Trulieve’s Unfair Advantage – Trulieve Cannabis Corp. (OTCMKTS:TCNNF)

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Summary

Trulieve (OTCPK:TCNNF) won a trial court victory over the state of Florida after challenging the state’s cap on dispensaries as unconstitutional. Florida and Trulieve have settled the case before the state’s appeal of the trial verdict.

Under the settlement, Trulieve’s 14 stores which were in place prior to Florida’s dispensary cap will be grandfathered in – they will not count towards Florida’s dispensary cap. This means Trulieve will be able to open 14 more dispensaries than their competition – up to 49 dispensaries.

This is a big victory for Trulieve, especially if they can open those stores quickly and gain a further advantage over their peers in patient count and revenue/store. But this is also likely to spell headaches for the State of Florida: This settlement looks patently unfair to other cannabis companies and could lead to a lawsuit from other Florida providers on pace to bump against Florida’s dispensary cap, especially Curaleaf (OTCPK:CURLF) and Surterra Wellness (private).

Those potential headaches for Florida may keep lawyers busy, but they won’t dampen Trulieve’s buzz – this is a big win for Trulieve.

Trulieve is expected to announce earnings for their December quarter in the next couple weeks. My full coverage of Trulieve, as always, can be found on The Growth Operation.

Unconstitutional Implementation of Ballot Text

“Allows medical use of marijuana for individuals with debilitating medical conditions as determined by a licensed Florida physician. Allows caregivers to assist patients’ medical use of marijuana. The Department of Health shall register and regulate centers that produce and distribute marijuana for medical purposes and shall issue identification cards to patients and caregivers. Applies only to Florida law. Does not immunize violations of federal law or any non-medical use, possession or production of marijuana.

A ‘yes‘ vote supported legalizing medical marijuana for individuals with specific debilitating diseases or comparable debilitating conditions as determined by a licensed state physician.

A ‘no‘ vote opposed this proposal for legalization of medical marijuana, keeping the state’s more limited medical marijuana program in place.”

Florida Medical Marijuana Legalization, Amendment 2 (2016)

Florida residents voted 71% in favor of legalized medical cannabis on Nov 8th, 2016. On June 9th, 2017, Florida’s legislature approved SB 8A, Medical Use of Marijuana Act, with former Governor Rick Scott signing the bill into law on June 23rd, 2017.

Among other provisions, the bill banned smoking of medical marijuana and placed a cap on the number of retail dispensaries until April 1st, 2020.

Florida clarified the dispensary cap in late 2017, putting the limit at 25 dispensaries per cannabis licensee (there are 14 licensees), plus an addition five dispensaries per licensee for each 100,000 Florida medical cannabis patients. There are currently slightly over 200,000 medical cannabis patients, so each cannabis company is permitted 35 dispensaries in the state of Florida.

Neither of these restrictions were included on Florida’s ballot text, quoted above.

Florida Loses Lawsuits

Florida was sued on both restrictions in different cases.

Smoking cannabis: In People United for Medical Marijuana v. Florida, People United challenged the Constitutionality of SB 8A, which banned smoking medical cannabis despite medical cannabis receiving 71% support in the 2016 referendum. The State of Florida denied this complaint and the case went to trial.

Florida lost. After losing at trial, Florida appealed and the ban on smoking medical marijuana remained in place pending a stay. In January 2019, new Florida Governor Ron DeSantis announced he was dropping the appeal. Smoking medical cannabis now legal in Florida, and smokable cannabis is offered by Trulieve, Curaleaf, Liberty Health, and others.

Dispensary cap: Trulieve also sued Florida, challenging the Constitutionality of Florida’s dispensary cap. Trulieve argued that the dispensary cap was unfairly penalized Trulieve and arbitrarily impairs product availability and safety.

At the time the cap was enacted, Trulieve already had 14 dispensaries and had already applied for licenses for 27 total dispensaries – two more than the cap allowed when implemented. Other companies in Florida had only opened a combined 17 dispensaries at the time, suggesting Trulieve was hurt the most by this cap.

Trulieve argued this was unfair because the company picked its first 14 locations without knowing such a cap – and such a low cap – would be impose. If Trulieve had known they would be limited to 25 (later 30 and 35) dispensary locations, they would have chosen their initial locations much more carefully. The State of Florida denied this complaint and the case went to trial.

Florida lost again.

