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spk03: Good day, and welcome to Aletheia Health fourth quarter 2020 and year-end results conference call. I would now like to turn the conference over to your host, Nick Bergamini, VP of Investor Relations. Please go ahead.
spk01: Thank you. Joining me on the call today are Aletheia Health CEO Jeffrey Benick and CFO Benjamin Ferdinand. This morning, Aletheia Health filed on CDAR its audited financial statements and notes thereto for the year ended December 31st, 2020, and its associated MDNA. All comments to be made on this call today should be taken with reference to and are qualified in their entirety by those documents. Please note that this call contains forward-looking statements or information and reflects the company's current expectations, estimates, projections, assumptions, and beliefs about future events and financial trends. that they believe may affect the company's financial condition, results of operations, business strategy, and financial needs. By their nature, forward-looking statements involve known and unknown risk, uncertainties, and other factors that may cause our actual results, performance or achievements, or other future events to be materially different from any future events, performance, or achievements expressed or implied by such forward-looking statements. Given these risks and uncertainties, shareholders and prospective purchasers of the company's security should not place undue reliance on these forward-looking statements. Further, they speak only as of the date on which that statement is made, and except as required by applicable law, the company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made. This call also contains non-IFRS financial performance measures, which the company believes provides users with relevant information regarding operations and performance. These measures are not recognized or defined under IFRS, and as a result, they may not be comparable to the data presented by other issuers. Jeffrey, over to you.
spk00: Thank you, Nick, and thanks everyone for joining us today. It's exciting to see how far we've come over the last two years. 2019 saw us build out our three production facilities. During 2020, we secured the licenses for these sites, while immediately shifting our focus to the development of differentiated cannabis products and brands. It's in the fourth quarter that we are just beginning to see the results from this groundwork we've laid over the last two years. Putting things in perspective, our net cannabis revenue has increased from 600,000 in 2018 to 11 million in 2019 to 41 million in 2020. Capping this off is our strongest sales quarter to date, with 14 million in net cannabis sales. This was driven by growth through all four channels of international, medical, adult use, and domestic wholesale. But what's most important is that 2020 saw us commence what is a major expansion of our product portfolio. As a result, we're beginning to see what will be a significant recalibration of our revenue, away from domestic wholesale and towards the sale of packaged cannabis products. I know Ben will discuss in greater detail, but I'll touch on the non-cash accounting write-downs, which clearly impacted the net loss in the quarter. But it's important to note that these are accounting non-cash, non-recurring write-downs of intangible assets or goodwill. These have no impact on our cash profitability, and they are not associated with the winding down of any facilities or other physical assets. It's something that many of our peers have also gone through. And with that behind us, we are in a great position for continued growth. Removing these non-cash items, we've realized our first annual positive adjusted EBITDA of $10 million on the year compared to a loss of $20 million in 2019. With the licensing bottleneck removed, our team did an excellent job developing new products, including some highly differentiated formats. Since the launch of vapes, we've delivered a total of of new nine new product formats or significant line extensions. Since October, we've released and launched a total of 31 new SKUs, many of which are sold in both the medical and adult use markets. Given where we started six months ago, this is quite an achievement from our team and something that really speaks to their executional capabilities. During Q4, we launched high-potency CBD oil, 510 vape cartridges, and cannabis-infused sublingual strips. Though sales of these products in the out-of-use market only commence in December, we are already beginning to see their impact as we saw a 500% sequential increase in recreational sales over Q3 driven by these new formats. In Q1 of this year, so far, our sublingual strips, Kinslips, were our top-selling product format, and CBD50 was our top-selling individual product SKU. And recently, we launched THC Soft Chews, our first cannabis edible format. Of even greater importance, though, is that much more recent expansion of our dried flower portfolio. This obviously remains the most important category in Canada by a wide margin. This month, we commence shipments of several new dried flower SKUs, including pre-rolls from our outdoor cultivation harvest. Rounding out the product front is the imminent launch of our wellness line, Noon & Night. This is a highly differentiated brand that features formats that are familiar to consumers in non-cannabis form, but which often are not yet available to Canadian consumers. We've received purchase orders for the first two formats under this brand, including Omega-3 soft gels. We're now at the point where we have an incredibly diverse product portfolio. but the consistent theme is that we focused on areas of key competitive advantages, whether that is through novel formats, quality, or