Aleafia Health: A Deep Dive

In late 2021, we had the opportunity to meet with the management team from Aleafia Health Inc. (TSX: AH, OTCQB: ALEAF) following which we were especially bullish on the Canadian Licensed Producer (LP).

We consider Aleafia Health to be a misunderstood growth story that is flying under the radar and want to issue an update on the business. We believe the company possesses the traits we look for in a long-term growth opportunity and want to share our rationale.

A Profitable Multi-National Growth Story

A few weeks ago, Aleafia Health reported third quarter financial results and we were impressed with the advancements that were made during the period.

From capturing market share in Canada to exporting cannabis to Europe, the Canadian cannabis company reported a series of important milestones. Some of the most significant highlights from the quarter include:

1. Aleafia Health reported positive adjusted EBITDA for the second consecutive quarter
2. The company completed its first shipment as part of a new European agreement
3. Medical cannabis revenue increased by 40% on a year-over-year basis

Focused on Building Cannabis Brands

A key reason for Aleafia Health’s success is the strength of the cannabis brands it owns. Divvy has served as a major growth driver for the business and we believe the significance of the brand is underappreciated by the street.

Since launching in the first quarter of 2021, Aleafia Health has recorded the #1 highest growth rate of retail sales pull through and the success can be attributed to Divvy, its everyday brand.. When it comes to Canada’s recreational cannabis market, the brand continues to serve as the company’s most significant growth driver and we expect sales numbers to improve in future quarters.

Through Divvy, the company has been able to capitalize on the recreational cannabis market in Canada. When compared to the prior quarter, recreational revenue increased by 9%. This is especially significant because many Canadian cannabis firms have reported declining recreational cannabis sales growth on a quarter-over-quarter basis. We attribute Aleafia Health’s success to Divvy and will monitor how the brand continues to capture market share.

The Canadian cannabis company has proven its ability to create attractive consumer brands and we would not be surprised to see the management team bring another leading brand to market. If the company could launch additional brands that can capture market share like Divvy, we expect the fundamentals of the business to improve incrementally.

During the last year, Aleafia Health entered into new provinces in Canada and we consider this to be an important growth driver for the business. It recently expanded the size of its total addressable market (TAM) by entering Manitoba (its fifth provincial distribution region). By entering the province, Aleafia Health is now selling products in provinces that account for more than 70% of the Canadian population and we are favorable on this trend.

Management Team is Focused on Creating Value for Shareholders

Aleafia Health is led by a management team that is focused on execution and profitability. When compared to last year, the company has made major cost reductions that were primarily related to efficiencies in its IT systems, enhanced procurement processes, and an ongoing vendor consolidation.

From streamlining the business to lowering headcount, Aleafia Health has recorded more than $16 million in annualized cost savings. We are favorable on this aspect of the story and believe the management team does not get enough credit for its ability to execute on a cost reduction strategy.

When compared to the same quarter last year, adjusted EBITDA increased by $2.8 million and we find this to be an outstanding achievement (increased by $0.4 million when compared to the prior quarter). A key reason for the higher adjusted EBITDA is Aleafia Health’s cost reduction program and we are favorable on how the management team has executed on this.

Another positive metric from the quarter is the amount of selling, general and administrative expenses as a percentage of net revenue. While most of its competitors are seeing these expenses as 60% to 80% of net revenue, Aleafia Health is under 40%. We find this to be significant when it comes to scaling the business in a profitable manner.

Capturing Market Share in Canada’s Medical Cannabis Segment

Although Canada’s medical cannabis market is a challenging market, Aleafia Health has continued to record strong growth in the vertical. We attribute the company’s success to its ability to further penetrate high value segments (i.e., veterans, Quebec, and third-party clinics). We are bullish on the success Aleafia Health has had in the medical cannabis market and consider the market segment to be more sticky than the recreational market.

We are also impressed by the performance of Aleafia Health’s medical cannabis business. During the quarter, medical cannabis revenue increased by $2.7 million on a year-over-year basis. We attribute most of the growth to the introduction of 12 specific new medical programs to patients which target individual patient segments with new product formats.

A key benefit from the management team’s focus on the medical cannabis market is its ability to cross-sell recreational cannabis products to patients. Most of the recurring medical revenue encompasses primarily cannabis derivative products which have a much higher gross profit margin than recreational cannabis products. We find this to be a misunderstood part of the story and want our readers to be aware of it.

An International Growth Story

We consider the developments on the international side of the business to be substantial and believe the market is not assigning much value to this aspect of the story. When compared to the prior 12-months, revenue from international markets increased by more than 150%.

During the quarter, the company made the first shipments to a previously announced international partner (two-year sales agreement that is worth approx. $4.6 million). In January, Aleafia Health signed a second European partner for a one-year contract that is worth approx. $1 million. We are bullish on the advancements on the international side of the business and expect this to be a growth vertical for the company.

