Auxly Cannabis Group Inc.

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to Oxley Cannabis Group's Q2 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, There will be a question and answer session from the company's analysts. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Ms. Cannon, you may now begin your conference.

Thank you, Operator, and good morning, everyone. Thank you for joining us for OxyCannabis Group's second quarter 2021 financial results conference call. A replay of this call will be archived on the investor relations section of Oxy's website. We will start the call with a presentation and corporate update by our CEO, Hugo Alves, followed by a recap of our second quarter results by our CFO, Brian Schmidt, before opening the floor to questions from our financial analysts. I encourage you to follow along with the presentation slides, which are posted on our website under the investor section under presentation. Before I turn the call over to Hugo, I'd like to remind everyone that our discussion today includes forward-looking statements that are based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from the views expressed today. Management can give no assurance that any forward-looking statement will prove to be correct. Forward-looking statements during this call speak only as the original date of this call, and we undertake no obligation to update or revise any of these statements except as required by applicable law. Management refers you to the cautionary statement and risk factors included in OXLU's disclosures. I note that all references on this call are to Canadian dollars unless otherwise stated. And with that, I'll turn it over to Hugo Alves.

Well, thank you, Julie. And good morning, everyone. I'm delighted to welcome you all to Oxley's inaugural earnings call. And we're very excited to host you for this call and share with you the results of what has been a record quarter for Oxley across revenue, adjusted EBITDA, and market share. So let's get started. I will be using the slide deck as a reference tool here. And with that, I would turn you to page six of the presentation. And I thought that it would be helpful to really start by grounding everyone in the five strategic objectives that Oxley is trying to accomplish during calendar year 2021 and how those were advanced during Q2. So in 2021, to recap, Oxley is focused on maintaining leadership in the 2.0 product segments, building to leadership in dried flower and pre-rolls, what's known as the 1.0 product segment, becoming a top five licensed producer by national share of market, improving our margins and revenue with low to no overhead growth, and achieving positive adjusted EBITDA by year end. And I am very happy to report that we made substantial advances in Q2 towards achieving each of those objectives. In terms of 2.0 market leadership, we continue to be the number one 2.0 company in the country with 15.4% share of total 2.0 market. And we continue to extend our leadership in the vapor segment with 23.4% share of market in Q2, a percentage that continues to increase month over month. For reference, we finished the month of June in Q2 with 25.6 share of market. We're also very excited about the progress that we've made in dried flower and pre-rolls. By leveraging our core capabilities of insights, innovation, branding, and route-to-market excellence, we've quickly established one of the most efficient flower portfolios in the market. The test SKUs that we've launched under both CoLab Project and Back40 Brands have enjoyed fantastic consumer success. And now that we've launched an expanded flower portfolio nationally, with additions to both the CoLab project and BAC40 brand portfolios, and of course our much anticipated BAC4040's pre-roll launch in Ontario last week, we should really start to feel the impact of those SKUs on our earnings in Q3. We are not yet a top five licensed producer, but we continue to move in the right direction. In 18 short months since the start of our commercial operations, we have risen to the number seventh ranked LP by overall recreational cannabis market share and finishing the quarter with 4.9% share of overall market. Importantly, we finished the quarter in the month of June with 5.4% share of overall market and moved into the number six spot overall. Our goal is to be in the 7% to 9% share of market range by end of the year and consolidation notwithstanding, we believe that that will be sufficient for us to achieve our strategic target of being in the top five. Brian Schmidt, our CFO, is going to give you more color on the financial metrics later in the presentation, but we continue to improve the cash flows of the company. We significantly improved net revenues from recreational cannabis sales to $21 million, improved our margins to 38%, and we continue to be laser-focused on cost optimization on a number of fronts, reducing the cost of goods through automation, optimizing supply chain efficiency, and of course, eliminating all non-value-adding costs. We're working hard to contain costs and most importantly, focus our spending on the capabilities and activities that are most impactful. And hand in hand with the continuing improvement in revenue and cost, we've also made significant improvements in our adjusted EBITDA. We finished Q2 with an adjusted EBITDA loss of $3.3 million, a significant improvement over both Q2 2020 and Q1 2021. So we are getting close to our positive adjusted EBITDA target, and we believe that we're on track to achieve this objective by calendar year end. So with that high-level overview in mind, I'm going to turn us to page 8 of the presentation. As already stated, we remain the number one LP in the 2.0 product segment with 15.4% of total 2.0 market. And it's worth noting that we have beat out much larger competitors, maintain leadership and continue to expand market share organically and not through consolidation. And we've done this by having a focused strategy and investing heavily in the capabilities that we believe are necessary to win in the consumer market. And because of that focus and strategy and because of the complementary and reinforcing capabilities that we've developed, we've seen our market share continually increase. It's already stated we finished the quarter with 5.4% share of market, moving us into the number six spot overall, and we believe if we hit our target of between 7% and 9% share of market by end of the year, that we will be able to move into the top five. Moving us to slide nine, this slide is really to give you an idea of how we're performing across our key categories, and also to help set some baselines for you to consider moving forward. So as you'll note here, we rank very highly in vapes and edibles, the formats that we've been in the longest. Moving us to concentrates, at the beginning of the year, we resolved to test launch into concentrates as we viewed it as an attractive growth category among certain consumer segments that we target