The rock star of the MSO’s, Trulieve ($TRUL) has been seen to do little wrong on its’ acent to the bell-weather position of US legal cannabis.

With market share dominance in Fortress Florida, expectations of a full flip to recreational in the State has given share price lots of gas, exclusive of Biden’s election (the Dems still want the 208e tax to apply, at least…when it historically has applied). A move to expand beyond the $TRUL castle domain is being anticipated in Pennsylvania. For $66MM up front, $TRUL got 35k ft² of grow space (expansion to 90k ft² supposedly coming online this quarter) and 3 dispensaries in the state. Earn-outs are listed at maxing out at another $75MM, and said to be remitted in ‘the value’ of $TRUL shares. I’ll have a look at their upcoming year end to validate acquisition cost and press release claims (yes, this should be done. Deals aren’t always what they seem, and can be more complex than a press release is designed to provide information about).

Similar to other MSOs, $TRUL sports both Multiple and Super Voting Shares. Both convert at a 100:1 ratio into subordinates at the holder’s pleasure. There are some restrictions around them primarily in takeover events, it’s a mechanism for founders to hang on to their control (and company). They’ll also convert should one of the founder’s decide to walk (or transfer), or, put them up on the market (look up “Mandatory Conversion” in their Annual Information Form if interested).

TheCannalysts have highlighted ‘best practice‘ around these previously (there’s a wealth of information out there on them, but primarily around voting power, not shares that lever into 100 or even 1000 subordinates per). Only Curaleaf ($CURA) has an actual ‘sunset clause’ built into their Charter, which will see Chairman Boris Johnson’s multiple voting shares automatically convert this October. Yet, $CURA’s only pertains to multiple votes…..as the conversion ratio is 1:1 on a per share basis otherwise.

The reality is that there is no price for them as they’re under a separate SEC filing, and unquoted. That means we need to assume a conversion price, or pricing mechanism. In the case of Cresco Labs ($CL), they struck an option that converted at a fixed price that was $9.50 in-the-money per subordinate share. I assumed a market price conversion for the remainder – and without visibility – I’ve got nothing else to go on. So, I’ll do the same here, and note how much I dislike this lack of visibility. I’ve gone back into the bowels of SEDAR looking for anything I can, and have come up empty so far.

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$TRUL has a relatively ‘clean’ balance sheet, but despite this, they’ve had a couple of missteps. At the 2019 Year End (published last spring), they remembered management had issued themselves some 11MM of 2 year options with a strike price of $6. They had reported $0 in share-based compensation, so, they amended the prior year’s amount by some $14MM to record it. It’s an odd booking as well – I can’t trace the other side of the entry. Nothing nefarious to be sure, but indicative of how a company initially grows and matures, some accounting issues can need to be sorted out. They never had a warrant nor option table until the 2nd quarter of 2020 – and it was a chore to slug through the financials prior to that.

The bulk of my efforts has been in trying to find the notional price of super and multiple share conversions, per above. By the third quarter of 2020, management birthed 20MM (!) shares for themselves, and I can’t find a single thing related to what they were converted at. Best I can impute is the delta in total share capital of about $80MM. That implies a ~=$4 conversion ($6 CAD) price per share, which happens to match the legacy warrant strikes. I’ve created 2 graphs, one with the super and multiples coming online at market (like in my assumption with $CL), and one using that $6 CAD notional conversion.

Before we get to the graphs, I’d like to point out some disclosure that’s been in $TRUL’s statements since the beginning. It’s similar to other MSOs. The first is with respect to disclosure requirements and ’emerging growth company’ exemptions:

The second pertains to the voting control (and by extension, total ownership) represented by the multiples and supers:

I honestly can’t say what the dollar value of the conversions are to the 20MM shares added to the float. I’ve a few feelers out, and will report back if I get anything. Disclosure around the subject is incredibly opaque: management isn’t keen to reveal how much equity they’re taking out of the company on the cheap. I’m certainly not pulling any fire alarms here. At this point, I use this to illustrate how much overhang the lowly subordinate shareholder might have above them in terms of claims to the assets of a business that has this sort of capital structure.

Hopefully, I’ll find some terra-firma in the Annual Information Form, which are typically published late April.

As of writing – should the assumptions in latter graph be correct – there is $2.5B in overhang sitting on $TRUL’s financial statements. Said another way, 35% of their current share price doesn’t exist.

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 $TRUL.