Valuations in the cannabis space have retreated in recent months as the sector has paused. However, just because share prices have flattened out doesn’t mean that these companies have ceased their own evolution. A case in point is Alternate Health Corp. (CSE: AHG, OTCQB: AHGIF, Forum).
The Stockhouse audience has already been introduced to this unique entity in the cannabis bio-pharma space, in a feature article from June 20, 2017. What makes AHG “unique”?
Evolving tech companies are typically big money-losers due to a high burn-rate. This stems from the fact that this business model requires an enormous investment in R&D before any revenue streams evolve to mitigate those losses. This is even more true in the pharmaceutical sector. But not with Alternate Health.
The Company made a strategic decision at the beginning of its evolution to build a business model with strong revenue components, in the early stages of operation, to offset their burn-rate. It is a three-pronged business model focusing on:
- Laboratory services
- Data software, collection, and analytics
- Researching, developing, licensing, and marketing its own proprietary cannabinoid-based drugs
This financial prudence allowed AHG to report $1.4 million in EBITDA in Q1 along with $1.1 million in adjusted net income. Now the Company has just reported its second quarter results. Revenues were $7.2 million, which is up 87% from Q1.
During Q2, Alternate Health also added new members to its management team. Stockhouse asked AHG’s new CEO, Dr. Michael Murphy, to update investors on the recent quarterly results, changes in management, and the latest news in the Company’s operations.
1. Alternate Health is proud of its three-pronged business model. Please explain to investors why AHG made a laboratory services division the starting point for its business model.
When you introduce an innovative product, it is often subject to the timing and vagaries of the marketplace, especially in terms of revenue. Our strategy was to build a solid, high-growth and predictable income base through our clinical laboratory business; this stable revenue source is used as the foundation to further develop the life sciences and software divisions of Alternate Health. In essence, our laboratory delivers steady revenue today and provides support for the growth of our CBD nutraceutical products, funds our clinical research initiatives, and advances our electronic medical software systems, which manage the doctor-patient relationship within the physician’s office.
Our lab also allows us to maximize the revenue potential across our verticals, particularly by processing the toxicology samples from cannabis physicians that already use our CanaCard software. Additionally, the laboratory provides critical testing services for Alternate’s clinical research studies that would otherwise pose an enormous financial burden to the company; since we own the lab, all clinical testing – which is a fundamental requirement of medical research – is performed at no additional cost.
2. Bringing in a significant revenue stream rather than burning through large quantities of shareholder capital in laboratory services will be music to the ears of investors. How has the Company’s laboratory services translated into bottom-line results?
Most of the company’s revenue to date has been generated by the core lab business. I am happy to report that we generated $11.2 million in topline revenue during our first two quarters alone. And to your point, that income has provided the liquidity necessary to accelerate the launch of our life sciences and software divisions.
This quarter, we decided to evolve our lab’s infrastructure from a primarily reference-based model to a direct billing entity in order to accommodate an even larger market base. As a result of this transition, we anticipate continued revenues in Q4 and increased sales volume moving forward. In short time, we expect the laboratory to show strong organic growth due to increased medical compliance for patients taking multiple prescriptions; increased compliance means increased clinical testing, which results in more lab samples for Alternate.
3. Alternate Health’s data software/collection/analytics division is also designed to be cash-flow positive over the near term. How has this branch of the business performed over the past quarter?
In June of this year, we finalized the agreement to launch our CanaCard Patient Management System within all 10 National Access Cannabis (NAC) clinics across Canada. NAC is one of Canada’s largest chains of medical cannabis clinics, and we felt their selection of our software as their exclusive EMR and practice management system was a strong vote of confidence in our platform’s abilities.
We have already begun implementing CanaCard into four NAC offices and plan to have the remaining clinics online within the coming weeks. By the end of Q4, we expect to have approximately 10,000 patient lives actively managed on the CanaCard system. Additionally, we are in discussions with interested parties from both Canada and the U.S. to implement our software, which specifically addresses controlled substance management from patient to physician.
4. In the second quarter; adjusted EBITDA declined from $1.4 million to $25,000. AHG’s quarterly loss actually increased from $0.6 million (Q1) to $3.6 million (Q2). Why is that bottom-line number not indicative of actual operations in the previous quarter?
