Aleafia Health Inc.

Nicholas Bergamini - Head of IR Geoffrey Benic - CEO Benjamin Ferdinand - CFO

Thank you for joining us for Aleafia's first 2018 third quarter earnings call. Joining me is Geoffrey Benic, CEO; and CFO, Benjamin Ferdinand.

This morning Aleafia filed its third quarter financial on SEDAR and EDGAR along with the Company’s news release that can found on www.aleafiainc.com. Please note that this call contains forward looking statements and information based on Aleafia management and reflects the Company’s current expectations.

By their nature forward-looking statements involve known and unknown risk, uncertainties and other factors which may cause our actual results, performance or achievements or other future events to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Geoffrey and Benjamin will now deliver remarks and afterwards, there will be a question and answer session.

Geoffrey, over to you.

Thank you, Nick. We’re very pleased to welcome shareholders to the call today.

First of all, our third quarter results are extremely encouraging. Aleafia reported quarter-over-quarter revenue growth in every quarterly report since its inception.

Our focus remains on excellence and execution and the revenue generated by first cannabis sale admirably speaks to that. We’re extremely pleased by our results, but this is just the beginning.

Please consider two, three key themes here today. The first, the combination related over the recent months have positioned us for exponential growth, for instance 99% of our projected 98,000 kilograms annual cannabis production capacity will be coming online during 2019.

Secondly, Aleafia's competitive advantage while legacy cannabis companies have done much of the heavy lifting starting the cannabis industry a second mover like Aleafia is uniquely positioned to learn from their mistakes and do things better, faster and at a lower cost. So case in point, now we can secure approval for an innovative outdoor cultivation facility, which will see us producing annual run rate of 60,000 kilograms drug cannabis flower beginning 2019, this positions us as a low cost leader.

This truly is a second mover advantage in action. I want to talk a little bit about management.

So I joined Aleafia in June 30, 2018, and my first priority was to building a strong management team, capable of achieving our objective of joining the first tier of global cannabis conference. Our critical hires included our Chief Financial Officer, Benjamin Ferdinand.

He joined us from the TMX Group where he led Finance, Strategy and Corporate Development. We also added an e-commerce veteran, Trevor Newell, as our Chief Marketing and Technology Officer.

Lastly, our leaf grower Lucas Escott, who is responsible for our two cannabis cultivation facilities, he may be among the world’s most experienced cannabis cultivators with prior facilities built out under his belt, he co-founded licensed producer Mettrum, which was subsequently sold to Canopy for $430 million. I want to talk a little bit about our strategy.

So Aleafia's two fully operational business divisions are Farm & Products and our Health & Wellness division, which includes our medical clinics. Our focus has been on enhancing the value chain and ensuring revenue generation from seed to sale.

Our medical clinic revenue largely derives from provincially funded health plans and by referral fees from other licensed producers from whom our patients purchase their medicine. Our Q3 results indicate that the clinic division has achieved profitability for the first time.

However future growth in our clinic business will be driven by directly selling cannabis to patients that means products that are grown, processed, labeled and shipped by Aleafia through the proprietary e-commerce platform which will be launched in 2019. Likewise, in the adult-use cannabis, we own the right to international brands, grown, labeled and shipped through our retail network.

It will also be listed through provincial distributors. In Q3, we created a foundation for these revenue growth drivers, medical clinics, cultivation in adult-use.

These three will drive Aleafia's growth in 2019. I want to segue over to cannabis cultivation today.

So, Aleafia's two major cannabis cultivation facilities are in Port Perry, Ontario and in Niagara Ontario. Together, they will produce 98,000 kilograms of dry cannabis on an annual run rate basis beginning in 2019.

So to put in perspective, our revenue growth has supported drive from only 1% of our total production online. The Port Perry location this is 7,000 square foot indoor hydroponic facility which is fully licensed and operational.

