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spk01: Good day, ladies and gentlemen, and welcome to the Aletheia Health Fiscal Year 2023 First Quarter Results Conference Call. This morning, Aletheia Health filed on its financial statements and associated management discussion and analysis for the three months ending in June 30, 2022. All comments to be made on this call today should be taken with reference to and are qualified in their entirety by those documents. Today's call includes estimates and other forward-looking information from other which our actual results may differ. Please review the cautionary language in today's press release regarding various factors, assumptions, and risks that could cause our actual results to differ. Furthermore, during this call, we will refer to certain non-IFRS financial measures, including branded cannabis net revenue, adjusted gross margin, and adjusted EBITDA. These measures do not have any standardized meaning under IFRS, and our approach to calculating these measures may differ from that of our other issues. And so, these measures may not be directly comparable. Please see this quarter's MD&A for more information about these measures. It is now my pleasure to pass the call over to Alethea Health CEO, Trisha Sims. Please go ahead.
spk02: Thank you, and welcome fellow shareholders. On behalf of our CFO, Matt Sale, and the entire team here at Alephia Health, we wish you a warm welcome. It seems like we just gathered for our year-end earnings. We were very optimistic then and said our prospects were the best they'd ever been. Today, on August 11th, Matt and I are excited to tell you about how Alephia continues to accomplish great things and is delivering on our strategic pillars on our path to profitability. Let's take a look at our overall business performance for the first quarter of our new fiscal year, starting with our four core strategic objectives. In the first quarter, we achieved significant milestones across all four pillars we outlined as our focuses for the year. The first is obtaining a top 10 adult use market share position and adjusted breakeven EBITDA profitability in the second half of fiscal year 2023. We are now approaching that inflection point. to achieve adjusted break-even EBITDA in fiscal year 2023. With an approximate 27 million run rate, the company has achieved the third highest growth rate among top 20 Canadian LPs in retail sales pull-through over the last four quarters, having achieved another increase in our market share ranking for the most recent quarter, up to number 12 in our core market. One of the reasons for these significant achievements is the leadership demonstrated by the Divi brand in the value segment. Divi's market share increased by 3.6% in Q1 from 3% last quarter across our core markets. Specifically, in our largest market of Ontario, dried flower and pre-rolls achieved monumental seventh and fifth rankings respectively in the value sector. We'll speak to these a little more as we go through the presentation. The second pillar is maintaining our growth and leadership in medical cannabis. The Q1 medical market highlights include 11 million run rate net revenue, deeper penetration in key high-value markets, including veterans, Quebec patients, and continuing to actively onboard new third-party channels and insurance-based coverage. While the overall market is declining, the company's market share in the Canadian medical market is growing, achieving a new high of 7.5% market share. The third pillar is our growing international sales, now with a 2 million run rate net revenue. Consequentially, a new international partner has been signed for our European markets, representing 4.6 million in potential sales. This new partnership deepens our penetration into the German market and adds to our portfolio of German, UK, and Australian sales, where we are continuing to build on pre-existing relationships and already have a history of shipping products. International distribution delivers a significant upside potential and is a diverse portion of our revenue portfolio, giving us unique competitive advantage. The company will continue to engage in export ramp-up throughout the fiscal year. Finally, in the fourth pillar, our expectations to achieve break-even adjusted EBITDA are based on completing a $5.6 million in equity financing and a $7.0 million receivable facility, refinancing $37 million converts, 12.3 million 2024 convert, 12.3 million 2026 convert, and 14.7 million 2028 convert, and extracting 10 million in annualized cost reduction. That is Alephia Health today, a financially disciplined, growth-focused company with a transforming balance sheet. Now we'll share a few highlights of our adult use sales channel. The biggest achievement is the continued rise of our everyday brand, Divi. Revenue in the adult youth sales channel has increased year-over-year at 176%, with net revenue growth of 107%. For the same period ending June 30th, 2021 and 2022, there is dramatic growth in DV's