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Cannabis investing $YOLO


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4 hours ago, chrispy said:

I believe VRNOF is much less risky and the share price is being hurt by all of the share unlocks at an unfortunate time in the market cycle.

 

He discusses VRNOF here:

Episode #342: Aaron Edelheit, Mindset Capital, “The Best Investors Are Those That View It As A Game” | Meb Faber Research - Stock Market and Investing Blog

 

VRNO ( Verano ) is also worth a look.

 

One thing I am struggling with is the regulation patchwork by state a good or bad thing for cannabis? Aaron thinks that it is a bad thing and the industry really takes off when this is regulated at a federal level and the sector has access to regular financing. But would this be a good thing for individual companies?

The concern is that interstate commerce leads to much more competition and all these dinky inefficient operations (and lets face it, even operators like Verano are dinky mish mash's of dozens of small operators) might get absolutely killed by operators that come from adjacent industries and know how to operate efficiently at scale.

 

I have learned one thing over the years - Manchester capitalism isn't necessarily good for returns, the best case scenario is actually benevolent (for the companies) regulation, which may be what we are having right now.

 

All  these constraints about access to capital, state regulations may be the best case scenario already in terms of profits, not necessarily market size. I really don't have an answer to this question.

Edited by Spekulatius
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Here's a nice little vertically integrated "seed to sale" rollup (pun fully intended), with lots of hair on it.

 

TRUL

 

Trulieve Cannabis Corp. (together with its subsidiaries, “Trulieve” or the “Company”) was incorporated in British Columbia, Canada. Trulieve (through its wholly-owned subsidiaries) is a vertically integrated cannabis company which currently holds licenses to operate in six states Florida, Massachusetts, California, Connecticut, Pennsylvania and West Virginia, to cultivate, produce, and sell medicinal-use cannabis products and, with respect to California and Massachusetts, adult-use cannabis products.

 

 

As of June 30, 2021, substantially all of our revenue was generated from the sale of medical cannabis products in the State of Florida. To date, neither the sale of adult-use cannabis products, nor our operations in Massachusetts, California, Connecticut, Pennsylvania, and West Virginia, have been material to our business.

 

In July 2018, Trulieve, Inc. entered into a non-binding letter agreement (“Letter Agreement”) with Schyan Exploration Inc. (“Schyan”) whereby Trulieve, Inc. and Schyan have agreed to merge their respective businesses resulting in a reverse takeover of Schyan by Trulieve, Inc. and change the business of Schyan from a mining issuer to a marijuana issuer (the “Transaction”). The Transaction was completed in August 2018 and Schyan changed its name to Trulieve Cannabis Corp.

 

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There's a lot of dilution going on with acquisitions and financing is done at less than desirable rates which probably reflects the risk associated with the business. Private placement notes of $130mm are due in 2024 and have warrants attached.

 

On December 10, 2020, the Company entered into a Supplemental Warrant Indenture with Odyssey Trust Company pursuant to which it amended the terms of the issued and outstanding subordinate voting share purchase warrants of the Company (the “Public Warrants”) to convert the exercise price of the Public Warrants to $13.47 per share, the U.S. dollar equivalent of the Canadian dollar exercise price of the Public Warrants of C$17.25. The U.S. dollar exercise price was determined using the U.S. dollar exchange rate published by the Bank of Canada as at the close of business on December 9, 2020 of C$1.00 = $0.781. The June Warrants and November Warrants converted to equity as per ASC 815-40, at an expense of $25.5 million and $27.1 million, respectively.

 

 

In 2019, the Company completed two private placement arrangements (the “June Notes” and the “November Notes”), each comprised of 5-year senior secured promissory notes with a face value of $70.0 million and $60.0 million, respectively. Both notes accrue interest at an annual rate of 9.75%, payable semi-annually, in equal installments, in arrears on June 18 and December 18 of each year. The purchasers of the June Notes received warrants to purchase 1,470,000 Subordinate Voting Shares and the purchasers of the November Notes received warrants to purchase 1,560,000 Subordinate Voting Shares, which can be exercised for three years after closing.

 

The fair value of the June Notes was determined to be $63.9 million using an interest rate of 13.32% which the Company estimates would have been the coupon rate required to issue the June Notes had the financing not included the June Warrants.

 

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The construction finance liability includes the sale & leaseback of properties used for cultivation.

 

In July 2019, the Company sold property it had recently acquired in Massachusetts for $3.5 million, which was the cost to the Company. In connection with the sale of this location, the Company agreed to lease the location back for cultivation. The landlord has agreed to provide a tenant improvement allowanace (“TI Allowance”) of $40.0 million, which was dispensed in its entirety as of December 31, 2020. The initial term of the agreement is ten years, with two options to extend the term for five years each. The initial payments are equal to 11% of the sum of the purchase price for the property and will increase when a draw is made on the TI Allowance. In addition, a 3% increase in payments will be applied annually after the first year. As of June 30, 2021, the total finance liability associated with this transaction is $44.3 million.

