGF) on The Growth Operation, I detailed two of Acreage's purchases: Prime Wellness of Connecticut ("PWCT") and D&B Wellness ("CCC" - operates as Compassionate Care of Connecticut). Financial statements for both companies were included in Acreage's filing statement filed on Nov 14, 2018.

Source: Author's coverage of Acreage Holdings on The Growth Operation based on Acreage Holdings filings.

Neither PWCT nor CCC grows cannabis, as shown by menus for each which sell the same brands of cannabis as Canna-Fill above. Acreage Holdings paid $12.2 million for PWCT (1.2x trailing sales, 6.7x trailing EBITDA) and paid $14.5 million for CCC (1.7x trailing sales, 10.6x trailing EBITDA) in separate purchases in late 2018. Combined Acreage paid $26.7 million for both businesses:

Source: Author's coverage of Acreage Holdings on The Growth Operation based on Acreage Holdings filings.

Trulieve did not provide financial information for THC, so we cannot directly compare THC to PWCT or CCC to estimate a price. One very rough approximation of size may be obtained by counting the number of reviews of each dispensary on Leafly, a popular cannabis review site owned by Tilray (TLRY) owners Privateer Holdings.

Dispensary Reviews First Review
The Healing Corner (Trulieve) 48 reviews (4.5 stars) Oct 27, 2014
Prime Wellness of CT (Acreage) 74 reviews (4.8 stars) Sep 26, 2014
Compassionate Care of CT (Acreage) 56 reviews (4.3 stars) Sep 23, 2014

Source: Data from Leafly on May 16th.

Based on this data, we see that each dispensary opened at approximately the same time. Since Fall 2014, THC has received about two-thirds as many reviews as PWCT and about 85% as many reviews as CCC. These figures are approximate, but it may be fair to infer that THC is slightly smaller or approximately the same size as CCC. Thus, it may be fair to further estimate that Trulieve may have paid about $10 to $15 million for this acquisition.

As of Dec. 31st, Trulieve had $24 million of cash on hand, offset by about $20 million of debt. Trulieve also generated operating cash flow of $8 million in the fourth quarter of 2018, although this was more than offset by $18 million of capital expenditures. Given that capital position, Trulieve may be likely to raise capital soon, perhaps helping to explain why they updated their base shelf prospectus on May 15th.

Outlook

Last quarter, Trulieve delivered EBITDA profits of $15.2 million (+21% QoQ, +592% YoY) on $35.9 million of revenue (+27% QoQ, +171% YoY). At a share price of C$16.41, Trulieve has an enterprise value of $1.3 billion USD. This suggests Trulieve trades at an EV/EBITDA of 22x annualized EBITDA, which is a fair price given 171% YoY revenue growth.

On a forward basis, I estimate that Trulieve will earn $225 million in revenue in 2019 and will earn $81 million of EBITDA. (My estimates are in line with analyst expectations.) This suggests that Trulieve trades at about 6x forward sales and 17x forward EBITDA. I further estimate that Trulieve will earn $145 million in EBITDA on $352 million in sales in 2020, suggesting two-year forward ratios of 4x sales and 9x EBITDA.

I am bullish on Trulieve and added to my position in Trulieve when shares were down due to news of J.T. Burnette's indictment. There is some risk that this indictment will lead to problems for Trulieve shareholders down the line if Kim Rivers gets pulled into the case. However, unlike most cannabis companies, Trulieve generates actual profits and it trades at a reasonable valuation given its profitability and growth. Those profits mean that Trulieve shares may have underlying financial strength to support their price if short-term difficulties (like further Rivers involvement in the Burnette case) harm share prices.

Trulieve's acquisition record is limited, but their frugality is clear. While many companies are losing tens of millions in EBITDA and operating cash flow, Trulieve has been profitable by both metrics for approximately five consecutive quarters. (Operating cash flow is not available for Q1 and Q2 due to the timing of Trulieve's going-public event, but OCF for 1H/18 was $8.2 million and EBITDA was positive in both quarters.) It is likely the Trulieve acquisition in Connecticut is also the result of this financially responsible track record of growth. This path may be unlikely to make Trulieve the largest or most valuable cannabis company, but this prudent and conservative growth pattern gives Trulieve much more financial stability than many of its MSO peers.

That said, an investment in Trulieve is still potentially risky. Even without the risk from the Burnette charges and FBI investigation, Trulieve's value comes from their Florida operations where competition is intensifying. Legal changes in Florida could potentially shift the power balance in the state and new competitors could hurt Trulieve's revenue or profitability. And even with profits to back up their share price, Trulieve shares could decline significantly on a whim in the volatile cannabis sector.

All that said, I added to my Trulieve holding on Monday (at C$14.80/share) and recommend that other cannabis investors consider a holding in Trulieve. Trulieve has not yet announced the timing of its next earnings release, but it is likely to release earnings in late May or early June. I will continue to cover the company in full on The Growth Operation.

Happy investing!

Disclosure: I am/we are long TCNNF. 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.