revenue. From a successful launch quarter in 2021 with $4.0 million in total revenue and $3.2 million in net revenue, In 2022, that number has skyrocketed to $11 million total revenue with a net revenue of $6.7 million. Divi is rapidly entrenching its sought-after position in the adult use market. It is in the top three LPs for total retail sales growth in our core markets, boasting a 47% growth over the last six months. The first quarter overall market share is approaching 2.5% in the company's four most important Canadian markets, BC, Alberta, Saskatchewan, and Ontario. In retail sales pull-through, we are seeing continued exceptional double-digit growth with 18% quarter-over-quarter growth and approaching our goal of a top 10 ranking across all participating markets. In the three largest categories, the numbers are very impressive. First, looking at pre-rolls. We've achieved a 42% quarter-over-quarter growth in retail sales through, a 69% CAGR since calendar year 2021 Q1, and a 3.2% market share in listed regions. In the largest category, being dried flour, we are showing a plus 28% quarter-over-quarter growth in retail sales pull through, a 90% CAGR since calendar year 2021 Q1, and a plus 2.5% market share in listed regions. And in vapes, the third largest category, we've seen a plus 16% CAGR since calendar year 2021 Q1 and a 1.53% market share in listed regions. Clearly, these results indicate that an increasing presence in the highest margin, most in-demand product categories has helped the company achieve higher growth in sales and market share. which given Divi's percentage of our revenue, adds to our momentum in attaining a top 10 standing in our core markets. Now we'll speak a little bit about market share position. While several of our peers see market share position, Aletheia continues to scale its adult use business amidst a highly competitive environment. As Aletheia continues to take market share, it is approaching a top 10 position in its core market. Now think of these two points. We launched the Divi brand only in Q1 calendar year 2021. It has quickly and steadily gained consumer acceptance in our present market. It is now enjoying a 3.6% market share in the value category, the market's largest segment. Two, only seven players ahead of Aletheia are both larger and growing based on retail sales pull-through data. where we enjoy an 18% growth quarter over quarter. Only two LPs enjoy a higher growth rate quarter per quarter in the top 12 in our market. With our now established brand Divi, with momentum in the marketplace, we see a highly executable path to a top 10 position. I'll speak a little bit now about the addressable value segment. The Divi Everyday brand continues to show rapid acceleration in Ontario and Alberta. and displays untapped potential in BC. The target addressable market, or TAM, is an estimated $750 million in LP net revenue. The value category is the largest adult use segment in the four provinces where the company's market share has risen from 3% in Q5 fiscal year 2022 to 3.6% in Q1 fiscal year 2023. With the Divi brand demonstrating significant growth in our home province of Ontario, the value segment market share has increased substantially, 3.4% in flour, an impressive feat considering the amount of flour shortages we've experienced, and an incredible 6.9% in pre-rolls, indicating a fifth market share rank, two exciting, a fifth and seventh market share rank, two exciting numbers for us as we've also launched a higher margin pre-roll format This format are seven by one gram. We've also just doubled our number of vape skews this quarter in Ontario and expect this market share number to increase as well from 1.4%. Achieving a top 10 ranking in the two dried flower categories in our market is a significant achievement. Now we'll speak a little bit about the medical sales channel. Let's take a look at the medical sales channel where there are turbulent forces that continue to challenge the entire segment. In a declining sector of the cannabis industry, quarter over quarter, our medical channel has seen incremental growth in revenue up 2.8 million from 2.5 million, as well as growth in high-value patient groups, veterans plus 4%. Our strong record of patient engagement is driving growth in average order value up plus 2.9%, and Quebec patients are up 71% quarter over quarter. We are very proud of our growth in medical patients and market share from 2019 to present, such that we've reached a new high of 7.5% patient market share and served thousands of patients receiving substantial relief by recommending medical cannabis products. This continues to be a fundamental pillar due to its high margin sticky revenue base, and we are uniquely positioned to continue capturing market share given our medical ecosystem, experience, and product portfolio. We'd like to speak a few minutes about our international channel. International revenue growth diversifies sales mix and unlocks untapped and growing markets at a higher price point at net realizable