Trulieve’s Growth: Q1 Success, Florida Legalization Hope, DEA Rescheduling Impact (TCNNF)

Since my previous analysis of Trulieve Cannabis Corp (“Trulieve”) (OTCQX:TCNNF) (CSE:TRUL), while Trulieve’s 2024 Q1 financial results were released, several other historical events also took place.

These historical events are:

1. On April 2, 2024, the Florida Supreme Court approved the ballot measure to legalize recreational cannabis in November 2024 if this ballot gets over 60% vote
2. On April 30, 2024, the news that the United States Drug Enforcement Administration (“DEA”) will reschedule cannabis to Schedule III was announced, which was later confirmed by the DEA.

We will dive into where Trulieve’s valuation stands given what happened in the past two months.

Introduction

Trulieve is one of the largest multi-state cannabis operators (“MSO”) in the United States. Trulieve operates a total of 195 dispensaries across its regional hubs, which are Florida, Pennsylvania, and Arizona. In 2024 Q1, Trulieve opened 3 more dispensaries in Florida, making it a total of 134 dispensaries in the state.

Compared to other MSOs, Trulieve is one of the most vertically integrated, with retail revenue contributing over 95% of its total revenue. This also explains Trulieve’s relatively higher gross margin.

2024 Q1 Results

Total revenue for 2024 Q1 was $298 million, which increased by 4% compared to $287 million in 2023 Q4. Q1 and Q2’s revenue is typically stronger in each year compared to Q3. In Q1 of each year, consumers restock cannabis after the holiday season and purchase more in March of each year, leading to 420. In Q2 of each year, consumers continue to purchase more cannabis around 420.

This increase in revenue is primarily a result of the opening of the 3 new dispensaries in Florida and increased retail traffic.

Gross margin increased significantly to 58% in 2024 Q1 driven by lower cultivation costs (from the economics of scale from the 750,000 square foot production facility in Florida) compared to 54% in 2023 Q4 or 52.7% in 2023 Q1. Overall, Trulieve’s gross margin is trending upward, demonstrating that it has successfully re-steered the business to profitability from the acquisition of Harvest Health & Recreation Inc. in 2021.

Trulieve’s EBITDA for 2024 Q1 was $85 million, remarkably increased by 54% compared to 2023 Q4 or 33% compared to 2023 Q1.

Trulieve generated record cash from operations of $139 million. Not only Trulieve did not make any tax payment in 2024 Q1 same as the prior quarter, Trulieve received $55 million in tax refunds, actually increased by $4 million (likely received in March 2024) compared to what was announced on February 29, 2024.

Although Trulieve takes the position that it doesn’t owe income taxes under 280E, it still records an income tax expense to add to its Uncertain Tax Position. Due to the accrual of $55 million in income tax expense, Trulieve reported a net loss of $23 million in 2024 Q1. Given the complexity of Trulieve’s tax position, evaluating the business based on gross margin and EBITDA are better measures at this time.

Trulieve’s balance sheet is quite strong at the moment with $320 million cash on hand and $468 million working capital.

Although Trulieve calculates its Adjusted EBITDA, I don’t find this measure as helpful. Trulieve adds back important items such as legislative campaign contributions and share-based compensation.

In 2024 Q1 alone, Trulieve spent $9.2 million in legislative campaign contributions, which is quite significant, considering that Trulieve made $20 million legislative campaign contributions in 2023 and 2022 respectively. Other MSOs don’t seem to add back legislative campaign contributions to calculate Adjusted EBITDA.

Altogether, since 2022 Q1, Trulieve made almost $50 million in legislative campaign contributions, primarily toward a Florida Ballot Measure. We will discuss the Florida Ballot Measure in more details shortly.

During 2024 Q1, almost 1 million stock options (with $10 weighted average exercise price) and 2.2 million RSUs were granted at an average of $10 fair value. It is quite significant, making up almost 1.5% of Trulieve’s total shares outstanding, in just one quarter. As a result, the share-based compensation for 2024 Q1 was $5.2 million, compared to just $2.4 million in the same period last year. However, when compared to other MSOs as follows, Trulieve’s share-based compensation was relatively fair, especially considering that Trulieve was able to generate more cash than its peers while incurring relatively smaller amount of share-based compensation.

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Overall, Trulieve reported a strong quarter with both growth in the topline, savings in expenses from increased efficiency, and record amount of cash generated.

Florida Ballot Measure Approval

On April 1, 2024 (not an April Fool’s prank), the Florida Supreme Court approved the ballot measure to legalize recreational cannabis in November 2024 if this ballot gets over 60% vote.

Trulieve is by far the largest contributor in this campaign with over $50 million spent as of March 31, 2024, and was the only contributor until December 31, 2023. In 2024 Q1, five other companies joined the force including Verano, Curaleaf, Green Thumb Industries, AYR Wellness and Cresco Labs, virtually all the major MSOs.

In 2024 Q1, the other five MSOs contributed about $5 million in total.

