Summary
- Trulieve
(TCNNF) was the first licensed cannabis company in Florida
- “Trulieve
Marijuana Millionaires” are replacing Quincy’s “Coca-Cola Millionaires.”
- Trulieve
is a profitable, vertically integrated company in a sector gushing red
ink.
- Unlike
other cannabis companies, Trulieve generates significant positive
operating free cash flow
- At the
end of 2018 Florida had 209,940 registered medical marijuana users and
700+ new users were registering every day
- Trulieve
is adding about 10,000 new customers a month to its 120,000+ customer
base.
- Trulieve
accounts for about 67% of all medical marijuana sales in Florida
The “official head office” of
Trulieve (TCNNF) is in Quincy, Florida, which at one-time was known as the
richest town per capita in the United States. Quincy earned that reputation
during the Great Depression of the ’20s and ’30s when a banker named Pat Munroe
urged everyone he knew to buy Coca-Cola shares.
He was convinced that Coca-Cola would be a huge success, because he
noticed people were willing to spend their last nickel to buy a bottle. He was so convinced about Coca-Cola’s bright
future that he told people he would lend them money to buy the stock. He was a trusted banker and many townspeople
took his advice.
At least 67 people amassed
significant fortunes and they became known worldwide as Quincy’s “Coca-Cola
Millionaires.” A single share bought during the depression for $20 is worth
more than $10 million today and its owner would be receiving about $300,000 a
year in dividends.
Perhaps history is repeating
itself and future generations will talk glowingly about Quincy’s “Trulieve
Marijuana Millionaires.” Interestingly, it would do wonders for Quincy’s fame
if Coca-Cola changed its corporate position on marijuana, joined the cannabis
feeding frenzy and bought Trulieve!
Florida Law on
Cannabis Use
The Florida legislature enacted
the
Compassionate
Medical Cannabis Act (CUA) effective June 16, 2014, Chapter
381.986, Florida Statutes, which allowed the sale of “low-THC cannabis” (below
0.8% THC) to patients diagnosed with severe seizures or muscle spasms and
cancer. Concurrently, the Florida Department of Health adopted Chapter 64-4,
Florida Administrative Code, to implement the ACT.
The 2016 Florida Legislature
passed House Bill 307, which among other things, amended CUA to allow sales of
full-strength marijuana, termed “medical cannabis,” to only terminally ill
patients who had been diagnosed by two physicians. That Bill was codified at
Sections 381.986 and 499.0295 of the Florida Statutes effective March 25, 2016.
Florida citizens seeking
treatment were not satisfied with their access to medical marijuana under the
2014 and 2016 legislation. Accordingly,
an amendment to add medical marijuana access to the Florida Constitution was
put on the 2016 general election ballot (Amendment 2). On November 8, 2016, 71.3% of Florida voters
approved that constitutional amendment.
Floridians right of access to medical marijuana now appears in Article
X, Section 29 of the Constitution, which is titled “Medical Marijuana
Production, Possession and Use.”
Unlike other constitutional amendments,
the voters directed the executive branch on its role in implementing the access
of qualifying patients to medical marijuana.
Specifically, the amendment set forth the actions the Department of
Health was to take in setting up the registry for qualifying patients and their
certifying physicians. The amendment
also stipulated guidelines to register those involved in growing and providing
patients with the medical marijuana needed for treatment. Voters inserted in
the Constitutional Amendment a proviso prohibiting the legislature from
enacting any provision inconsistent with the voter-adopted unlimited access
system.
In 2017 the Florida legislature
passed SB 8-A, a 48 page statute known as the medical marijuana implementing
bill. It was signed into law by Governor
Rick Scott on June 23, 2017. Among other
things, the 2017 Law established limits on the number of growers, number of
dispensaries, location of dispensaries and prohibited the sale and consumption
of buds/flowers. It also prohibited
residents from growing their own marijuana.
Process for People to
Obtain Marijuana in Florida
Under Florida’s 2017 law, only
Florida residents are eligible to obtain medical marijuana. A resident is
required to see an approved physician and be diagnosed as having a qualifying
condition. The physician makes their determination based on examining the
person and reviewing their medical history.
The physician then certifies the patient by notifying the Florida
Department of Health, Office of Medical Marijuana Use of their diagnosis and stipulates the
types of administration (e.g. topical, oral, inhalation) and number of
milligrams per day a patient can obtain under the program.
A physician’s order is valid for
70 days and must be refreshed by the physician with the Office of Medical
Marijuana Use. All physician
certifications expire in 210 days.
Physicians typically charge $250
to make an initial diagnosis, $100 for each 70 day follow-up and another $250
for a 210 day re-certification. A
Florida resident who uses medical marijuana for a full year can therefore
expect to pay physician fees of $900 in a one year period. Physicians normally accept credit cards.
Following their initial diagnosis
a patient completes a Florida Department of Health, Office of Medical Marijuana
Use application and transmits that form along with $75 and a copy of their
Florida driver license to Tallahassee.
The application can be completed online and the registration fee can be
paid with a credit card. An applicant
usually receives their patient registry identification card within two weeks
and the card is good for one year from the date of issuance.
Per the aforementioned amounts,
Florida residents have to pay about $325 before they get any medical cannabis
($250 to Physician + $75 to State). On their first trip to the dispensary a
patient is likely to spend about $150 for a one month supply of medical
marijuana. A patient will therefore have
to spend about $475 to get their first medical marijuana product.