margin. This quarter, we have signed a new European partner in a two-year agreement with a total contract value of 4.6 million. This partnership optimizes the supply chain and reduces the cash conversion cycle. We intend to leverage our international success to further develop the international channel, a key differentiator for the company. In our fiscal year 2022 presentation, we discussed the challenges in the first calendar quarter of 2022 in our greenhouse. We wanted to provide you a quick update on how we are maximizing our yield of usable flour across our three facilities to support our sales demand. Our Port Perry outdoor facility is deep in the 2022 growing season with an expected harvest to start mid-September. This harvest goes directly into branded cannabis products in the adult use segment. We are also expanding our indoor grow by converting existing spaces into new grow rooms in Paris, Ontario. This supports the continued uptake of committed sales contracts by international partners, which delivers to Aletheia locked in sales, high margin, and cash flow visibility and is an excellent example of Alephia leveraging its cultivation knowledge and ability to sell on-trend strains through multiple channels. Finally, in our hybrid greenhouse in Grimsby, we are continuing to make improvements and remediate issues identified in Q4 fiscal year 2022. We're also testing new genetics and focusing on efficient growing practice and enhanced irrigation. These three facilities provide distinctive competitive advantage, growing branded cannabis for domestic and international markets, and yielding both A- and C-grade flower with potent THC and terpene profiles. I will now turn it over to our CFO, Matt Sale, to give us an initial update.
spk03: Thanks, Tricia. To drive the company's continued success, we are scaling net revenue growth across all three of our core sales channels in our branded cannabis portfolio. As you can see in looking at net revenue composition with the transformation of our business towards a branded cannabis producer, branded cannabis now assumes over 80% of our total net revenue with wholesale contributing the remainder. We are currently producing a run rate net revenue of 48 million based on an annualization of the most recently completed quarter. And for this current fiscal year ending March 31st, 2023, We are maintaining guidance between 53 and 63 million in total net revenue. We will accomplish this by focusing on our core three revenue streams. In adult use, we are leveraging supply partnerships to procure high-quality usable flour to improve our out-of-stock performance and unlock unmet consumer and patient demand. We are also launching our Divi Buyers Club, which will provide consumers with new emerging cultivars. We're intently focused on hitting a top 10 market share position in our core markets. And given our success in the value category with our Divi brand, we see a clear pathway there in this fiscal year. In the medical channel, we are attuned to our patients' needs by streamlining their journey and offering innovative promotional products. We're also looking to focus on high-value patients, such as veterans in the Quebec market, and deepening our presence there. and continuing to drive uptake through our Unifor exclusive partnership. Supported by the recent integration of our three medical channels, including physical, virtual, and third-party clinics, we are seeing steady upticks in our market share and continue to build a high margin recurring revenue base. In the international channel, we are continuing to drive revenue growth in Germany, Australia, and the UK by building on existing partnerships, entering into strategic supply agreements with new international customers, which provide the company with revenue and cash flow visibility, due to them being fixed price in nature and having sales commitments, which are in some cases multi-year in nature, and they deliver higher margins than either the adult use or medical channels. It is a high strategic priority for the company, and we are seeing those efforts result in revenue growth. Here we take a look at the comparisons from the quarter ending June 30th, 2021 to the same period this year. Branded cannabis net revenue increased 31% from 7.6 million to 10 million. This is our sixth consecutive quarter of growth in this channel. Wholesale revenue by design was reduced from 3.1 to 2.1 million as part of our pivot away from that higher volume but non-recurring business. Total net revenue increased 13% from $10.7 million to $12 million in this most recent quarter ended June 30th. Adjusted gross profit margin before fair value adjustments declined from 43% to 22% in this quarter. The primary driver of this decline is due to our intentional sales mix shift towards adult use, where as mentioned before, we see lower margins in both medical and international channels. We're actively mitigating this. We completed a detailed portfolio optimization in Q5 of the year 2022, which is now starting to result