In Q3, Port Perry received its health cannabis sales license and we start currently sold our first harvest, resides on some prime farmland where Aleafia has received local approval for a 30 acre secure outdoor grow expansion which will produce 60,000 kilograms per year. The ground will be broken for an outdoor growth expansion in the spring of 2019 and our first harvest will be completed that summer.

Our second facility is our modern 160,000 square foot Niagara Greenhouse. The acquisition of which was completed in Q3 is currently being retrofit for cannabis production will arguably have a most advantaged cannabis production system in existence.

And what we continue to benefit from the last year's seamless transition between our production cycles, it's enabling the perpetual harvest. The standard product will meet the highest quality, control standards allowing fulfilling inventory demand and generating consistent revenue.

It will be fully operational in 2019 and the first harvest will occur in spring of 2019. As I mentioned earlier, our objective is to close the loop on cannabis value chain and supply both medical and adult-use customers of cannabis that will lead to growth, processes, packages and shifts.

To that end, we are exploring and adding process and labeling the shipping operation to one or both of our facilities. Our primary growth driver for the next 12 months is expected to drive from the wholesale of dried cannabis flower from our 98,000 kilogram annual production capacity.

There is a supply agreement to sell up to 15,000 kilograms to CannTrust in 2019 and the future transactions are expected to replicate some versions of that. However, as we progress, we will gradually shift towards the selling of finished products in both the adult-use and in medical markets as well as capable to become online in 2019.

Let me talk about medical clinics. So, we feel medical clinic is staffed by practitioner physicians who specialized in cannabis treatment.

Currently, the business has three revenue streams. The first, per patient visit, which is billed to government healthcare insurance providers here in Ontario we own it.

Clinical research, in which companies use our unique clinic infrastructure undertake research studies. We have a current study [indiscernible] to replace sleeping pills with medical cannabis treatment.

Thirdly and as a patient who purchased products we also receive a percentage from our licensed producers who our patients purchased medicine from. A variety of our projections examine how the legalization of recreational cannabis would affect the medical market, for Aleafia, there has been a steady increase in patient visits per month since October.

We attributed to the patient loyalty that has been garnered via the physician-patient relationship which is unique to Aleafia. The sustained increased volume, we have significantly expanded our total medicine solutions, and we will soon launch a concerted physician recruitment campaign.

Next year, our e-commerce platform complete with scheduled delivery will see patients able to purchase medical cannabis products that are produced, processed and shipped by Aleafia. Medical cannabis offers several key advantages over adult-use sales and producers can sell and ship directly to patients with significantly higher levels of consumption and the higher price per gram.

Aleafia Health also plans to leverage its over 10 million patient data points, intellectual property which will provide real commercial benefits including the development of unique medicinal products. I want to switch to adult-use.

As we saw the partnerships are critical tactics to achieve our objective and scaling faster better and at lower cost than legacy cannabis companies. That’s why we are so pleased to have concluded a wide reaching agreement with the Serruya Private Equity and its principle owner Serruya.

We had hoped to conclude the agreement earlier but should remain flexible as the Ontario government provincial retail licenses were not yet disclosed in the retail ownership funded 9.9% through licensed produces in Ontario. We have achieved the best possible outcome given the law requirements framework.

Serruya is well known as a principal investor in Aleafia. We now have a substantial financial backing through a $10 million private placement.

With these agreements in place, Aleafia is now well positioned to produce commercially-proven international cannabis brands for national cannabis retail network along with at least of them through provincial distributors. These transactions will see Aleafia immediately assume a leadership role in adult-use cannabis production, supply and retailing, complementing our proven medical cannabis operations.

Then switch over to international franchise. For some time now, Aleafia has been closely studying a number of international opportunities.

For us, a prospective partner has to meet two core criteria, a complimentary business model and a strong management team. We now believe that we’ve found that partner in Australian producer CannaPacific.

We just entered into a letter of intent to acquire 10% stake in CannaPacific. The Company has been granted licenses to cultivate, produce, and research medical cannabis in Australia.