If the average patient spends
$150 per month at a dispensary then during a year of use they will spend $2,775
as follow: $900 going to physicians, $75 to the State and $1,800 ($150 per
month) for medical marijuana. These outlays are not covered by insurance; therefore,
medical marijuana use in Florida is costly.
Only cash payments are accepted
at dispensaries and all purchases are recorded by the Florida Department of
Health, Office of Medical Marijuana Use. The number of milligrams dispensed,
the category of cannabis (either low-THC or medical cannabis) and the type of
product (tincture, ointment, etc.) are all recorded in the Florida Department
of Health registry for each patient transaction.
Typical Florida Dispensary
The layout of a typical Florida
medical marijuana dispensary is similar to a jewelry store with display cases
surrounding sales personnel. Current
activity in a Florida dispensary is like that experienced decades ago in banks
on payday when workers received actual checks and went to banks to cash
them.
Sales people in a dispensary
stand behind waist high display counters where they help customers select
product, accept cash and hand customers change along with their requested
product. ATM machines are actually inside some dispensaries.
The dollar amount of business
transacted in a dispensary dwarfs any traditional retail establishment. If there was one word to describe a Florida
marijuana dispensary today it would be “ka-ching.”
Willie “The Actor” Sutton, an
often convicted bank robber, when asked why he insisted on robbing banks once
replied – “because that’s where the money is.”
Well, if Willie were alive today, he would not waste his time robbing
banks; instead, he would be targeting medical marijuana dispensaries in
Florida.
It is intuitively obvious that
federal law needs to be changed to permit use of credit cards to protect
employees and customers at medical marijuana dispensaries. The presence of massive amounts of cash at a
dispensary invites internal and external threats that require extreme
vigilance. For this reason dispensaries
have armed security guards.
For those not wanting to use
cash, they can use a mobile payment app, CanPay. This Colorado based online payment service is
available in Florida to buy Trulieve products in the dispensary or upon
delivery. Orders are delivered by the
Trulieve dispensary nearest to the patient in company vehicles. The customer
can use cash or CanPay to pay the Trulieve driver for their marijuana product.
To handle its cash, Trulieve has established
a relationship with a Florida state-chartered bank that is willing to accept
its deposits. Banks in other states,
where cannabis is legal, are reportedly converting from national charters to
state charters, since the former are federally chartered and face severe
potential penalties if they conduct any business with cannabis companies.
Cannabis Regulations in
Florida
Florida’s 2014 Compassionate Care
Act (CUA) created a competitive licensing structure allowing for one vertically
integrated license to be awarded in each of five designated regions of the
state. Applicants were restricted to nurseries that had at least 400,000
nursery plants in production and had been a registered nursery for at least 30
continuous years. Applicants also had to
provide a $5 million performance bond.
In addition to granting licenses, CUA also created the Florida state
registry to track dispensations of cannabis.
The 2017 Law passed by the
Florida Legislature provided for another four fully integrated licenses to be
issued for every 100,000 patients added to the registry. They also limited license holders to a
maximum of 25 dispensaries, but allowed them to add five more retail locations
for every 100,000 patients added to the licensed entity’s registry.
Dispensaries are only allowed to
sell cannabis products derived from plants grown in Florida by licensed
nurseries. There is no state-imposed
limitation on the permitted size of cultivation or processing facilities, nor
is there a limit on the number of plants that may be grown at a nursery.
Florida’s First Licensed
Medical Marijuana Company
Trulieve, Inc. is a Florida
corporation created when three large, family-run nurseries in northwest Florida
united to obtain the sole, vertically integrated license to be awarded for the
northwest Florida region. Trulieve was the brainchild of George Hackney Sr., the
owner of Hackney Nursery in Quincy, Florida who conducted extensive research
and determined medicinal marijuana could help people deal with illness. He
realized there were only five nurseries in the northwest region of Florida that
were qualified to apply for the CUA license.
He then convinced Richard May of
May Nursery in Havana, Florida and Thad Beshears of Simpson Nursery in
Monticello, Florida that they needed to team up and submit an application.
On November 23, 2015 Trulieve,
Inc. was awarded the first medical cannabis license by the State of Florida. It
would become the first licensee to have cultivation facilities up and running;
the first to serve a patient; the first to open a dispensary (July 2016); and,
the first to make a home delivery.
Once their license was awarded,
the nurserymen decided their expertise in cultivation and growing alone was not
enough to build a successful firm. They
decided they needed people who could plan, organize, lead and control the
business. Accordingly, they hired Ms. Kim Rivers as CEO and Jason Pernell as
COO.
Trulieve is now a vertically
integrated “seed to sale” company that cultivates and produces all of its
products in-house. It then distributes
products to Trulieve-branded stores (dispensaries) throughout Florida, as well
as directly to Florida residents via home delivery. Its private labeled, medical grade cannabis
products number 125+ SKUs including nasal sprays, capsules, concentrates,
syringes, topical creams, tinctures and vape cartridges. Trulieve, Inc. cultivates, produces and sells
medicinal cannabis products throughout Florida.
The sale of smokeable flower is
not permitted under Florida law; however, cannabis flower can be sold in a
tamper-proof container intended for vaporizing. Trulieve has developed and is
selling a product that meets this requirement.
