During the last few weeks, several leading Canadian Licensed Producers (LPs) have reported quarterly financial results and this has been a driving force behind the sector’s recent price movements. Although these companies have been reporting strong growth, the market has responded negatively, and this is a trend that we are watching.
Aleafia Health Inc. (ALEF.TO) (ALEAF) is one of the companies that have been impacted by the recent trend and this is an opportunity that we have been closely watching. In early August, Aleafia Health released second quarter financial results that showed strong growth and reported record revenue of approx. $4 million, an increase of 159% over the prior quarter. The increase in revenue was primarily fueled by the sale of recreational cannabis in Canada and partly by an increase in clinic revenue.
A Cost-Effective, High-Growth Canadian LP
During the quarter, the Canadian cannabis producer recorded a substantial decrease in expenses, and this is partly related to the synergies recognized from the Emblem acquisition. The significant reduction in expenditures, which is a continued business priority for the company, was driven by operational synergies following the acquisition and we expect Aleafia Health to continue to find synergies as additional production capacity comes on-line.
The Emblem acquisition is quickly proving to be accretive and this is a trend that we expect to continue. When the quarter came to a close on June 30th, Emblem Cannabis had 6,959 active, registered medical cannabis patients. As of August 13th, the company had more than 8,500 patients and we are bullish on the amount of revenue that can be generated as a result of this increase.
An important aspect of the business to highlight is the cannabis clinic opportunity and during the second quarter, this vertical of the business recorded a 43% increase in revenue over the prior quarter. Through Aleafia Health’s network of medical cannabis clinics and education centers, the company has seen more than 65,000 clinic patients to date. We believe that the company is well positioned to capture additional market share in Canada’s medical cannabis market due to the strategic structure of the business and the focus on creating a leading integrated health and wellness ecosystem.
Last month, Aleafia Health raised more than $40 million through a strategic financing and is well positioned to capitalize on strategic opportunities. The company has ample liquidity to execute on previously announced initiatives and we expect to see revenue ramp as a result of the outdoor operation and the increased production capacity. Going forward, we expect the recreational market to continue to be the most significant revenue driver and are bullish on the amount of distribution that is in place.
Emblem is Quickly Proving to be an Accretive Acquisition
Earlier this year, Aleafia Health completed the acquisition of Emblem and this transaction was transformational was for both companies. The combined company is better positioned to capitalize on the global cannabis market, and we are favorable on the way the management team has already been able to advance the fundamental story.
Prior to the acquisition, Aleafia Health and Emblem were both focused on the international cannabis opportunity. The companies were targeting different markets and Aleafia Health was focused on the Austrailian market via CannaPacific, while Emblem was focused on Germany via a joint venture with German pharmaceutical wholesaler and logistics company Acnos Pharma GmbH.
During the quarter, Aleafia Health successfully secured export and import permits allowing for its first international product shipment to be distributed by CannaPacific. The company owns 10% of CannaPacific which has been highly focused on increasing production capacity to capture additional market share in Australia.
In May, Aleafia Health entered the German medical cannabis market by expanding the scope of Emblem’s joint venture with German pharmaceutical wholesaler and logistics company Acnos Pharma GmbH. The company owns 60% of the joint venture, and will leverage Acnos’ supply chain network, including access to approximately 20,000 pharmacies and 110 distribution centers in the world’s largest medical cannabis market.
The growth prospects associated with these two international medical cannabis markets are significant and the combined company is better positioned to capitalize on this. Over the next year, we expect to see the international side of the business to record massive growth and believe that the market does not fully appreciate this aspect of the story.
The Outdoor Grow Represents a Major Near-Term Catalyst
In the near-term, one of the most exciting opportunities for Aleafia Health is related to the outdoor cannabis opportunity. The management team has been laser focused on advancing this aspect of the story and we are impressed with how the team has been able to execute on this so far. In June, Aleafia Health received a license amendment allowing for outdoor cultivation at its Port Perry facility. A few weeks after this, the company received an additional license amendment allowing for outdoor cultivation at the entire 1.1 million sq. ft. facility.
The 2019 outdoor crop is progressing well, with plants entering the beginning of the flowering stage. Aleafia Health expects the new drying building to be completed in September, which will be utilized for the year’s outdoor crop harvest. The growth prospects associated with the outdoor cultivation facility are huge and will significantly increase production capacity.
