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Aleafia Health CEO Talks Expansion Plans and Progress

Omri Wallach Omri Wallach, Stockhouse
1 Comment| October 1, 2019

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(Image via Aleafia Health. Click image to enlarge)

When a business strategy works and can be expanded, the smart bet is to double down. That’s the logic in any industry, and the still-growing cannabis market is no different.

That’s why Aleafia Health Inc.(TSX:ALEF, OTC:ALEAF,Forum), in greatly expanding its outdoor growing operation, made a significant play. On Sept. 4, the vertically integrated cannabis operator announced it had acquired an additional 60 acres of cannabis cultivation area directly adjacent to its existing Port Perry Outdoor Grow facility.

After first securing its outdoor cultivation license in June (the first of its kind), the recent $1.2 million transaction lets Aleafia Health significantly scale up cannabis production right as the market is expanding. Pending an amendment to its existing Health Canada license, the Port Perry facility’s production capacity could increase more than threefold.

At the same time, the Company is making further financial improvements following a strong Q2 performance. The $1.2 million acquisition happened alongside the sale of an unused 43-acre Ontario property for net cash proceeds of $8.2 million. That’s strengthened Aleafia Health’s balance sheet, revealing the Company’s strong $51 million cash position.

By focusing on what works and benefitting from economies of scale, Aleafia Health clearly is shaping up a long-term business strategy. With “Cannabis 2.0” around the corner, now is the perfect time for the Company to carry out its plan.

Recently, Stockhouse Editorial caught up with Geoffrey Benic, Aleafia CEO, to discuss the operator’s recent expansion plans, quarterly focus, and thoughts on the sector heading into the next Canadian wave of cannabis legalization.

1. Thank you for taking the time to catch up with us. To start off, Aleafia Health is coming off a strong Q2 performance, and Q3 looks like it will follow suit. What approach did you take for success in Q3?

With the acquisition of Emblem, we saw over the short term a large amount of expenses directly or indirectly related to the acquisition, from transaction legal fees, to management severance packages. As we said, we fully wound these expenses down in Q2, and Q3 will see another major reduction in expenses substantially improving our bottom line.

That means our Q3 will be the second consecutive quarter featuring both revenue increases and substantial reductions in expenses, which would make us right now an outlier in the industry.

Secondly, we're now reaping the benefits of our integrated health and wellness ecosystem while ramping up our effort to increase medical cannabis sales.

Lastly, we've been undergoing three major capital projects over the last year at our three facilities. Now, with all either complete or weeks away from finishing, it will be the start of a new phase in the Aleafia Health story.

2. Most recently you expanded on a big move into outdoor growth at the Port Perry facility with the acquisition of adjacent outdoor farmland. What brought about this opportunity?

Outdoor cultivation’s legalization has presented a unique opportunity as a younger company to scale quicker and at a lower cost than our peers who depend on legacy indoor greenhouse infrastructure.

This year, the biggest challenge came from the uncertainty with licensing timing and being ready for a Health Canada greenlight on a moment’s notice. We overcame those hurdles, and when the opportunity for a major expansion presented itself, it was clearly a no-brainer.

Increasing the scale of our outdoor grow at one site presents itself with so many advantages, including a more streamlined licensing process and reduced overhead costs. We’re excited for the opportunity and not wasting anytime to prepare the new 60-acre site for 2020.

(Image via Aleafia Health. Click image to enlarge)

3. The acquisition also reflects well on the existing Port Perry facility. How are things progressing at the 26-acre cultivation site?

Very well. We’re planning for a harvest soon and have been blessed with some beautiful late-September weather that will allow us to squeeze a little more yield out of the plants.

For us, the outdoor harvest is expected to be greater than all the Kgs harvested so far.

4. Alongside the acquisition was the sale of an unused property in Brant, Ontario that brought in significant cash proceeds. Can you elaborate further on the deal?

As part of the Emblem acquisition, we acquired a large parcel of land that they may have been planning on using for a cultivation facility. But given our infrastructure already in place, that would never be part of our plans. With the Port Perry outdoor acquisition and the sale of this property, we added 60 acres of outdoor cultivation and increased our cash position by $7 million.