Although recent data suggests that only 58% of voters in Florida support the ballot measure, which is under the required 60%, with more funding toward this campaign from MSOs (especially flushed with cash from not having to pay 280E tax anymore), it is very likely that Florida will be able to gather 60% vote in November 2024.

Once legalized, the annual sales of cannabis in Florida is expected to increase from $2 billion to about $5 billion quickly. Considering that Trulieve has about 21% market share in Florida from my previous analysis, this boost would add an additional $600 million revenue to Trulieve’s topline. It is refreshing that Trulieve is staying true to its regional hub structure, allocating capital to its core market rather than overextending itself. If this ballot gets passed in November 2024, the $50 million legislative campaign contribution should be well worth it. At Trulieve’s gross margin of 58%, in one quarter after Florida legalizes cannabis for adult use, the $50 million contributions would be paid back.

However, it appears that the market hasn’t fully priced in the impact of Florida’s legalization of adult-use cannabis with Trulieve.

Rescheduling of Cannabis by the DEA

On April 30, 2024, the news that the United States Drug Enforcement Administration (“DEA”) will reschedule cannabis to Schedule III was announced, which was later confirmed by the DEA.

This is a historical event that will officially decriminaze cannabis related activities and remove the burden of 280E tax from.

On April 30, 2024, Trulieve’s stock price jumped from $10.70 per share to as high as $14.03 per share, a 31% increase in just a few hours. However, the excitement quickly faded as the market realizes that this rescheduling process is quite long (for example, the DEA needs to obtain White House’s approval, congressional review, and address all public comments to its proposal, it can easily take months if not years before the rescheduling takes effect) and may not impact cannabis businesses as much in the near term. As of May 17, 2024, Trulieve’s stock price has fallen back to just $11.75 per share.

The largest impact to Trulieve from this announcement by the DEA is the rescheduling’s impact on 280E tax.

This position by the DEA arms Trulieve with a strong argument that the 280E tax should not be applicable to Trulieve’s business.

As of March 31, 2024, Trulieve had $278 million in Uncertain Tax Position Liabilities related to the 280E tax dispute with the IRS. Trulieve is slowly winning this battle against the IRS. While most other MSOs have not publicly stated that they filed amended tax returns with the IRS and are in the same fight as Trulieve, Ascend Wellness has followed suite and filed amended federal tax returns for 2020, 2021 and 2022 fiscal years.

Given that Trulieve usually was quite proactive in these matters, such as the Florida Ballot Measure, it won’t be surprising if more MSOs follow suit in the coming quarters to file amended federal tax returns. This will add pressure for the IRS to allocate resources to conclude on this matter.

However, while the IRS must agree that 280E tax will not apply going forward once the rescheduling takes effect, it is a question of fact what position the IRS will take for tax returns already filed from 2019 to 2024.

There may be some case laws that Trulieve can reference to where the application of 280E tax can be added or removed retroactively in certain situations. However, I admit my limitation in expertise that I am not able to find these case laws yet.

Overall, it appears that the market has been adjusting fairly after the overexcitement on the news to recognize the long process of rescheduling and uncertainty. How much exactly this position taken by the DEA will support Trulieve’s argument against the IRS, it is yet to be seen.

Valuation

Below is the latest comparison of valuation between Trulieve, Curaleaf and GTI.

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Both in terms of Forward Revenue Multiple and Forward EBITDA Multiple, Trulieve appears to be quite undervalued, especially considering Trulieve’s strong capital structure and growth potential in Florida.

If Trulieve were to generate $1.18 billion in revenue in 2024, at its gross margin of 58%, Trulieve would generate $684 million in gross profits. At the current market capitalization of $2.21 billion, it is just 3.23 times 2024 annual gross profits, which is consistent with its valuation in my previous analysis.

At the current pace of growth, unless Curaleaf makes drastic changes, Trulieve is poised to surpass Curaleaf and become the largest MSO in terms of the U.S. domestic revenue in 2025 if Florida were to successfully legalize adult-use cannabis.

Risk Factors

Although quite unlikely at this moment, given that all the MSOs are on board to fund and gather votes for the Florida Ballot Measure in November 2023, there is still a chance that Florida is not able to gather over 60% of votes and fail to pass this measure. If this measure does fail to pass, I believe that it is just a matter of when rather than if recreational cannabis will be legalized in Florida. If Florida fails to achieve this through registered voters, Trulieve and the other MSOs will continue the lobbying effort to legalize recreational cannabis through legislative or executive actions.

Conclusion

Trulieve saw significant growth and profitability in 2024 Q1 amid key regulatory changes. The potential legalization of recreational cannabis in Florida, coupled with the DEA’s announcement to reschedule cannabis to Schedule III, positions Trulieve favorably in the market. Trulieve’s valuation metrics indicate it is undervalued compared to its peers. As Trulieve continues to leverage its regional hub strategy and navigate regulatory changes, it is well-positioned to become the largest multi-state operator in the U.S. by 2025.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.