Trulieve Finds Itself In The Crosshairs

Trulieve Cannabis Corp. (OTC: TCNNF) was being touted as the most promising of cannabis stocks. Its earnings reports put competitors to shame as the company delivered impressive net incomes and others instead struggled with net losses. This week a short-seller report has accused the company of being a fraud and that comes a week after the company faced fire over unwanted texts.

On Thursday, the company announced the appointment of two new advisors to the board of directors. Susan Thronson was a Senior Vice President of Global Marketing for Marriott International, leading Marriott’s worldwide integrated marketing strategy and execution for its 15 hotel brands. Ms. Thronson formerly served as a director of Angie’s List, an internet service company, and SONIC Drive-In, an operator of an American drive-in fast-food restaurant chain based in Oklahoma City, Oklahoma.

Thomas Millner served as CEO of Cabela’s, a direct marketer and specialty retailer of outdoor recreation merchandise, for nearly a decade.  Prior to Cabela’s, Mr. Milner spent 14 years as president and CEO of North Carolina’s Remington Arms Company, an American manufacturer of firearms and ammunition.

The stock tumbled on the news of the Grizzly Report but began to recover as others stepped up to defend the company. The stock fell from a close of $11.91 on Monday to $10.40 on Tuesday but was lately trading at $10.84.

Grizzly Research Report

The report called out the company for a variety of bad behaviors and questioned the earnings. The report said, “The company’s profitability is largely reliant on paper-gains, namely mark up on biological assets. Real cash flow has been in fact negative. We saw the company’s low-quality production, which makes us highly suspicious of the mark-ups that are far bigger than in for any other peer.”

It went on to say, “While almost all others are operating at a net loss during the examined horizon, Trulieve (using its
biological assets mark-ups), was able to consistently achieve positive net income with an astounding net
profit margin of as high as 99%. Upon closer inspection, we realize that at any given time, Trulieve holds an abnormally large amount of biological assets. Biological assets should typically be used to support revenue. However, we are seeing that Trulieve’s biological assets utilization efficiency is relatively low compared to peers. In other words, for every dollar in biological assets, Trulieve is able to generate the least amount of dollar sales. This
strongly suggests that the mark-up on these assets is overstated.”

The report did not shy away from its harsh words and allegations. It concluded, “CEO Kim Rivers and her husband JT Burnette are at the very center of a political crime ring the FBI has subpoenaed, and we have shown the multiple previously unknown connections between Trulieve and Burnette. We expect serious consequences for CEO Kim Rivers and Trulieve. They have been crooks then, and they are crooks now. We think Trulieve is absolutely uninvestible.”

Here’s a summary of the allegations:

  • Low quality cultivation facilities that could lead to poor products
  • Accusations that the CEO Kim River’s husband JT Burnette is involved in an FBI probe
  • Accusations that Burnette is Trulieve’s main construction partner
  • Alleges that Trulieve is not being truthful about its lenders and takes out small loans from insiders even as it suggests it has plenty of cash
  • Alleges that Trulieve is marking up the product to portray profitability

Trulieve Responds

While Trulieve, didn’t answer the accusations one-by-one it did release a response via a press release.  CEO Kim Rivers said, “We ask that our investors be aware that the Report reflects the opinions of an acknowledged short seller, whose sole interest is in profiting from a decline in the price of the Company’s shares. I have full confidence in our management team and their abilities to continue to serve our customers without being distracted by these baseless allegations. Trulieve reserves all of its rights to take appropriate legal action against those responsible for the Report.”

She went on to say, “Trulieve sells high quality flower, cultivated in our indoor facilities, and was recently recognized by an award from the Cannabis Business Association of having the best flower in Florida. We stand behind the quality of our products and have a long-standing no-questions-asked return policy.  Trulieve set a record for flower sales in Florida just last week, capturing over 51% of the market.”

Stifel Research

Stifel Director of Research Robert Fagen gave a fuller response to the Grizzly report. He addressed the FBI suggestion saying, “Kim Rivers’ involvement in the FBI investigation surrounding the activities of the Tallahassee CRA and its allocation of public funds has been well documented in TRUL’s disclosure since it went public.” The comment also noted that Trulieve paid for an independent review that determined the risk was not enough to keep Rivers from acting as CEO.

Fagen also noted that Burnette’s relationship as the main construction partner is not new information. “While we acknowledge the large amounts of equipment purchases by TRUL from an affiliated entity do not provide the best optics, we fail to see how this activity is technically illegal in light of public disclosures. It is rather a conflict of interest in our view.”

With regard to the accusation of poor quality products, Stifel reminded readers that the majority of the plants grown in the facility were intended for extraction purposes, which typically use a lower quality flower. He also pointed out that Trulieve has facilities for devoted to higher quality flower. “We would remind investors a major reason TRUL has maintained its disproportionately high market share is due to its high product quality, driving its strong repeat business.”

Finally, Fagen addressed the alleged paper-gains on the books by noting that an IFRS requirement forces the company to account for the product a certain way. “The concept that TRUL should be scrutinized for reporting gross margin in excess of revenue or large net income based on non-cash biological asset gains is rankly ridiculous in our view,” said Fagen.

Stifel did concede that Burnette’s relationship isn’t the company’s greatest attribute, but overall the Trulieve has been compliant in its disclosures. Stifel also pointed out that Trulieve’s competition is beginning to divert some of their capital away from the state as they tire of Truelives’s market share growth.

Unwanted Texts

It’s been a tough month for Trulieve. Mats Jaslow filed a class-action lawsuit last week claiming Trulieve is spamming its customers and followers with thousands of incessant texts. He claims the promotional tactic and its frequency violates the Telephone Consumer Protection Act, which aims to reduce the number of nuisance calls from businesses. Cannabis companies often turn to text messaging as a way to communicate with customers since many forms of advertising aren’t allowed.

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