with our brands. And we're very pleased with the results of our tests. We think we've gotten a value proposition for our CoLab consumers spot on. Our CoLab Project Diamond product was launched to universal consumer acclaim and has quickly propelled us to the number five spot nationally in concentrates, and that's with just one SKU. So you can expect to see us launch some exciting new innovations in this category over the balance of the year as we try to push deeper into this category. And of course, dried flower and pre-rolls where we're just getting started. And these numbers are really ended here as more of a baseline to enable you to see how our market share improves in these formats over the balance of calendar year 2021. You know, I would point you in particular to our pre-roll market share, which we expect to jump significantly over the balance of the year. One final point before I leave this slide is about our continued focus on driving distribution for our portfolio. We work tirelessly with our distributor, Kindred, every single day to increase the breadth and depth of our distribution, both in terms of total number of stores and number of SKUs within each store. And over the quarter, our products are now sold in approximately 2,000 retail locations across the country, representing approximately 92.5% of all retail locations across Canada, excluding Quebec. And that growth in the quarter represented a quarter-over-quarter increase of about 28% in distribution. Moving us to slide 10, I'm not going to dwell here, as most of you are familiar with this data, but what the data here underlines is some of our confidence in our ability to continue capturing market share. So on the left hand of the slide, what it shows is we really believe that our leadership in the 2.0 segment will result in material share of market gains over the course of the next three to four years as the 2.0 market continues to become an increasingly larger part of the overall market. And then, of course, now that we are building a portfolio of dried flower and pre-roll products, we're also very well positioned to address the 1.0 segment, which still accounts for over 70% of markets. Okay, so moving us along, I'm going to wrap things up here for my portion of the presentation by giving you a very high-level overview of our brand performance and our innovation pipeline for the balance of 2021. So I'm going to turn your attention to slide 12. As some of you may know, one of our key aspirations at Oxley is to build brands that our consumers love and trust. Our brands are targeted at specific consumer segments, and then we work very hard to stay close to our targeted consumers, build authentic connections with them through our brands, and then evolve our brands as our consumers evolve in order to maintain that connection. As I've already stated, consumer understanding is a core capability that we've invested heavily in. While we do use a variety of agencies and services for data and consumer research, We've also invested heavily in bringing key insights and data analysis functions in-house so that we are always keenly focused on our consumers' wants and needs, present and future. And I'm delighted to report that our efforts are slowly but surely paying off. I'm going to use the vapor segment here as a proxy only because, as many of you know, the vape category is uber competitive with lots and lots of SKUs and brands and market participants across the country. So it's every bit as the dried flower segment is, but yet we've been able to continually increase our share of market in that segment and maintain relevance of all three of our vape brands. At the end of Q2, all three of our vape brands were in the top five brands nationally for vape. Our Back 40 brand being the clear market leader in vape market share with a whopping 13.3 share of total market as a brand. Colab and Foray ended the quarter fourth and fifth ranked brands nationally with 4.6 and 4.4 share of market respectfully. And in our largest market, Ontario, on a rolling 12-week basis at the end of Q2, all five of the top five selling vapor SKUs in the province were Oxley branded SKUs. So the takeaway here is really that while it's still too early in the market to draw definitive conclusions about brand health and brand relevance, We believe that we've invested in the right capabilities to enable us to build meaningful brand connections with our consumers and help us win that first moment of truth. We believe that our brands provide us excellent coverage among our targeted consumer segments. And we believe that early signs are very encouraging in terms of our brands working towards our aspiration of building trust and the admiration of our consumers. Turning us to slide 13, one of the key ways that we're going to continue building brand relevance and share of market is by leveraging our innovation and manufacturing capabilities to bring new and exciting products to market under each of our four brands. I'm not going to point to any individual product or brand on this chart because, as it clearly illustrates, we're launching exciting new innovations across all of our brands. But I will point out three quick things here. First, this is not an exhaustive list of the products we anticipate launching during the balance of 2021. We have purposely left out a number of products here because we consider the information competitively sensitive. Second, not all of these products will launch nationally at the outside. As with all of our new product innovations, We will soft launch some of these in select markets to gain consumer feedback, refine and prove our concept before we scale up production and distribution. But then finally, and it should come as no surprise, like our brand development, our product development is targeted to specific consumers that we address under each brand. Whether it's our back 40 brand where we focus on simple quality, inhalable and edible products for consumers who are looking for quality at affordable prices, our CoLab project premium products, which focus on higher potencies and true-to-plant experiences, Foray, where we create approachable, balanced, convenient products focused on the novice consumer, and of course, Doscan, where we really target a wellness consumer. And so even though on this chart it's not an exhaustive list, what you can see is that we have a very robust innovation pipeline planned for the remainder of 2021. with lots of first-to-market products. And we believe that our innovation and manufacturing capabilities, our ability to take consumer insights and turn them into product differentiations is one of our keys to the success. We think we do it better than any other cannabis company on the planet, and we think it's the key reason why we're confident that we will continue to win with consumers and continue to capture market share. So I'm going to stop there and turn it over to our CFO, Brian, to deliver the rest of the presentation. Brian, over to you.

