Aleafia Health Inc. (OTCQX:ALEAF) Q1 2023 Earnings Conference Call August 11, 2022 8:30 AM ET
Company Participants
Tricia Symmes – Chief Executive Officer
Matt Sale – Chief Financial Officer
Conference Call Participants
Matthew Baker – Cantor Fitzgerald
Venkata Velagapudi – Research Capital
Operator
Good day, ladies and gentlemen and welcome to the Aleafia Health Fiscal Year 2023 First Quarter Results Conference Call. This morning, Aleafia Health filed on SEDAR its financial statements and associated management discussion and analysis for the 3 months ended June 30, 2022. All comments to be made on this call today should be taken with reference to and are qualified in their entirety by those documents. Today’s call includes estimates and other forward-looking information from which our actual results may differ. Please review the cautionary language in today’s press release regarding various factors, assumptions and risks that could cause our actual results to differ.
Furthermore, during this call, we will refer to certain non-IFRS financial measures, including branded cannabis net revenue, adjusted gross margin and adjusted EBITDA. These measures do not have any standardized meeting under IFRS and our approach to calculating these measures may differ from those of our other issues. And so these measures may not be directly comparable. Please see this quarter’s MD&A for more information about these measures.
It was now my pleasure to pass the call over to Aleafia Health CEO, Tricia Symmes. Please go ahead.
Tricia Symmes
Thank you and welcome fellow shareholders. On behalf of our CFO, Matt Sale and the entire team here at Aleafia Health, we wish you a warm welcome. It seems like we just gathered for a year end earnings. We were very optimistic then and said our prospects were the best they have ever been. Today, on August 11. Matt and I are excited to tell you about how Aleafia continues to accomplish great things and is delivering on our strategic pillars on our path to profitability.
Let’s take a look at our overall business performance for the first quarter of our new fiscal year, starting with our four core strategic objectives. In the first quarter, we achieved significant milestones across all four pillars we outlined as our focuses for the year. The first is obtaining a top 10 adult-use market share position and adjusted breakeven EBITDA profitability in the second half of fiscal year 2023. We are now approaching that inflection point to achieve adjusted EBITDA in fiscal year 2023. With an approximate $27 million run-rate, the company has achieved the third highest growth rate among top 20 Canadian LPs and retail sales pull-through over the last four quarters, having achieved another increase in our market share ranking for the most recent quarter up to number 12 in our core markets.
One of the reasons for these significant achievements is the leadership demonstrated by the Divvy in the value segment. Divvy’s market share increased to 3.6% in Q1 from 3% last quarter across our core markets. Specifically in our largest market of Ontario, dried flower and pre-rolls achieved monumental 7th and 5th rankings respectively in the value sector. We will speak to these a little more as we go through the presentation.
The second pillar is maintaining our growth and leadership in medical cannabis. The Q1 medical market highlights include $11 million run-rate net revenue, deeper penetration in key high value markets, including Veterans, Quebec patients and continuing to actively onboard new third-party channels and insurance-based coverage. While the overall market is declining, the company’s market share in the Canadian medical market is growing, achieving a new high of 7.5% market share.
The third pillar is our growing international sales, now with $2 million run-rate net revenue. Consequentially, a new international partner has been signed for our European markets, representing $4.6 million in potential sales. This new partnership deepens our penetration into the German market and adds to our portfolio of German, UK and Australian sales, where we are continuing to build on pre-existing relationships and already have a history of shipping products. International distribution delivered a significant upside potential and is a diverse portion of our revenue portfolio giving us unique competitive advantage. The company will continue to engage in export ramp up throughout the fiscal year.
Finally in the fourth pillar, our expectations to achieve breakeven adjusted EBITDA are based on completing a $5.6 million in equity financing and a $7.0 million receivable facility, refinancing $37 million converts $12.3 million 2024 convert, $12.3 million 2026 convert and $14.7 million 2028 convert and extracting $10 million in annualized cost reductions. That is Aleafia Health today, a financially disciplined growth focused company with a transforming balance sheet.
