Following their recently reported year end, Trulieve ($TRUL) issued their first quarter of fiscal 2020. GoBlue’s already dropped his ‘Quarter in Pictures’ on them.

$TRUL now has 47 dispensaries open, and has been showing decent and (generally consistent) sales growth for 8 quarters now. Their MD&A is helpful in this regard, laying it out:

While revenue growth has been largely linear, income has not. Scaling will do this, and we’ve touched on some of the drivers. Fair Value Adjustments on Bios produced the income numbers reported over June & September’s financials – as a hard production ramp began ‘growing’ assets.

This has abated as production throughput is stabilizing to some degree over the past 2 quarters.

The revenue jump this quarter is atypical (they added 9 stores to the system), but their ability to generate and manage throughput is borne out. This has led their share price back to near their highs during an effervescent period in April of 2019. GoBlue’s unwinding of GoB Voodoo is vital in understanding underlying operations.

The company (to myself) comes with some caveats. The capital structure being first and foremost. Inventory accumulation another.

To the financials!

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• Cash up $9MM to $100MM.
• Inventory now at $227MM. Wow.
• Intangibles and Goodwill a lean $30MM on a $600MM asset base.
• Margin holding at around 70%.
• 35MM subordinate shares o/s, but Supers & Multiples bring the total diluted float up to 115MM.
• Their debt at ~=13.5% ($130MM) isn’t cheap, just under $7MM of interest expense reported over the quarter. They also reported other income of positive $5MM, which stems from warrant re-valuation.
• The warrants can’t be found in shareholder capital, because they are not in the native currency of the balance sheet which is denominated in $USD. More below.

Ok, I’m going to stop there. GoBlue’s covered most of their tracks in his ‘Quarter in Pictures’. A few things stand out though.

Extremely long turns for plants at Trulieve are at a reported 119-136 days to plant maturation. This is different from many other reported grow assumptions (Canadian LP’s are largely from 85-110 days). $LHS reports on 110 days, $CURA, at 85 days (solely from unblended FLA ops last summer). The length of grow could be a function of climate, cultivars, or grow modality. It doesn’t appear to be impacting them, as inventory growth continues and margins hold. It would be a great place to make shareholders some money if they can get that actual (or whatever is ‘real’) number down.

The November/June warrants mentioned above brought a positive $5MM to the income statement, it stems from a change in the underlying share price QoQ. The $130MM in 5 year Notes they issued last year went out the door with either 26 or 21 warrants attached to each unit – depending on the month of the raise. Two issuances of them (in November and in June), came with a strike of $17.60CAD and $17.25CAD, and a 3 and 2 year life respectively.

$TRUL’s share price declines between December and March (of some $2) initiated the re-val. It’s a better feature in my eyes to ‘pay as you go’ with respect to overhang, and that’s what this mechanism does. Since the share price has now gone above strike (the advance is about $5 in absolute as of writing), should sensitivity hold (it will), there’s going to be a large non-cash charge against earnings next quarter of $12-$14MM. The impact of the warrants will decline as time decay kicks in. The adjustment is continuous.

$TRUL appears to using a rolling historical vol too, which, I think is great. Far better than the Canadian ‘accounting’ method of option valuation in my opinion. And good on $TRUL. Might not be their choice, but to me its’ best practice…….no matter the reason.

Their costs of production have shown increases in efficiency. $TRUL disclosure (in general) is good in helping to derive this from production volume, and segregates a ramp from steady state production. Look at the periods compared below and the attendant COGS. Sales in the periods were $96MM and $44MM respectively:

Processing costs likely reflects the wider number of SKUs $TRUL is packing (which is listed at 350 now, but was only 230 then).

Florida’s ability to absorb expansion ($CURA/$LHS, and even $iAN) continues. Trulieve and Liberty Health Sciences are our best proxies for its’ durability. The patient count continues to demonstrate hard growth YoY, doubling from 2018 to 2019. That news story provided serves as an instruction manual on ‘How To Get a Medical Card’ (which is how formal commerce approaches growing a market: feed media with what they need to catch eyeballs, and get what you want in enabling a larger consumer base to sell to).

Compare that with, say, Arizona (a somewhat reluctant ‘Red’ state). The robustness of FLA combined with an easier ‘pay for access’ model adds fuel to sales that the sector needs.

This informs us about about operating exposures companies face in different jurisdictions, and tells us that not all markets are created equally. Fits and starts across regions are frustrating to an investor, as we are left to speculate on regulatory actions. Which, frankly, sucks.

Should full recreational be enabled, all of these musings will be blown away: a regulatory meteor strike of the best kind.

$TRUL has girded themselves in Fortress Florida™, and taken a more austere approach to ex-state expansion than a $GTII or $CURA is performing. ILL is rocking, and the potential for more states to open and begin rocking exists as well. If history is our guide – that ‘rocking’ will be to varying degrees – state by state.

I share the enthusiasm that some capital market participants and observers have for the ultimate potential of the cannabis sector.

Cannabis companies that haven’t stretched thin (by luck or design….who’ve chased after poorer performing regions) stand to benefit greatly if they are nimble and cash requisite. The self immolation seen in an $iAN or $MMEN is a reflection of this in many ways to myself.

Companies that can strike like a cobra are what I’m looking for. Ones with a stable homeland and an easily scalable business model. $TRUL is bearing out as an operator, but Rivers doesn’t strike me as that cobra.

$TRUL is the first MSO I’ve seen consistently on track. And despite related party kinder-care bullshit and a capital structure that (from an investor standpoint) needs to be addressed, we’re finally moving into a field where valuations are becoming more connected to reality. Good. The faster someone sets the bar, the better.

Like how first movers defined share prices, perhaps now we are maturing to a business level where valuation can actually be calculated. We’re not there yet. My number on $TRUL has a far higher cost of capital than they are delivering.

At the least, we can finally look at a genuine actual real-live business in publicly listed MSO’s that doesn’t have too much hair on it. And it’s promising.

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