Aleafia Health Inc. (ALEAF)

[FUNMAN]

A little color about the article --->>> Aleafia has executed as well as could be expected given what they had to operate with; that being limited access to capital. We have to deal with the O/S consequence of it.

That's always going to be an EPS limiter.

Operationally, I have confidence in the moves they made especially with kin slips.

This article points out that their outdoor grow is not equal comparatively to the quality of indoor grow. DUH

It points out the indoor Niagara facility is now online. It leaves out that they are harvesting every month because of it. That gives them the ability to produce consistent quantities and level off revenue peaks and valleys.

It also leaves out that outdoor grow is cheap and perfectly fine for Cannabis 2.0 products. It pointed out that the Niagara facility was used last year to produce starter plants for outdoors. It left out that Aleafia will not be doing that again this year. At the outdoor grow facility Aleafia also built incubation sheds for starter plants. That will add production efficiency and a much earlier planting.

The article also left out how late the Niagara facility license was issued last year. That delayed the starter plants, which delayed/reduced outdoor yield. It also delayed the first indoor harvest, which vastly delayed product, which crushed Q3.

It also left out the stolen product shipment in Dec 2019 which Aleafia made up for, which further depleted inventory. Aleafia never provided follow-up. The lack of news leads me to believe they were never adequately compensated by the insurance company. - FUNMAN

If you want to read the article and see the charts, read it at the following link, otherwise continue reading below:

https://seekingalpha.com/article/4408159-aleafia-stock-2021-could-prove-pivotal ;

Aleafia Health: Slow Start, But 2021 Could Prove Pivotal

Feb. 23, 2021 8:25 AM ETAleafia Health Inc. (ALEAF)

Summary

* Aleafia is a small-cap Canadian LP that burst onto the cannabis scene in 2018 and has since acquired Emblem to become a meaningful player.

* Aleafia spent much of 2018-2020 building its outdoor growing operation, which has so far yielded limited benefits. It also neglected the adult-use market and is now trying to catch up.

* 2021 is looking better now that the Niagara facility has begun indoor cannabis cultivation and striking distribution partnerships in Israel and the EU.

* We think Aleafia could have executed better but 2021 is likely to see improvements. We are Neutral given it remains a show-me story.

Aleafia Health (OTCQX:ALEAF) is one of the Canadian LPs that entered the cannabis scene in 2018 to raise a bunch of money without having grown or sold much cannabis. The company rode the wave of investor interests ahead of Canadian legalization and acquired Emblem to help become a legitimate player. However, more than two years after legalization, Aleafia's progress has been slow but it promises a big Q4 2020 and 2021.

Given the poor performance to date, we think 2021 is likely to show substantial improvement as the company improves from its costly focus on outdoor grow instead of indoor cultivation. Aleafia is several years behind other LPs in the adult-use market so the stock is likely to be volatile depending on its success. Its recent progress in entering international markets is positive, but whether these sales are meaningful or merely PR stunt remains to be seen.



(All amounts in C$)

Recent Development
Aleafia burst on to the Canadian cannabis scene in March 2018 and grabbed our attention after its stock shot up 300% after several announcements that lacked substance. The stock reached its all-time high of above $3/share in 2018; fast forward to today, and it closed at $0.61 Monday. Clearly, the hype was overdone and the stock remains well below these levels seen in 2018. Since then, the Canadian cannabis market has been in a lull and only a few well-capitalized leading LPs were able to make some headway through M&A or international expansion. Aleafia moved at a much slower pace.

By December 2018, Aleafia decided that it is probably easier to acquire an LP with existing facilities, brands, and provincial supply agreements. Aleafia announced its acquisition of Emblem in an all-stock deal. The rationale actually made sense to us. Emblem was struggling and pivoted its strategy to focus on branding and marketing while reducing in-house production and relying on the wholesale market. Meanwhile, Aleafia did not have any meaningful licensed cultivation capacity, nor does it have experience growing and selling cannabis products at scale.

Therefore, the two companies combined to create an LP that actually had real brands and distribution capabilities. Aleafia later decided to use Emblem's 30,000 sq ft Paris facility for packaging and 2.0 product manufacturing and kept Emblem's brands for domestic sales. We think the transaction was positive for Aleafia, because it would have taken them a lot longer to develop brands and earn distribution rights to each Canadian province. While the transaction looked very unattractive to Emblem shareholders given Aleafia's less developed assets and the very low implied premium, Aleafia shareholders benefited immensely from the deal, and things could have been a lot slower without it.