Edible products were authorized
by the Florida Legislature in the 2017 Law and are pending rulemaking by the
State Department of Health, which has held workshops regarding edibles but has
not yet drafted the contemplated regulations. Hydrocarbon extracted products
were also contemplated in the 2017 Law and are awaiting rulemaking by the
Health Department.
On June 2, 2018 Trulieve, in
anticipation of cannabis-infused edible products being approved, executed a
Trademark Licensing Agreement with Bhang Corporation (“Bhang”). Pursuant to the
Agreement and contingent upon approval by the Office of Medical Marijuana Use,
Trulieve will manufacture the Bhang edibles line of cannabis products and
distribute those products in Trulieve stores.
Bhang has developed an award-winning line of cannabis chocolate bars as
well as gums and mouth sprays.
Florida Marijuana Laws are Changing
Only companies licensed by the
Florida Department of Health are currently allowed to grow marijuana in the
state. It is unlawful for any person to
engage in the production, preparation, packaging, labeling or re-labeling,
propagation, compounding, cultivating, growing, conversion or processing of
cannabis in Florida whether for personal use or sale.
Florida municipalities are
allowed to ban dispensaries within their jurisdiction. Municipalities that
prohibit dispensaries in southeast Florida include Jupiter, Boca Raton, Delray
Beach, Mangonia Park, Palm Beach Gardens, Royal Palm Beach, Pompano Beach,
Sunrise, Margate and Coral Springs.
Numerous lawsuits have been filed
in State courts against Florida’s medical marijuana laws and plaintiffs have
generally won. Court decisions
frequently stated that laws imposed by the State thwarted the will of the
people who had voted overwhelmingly to
legalize the use of marijuana for medical purposes. The decisions in all
these cases were appealed by the State of Florida during the administration of
Governor Scott and those appeals are pending.
One case decided on January 2,
2019 is particularly significant since it involves Trulieve. Judge Karen Gievers of the Florida’s 2nd
Judicial Circuit in Leon County in the case of George Hackney, Inc., d/b/a
Trulieve as Plaintiff v Florida Department of Health as defendant rendered
Judgment for Trulieve. The judge ruled
that Florida’s Constitution does not allow the State to determine the number of
dispensaries that a company can have.
Judge Gievers stated Trulieve “is entitled to be registered and operate
as many (locations) as it wishes.” In
her ruling she stated the Department of Health and the Legislature had failed
to comply with the voter approved amendment and the 2017 Law was
unconstitutional
If the above Trulieve ruling
stands and the new administration in Tallahassee drops all the appeals the
State filed in marijuana cases, then Florida will be flooded with medical
marijuana. The number of growers,
extractors, distributors, dispensaries and consumers will increase dramatically. Edibles will explode onto the market along
with actual flower.
All indications are that
decisions on the appeals will soon be made in Tallahassee. Speaking to
reporters after an inaugural event on January 5th, then Governor-elect Ron
DeSantis said his early actions will include announcing his administration’s
stance on the medical marijuana lawsuits.
At the same time, Governor DeSantis said he is not committed to
upholding Florida’s ban on smoking medical marijuana and that he will make an
announcement on that matter within a week or two.
Lt. Gov. Jeanette Nunez recently
said Governor DeSantis is considering a number of options, including dropping
the appeals. Additionally, Florida
Agriculture Commissioner Nikki Fried (a former medical marijuana lobbyist) is
on record favoring the transfer of medical marijuana regulation from the
Department of Health to the Department of Agriculture.
Trulieve
shareholders would likely benefit the most if Judge Gievers’ ruling is not
appealed, but all the other appeals are allowed to continue. Trulieve could then establish dispensaries
throughout Florida without fear of new competitors entering the medical
marijuana space. The fact is that
Trulieve has done extremely well and has benefitted greatly from Florida’s current
medical marijuana laws.
Trulieve Cannabis
Corporation formed in Reverse Merger
At the present time there are
almost 400 publicly traded cannabis companies and fewer than 20 trade on the
major U.S. Exchanges. Almost all the companies trade on either the Toronto
Stock Exchange (TSX) or the Canadian Securities Exchange (CSE) and are
cross-listed on the over-the-counter market (OTC) in the United States.
The Toronto Stock Exchange (TSX)
no longer allows their listed companies to engage in the cannabis business in
the U.S. As a result, in 2018 Aphria
divested Liberty Health Sciences, a vertically integrated medical marijuana
company in Florida, to stay listed on the TSX.
In the past, investors have
tended to distrust companies that listed their securities on foreign stock
exchanges. The truth is that U.S. investment and commercial banks have shied
away from cannabis companies because of cannabis being categorized as an
illegal substance at the federal level.
Increasingly, cannabis companies
that want to get shares listed on an exchange are turning to Canada and
utilizing the reverse takeover strategy.
While viewed with suspicion by some investors, this method speeds up and
simplifies the process of going public.
Furthermore, a number of Canadian cannabis companies, including Tilray (TLRY),
Cronos (CRON), Canopy Growth (CGC), Aurora (ACB) and Aphria (APHA) have been able to migrate to the NYSE
and NASDAQ after first trading in Canada.