Thank you, Hugo, and good morning. It's a pleasure to be presented today on our first earnings call, being able to report record results for the quarter. We couldn't be more thrilled and look forward to continuing to deliver even more in the future. Before we continue with a review of the quarter, please note that as a result of the KGK disposition, Historical results have been retrospectively restated to remove the impact of KGK from individual financial statement line items and have been aggregated into discontinued operations. As such, operating results and cash flows from continuing operations may differ from previously reported public results. Now turning to revenues from continual operations on slide 19. We are excited to report the achievement of nearly $21 million in revenue, up significantly from the second quarter of 2020, and more than double the previous quarter. Consistent with our strategy to increase sales of cannabis 1.0 products, revenue for the current quarter was comprised of approximately 25% of these product sales, increasing from 10% the previous year, while maintaining leadership in cannabis 2.0 product sales. With the expansion of Ontario store openings, our revenues from BC, Alberta, and Ontario increased by 5% to approximately 85% for the quarter. However, please note that we do not presently sell products in the province of Quebec. The next slide captures our gross margin, adjusted EBITDA, and net income performance for the second quarter, all reflecting significant improvements. gross margins grew to 38% during the current quarter, double the same period in 2020, and 34% year-to-date. In addition to contributions from newer products such as our success to date in concentrates, gross margin improvements were driven by production cost reductions through further automation, streamlining processes, larger batch sizes and volumes, and lower input costs from cannabis, gaining efficiencies on our in-house extraction methodologies, reducing packaging costs, and logistics management were all contributing factors. While cannabis 1.0 product margins were nominal during the quarter, we anticipate improvements in gross profit from dried flower and pre-roll products as automation is implemented and volumes increase over the next two quarters. Adjusted EBITDA improved significantly based upon the strength of revenues, gross margin, and measures taken to reduce SG&A as announced in October 2020. While SG&A excluding non-cash share-based compensation increased over the previous quarters, expenditures were $1.2 million below the second quarter of 2020 and are in line on a year-to-date basis with our quarterly cash-based SG&A target of $10 million. Net income, and yes, I did say net income, was positive for the quarter. Impacted by the strength of operations, however, improved further on a net basis as a result of three non-recurring transactions, including the sale of KGK on June 2nd, which resulted in a net gain of $12.1 million, the sale in July of the vacant Curative Cultivation Facility, resulting in a loss of $11.4 million, and The impact of the Imperial Brands convertible to venture amendments, which resulted in a net gain of $17.5 million. And lastly, the non-cash tax recoveries of $4.3 million associated with these transactions. Next, on slide 21. Slide 21 outlines our progress since the company commenced cannabis sales, showing a strong positive trend in retail sales that is a key indicator of the company's performance. With an adult use recreational focus, Oxley's revenues are recognized and influenced by buying patterns of our channel partners. Continued improvements in the share of market inevitably leads to improved revenues as noted by the strong current quarter performance. The positive revenue trends have also resulted in sharply increased adjusted EBITDA. which includes our efforts to improve gross margins and manage cash-based SG&A, all of which we believe is a very encouraging picture. As we turn to slide 22 and consider the company's earnings multiple relative to its immediate peers, you can see that there's an opportunity for multiple expansion as the company's share of market increases through continued execution against our plan. As Hugo indicated earlier, Oxley's share of market was 4.9% for the second quarter. For the month of July, based on Headset Insights data, Oxley continued to improve its share of market to 5.4% as we began to accelerate participation in the cannabis 1.0 products. We'll be further supported by our recently launched bag flower and pre-roll offerings under the Back 40 brand. Oxley has successfully retained its leadership position and expanded its share of market in cannabis 2.0 products with greater than a 15% market share, where those products account for approximately 20% of the total recreational market sales. As cannabis 1.0 is approximately four times larger, an equivalent share of market for Oxley is an obtainable 4%, which we look to surpass. We feel this is an achievable objective and are targeting an overall share of market between 7% and 9% by the end of the year, This, we believe, will also coincide with our goal to be adjusted EBITDA positive in the fourth quarter. Throughout today's presentation, we have highlighted how we are differentiated from our peers in building success in the Canadian cannabis industry. We believe the acceleration of revenues and net income supported by high growth adult recreational cannabis sales and careful execution against our objectives will lead to notable market expansion and share price appreciation in the coming quarters as we move to be within the top five LPs. And with that, I'll turn it over to Hugo for concluding remarks.

