The Florida-based cannabis company Trulieve Cannabis (TCNNF) has found itself a target of short-selling research firm Grizzly Research Inc., which earlier this week called the company a "fraud," and accused it of wrongdoing.
This came as a surprise to cannabis watchers, as Trulieve has been considered one of the better performing companies in the sector.
Trulieve quickly fired back in defense after the reports of Grizzly's research surfaced on investment news sites, but its stock still suffered, falling from a close of $11.91 on Monday to $10.40 on Tuesday. It was rising in pre-market trading on Wednesday as others, including an analyst at Stifel, began to defend the company.
Grizzly's report called out the Sunshine-state-based company for a variety of supposed bad behaviors including having low quality cultivation facilities that could lead to low-quality products; accusations that chief executive Kim Rivers' husband J.T. Burnette is involved in an FBI probe; accusations that Burnette is Trulieve's main construction partner and that Trulieve takes out small loans from insiders, while suggesting it has plenty of cash; and allegations that Trulieve is marking up the product to appear profitable.
In its defense, Trulieve issued a statement that Grizzly's report "contains several false, slanderous and misleading statements about Trulieve."
"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," said Trulieve's Rivers in the statement. "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."
Rivers went on to defend the company's "high quality flower," that was recently recognized by an award from the Cannabis Business Association as being the "best" in Florida.
Stifel's on Trulieve's Side
Stifel Director of Research Robert Fagen also countered the Grizzly report, contending that FBI-related allegations were already disclosed by the company, and that Trulieve paid for an independent review that determined the risk was not enough to keep Rivers from acting as CEO. Earlier this year, Burnette was charged as an additional defendant in on ongoing racketeering conspiracy case involving a suspended Tallahassee City Commissioner, a political consultant and others, according to the U.S. Department of Justice.
Fagen also said that Burnette's role as a main construction partner is not new information, either.
"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 regards to the accusation of poor quality product, Stifel noted 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 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."
Fagen also addressed the alleged paper-gains on the books by noting that an International Financial Reporting Standards requirement forces the company to account for 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 that 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 Trulieve's market share growth.
The cannabis industry has seen it fair share of short-seller attacks. While some have been lauded for finding egregious behavior, others have been accused of issuing negative reports just to drive down the price and make themselves a large sum of money.