I LOVE analyzing this tire fire.  They play a very bad game of “hide the weenie”.

OK… let’s get to the good stuff.

Aleafia booked a bad debt expense of $7 million accruing from two customers… total bad debt expense last six quarters $9.6 million versus wholesale revenue of $35 million, for a bad debt expense ratio of 27% of each dollar sold.  Now, if you believe they also had biomass boomerangs (and the hallmarks are there) then this figure would be higher.

AH new CFO then decided that backing out a bad debt expense to get Adjusted EBITDA was a proper thing to do… It isn’t!  This was a bad decision by management selling to a uncreditworthy customer, backing it out is like absolving them of their sins. It is not like the new CFO went back and backed the EBITDA from the sale of these goods from previous Adjusted EBITDA.

Aleafia also still thinks its proper to reverse Business Transaction Costs which they record every single quarter. This is not a one-time event, which deserves consideration for backing out of EBITDA to show the “true” operations of the company.  If you are recording this expense every quarter, it is an operating expense. This line item used to be called Business Advisory Services when they were backing it out a year ago.

This Q Aleafia had a strange + Unrealized Gain on Biologicals.  It takes some math to figure it out because they consolidate two line items (the aforementioned plus Realized Gains on Bios) into one aggregate line item of “Fair Value Change in biological assets and changes in inventory sold”. The figure should be a negative if their crop was growing in size, it was positive.  This could indicate a crop failure.  They did knock down transfer price of outdoor to $0.25/gram from $0.35/gram, but they just planted in June so the writedown would be from indoor crops.

Their aggregate figure for the Q is $3,572… the Gain on inventory sold is $347 and the Decrease in FV on biological assets is $3,225 (this figure should actual be a negative number).  Add them together and you get their number.  There was no mention of this strange figure in the MDA, notes to financials and on the conference call.

Salaries and Benefits in Operating expenses, NOT PRODUCTION wages (which is in COGS or should be), almost doubled in the Q to $4.3 million an increase of $2.0 million. Why the need for more office staff?  Unless they are not allocating production staff expense to COGS?

But this quarters piece de resistance is the $12.1 million gain on sale of their medical clinics to Myconic Capital dba as Ketamineone Capital Limited.  They received 7 million shares in this… cough cough… publicly traded company as consideration for $12.25 million purchase price of their clinics.  That is $1.75/share.  Wait… there is a statutory hold and they cannot before September 11, 2021 when they can unload 2.1 million if these beauties, another 1.75 million November 11, 2021, 1.75 million February 11, 2022 and 1.4 million May 11, 2022.  Last trade $1.25 so knock 29% off ($3.5 million) off that security, assuming you can sell any.

Since March 2022 the trading volume has had three single days with volume of 86,000, 64,000 and 51,000 shares traded, and every other day was sub 1,000 shares traded.  No shares have traded the last two days.  Here is the level 2:

At non peek volume it will take them 7,000 days to unload these shares or 19 years.

You might recall that we have removed Aleafia Health from peer groups as we do not want anyone getting the wrong idea about this company and their suspicious transactions.

Income Statement Drivers – Trend

[REMOVED FROM PEER GROUP]

Sales for the Q were $10.7 million an increase of 51% QoQ or $3.6 million last Q, after a decrease of $8.1 million the prior Q. 

Sales are derived from:

• Consulting Services of $1.0 million doubled QoQ
• Research of $0.4 million last Q nil this Q
• Cannabis of $9.6 million a +54% increase QoQ or a $3.4 million increase

Cannabis sales are further segmented

• Medical of $3.2 million +23% QoQ
• Adult Recreational of $3.2 versus $1.7 million QoQ +87% (new skus are selling)
• Wholesale bulk of $3.1 million a +66% increase QoQ or +$1.3 million. I wonder how much will become a bad debt expense?

Adult sales were at $5.29/gram, an increase of 8% QoQ, spread over 608 KGs.  While medical sales were at $7.25/gram, a decrease of -14% QoQ, spread over 450 KGs.