Hey, thanks for that, Brian. Look, that concludes our earnings presentation. We hope that we've been able to give you a clearer picture of our company, how we're doing in the consumer market, and why we're very confident about our future. For us, it's all about having a focused strategy, one that is focused on winning in a defined playing field with a defined consumer and in a defined way. And because of that focus, we've been able to identify and then build the capabilities that we think are necessary to win in the consumer market. We've been working tirelessly over the last four years to build those capabilities, and now we're starting to see the fruits of those efforts. Our people, assets, and capabilities and how they work together and reinforce each other are the reason why we're in the ascendancy in the consumer market. And having proven the bona fides of our approach in the 2.0 market, we're now applying the same rigor, the same approach, and leveraging the same core capabilities to stretch our brands into the 1.0 market, and early results have been extremely encouraging. So I want to thank you listeners for your time today and your support of Oxley, and I'm now going to turn it over to Julie to open up the floor for Q&A.

Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press the star followed by the one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Rahul Sarugasar of Raymond James. Please go ahead.

Thank you, operator. Good morning, Hugo, Brian, Julie. Congratulations on the terrific quarter. So my first question is, you know, clearly Oxley had for a long time had his priority focused on cannabis 2.0, always been punching well above its weight in that segment. So, you know, we'll park that for the moment. In terms of the push into 1.0, as you outlined, Hugo, this is, of course, a very, very crowded market, difficult to be profitable. So maybe you can elaborate a little bit more in terms of both the ability to drive top line and penetration, but also, just as importantly, manage cost of goods such that you can continue to be profitable on the push into 1.0.

Hi, Raul.