Now, we will share a few highlights of our adult-use sales channel. The biggest achievement is the continued rise of our everyday brand, Divvy. Revenue in the adult-use sales channel has increased year-over-year at 176%, with net revenue growth of 107%. For the same period ending June 30, 2021 and 2022, there is dramatic growth on Divvy’s revenue. From a successful launch in quarter – launch quarter in 2021 with $4.0 million in total revenue and $3.2 million in net revenue, in 2022, that number has skyrocketed to $11 million total revenue, with a net revenue of $6.7 million. Divvy is rapidly entrenching its sought after position in the adult-use market. It is in the top 3 LPs for total retail sales growth in our core markets, boasting a 47% growth over the last 6 months.
The first quarter overall market share is approaching 2.5% in the company’s four most important Canadian markets: BC, Alberta, Saskatchewan and Ontario. In retail sales pull-through, we are seeing continued exceptional double-digit growth with 18% quarter-by-quarter growth and approaching our goal of a top 10 ranking across all participating markets. In the three largest categories, the numbers are very impressive.
First, looking at pre-rolls, we have achieved a 42% quarter-over-quarter growth in retail sales through, a 69% CAGR since calendar year 2021 Q1, and a 3.2% market share in this region. In the largest category being dried flower, we are showing a plus 28% quarter-over-quarter growth in retail sales pull-through, a 90% CAGR since calendar year 2021 Q1, and a plus 2.5% market share in listed regions. And in vapes, the third largest category, we have seen a plus 60% CAGR since calendar year 2021 Q1 and a 1.53% market share in listed regions. Clearly, these results indicate that an increasing presence in the highest margin most in-demand product categories, has helped the company achieve higher growth in sales and market share, which given Divvy’s percentage of our revenue add to our momentum in attaining a top 10 standing in our core markets.
Now, we will speak a little bit about market share position. While several of our peers see market share position, Aleafia continues to scale its adult-use business amidst a highly competitive environment. As Aleafia continues to take market share, it is approaching a top 10 position in its core markets. Think of these two points. We launched the Divvy brand only in Q1 calendar year 2021. This quickly and steadily gained consumer acceptance in our present markets, it is now enjoying a 3.6% market share in the value category, the market’s largest segment. Two, only 7 players ahead of Aleafia are both larger and growing based on retail sales pull-through data, where we enjoy an 18% growth quarter-over-quarter. Only 2 LPs enjoy a higher growth rate quarter-over-quarter in the top 12 in our markets. With our now established brand, Divvy, with momentum in the marketplace, we see a highly executable path to a top 10 position.
I will speak a little bit now about the addressable value segment. The Divvy everyday brand continues to show rapid acceleration in Ontario and Alberta and displays untapped potential in BC. The target addressable market or TAM is an estimated $750 million in LP net revenue. The value category is the largest adult-use segment in the four provinces, where the company’s market share has risen from 3% in Q5 fiscal year 2022 to 3.6% in Q1 fiscal year 2023.
With the Divvy brand demonstrating significant growth in our home province of Ontario, the value segment market share has increased substantially, 3.4% in flower, an impressive feat considering the amount of flower shortages we have experienced and an incredible 6.9% in pre-rolls indicating a fifth market share rank too excited – a sixth to seventh market share rank, two exciting numbers for us as we have also launched a higher margin pre-roll format – this format our 7/1 grant. We have also just doubled our number of vape SKUs this quarter in Ontario and expect this market share number to increase as well from 1.4%. Achieving a top 10 ranking in the two dried flower categories in our market is a significant achievement.
Now, I will speak a little bit about the medical sales channel. Let’s take a look at the medical sales channel where there are turbulent forces that continue to challenge the entire segment. In a declining sector of the cannabis industry, quarter-over-quarter, our medical channel has seen incremental growth in revenue, up $2.8 million from $2.5 million as well as growth in high value patient groups, Veterans plus 4%. Our strong record of patient engagement is driving growth in average order value, up plus 2.9% and Quebec patients are up 71% quarter-over-quarter.
We are very proud of our growth in medical patients and market share from 2019 to present, such that we have reached a new high of 7.5% patient market share and served thousands of patients receiving substantial relief by recommending medical cannabis products. This continues to be a fundamental pillar due to its high margin sticky revenue base and we are uniquely positioned to continue capturing market share given our medical ecosystem experience and product portfolio.
