Aleafia Health Inc.

Thank you. And thank you for joining us on the call today.

Joining me is our CEO, Geoffrey Benic and CFO, Benjamin Ferdinand. This morning Aleafia Health filed on SEDAR’s unaudited consolidated financial statements and notes thereto for the year ended March 31, 2020, which have been prepared in accordance with IRFS Standards.

The associated management discussion and analysis as well. All comments we made on this call today should be taken with reference to and are qualified in their entirety by these documents.

Please note that this call contains forward-looking statements or information and reflects the Company’s current expectations, estimates, projections, assumptions and beliefs about future events and financial trends that they believe may affect the Company’s financial condition, results of operation, business strategy and financial needs. 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 events performance or achievements expressed or implied by such forward-looking statements.

Given these risks and uncertainties, shareholders and prospective purchasers of the Company’s securities should not place undue reliance on these forward-looking statements. Further, any forward-looking statements speaks only as of the date on which such statement is made.

And except as required by applicable law, the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made. This call also contains non-IFRS financial performance measures, which the Company believes provides users with relevant information regarding operational performance.

These measures are not recognized or defined under IFRS and as a result, they may not be comparable to the data presented by competitors. I’ll now hand it over to CEO, Geoffrey Benic.

Geoff, over to you.

Thank you, Nick. And behalf of Aleafia Health team I’d like to thank our stakeholders for joining us today.

Before we begin, I’d like to recognize three board members who are departing Aleafia at the end of this week. Our Chairman, Julian Fantino and Directors, Raf Souccar and Bill Stewart.

All three have played a significant role in Aleafia from the earliest days and I’d like to thank them for this contributions. Julian has often said that when the business began it was without a telephone and an office.

But what resonates with me about this story is that the days with no office and telephone was only three years ago. We’ve come a long way since then so thank you to Julian, Raf and Bill.

And joining our board are two outstanding new Directors; Glenn Washer and Rhonda Lawson. Each brings unique executive and board level experience in the pharmaceutical healthcare and insurance industries which will be invaluable to us in our future growth.

This was for many reasons a breakthrough quarter for Aleafia Health. I’d like to look back in time to put things in perspective.

In Q1, 2018 we generated $83,000 in revenue, in Q1, 2019 revenue was $1.5 million and, in Q1, 2020 that number has further exponentially increase to $14.6 million. While this is just a starting point for us, it’s exciting to see this dynamic growth in a young company.

This was our fifth consecutive quarter of record revenue and our second consecutive quarter of positive adjusted EBITDA and our first quarter of positive cash flow from operations. And yesterday’s news really begins new chapter for our business.

Over the last 18 months, we’ve been simultaneously building a three unique production facilities. In the last two months, we received a necessary license for all of them.

Our team has done a great job in removing the license roadblock. Now it’s all about execution.

This quarter really speaks to the power of a low cost cultivation advantage. Our gross margin on Cannabis revenue was 85% which is we believe the best among, the best in the industry.

While many of our peers operate expensive oversized greenhouses, we use our second mover advantage to accelerate our growth through outdoor cultivation. We look forward to building on the 13,000 kilograms produced on 13 acres in 2019.

But that’s only one side of the coin. Our goal has always been to couple low cost cultivation with high margin value added production at large scale.

We’ve only seen the tip of the iceberg and our potential in that regard. But we’ve turned the corner.

With the license of our Paris Phase II expansion which is by far our most important facility. The expanded Paris facility is the state-of-the-art and purpose built to meet EU-GMP standards.

Senior members of our team have spent their entire careers in the EU-GMP production and their expertise will be essential as we look forward to gain market access to the EU. Our application for inspection has already been submitted to German regulatory authorities.

On the more near term horizon, Paris allows us to rapidly scale up the extraction production and packaging of our existing product portfolio while bringing new products to the market. To put things in perspective, our incredible team may due with only 2,500 square feet of processing, packaging and extractionary [ph] in the legacy Paris building.

It’s a 20,000 square feet and the expanded building. This means greater breadth of formats, greater scale and automation and ultimately bigger margins as we leverage all of these new advantages.

Paris is also the milestone we needed to hit to give us a clear path to launching Cannabis 2.0 products. We agree with certain analyst commentary that offering a portfolio differentiated new cannabis product formats will be essential to our success.

Over the course of the second half of 2020, we’ll be introducing a series of new formats including sublingual strips, vapes, candies and additional derivative formats. Our goal is to have some of these in market in Q3 and others in Q4.

We expect to have a clear picture in the coming weeks and if there will be any supply chain disruptions due to COVID-19 which might delay the delivery of certain machinery and hardware. And we look forward to providing our full product rollout planned in very short orders.