One of the reasons for our bullish outlook on the international side of the business is the completion of expansion plans at Aleafia Health’s indoor cultivation facility. The development will increase grow capacity by 20% for international markets and we find this to be significant.

A Misunderstood Growth Opportunity

Although Canada is considered to be a mature cannabis market, Aleafia Health is reporting impressive growth when compared to its peers. We believe the business is well positioned to build on its success in 2023 and find the valuation to be attractive when compared to other Canadian LPs.

At current levels, we consider the risk-reward profile to be favorable and believe our readers need to be aware of Aleafia Health. From Canada to Australia, the company is focused on capturing market share in burgeoning cannabis markets. We are of the opinion that the market is discounting the growth prospects that are associated with this multi-national cannabis firm and consider Aleafia Health to be a misunderstood opportunity.

Going forward, we expect Aleafia Health to report continued strength across its business segments (medical, recreational, and international) and believe its focus on building brands will benefit the business over the long-term. We expect the market to become more interested in Aleafia Health as the management team continues to execute and this is an opportunity to put on your radar.

If you are interested in learning more about Aleafia Health, please send an email to support@technical420.com with the subject “Aleafia Health” to be added to our distribution list.

Company Relationship Disclosure

T420 is responsible for the T420 opinions provided in this disclosure except all sources or information provided by other parties were not verified or authenticated and T420 does not undertake to confirm or substantiate or be responsible for such information provided by other parties

Any Content posted regarding a Profiled Issuer is not a solicitation or recommendation to buy, sell or hold securities. We cannot and do not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. All information should be independently verified. We are not responsible for errors or omissions in our publications, and any opinions expressed are subject to change, without notice. We do not, nor are we under any obligation to undertake due diligence or investigation or authenticate and verify whatsoever regarding Profiled Issuers or any Content posted in relation thereto and we do not receive any verification from the Profiled Issuer regarding the Content we disseminate. Similarly, while we endeavor to facilitate the provision of quality information, we are not responsible for any loss or damages caused or alleged to have been caused by its use nor verify or authenticate or update such information.

Pursuant to an agreement between Spotlight Media Corp. and Aleafia Health we have been hired for a period of 90 days beginning February 14, 2023 and ending May 14, 2023 to publicly disseminate information about Aleafia Health including on the Website and other media including Facebook and Twitter. We are being paid $3,000 per month Aleafia Health and were paid “ZERO” shares common shares. We hold “ZERO” shares common shares. We will not sell or purchase shares during the Term. We reserve the right to buy or sell shares after the Term in accordance with State and Federal securities laws. See “Disclosures” below which is to be read in conjunction with this release.

This article contains forward-looking statements within the meaning of applicable securities laws. All statements that are not historical facts, including without limitation, statements regarding future estimates, plans, programs, forecasts, projections, objectives, assumptions, expectations or beliefs regarding future performance are “forward-looking statements”. Forward-looking statements can be identified by the use of words such as “expects”, “does not expect”, “is expected”, “believes”, “intends”, “anticipates”, “does not anticipate”, “believes” or variations of these words, expressions or statements, that certain actions, events or results “may”, “could”, “would”, “might” or “will be” taken, will occur or will be realized. Such forward-looking statements involve risks, uncertainties and other known and unknown factors that could cause actual results, events or developments to differ materially from the results, events or developments expected and expressed or implied in such forward-looking statements. These risks and uncertainties include, but are not limited to, dependence on obtaining and maintaining regulatory approvals, including the acquisition and renewal of federal, provincial, state, municipal, local or other licenses, and any inability to obtain all necessary government authorizations, licenses and permits to operate and expand the Company’s facilities; regulatory or policy changes such as changes in applicable laws and regulations, including federal, state and provincial legalization, due to fluctuations in public opinion, industry perception of integrative mental health, including the use of psychedelic-assisted therapy, delays or inefficiencies or any other reason; any other factor or development likely to hamper the growth of the market; the Company’s limited operating and profitability track record; dependence on management; the Company’s need for additional financing and the effects of financial market conditions and other factors on the availability of capital; competition, including that of more established and better funded competitors; the impact of the Russia-Ukraine conflict on the global economy; the continued impact of the COVID-19 pandemic; and the need to build and maintain alliances and partnerships, including with research and development companies, customers and suppliers. These factors should be carefully considered, and readers are cautioned not to place undue reliance on forward-looking statements. Despite the Company’s efforts to identify the main risk factors that could cause actual measures, events or results to differ materially from those described in forward-looking statements, other risk factors may cause measures, events or developments to materially differ from those anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in forward-looking statements. The Company does not undertake to revise forward-looking statements, even if new information becomes available as a result of future events, new facts or any other reason, except as required by applicable laws

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Michael Berger is Managing Partner of StoneBridge Partners, LLC and Founder of Technical420.com. Prior to entering the cannabis industry, Michael was an Equity Research Analyst at Raymond James Financial covering the Energy Sector. Michael has been featured in publications such as The Street, Bloomberg, US Money News, and hosts various cannabis events across North America.

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