pricing. On the international front, we've also made some significant headway. In December, we announced that our Niagara greenhouse was deemed EU GACP compliant. Why that's important is that means flower grown at our greenhouse is eligible to be exported to European Union and other international markets, with the caveat that it must be dried and shipped from an EU GMP certified facility. And we have a strategic partner that does that for us. Since that time, we have sent batches to Germany for stability, quality, and cannabinoid testing, and they were all deemed to meet EU GMP standards. We're now in the final stages of beginning exports to the EU, which securing the customary import and export permits. Similarly, we received an export permit earlier this week, for our greenhouse flower to be exported to the UK. Obviously, the international channels are filled with red tape and take time, but most of the heavy lifting is done, and we're excited to commence our first exports to new countries in Europe in the near future. We also completed our largest international shipment ever to Australia in Q4. We may start to see more regularity in orders from our customers there as we immediately received a larger purchase order in January and are just waiting for the export permits now. Lastly, I will touch on our agreement with Unifor, Canada's largest private sector union, which has 315,000 members. For American shareholders, Unifor would be the equivalent of the UAW in the US. The purpose of this agreement is to gain insurance coverage for medical cannabis for union members and their immediate family members. Unifor has shown great leadership in advancing this cause, which is fundamentally about patient access to medicine. We now have one of Canada's largest employers signed on to the program, with their employees and family members soon becoming eligible to spend $500 per year per person on medical cannabis through their insurance plans. We are working on and hope to have many more large employers sign as we build out this program. The Unifor opportunity truly plays to the strengths of our medical cannabis ecosystem, from products to physician consultation and scheduled home delivery. The team has worked incredibly hard to launch it with our first employer, and as we demonstrate its potential, this is another area that will truly differentiate us from our peers. Ben, over to you.
spk02: Thanks, Jeff. This was both a very strong year and Q4 for Aletheia. Q4 was a strong quarter, not just from a revenue growth perspective, but also through a significant improvement in adjusted gross margins through all sales channels. But first, as Jeff said, it's important to note that the substantial net loss is largely due to non-cash, one-time accounting expenses. Primarily, this was due to the write-down of goodwill associated with the acquisition of Emblem Corp. We announced this all-share acquisition in December 2018, and it closed in March 2019. In that time between announcement and close of the transaction, the share prices of both companies nearly doubled. But from a relative perspective, the acquisition was unchanged. The increase in emblem share price during that time resulted in a large accounting non-cash goodwill asset on our balance sheet, which we have now written down. Q4 gave us the first indications of what we expect will be a significant recalibration of our sales mix in 2021. from domestic wholesale towards more valuable and sustainable adult use medical and international channels. Medical cannabis sales increased 42% sequentially in Q4 2020 versus Q3 2020. New product formats, as Jeff talked about, have had an accretive effect on sales as we had hoped. As we introduce more formats to medical patients, We are really starting to see Emblem Cannabis become more of an e-commerce marketplace and a one-stop shop for medical cannabis. Also, a lot of this growth is occurring in the Greater Toronto Area where our Sure Home Delivery same-day service is available. We intend to strategically push our competitive advantage in the GTA for both medical and recreational. Medical cannabis adjusted gross margin improved to 48% from 26% in the prior quarter. This was largely due to the ongoing optimizations and scale from operating in the expanded Paris facility, which only commenced in May of last year. As we've previously said, the Canadian adult use market was going to increasingly be a focus for us as we've gained the ability to expand our product portfolio. Adult use cannabis sales increased 500% sequentially in Q4. Prior to this quarter, our adult use sales were almost entirely from extract products. Our adult use portfolio has really begun to broaden, and through the product launches only occurring late in the fourth quarter, they are already having a very positive impact. With respect to domestic wholesale, obviously we have benefited from strong outdoor cultivation harvest, which contributed, which generated 10 million in sales from this segment. Given our focus on adult use, medical and international, we primarily have our greenhouse dried flower allocated to adult use and international sales. It's likely that we will see quarterly domestic wholesale revenue decline in the first quarter of 2021 relative to Q4 2020. Lastly, our focus on sustainable growth has led to revenue increasing by a much higher margin than our operating expenses. We are really just scratching the surface of our revenue generating potential of our production facilities that have been fully operational now for several months. Again, we reported positive adjusted EBITDA of 4.3 million for the quarter and positive adjusted EBITDA of 9 million for the year, which is a significant achievement for us and one which we hope to build on this year. Operator, back to you.