We would like to speak a few minutes about our international channel. International revenue growth, diversified sales mix and unlocks – untapped and growing markets at a higher price point at net realizable margin. This quarter, we have signed a new European partner in a 2-year agreement, with a total contract value of $4.6 million. This partnership optimizes the supply chain and reduces the cash conversion cycle. We intend to leverage our international success to further develop the international channel, a key differentiator for the company.
In our fiscal year 2022 presentation, we discussed the challenges in the first calendar quarter of 2022 in our greenhouse. We wanted to provide you a quick update on how we are maximizing our yield of usable flower across our 3 facilities to support our sales demand. Our Port Perry outdoor facility is deep in the 2022 growing season, with an expected harvest to start mid-September. This harvest goes directly into branded cannabis products in an adult-use segment. We are also expanding our indoor grow by converting existing spaces into new grow rooms in Paris, Ontario. This supports the continued uptake of committed sales contracts by international partners, which delivers to Aleafia locked in sales, high margin and cash flow visibility and is an excellent example of Aleafia leveraging its cultivation knowledge and ability to sell on strain through multiple channels.
Finally, in our hybrid greenhouse in Grimsby, we are continuing to make improvements and remediate issues identified in Q4 fiscal year 2022. We are also testing new genetics and focusing on efficient growing practice and enhanced irrigation. These 3 facilities provide distinctive competitive advantage, growing branded cannabis for domestic and international markets and yielding both A and C grade flower with potent THC and terpene profiles.
I will now turn it over to our CFO, Matt Sale to give a financial update.
Matt Sale
Thanks, Tricia. To drive the company’s continued success, we are scaling net revenue growth across all three of our core sales channels in our branded cannabis portfolio. As you can see in looking at net revenue composition with the transformation of our business towards our branded cannabis producer, branded cannabis now assumes over 80% of our total net revenue, with wholesale contributing the remainder. We are currently producing a run-rate net revenue of $48 million based on an annualization of the most recently completed quarter. And for this current fiscal year ending March 31, 2023, we are maintaining guidance of between $53 million and $63 million in total net revenue.
We will accomplish this by focusing on our core three revenue streams. In adult-use, we are leveraging supply partnerships to procure high-quality usable flower to improve our out-of-stock performance and unlock unmet consumer and patient demand. We are also launching our Divvy Buyers Club, which will provide consumers with new emerging cultivars. We are intently focused on hitting a top 10 market share position in our core markets and given our success in the value category with our Divvy brand we see a clear pathway there in this fiscal year.
In the medical channel, we are attuned to our patients’ needs by streamlining their journey and offering innovative promotional products. We are also looking to focus on high value patients such as Veterans in the Quebec market and deepening our presence there and continuing to drive uptake through our Unifor exclusive partnership. Supported by the recent integration of our three medical channels, including physical, virtual and third-party clinics, we are seeing steady upticks in our market share and continue to build a high margin recurring revenue base.
In the international channel, we are continuing to drive revenue growth in Germany, Australia and the UK by building on existing partnerships, entering into strategic supply agreements with the new international customers, which provide the company with revenue and cash flow visibility due to them being fixed price in nature and having sales committed commitments which are some cases multiyear in nature and they deliver higher margins is either the adult-use or medical channels. It is the high strategic priority for the company and we are seeing those efforts result in revenue growth.
Here we take a look at the comparisons from the quarter ending June 30, 2021 to the same period this year. Branded cannabis net revenue increased 31% from $7.6 million to $10 million. This is our sixth consecutive quarter of growth in this channel. Wholesale revenue by design was reduced from $3.1 million to $2.1 million as part of our pivot away from that higher volume, but non-recurring business. Total net revenue increased 13% from $10.7 million to $12 million in its most recent quarter ended June 30.
Adjusted gross profit margin before fair value adjustments declined from 43% to 22%. In this quarter, the primary driver of this decline is due to our intentional sales mix shift towards adult-use or as mentioned before we see lower margins in both medical and international channels. We are actively mitigating this. We completed a detailed portfolio optimization in Q5 fiscal year 2022, which is now starting to result in margin improvements. We are managing our portfolio of products to focus on larger format higher margin dollar SKUs and we are increasing our export supply into international markets, which delivered the highest margin potential.