 

 

In October 2019, the Company sold property in Florida in exchange for cash of $17.0 million. Concurrent with the closing of the purchase, the buyer entered into a lease agreement with the Company, for continued operation as a licensed medical cannabis cultivation facility. The initial term of the agreement is ten years, with two options to extend the term for five years each. The initial annualized payments are equal to 11% of the purchase price for the property. A 3% increase in payments will be applied annually after the first year. As of June 30, 2021, the total finance liability associated with this transaction is $17.3 million.

 

 

In October 2019, prior to acquisition by the Company, PurePenn, LLC (“PurePenn”) sold their cannabis cultivation facility in Pennsylvania for $5.0 million. Simultaneously with the closing of the sale, PurePenn agreed to lease the cultivation facility back. The initial term of the lease is fifteen years, with two five-year options to renew. The landlord has agreed to provide a TI allowance of $21.0 million as an additional component of base rent. Payments are made based on one twelfth (1/12) of the TI allowance dispersed with 12.75% due for the first $5.0 million and 13.75% thereafter. On March 8, 2021, the Company entered into an amendment with the landlord to increase the tenant improvement allowance to $36.5 million at a rate of 10.75% on the additional allowance in excess of $21.0 million. As of June 30, 2021, $23.8 million of the TI allowance has been provided. As of June 30, 2021, the total finance liability associated with this transaction is $28.7 million.

 

They now own PurePenn.

 

On November 12, 2020, the Company acquired 100% of the membership interests of both PurePenn, LLC, which holds a permit to cultivate and process medical marijuana in Pennsylvania, and Pioneer Leasing & Consulting, LLC (collectively “PurePenn”). The purpose of this acquisition was to acquire the cultivation and manufacturing facility located in McKeesport, Pennsylvania.

 

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There are multiple classes of shares and this is where I really get lost:

 

Subordinate voting (1 vote / share) unlimited
Multiple voting (100 votes / share) unlimited
Super voting (200 votes / share) unlimited

 

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Related party info:

 

 

The Company had raised funds by issuing notes to various related parties including directors, officers, and shareholders and the balance at June 30, 2021 and December 31, 2020 was $12.0 million and $12.0 million, respectively, as discussed in “Note 8 – Notes Payable Related Party”.

 

J.T. Burnette, the spouse of Kim Rivers, the Chief Executive Officer and Chair of the board of directors of the Company, is a minority owner of a company (the “Supplier”) that provides construction and related services to the Company. The Supplier is responsible for the construction of the Company’s cultivation and processing facilities, and provides labor, materials and equipment on a cost-plus basis. At June 30, 2021 and 2020, property and equipment purchases totaled $76.4 million, and $35.9 million, respectively. As of June 30, 2021 and December 31, 2020, $13.8 million and $10.4 million of property and equipment purchases was included in accounts payable in the condensed consolidated balance sheets. The use of the Supplier was reviewed and approved by the independent members of the Company’s board of directors, and all invoices of the Supplier are reviewed by the office of the Company’s Chief Legal Officer.

 

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Legal problems resulting from the property shell game,

 

On December 30, 2019, a securities class-action complaint, David McNear v. Trulieve Cannabis Corp. et al., Case No. 1:19-cv-07289, was filed against the Company in the United States District Court for the Eastern District of New York. On February 12, 2020, a second securities class-action complaint, Monica Acerra v. Trulieve Cannabis Corp. et al., Case No. 1:20-cv-00775, which is substantially similar to the complaint filed on December 30, 2019, was filed against the Company in the United States District Court for the Eastern District of New York. Both complaints name the Company, Kim Rivers, and Mohan Srinivasan as defendants for allegedly making materially false and misleading statements regarding the Company’s previously reported financial statements and public statements about its business, operations, and prospects. The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and SEC Rule 10b-5 promulgated thereunder. The complaint sought unspecified damages, costs, attorneys’ fees, and equitable relief. On March 20, 2020, the Court consolidated the two related actions under In re Trulieve Cannabis Corp. Securities Litigation, No. 1:19-cv-07289, and appointed William Kurek, John Colomara, David McNear, and Monica Acerra as Lead Plaintiffs.

 

www.mortonstreetgroup.com/blog/three-takeaways-from-the-trulieve-complaint

 

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This is my short take from the latest Q up to the MD&A. I have to go to class and will decide whether it's worth reading the MD&A when I get back home.