in margin improvements. We're managing our portfolio products to focus on larger format, higher margin dollar SKUs. And we are increasing our export supply into international markets, which deliver the highest margin potential. Adjusted EBITDA improved by 2.5 million over the prior year. to negative 0.9 million due to some key factors, including adjusted SG&A was reduced by 5 million from 9.7 million to 4.7 million, a significant 51% reduction over the last four quarters. Company-wide, we've enacted a strategic headcount realignment and focused on aggressive cost rationalizations and containments to make this happen. Adjusted SG&A as a percentage of total net revenue declined from 91% to 39% and we anticipate this percentage to continue to improve as we drive revenue growth and extract operating leverage from our largely fixed SG&A base. Our branded cannabis net revenue continues to scale whilst many peers in the industry show significant and consistent declines quarter over quarter. On the left, we plotted our growth in retail sell-through in our core markets for the quarter end of June 30th, 2022. Here, we delivered the second highest growth rate of 18% amongst our peers. This places us firmly in the top quartile. In contrast, when you look at our valuation based on consensus 2023 net revenue estimates, this suggests Aletheia trades at a deep discount to most of our peers. The average amongst our peers is 2.2 times net revenue versus our 1.4 times net revenue trading multiple, a 35% discount to our peers. We believe with our continued success and improved awareness of our growth strategy and financial performance, this leaves meaningful room to narrow this valuation gap and drive improved shareholder returns. The companies enjoyed strong growth in Q1 fiscal year 2023, growing revenue by 67% and net revenue by 30% over the prior year. The difference between the growth rates in revenue and net revenue is a result of the higher excise tax burden on adult use sales than our other sales channels. But more than that, this slide reflects our changing business model. With our strategic shift towards branded cannabis products, wholesale, increasingly represents a smaller proportion of our total net revenue, reaching 17% in the most recent quarter ending June 30, 2022, down from 29% in the prior year. Over 80% of our net revenue is now derived by branded cannabis products. International continues to emerge as a sizable sales channel for us, representing 4% of total net revenue in the most recent quarter. With purchase orders and firm sales commitments in place, we anticipate this increasing as a proportion of total net revenue in the quarters ahead, driving an increasingly diversified sales mix in the branded channels. And all this shifting has happened while our balance sheet was transforming. We now have over $10 million of liquidity to drive growth, with $5.6 million cash on hand and access to a $7 million dollar receivables facility, 5.2 of which remains undrawn in the most recent quarter into June 30th. There are no near-term refinancings, with December 2023 being the nearest term refinancing of our credit facilities. We have no debt service costs for our convertible debentures, as they require no mandatory cash interest payments until June 30th, 2024. Notably, our total net debt balance on the balance sheet has declined to $39 million in the most recently completed quarter ending June 30th, and we continue to monitor this carefully. In short, all of these measures improve our balance sheet and provide the liquidity and capital to continue scaling our business. The company's net working capital is being optimized to enhance returns on our capital employees. Networking capital as percentage of total net revenue decreased from 89% in Q2 of fiscal year 2022 to 33% in Q1 of fiscal year 2023. This significant enhancement in networking capital performance was driven by actively managing receivables. Given the buying patterns of provincial agencies in the adult use sales channel, we anticipate overall growth in our receivables. However, We have partially mitigated this impact by initiating our revolving receivables facility to help fund growth in AR. On the inventory front, there were a number of initiatives to right-size our inventory, leading to a significant increase in inventory turnover from 0.8 times in Q2 of fiscal year 2022 to 1.8 times in Q1 of fiscal year 2023. Our diverse flour supply is being dynamically directed to sales channels with the highest net realizable margin and strategically adding finished goods to minimize product stock outs. In addition, aggressive cost containment has engineered a reduction in accounts payable, and we continue to drive cost efficiencies through economies of scale and consolidation of vendor relationships across our four sites. As I've explained on prior earnings calls, we continue to be highly focused on extracting costs out of our business. On this front, we are very pleased with the performance in our SG&A profile. On the left part of