Adjusted EBITDA improved by $2.5 million over the prior year to negative $0.9 million due to some key factors, including adjusted SG&A was reduced by $5 million from $9.7 million to $4.7 million, a significant 51% reduction over the last four quarters. Company-wide, we have enacted strategic headcount realignment and focused on aggressive cost rationalizations and containments to make this happen.
Adjusted SG&A as a percentage of total net revenue declined from 91% to 39%. And we anticipate this percentage to continue to improve as we drive revenue growth and extract operating leverage from our largely fixed SG&A base. Our branded cannabis net revenue continues to scale, whilst many peers in the industry show significant and consistent declines quarter-over-quarter. On the left, we plotted our growth in retail sell-through in our core markets for the quarter ended June 30, 2022.
Here we delivered the second highest growth rate of 18% amongst our peers. This places us firmly in the top quartile. In contrast, when you look at our valuation based on consensus 2023 net revenue estimates this suggests Aleafia trades at a deep discount to most of our peers. The average amongst our peers is 2.2x net revenue versus our 1.4x net revenue trading multiple, a 35% discount to our peers. We believe with our continued success and improved awareness of our growth strategy and financial performance this leaves meaningful room to narrow this valuation gap and drives improved shareholder returns.
The company has enjoyed strong growth in Q1 fiscal year 2023 growing revenue by 67% and net revenue by 30% over the prior year. The difference between the growth rates in revenue and net revenue is a result of the higher excise tax burden on adult-use sales than our other sales channels. But more than that, this slide reflects our changing business model with our strategic shift for its brands at cannabis products, wholesale, increasingly represents a smaller proportion of our total net revenue, reaching 17% in the most recent quarter ending June 30, 2022, down from 29% in the prior year. Over 80% of our net revenue is now derived by branded cannabis products.
International continues to emerge as a sizeable sales channel for us, representing 4% of total net revenue in the most recent quarter. With purchase orders and firm sales commitments in place, we anticipate this increasing as a proportion of total net revenue in the quarters ahead, driving an increasingly diversified sales mix in the branded channels. And all this shifting has happened while our balance sheet was transforming. We now have over $10 million of liquidity to drive growth, with $5.6 million cash on hand and access to a $7 million receivables facility, $5.2 million of which remains undrawn in the most recent quarter ended June 30.
There are no near-term refinancings with December 2023 being the nearest term refinancing of our credit facilities. We have no debt service costs for our convertible debentures as they require no mandatory cash interest payments till June 30, 2024. Notably, our total net debt balance on the balance sheet has declined to $39 million in the most recently completed quarter ending June 30 and we continue to monitor this carefully. In short, all of these measures improve our balance sheets and provides the liquidity and capital to continue scaling our business.
The company’s net working capital is being optimized to enhance returns on our capital employed. Net working capital as a percentage of total net revenue decreased from 89% in Q2 of fiscal year 2022 to 33% in Q1 of fiscal year 2023. This significant enhancement in net working capital performance was driven by actively managing receivables. Given the buying patterns of provincial agencies in the adult-use sales channel, we anticipate overall growth in our receivables. However, we have partially mitigated this impact by initiating our revolving receivables facility to help fund growth in ARR.
On the inventory front, there were a number of initiatives to right-size our inventory, leading to a significant increase in inventory turnover from 0.8x in Q2 of fiscal year 2022 to 1.8x in Q1 of fiscal year 2023. Our diverse flower supply is being dynamically directed to sales channels with the highest net realizable margin and strategically adding finished goods to minimize product stock-outs. In addition, aggressive cost containment has engineered a reduction in accounts payable and we continue to drive cost efficiencies through economies of scale and consolidation of vendor relationships across our 4 sites.
