We’ve had much to say about Aleafia ($AH) over time, here’s my last Structure on them, and GoBlue’s previous ‘Quarter in Pictures’.

We have questions around the existence of forward product swaps, the disposition of last year’s outdoor harvest….and we’ve looked at their ability to raise in a relatively unfriendly cannabis-sector environment for money shoppers. The two gerbils in Julio Fantino and ‘Big Raf’ Souccar are now fully in $AH’s rearview, and everything is said to be on track.

Let’s look at these statements and see if they support that claim..

To the financials!

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• Last quarter….$9.7MM in net sales….this time…$4.9MM. Eep.
• Consultation service revenue increased by as much as research revenue declined. These types of business lines really haven’t bolstered much anywhere (only exception I can think of it $XLY & their KGK subsidiary, and only in research).
• Indeed, consultation services include payments to doctors to sell their product. For $475k in revenue, they paid doctors $372k, and that’s before any product is sold. It’ll help with final margins, but at these levels, the G&A that attaches isn’t commercially attractive. We’ve seen other shops sell or wind down medical spending, and this doesn’t really look much different.
• In a company that isn’t killing it at the moment is when low contribution margin business lines usually starts sweating. Here, that’s the only business line they have.
• And sweating they should. Looks like a tranche of convertibles is coming due prior to their year end. More below.
• Cash position at $34MM is the best looking thing about the place. They’ve got room, whether they know where it is or whether they can get into it is a different question.
• 56% of total assets is goodwill and intangibles. Look for some moves in it over year-end as testing is required. That Emblem buy typifies the fervour at the time they executed it, with $300MM given to buy $75MM in tangible assets.
• $650k for SBC, and OPEX running around $8MM excluding depreciation. On $5MM in sales. They’ve pulled out $5MM in executive compensation in the 9 months these statements cover. Not impolite….but disconnected from performance.
• Their adult recreational sales in the quarter was $234k at a 20% margin (Previous: $870k). I don’t need to say that this is not good. It’s sclerotic. 835 kgs of total sales in the quarter. This after the previous quarter where stock-outs were blamed for crimping sales.
• This is the discordance I see in their narrative. Lots of inventory, not much sales, yet product outages.
• Medical holding a decent $7.80/gram sell price. Medical is keeping these guys going, but contribution margin isn’t much.

Ok.

In the MD&A is this absolute gem of a line. Corp-speak will typically smooth over the rougher parts of operational issues, and is a feature of our modern age of communication strategies. As Exhibit “A”:

The thing here is the logic behind how seasonality of production decreases sales. Especially when $AH bought $20MM in product last quarter (Hey, they said they bought product….forward product swaps don’t exist unless they’re disclosed, right?).

As mentioned, they’ve got some $25MM in convertible debt coming due they inherited from the Emblem buy. A $300MM gift that keeps on giving, and it gives on February 2, 2021. Which, is also prior to the year end financials. Important? Yep. Because unless they accelerate the year end, they’ll have to raise on these financials. And these financials?

Here’s something I queued in on when GoBlue mentioned it….this is something else:

Prior quarter?

I know what I see. Once GoBlue stops laughing, we’ll compare notes. But the total of what I see is a company being cute, and leadership using narratives that feel like they’ve been bought on the cheap. I can sum this company up very simply: it lacks transparency. To wit:

How does $20MM in finished goods vanish on $4MM of sales? They never did get to that on the conference call, but it sure looks like a forward product swap being rolled up.

GoBlue said to me that retail investors aren’t being served well holding a company that lacks transparency and presents numbers like this does (heavily paraphrased 🙂 ). Can things change? Sure. As it’s been so far though….they seem to be pushing a string. Perhaps their 2.0 SKUs and expanded flower offerings (with pre-rolls in every SKU!) will help. I see a crowded landscape of others in the same position, all vying for the same consumer dollar.

$AH doesn’t strike me as a shop with hard product differentiation nor unique story. Ultimately, that doesn’t really matter to those providing discount brands of toilet paper, but as I’ve put forward before, I think that cannabis is closer to a service than a product.

I think the company who can present that exact thing to a consumer will gain traction. In $AH, all I see is a bunker mentality presenting narratives discordant with financials. They made a huge mistake (in my eyes) guiding to an outdoor crop of 60k KGs. As it turns out, they produced ~=30k kgs, 24k kgs of CBD, the remainder comprised of some 40 cultivars planted in what was ostensibly a test grow. I harp on consistency of product – it’s literally one of the largest single weaknesses of Canadian cannabis production at this stage to myself. A consumer wants to repurchase one of these 40 cultivar products again? Good luck with that. No wonder they’re wholesaling.

And that CBD cultivar they repeated planting? Now they have 24k kg of more of the same product that was written down by $16MM in these financials. From a production planning standpoint – the ultimate measure of near/mid-term strategic thought by management – that decision now looks just plain ‘ol ugly.

Look for a proposal soon to reprice the convertibles coming due in February – or a presser on how $AH is going to deal with the liability. Might go deep into December to get it done. Despite $AH packing a sexy $34MM in their chequing account (coming off of a $13MM issue), this quarter they burned through ~=$8MM give or take, have 300MM shares, and zero traction in recreational.

I really don’t know where these guys are going. My honest reaction from these financials is that $AH doesn’t know either.

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