When analyzing an outdoor cannabis cultivation operation, you will find that the cost per gram tends to be much lower. Also, the costs associated with an outdoor operation are substantially cheaper and we are favorable on this. Aleafia Health will be able to process the cannabis from the outdoor facility and create high-margin cannabis derivative products (i.e. concentrates, vape pens, and cannabis infused products). We are bullish on the growth prospects associated with this and will monitor how the team continues to execute.
A Company with Significant Distribution Relationships
Earlier in this article, we briefly highlighted Aleafia Health’s focus on distribution and want to provide a more in-depth look into this. The company has distribution relationships across four provincial providers (Ontario, Saskatchewan, British Columbia and Alberta), three independent retailers (Fire & Flower, Starbuds, and OnePlant), and Shoppers Drug Mart.
During the quarter, OnePlant, the cannabis retail joint-venture which Aleafia Health owns a 9.9% equity stake in, entered into agreements with one of the 25 cannabis retail license pperators in Ontario and this represents a significant opportunity. Under the terms of the agreements, OnePlant will provide certain management services and financing in connection with the Ontario retail cannabis store, which is currently open in Ajax, and is operating under the business name Smok.
We are bullish on the relationship with Fire & Flower, a leading Canadian cannabis retailer (that Aleafia Health indirectly owns an interest in) due to the supply agreement that is in place. Over the last few months, Fire & Flower has opened new dispensaries, and this is a trend that we expect to continue. Going forward, we expect this relationship to become more significant for Aleafia Health and will monitor how the companies continue to work together.
A Company With Catalysts for Growth
When looking at Aleafia Health, we see a company that has significant catalysts for growth and believe that the market underappreciates many aspects of the story. From the international opportunity to the outdoor cultivation facility, Aleafia Health represents a multi-national growth story and we believe the company is reaching an inflection point.
One of the most exciting near-term opportunities for the Canadian LP is related to the updating of Health Canada’s regulations, which take effect in October. Aleafia Health is working tirelessly on the completion of the Phase II expansion of the Paris Processing facility. The expansion is dedicated to the production of new cannabis products that will become legal following the change in regulations and we are bullish on the growth prospects associated with this.
All extraction and packaging machinery for the expansion has been ordered and installation will commence this month. The management team has had its finger on the pulse of the Canadian cannabis market and we are favorable on the foresight when it comes to the changing regulations. We are favorable on the amount of value that can be created through the sale of these products and will monitor how the team continues to execute.
Focused on Improving Education
Aleafia Health’s cloud-based cannabis education and certification platform, FoliEdge Academy, has seen four of five courses pass the testing and peer-review stages, with the fifth course undergoing this process currently. All courses are expected to be launched in the third quarter and the company is currently engaged in discussions with a number of Canadian and international academic institutions, along with large corporations and healthcare associations.
Over the next few years, we expect to see a significant increase in the need for education and training services for the cannabis industry. FoliEdge Academy course content will represent an important part of Aleafia Health’s scalable, cannabis health and wellness ecosystem, and can integrate with the company’s medical cannabis clinic network that has seen more than 65,000 patients to date.
FoliEdge Academy represents an important pillar when you look at Aleafia Health’s cannabis health and wellness ecosystem. There will be a number of ways that this program will enhance the work that is being done on the clinic side of the business and we find this to be significant. The introduction of this platform cements Aleafia Health’s horizontal diversification strategy and we are bullish on the growth prospects associated with this.
A High-Growth Opportunity that is Trading at a Discount
Aleafia Health is in the middle of a major expansion and expects to reach an annual production capacity of 138,000 kg of dried flower across indoor, greenhouse, outdoor and strategic supply agreements, as well as an extraction capacity of 50,000 kg. We are bullish on the amount of revenue that can be generated once the company is operating at full capacity and this is an opportunity to be watching.
Although Aleafia Health has been nothing short of an execution story and has been able to significantly advance its fundamental story, the shares have come well of its July highs and have traded lower with the rest of the Canadian cannabis sector. We believe that the company represents a compelling play on the burgeoning global cannabis market, and this is an opportunity to be watching.
Only a few months ago, Aleafia Health received a positive upgrade from Eight Capital which issued the company a Buy rating and a $3 price target. As the company continues to execute, we expect to see more broker-dealers start covering the story and we will be monitoring this. If you want to learn more about Aleafia Health, please contact firstname.lastname@example.org.
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