As I have explained on prior earnings calls, we continue to be highly focused on extracting costs out of our business. On this front, we are very pleased with the performance in our SG&A profile. On the left part of the slide, you can see the dramatic improvement in our adjusted SG&A profile over the last seven quarters. Our quarterly adjusted SG&A has declined by $5 million over the last four quarters from $9.7 million to $4.7 million, representing a 51% reduction. This represents an annualized savings of approximately $20 million over this period. As a result of aggressive cost realizations, the company is continuing to reduce adjusted SG&A, with many key cost initiatives, including vendor consolidations – and the vendor consolidation initiatives driving cost reduction through economies of scale across our 4 sites. This started in its most recent quarter and we have already identified over $2 million in annualized savings thus far. In addition, in-sourcing or bringing in-house certain functions of legal, finance, and IT have resulted in further cost savings.
In the other direction, we do anticipate continued investment in our business to drive top line growth across our three sales channels. Overall, our current adjusted SG&A profile is flexible and scalable to facilitate continued revenue growth. We remain on track to meet our target of between $25 million and $27.5 million in adjusted SG&A in fiscal year 2023.
Before we turn the presentation over to some Q&A, let me conclude by addressing our highest strategic focus on accelerating inflection point of achieving breakeven adjusted EBITDA profitability. With 13% growth in total net revenue year-over-year and $5 million reduction in quarterly adjusted SG&A year-over-year, have led us to inching ever closer to that profitability inflection point. However, at this point it would have been even faster where it not for a $2 million non-recurring operational issue at Grimsby and $1.9 million wholesale negative margin in Q5 of fiscal year 2022. That said there are many projects underway to drive profitability, including an evolution of our product performance, maximize margin, forming strategic relationships to unlock further high-quality flower supply, enhancing our B2B logistics and warehousing services and launching private label services. All these initiatives are margin accretive to drive further utilization of our existing asset profile, increase top line revenue performance and extract operating leverage in our adjusted SG&A profile, contributing towards long-term sustainable profitability.
This completes our presentation today. Thank you for listening. I’ll turn it back to Tricia Symmes for a few closing remarks before we take questions. Tricia?
Tricia Symmes
Thank you, Matt, Aleafia’s shareholders, analysts and everyone listening today. I am very proud of what we have been able to accomplish in the first quarter of this new fiscal year. Everyday, I am honored to work with this incredible team of people who are so completely dedicated to their part, making Aleafia Health a company to be proud of. We said we were going to deliver and that is what we continue to do making lives better together as a team by growing and creating innovative products and brands that adult-use consumers and medical patients are attracted to, at the same time, increasing revenue and market share, reducing costs and driving toward breakeven adjusted EBITDA profitability. This is Aleafia Health today devoted to building the company into a truly great organization together.
Now, I will turn it back over to the operator to take some questions and answers.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question is from the line of Pablo Zuanic from Cantor Fitzgerald.
Matthew Baker
Good morning. This is Matthew Baker on for Pablo. Thank you for taking our questions. Regarding the structure of the convertible debt, is all of this done or is there something that’s still pending? And was all of this – was all of this refinanced or only part of it? Thank you.
Matt Sale
Hey, Matthew. Thanks for the question. Good to hear from you again. So, the convertible debenture amendments were concluded in the last week of June and that was finalized and ratified by a vote. Given that the existing convert was a $37 million convert is being exchanged for three new convert issuances, there is a 4 month plus 1-day statutory hold. So we expect that to happen in the coming months ahead. We have also applied for a public listing. And we anticipate that to close as scheduled next quarter. And then there would be freely trading converts. That wasn’t – the other – second part of your question was that, I think was that the entire convert? And yes, the entire convert was refinanced in separate into three new tranches. There is a 2024 convert of about $12.3 million, a 2026 convert of equivalent amount, and then a 2028 convert at just over $14 million.
Matthew Baker
Okay, thank you for clarifying that. And I know this was touched on on the call, but can you clarify what has to happen for you guys to get to the high-end of your sales guidance range of net revenue between $53 million and $63 million, especially after $12 million in first quarter?