Wholesale revenue were at $0.46/gram, a decrease of 39% QoQ from $0.75/gram last Q, spread over 6,739 KGs.  

Last Q CEO Benic had guided to another $4 million in sales on the wholesale front to drop in the prior Q.  This increase does not even cover that.  And oh yeah, they reduced the transfer price on outdoor crop inventory to $0.25/gram from $0.35/gram QoQ. 

Let me quote CEO Benic: ““When someone’s coming and offering you $2.50 a gram for your outdoor grow, or even $2 grams, it’s hard not to want to take some of that, because it’s profitable for you as you build your business,” he told a virtual investor conference on June 24, 2020. “But make no mistake folks. I want to be very clear on this. We’re not wholesalers. We are building consumer experiences.”

Should have taken the $2.00/gram you wholesaler.

Gross Margin- Trend

[REMOVED FROM PEER GROUP]

If you belive that they are not using biomass boomerangs to move biomass…

Gross Margin decreased to 43% from 47% last Q. In absolute terms that GM was $4.5 million versus $3.3 million in the previous Q, an increase of $1.2 million. BUT that GM is only real if they did not pull a biomass swap.

To refresh your memory on biomass swaps… In five Q’s from Dec 31, 2019-Dec 31, 2020 they purchased $45 million in inventory.  Their CoGS over that period was $23 million.  Their Wholesale revenue was $33 million.  With low-cost outdoor cultivation and in-house extracting… those are some pretty telling figures.   Why would a cultivator with extraction capability buy inventory, and that much inventory, when they had so much inventory they had to impair it?

Gross Margins on Adult use and medical were 32% and 38% versus 53% and 57% last Q, respectively.  Wholesale GM, if you trust it, was 51% this Q versus 71% last Q. 

Cannabis GM was $3.9 million versus $3.7 million last Q. They had to sell 147% more KGs (7,811 KGs sold) to achieve a GM lift of $0.2 million.

Selling General and Administrative Expenses & Share Based Compensation- Trend

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Aleafia record no selling expenses. 

G&A expenses saw an increase to $10.2 million or +$1.8 million QoQ. Wages and benefits increased $2 million to $4.3 million.  That compares to a GM of $4.5 million.

Wages increased $2 million in one Q IN ADMINISTRATION not production!!! They almost doubled!

Bad Debt was $7.2 million for the Q after $0.6 million last Q and $1.9 million for the fiscal 2020 year.  So, I guess some of the wholesale might not have been a swap, or they swapee did not return biomass or extract.

SBC was $0.5 million versus $0.6 million last Q.

Depreciation rounds out Opex at $1.7 million.

Total Opex is $19.6 million against GM before IFRS VooDoo of $4.5 million leaving NOP at a negative $15 million versus as negative $8 million last Q. Again, if you believe wholesale.

Other income and Expenses: Last Q totaled expenses of $2.3 million versus income this Q of $11.5

 million

• $1.8 million interest expense versus $2.2 million last Q.  They paid out debenture the prior Q.
• $12.1 million gain on the sale of their clinics, mentioned above.  Good luck realizing this gain.
• Gains and other non-operating income was $1.2 million

Net Income for the Q net of IFRS voodoo is negative $3.6 million versus negative $10 million last Q. 

EBITDA Trend

Aleafia once again removed business transaction expenses and bad debt from EBITDA to get to their negative $3.3 million Adj EBITDA. I have them at -$10.6 million versus -$5.0 million last Q… again, if you believed the wholesale was real.

Sales Required to Achieve Breakeven Adjusted EBITDA:

[REMOVED FROM PEER GROUP]

Balance Sheet Items of Note:

Cash Position

• Cash decreased $4 million. 
• They have “Restricted Marketable Securities” of $13 million… I do not know how “marketable” they really are
• Accounts Receivable have been impaired by $7.1 million, and ring in at $4.7 million. Medical is a cash business and Adult Use is generally 60-day terms, which would yield A/R of 2/3rds of last Q rec sales or $2.1 million, leaving wholesale A/R of $2.6 million.  We will see if the bad debt parade continues.

