Aleafia Health Reports Q3 2021 Financial Results with 123% Increase in Cannabis Net Revenue

$9.6 million net revenue with an improved sales mix focused on the high-growth adult-use and recurring medical cannabis sales channels
2,044% y/y increase in adult-use cannabis net revenue
31% y/y increase in medical cannabis net revenue
Top 10 in national market share in pre-rolls achieved subsequent to the reporting period¹
Top 10 in national adult-use market share in edibles and oils categories¹
Outdoor harvest produced average yield on THC-dominant dried flower of 22%
SG&A expenses declined 24% over the previous quarter
Strengthened product portfolio with a total of 35 and 46 SKUs listed in Ontario and Alberta respectively by January 2022

TORONTO, Nov. 11, 2021 (GLOBE NEWSWIRE) — Aleafia Health Inc. (TSX: AH, OTCQX: ALEAF) (“Aleafia Health” or the “Company”) is pleased to report its financial results for the three and nine months ended September 30^th, 2021. The Company’s 2021 third quarter unaudited, consolidated financial statements and management discussion and analysis will be available in the Investors section of the Company’s website at aleafiahealth.com and will be filed on SEDAR and available at sedar.com.

“Our momentum in the adult-use cannabis sector has continued with our strongest quarter to date by a significant margin,” said Aleafia Health CEO Geoffrey Benic. “Consumer demand for our portfolio has been clearly demonstrated as we now begin to capture meaningful market share, entering the top 10 nationally in the pre-roll, edible, and oils categories. Most importantly, we’ve realized a five-fold sequential increase in dried flower market share during the quarter, in a category that is both Canada’s largest and one that leverages our low-cost cultivation advantage.

“The outdoor cultivation harvest, our third to date, has yielded a material improvement in potency, providing us with a high-quality THC-dominant dried flower for use in our milled and pre-roll product formats. This is expected to significantly improve our available supply of top-selling SKUs, which consistently sell-out in adult-use markets. In 2020, we undertook capital improvements to the outdoor facility while running a cultivar R&D testing program, which has resulted in new, high-potency strains that will enter our portfolio and provide strong momentum heading into the new year.

“Like many of our peers, we have enacted an impairment of goodwill and intangible assets which while negatively affecting net income, are a non-cash expense. We have also undertaken cost review initiatives which have resulted in a sequential decline in SG&A expenses, and we expect will result in additional cost savings in the near term.”

Net cannabis revenue was $9.5 million for the three months ended September 30, 2021 (“Q3 2021”), an increase of 123% over the prior year’s quarter. This was primarily due to an increase in the sale of cannabis in the adult-use and medical cannabis sales channels.
Net adult-use cannabis revenue during the three months ended September 30, 2021 was $5.0 million, an increase of 57% over the previous quarter and 2,044% over the prior year’s quarter. The sequential increase was primarily due to greater product availability and the launch of new product formats and SKUs. Specifically, this was driven by increased sales of dried flower and pre-roll products, which make up the largest and third largest adult-use product categories in the Canadian market.
- Adjusted gross margin in the adult-use cannabis segment before FV adjustments was 28%, compared to 21% in the prior year’s quarter. The sequential decline in gross margin percentage was primarily due to the increase in sales of value priced pre-rolls, which contribute a lower gross margin.
Medical cannabis net revenue for Q3 2021 was $2.5 million, a 23% decrease over the previous quarter and a 31% increase over the prior year’s quarter. The sequential decline was due to seasonally lower prescriptions written and filled during the summer months and a decline in international medical cannabis sales during the quarter.
- Adjusted gross margin in the medical cannabis segment was 47%, compared to 26% in the prior year’s quarter. The improvement was due to optimizations and economies of scale in the production of cannabis products, and from lower costs of input material due to the ramp-up of production at the Niagara Greenhouse and Port Perry outdoor cultivation facilities.
Net bulk wholesale revenue received from sales to cannabis licensed producers, as defined in the Cannabis Act was $1.9 million, compared to $3.1 million and $2.1 million in the previous and prior year’s quarters, respectively.
- The negative gross margin in the bulk wholesale segment during Q3 2021 of 169% is attributable to the Company recording of an inventory provision for slow moving inventory of $2.4 million expensed to cost of sales, and the opportunistic sale of aged CBD distillate, due to a greater focus by the Company on THC dominant SKUs.