Sorry, snafu on the mute, unmute. Look, great question. I think, first of all, when we make the decision, the strategic decision to focus on 2.0, it was with the knowledge that our cultivation assets would take a number of years to really get up and running and dialed in and And so we didn't have the right capabilities to win in 1.0 at the time. So we focused on 2.0. That's the, you know, we built out the capabilities that we thought we needed to win in the consumer market, right? Consumer insight, branding, you know, all of those route to market excellence, innovation, manufacturing. But in the background, we were always building our cultivation facilities. Those facilities are now up, running, dialed in. They're producing fantastic flour. We're very confident in our cost structure to be able to, you know, produce the value propositions that are specifically targeted to our consumers. And that, you know, that ranges, you know, as I set out in my presentation from kind of our back 40 brand to our collab brand. But for us, it's going to be staying focused on our consumers, right? We're only... interested in our consumers, not all consumers, really continuing to build, invest in, and leverage the capabilities that we believe are the reasons for our success and why we're enjoying success in the consumer market, and then continually refining our cultivation operations to be able to match our strategy. But we think we have the assets to be able to compete in 1.0, and our insights, you know, we think we've gotten it right so far. So I would, we're very confident about the future in the 1.0 segment.

Terrific. Thanks very much. And then just sort of a quick follow-up. You talked about 1.0, we've talked about 2.0, but sort of in the middle is the emergence and rapid emergence of the craft cannabis sector or sub-segment. You obviously have this play through Robinson's and some through the CoLab partners. Maybe could you give us a little bit more color in terms of how Oxley is planning to penetrate the super premium segment as well?

Yeah, thanks for that, Raul. I would say we're not penetrating the super premium segment. That's a small segment in terms of overall market. It's very crowded. and it's not our consumer. So we do target a premium consumer through our CoLab branded project, CoLab project branded portfolio. We really focus on higher potencies, unique genetics, and true to plant experiences there. And, you know, I think our track record under that brand speaks for itself. The CoLab grower series flower is always among the top 10 selling SKUs in its markets and So Robinson's you mentioned, so that is a brand where given the market dynamic that we were seeing, we really felt that product was better suited for a CoLab project value proposition. So we're bringing it under the CoLab brander. We think it will have tremendous success there. And again, it allows us to focus our branding and marketing spend to get better traction among the remaining brands.

Well, terrific. Thank you so much, as always, for taking our questions. We'll get back in the queue.

Thanks, Raul.

Your next question comes from Frederico Gomez of ATB Capital. Please go ahead.

Thank you, and good morning, Hugo and Brian. Congrats on the great quarter. Just had a question about your adjusted EBITDA goals turning positive by year-end. You know, this quarter, I think you guys spent close to $12 million in cash, and most of that came from changes in working capital. So I'm just wondering about your expectations for turning cash flow positive, at least from a cash from operations perspective, just the sense of what are your expectations regarding working capital as you continue to grow the business? Thanks.

Thanks, Frederico. I heard a couple questions in there, so... Our immediate goal is just to be a bit of positive, not necessarily cash flow positive. So, you know, cash flow positive would be after this year to hit the first milestone, as we've outlined in the presentation, but I'll recap a little bit. You know, some of the key drivers, of course, for the Oxley company is adult rec sales. So share of markets, as we've outlined, seven and nine things positive. we believe will give us the top line revenue to achieve that goal. We are targeting a 30% overall margin, gross margin. And then SG&A, we're looking to hold it at the $10 million in all material respects, as we outlined almost nine or more months ago as our goal for sort of 2021. That may change, of course, as we complete our budgets into 2022. But for now, we think that's a reasonable goal. And obviously, as sales go up, there will be some incremental costs that weren't contemplated when we did that. But we feel pretty comfortable with those broad goalposts.

Thanks, Brian. And then in terms of, I'm just curious about your soonest facility and the flower supply coming from there. So I guess I read in your MD&A that close to 80% of your supply this year came from third parties. Just curious, where do you see it in terms of a run rate right now of flour coming from Sooners? And, you know, what can you tell us about the production there in terms of field and cost related to what you can buy in the open market? Thank you.