the slide, you can see the dramatic improvement in our adjusted SG&A profile over the last seven quarters. Our quarterly adjusted SG&A has declined by $5 million over the last four quarters, from $9.7 million to $4.7 million. representing a 51% reduction. This represents an annualized savings of approximately $20 million over this period. As a result of aggressive cost realizations, the companies continue to reduce adjusted estuarine with many key cost initiatives, including the Vendor Consolidation Initiative, driving cost reduction through economies of scale across our four sites. This started in this most recent quarter, and we've already identified over $2 million in annualized savings thus far. In addition, insourcing or bringing in-house certain functions of legal, finance, and IT have resulted in further cost savings. In the other direction, we do anticipate continued investment in our business to drive top-line growth across our three sales channels. Overall, our current adjusted SG&A profile is flexible and scalable to facilitate continued revenue growth. We remain on track to meet our target of between 25 and 27 and a half million in adjusted SG&A in fiscal year 2023. Before we turn the presentation over to some Q&A, let me conclude by addressing our high strategic focus on accelerating the inflection point of achieving break-even adjusted EBITDA profitability. With 13% growth in total net revenue year-over-year and $5 million reduction in quarterly adjusted SG&A year-over-year have led us to inching ever closer to that profitability inflection point. However, this point would have been even faster were it not for a $2 million non-recurring operational issue at Grimsby and $1.9 million wholesale negative margin in Q5 of fiscal year 2022. That said, there are many projects underway to drive profitability, including an evolution of our product formats to maximize margin, forming strategic relationships to unlock further high-quality flower supply, enhancing our B2B logistics and warehousing services, and launching private label services. All these initiatives are margin-accretive drive further utilization of our existing asset profile, increase top-line revenue performance, and extract operating leverage in our adjusted SG&A profile, contributing towards long-term sustainable profitability. This completes our presentation today. Thank you for listening. I'll turn it back to Tricia Simms for a few closing remarks before we take questions. Tricia.
spk02: Tricia Simms Thank you, Matt. Alethea shareholders, Analysts and everyone listening today, I'm very proud of what we've been able to accomplish in the first quarter of this new fiscal year. Every day, I'm honored to work with this incredible team of people who are so completely dedicated to their part in making Aletheia Health a company to be proud of. We said we were going to deliver, and that is what we continue to do, making lives better together as a team by growing and creating innovative products and brands that adult use consumers and medical patients are attracted to. At the same time, increasing revenue and market share, reducing costs, and driving toward break-even adjusted EBITDA profitability. This is Alephia Health today, devoted to building the company into a truly great organization together. Now I'll turn it back over to the operator to take some questions and answers.
spk01: Thank you. If you would like to ask a question, press star 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Please hold for your first question.
spk05: Your first question is from the line of Pablo Zuneck from Cantor Fitzgerald.
spk04: Good morning. This is Matthew Baker on for Pablo. Thank you for taking our questions. Regarding the structure of the convertible debt, is all of this done, or is there something that's still pending, and was all of this refinanced or only part of it? Thank you.
spk06: Hey, Matthew.
spk03: Thanks for the question. Good to hear from you again. So the convertible to venture amendments were concluded in the last week of June. That was finalized and ratified by a vote. Given that the existing convert was a $37 million convert is being exchanged for three new convert issuances, there is a four-month plus one-day statutory hold. So we expect that to happen. In the coming months ahead, we've also applied for a public listing, and we anticipate that to close as scheduled next quarter. and then there would be freely trading converts. The second part of your question was that, I think, was that the entire convert? And yes, the entire convert was refinanced and separated to three new tranches. There's a 2024 convert of about 12.3 million, a 2026 convert of equivalent amounts, and then a 2028 convert at just over 14 million.
spk04: Okay, thank you for clarifying that. And I know this was touched on on the call, but can you clarify what has to happen for you guys to get to the high end of your sales guidance range of net revenue between 53 and 63 million, especially after 12 million in the first quarter?