Schyan Exploration Inc., a
non-operating British Colombia company, merged its wholly owned subsidiary
Subco with Trulieve, Inc., a Florida corporation, on September 21, 2018. Pursuant to the transaction, Trulieve, Inc.
of Florida became a wholly owned subsidiary of Schyan Exploration, which
changed its name to Trulieve Cannabis Corporation. Trulieve’s “head office” is
located in Quincy, Florida, but its “officially registered office” is in
Vancouver, British Columbia
In connection with the reverse
merger, Trulieve Cannabis Corporation created three classes of common stock:
Super Voting Shares (SVS), Multiple Voting Shares (MVS) and Subordinated Voting
Shares (SUB). Schyan owners were given
200,000 SUB shares as payment for selling their corporation and 10,927,500 SUB
shares were sold in a brokered private placement at C$6 per share. Buyers of issued 3,573,450 of the SUB shares immediately
converted their shares into 35,734.50 MVS shares.
Cannacord Genuity Corporation and
GMP Securities L.P. were the lead agents in the offering. The gross
proceeds amounted to $50,625,000 (C$65,565,000) and after transactions costs
resulted in net proceeds of $47,466,943.
The investment bankers were granted 535,446 broker warrants exercisable
at any time prior to September 21, 2020 permitting them to acquire an equal
number of shares at a price of C$6.00.
In October 2018 321,268 broker
warrants were exercised. The total
number of SUB shares available to trade immediately after the warrants were
exercised was 7,875,314.
Trulieve shares are listed on the
Canadian Stock Exchange (CSE) where they began trading on September 24, 2018
under the symbol TRUL. In the United
States Trulieve shares trade on the over-the-counter (OTC) market under the
symbol TCNNF.
Management stated the money
raised in the Trulieve offering was to fund added grow and production capacity,
retire debt and finance expansion into new markets. The reverse merger created a market for
otherwise illiquid Trulieve, Inc. shares owned by Quincy insiders who became
multimillionaires while maintaining control.
The general public received Subordinated (SUB) shares entitling them to
one vote per share, while the insiders got Super Voting Shares (SVS) and
Multiple Voting Shares (MVS) entitling them to 200 and 100 votes per share,
respectively.
A total of 852,466 SVS shares
were issued to Ms. Kim Rivers, Ben Atkins, Thad Beshears, George Hackney, Jason
Pernell and Richard May who were all directors of Trulieve. A total of 170,102.50 MVS shares were issued
to other Trulieve insiders. Each SVS
share is convertible into one MVS share and each MVS share is convertible into
100 SUB shares. Owners can convert their
shares whenever they want; however, conversion of all these shares into SUB
shares becomes mandatory on March 21, 2021. Owners of the SVS and MVS shares
essentially paid about $44 million for those shares or about $0.43 per share
based on Trulieve’s capital and retained earnings at the time of the
merger.
In addition to the SVS and MVS
shares, 10,981,090 warrants were awarded to George Hackney, Jr., Jason Pernell,
Craig Kirkland, Jordan Atkins, Ben Atkins and Kim Rivers in exchange for the
Trulieve, Inc. warrants they were awarded in June 2018. The warrants are exercisable to acquire such
number of SUB shares, in the aggregate, as is equivalent to 8.0% of the issued
and outstanding share capital of Trulieve at an exercise price per share to be
determined had Trulieve had a market cap value of US $500,000,000. The warrants
are not exercisable until March 24, 2020.
If the owners of the SVS shares,
MVS shares and warrants converted to SUB shares at the time of the public
offering, they would have had 102,256,850 SUB shares or 93.12% of all SUB
shares. Accordingly, SUB shares issued
in the public offering, also known as the tradeable float, amounted to only
about 7% of the Trulieve’s equity.
The facts that the insiders
maintain voting control and Trulieve only issued a small percentage of its
common shares to the public is a trademark of companies going public during the
past several years in the United States and Canada. Trulieve’s percentage is not vastly different
than Acreage Holdings or Tilray, which immediately following their IPOs had
tradeable float percentages of 11% and 9.8% of their common stock,
respectively. The existence of small
float percentages does introduce the possibility of significant volatility in a
stock price, especially in situations where investors either want to buy or
sell a large number of shares.
Tilray, which has 81.7% of its
equity owned by one holder, has been particularly susceptible to wild swings in
its stock price. Its IPO was at $17 and
it reached the mid-$30s in August 2018.
However, on September 19, 2018 it traded at $300/share intraday before
falling back to close at $214 per share.
Lock-Up Considerations
The directors, officers and
certain shareholders of Trulieve entered into 120-day lock-up agreements
concurrent with the SUB offering. Such lock-ups are a normal part of public
offerings. Investment bankers insist on lock-ups to prevent insider selling
pressure while they themselves are selling newly issued shares. The Trulieve lock-ups are scheduled to end 120
days following September 24, 2019, which was the escrow release date.
Following the closing of the
public offering, a number of holders of MVS shares, who apparently were not
covered by the lock-up proviso, converted to SUB shares such that on December 4,
2018 Trulieve reported 11,135,117 SUB shares outstanding. Accordingly, about
99 million shares will become eligible to sell on the CSE on January 25, 2019 when
the lock-up expires. Unlike lock-up provisions contained in other IPOs, there
were no limits imposed on the percentage of a Trulieve insider’s shares that
they could sell at different intervals. By
contrast, in the Acreage Holdings IPO a holder was limited to selling no more
than 5% of their shares in the 2-4 month period after the IPO closing, no more
than 15% in the 4-6 month period and 100% after 6 months.