Today, we’re extremely well capitalized, with $51 million in cash on hand, as we recently announced. Likewise, with our major capital projects wrapping up, we’re in a great financial position.

5. And Aleafia has more expansion plans in the works. Can you update investors on the Company’s automated Niagara Greenhouse and progress at the Paris Processing Facility?

Our Niagara Greenhouse has been plant-ready for some time now. We spent the resources necessary to build a greenhouse that will feature the most modern, automated systems, which reduce production costs. We know that Health Canada is actively reviewing the application, and we’re ensuring that we are ready to move quickly when we receive the go ahead, just as we did with the Outdoor Grow.

The Phase II expansion of our Paris Processing facility will truly be the crown jewel of our production division. It’s 100 per cent dedicated to the production and packaging of value-added products, and purpose-built to EU GMP standards, which will allow us to begin exporting to the EU market.

The construction will be wrapping up next month. This is where the well-known Cannabis 2.0 brands that we have locked up will be produced.

(Image via Aleafia Health. Click image to enlarge)

6. With all the recent expansion progress, there have also been developments on the international front, with the first Australian medical patients. How do you see this part of the business growing?

We did complete our first international export this quarter, through a sale of medical cannabis oils to our strategic Australian partner, CannaPacific. Having our team complete the export process really sheds light on how complicated it is. Only a handful of companies have been able to do this.

Now, with the experience, we are building our international sales pipeline. It’s far too early to make projections, but certainly this should be an important element of our 2020 growth.

The demand is there, as are the attractive margins, and you’re often not competing with dozens of other LPs that are in the Canadian market.

7. On the medical side, you’ve recently reached a significant milestone with 10,000 active registered patients, up from 7,000 in July. How has Aleafia managed to accomplish this so quickly?

For the first half of 2019, we did not have enough inventory of medical products to really pursue adding new patients. It was about ensuring adequate supply for the roughly 7,000 we had. Obviously, running out of supply for existing patients in the pursuit of new ones is unacceptable. However, it’s been in the last couple of months that we had added more product supply, allowing us to internally say, ‘okay, it is time to grow our registered patient base.’

That brings us back to our business model. We operate the largest network of medical cannabis clinics, staffed by doctors and nurses, with over 65,000 unique patients seen to date. In the past, these patients have purchased product from a number of different LPs. Now, as we have product supply, and an existing relationship with a huge number of patients, we can offer them Emblem medical products as a new alternative.

Finally, CannTrust was one LP that many of our clinic patients purchased from. These are known patients; we have relationships with them, and they are seeking a new LP. These former CannTrust patients want an LP they can count on. And we are uniquely positioned to be that LP, because of the pre-existing relationship.

8. We’re now less than a month away before the next round of cannabis legalization in Canada. What are you expecting to see in the sector?

Legalization 2.0 is a game changer for the Canadian market. Obviously, just for its sheer size. It will also create a lot more competition among LPs. Today, we see nearly identical products and no brand identity.

While the marketing restrictions will stay in place, what changes is that LPs can differentiate by having strong, unique formats. Ones with unique appeal that a consumer can’t find anywhere else. This is where we will see brand loyalty begin to develop and the cream rise to the top.

On products, it’s essential to offer a strong portfolio of products in Legalization 2.0. On one hand, we will produce outdoors at 20 cents a gram. On the other, we will be producing the products in-house and capturing 100 per cent of the margin.

It’s easy to underestimate how difficult it will be to create some of these new product formats, and to do it in a cost-effective way. Licensed production space is at a premium. Every square foot must be used effectively.

For us, the goal is to bring dynamic, new products to Canada, with strong brands, but to do so successfully. We are accomplishing that by acquiring the exclusive Canadian rights to a brands portfolio belonging to four California-based cannabis companies representing over 100 product Skus across edibles, beverages and topicals.

(Image via Aleafia Health. Click image to enlarge)

FULL DISCLOSURE: This is a paid article produced by Stockhouse Publishing.

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