spk03: Yeah, good question, Matt. So we're focused on growing each of our three core branded sales channels on medical, with its recurring revenue base, We have seen that growth restart this past quarter into the double digits. That's in a market that's been declining, but we have found ways to grow our market share and continue to grow that business by focusing on high-value markets, reengaging with inactive patients, and offering promotional products, innovative products to those patients. On the adult use side, you know, anchored by our Divi Value brand, we're seeing incredible market uptake. In Ontario, our home market, we have already achieved a top five position in pre-rolls, and a top seven position in flour. Vapes is the one that's lagging behind there, and with our launch of new product formats, we think we can get there as well this fiscal year. On international, we just secured a new $4.6 million total contract value, which was signed last week. We think that this will start being executed and ramped up in this fiscal year. And we're in discussions with other European partners with similar contractual commitments, multi-year, fixed price, margin accretive. And this provides a attractive offtake from our indoor facility. And with those focusing on those three core sales channels, we see a pathway to hit our guidance between 53 and 63 million. I think to get towards the top end, the last piece I'll focus on is flower supply. And we're looking at ways of procuring high-quality usable flower through strategic partnerships. That allows us to do it in an asset-light way. It allows us to leverage our brand and our internal sales force, which is a competitive advantage for us. to continue growing our top line performance and hit the top end of that guidance. Patricia, anything to add on that?
spk02: No, I think that's excellent, Matt. I think the only other thing that I would add to that, Matthew, is that we had more demand in Q1 than we had supply. So while the numbers we're reporting in net revenue were based on the supply available, And that gives us a lot of confidence based on the strong growth of the brand and the demand for Divi in the market. As Matt mentioned, we have also sourced additional flower supply and we have new SKU launches with the Divi Buyer Club that is really going to allow us to be able to continue to accelerate that growth. And then the second point I would mention on the vapes is we just recently launched the vapes at the end of fiscal, sorry, calendar year 2022. and we have new formats that are entering both into the Ontario and Alberta markets. As you know, this is the third largest segment. We've seen excellent uptake with these first initial launches, and we continue to find this to be a real advantage to ours that we can make these in-house and have no limit to supply. We also have launched a unique CBD vape and a balanced vape, which was a strong demand in the market, which is going to allow us to continue share in that area so we're very confident on the guidance that we've put out and then lastly on on the international side as it takes you know some time to be able to establish the partnerships and then it becomes into a consistent cycle and flow quarter per quarter you'll continue to see increased growth on a higher margin and net revenue based across our international business as we move through the next three quarters
spk04: All right, thank you to both of you for the color there. If I could just ask another follow-up, can you comment on the gross margin differences between your domestic rec and medical business? And then could you remind us of how many people are reimbursed for medical cannabis in Canada? And has this number changed? And what do you think could realistically help grow the domestic medical market? Thanks.
spk03: Okay, Matthew, I think there were three questions in there. Let me unpack one at a time. So the first one on the margins, This was intentional and anticipated with adult use being the highest growth sales channel for us. And that's a strategic priority for us to get into that top 10 in our core markets. What you'll see, and you know this as well across the industry, is there's been some price compression. Our view is that has now largely stabilized. And in fact, we've been bucking that trend with a moderate strategic price increase enacted last quarter. We're now seeing that start to flow through into our margin profile. Additionally, we're working with our key trusted vendors through consolidation and negotiating price improvements to drive margin expansion in our rec business. It is largely driven by flour. It is two-thirds of the adult use segment. On medical, it structurally does deliver a higher gross profit margin. as it's the inverse. Over 80% of our sales in medical are based on derivative products, and those derivative products deliver a much higher margin profile on average than flour formats.