Yeah, hi, Frederico. It's Hugo. So I'll take that one. So, you know, over the quarter, we actually reduced reliance on third-party offtake to about 59%. So we would expect to continue leveraging our student's facility to a greater and greater extent as operations there continue to be dialed in, yields continue to expand, and of course our flower portfolio continues to grow. So we've tried to be very mindful in terms of our approach to not get out ahead of ourselves and end up with a bunch of inventory that we can't move We are focused and obsessed as a company on quality, and that includes our flour products. So we want to make sure that we're getting the best possible flour to the consumer. So we think that our offtake costs at Sunans are at very, very favorable rates. That put us in a great position to attack the market with the value propositions that we think are going to resonate with our consumers.

Thank you. That's helpful. I'll hop back to you.

Your next question comes from Pablo Zwanek of Cantor Fitzgerald. Please go ahead.

Thank you. Good morning, and congratulations on the progress that you continue to make. Look, just one first question, very simplistic maybe. So you have about 5% market share, 5.4% I think you said for July, targeting 7% to 9%. I suppose that's going to come from pre-rolls on flour, right, because it's already at 25% on vapes. So just talk about what gets you to the seven and what has to happen to get to the nine. It seems quite ambitious, you know, doubling share almost by year end. Just walk us through, please, through that.

Hi, Pablo. So, you know, look, I think I tried to leave the witness there a little bit with our slide showing how we're performing across our relative categories. So we've obviously modeled out internally kind of what our share of market from our various – you know, our various products will result in. I would say, look, in 2.0, we continue to expand the market share and we're not going to stop, right? That is a very busy innovation component for us at our Dosecan facility where we think there's still a lot of great things to bring to consumers. You've seen in concentrates, a growing category, one that we think is particularly relevant to our CoLab project consumers. And I think there we've tested the waters, we've refined our value proposition, we've had tremendous success. So you will start to see more concentrates products coming on the market. But then, yes, there will be a lot of growth in dried flower and pre-rolls. You've seen the pre-rolls now, or if people haven't seen it, they can feel free to drop me a line and I'll make sure that you see them. But we think that these are going to be big sellers in the market. They are highly differentiated. Early feedback has been fantastic. And you saw our market share there. We're the 19th ranked player in the country nationally by pre-roll market share. And we think that we'll push up into that leading group by year end. So we're comfortable in our seven to nine range target. And I think early indications, at least from the first of the first week or 10 days now of our flower launch would continue to give us real cause for optimism in those estimates.

Great. That's very helpful. Thank you. And then in the case of pre-rolls, I know you have talked about a new machinery coming in, automation, better cost, and of course being able to offer a better price in the market. Has that already started or is that still a 3Q story? Thank you.

Look, it started, we launched pre-rolls yesterday. We launched a, it's a 10-pack of 3.5, 0.35 gram slim roll joints, and they've launched at a retail price of $19.99, which is obviously tremendous value to the consumer. Our automated filling machinery is in place. There are some additional throughput requirements. enhancing pieces that should be with us kind of by before year end. Automated packaging line which is really kind of allows you to use the throughput on the filling machine to its full potential arrives at our facility late this month or early next month. So what you'll start to see is the impact of the initial push in dried flower and pre-rolls that launched last week. We're only launching pre-rolls in Ontario. For now, that is a lesson learned from our 2.0 launch. We want to make sure that we're able to really test the value proposition in our biggest market and ensure high fill rates with our customer for that product. But yeah, you'll start to see some impact on our revenue lines from those two formats this quarter, keeping in mind that it's less than half a quarter that you'll see. And then in Q4, you'll start to see a lot of the efficiency gains which should, you know, obviously impact margins and revenue to a greater extent.

That's great. And one last one, if I may. Can you just give us a quick recap in terms of what's happening in the vape market, right? Obviously, we have the data, scanner data gives a lot of details. But, you know, we hear there's been significant price inflation in vape, as we saw in flour. People are now talking about live resin, which I suppose is more on the high end. Just talk about in terms of what's happening in the vape market. And obviously, you continue to gain share, but it seems that there's been some evolution of the category, not just in terms of growth. Thanks.