PRODUCT LAUNCHES & KEY DEVELOPMENTS

Throughout the reporting period, the Company undertook an expansion of its cannabis brand and product portfolio, including differentiated formats and new SKUs in the important value flower and pre-roll categories.

High Potency Outdoor Cultivation: Subsequent to the reporting period, the Company completed the harvesting of its 2021 outdoor cannabis facility in Port Perry. Testing and weighing of CBD-dominant and CBD/THC balanced cultivars, which represent the vast majority of the total weight harvested, remains underway, and are not reflected in the results below.

Cannabinoid testing results of THC dominant dried flower indicate a significant improvement in potency and total kilograms harvested that can be made available to sell in the adult-use market in pre-roll and milled formats. A total of 11,600 kgs with an average THC potency of 22% will be allocated for sale in the adult-use market, primarily under Aleafia Health’s everyday cannabis brand Divvy. By contrast, in 2020, the Company harvested 7,200 kgs of THC dried flower, but only 7% of this harvest exceeded THC potency of 20%, a key threshold in the adult-use market. The material improvement in potency and yield is attributed to additional cultivars introduced in 2021, following R&D testing in 2020, along with improvements in site infrastructure.

Significant Increase in Dried Flower Market Share: The Company has undertaken an expansion of its dried flower portfolio, the largest product category in the Canadian cannabis market, with new large format SKUs and additional cultivars launched during the reporting period. Strong demand for the Company’s everyday cannabis brand Divvy resulted in an 81-basis point (BPS) increase in national adult-use market share¹ over Q2 2021.

Divvy Line Extensions: Following a successful launch of Divvy earlier in 2021, the Company has recently added to the brand portfolio, with additional large format milled and dried flower SKUs. These products lean on Aleafia Health’s low-cost outdoor and greenhouse cultivation advantage with low-cost input material allowing for competitive pricing while protecting gross margins. Additionally, the Company has also recently launched oils under the Divvy banner, which will be available in adult-use markets in Q4 2021.

Top 10 Market Share in Pre-Rolls: Buoyed by continued growth during Q3 2021 in the pre-roll category, the Company sequentially doubled national market share following the launch of larger format SKUs in the value segment under the Divvy brand. Since the close of the reporting period, the Company has entered the top 10 in national market share¹ in the category, estimated to be Canada’s third largest.

Top 10 Market Share in Edibles: Through the strength of its Kin Slips sublingual strips² brand and additional Bogart’s Kitchen confectionary edibles SKUs, the Company has maintained top 10 national market share¹ in the edibles category.

Launch of Premium Brand Nith & Grand: Featuring hang dried, hand trimmed, small batch dried flower, and premium concentrates, Nith & Grand appeals to experienced cannabis aficionados. The initial launch features TF Pink Kush Live Resin vape cartridges, which comprises a hydrocarbon extraction process utilizing fresh-frozen cannabis flower that preserves the strain’s natural flavour, aroma and terpene profile.

Net loss for the three months ended September 30, 2021 was $82.9 million compared to a net loss of $19.8 million over the prior year’s quarter. The increase in net loss over the prior year’s quarter is primarily due non-cash items including a $53.1 million impairment of intangible assets and a $11.3 million impairment of goodwill.
During Q3 2021, wages & benefits, and selling & administrative expenses were $7.0 million, a decline of 24% over the previous quarter. This follows cost review initiatives undertaken during the reporting period which remain ongoing.
Adjusted EBITDA for the three months ended September 30, 2021 was a loss of $7.6 million, compared to a loss of $5.2 million in the prior year’s quarter. The decline over the prior year’s quarter was primarily due to an increase in cost of sales, which relates to the one-time sale of aged inventory in the bulk wholesale channel.