After completing agreement expected in next month, we will begin deploying our cannabis Health & Wellness expertise including clinic operations and doctor recruitment along with training and education courses. This proposed transaction marks the launch of Aleafia's global expansion with the foothold in the budding Australian medical cannabis.

Now, I would like to hand it over to our CFO, Benjamin Ferdinand.

Thank you, Geoff. Please note that the third quarter results refer to the period ending September 30, 2018, and all figures are in Canadian dollar unless otherwise stated.

Aleafia's focus is on providing best-in-class experience for our consumers while creating significant value for our shareholders. We’re very disciplined on the top containment while allocating capital for the highest value added areas in the value chain.

As Geoff said, this quarter we completed our first sales of wholesale cannabis under our brand new product division. This represents in addition to the revenue generated by our Health & Wellness division which includes our cannabis clients.

I will look at things from an overall performance perspective. We are extremely happy with this quarter.

Revenue for the third quarter was 1.6 million, a 36% increase from the second quarter. We are very pleased to report that both our Health & Wellness division as well as our Farm & Product divisions were profitable this quarter before depreciation.

This is a first in the Company's history and a significant milestone. On a consolidated basis, operating margin excluding non-cash items was a loss of 812,000, although revenue was at an all-time high.

There were increased in investments compared to the second quarter. This was due to investments to develop our Niagara facility and to develop local capabilities for our consumer platform.

For our online platform, our investment areas included technology, management and general and administrative costs. We will be very disciplined on cost containments while continuing to invest in higher value added offerings providing higher margins and growth.

Next, I will discuss our two divisions. Firstly, our Health & Wellness division.

This division reported revenue of 1.1 million and earnings excluding non-cash charges of 206,000. This is an operating margin of 19%.

Our Farm divisions have revenue of 529,000 and earnings before non cash charges of 217,000. The cannabis supply situation in this market is very tight and we forecast that will remain so through 2019 and into 2020.

Moving to our balance sheet, the Company is in a very strong financial position. We ended the third quarter with 22.8 million of cash on hand.

Subsequent to the quarter end, we announced the $10 million of private placement with the Serruya family. $5 million of which will be reinvested in our adult-use joint ventures.

This brings our current cash balance to over 27 million. We have significant liquidity.

We are nearing completion of Phase 1 of our Niagara greenhouse retrofit with the initial health cannabis expecting inspection, expected in late 2018. The greenhouse will have total square footage of 160,000 square feet with an annual production capacity of approximately 37,000 kilograms.

We believe we will be the first licensed producer to execute on outdoor grow expansion at our Port Perry facility. This will facilitate adding another 30 acres of growing capacity which will produce approximately 60,000 kilograms of cannabis annually.

The capital expenditures will be minimal providing us with high return on investment and will secure high margins. This expansion is fully funded with the existing cash resources.

Putting all this together, Aleafia's total run rate capacity will be approximately 98,000 kilograms. These investments are expected to entrench Aleafia as a global leader in the production of standardized cannabis products florification.

We will continue to be vigilant in the allocation of capital toward maximizing value for our shareholders. I'll now turn the call back over to Nick for closing remarks.

Thank you, Ben. We will now begin the question-and-answer session.

I'll remind participants the questions may only be submitted via return form in the internet webcast. Please hold for a moment while we queue the questions.

The first question is. When can we see results of the sales of the second completed harvest?

And what is the value or average for these harvested results?

So, it's Geoffrey Benic to take that question. So the second harvest is complete we are currently waiting for Health Canada's inspection on the dried cannabis.

There is a process in place where Health Canada before given approval on the sale. We got to turn out to labs for [indiscernible] check.

So, the check is complete and the sale is imminent and it will hit this next quarter. I also want to say encouragingly as well we also have -- we are coming down to the last few weeks of our third harvest, and third harvest is looking very, very great and very promising.

And we think that that third harvest will hit the next quarter -- will hit the same subsequent quarter. In terms of the fourth quarter both of them will hit.

