Trulieve (TCNNF 1.00%), the largest medical cannabis company in Florida and multi-state operator (MSO), undertook a major acquisition last year in order to expand its footprint from its hub in Florida to the southwest and northeast U.S.
Subsequently, it had to take on additional debt in the form of two bond issuances in the following quarters to keep expanding and pay some of its bills. It just released its Q2 2022 results, showing some positive gains for the company, but shareholders may not be as happy with where their share price stands today as Trulieve's front office is with the earnings report.
Trulieve merged with Harvest
Last October Trulieve, until then largely Florida-centered, closed its bid to acquire leading Arizona-based MSO peer Harvest Health & Recreation in an all-stock deal for $2.1 billion where Harvest stockholders exchanged one of their shares for 0.117 of a subordinate voting share of the parent company. Trulieve issued 50.9 million shares for Harvest, which penciled out to about $4.79 a share, a good deal for Harvest shareholders at the time. But, Trulieve shareholders saw their stock value slide by 40%.
Trulieve CEO Kim Rivers said at the time of the merger announcement the new company would be the most "profitable public multi-state operator" in the U.S., and today it has 175 dispensaries and over four million square feet of cultivation and processing capacity in eleven states. Those states include the medical-only markets of Florida, Ohio, Pennsylvania, Maryland, and West Virginia and the adult use markets of Connecticut, California, Massachusetts, and Arizona (where it has the most dispensaries outside Florida). The company management also disclosed in its Q2 results that it may be leaving the Nevada market, after discontinuing wholesale last quarter. The reason for the exit remains unknown but is possibly related to falling Nevada indoor and greenhouse cannabis prices.
Selling bonds to pay down Harvest debt
In order to cover capital expenditures and Harvest debt, Trulieve issued $350 million of privately placed senior secured notes on the Canadian Stock Exchange (CSE) at 8% per annum after closing the Harvest deal in early October 2021. It'd go on to issue in Q1 2022 an additional $75 million in bonds, under the same terms as the October bond sale, for more capital expenditures and other expenses, bringing the total amount owed to senior noteholders to $425 million. The notes can be redeemed after October 6, 2023, and mature on the same day three years later. Between the two offerings, Trulieve's long-term debt grew 345% year-over-year to $542.4 million by June 30, 2022, a big number considering some of that comes into play a little over a year from now.
Top line looks good, but issues are there
In Q2 2022, revenue grew 43% year-over-year to $320.3 million. The dispensary heavy MSO's retail revenue grew quarter-to-quarter by 3% to $298.6 million. Sales, general, and administrative expenses (SG&A) has been relatively constant as revenue has grown since the Harvest purchase, hinting its business plan is operating efficiently. The company continues running at a loss of $22.5 million for the period, although it was a 30% improvement sequentially. Much of the loss is attributable to one-time write-offs related to the Harvest merger. Adjusted, the company's loss was only $1.1 million last quarter, all good news for Trulieve.
Its all-important cash in the bank came in at a cool $181.4 million, down 32.1% sequentially and a 37.3% year-over-year drop, a consequence of its mounting expenses running a bi-coastal cannabis venture. If that cash continues to dwindle, the company may be tempted to dilute shares again or take on more debt. Furthermore, taking a peak at the company's historical stock prices since it merged with Harvest, shares lost more than 56% of their value, along with the 40% dilution mentioned above for shareholders, since last October. In other words, if you bought $100 of Trulieve stocks in early Q4 2021, by today you'd lost about $56 of that investment.
Sixty-eight percent of Trulieve's operations are in Florida, the third largest medical cannabis market in the country. Due to its market dominance there and its emerging presence in adult use states like Arizona, Trulieve has an adequate base to help foot the bill for the company as its recent borrowings wane. However, if it's counting on Pennsylvania, Maryland, or even Florida to boost revenues after they adopt adult use it may have to wait years, which may result in more borrowing and stock dilution to keep the company growing, a situation it can't afford with stock prices already down and senior noteholders beginning to cash in next year.
It may be hard for stockholders to fully recover their lost investments in Trulieve if it keeps on its same path. The stock may recover some as it fully integrates Harvest into its brand and medical cannabis gains popularity but it will be a while, making it not such a great buy right now for investors looking for quick returns.
