Remember this little diddy from Aleafia Q3 F2020 earnings release:

• “$16M in Contracted Cannabis Sales: In addition to growth in the medical, adult‑use and international channels, the Company has contracted sales that will, upon completion of shipments, generate net revenue of $16 million. It is expected that the majority of the domestic wholesale shipments will be completed in the three months ended December 31, 2020 (“Q4 2020“), with the remainder shipping to customers early in the first quarter of 2021 (“Q1 2021“).”

That Guidance missed by $4.1 million or 25%. Now, $4.1 million doesn’t seem like a lot until you put it up against the Q1 F2021 sales of $7.1 million.  What do shareholders get??? Crickets. No explanation.

And I am pretty sure they did not pull a biomass swap this Q as they sold their bulk at $0.75/gram exactly what they have it as booked value. 

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

Here is a table showing the hallmarks of the biomass swap:

What I said last Q:

Its pages of them playing hide the weenie with all the hallmarks of biomass swaps and them playing loose and fast with adjustments to EBITDA. 

Maybe this is the quarter that gets their CEO fired.  One can only hope.

Let us get to the financials. I won’t be doing any peer comparisons, as I do not trust their financial statements and I do not want investors getting the wrong idea about Aleafia when comparing numbers I do not trust to other companies.

Income Statement Drivers – Trend

Sales for the Q were $7.1 million a decrease of -54% QoQ of $8.5 million last Q. 

Sales are derived from:

• Consulting Services of $0.5 million flat QoQ
• Research of $0.4 million -$0.2 million QoQ
• Cannabis of $6.2 million a -55% decrease QoQ or a $7.9 million decrease

Cannabis sales are further segmented

• Medical of $2.7 million -2.2% QoQ
• Adult Recreational of $1.7 million versus $1.4 million QoQ!! +22%
• Wholesale bulk of $1.9 million a -81% increase QoQ or -$8.1 million. I guess they could not find a dance partner for a biomass swap.  Not for lack of effort I bet.

Adult sales were at $4.89/gram, an increase of 6% QoQ, spread over 352 KGs.  While medical sales were at $8.46/gram, an increase of +6% QoQ, spread over 314 KGs.

Wholesale revenue were at $0.75/gram, an increase of 56% QoQ from $0.48/gram last Q, spread over 2,488 KGs.  What happened to the other $4 million in sales CEO Benic?? What, no mention in the presser??

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

Gross Margin increased to 47% from 44% last Q, thanks to that wholesale revenue being muted. But in absolute terms that GM was $3.8 million versus $8.5 million in the previous Q. BUT that GM is only real if they did not pull a biomass swap in Q4F20. Which has all the hallmarks of a biomass swap.

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.   

Gross Margins on Adult use and medical were 53% and 57% versus 16% and 33% last Q, respectively.  They aggregate $1.4 million in GM versus $1.0 million last Q.  Wholesale GM (if it can be believed) was 71% or $1.3 million versus $5.1 million last Q.

Cannabis GM was $3.7 million versus $6.3 million last Q. Their cash OPEX is $9 million.

Selling General and Administrative Expenses & Share Based Compensation- Trend

Everything seems to be a plug in Q4 F2020, which leads to some crazy changes in the line items.

This Q:

Aleafia record no selling expenses.  Given their Adult rec performance that is not shocking.  If they want to penetrate Adult Rec expect this to ramp up.

G&A expenses saw an decrease to $4.6 million or -$2.0 million, and an increase as % of sales to 65% from 43%.   Comparing to Q4 plugs is not a worthwhile exercise.

Bad Debt was $0.6 million for the Q after $1.9 million for the fiscal 2020 year.  So, I guess some of the wholesale might not have been a swap.

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

Depreciation rounds out Opex at $1.8 million.

Total Opex is $11.3 million against GM before IFRS VooDoo of $3.3 million leaving NOP at a negative $8.0 million versus as negative $3.3 million last Q. Again, if you believe wholesale.

Aleafia needs 244% incremental quarterly sales at current GM% and OPEX$’s to achieve +NOP.

Other income and Expenses: Last Q totaled expenses of $201 million versus expenses this Q of $2.3

 million

• $2.2 million interest expense versus $3.3 last Q.  they paid out debenture so this will reduce further.   
• Goodwill and Intangibles were written down $200 million last Q and nil this Q. $11 million is impaired from Flying High Brands and the rest looks like Emblem which they purchased for $200 million.

Net Income for the Q net of IFRS voodoo is negative $10 million versus negative $201 million last Q. 

EBITDA Trend

Aleafia once again removed business transaction expenses and bad debt from EBITDA to get to their -$3.0 million Adj EBITDA I have them at -$5.0 million versus -$0.06 million last Q if you believed the wholesale was real.

Sales Required to Achieve Breakeven Adjusted EBITDA:

They require incremental sales of 54% at present GM% (if you believe their GM) and cash OPEX$’s to be +EBITDA.

Balance Sheet Items of Note:

Cash Position

• Cash and marketable securities decreased $13 million.  They paid out Debentures $26 Q and raised $21 million for a net -$5 million.
• A/R of $11 million and tax A/R (likely HST refund) of $2.1 million.  Interesting given non-cash sales (med is cash) were $3.6 million.  More fun and games at Aleafia.

Inventory:

• They have removed any reference to purchased inventory again.
  • Finished Goods increased by $1.2 million to $5.1 million.
  • WIP increased by $2.5 million to $24 million.   They had the product to wholesale but fell 44 million short.

• They have $33 million Convertible Debentures in Long term Liabilities.  That debenture matures June 27, 2022.  So, it will slide into current liabilities next Q. I doubt it hits the $1.55 strike price. Will Aleafia be around as is when this matures. I doubt it. Brace yourself for more dilution.

What I said two three 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 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 Q:

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.

This Q:

Wait two more quarters… we just rolled out a bunch of new SKU’s.  This was the opening pargargh 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 a 3 times increase in incremental sales to breakeven.

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.