Matt Sale
Yes, good question, Matt. So we are focused on our growing each of our three core branded sales channels on medical with its recurring revenue base, we have seen that growth restart this past quarter into the double-digits. That’s in a market that’s been declining, but we have found ways to grow our market share and continue to grow that business by focusing on high value markets, re-engaging with inactive patients and offering promotional products, innovative products to those patients. On the adult-use side anchored by our Divvy value brand, we are seeing incredible market uptake. In Ontario, our whole market, we have already achieved top five position in pre-rolls and a top seven position in flower. Vapes is the one that’s lagging behind there. And with our launch of new product formats, we think we can get there as well, this fiscal year. On international, we just secured a new $4.6 million total contract value, which was signed last week. We think that this will start being executed and ramped up in this fiscal year. And we are in discussions with other European partners with similar contractual commitments, multi-year fixed price margin accretive and this provides a attractive off-take from our indoor facility. And with those – focusing on those three core sales channels, we see a pathway to hit our guidance between $53 million and $63 million, I think to get towards the top end, the last piece I will focus on is flower supply. And we are looking at ways of procuring high quality usable flower through strategic partnerships that allows us to do it an asset lightweight. It allows us to leverage our brand and our internal sales force, which is a competitive advantage for us to continue growing our top line performance and hit those top into that guidance. Tricia, anything to add on that?
Tricia Symmes
No, I think that’s excellent Matt, I think the only other thing that I would add to that, Matthew is that we had more demand in Q1 than we had in supply. So, the numbers we are recording in net revenue are based on the supply available. And that gives us a lot of confidence based on the strong growth of the brand and the demand for Divvy in the market. As Matt mentioned, we have also sourced additional flower supply and we have new SKU launches with the Divvy Buyer Club that is really going to allow us to be able to continue to accelerate that growth. And then the second point I would mention on the vapes is we just recently launched the vapes at the end of fiscal – sorry, calendar year 2022. And we have new formats that are entering both into the Ontario and Alberta markets. As you know, this is the third largest segment. We have seen excellent uptake with these first initial launches. And we continue to find this to be a real advantage to us that we can make these in-house and have no limit to supply. We also have launched a unique CBD vape and the balanced vape, which has a strong demand in the market, which is going to allow us to continue to gain share in that area. So, we are very confident on the guidance that we have put out. And then lastly on the international side, as it takes some time to be able to establish the partnerships and then it becomes into a consistent cycle of flow quarter-over-quarter, you will continue to see increased growth on a higher margin and net revenue base across our international business as we move through the next three quarters.
Matthew Baker
Alright. Thank you to both of you for the color there. If I can just ask one – another follow-up. Can you comment on the gross margin differences between your domestic rec and medical business? And then could you remind us of how many people are reimbursed for medical cannabis in Canada? And has this number changed? And what can you realistically look? What do you think could realistically help grow the domestic medical market? Thanks.
Matt Sale
Okay. Matthew, I think there were three questions in there. Let me unpack one at a time. So, the first one on the margins, this was intentional and anticipated, with adult-use being the highest growth sales channel for us. And that’s a strategic priority for us to get into that top 10 in our core markets. What you will see and you know this as well across the industry is there has been some price compression. Our view is that has now largely stabilized and in fact, we have been bucking that trend with a moderate strategic price increase in active last quarter, we are now seeing that start to flow through into our margin profile. Additionally, we are working with our key trusted vendors through consolidation and negotiating price improvements to drive margin expansion in our rec business. It is largely driven by flower. Actually it is two-thirds of the adult-use segment. Medical, it structurally does deliver a higher gross profit margin as it’s the inverse, over 80% of our sales in medical are based on derivative products. And those are the products are – deliver a much higher margin profile on average than flower formats.