To put it simply, the company did not lose money in the second quarter; the “losses” shown were principally a non-cash, nonrecurring accounting entry to report management and director options as a current charge in the second quarter. This decision strengthened our ability to attract top talent to the company’s management and to our Board of Directors over the last quarter, and I am pleased with the strong corporate team now operating and overseeing our organization. I am equally happy to report that the money we did earn was invested productively in growth opportunities for the Laboratory, Life Science and Software Divisions.
5. This isn’t the only news reported by the Company in Q2. Significant changes were made at the management level, including your own appointment from being AHG’s Chairman to now serving as both Chairman and CEO. Could you please outline the reasoning behind these changes?
Yes, we had a number of pivotal changes to our management as well as some strategic additions to the company’s Board of Directors. These decisions were part of a reorganization and consolidation plan, strategically built upon the vision of creating a team that would be able to grow with the company year over year. Alternate Health’s original management team was comprised of established business colleagues that divided responsibilities along the basis of expertise, and who were integral to our successful launch as a public company. Alternate was fortunate to experience such a strong corporate start, and we quickly determined that the potential of our unique business model could be maximized by adding fresh talent from multiple industries to our management and operations. I am extremely pleased with the current team as well as our strong Board of Directors, each of whom is an incredible asset in the deployment of our business plan.
6. Are these moves indicative of any change in Alternate Health’s business strategy?
We have no changes planned for our basic business strategy. Our current business plan utilizes the three-pillar model of lab services, medical software and life sciences, and we feel this is a very effective approach for Introducing our software and nutraceutical CBD products to the emerging medical cannabis industry. Of course, recognizing that we are living in a period of disruptive change for modern medicine, Alternate will always remain flexible in order to identify growth opportunities for all of our current and potential business ventures. That being said, we are delighted with the present level of interest in our products and services and we will be very effective in executing on our original strategy.
7. Turning to operations, management made a strategic change in its laboratory services division on July 3, 2017. What was the nature of this change, and when should shareholders expect the new strategy to be reflected in improving bottom-line results?
Alternate Health Labs began as a reference laboratory, which means we primarily tested clinical samples from hospitals and other labs that had reached their machines’ capacities and paid us to process their overflow or surplus business. Although we generated significant revenue from this model, we identified an opportunity for growth by transitioning into a full-service laboratory; under the new infrastructure, Alternate will be providing blood, toxicology and pharmacogenetics testing for samples sent directly to AHL by physicians and other healthcare providers. We are poised for the opportunity to become a direct provider for Medicare, Medicaid and other federal as well as private insurance carriers. By positioning ourselves to bill directly to these payers, we will expand our business volume, eliminate massive third-party expenses and significantly increase our revenue per sample.
8. The Company’s PTSD initiative boasts a very high-profile spokesman regarding the need for better treatment options here. Please comment on progress in this research as well as Alternate Health’s efforts to raise the profile of its important research in this area?
The spokesman you are referring to is General Wesley Clark, a retired Army General and former NATO Supreme Commander, who is an active advocate for veterans’ health affairs. General Clark’s son, Wesley Clark Jr., also served in the military and is also a veterans’ health activist.
General Clark is acting as an advisor and supporter for our PTSD research, while Wes Clark Jr. is leading the research project by helping us identify qualified veterans and establishing a standard of care and evaluation points to use during the clinical study. The study will research the results of CBD administered through Alternate Health's patented delivery systems, building on the company's research assets. The company expects the results to bolster support and awareness of CBD in the medical community, with possible scientific breakthroughs forming the potential basis of new technology and patents.
9. Could you provide investors with an overview of what to expect from AHG over the near-term along with perspective on the Company’s longer term goals?
For the remainder of the fiscal year, Alternate will continue aggressively growing our lab division and further expansion of our software and life sciences divisions, which we anticipate will move from pre- to post-revenue in Q4. The lab is on track to continue its steady growth and sustained revenue, and the daily operations of that facility are routine enough that we can easily allocate resources to our newest verticals.
One of Alternate’s primary focuses over the coming months is the international distribution of our cannabis management software, concentrating on nationwide placement across Canada via NAC and state-by-state deployment here in the U.S. Another short-term priority is the finalization of the manufacturing and distribution infrastructure for our CBD nutraceutical products. Ultimately, Alternate’s goal is to establish itself as a multi-vertical powerhouse in the medical space with profitable operations, valuable IP and patented technologies that will convert to increased revenue and significant capitalization opportunities over time.
FULL DISCLOSURE: Alternate Health Corp. is a paid client of Stockhouse Publishing.