Finally, I’ll touch on the couple projects our team is particularly proud of. Our newly launched medical cannabis direct-to-door service and are transitioned to 100% virtual, if any consultation.

Assured home delivery has been long in the works, but following the needs of our patients in these unprecedented times we launched early. Assured home deliveries now available in nearly entire greater Toronto area home to nine million people and we will begin servicing the final communities next week.

With the investments we’ve made over the last two years in virtual clinic services. We’ve been able to quickly transition to completing a 100% of our physician-led patient consultations remotely following this temporary voluntary closure of our physical clinic location.

Now our patients can be seeing a physician in the morning, order medical cannabis and then have it delivered to their home that same day. I’ll now pass it over to our CFO, Benjamin Ferdinand.

Thanks Geoff. It’s good speaking to you all this morning.

This quarter really demonstrates or differentiate help them on the strategy and action as our team executes. Our ecosystem strategy has high barriers to entry and provides with defendable long-term competitive advantage relative to our peers.

We’re laser-focused on having one of the highest margins in the business, the right cost controls, disciplined capital allocation and relentless execution. This quarter demonstrated our strategy and action.

In Q1, we saw the continued trend of five quarters of record revenue growth. The second consecutive quarter of positive adjusted EBITDA and the first quarter of positive cash flow from operations all significant milestones for us.

Much of the attention will be on revenue growth but equally important to us is our focus on cost discipline. Again, we’ve seen operational expenses and SG&A remain tightly controlled while we scale revenue and demonstrate the operational leverage in our business model.

Our team believes that we must continue to do more with less. Now we’ll look to the income statement.

We are very pleased to see solid top line growth. Our Q1 revenue was $14.6 million, the key driver of that was that cannabis revenue increased by 183% over the previous quarter and over 2,400% over the prior year’s quarter.

Our Q1 adjusted EBITDA was $6.4 million were very strong 44% adjusted EBITDA margin. The net loss for accounting purposes was $6.2 million compared to $9.8 million loss in the previous quarter.

However this was largely due to non-cash items including depreciation and amortization and a $6.2 million non-cash expense based on fair value of inventory sold in the period. For those not as familiar with IFRS, this is not an inventory write-down.

This recognizes the fact that there was an increase in value to the cannabis crop while the crop was still growing then balances it out as an expense when the corresponding portion of the crop is sold. Next, I’ll turn into our balance sheet.

On Monday, we announced a bought deal offering upon closing will add an additional $13 million to our cash position. We said that in Q4, we would prioritize non-dilutive financing but we had a great opportunity to raise capital in a very difficult global economic environment so we took advantage of the opportunity.

We view this moderately sized capital raise as very prudent. It provides us with substantial security during the time of global economic uncertainty along with the ability to take advantage of growth opportunities should they arise.

With regards to cash flow, we generated our first quarter of positive cash flow from operations. This is a major milestone for a firm and the cannabis industry.

Cash flow used in investing activities was $7.9 million which was entirely due to the acquisition of property plant and equipment. This included the payment of construction holdbacks for already completed work at the Paris facility and Niagara facility.

The company also further invested in additional infrastructure up in Port Perry facility to manage the 2020 outdoor cultivation harvest along with the purchase of planting and harvesting equipments. Investments were also made in new production machinery primarily for our new cannabis 2.0 product formats.

With regards to capital expenditures going forward, the figure will be lower in Q2 compared to Q1. Our remaining capital expenditures for the year will be focused on machinery and equipment for outdoor harvest and 2.0 products.

Next, we’ll look at cannabis segments. Our medical cannabis revenue declined by 21%, but this was due to a decline in international sales.

They’re included in our medical cannabis revenue segment. With regards to Canadian medical cannabis sales, they remain flat quarter-over-quarter.

As we previously guided in Q4 earnings, we had some substantial supply challenges that led to inventory shortages for top selling medical SKUs at the beginning of the year. I’m happy to report that since March these SKUs are all back in stock and we have strong inventory of medical cannabis products.

The result was our best ever medical cannabis sales month in March followed by an even stronger April and another new record. On another positive note in medical space, our active registered patients increased to 11,000 at quarter ends and surpassed 12,000 just yesterday.

This is an increase of over 1,000 patients in just six weeks a strong validation of our business model from our patients in challenging times. Our adult-use revenue increased although not at the same pace as our overall cannabis sales growth.

Part of this was due to us ramping up inventory for adult-use and we’re now in the process of building out adult-use inventory. We will soon be launching one of the most competitively priced high quality, high value CBD oils available in Canada through our adult-use distribution network.

However with very low cost outdoor cannabis has input [ph] material our margins on these products should remain strong. Operator, over to you.