spk02: I can answer the second part of the question specifically with regards to what we're doing in terms of new patient growth on the medical side and talking a little bit more about the reimbursement side of that market. So the first thing that's been very important to us is to ensure that with the current patients that we have, that we've been able to increase the value of our offering. So we've recently expanded our medical portfolio to include other topical products and products specifically for certain conditions, such as sleep with the launch of our new Nightcaps brand, which is a significant innovative product with melatonin. As you know, sleep is the number one cause of affected issues for people in using on the medical side of the business. This product we are very hopeful will have a significant impact on helping patients lives. We've also increased the supply of flour, high value flour, high THC flour. This has been a significant part of the portfolio that we needed to ramp up specifically for our veterans patients and ensuring, you know, with patients that have consistent chronic conditions that they have access to flour with a consistent supply. And then we've made a real focus on insurance-based coverage, specifically through our Unifor partnership and then also with our veterans. There are many insurance carriers now that are starting to cover medical cannabis, specifically on the CBD side. Coming from a background in pharmaceuticals and having an expertise in this side of the business, it's important to work early with these healthcare coverage providers and employers. We are engaging specifically on educating our patients on how they can access third-party coverage and in working with the employers that we've onboarded with Unifor to specifically make sure that these patients have access to coverage and have it reimbursed through their healthcare plans. That's another continued part of the expansion of our business is working specifically to ensure that we will be onboarding additional employers to help support that, of which we have active ones as part of the channel. So hopefully that gives you a little bit more of color in terms of not only the margin side of the business, but also the importance of patients that are reimbursed and the sustainability of that. And I think that one thing you'll see versus medical and the rec side of the business is there's just so much opportunity for people to have recreational cannabis readily available at their doorstep where you've seen this decline in potential patients of the medical business. yet we continue to be able to increase the size of that patient population with some of the initiatives that we just discussed about. And we do think that there will continue to be a strong, viable medical business, especially as more insurers start to onboard patient coverage.
spk04: Okay, thank you. And then one final question. Just thinking, how is the company thinking about the outdoor business, mainly from a company strategy point of view? Thanks.
spk02: Yeah, thank you. Excellent question. So the outdoor grow in Port Perry is one of our critical competitive advantages in the market. We made a shift to make the decision to move away from wholesale and focus on branded cannabis revenue earlier this year. And as such, we are one of the first companies to secure listings where we use outdoor products specifically in the Divi Everyday Value brand. What that means basically is that our pre-rolls and our milled product, which is a new offering, come directly from our outdoor Port Perry harvest. This is at obviously a lower cost than growing indoor or in a greenhouse and at a significant supply that ensures that we can really ramp the volume of these products, which are meeting the needs of the everyday consumer. This has become a fundamental pillar for us in being able to provide a consistent supply. with these categories, which, as you know, flour is the fastest-growing category, milled in different formats also being one of the areas where we're seeing a unique competitive advantage, and we're also able to offer non-strain-specific products into the milled and then strain-specific products into the pre-rolls. Those are the two fastest-growing categories for us in our business, and it helps, obviously, increase our margins and offset other challenges we've had in the greenhouse.
spk06: Thank you.
spk05: Thank you.
spk01: Your next question is from the line of research capital.
spk00: Thanks, operator, for taking my question. Congrats, Matt and Tricia, for reporting good set of results this time. I have one clarification about revenue guidance. You mentioned that you secured a new international partnership for 4.6 million sales commitment. And you also mentioned that this will be around 2 million per year. So just want to understand, is this factored in your low end of revenue guidance or is this in addition to that?
spk03: Hi, Ven. Good morning. Thanks for joining and thank you for the question. So, as you know, you know, our revenue guidance is on an annual basis and not on a quarterly, but to give some more color on that contract. So it was just signed last week and it will take some time to work through. all of the various operational certifications to execute that new supply chain and that new relationship. We think that that should happen towards the end of this calendar year and start being brought online commercially and recording revenue, if not later this calendar year, early next calendar year. So we think it'll start flowing into this fiscal year's guidance, but we've not materially changed our guidance to reflect that sales commitment. And to be clear, it is 4.6 million in total. The minimum annual is 2 million, so about 500K a quarter.
spk00: Yeah, that's great. And so what kind of gross margins do you assume for achieving positive adjusted EBITDA? Because I see that gross margin is improving compared to last few quarters. but what factors should come into play to improve the gross margin from this level? Obviously, one of the factors might be improving medical sales, but do you see any other levers to improve gross margin from this level?
