Aleafia Health Inc Acquires Emblem Corp: CEOs Geoff Benic (CVE:ALEF) and Nick Dean (CVE:EMC) Explain the Merger

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Aleafia Health Inc (CVE:ALEF) (OTCMKTS:ALEAF) (FRA:ARAH) grabbed headlines by announcing the acquisition Emblem Corp (CVE:EMC) (OTCMKTS:EMMBF) (FRA:E0M). The all-share transaction is valued at approximately $173 million and will significantly alter the medical cannabis landscape in Canada. Emblem CEO Nick Dean explains that the company’s investors should be excited about the deal’s 0.83 share ratio, which means Emblem shareholders will receive 41% of a stronger combined entity. Aleafia CEO Geoff Benic stresses the compatibility of the companies, emphasizing that Emblem’s 30,000 square foot extraction facility compliments Aleafia’s outdoor grow plans. Benic also notes that Emblem’s GrowWise Health clinics bring the combined entity’s total clinics to 40 while Emblem has the capability to supply product to Aleafia’s patients.  As a result, the combined company’s potential for patient growth and retention, as well as product innovation in the medical space, is significant.

Transcript:

James West:   Why here’s a pleasant surprise: we’ve got both Geoff Benic, CEO of Aleafia, and Nick Dean, CEO of Emblem, in the house to discus the recent combination of their two companies in an all-stock transaction. Gentlemen, welcome.

Geoffrey Benic:    Thank you.

James West:   Okay, so, sorry, got a frog in my throat. The first thing I want to point to, here, is that there were some discussions even just a couple of months ago where Emblem was contemplating being sold for $200-plus million if I’m not mistaken; is that true?

Nick Dean:    That is not true. So look, we’ve had a number of discussions over the last year with different parties about bringing the company together or strategic partnerships, but there was not a combination in play, officially, anytime throughout the year.

James West:   Okay. So investors on both sides will want to know that they’re getting a good deal, here.

Geoffrey Benic:    Absolutely.

James West:   So I’m just going to play devil’s advocate for the shareholders of Emblem, because at a 27 percent premium, let’s call it? So investors who bought into the company like even six months ago are not exactly going to be happy with that.

Nick Dean:    Yeah. So I think, you know, we’ve been watching the forums this morning, and we’ve seen some feedback from shareholders and analysts, and it’s a similar question. And I think what we really need to focus on in this deal is the exchange ratio. So ultimately, it’s a 0.83 exchange ratio for every Aleafia share, Emblem shareholders will receive that ratio. So we will see upside potential as Aleafia shares appreciate into the New Year, which we expect, right? We’re looking at the market right now and there’s a lot of downward pressure on the category because of tax loss selling.  You know, I anticipate that in the new year, we’re going to start to see that improvement again in the marketplace.

As a result of that, our shareholders may actually see a more significant share price or transaction based on that exchange ratio.

Geoffrey Benic:    I think it’s also important to look at the pro forma, right? Emblem shareholders are going to get 41 percent of a phenomenal, medically-focused, international cannabis company, and this is going to give us a lot of force power to amplify our growth strategy, and there’s a lot of accretive benefits and a lot of synergies.

James West:   SO basically the Emblem shareholders should be happy because they’re just transferring their upward rise into Aleafia shares from Emblem shares?

Geoffrey Benic:    Correct.

James West:   Great. Well, okay, that’s an awesome explanation. I’m going to keep my stock.

Geoffrey Benic:    [laughter]

James West:   So Geoff, you are – how did this, how did the whole thing come together? Whose idea was it, and what was the sort of driving impetus behind it?

Geoffrey Benic:    So I think it was collaborative. First of all, I just want to commend Nick and his team. Nick’s done a phenomenal job at Emblem, and he’s really transformed that business since he took it over or took responsibility as CEO. And I think that the whole Emblem brand has just really, really developed tremendously under Nick’s leadership and his team. So I wanted to get that out there first and foremost.