I just wanted to start off with respect to either on a top line or a kilogram basis. Would you be able to provide what the split was there in the segments in terms of medical adult-use and wholesale?

When you look at kilogram sold and the total kilogram sold for this quarter out was approximately 5,000 kilograms sold with the split of substantial portion being wholesale followed next by medical and adult-use. We can follow-up with the specific details.

Okay, thanks. So with respect to thinking through the remainder of 2020.

How do you expect relative to what the split was like in this quarter? How do you expect that - would you expect that a larger proportion becomes adult-use and if were to look sort of towards the end of the year, where would you envision the largest segment being at that point?

We don’t provide specific guidance, but what we can say when we think about our medical division it continues to ramp up as we have inventory and as we highlighted our patient growth remained strong and we balanced our medical and adult-use segments with our wholesale business and as you’ve seen with our execution last year on outdoor and as we expect to have this year. We’ll have a large opportunity to have a significant amount of product in outdoor and we will opportunistically looking to - the key thing being putting back those sales revenues through our medical, international and adult use.

But there will be an opportunity for us to sell wholesale based on discussions that we’re having and what we’re seeing in the market. So I don’t have a specific split, but we will do what we can to maximize the revenue profit potential for our shareholders.

Okay, thanks. And then to follow-up with the respect to the outdoor facility.

What sorts of strains or what sorts being [ph] here? Can you provide - you’re going to be looking to plant or there’s going to be strains that are heavier on the CBD side as you mentioned that product launch earlier on the call.

Are you looking for something that’s high potency THC side, [indiscernible] out of these market? What are you guys doing there from a demand planning perspective to make sure that you have the optimal range of biomass?

So we’ve taken a lot of lessons from our playbook last year in terms of outdoor, in terms of strains. And as everyone knows, we had a really successful outdoor harvest in 2019 and we’ve taken a lot of that data to help us determine which strains we’re going to plant this year and obviously one of the big - in the format, the 2.0 format.

They’re going to be leading [ph] that in Q3, Q4. Obviously, there’ll three kind of formats.

There will be high THC, high CBD and obviously a balance. In terms of distribution right now as Ben mentioned we are looking at number of wholesale opportunities as well as our medical channel, so [indiscernible] medical.

The balance then and the CBD are strong contributors to that and also with 2.0 format, THC will play a big role in that as well. So in terms of the distribution, again to Ben’s point we don’t give guidance.

But I could tell you, it’ll be a cross-section of all three strains.

Okay, thanks. And then my final question here.

As Paris, the Phase II there begins to ramp up and you’re going to launch some products into the second half of the year. Are you expecting any sort of initial margin headwind as you work through the first couple batches of those product?

And how might that differ from sort of the traditional margins you’re seeing on your derivate products? Thanks.

Yes, that’s a good question. I think because it will be - we’re going to very focused on investing the resources in 2.0 to align with the revenue.

And as the ramp up will be at a reasonable pace, we don’t expect there to be significant margin decreases, thanks to 2.0. There could be some but our focus is we’re going to have a balance portfolio where we’ll have - the goal of a good margin profile across all.

In terms of the patient growth that you saw in the quarter. Can you comment on how trends evolve subsequent to the quarter up to the extent that there is a kind of discernible impact positive or negative from COVID?

Thanks.

Thanks Vivien. For us, our business model has always been dynamic and prepared for scenarios like this.

So our business model has physical clinic but we’ve also been working on virtual clinics and virtual doctor consultations for two years now. So for us, as we recognize the impacts of COVID becoming more severe, we proactively did not allow any physical meetings with our doctors who are coming into our clinics.

So we switch within 24 hours to 100% virtual and we did not miss a beat and as you highlighted, all past six weeks our model has continued to demonstrate our ability to execute with over 4,000 patient visits and over 1,000 new patients that have come through. So our business model has executed very well and has played very well into the global market turbulence.

I’d like to add to that as well Vivien. So our assured home delivery has really a game changer, it’s convenient and it’s contactless.

So I just want to walk you through our process. Right.

So a patient now can be seen, heard and scripted at 9 AM registered by 10 and have their delivery the same day. And we think that, that’s not only convenient but also contactless in this environment of unprecedented time of COVID and ultimately, we think it’s a game changer and as we continue to build out our logistics capability.

We’re going to be able to offer this service 24x7, no matter what time of the day, what time of the night we will be - being able to offer this service.

That’s great. Thank you for that, that incremental color.

And then follow-up, will be in line with Graeme’s question earlier. But given how successful you’ve been in transitioning to contactless patient’s engagement that was until kind of your pre-COVID expectations entering the year.

Are you more constructive on the potential for the business mixed skews towards medical than you were pre-COVID? Thanks.