Tricia Symmes
I can answer the second part of the question specifically with regards to what we are doing in terms of new patient growth on the medical side and talking a little bit more about the reimbursement side of that market. So, the first thing that’s been very important to us is to ensure that with the current patients that we have, that we have been able to increase the value of our offerings, so we have recently expanded our medical portfolio to include other topical products and products specifically for certain conditions, such as sleep with the launch of our Noon & Night caps brand, which is a significant innovative product with melatonin. As you know, sleep is a number one cause of affected issues for people in using on the medical side of the business. This product, we are very hopeful will have a significant impact on helping patients lives. We have also increased the supply of flower, high value flower, high THC flower. This has been a significant part of the portfolio that we needed to ramp up specifically for our veterans patients and ensuring with patients that have consistent chronic conditions that they have access to flower with a consistent supply. And then we have made a real focus on insurance based coverage, specifically through our Unifor partnership and then also with our veterans. There are many insurance carriers now that are starting to cover medical cannabis, specifically on the CBD side. Coming from a background in pharmaceuticals and having expertise in this side of the business, it’s important to work early with these healthcare coverage providers and employers. We are engaging specifically on educating our patients and how they can access third-party coverage. And in working with the employers that we have onboarded with Unifor to specifically make sure that these patients have access to coverage and have it reimbursed to their healthcare plans. That’s another continued part of the expansion of our business is working specifically to ensure that we will be onboarding additional employers to help support that at which we have active ones as part of the channel. So, hopefully, that gives you a little bit more color in terms of not only the margin side of the business, but also the importance of patients that are reimbursed and the sustainability of that. And I think that one thing you will see versus medical in the rec side of the business is there is just so much opportunity for people to have recreational cannabis readily available at their doorstep where you have seen this decline in potential patients in the medical business. Yes, we have continued to be able to increase the size of that patient population with some of the initiatives that we just discussed about and we do think that there will continue to be a strong viable medical business, especially as more insurers start to onboard patient coverage.
Matthew Baker
Okay. Thank you. And then one final question. Just thinking how was the company thinking about the outdoor business, mainly from a company strategy point of view? Thanks.
Tricia Symmes
Yes. Thank you. Excellent question. So, the outdoor grow in Port Perry is one of our critical competitive advantages in the market. We made a shift to make the decision to move away from wholesale and focus on branded cannabis revenue earlier this year. And as such, we are one of the first companies to secure listings where we use outdoor products specifically in the Divvy everyday value brand. What that means basically is that our pre-rolls and our milled product, which is a new offering come directly from our outdoor Port Perry harvest. This is obviously a lower cost and growing indoor or in a greenhouse and at a significant supply that ensures that we can really ramp the volume of these products, which are meeting the needs of the everyday consumer. This has become a fundamental pillar for us and being able to provide a consistent supply with these categories, which as you know, flowers is the fastest growing category, milled in different formats also being one of the areas where we are seeing a unique competitive advantage. And we are also able to offer non-strain specific products into the mills and then strain-specific products into the pre-rolls. Those are the two fastest growing categories for us in our business. And it helps obviously, increase our margins and offset other challenges we have had in the greenhouse.
Matthew Baker
Thank you.
Tricia Symmes
Thank you.
Operator
Your next question is from the line of Venkata Velagapudi with Research Capital.
Venkata Velagapudi
Thanks, operator for taking my question. Congrats Matt and Tricia for reporting good set of results this time. I have one clarification about revenue guidance. You mentioned that you secured a new international partnership for $4.6 million sales commitment. So and you also mentioned that this will be around $2 million per year. So, just want to understand, is this factored in your low end of revenue guidance, or is this in addition to that?
Matt Sale
Hi Ven, Good morning. Thanks for joining and thank you for the question. So, as you know, our revenue guidance is on an annual basis and not on a quarterly. But to give some more color on that contract, so it was just signed last week. And it will take some time to work through all of the various operational certifications to execute on that new supply chain and that new relationship. We think that that should happen towards the end of this calendar year and start being brought online commercially a recording revenue, if not later this calendar year, or early next calendar year. So, we think it will start flowing into this fiscal year as guidance, but we have not materially changed our guidance to reflect that sales commitment. And to be clear, it is $4.6 million in total, the minimum annual is $2 million, so about $500,000 a quarter.
Venkata Velagapudi
Yes, that’s great. And so what kind of gross margins do you assume for achieving positive adjusted EBITDA, because I see that gross margin is improving compared to last few quarters. But what factors should come into play to improve the gross margin from this level? Obviously, one of the factors might be improving medical sales. But do you see any other levers to improve gross margin from this level?
