Auxly Cannabis Group Inc.

good morning ladies and gentlemen 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 q2 2022 earnings results conference 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 financial 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. I would now like to turn the call over to Julie Cannon. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us for Oxley Cannabis Group's second quarter 2022 financial conference call. A replay of this call will be archived on the investor relations section of Oxley's website. We will start the call with a presentation and corporate update by our CEO, Hugo Ellis, followed by a recap of our year and financial results by our CFO, Brian Schmidt, before opening the floor to questions from our financial analyst. Joining us for the question portion of the call will be our president, Michael Lickfer. 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 any forward-looking statement will prove to be correct. Forward-looking statements during this call speak only as the original 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 Oxley's disclosures. I note that all references on this call are to Canadian dollars unless otherwise stated. With that, I'll turn it over to our CEO, Hugo Alves.

Thanks, Julie, and good morning, everyone. to our Q2 2022 earnings call. Start the presentation on slide five. As we have indicated throughout the year, our main goal for 2022 is to improve revenues and gross margins and achieve adjusted EBITDA profitability. Brian is going to present the financial results later in the presentation, but at a high level, we are very happy with the progress that we've made during the quarter towards achieving those goals. We materially grew revenue and increased gross profits, Yet despite that growth, we were able to maintain our SG&A spending relatively flat, resulting in a 37% improvement in our adjusted EBITDA quarter over quarter. We have earned these results in an increasingly diverse and competitive market by remaining focused on product quality, innovating to meet the evolving needs of our consumers, and continuing to improve our operating capabilities. Turning to slide six. Q2 saw more new products launch into our market than any other time since the start of legalization, resulting in increased fragmentation and continued price compression. While this did impact our share of market across formats, we remained the number one LP in the 2.0 segment, including maintaining our number one position in vapes year to date. Our brands continue to be consumer favorites, with Back 40 in particular continuing to garner leading shares in vapor and dried flour, and we remained among the leading licensed producers, being the sixth largest licensed producer by share of market. While we will certainly look to regain lost share over time, we will not chase share at the expense of profitability, and what we are most encouraged by over the quarter is the increase in our revenues on a year-over-year and quarter-over-quarter basis, the significant increase in our blended gross margins to 36% as we are starting to see the margin impact of our Leamington operations, our continued rate of innovation, and the fact that we have been able to maintain our leadership in the 2.0 segment and VAPR format despite maintaining our pricing over the first half of the year. Slide 7 sets out our market share by product segment for the first half of 2022. As stated, our share has declined quarter over quarter, driven primarily by increased competition, continued price adjustments by many of our peers, as well as the residual impacts from last quarter's operational supply chain challenges. In the vapor category, there has been a 65% increase in vape brands year over year, and there are now 117 unique brand families and over 600 vape SKUs in market. The category is continuing to see aggressive price adjustments, with the price per milligram of vapes declining 28.5% on average monthly basis since July of 2021. The vapor category is now dominated by the ultra value price tier. We saw 12 new brand families enter the ultra value price tier during Q2 alone and ultra value sales now make up approximately 82% of total vape sales in July of 2022 as compared to just 32.5% of total sales in July of 2021. Despite those challenges and even with our competitors making significant price drops to try and win share, we still managed to capture almost 18% of the vape market during the first half of the year and remain the number one vape company in the country year to date. While we certainly acknowledge and respect all of our competitors, we are still a dominant force in the segment and are confident that we will be able to recapture lost share. We deferred lowering price during the quarter, choosing instead to focus on implementing operational efficiencies that allow us to respond to pricing changes without material impact on our margin profiles. We are among the few companies that have a significant presence in the premium segment of vape, a segment where we have been able to maintain share through unique first-to-market products like our CoLab solventless vape. And we are continuing to innovate. Our BAC40 vapor products fundamentally changed the market and paved the way for many of our competitors in terms of format, size, hardware, and flavors. And during the back half of the year, consumers will see the next wave of innovations across all three of our brands, and in particular, BAC40. In dried flour and pre-rolls, the other two key formats in our market, We also saw small share of market losses driven primarily by temporary production challenges during Q1 and early Q2 impacting product availability. This caused out of stocks on our most popular wedding pie strain in many markets during the front and middle of Q2. In the pre-roll segment, we remain capacity constrained in our pre-roll formats as we've waited for the arrival and commissioning of our automated equipment. And because of those constraints, our slim roll pre-rolls are currently available in only four markets, Ontario, BC, Alberta, and Prince Edward Island. However, like the vape format, we are encouraged by the continued traction of our brand despite these challenges, and we feel that flower and pre-rolls represent tremendous growth opportunities for Oxley. On the flower front, The operational issues we faced early in the year are behind us, and we are making tremendous progress at our Leamington facility, where we have been able to increase efficiency and reduce costs. We are seeing gains in flower