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Aleafia Health Stock – What You Need to Know

Another day, another cannabis stock looking to list on a major U.S. stock exchange. This time it’s Aleafia Health stock being offered on the Nasdaq exchange, that’s according to a filing that was made earlier this month. The first thing we want to point out here is that Aleafia Health (ALEF:CN) is a whole lot different from the other two stocks that we’ve looked at which are listing on a major U.S. exchange. (Aurora Cannabis has already listed under the ticker ACB and Aphria plans to list at a yet-to-be-determined date.) Here’s how these three stocks compare in size and the amount of weed each company grew in 2018:

Canopy Growth vs. Aurora Cannabis vs. Aleafia

Canopy Growth vs. Aurora Cannabis vs. Aleafia

The latest financial report from Aleafia which was filed on August 27, 2018, states that “operations at the Aleafia Farms facility have not commenced but the Company intends to produce medical cannabis for sale and distribution in Canada.” We’re not off to a good start, because here we have a licensed producer that isn’t actually selling anything, yet two major competitors have managed to each sell more than 5 tons of cannabis in 2018. As we talked about before, we’re mainly interested in looking at cannabis stocks that have a proven track record of growing lots of marijuana with attractive margins, Aphria probably being the best example of that we’ve seen to date. “Kilos sold” is an easy metric to track, and it allows us to better understand what we’re investing in and perform comparables. Then, we looked at Aleafia’s latest investor presentation which implies that they are actually growing and selling cannabis.

Is Aleafia Selling any Cannabis Yet?

The first place we turn to for analyzing how much product a company has sold is by looking at their revenues along with any statements in the financial filings that disclose a key piece of information: how many kilos of cannabis have been produced and sold? In looking through the latest Aleafia Health filing, we can see that they generated about a $1 million USD in revenues for the first half of this year: Consultation Services ($446,752 USD), Research Revenue ($484,327 USD), and Other ($85,197). Here’s a blurb from Aleafia as to what these categories refer to:

The Company earns revenue by providing medical consulting services to patients suffering from chronic pain and disabling illnesses and the sale of products related to those services. The Company also conducts medical research associated with the use of medical cannabis. Another revenue stream for the company is the sale and distribution of medical cannabis in Canada in accordance with the ACMPR.

While the “Other” category could contain revenues from the sale of cannabis, no mention is made of any revenues attributed to growing and selling cannabis in their latest filing. However, looking at the investor deck tells a different story. Here are two tidbits we pulled from the latest Aleafia investor presentation which is presently available on their website as of 10/28/2018:

Source: Aleafia Corporate Presentation - June 25, 2018

Source: Aleafia Corporate Presentation – June 25, 2018

We added the little red arrow seen above which points to a statement the company makes which says “harvested first crop at the Scugog facility, pre-sold to CannTrust” which leads us to believe that they are already selling cannabis. We could not find any mention of this being made in the company’s latest financial filing, and we assume that they will disclose how many kilos were produced and sold in their next financial statement.  Current shareholders should keep an eye out for that. Perhaps even more interesting is that the company makes the following statement:

  • 16,500 kg annualized production on stream by end of 2018

While the term “on stream” could have many meanings, your average reader would probably conclude that in 2019 the company should be able to grow 16,000 kilos of marijuana. Seems like quite a stretch when you consider that two of Canada’s biggest growers, Aphria and Canopy Growth, were only able to produce 14,339 kilos in 2018 combined. If the company wants to clarify that statement, we’ll happily update the article with what exactly that means and change the above comparison chart. In the meantime, let’s take a look at how Aleafia Health plans to operate with a vertical business model.

Canabo Medical Clinic and Aleafia Health

Aleafia Health is an amalgamation of two companies, one of which is Canabo Medical Clinic (CMC), the country’s largest network of referral-only medical cannabis clinics. It seems that doctors are paid commissions to refer patients to these clinics, as Aleafia’s financials list 328,230 USD spent on “doctor commissions” during the first half of 2018. Canabo’s network of 22 clinics is spread out across Canada as seen below:

Canobo Clinics Across Canada

Canabo Clinics Across Canada

Those clinics work with more than 80 physicians and 50,000 patients. (In Aleafia’s financials, they ascribe a $12 million valuation to this patient list.) The idea would be that these clinics can now help promote the cannabis that Aleafia grows so that they can go “direct-to-consumer.” Consequently, Aleafia is a business that consists of two major parts; clinics which have patients who are prescribed medical marijuana by doctors who refer said patients in exchange for a commission, and a growing operation that may or may not be selling marijuana at the moment. We’ll look forward to receiving more color on that from the company.

Conclusions

While we could spend days deep-diving into Aleafia’s plans for the future and speculating as to what great things they might be able to accomplish in the coming years, we’re more interested in larger companies that are doing things now at scale. We’re a bit turned off by the fact that Aleafia has spent $275,000 USD this year on investor relations and promotion (which usually results in research reports like this one which always show astronomical projected growth rates that are supposed to support some stock price target). At the same time, who can blame them for getting the word out in anticipation of their planned Nasdaq listing? All these efforts appear to be paying off, with Aleafia Health stock having appreciated around +200% in just over two months:

Aleafia Health Stock Price

Aleafia Health Stock Price

The promotion spending is helping Aleafia become more widely recognized, and on September 21, 2018, they were added to the biggest marijuana ETF around, HMMJ. (To be fair, we haven’t been overly impressed with some of the names HMMJ has been adding to their ETF lately.) You could always consider a diversified investment in a cannabis ETF like HMMJ, but if you like what you see with Aleafia Health then back up the truck. Why wait for them to list in the United States? You can just open an account with Zacks Trade right now and buy shares of Aleafia Health on the Canadian stock market under the ticker (ALEF).

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