Aleafia Health Inc.

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.

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.

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.