Will Aleafia Reach Its Revenue Goals With Convertible Debt Being 'Pushed Back'? Analyst's Thoughts Post Q4 Earnings

Aleafia Health Inc. ALEAF reported its financial results this week for the three and 12 months ended Dec 31, revealing quarterly revenue of $8.8 million compared with $15.2 million in the fourth quarter of last year, representing a 9% sequential drop.

Recreational sales increased to $6 million. However, medical and bulk sales decreased to $2.5 million and $0.5 million, respectively.

The company said that it would ramp up branded sales in both adult-use and medical segments as well as reduce exposure to the bulk market.

In the management discussion and analysis section of its annual report, Aleafia set the following guidance range for fiscal 2023:

• Net sales of $53 million - $63 million.
• Attaining a top 10 market position in the recreational market with sales of $35 million - $40 million.
• Remaining a leader in the medical marijuana market with sales of $15 million - $18 million.
• Gross margins of 32.5% to 37.5%.
• Adjusted SG&A of $25 million - $27.5 million.
• Negative adjusted EBITDA of $2.5 million to - $7.5 million.

The Analyst

Cantor Fitzgerald’s Pablo Zuanic retained a Neutral rating, lowering the 12-month price target to CA$0.13 ($0.1) from CA$0.22 due to lowered estimates and increased B/S risk.

The Thesis

Zuanic said in his latest note that “the B/S and convertible debt due this June are both significant concerns," adding that “despite cost-cutting, cash burn remains an issue, even though it improved sequentially.”

Aleafia recently revealed that it has entered into a forbearance agreement with debenture holders representing 58% of the debentures’ aggregate principal amount outstanding. The forbearance agreement’s initial term extends to Feb 28, 2022, and the contract automatically renews for 14-day periods thereafter unless notice to the contrary is provided.

Under the agreement, the holders and the company agreed to work expeditiously and in good faith to negotiate a potential transaction to amend the terms associated with the convertible debt.

The company highlighted that it is advancing towards achieving a beneficial outcome for all its stakeholders.  

In addition, it recently obtained $19 million in a secured financing facility.

“We would expect the vast majority of the debt to be pushed back, with the company hoping to reach its revenue targets, “ the analyst continued, adding that “raising equity as it did in early 2021 is not a viable option.”

“If Aleafia were to issue stock to pay down the convertible debt, that would imply 310 million shares,” Zunaic added.

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