 

VERY hairy but jeez, that growth + the ability to capture value throughout the chain...

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Easiest way to invest? You have a kid right? Wait til he's in Jr HS and give him a $500 cash LOL Its the suburban entrepreneurial experience. Right of passage for ambitious teenagers. Just kidding of course.

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1 hour ago, Gregmal said:

Easiest way to invest? You have a kid right? Wait til he's in Jr HS and give him a $500 cash LOL Its the suburban entrepreneurial experience. Right of passage for ambitious teenagers. Just kidding of course.

 

That's an extremely difficult business to build. Lots of paranoid networking in clubs to find volume purchasers & there are quite a few under-covers looking for you. There's plenty of supply available from bootleggers but it's definitely a wild west scenario.

 

These dispensaries have a license to print money.

 

I'm still betting on Altria to build a business in this market.

 

On another note, check out this numbnuts LinkedIn profile,

 

www.linkedin.com/in/howard-willard-1132771a9

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Most of the companies operating in the US are crappy businesses and poor capital allocators.  There are so many different ways things could work out that I think its important to buy a company that is profitable today.  There are so many conflicts of interest its hard to know how things will work out.

 

-Taxes are collected at the federal level even though it's a criminal enterprise.  What is the rush to decriminalize it and fix the accounting rules?

-States legalized it to create jobs and tax revenue, they would likely fight cross state commerce; yet that is the bull thesis for several companies.

-Will tariffs be imposed for stuff grown in Mexico or South America?  Why would any legal cannabis be grown in the US?

-If cannabis is approved on a medical level why does it not require FDA approval?  If the feds allow medical use, and therefore FDA approval, what role do dispensaries play?  Wouldn't licensed pharmacies distribute the "medicine"?

 

I know these seem like silly questions, but this industry is in a really silly place right now.

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1 hour ago, JRM said:

Most of the companies operating in the US are crappy businesses and poor capital allocators.  There are so many different ways things could work out that I think its important to buy a company that is profitable today.  There are so many conflicts of interest its hard to know how things will work out.

 

-Taxes are collected at the federal level even though it's a criminal enterprise.  What is the rush to decriminalize it and fix the accounting rules?

-States legalized it to create jobs and tax revenue, they would likely fight cross state commerce; yet that is the bull thesis for several companies.

-Will tariffs be imposed for stuff grown in Mexico or South America?  Why would any legal cannabis be grown in the US?

-If cannabis is approved on a medical level why does it not require FDA approval?  If the feds allow medical use, and therefore FDA approval, what role do dispensaries play?  Wouldn't licensed pharmacies distribute the "medicine"?

 

I know these seem like silly questions, but this industry is in a really silly place right now.

 

I agree with everything except the part about Mexican dirt weed.

 

Seriously though, the "medicinal" part is a ruse to get it removed from schedule I status.

 

 

Schedule I substances, such as marijuana, are substances that have "a high potential for abuse" with "no currently accepted medical use in treatment in the United States" and that cannot safely be dispensed under a prescription.

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Ive heard the argument, which seems most sound to me, is that those who can pass a bill in the senate and house are only worried about being elected by the citizens of their state. So, what would make them want to disrupt the status quo (jobs, tax revenue, etc) to their state at the cost of ruining a sector in their state and losing re-election? I therefore think the most likely outcome is the fed to say we dont care about this anymore, it is state by state, figure it out. Dont forget, these businesses were deemed essential during COVID, state budgets have been decimated, the terrible laws within the US have forced each state to go at it on their own, and therefore states will do whatever it takes to retain the jobs and tax revenue.

 

 

We are many, many years from Mexico/Colombia shipping weed into the US. Look at how ridiculous US laws are regarding cannabis, how little change is occurring despite 60-70% of americans believing it should be decriminalized, and now we think that south american countries which are looked down upon by the US will be able to import a previously schedule 1 drug!? It may happen but it is a long way out.

 

Lastly, the MSOs which have retail and cultivation within states are likely to have a dominant position where they are building operations. In california, and now NJ, less then 50% of counties allow for ANY cannabis dispensaries. Few communities will allow for cannabis stores on every block or shopping center. Therefore, those which have locations, have cultivation, have shoppers in the habit of visiting their stores will be in a commanding position. Additionally, with NJ going adult use there is now the problem of getting an industrial property to build out cultivation. These buildings are being used up by fullfilment centers and then of course you have the zoning regs described earlier. The ones with cultivation built out, TerrAscend for example, are going to print money for a minimum of 2 years while the whole state finally gets to feast on recreational cannabis.

 

This was pretty good from JW Asset Management (Jason Wild of TerrAscend):

 

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