spk03: Thank you. To ask a question, you would need to press star then one on your telephone. To withdraw your question, please press the pound key. Again, that is star then one if you would like to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Raul Sarugaser with Raymond James. Your line is now open.
spk04: Thank you very much. Morning, Jeff, and Ben. Thanks so much for taking our questions, and congratulations on the strong quarter. Indeed, a testament to all the work that's been done at Olivia. So I guess one of the first primary questions I have, of course, is that The large portion of the cannabis sales have come from essentially wholesale LP to LP. How do you see that playing out going forward, given that in this quarter it represented the majority? And then how should we be thinking about that channel mix between medical adult use and LP to LP going forward?
spk02: Thanks. It's Ben. We don't give specific guidance, but as we've talked about, as our business continues to evolve, we continue to shift more of our emphasis and focus onto the business segments around medical adult use. and international. So as we see 2021 being compared to 2020, we would envision more and more of our relative mix shifting away from wholesale and more focused on the rec, medical, and international.
spk04: Great. Thanks for that, Ben. So maybe focusing a little bit more on on the adult use market now, given that Alifi is really moving into space. Jeff talked about some of these SKUs being well received. We know that particularly Ontario did a bunch of SKU rationalization this first quarter. So how did you see that SKU rationalization impacting Alifia?
spk00: Hey, Raul. Thanks for being on the call. We've had a lot of products that were in high demand by the OCS and are now entered in their program, and you're going to start seeing them. I think what a lot of OCS really likes is they create a category or are in the process of creating a category specific for outdoor grow, and we have a 12-pack format .350, pre-roll which we think is just going to be dynamite in the marketplace. You get two extra pre-rolls basically for the same price as you're paying for a 10-pack. So we really think that's going to be kind of a game changer for us and ultimately we just have a larger number of new listings And they really like our full portfolio, which is we're also seeing a number of new dried flowers and CBD wellness lines that are coming on. And the OCS has taken all of them.
spk04: Great. And if you'll indulge just one last quick question. Of course, Olivia is quite unique in its partnership with Unifor. So how, you know, given that it's early days and there's a lot of potential there, How should we be thinking about penetration into Unifor's 300,000 or so members? And this also is a follow-on. How should we be thinking about future sign-ups of any additional unions going forward?
spk00: So look, I'll answer that question. So first of all, when you look at the opportunity of Unifor, let's start with their 315,000 members. and their family members, which we like to use about two and a half to three incremental per household, which puts us in over a million folks that will be insured by Unifor. So we have to go on to a collective bargaining basis, but already some very, very large employers have approved medical cannabis coverage for their members, and we're just getting ready to start the program. So the opportunity is significant. However, it's also very new and we expect that it'll take a time, sorry, it will take time to ramp up. So we'd really need to get a full quarter of sales from the program before we can look further ahead, but it'll take time. But it's a great opportunity. And on that point as well, as these collective bargaining agreements come up and there's literally dozens and dozens of them, Raul, under Unifor as well. So you have CP Rail, CN Rail, Bell Canada, Air Canada, you know, oil and gas sector. You know, I could tell you that these opportunities for the sell-in is pretty easy, especially once we're going to have kind of the template of being able to, you know, sell, sorry, register, sell, deliver, bill, and make it really seamless and make it easy. So I think it's going to be a really, really big hit. Also on top of that, what people don't really understand about this opportunity, Raul, is that we are collecting a tremendous amount of data here. And the data that we're going to be collecting on a fully funded basis is really going to be able to allow us to start selling to other unions and other private employers or public employers. So what I mean by that is this. In the past, when you go in and you start selling into some of these channels and potential clients, the first question they ask you is, you know, can you cost justify it, right? And no one's really had that data to be able to qualify and quantify the value of what you're doing for each one of these patients. So that data for us is going to be very, very integral in terms of being able to take that data and use it to sell in and show other employers, other unions, the real value of medical cannabis as an opiate replacement therapy. So we think that by us having that data, not only is it going to help Aletheia, but we truly think it's going to help the entire industry. And we think the medical cannabis is just skimming the iceberg right now. When people thought it was going away, it's just getting started.
spk04: Perfect. Thank you very much. That's some excellent color. And Jeff and Ben, thanks as always for including us in the question lineup.
spk00: Thank you.
spk03: Thank you. There are no further questions. Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.
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