Ah, Aleafia Health ($AH). I’d skipped doing a Structure on their 4th quarter, deferring to the Q3 F2020 one instead.

GoBlue has a great line of sight on this outfit, and $AH is to GoBlue as $ZENA <was> to me as fascination. Certainly not as investment (I won’t trade $AH either as I have very little respect for management) but as business story. And I shared his view that it won’t have a happy ending for shareholders in the absence of serious change, much like the path that $ZENA walked.

$AH hit a raise at a pretty good time, landing an $0.83/unit price (with only half warrants going out). They’ve had a lack of any kind of sustainment of that issue price though, as its’ atrophied in the interim. There’s strong pattern thats emerged from WSB/GME interest in the sector back in late January, and it isn’t a pretty picture:

Like all things though, sales and margin cures all. Let’s see how a challenging first quarter for many in the sector has panned out for them.

To the financials!

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• The Canabo clinics are gone (largely), replaced by an operating agreement and a ‘virtual’ presence for weed sales. All in paper, and it’s subject to stages of lockup for a year. Given vol…well….any deal they could get to get those assets monetized I guess made sense.
• Doctor/educator costs higher than revenue. Yep. Now, that other outfit will have to deal with those doctors and educators, while introducing intravenous ketamine as a product no less. Brave new world.
• Cash at $17MM, A/R at $11MM, payables at $19MM(!). Wow. Net $8MM down in cash position, that $22MM raise now sees less than $10MM in cash net in barely more than 60 days. Wow again.
• $7MM in sales in the quarter, 44% margin. Not bad (at least for margin). Sales are showing growth, albeit little QoQ. Yet that’s all set against a $9MM cash OPEX, a bleed of $2MM/month(!).
• All of $AH’s 2.0 offerings and product in-development: the oral strips, gels, pre-rolls, a ‘coming soon’ craft kinda offering….they’ve got a full suite of products that needs to show something far more than this. They look to be some sort of Supreme – while being short about millions per month in sales.
• Which reinforces a takeaway we’ve seen many times over the past couple of years: just because you build it don’t mean they’ll come. $GTEC, $FIRE, $XLY, these are shops (that even if wobbling) have at least demonstrated those outfits can get into consumer’s wallets.
• $31MM in inventory.

Ok, I’m pretty much done here. We’ve had extensive looks into the capital structure and operations – when there looked to be a potential business here. Haemorrhaging cash at this rate – after sequential quarters of less than improving anything – this thing looks to be terminal.

Will things turn out differently for $AH than what happened to $ZENA? Well, I’ve heard rumours that $AH has been shopped around for awhile now. And they differ in several respects that $ZENA presented: eg – low cost production; demonstrable sales; revenue streams from non-cannabis sources; a lack of inflated sales numbers; production planning; et al.

$AH does lack what appears to be in vogue: sales and branding.

They do seem to have a similarity in being poorly managed. And I’m giving $AH the benefit of the doubt here, because that assumes ‘good’ management could do anything with a recreational presence one could fit in a closet. I could point out the highly touted low-cost outdoor that didn’t deliver sales last year (outside of forward product swaps) – were no less planted again in the same output profile as last year, relying on 70% CBD, and switching to an ostensible test-pilot in year 2 of a mish-mash of 40 different cultivars chasing THC.

Am I jumping the gun in writing an obituary? Others have certainly defied declarations of imminent death, and lumbered on through year long ‘restructurings’ and switching cash for paper in compensation. Heck, Supreme was walking pretty close to the edge barely more than a year ago.

The challenge for $AH is something they’ve never had: sales. Medical is the only thing one can really hang their hat on here. But that hat isn’t larger than a Size 2. $90MM in PP&E, a remaining $56MM in G&I, a headcount that’s nuts, and an approach to being all things to all customers (free delivery!) – having first done none of it successfully at any stage.

This dog don’t hunt. And I doubt it’ll even be able to drag itself to a food dish soon. Unless something drastic happens here, that’ll soon be the reality.

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 holds no position in $AH