Second of all is that, you know, I’ve never seen an industry that was so well capitalized, that is consolidating, is commoditizing so fast, so it’s one of these scenarios whether where you’ve got to look for great assets that can transform your business, and that are complementary to what you’re doing. And you consolidate. And so I think clearly what you’re seeing here is that, you know, Emblem was a great opportunity, and we saw that. We saw that what Nick and the team were doing there was very complementary to what we’re doing; combined 60,000 patients, 40 clinics, all medical, some of the brands that Nick had or has in terms of capsules, oils and – the sprays, sorry, it was just a phenomenal opportunity. We just thought it was a great time to move.

James West:   Right. So now it transforms Aleafia into more of an LP, and everybody rides off into the sunset, I guess. So Aleafia, how many consultancies are there right now? Clinics?

Geoffrey Benic:    Right now we have 22, and with grow-wise we now have 40 combined, and 60,000 patients. And that’s really the interesting part of it, right? The 60,000 patients that, you know, for the longest time have been for whatever reason, not being able to buy medicine because of, you know, the shortage of supply. So we’re committed to our patients, as is Nick and Emblem, and we just think it’s a tremendous opportunity to make sure that our patients are always in stock for medicine that they need.

James West:   Okay. Does Emblem have the capacity right now to supply 60,000 patients?

Nick Dean:    We do. I think though, the way we look at this is, we see this as probably the biggest benefit of the combination, is that Aleafia has seen over 60,000 patient encounters. We then combine that, their incredible capability of bringing patients into their clinics, with our grow-wise capability where we’re great at education and converting those into Emblem patients.

So we see a really a strong vertical integration down the pipe, from patient acquisition straight through to patient conversion and retention.

As Geoff has mentioned, we have a significant product pipeline, whether it’s our dried flowers, oils, capsules, sprays, soon to be tablets, and so on and so on as we continue to product innovate. So you really are able to satisfy all of those patients’ needs with the product that we have on hand, and that’s where we see significant benefit in terms of not only revenue but profitability down the line relatively quickly, because these are high-margin product, which you and I have talked about, right?

James West:   Right.

Nick Dean:    Our oils, we’re seeing an average price of about $15 per gram in recognized revenue. When you move up the value chain into capsules, into oral sprays, the number only increases. So as we continue to broaden our product innovation pipeline, we think that’s going to be an incredible opportunity for the combined company.

Geoffrey Benic:    And I really don’t want Nick to underplay the crown jewel of the deal is the 30,000 square foot extraction facility that Nick and his team have been developing. It’s a great facility; it’s going to complement our outdoor grow, which we’ve announced that we’ll be bringing out in April. Biomass that we’re going to be able to extract and look for better margin opportunities downstream, as in edibles, etcetera, etcetera.

James West:   Sure. Let’s talk about the outdoor grow, because that’s going to be one of the first in Canada, I take it. So essentially, are you going to be growing like a hemp variety of cannabis where it’s low in THC, or are you going to just grown full on cannabis sativa and indica?

Geoffrey Benic:    So we’re looking at, wherever we can get the best opportunity, whether it’s in CBD or THC. Obviously this will not be typically flower that you’re going to inhale, right? It’s going to be more biomass that we’re going to extract and create some real opportunities downstream for great margins. Because you know, this product, or sorry, the extraction, or the oils that we’ll get out of this will be very, very low cost; you know, much below traditional indoor and/or hybrid greenhouse grow.

James West:   Right. So we talk now about cost per gram in the $0.80 to $2.000 range; do you have an idea what the cost per gram would be in an outdoor situation at this point?

Geoffrey Benic:    So I would say that we’re probably in the $0.25 a gram range, and it’s just a great opportunity, it really is. Second mover advantage is phenomenal, you know, don’t make the same mistakes that some of the market leaders did, and you get to learn from them, and this clearly is that.

James West:   Okay. What’s the size of the outdoor grow?

Geoffrey Benic:    So we’re going to do 30 acres, right, 30 acres, producing about 60,000 kilograms.

James West:   Wow, that’s exciting. And that’s in Ontario?

Geoffrey Benic:    Yeah, that’s in Port Perry facility.

James West:   Oh, okay, well, we’ll bring our cameraman by to shoot it when it’s growing!

Geoffrey Benic:    Sure.

James West:   Okay, well that’s great. It sounds like a great transaction – I’m excited for you both. Thanks for joining us today.

Geoffrey Benic:    Yeah, thanks for having us.

Nick Dean:    Thanks, James.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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