Aleafia Health Inc.

Thank you. And thank you for joining us today.

Joining me is CEO, Geoffrey Benic; and CFO, Benjamin Ferdinand. This morning Aleafia Health filed its second first quarter financial statements and associated management discussion and analysis on SEDAR and EDGAR.

Please note that this call contains forward-looking statements and reflects the company’s current expectations. By their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that 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. Geoffrey, over to you.

Thank you, Nick. And good morning, it's a beautiful sunny day here in Toronto and thank you to our many shareholders for joining us.

I'd like to touch on some of our key operational highlights of the past quarter and also how we see the upcoming outlook, before Benjamin will outline the financials. This quarter has seen this really take a significant step forward in all key metrics, sequential quarter-over-quarter revenues up 159%, driven by a 377% increase in cannabis revenues.

Total expenses have been reduced by 41% and active registered patients increased particularly in the last month. The company's historic all time high was approximately 1700 patients and as of yesterday we've reached 8,861 patients.

Clearly, we've made a substantial progress on these key metrics, but there remains a tremendous amount of room to grow. Increasing product supply continues to be our primary focus.

During the quarter to our knowledge we became the first Canadian LP, The Complete planting a large scale outdoor cannabis crop. For those viewing the presentation online, I think the photos really speak for themselves.

I'm tremendously proud of our team. As with every outdoor grow license applicant there was a tremendous amount of uncertainty surrounding licensing timing and also a very small window to complete the facility, following a much longer than normal winter.

We're just one of a handful of companies that successfully made this happen. The crop is proceeding well and we're off - we're well on track for September harvest.

The outdoor grow has really highlighted the benefit of our closed loop production ecosystem. We've had generics grown in our person or grow operation, in following harvesting the flower will be sent back to Paris for production of our value-added products.

We've also had some positive developments with our Niagara Greenhouse. Our application is now being reviewed by Health Canada.

We're eager to get this facility up and running and expect to soon start propagating starter clones in our indoor facilities for that purpose. During June and July, we've been able to ramp up production in our Paris processing facility.

In addition to our indoor grows, sorry to indoor grows, we've increased supply through some wholesale purchases. This has allowed us to really ramp up production, particularly our medical sales in recent weeks.

To take a step back, we don't ever want to see a situation arise where our medical products are out of stock, so it's only been in recent weeks that we've actually begun efforts to increase our registered patient count in the per purchase order size. This is where we see the benefits of our clinics come into play.

There's room for growth in our medical sales and we expect to see a large number of our clinic patients become registered patients. July by a wide margin, the best medical sales month to date.

For instance from June to July, the order count increased by 165%. This didn't happen by accident, because of our integrated model with clinics, we have a unique opportunity to increase our patient count and we will continue doing just that as supply increases.

Lastly, I just want to touch on some of our new product initiatives, cannabis 2.0 or the legalization of new formats in Canada will obviously significantly increase legal cannabis market size. We will have products in some of these new formats.

To that end, our majority owned subsidiary Flying High Brands Inc. has signed definitive licensing and IP agreements with four California Cannabis producers.

These will give us exclusive right to produce and sell those proven brands in Canada. We want to move quickly and efficiently and learn from the best practices from others.

We're looking forward to launching these brands in the future. Benjamin, over to you.

Thanks, Geoff. This quarter we are intent on focusing on the cost discipline that we've consistently exercised.

In previous quarter we experienced a large number of onetime expenses related to the closing of the Emblem acquisition and some [ph] did carry over to this quarter, including employee severances and banking advisor success fees. That said, these large onetime expenses have decreased significantly in the quarter but we focused on cost savings and streamlining the business.

We're now seeing all major financial and operating metrics trending in the right direction. Adjusted EBITDA loss was $2.7 million, an improvement of 43% quarter-over-quarter.

We will be looking to improve profitability further in subsequent quarters. Perhaps and most promising element of our execution really was the substantial improvement in our cannabis production.

We've benefited from a closed loop ecosystem as Geoff alluded to and then in the last half of the previous quarter it began utilizing new packaging and labeling processes that reduced costs. Previously all cannabis sold by Aleafia Health was wholesale to other licensed producers.

This quarter in contrast we saw 100% of revenues from the sale of cannabis go to high margin medical or adult-use markets. Additionally, we expect to see improved margins as we can process the dried flower of our low cost later to our [ph] grow harvest and later from the low cost Niagara Greenhouse.

The supply from both of these new operations will obviously have an even lower per gram production costs relative to our two core current indoor facilities. From a revenue perspective where we see the greatest growth opportunity coming from is in the medical cannabis sales, for purposes of ensuring consistent inventory for existing patients who are very conservative in any efforts to increase the per patient order or the total number of registered patients.

As we increased medical product inventory beginning in June we've had great success on both these metrics, particularly in the last six weeks as we take advantage of gaps in the market. Our commitment to providing our patients with high quality, consistent products has allowed us to take advantage of issues in the market with other licensed producers withdrawing their supply.

