Auxly Cannabis Group Inc.

Good morning, ladies and gentlemen, and welcome to the Auxly Cannabis Group Q2 2026 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 13, 2026. I would now like to turn the conference over to Mr. Hugo Alves, CEO. Please go ahead.

Thank you. Good morning. I'm Hugo Alves, Auxley's co-founder and chief executive officer. I'd like to welcome you all to Auxley Cannabis Group's Q2 2026 conference call and webcast. Joining me on this call today are Travis Wong, our chief financial officer, and Mark Charbent, our head of investor relations. Today, I'll share highlights from the quarter, and then we'll open up the call to questions from analysts, and answer some questions that have come through the investor relations inbox over the last few days. Before we begin, I'd like to remind you that our remarks may contain forward-looking information and actual results could differ materially. Forward-looking information is subject to many risks and uncertainties. Certain factors or assumptions applied in the forward-looking information can be found in our latest annual information form and management discussion and analysis. These documents are available on our website and at cdarplus.ca. More generally, if you have questions once the call is complete, please reach out to our investor relations. Our contact information can be found at the end of our earnings press release. Moving on to our financial results, Our Q2 2026 financial results represented a quarterly record in net revenue, adjusted EBITDA, and cash flow from operations. Net revenue reached $45.8 million, an increase of 18% year-over-year. Gross margin on finished cannabis inventory sold increased to 55%, up from 52% in Q2 2025. Adjusted EBITDA was $14.3 million, an increase of 24% year-over-year, representing an EBITDA margin of 31%, and cash flow from operations before working capital changes reached $13.4 million, an increase of 31% year-over-year, and representing a 94% conversion from Adjusted EBITDA. Our net revenue growth is driven by continued strong demand for our core portfolio led by Back Forty's strength in flour, pre-rolls, and vapes. Our gross margin reflects continuing improvements across our operating footprint, strategic procurement initiatives, and a favorable product mix. And we believe that the operating leverage we are delivering is structural. We have the operating assets, the scale, and the cost discipline to deliver best-in-class margins, and these results demonstrate that. Our improved profitability is translating directly into cash flow with a 94% conversion rate between adjusted EBITDA and cash flow from operations before working capital. Our balance sheet remains strong with $38 million in cash and $44 million in long-term debt. This cash balance also reflects the deployment of $5.7 million in the quarter to repurchase 2.6 million post-consolidation shares through our active NCID program. And of course, in July, we completed our 14-to-1 share consolidation, an important step forward in aligning our market profile with the quality of the business we have built. We are encouraged by the response from shareholders and the confidence that has been reflected in our share price performance since the consolidation effect. Looking forward, our outlook for 2026 is unchanged. We believe Auxley can continue to grow net revenue above market rates through investments in distribution, innovation, and increased quality and capacity at Auxley Leamington. In July, we launched a new sativa cultivar under our Back 40 brand, Galactic Jack, and the early consumer response has been tremendous. We have additional innovations across our four categories planned for the seasonally stronger back half of the year. We continue to invest in operational efficiency and maintain rigorous cost control across the organization to support continued profitability and we expect improved cash conversion through the reduction of interest expense and working capital to remain similar to last year with modest increases to support net revenue growth. In the outlook section of our Q2 MD&A, we have outlined a longer-term capital program of approximately $30 million over the next three years to increase yield at Auxley-Leamington by approximately 30% Thank you for joining us. To conclude, The Auxley team is focused and aligned in our pursuit of quality, innovation, and profitability. We are delighted with our record two Q2026 results and seeing continued strong demand for our products as we head into the back half of the year. I'd like to thank our teams in Leamington, Charlottetown, and Toronto whose commitment, passion, and resilience are the driving force behind Auxley's emergence as an industry leader. We are also grateful for the continued support of our shareholders, vendors, and partners. We are building to last. We are excited about the future and believe the best is yet to come. This concludes our prepared remarks. We're going to take calls from analysts, and then we'll answer questions that our investors have sent to us over the last few days. Operator, please open the call for questions. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Neil Gilmer with Haywood Securities. Your line is now open.