Can Trulieve bounce back from the Harvest deal? – The colorful fool | Vette Leader

verily (TCNNF 0.94%)Florida’s largest medical cannabis company and multi-state operator (MSO), made a significant acquisition last year to expand its footprint from its Florida hub to the Southwest and Northeast United States

The company then had to take on additional debt in the form of two bond issues in subsequent quarters in order to continue expanding and pay part of its bills. It just released its second-quarter 2022 results showing some positive gains for the company, but shareholders may not be as happy with where their share price is today as the Trulieve front office was with the earnings report.

Trulieve merged with Harvest

Last October, Trulieve, until then primarily focused in Florida, completed its bid to acquire leading Arizona-based MSO competitor Harvest Health & Recreation in an all-stock deal for $2.1 billion that saw the Harvest shareholders exchanged one of their shares for 0.117 of a junior voting share in the parent company. Trulieve issued 50.9 million shares for Harvest, which was about $4.79 per share, a good deal for Harvest shareholders at the time. But Trulieve shareholders saw their stock value plummet by 40%.

Kim Rivers, CEO of Trulieve, said at the time of the merger announcement that the new company would be the “most profitable multi-state public operator” in the U.S. Today, it has 175 dispensaries and over four million square feet of cultivation and processing capacity in 11 states. These states include the medical markets of Florida, Ohio, Pennsylvania, Maryland, and West Virginia, and the adult markets of Connecticut, California, Massachusetts, and Arizona (where most non-Florida pharmacies are located). Management also announced in its Q2 results that it may exit the Nevada market after halting wholesale operations last quarter. The reason for the exit remains unknown, but may be related to falling indoor and greenhouse cannabis prices in Nevada.

Sell ​​bonds to pay off Harvest debt

To cover capital expenditures and Harvest debt, upon the closing of the Harvest deal in early October 2021, Trulieve issued $350 million in privately placed senior secured notes on the Canadian Stock Exchange (CSE) at 8% per annum in the first An additional $75 million in bonds in Q2 2022 on the same terms as the October bond sale for further investments and other expenditures, bringing the total amount owed to senior noteholders to $425 million. The Notes will be redeemable after October 6, 2023 and will mature three years later on the same date. Between the two offerings, Trulieve’s long-term debt rose 345% year over year to $542.4 million through June 30, 2022, a big number considering some of that comes into play in just over a year .

The top line looks fine, but there are problems

In the second quarter of 2022, revenue grew 43% year over year to $320.3 million. Retail revenue for the issuer-heavy MSO grew 3% quarter-over-quarter to $298.6 million. Selling, general, and administrative (SG&A) expenses have remained relatively flat as revenue has increased since acquiring Harvest, indicating the business plan is working efficiently. The company continues to report a loss of $22.5 million for the period, although it was a 30% sequential improvement. Much of the loss is due to one-time write-downs related to the Harvest merger. The company’s adjusted loss last quarter was just $1.1 million, all good news for Trulieve.

Its all-important cash in the bank was a cool $181.4 million, down 32.1% sequentially and 37.3% year-over-year, reflecting rising expenses for the leadership of a cannabis company on both coasts. If that cash continues to dwindle, the company could be tempted to dilute its stock again or take on more debt. Additionally, shares, which have hit a high in the company’s historic stock prices since its merger with Harvest, have lost more than 56% of their value since last October, along with the aforementioned 40% dilution for shareholders. In other words, if you bought $100 worth of Trulieve stock early in the fourth quarter of 2021, you’ve lost about $56 of that investment to date.

68 percent of Trulieve’s operations are in Florida, the country’s third-largest medical cannabis market. Because of its dominance there and its emerging presence in states used by adults, such as Arizona, Trulieve has a reasonable base from which to foot the bill for the company as its recent borrowings dwindle. However, if it relies on Pennsylvania, Maryland, or even Florida to grow revenue after they roll out adult use, it may have to wait years, which may involve more borrowing and stock dilution, to sustain the company’s growth, a Situation that can’t afford with stock prices already down and senior bondholders starting to make money next year.

It can be difficult for shareholders to fully recoup their lost investment in Trulieve if it stays on the same path. The stock could rebound somewhat as it fully integrates Harvest into its brand and medical cannabis gains popularity, but it will take a while, making it not a great buy for investors looking for quick returns right now.

Lukas Barfield has no position with Trulieve. The Motley Fool has positions in and recommends Trulieve Cannabis Corp. The Motley Fool has a disclosure policy.

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