In recognition of a looming
problem on the lock-up expiration that would cause the stock to fall like a
rock on insider sales, on January 16, 2019 Trulieve announced that the Company “founders”
entered into voluntary lock-up agreements with the Company in respect to
75,510,694 subordinate voting shares (on an as-if converted basis),
representing 68.6% of the subordinate voting shares of the Company, assuming
the conversion of all issued and outstanding multiple voting and super voting
shares of the Company. The voluntary
lock-up agreements stipulate that these shareholders will not offer to sell,
contract to sell or otherwise dispose of any Trulieve securities, or enter into
any transaction to such effect, directly or indirectly, in addition to other
restrictions, on or before July 25, 2019.
In making this announcement, the CEO said the agreement was designed to show
the confidence of the “founders” in future of Trulieve and their desire to take
a responsible approach to managing its share float.
While these agreements provide
some comfort, “non-founder” shares are not covered by the agreements. There are about 23.4 million shares owned by
“non-founders” that, therefore, become available for sale on January 25,
2019. These “non-owner” shares are 2.1 times the current tradeable float of 11.1 million shares and equal 117 times
average daily trading volume.
Investors normally expect a stock
to decline in price whenever a lock-up expires. The extent of any decline is
largely dependent on the number of shares sold relative to average daily
trading volume. The tendency for people
to sell when their lock-up expires is a function of their cost basis relative
to the trading price and the percentage of their net worth in that stock. If a person has 95% of their net worth in a
single stock and their cost basis is well below the market price they will have
a greater tendency to sell than a person who has only 10% of their net worth
invested in that stock. People who have
great wealth are also less likely to sell immediately following lock-up
expiration.
Some investors actually look on
lock-up expiration as a time to acquire stock at a depressed price caused
solely by insiders selling to diversify their investments. Investors are also
likely to be able to acquire a greater number of shares than they otherwise
might because sale of lock-up shares increases the shares available in the market.
Trulieve shares do not enjoy
great liquidity as evidenced by the fact that the spread between bid and asked
price is quite wide. Furthermore, only
about 100,000 shares of TCNNF trade each day on the U.S. OTC market, while about the same number trade as TRUL on the CSE. Such volume equates to only about $2 million
worth of Trulieve stock trading per day.
As a result of its miniscule volume, modest orders will move Trulieve’s
share price; therefore, all orders for Trulieve shares need to be limit
orders.
It is extremely likely that, when
their lock-ups expire, a number of “non-founders” will sell shares. Their sales will put considerable
downward pressure on Trulieve stock because the market for its shares is
thin. These sales are likely to take
months to execute because of the low volume of trading; unless, some deep
pocketed investor decides to opportunistically establish a significant
ownership position in Trulieve. The coming sales by insiders should not be
taken as a negative for the company’s outlook. In fact, any weakness should be
viewed by investors as a buying opportunity, since it will be caused by an
understandable desire of holders to diversify their investments.
The reverse merger created a new
group of paper Quincy millionaires who the town can claim are “Trulieve
Marijuana Millionaires.” George Hackney,
Thad Beshears and Richard May, owners of the original three nurseries who
banded together to form Trulieve, Inc., each ended up with about 15 million SVS
shares worth about $120 million; and, as is said in a famous ad – “they earned
it.”
The three nurserymen who founded
Trulieve have been incredibly generous in sharing their wealth. In less than three years they have given up
about 59% of their equity as evidenced by the fact that they now own only about
41% of the company. The single greatest
beneficiary of their largess has been Ms. Kim Rivers, the CEO. When the public offering closed, Ms. Rivers
owned 159,867 SVS shares, 5,802 MVS shares and 2,811,159 warrants. If she
converted all her holdings to SUB shares she would have 19,378,059 shares worth
$170.5 million at the end of 2018.
All of the officers and directors
of Trulieve are Americans, none are Canadians.
The fact that Trulieve is a Canadian corporation is an anomaly; it has
nothing in common with other Canadian cannabis companies like Canopy Growth,
Aphria, Aurora, et cetera other than the fact that Trulieve’s official
corporate office is in British Columbia, where it has no people. Trulieve’s roots are in Florida where it was
born.
Trulieve Dominates Florida
Trulieve, Inc. had two medical
marijuana dispensaries at the end of 2016, 13 at the end of 2017 and 23 at the
end of 2018. By the end of Q1 2019 the company expects to have 30 dispensaries,
which is the maximum number of Trulieve dispensaries allowed under the 2017 Florida
Law. However, if Trulieve’s previously
mentioned 2nd Judicial Circuit Court victory is allowed to stand
then it can add as many dispensaries as it wants. Trulieve says that 90% of all
its sales are currently made at its dispensaries so being able to add
dispensaries is significantly positive.
On December 31, 2018 there were
209,940 patients registered to receive medical marijuana with the State of
Florida, Office of Medical Marijuana Use and more than 700 residents were
registering every day. Expectations are that patient growth will continue to
accelerate as marijuana use for the treatment of various ailments becomes more
commonplace and as word spreads of someone finally getting relief from pain,
insomnia, anxiety, etc. Senior citizens
are likely to account for a disproportionate share of the growth in number of
patients, because they have a higher incidence of arthritic pain. Diagnosis of arthritis is the most frequent
reason cited by physicians in qualifying patients to receive medical
marijuana. The fact that the elderly account
for about 19% of Florida’s more than 21 million residents makes Florida prime
territory for a medical marijuana company.
Trulieve itself has more than
120,000 patients and has said its average patient visits one of their
dispensaries 1.83 times per month. During Q3 of 2018 Trulieve was adding about
2,200 new patients per week, but during the first three weeks of November it
added between 3,000 and 4,200 per week.