In terms of their price per gram, I cannot tell you what we think the price will be, but one thing I can tell you though is that there is a tremendous shortage in the market place right now for dried cannabis. So, we expect to get a premium in this tight market.

Thank you.

The next question is from George Minto. When do you expect the uplifting to the NASDAQ Stock Exchange to be completed?

Will it be before yearend?

Thank you it's Benjamin Ferdinand. We are progressing very well with our application.

There is only so much we can say, but we’re working with NASDAQ and are working through a price list, which we think that we’re well on track for with potential uplifting being by the end of this year or in January 2019.

The next question is from Michael Antonio. What are you doing in the area of patient education work related et cetera?

Through your clinic you have developed a great deal of knowledge. Is there are way to monetize this resource?

So, it's Geoffrey Binic to answer that question. So, we've been working really hard work on developing a tech platform that’s very scalable and our approach with that [indiscernible] and team is a big part of that is an education platform.

So, the education platform is actually going to do a number of things including certification. So I have an example.

If you’re a unionized company or big employer, we’re actually going into these employers setting up a slight what the skill of that employer, and what we’re doing is we’re selling a service through that employer and where we’re doing education certification. So I have an example.

Cannabis 101, cannabis in the work place, patient dosing and titration are just to name of few of them that we’re doing. So we think that it's potential revenue enhancer for our business, but more important what it does it continues to show that Aleafia Health is truly going down the path of building a strong relationship between medical users and in this case employers and becoming the leading brand on educating and informing and bringing the tremendous amount of awareness to potential users.

We do charge a fee for that and it is a scalable platform that we will become market leaders and last not the least thin edge of the wedge that really what it does to it is, it drives more business to our clinic as well. So, it's scalable, it's global and it could be modified into many different languages and it provides the gateway to international expansion, it's something that we’re leading into Australia as well.

The next question is from Frank Acklin. How do you respond to the concerns that are reverse split and uplifting to NASDAQ with such a small flow affect to stock liquidity?

Thank you. It's Benjamin Ferdinand, I will respond to that.

So that first I want to make clear that there is no guaranteed reverse consolidation. The concept being that we may do a consolidation at all or consolidation maybe smaller, so that’s what I wanted to make clear at the beginning.

Second and the value that NASDAQ brings is that it allows us to expand our investor base into the one of the largest investment markets in the world. You’re creating significant demand for our story and for our stock.

And so, we anticipate that we will actually very beneficial for our shareholders to list on NASDAQ.

Okay, we will just hold for one moment, one more question come into queue. Okay, we have time for one more question.

The question is from Greg McLeish from Mackie Research. Can you elaborate on the prudent gram that you have secured under the Serruya joint venture?

Thank you. It's Benjamin Ferdinand, I'll respond to that.

We are extremely excited about this Serruya joint venture as the question highlights what this partnership does for us is twofold. One is that it gives us exposure into the retail stakes of the 10% ownership or 9.9% ownership in approaching retail landscape in Canada and globally.

Second, it also provides us with access to license key U.S. brand in California.

The specific brands are not able to release them right now, but what I can say is that they are very exciting and are some of the top brands in California through the leadership of the Serruya family. So, we will be providing more of an update to our stakeholders and shareholders in the coming weeks, but we think this will be a key differentiator for us not only in the short-term but also creating long-term sustainable value for our company as well as having a sustainable competitive advantage.

Thank you. That will conclude the question-and-answer session.

I'll pass it over to Geoff Binic briefly.

I just wanted to thank everyone all the participants on the call. I want to thank all our shareholders for their patience.

And I want you to know that we are out there aggressively working every day on flawless execution. The one thing about our business and our team is, we are about flawless execution.

You will get a 120% from every day, day in day out as we continue to grow this business and become global market leaders in medical cannabis. So, we really look forward to what the future has to bring.

We are super excited and the best is yet to come.

Thank you, Geoff. Operator, over to you.