We are already seeing the results in significantly increased patient counts. 27% increased since June 30th.

We're very excited by this. Lastly, our balance sheet has strengthened significantly.

We have been undergoing major CapEx projects with Niagara Greenhouse, Paris processing Phase 2 expansion and the Outdoor Grow all nearing completion. With the successful $40 million public offering, we have a very strong balance sheet which positions us for growth in the future and the ability to take advantage of new opportunities as they arise.

Next we'll focus on international expansion. This quarter we made some important strides in our international businesses.

Having successfully gone through the process of the - of obtaining import and export permits for the international sale of cannabis, our team is ready to take on more global business. There are very few companies even today that have shipped cannabis across international borders and going through that process, which needless to say is incredibly complex has put our team in a great position.

We are in discussions today with a number of international partners that we look forward to speaking to in greater detail shortly. It's not our intention to sign international one-off supply agreement.

It's not what either party is looking for. For us what attracts us to companies and global markets like Europe and Australia is exporting our entire health and wellness ecosystem.

This includes running cannabis clinics, physician and patient training courses and of course, distributing high-end, high-margin products. That's the full value proposition that Aleafia Health can deliver and that's what setting us apart from our competition.

We look forward to significant growth in the future. Nick, back to you.

Thank you. Operator, we're now available for questions.

Hi. Thanks for the questions.

Congrats on the quarter. First question I had was just on the supply agreement with Aphria, if you could just provide any detail you know, how much supply you've received from them to date and how best to think about, the cadence they're kind of going forward and how that contracts kind of evolved?

Thank you.

Aaron. Great question.

So the agreement remains in place and there's been some issues to date with us not receiving shipments required and we're working through those issues with them. But look, we're in month four of a five year agreement.

And so we're not overly concerned at this point. We continue to favor and believe in the agreement and it's fully our intention to continue to work with them to ensure we receive all shipments that are contractually obligated to us.

Okay. Great, that's helpful.

So just as we think about kind of the cadence of the top line kind of going forward. So, as we look at kind of other avenues for cultivation, what the Outdoor Grow and then the Greenhouse as well, kind of how best to think about that kind of going forward, with outdoor harvest how best thing about one that flows to the top line and then any line of sight on the Greenhouse as well?

That would be helpful. Thank you.

So that's a great question Aaron, again, and I'm going to ask Benjamin to answer that question.

Thanks, Geoff. We're in a really strong position to continue with some progressively strong quarters.

As we've indicated, we were able to increase supply in the last week to this quarter and expand our medical product inventory. I think we've already surpassed our Q2 medical sales this quarter.

So today's baseline with no additional third party supply, no Grimsby production, no outdoor growth production. So I think you've got a lot of room to grow and things really are getting excited as we add these new inputs, any one which exponentially increases our supply.

And from a cost perspective, we're going to continue running a lean, mean operation. This is our second mover advantage, as Geoff has highlighted in the past, doing things faster, smarter and more efficiently, by learning from legacy players mistakes.

Ultimately we're driving to become EBITDA positive and see path [ph] to getting there. But the exact timing will depend on some of the licensing items coming through.

Okay, great. Thanks for the help.

And then just last one for me, you talked about running lean operations and obviously with the outdoor grow that provides you kind of low cost of cultivation. So how best to think about kind of the margin opportunity over time and kind of the cadence of that?

Yes, look we want - the strategy that our board, Geoff and the management team has really focused on and being leader in is having the lowest cost supply in the industry. So being a leader in the outdoor grow, we're very excited about the margins that can provide and some of the -- this is going to be our first crop this year.

But some of the public comparisons that you're seeing in the market are looking at you know, sub $0.25 or sub $0.15 for outdoor grow. So we're not giving particular guidance.

But those types of numbers are out there and we're excited to look at those numbers and even surpass it as we execute well.

Aaron, I just want to comment on that as well, is that the plants are just looking phenomenal, out in Port Perry and our Outdoor Grow, even with coming in to - into the grow so late this year because of Health Canada and really a challenging winter in terms of getting the infrastructure up to support the licensing requirements. Next year we're looking at auto flower plants where we'll seed and we're actually expecting that we'll get two harvest out of our Outdoor Grow next year.

All right, great. Thanks, that's helpful.

And best of luck.

Thank you.

Yes. Thank you and we'll just pass it back to Geoffrey Benic.

So I just want to say that, we have never been in such a strong position, both on regulatory new builds coming out. The future of Aleafia has never looked so clear.

If you look at our balance sheet where we are in stage of our Grimsby license, as well as the prospects of our Outdoor Grow, not to mention that the patient counts and the volume through our clinics continues to be very, very positive and I'm a firm believer that you know, we're on path to a great future and as I always say, the best is yet to come.

Thank you.