Canopy Growth, which has a market
capitalization of $13 billion, only has about 90,000 medical marijuana
customers; and, Aurora, which has a market capitalization of $6.4 billion, only
has about 70,000. Trulieve, therefore,
has 1.3 times the number of medical marijuana customers as Canopy and 1.7 times
the number of customers of Aurora.
Trulieve’s market capitalization of $900 million at the end of 2018
should clearly be much higher based a comparison of the number of customers.
Trulieve’s dominant market
position is illustrated by the fact that it sold 67% of all milligrams of
cannabis distributed in Florida during the first nine months of 2018 according
to the Office of Medical Marijuana Use. By comparison, the next largest company
accounted for only about 11%. Companies
competing with Trulieve include Surterra, Liberty Health Sciences, Knox,
Curaleaf, Grow Healthy, The Green Solution, Columbia Care, Altmed and Vidacann.
Trulieve is clearly the dominant
medical marijuana company in Florida, and no other company is even close. The odds of Trulieve retaining such a huge
market share going forward is remote; however, the Florida market is growing so
fast that Trulieve should enjoy continued rapid growth in revenue, profits and
operating free cash flow for the foreseeable future.
2018 Revenue, Income, Cash Flow
For the recently reported three
and nine month periods ended September 30, 2018 Trulieve reported actual sales
revenue of $28.3 million and $66.9 million, respectively. Its gross profit, which includes the change
in fair value of biologicals, was $35.8 million and $71.8 million for the same
three and nine month periods.
Trulieve’s revenue and gross profit
in the September quarter dwarfed Canopy, Tilray, Aurora, Aphria and Cronos.
These much ballyhooed Canadian cannabis companies showed the following
respective results (in millions) for revenue and gross profit: Canopy $23.3 and
-$34.0; Tilray $10.0 and -$20.0; Aurora $26.5 and $8.0; Aphria $24.5 and $5.9;
and Cronos $3.7 and $2.1. All these
results were for their quarters ended September 30, 2018 except for Aphria’s
results which were for its quarter ended November 30, 2018. Furthermore, their above results are in
Canadian dollars which are worth only about $0.75 USD, so the extent to which
Trulieve outperformed these companies in sales and gross profit is actually
much greater than the raw numbers indicate.
Trulieve’s net income after taxes
(NIAT) amounted to $17.5 million and $32.3 million for the three and nine month
periods ended September 30, 2018. If Trulieve’s Q4 matched its Q3,
it would report NIAT of about $49.8 million or $0.45 per share for fiscal 2018
on its approximately 110 million fully-diluted shares outstanding.
TCNNF closed at $8.08 on December
31, 2018; therefore, Trulieve’s actual PE ratio was about 18 at the end of
2018. By comparison, virtually all of its competitor’s shares trade with PEs of
infinity, since they have no earnings!
For example, Canopy Growth reported a loss of C$330 million for its
quarter ended September 30, 2018.
Importantly, Trulieve also stands
out from other cannabis companies by generating
positive operating free cash flow.
For the nine months ended September 30, 2018 Trulieve reported net cash
provided from operations of $17,184,783, which represented 53.2% of its NIAT. Tilray
for the same time period reported negative operating cash flow of C$26 million;
Canopy for its six months ended September 30, 2018 reported negative operating
cash flow of C$198 million; and Aurora for its three months ended September 30th
reported negative operating cash flow of C$69 million; and Aphria for the six
months ended November 30th reported negative operating cash flow
C$16 million.
At a time when investors are
asking if or when Canadian cannabis companies will earn a profit and experience
positive free cash flow, Trulieve stands out as a rare example of a company
that has already achieved those mileposts.
It is a vertically integrated, pure cannabis play that has significant
profits and positive net operating free cash flow with 100% of its sales in the
rapidly growing Florida medical marijuana market.
Outlook for 2019 and 2020 Revenue and Income
Trulieve’s CEO, Kim Rivers, in an
interview published on November 22, 2018 in
www.newcannabisventures.com
projected revenue of $214 million for fiscal year 2019 and $291 million in
2020.
On the Trulieve website she also
predicted gross profit of $145.3 million and $197.4 million for those two
years.
Trulieve’s NIAT was 45% of its
gross profit for the first three quarters of 2018 and 49% in Q3. Trulieve
should therefore be able to bring at least 45% of its gross profit to the
bottom line. If it achieved 45% then its
NIAT would equal $65.4 million in 2019 and $88.8 million in 2020. Earnings of
that size would equal earnings per share (EPS) of $0.60 in 2019 and $0.81 in
2020. At its year end 2018 price of
$8.08, TCNNF was therefore trading at 13.5 times 2019 expected earnings and 10
times expected 2020 earnings.
These management projections were
based on Trulieve being limited to 30 dispensaries. Given Judge Gievers ruling that Trulieve can
have as many dispensaries as it wants, the above revenue, profit and EPS
estimates made by Trulieve management are likely to be very conservative.
Maximum Revenue, Earnings and Cash Flow
Trulieve now operates 627,400
square feet of cannabis cultivation facilities across three sites, which have
abundant acreage for further expansion.
Per Florida law, these are enclosed structures operating as indoor and
greenhouse type grows. Management
estimates its facilities grow about 30,000 kilograms (1,000 grams per kilo) of
cannabis annually, which it transforms into 125+ cannabis products it sells
patients.