output and potency, while improvements to our post-harvest processes have also increased overall product quality, and we are continuing to innovate. We launched Mandarin Cookies, our first sativa under the BAC40 brand during the quarter, which quickly rose to a top 20 skew in Ontario. And you will likewise see us launch unique high-potency strains under both our BAC40 and CoLab brands in the back half of the year, like our Panda Puff strain, which will launch under BAC40 later this quarter and has been testing at industry-leading potencies. We've also ramped up our R&D program for flour so that we have new high-potency strains ready to meet the evolving needs of our consumers. Finally, we will use the competitive advantages provided by our Leamington facility to bring high-quality cannabis to the ultra-value segment. This segment now makes up 35% of the category, and given our low-cost, high-quality cultivation capabilities in Leamington, we will look to participate in a broader part of the flower segment by increasing our breadth and depth of assortment in milled flower and large format bags under a new brand targeting this price tier. And with respect to pre-rolls, further automation equipment for our slim roll format has arrived and is being commissioned during the quarter, which will increase volumes and have a positive impact on margins in Q4. We have also received automation for our infused pre-rolls, a category that saw explosive 107% growth in the quarter. The receipt of automation will allow us to increase distribution and fill rates as well as increase the breadth of our portfolio. We have exciting new high-potency strains launching under both BAC40 and CoLab brands in the 10 times 0.35 gram slim roll formats, as well as innovative infused pre-rolls launching under our BAC40 brand, targeting a broader range of consumers in terms of price, potency, and flavors. Moving to slide eight, as you can see, our brands have also grown in awareness in the first half of 2022. We are committed to building lasting brands and we will continue to make investments in insights, innovation and brand development so that we can ensure we are helping our consumers live happier lives by consistently delivering quality products at a great value under brands that they can trust and love. Back Forty in particular has become one of the fastest growing brands in Canada, driven by its leadership and vapor and increasing portfolio of 1.0 products. CoLab has also continued to make awareness gains by remaining focused on higher-potency, true-to-plant premium experiences for the discerning consumer. 4A has built a consumer following by remaining focused on the needs of our novice consumers, most recently announcing the launch of Eddie's by 4A, a low-dose edible that allows consumers to enjoy a great-tasting edible and control their cannabis experience. Eddie's first product, a 20-pack of chews, each with 0.5 milligram of THC and bursting with familiar flavors like lemon, lime, cherry, and orange, will be available in stores by end of this month. And finally, we believe that our Dosecan brand remains exceptionally positioned to address the wellness consumer. Even with a very limited product portfolio, Dosecan is a leader in the topical and capsules categories because of the quality, safety, and efficacy of its products. We recently launched a new topical, a hot and cold cream to market and has quickly become the top selling topical in Ontario. Turning to slide 9, as consumer preferences continue to evolve, innovation and new products continue to drive both consumer and customer purchasing behaviors. While product life cycles vary by category and price point as many as 15% of the top-selling SKUs in each category are new products launched within the given quarter. In the first half of this year, we launched 27 new SKUs to market, and we anticipate launching another 19 new SKUs during Q3. And while you will continue to see innovation across our portfolio, such as Eddies by Foray and the Dosecan Hot and Cold Cream that I just mentioned, you will also see an increasing innovation focus on our key growth categories of vapor, dried flower, and pre-rolls throughout the balance of the year as we look to leverage our Leamington capabilities, new automation equipment, and the development work that we've done in those formats during the front half of the year, all of which we believe will help recapture lost share and support our goal of achieving adjusted EBITDA profitability in 2022. Turning to slide 10, I will give a brief update on how we have worked to continuously improve our operations to make processes more efficient and unlock cost savings. First, as already mentioned, further pre-roll automation will be installed and commissioned during the course of Q3. This will more than double our capacity in conventional pre-rolls and triple capacity in infused pre-rolls, and we will start to feel the impact of increased throughput and enhanced product margin in Q4. Through continuous improvement efforts in vape and working with our key vendors, we are driving efficiencies through vape hardware and packaging modification to reduce COGS without impacting product quality, thereby allowing us to stay competitive in the current price environment without materially impacting margins. And we are making fantastic progress at our Leamington facility, some of which I've already highlighted for you during the presentation. Process improvements and increased automation saw us achieve a 46% increase in flower output quarter over quarter, resulting in approximately 18,000 kilograms of cannabis grown during the quarter, which is almost as much product produced in Leamington during the entirety of 2021. We also achieved improved product specifications across the key metrics of potency, moisture, terpene expression and bud structure and a lower cost of production program. Finally, we have had a very successful quarter of flower innovation in Leamington where we successfully trial 26 new genetics with tremendous results, ensuring that we have a pipeline of exciting high-potency genetics ready to release to market. We feel that there are very few competitors that can grow the same quality of flower with the efficiencies that we have in place at our Leamington facility and we plan to leverage this competitive advantage to continue building leadership in 1.0 segment, grow our revenue, and improve gross profit margin. I will stop here and now turn over the presentation to our CFO, Brian Schmidt, to walk you through the financial results. Brian?