“‘The evidence clearly and conclusively establishes beyond any doubt that conveniently located medical marijuana dispensaries (as opposed to vehicle delivery, the only allowed alternative means of dispensing) promote authorized users’ improved access to medical marijuana products and related information and services, at lower cost, and promote public safety (the stated goals for regulation in the amendment),’ Gievers wrote in Friday’s ruling.

The statutory cap ‘erects barriers that needlessly increase patients’ costs, risks, and inconvenience, delay access to products, and reduce patients’ practical choice, information, privacy and safety,’ the judge wrote, adding that the limit on the number of dispensaries, ‘even if time limited, is the kind of regulation that the amendment was intended to eliminate.'”

Tallahassee Democrat, Feb 4th

Settlement in Lieu of Appeal

After this victory, Florida settled with Trulieve rather than pursuing an appeal.

“Following a ruling by Judge Karen Gievers claiming the statutory caps on dispensaries unconstitutional, Trulieve Cannabis, Florida’s largest medical cannabis licensee, has settled their challenge with the Florida Department of Health. Trulieve’s 14 dispensaries that were established before the statewide cap was enacted are now excluded from the statutory cap.

Trulieve and the Florida Department of Health reached a mutual settlement which specifies that only dispensaries approved after the statewide cap was enacted are counted in the cap calculation for Trulieve. Presently, the law limits the number of dispensaries a medical marijuana treatment center (‘MMTC’) is allowed to open based on the number of active patients on the medical marijuana registry. These caps are in place until April 2020. Under this settlement Trulieve will be entitled to 14 dispensaries in addition to the authorized cap amount for as long as the cap remains in place.”

Trulieve Press Release, April 1st

Under the terms of settlement, Trulieve’s first 14 dispensaries – which pre-date the cap – will not count towards Trulieve’s dispensary limit. This allows Trulieve to open up to 49 dispensaries in Florida before April 1, 2020, while other cannabis companies will be capped at 35 dispensaries.

The settlement does not apply to the cannabis companies that operated the other 17 dispensaries that were in place prior to the cap being enacted – those companies are still capped at 35 dispensaries until April 2020.

Thoughts

While April 2020 is only one year away, this result may be significant for Trulieve and its competitors. In general, longer-established dispensaries will have built up more patients and will generate more revenue than newly-established dispensaries.

There is a 92% correlation between the average age of Trulieve stores and Trulieves revenue per dispensary.

For example, over the past seven quarters, there is a 92% correlation (84% r-squared) between Trulieve’s revenue/dispensary and their average dispensary age, figures that I track for my coverage of Trulieve on The Growth Operation. To the extent that Trulieve can surpass 35 dispensaries before its peers, Trulieve will have an advantage over those peers – especially peers that have to “wait” at 35 dispensaries until April 2020.

As of Florida’s most recent Office of Medical Marijuana Use update, Trulieve has 27 dispensaries and has opened 10 dispensaries since the start of October 2018. As this pace, Trulieve would hit 47 dispensaries by April 2020, well past the 35-dispensary limit of other cannabis producers, even without accelerating their dispensary opening schedule due to a higher cap.

Meanwhile, both Surterra Wellness and Curaleaf are also nearing the dispensary cap:

Company Dispensaries, 3/29/19 Dispensaries, 9/28/18 6-mo Change Implied Dispensaries, 4/1/20
Surterra Wellness 23 11 +12 47
Curaleaf 23 11 +12 47

Source: State of Florida and author’s estimates.

Both Surterra Wellness and Curaleaf are on pace to bump into the 35-dispensary cap in about six months, in September or October 2019. In both cases, these companies will be forced to stop building dispensaries while Trulieve is able to glide through the 35-dispensary limit on its way to 49 dispensaries.

None of the other competitors in Florida, including Liberty Health (OTCQX:LHSIF) or recent-IPO Cansortium‘s (CNSX:TIUM.U) Knox Medical are on pace to pass the 35-dispensary mark by April 2020. However, recent Florida entries from multi-state operators including Acreage Holdings (OTCQX:ACRGF), MedMen (OTCQB:MMNFF), Green Thumb (OTCQX:GTBIF), and iAnthus (OTCQX:ITHUF) may also challenge this settlement, given their relatively deep pockets that could enable rapid growth, if permitted by Florida law.

Under the terms of this settlement, it feels like Trulieve has an unfair advantage over its competitors. As a Trulieve investor, I don’t mind.

Happy investing!

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Disclosure: I am/we are long CNSX:TRUL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.



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