Matt Sale
Yes. Good question. Margins are very much a high priority focus for us. As part of our thinking as a company has evolved from top line revenue performance, which is very important, but equally is important is making sure that our margins are maintained and grown. And I think of our three main sales channels, adult-use, medical and international, directionally, medical delivers higher gross profit margins in adult-use, primarily because products are sold at a different price point. And two, the types of products are typically derivative products, extracted products, oils, capsules, vapes versus in the flower categories, you know Ven, about two-thirds or three quarters of the market is flower. International, today our smallest, but our fastest growing sales channel delivers the highest margin. It is a combination of bulk flower, and derivative products. On the bulk flower side, we in contrast to adult-use, we don’t have any excise tax burden. And two, we don’t incur much of the same finished goods, packaging, labeling, processing, tins, these other costs of production that is incurred in adult-use segment, none of that is incurred when we sell our flower in bulk format internationally. So, it delivers both the highest margin percentage and the highest realizable margin per gram of equivalent flowers sold. So, as that channel ramps up, we see that as a very strong catalyst to improve our margin profile. The guidance we have out for this fiscal year, as you will recall, is between $32.5 million and $37.5 million, on an average basis. And we feel confident that we can still hit that in this fiscal year, given the growth trajectory of our – each of our three businesses and the cost rationalization initiatives we have underway to improve margins and to extract further synergies.
Venkata Velagapudi
That’s good Matt. Finally, so how much medical revenue is coming from Québec? Just want to understand, like, how many – I mean what factors will contribute to increase in medical cannabis sales from this level? I think you mentioned you already have like 7.5 market share in Canadian medical market, which implies a market size of around $450 million. So, just want to understand what factors will drive you over medical sales over the next few years?
Tricia Symmes
Yes. Thank you. Excellent question on the medical side of the business and certainly this continues to be a critical focus and a core pillar for us, especially from the higher margin and more of a sticky recurring patient basis that is consistent, the reliability on that group of sales. First, on the Québec market, we have had a 71% increase in new patients coming from Québec. This was a strategic decision that we made earlier this year. Previously, we had not been in that market. We are also running some clinical trials in the Québec market, where patients have access to go on to some of our unique products, Omega-3, CBD and our candlelit products to help obviously, with sleep, anxiety and pain and other conditions. We have connected with a physicians group there who is actively enrolling patients into these trials and learning about these types of products and how they can benefit their patients. And as an opportunity from that patients have the opportunity to register with emblem should they wish to move forward. So, this has been an important part of exposing the Québec market to the value offerings that we have, a market that we are not in the adult-use segment. We have not segregated the revenue specifically from Québec. But we can definitely follow-up with you on that to share what those numbers look like. But it is an increasing high-value segment for us. The other one is on the veterans, I am ensuring that we have products that can help keep veterans patients consistently available for therapy. One of the challenges we have had in the past is not having high quality, high THC flower north of 25% for veterans, and this has been a miss on our product portfolio. However, in the last quarter, we have secured significant high quality high THC and we have strong partnerships with third-parties that have now allowed our veteran population to have consistent products and are also seeing a growth almost close to 5% in that group. So, that becomes very important part of us as we move forward. And then we are expanding our product portfolio to be very medically focused and almost nutraceutical based where we have products that traditionally are used for many common conditions that are now combined with CBD to have an added benefit. One of these is obviously the benefits are with Omega-3, which is one of our top-selling products. And the newest one is specifically with melatonin for sleep, which is a product that has had a high unmet need. And we are the first company out there to bring that to market. And then lastly, I would say in terms of expansion of our patients is really working with onboarding new third-party partnerships. And this is something that you have seen in the medical market, while many of our other fellow LPs have left this market. There is a significant opportunity to still compete and be one of the larger players in a smaller market. And that’s something that we are capitalizing on to make sure as they leave the market, we have ability for these patients to still continue to receive medical therapy and work very closely with emblem. And as Matt mentioned, this is where we are starting to see a re-growth in our medical business, and will continue to be a strong focus for us as we go through the remainder of this fiscal year.
Venkata Velagapudi
Excellent. Thank you. Thanks a lot, Tricia. And that’s all for me.
Tricia Symmes
Thank you very much Ven.
Matt Sale
Thanks Ven.
Operator
[Operator Instructions] At this time there are no further questions. I will now hand the call back over to our presenters for any closing remarks.
Tricia Symmes
Thank you very much shareholders, analysts and all participants on the call. Today was a pleasure to spend time with you. We look forward to presenting our continued upward trajectory and great news on our next earnings release. And from Matt, myself and the entire Aleafia team, thank you for joining us today.
Operator
This concludes today’s call. Thank you for joining. You may now disconnect your lines.
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