Trulieve has said that each gram
of cannabis harvested gives rise to about $80 in sales. Accordingly, Trulieve could theoretically
generate maximum sales revenue of $2.4 billion ($80 x 30 million grams) if it
operated its nurseries at capacity and sold 100% of its marijuana
products.
If Trulieve can maintain recent
margins when operating at maximum capacity then it could produce incredible
results. If its 2019 estimate of a gross margin of 67.8% is applied to $2.4
billion in sales, then gross profit would amount to $1.627 billion. Recent results show that NIAT has been about
45% of gross profit; and, if that percentage is applied to the maximum gross
profit then net income after taxes would amount to $732 million ($1.627B x
0.45). The EPS on 110 million shares
outstanding would be $6.54 per share.
Accordingly, at the end of 2018 TCNNF was trading at 1.24 times its
maximum theoretical EPS given the existing acreage it is cultivating. EPS would obviously increase if cultivation
capacity and sales increased.
Knowing what the maximum
financial results are is important because it encourages people and companies
to reach higher than they otherwise might.
This exercise suggests Trulieve has huge upside potential in Florida if
sales continue to grow and margins are maintained.
Real Growth
In contrast to other publicly
traded cannabis companies, all Trulieve’s growth through the third quarter of
2018 was internally generated. It did
not buy its growth by acquiring other companies or assets at more than their
value. As a result, Trulieve’s balance sheet is not littered with “goodwill”
and other intangible assets. In fact as
of September 30, 2018 its only goodwill and intangible asset was its tradename,
which was carried on its books as a $1 million asset or 1.1% of its
equity.
By comparison, Aphria has C$1.1
billion in goodwill and intangible assets, accounting for 51.5% of its equity.
Canopy Growth has C$1.2 billion in goodwill and intangible assets, accounting
for 67.5% of its equity. Aurora Cannabis, which might be called the Pac-Man of
Canadian cannabis, has a mind-boggling C$3.5 billion in goodwill and
intangibles on its balance sheet, accounting for 79.5% of its equity.
The existence of these
disproportionately large nonearning assets could be a reason why whenever a
rumor surfaces about a company being in talks to acquire Aurora or Aphria the
rumor dies. In all likelihood the goodwill
and intangible asset values shown on balance sheets of Aphria, Canopy and
Aurora are vastly overvalued, regardless of any auditor assurance and/or
investment banker fairness opinion.
The fact is that in the Canadian
cannabis sector much of what is carried on company balance sheets is nothing
more than the debris left behind after the investment bankers have cashed their
checks and left. If auditors do their job properly, huge write-downs are
inevitable; and, when they occur, company management will claim the write-offs
are a non-event because company cash flow and operating income will not be
affected. The truth is the write-downs
will belatedly recognize that the company paid too much for past acquisitions
at the expense of shareholders.
Trulieve’s Birthplace
Trulieve grows plants, harvests
buds, extracts oils, manufactures products, warehouses products, and sells
those products through its own dispensaries.
Of Trulieve’s more than 1,200 full time personnel, about 60% are in
retail, 23% in cultivation and 13% in production.
Trulieve is a labor intensive
system of interconnected parts. Fortunately, however, it is located in Gadsden
County, which has an abundance of available, relatively cheap labor. Gadsden
County is one of the poorest counties in Florida and has a poverty rate of
about 20% affecting one in five
residents and one in three children. Only half of Gadsden high school students
graduate.
The relationship between Gadsden
County and Trulieve is indeed a symbiotic one that is benefitting both. The company is investing millions of dollars
in the county as it experiences explosive growth in its marijuana
business. It has acquired a number of vacant
commercial properties in Quincy and the surrounding area, and also constructing
new facilities. While many residents were initially opposed to marijuana, they
now openly embrace the positive impact Trulieve is having on the area. All indications are Trulieve’s positive
impact will just continue, because its lifeblood is in the soil of Gadsden
County. Unlike other businesses, it
cannot pickup its cannabis plants and move to another state or foreign country.
Trulieve is by far the largest
employer in Gadsden with more than 500 employees and its payroll continues to
grow. Its impact on Quincy is equally
significant since that town only has about 8,000 residents. Quincy and Gadsden County were once among the
wealthiest counties in Florida due the area being in the Georgia-Florida Shade
Tobacco District. Gadsden County’s shade
tobacco was used to wrap cigars sold all over the world. It is once again gaining prominence from an
unlikely source.
Importance of Management
It is well understood that
managerial attention is critical to the success of any business that is labor
intensive. Trulieve management therefore has to keep a keen eye on operations
in the nurseries, lab, warehouse and dispensaries. All these operations are important parts of
the Trulieve engine; and, if one fails to perform, the engine will grind to a
halt. Without flowers there will be no
product to sell; similarly, without extraction there will be no product. The importance of managerial oversight
throughout the Trulieve organization cannot be overstated.
Trulieve management must at the
same time stay abreast of changes in cultivation and harvesting to insure the
grow operations are efficient. The
founders must recognize they cannot rely on an abundance of high quality, cheap
labor forever and that their knowledge of cultivation cannot be easily
replicated. It is incumbent on them to
be aware of cost effective mechanization and succession. It is doubtful, however, that successors will
ever have the same degree of care as the founders.