(Source: 2018 Investor Presentation)

Fast forward to Aleafia's Q3 2020 results, and there are a few things that jump out. First of all, the cannabis clinics are not exactly money makers: this segment only contributed ~$723,000 during Q3, which is negligible. So much for the 17,500 patients registered with Aleafia's GrowWise and Canabo medical clinics. The Canadian medical cannabis market is tiny and has been contracting after the full legalization, so we don't think these clinics will become meaningful revenue contributors in any event, even though they might be able to refer some patients which are immaterial. Aleafia reported $4.2M of cannabis net sales and its gross margin was only $0.7M for a gross margin of 17%. The low margin was due to its reliance on the wholesale channel and its outdoor harvest, which likely carry lower quality and thus lower sale prices.

The company reported a negative adjusted EBITDA of $5.7M in Q3 and 2020 YTD EBITDA was positive $3.8M due to the seasonality of its outdoor harvest.



(Source: Filings)

Looking at the more detailed results shows that wholesale sales made up half of the cannabis revenue and the average selling price was only $2.61/gram for the nine months. The Niagara greenhouse was used as a staging area for the 2020 outdoor growing season at Port Perry but has since switched back to normal course cannabis cultivation with the first harvest in September 2020. We expect Q4 revenue to show significant improvement from adult-use sales.



(Source: Filings)

Based on the results from various LPs, outdoor cultivation seems to be a challenging business in Canada due to the lower yield of high-quality dried cannabis. Most of Aleafia's outdoor harvests were sold to the wholesale market with depressed pricing that is unlikely to improve in the near-term. The beginning of harvest at Niagara facility is positive, but it would likely be challenging for Aleafia to compete effectively in the highly competitive adult-use market given it has been absent in the last two years. The market has been dominated by large LPs such as Canopy (CGC), Aphria (APHA), Aurora (ACB), and HEXO (HEXO), and Aleafia currently lacks branding and consumer awareness. While the company gave an upbeat update in February on its Q4 results and early Q1 2021 progress, investors will need to see the actual results to gain confidence after years of slow progress. Aleafia is also making progress on the international markets, including securing supply agreements partners in Europe and Israel (two orders so far are 1,400 kg of dried flower to Israel and 1,000kg of dried flower to the EU). We expect international sales to command material higher sales prices vs. the domestic market. Its Niagara facility was deemed EU GACP compliant in late 2020, which allows the company to export to the EU and other markets, including Israel.



(Source: Company Website)

Valuation and Trading

Aleafia currently has a market cap of $250M and trades at 6.4x EV/Sales and 49x EV/EBITDA based on annualized 2020 Q3 YTD results. While we expect Q4 and 2021 results to improve materially given its introduction of adult-use products and progress in international distributions, the stock is likely to remain range-bound before tangible progress is made. The company has performed in line with the broader sector was tracked by ETFMJ Alternative Harvest ETF (MJ), which tracks primarily Canadian cannabis stocks. The company had $43M of cash at end of September and announced another bought deal to raise $20M at $0.83 per share. Sadly, Aleafia still needs to issue half a warrant for each share sold at an exercise price of only $1.05 to get the deal done, something that reflects its underperformance and funding disadvantages vs. other Canadian LPs. Aleafia is now saddled with warrants that will result in material dilution in the future: Prior to the most recent raise, it already had 13 million warrants exercisable at $0.80 and another 60 million with a blended exercise price of $2.05.



(Source: Bloomberg)

Conclusion

We expect Aleafia's Q4 and early 2021 results to show significant improvement, but it is a bit too late considering that more than two years have passed since the initial legalization. The company has focused on its outdoor harvest operation, which is facing a challenging wholesale market due to oversupply. The Niagara facility is finally moving back to indoor cannabis production, which should help Aleafia regain domestic market share and make incremental sales into the international markets. We are cautiously optimistic about Aleafia's 2021 outlook given the two catalysts in Canada and internationally. The company is adequately funded, but recent funding rounds have come with punitive warrant issuances. We expect the stock's performance in 2021 to be dominated by its progress and financial performance. The Canadian domestic market is improving, but competition is fierce and ongoing industry consolidation will make small LPs like Aleafia less competitive. Therefore, we are Neutral on the stock given its poor track record paired with our slightly optimistic 2021 outlook.