Yeah, sure. Listen, as I said, the vape market I used as a proxy for our ability to leverage our capabilities and continue driving market share. even in a highly competitive market, because the vape market is uber competitive. And I think that's driven by not only the popularity of the format, but the availability of third-party contract manufacturing, which allows some of these marketing entities to really not have to invest in licensed infrastructure to manufacture their own vapes. And yet, you know, we have been able to continually outperform the market, and we've done that through, you know, consumer insights, innovation, and really targeting what's next. So we were the first with the one gram vape cart. Our co-lab project vapes now with the live resin carts. There are further innovations in mature vape markets that will come to market here in Canada over time. So I think for us it's really about breadth and depth of distribution building our brand so that consumers trust and love our brand when it comes to vapor. They understand it's going to be quality at any price point and will deliver on that second moment of truth when they get the product home. But certainly, you need to stay very close to your consumer. You need to listen to their needs. You have to have the innovation muscle to be able to take those insights and figure out the scientific problems to convert it into differentiation. And then you need to be able to wrap it in a brand that consumers will trust and get it on broad distribution so that they have access to the product whenever they want it. And then I would say, look, finally, we also have a strategic partner that knows a thing or two about the Vapor segment that we work with on a regular basis to ensure that we're getting the right value propositions.

That's very color. Thank you. Congratulations again.

Thanks, Pablo.

Your next question comes from John Chu of Desjardins. Please go ahead.

Hi, good morning. So my first question is just on the sales. You had a really nice quarter-over-quarter jump, and I'm trying to understand the sustainability of that level. And one of the things that you mentioned as a key driver was just some wholesaler restocking. So we haven't seen much of that from some of the other cannabis players out there about the restocking. In terms of what they're reporting, they seem to be more flattish to down quarter of a quarter. So I'm just trying to understand what your level of confidence is on that sustainability. And is it just restocking their inventory to then the quarter after that it starts to pull back a bit because they're pretty well stocked up. So if you can talk to that, that'd be great.

Yeah, sure, John. Look, I think the restocking issue is more of an inventory management issue at our customers than it is restocking. So they work through their inventory in Q1, releasing their weeks of safety stock on hand dramatically so that they could end Q1 with a nice inventory number on their back of sheet. And then what we've seen is back to kind of normal practices on the ordering. if last year is an indication, which it wasn't in Q1, granted, we would expect to see strong pull for the remainder of the year. And look, our sales to date in Q3 give us confidence in that assumption, in that view.

Okay, that's very helpful. And then just on the margins, again, you posted really nice margins in the quarter, mostly driven from Cannabis 2.0, but there's a push into the 1.0. So does that product mix push your margins down? Because presumably the 1.0 is lower margin than the 2.0?

Yeah, John, that's Brian. That's our assumption with an overall margin, target margin of 40%. We expect some lower margins in the 1.0 section of the market. But again, we look to increase our margin from, today through the automation that we've recently outlined in our public reporting on the call today. And then for sure on a gross profit dollar basis, you know, that incremental margin will drive to the bottom line.

And then maybe another question just related to margins and I guess sales as well. To what extent has COVID and the store restrictions and really more so for your premium products like Colab and Robinson's, how much has that been impacted from a sales perspective and presumably on the margins too, given that I'm of the understanding that pod tenders play a pretty important role in the sale of premium products, especially newer products. So can you just maybe talk a bit about that? And now obviously the store is reopening. Is there a potential for a boost from that front?

Yeah, so John and T, though, I would say, like, it's not really a margin issue for us, right? Like, we sell into the Provincial Control Board at a price, so the margin beyond that is for someone else's benefit. I would start by saying, look, we're absolutely excited to have all of our retail partners welcoming consumers back. COVID's been hard on our retail partners and hard on the bud tenders, so I think, first and foremost, we're happy to have them back. And we're always looking for ways to help and support our retail partners and help us connect with our consumers. So I wouldn't say it's a margin issue, but for sure it allows us to get back closer with our consumers, work with our retail partners. work with our bud tenders to drive visibility for our products, drive the brand narrative to consumers through retail, and increase the breadth and depth of our distribution. So we are delighted to have the stores reopen again, but in terms of margin performance, it's not as applicable.

Okay, thank you.

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