Inventory:

• They have removed any reference to purchased inventory from the quarterlies.  We will see if yearend audit resurrects.
  • Finished Goods increased by $0.9 million to $9.6 million, enough for several quarters.
  • WIP increased by $2.4 million to $27 million.   
  • Bio Assets are climbing with replanting of outdoor and increased $5.6 million to $8.6 million

• They have $34 million Convertible Debentures in Long term Liabilities that moved to Current Liabilities this Q.  That debenture matures June 27, 2022. I doubt it hits the $1.55 strike price. Will Aleafia be around as is when this matures?  Brace yourself for more dilution if they are.

What I said two three four Qs ago:

It sure looks like an inventory swap over the Dec/19 and March/20 Q’s, and I am suspicious of the purchasing and wholesaling activity this Q. I cannot trust their wholesale revenue numbers.

The fact they reportedly did not sell much outdoor flower this Q is confirming my thoughts that Outdoor will face a rough ride on the 2020 harvest.

They have sufficient cash to ride this out, but without stronger sales into the adult rec channel they are going to have issues.  They have 66,000 KGs of inventory incoming from indoor and outdoor and sold 2,545 KGs this Q.  They need a channel to move it.

What I said last two three Q’s ago:

The pitch from Aleafia has always been wait a quarter or two, everything is coming together.  Yet when the strip disclosure to obfuscate financial results and represent items that appear less than factual… it is tough to believe anything the c-suite is saying.

Yes, they may well have great sales each of the next two Q’s.  But unless they address the potential Biomass Swaps and are clear on sale price and any repurchase of extracts going forward it is tough to believe anything they say.

They have enough cash to get them through next quarter, but that convertible debenture is due in Q1F2021 in less than 6 months and things will tighten considerably by then. 

From their presser:

• By Q1 2021, the Company expects that the sale of packaged cannabis products in the medical and adult‑use sales channels will represent a majority of total cannabis revenue.

Forgive me if I want to see it before I believe it, given aggregate sales of $0.5 million this Q.

What I said last two Qs ago:

If you believe their wholesale was real and not a Biomass Swap, it looks like a good quarter. I believe it was a Biomass Swap and certainly not the first.

They certainly cannot pay the SGA of $6.5 million on GM of $1.1 million from Adult and Medical. 

I have never seen so many breaks between what a CEO says and what the financials tell me.

If you are investing in this wear a full hazmat suit.  It looks like the C-suite are playing games and collecting paychecks.  The music will stop once the cash runs out or they will convince some other retail investors to take a plunge.  If the board has not fired CEO Benic yet, it is likely they won’t.

What I said last Q:

Wait two more quarters… we just rolled out a bunch of new SKU’s.  This was the opening paragraph of a very short presser:

• “This quarter saw us achieve important executional breakthroughs as we realized the exponential increase of our cannabis product portfolio. Likewise, as we benefit from greater scale, we are demonstrating substantial improvements in the profitability of our core adult-use and medical cannabis product sales, contrasting with the broader industry trend of price and margin compression,” said Aleafia Health CEO Geoffrey Benic.

Adult and medical had a combined GM of $2.4 million. There is $9 million in cash Opex.  They need almost 3 times increase in incremental sales to breakeven.

This Q:

Well reader… if you got this far into this saga, I guess I owe you a closing statement. 

GM is barely covering Administrative Expenses on an increase in sales of 51%.  The veracity of the sales is questionable given the hallmarks of biomass swaps and the persistent bad debt expense.

They consistently mislead shareholders with their adjustments to EBITDA.

Given CEO Benic’s history of boasts that do not materialize and the above, how do you trust the c-suite to turn things around?  and … The company is on the clock to refinance $34 million in convertible debentures June 2022, as it is doubtful the $1.51 strike price is triggered for a convert. 

I have to go take a shower.

That’s all I have.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in AH and will not start one in the next five days.