Until now Trulieve has been able
to prosper in Florida because it had a huge first mover advantage. Being first out of the gate with little or
no competition enabled Trulieve to succeed on a scale its founders probably
never thought of in their wildest dreams.
Trulieve has had the proverbial
“bird’s nest on the ground” due to its great timing. Going forward to maintain prosperity in a
more competitive environment Trulieve will have to differentiate itself by more
than just packaging. It has already
introduced a customer loyalty program to create a stickiness in its customer
base.
The January 10, 2019 announcement
of a deal with Sunshine Cannabis to develop a full suite of premium eponymous
products based upon proprietary strains of cannabis is definitely a step in the
right direction. The products are set to
launch with Trulieve’s signature TruPOD formula in the first of Sunshine
Cannabis’ proprietary strains, Sunshine Kush.
The brand is expected to expand into more delivery methods along with
Sunshine Cannabis branded merchandise and medical cannabis accessories and will
be sold at Trulieve dispensaries and online.
Customer loyalty programs and proprietary products will undoubtedly help
shelter Trulieve as competition emerges in Florida.
If the 2nd Judicial
Circuit decision is not appealed then Trulieve will be able to reach its stated
goal of having 52 dispensaries by about the end of 2020. The number of dispensaries will be largely
determined by the amount of flower produced and Trulieve’s ability to convert
that flower into marijuana products desired by customers.
It does no good to have a great
location and no products to sell. In
fact it does significant harm because word will quickly spread on social media
that Trulieve dispensaries are out of product and cannot be depended on to
provide products on a consistent basis.
The opening of new dispensaries cannot occur without adequate inventory
and predictable flower production.
The disastrous rollout of
recreational marijuana in Canada is a classic example of sellers vastly
overestimating supply and causing considerable unrest among customers. Canadian cannabis company shareholders were
also extremely disappointed when they realized their sales expectations were
overly optimistic; and, as a result, share prices dropped significantly.
Beware of Investment Bankers
It is impossible to compare Trulieve
(TCNNF) to other publicly traded cannabis companies. At this moment, Trulieve
is basking in profits, cash and Florida sunshine, while other companies wallow
in a quagmire requiring massive amounts of cash to keep them afloat. In the near future gullible investors will
realize they have been patsies and they will stop buying the endless debt and
equity issues of Canadian cannabis companies.
Trulieve’s prosperity is due
largely to the fact that its hardworking founders started the business with the
intention of using their skills as nurserymen to help fellow Floridians deal
with medical issues. Unlike most other
Canadian cannabis companies, Trulieve was not started by promoters who knew
nothing about cultivation and just wanted to make a quick buck. In fact, all Trulieve’s early financing was
from sweat equity or actual loans made to the company by the nurserymen
themselves or their acquaintances.
Trulieve’s roots and corporate
culture run deep in the soil of Gadsden County where it enjoys a special
interdependent relationship. The fact
that its operating headquarters are in Quincy, Florida, the city of its birth
and the home of Hackney Nursery, speaks volumes about the character of its
founders, the importance of cultivation to company success and the ingrained
sense of community. These valuable
traits are found in no other publicly traded cannabis company.
Trulieve rests on the rock solid
foundation that George Hackney, Thad Beshears and Richard May laid as operating
owners. Other companies in the cannabis
sector are built by people capturing other people’s money for the purpose of
investing that money in land, labor and equipment along with buying other
companies for the sole purpose of making themselves fortunes. The contrast
between Trulieve and other marijuana companies speaks volumes and makes it the
best investment in the cannabis space.
The fact that Trulieve has such a
firm foundation is not a guarantee they can maintain it. At least one other company, Aphria, was
started by nurserymen with good intentions only to see the company lose its way
as financial sharpies took on executive decision-making power and began
purchasing other cannabis operations throughout Canada and as far away as
Jamaica, Argentina and Columbia at inflated prices with money obtained from
unwitting investors.
The Canadian cannabis companies
have been “gravy trains” for Canadian investment bankers who encouraged them to
acquire other cannabis companies, while at the same time underwriting the
required financing. The investment
bankers earned fees on the mergers and acquisitions then earned more money by
underwriting debt and equity issues required to replenish cash positions at
acquiring companies. It is a beautiful
scheme that rests entirely on investors continuing to provide funds to
acquiring companies that continually flare cash. It is like a “legal Ponzi scheme” supported
by investors who hope to hit it big!
Canadian investment bankers have
made and continue to make fortunes in the cannabis industry by promoting
mergers and acquisitions. The fact that bankers have issued favorable fairness
opinions as a part of the frenzied cannabis merger and acquisition activity
should provide little or no comfort to buyers and investors.
With the exception of its reverse
merger, SUB stock offering and listing on the CSE, Trulieve has escaped the
clutches of the investment bankers.
Going forward, however, Trulieve is bound to be approached by investment
bankers who want to “help.’” Trulieve management must be on high alert when the
investment bankers come to offer guidance and wisdom.
There can be no guarantee that
Trulieve management will be able to avoid being entrapped by supposedly great
opportunities offered them by investment bankers. Massive wealth like that now enjoyed by
Quincy’s “Trulieve Marijuana Millionaires” can cause people to get an inflated
view of their personal abilities and do strange things.
The board of directors of
Trulieve needs to be on high alert for carpetbagging investment bankers looking
to make quick money by encouraging meritless expansion strategies, mergers and
acquisitions. That path is already
littered with corporate corpses and it would be a real shame if that happened
to Trulieve.