So we think that is a tremendous amount of value and a tremendous amount of opportunity still in the medical channel. And we think that, within the regulatory challenges of adult-use and the convenience that has truly still being an inconvenience in adult-use to the slow rollout and deployment of retail stores.

We truly believe that with assured our contactless convenience delivery, we see tremendous amount of upside opportunity for us to continue to add a tremendous amount of patients that were either self-medicating through the adult-use channels through convenience. Now looking at assured and our logistic supply chain capabilities and not to mention all our formats and our abilities to provide a great contactless community service that we’ve seen a tremendous opportunity in the medical channel on an ongoing basis.

Understood. Thanks so much for the color.

Sorry about that. Thank you for that.

I apologize. Good morning, thank you so much for taking my question, gents.

So my question is somewhat philosophical. Given Aleafia’s dominance in the medical channel and of course given the constant goods and potential for dominance in wholesale channel.

My question really is around Cannabis 2.0. We’re seeing in the early days here that even some of the most well developed producers struggling the cost of goods and given that your strategy is primarily to work with external partners and external IP, how do you see this fitting in with your broader philosophy being a medical focused producer with real advantages in two of three primary channels and maintaining those margins in those channels as compared to what maybe compressed margins in Cannabis 2.0 for yourself?

That’s a great question, Rahul. So now that we have our Paris facility licensed, the clock has really begun, ticking up bringing new products to the market.

Our focus will be on helping in [indiscernible] formats. But we intent to bring these to both the medical and adult-use markets.

So it’s too early to give exact timelines but at sometimes we’ll be looking to do over the next comings weeks. But for starters, we’ll be focusing on vapes, sublingual strips and candies.

But we expect there will be more, but we’re not ready to announce that yet. We’ve been preparing for months with equipment order, formulations completing have built up large inventory cannabis extract, to be used and in - material of new formats and immediate use in the new facility.

Now it’s time for execution and ultimately in terms of our formulations, licensing agreements that we have we truly save money and time. Our second mover advantage we always talk about this.

But we’re really not reinventing the wheel. We are becoming asset-light, asset smart in terms of execution and really looking at the first movers, picking up on some of the mistakes that they made and in terms of investment, in terms of time and unfortunately some of the regulatory hurdles that are unplanned for.

In this environment I can tell you from experience is that, it really depends on how fast you can pivot if you’re a first mover. So being second mover you get to learn from the mistakes and ultimately it translates into saving time and money.

When you have lower input material like we do from outdoor grow, it really gives us a strong competitive advantage in market, on the shop. So as an example, a 10 mil serving chocolate for us.

Our biggest cost unfortunately now will be packaging. In packaging is trying to sell for not [indiscernible] material format I think that’s a great problem to have.

In some of the IP that were relationships with our flying high brands that we’re going to be rolling I think people will see how in-market we can very, very competitive and maintain very, very strong margin.

Great, thank you for that color. And then just a quick follow-up.

One thing we have been seeing is that, that wholesale markets while they’re somewhat volatile still quite volatile starting to stabilize a bit and represent some sort of buffer for some of the lowest cost producers particularly as adult-use sales wholesales are continue to volatile. How do you - your customers shaping up - so in terms of wholesales, are there primarily other LPs, are they primarily extractors and sort of how do you foresee the durability of your revenue in the wholesale channel?

So for our business model, it kind of goes back to basic economics and we view as having a key strength is having the lowest cost and what we’re able to do there, is we can leverage that as we work with our partners at scale and pricing. So we are very confident and our business model which provides us the flexibility to have to work with any of our partners as we’ve already demonstrated with high quality product, consistent product, at scale so that our partners know exactly what they’re going to get at a price that make sense.

So as the wholesale market evolves, we view ourselves as very well positioned in any way it goes to be able to partner with our - partners in any way that works for them. And that could be, it could be extractors, it could be other license producers, it could be lot of the players that want to get out of this space because their cost structures are just too high and it’s not sustainable.

We stand with our cost structure ready to take market share and really provide a strong partner for those that want to work with us.

And Ben I’d like to add to that as well, Rahul. This is a scaled operation, so 86 acres is potentially over 100,000 kilograms based on the results of last year.

So this is large scale. We’re not growing 100 kilogram batches.

We’re talking about 100,000 kilogram scale which is really attractive to someone that’s running a scale business that will need scaled product to API to be able to formulate, standardize and continue down the path of some of the formats.

Great, Geoff and Ben. Thanks so much for taking my questions.

I’ll fall [ph] off there. Thank you.

This concludes today’s question-and-answer session. I would now like to turn the call back to Geoff Benic for closing remarks.

Thank you, operator, and thank you to everyone for joining us. We’re excited about the future and behalf of the Aleafia Health team.

Wishing you all the best to you and your families. Thank you.