spk03: Yeah, good question. Margins are very much a high-priority focus for us. You know, as part of our thinking as a company has evolved from... Top-line revenue performance, which is very important, but equally as important is making sure that our margins are maintained and grown. And I think of our three main sales channels, adult use, medical, and international, directionally, medical delivers higher gross profit margins than adult use, primarily because products are sold at a different price point. And two, the types of products are typically derivative products. extracted products, oils, capsules, vapes, versus in the flour category, as you know, about two-thirds to three-quarters of the market is flour. International, today our smallest, but our fastest growing sales channel delivers the highest margin. It is a combination of bulk flour and derivative products. On the bulk flour side, In contrast to adult use, we don't have any excise tax burden. And two, we don't incur much of the same finished goods, packaging, labeling, processing, tins, these other costs of production that is incurred in the adult use segment. None of that is incurred when we sell our flour in bulk format internationally. So it delivers both the highest margin percentage and the highest realizable margin per gram of equivalent flower sold. So, as that channel ramps up, we see that as a very strong catalyst to improve our margin profile. The guidance we have out for this fiscal year, as you'll recall, is between thirty two and a half and thirty seven and a half on an average basis. And we feel confident that we can still hit that in this fiscal year, given the growth trajectory. of each of our three businesses and the cost rationalization initiatives we have underway to improve margins and to extract further synergies in this journey.
spk00: That's great, Matt. Finally, so how much medical revenue is coming from Quebec? Just want to understand what factors will contribute to increase in medical cannabis sales from this level. I think you mentioned you already have like 7.5 market share in Canadian medical market, which implies a market size of around 450 million. So just want to understand what factors will drive your medical sales over the next few years.
spk02: Yeah, thank you. Excellent question on the medical side of the business, and certainly this continues to be a critical focus and a core pillar for us, especially from the higher margin. more of a sticky recurring patient basis that's consistent and the reliability on that group of sales. First, on the Quebec market, we've had a 71% increase in new patients coming from Quebec. This was a strategic decision that we made earlier this year. Previously, we had not been in that market. We're also running some clinical trials in the Quebec market where patients have had access to go on to some of our unique products, Omega-3, CBD and our can slip products to help obviously with with sleep anxiety and pain and other conditions we've connected with a physicians group there who is actively enrolling patients into these trials and learning about the these types of products and how they can benefit their patients and as an opportunity from that patients have you know the opportunity to Register with emblem should they wish to move forward. So this has been an important part of exposing the Quebec market to the value offerings that we have a market that we're not in in the adult adult use segment. We have not segregated the revenue specifically from Quebec, but we can definitely follow up with you on that to share what those numbers look like. But it is an increasing high value segment for us. The other one is on the veterans. ensuring that we have products that can help keep veterans patients consistently available for therapy. One of the challenges we've had in the past is not having high quality, high THC flower north of 25% for veterans. And this has been a miss on our product portfolio. However, in the last quarter, we have secured significant high quality, high THC, and we have strong partnerships with third parties that have now allowed our veteran population to have consistent products and are also seeing a growth almost close to 5% in that group. So that becomes a very important part of us as we move forward. And then we're expanding our product portfolio to be very medically focused and almost nutraceutical based where we have products that traditionally are used for many common conditions that are now combined with CPD to have an added benefit. One of these is obviously the benefits with Omega-3, which is one of our top selling products. And then the newest one is specifically with melatonin for sleep, which is a product that has had a high unmet need. And we are the first company out there to bring that to market. And then lastly, I would say in terms of expansion of our patients, it's really working with onboarding new third party partnerships and This is something that you've seen in the medical market while many of our other fellow LPs have left this market. There's a significant opportunity to still compete and be one of the larger players in the smaller market. And that's something that we are capitalizing on to make sure as they leave the market, we have ability for these patients to still continue to receive medical therapy and work very closely with Emblem. And as Matt mentioned, this is where we're starting to see a regrowth in our medical business. And it will continue to be a strong focus for us as we go through the remainder of this fiscal year.
spk00: Excellent. Thanks a lot, Patricia. And that's all from me.
spk05: Thank you very much, Ben.
spk00: Thanks, Ben.
spk05: As a reminder, to ask a question, press star 1 on your telephone keypad. At this time, there are no further questions.
spk01: I'll now hand the call back over to our presenters for any closing remarks.
spk02: Well, thank you very much, shareholders, analysts, and all participants on the call. Today was a pleasure to spend time with you. We look forward to presenting our continued upward trajectory and great news on our next earnings release. And from Matt, myself, and the entire Aletheia team, thank you for joining us today.
spk01: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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