Auxly Cannabis Group Inc. (XLY) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Annual General and Special Meeting of Shareholders for Auxly Cannabis Group Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chuck Rifici. Thank you. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and welcome to the Annual and Special Meeting of the Shareholders of Auxly Cannabis Group Inc. The meeting will now come to order. My name is Chuck Rifici, and I am the Chairman of the Board of the Directors of Auxly. I will act as Chairman of this meeting. I'd like to remind everyone on the call today that the meeting materials as well as Auxly's slide deck that we're speaking to on today's call are available on the Investors section of the Auxly website at auxly.com. Today's call is being recorded, and a copy of the transcript will be available for playback on the Auxly website. Thank you for your cooperation. I hereby appoint Ron Fichter, General Counsel and Corporate Secretary of Auxly, to act as secretary of the meeting; and Mark Manalo of Computershare Trust Company of Canada to act as scrutineer. To cover all business within a reasonable period of time, we have prearranged for certain persons to move and second certain resolutions. This is not an attempt to discourage participation but merely a way to expedite proceedings. In an effort to make the virtual meeting as efficient as possible, we will not be taking questions over the phone. However, management will answer sufficiently the questions after the meeting following the corporate presentation. I have received an affidavit from an official of Computershare that proper notice of this meeting has been given on June 10, 2020. All shareholders of record as of June 2, 2020, were mailed a package contained the notice calling this meeting and the form of proxy for use at this meeting. The declaration of mailing is available for inspection by any registered shareholder. I have declared the service of notice has now been established and would ask that the secretary file with the minutes of this meeting copies of all such documents. If there's no objection, the reading of the notice of meeting will be dispensed. Pursuant to the articles of Auxly, business may be transacted at this meeting if 1 person who was present or is represented by a proxy holder holds, in the aggregate, at least 5% of the outstanding shares entitled to be voted at this meeting. The scrutineer's report has been received and shows that notice of the meeting has been properly given and that there is a quorum present. I declare this meeting is regularly called and properly constituted for the transaction of business. Only shareholders of record as of June 2, 2020, or their properly appointed proxy holders are entitled to speak and vote upon matters at the meeting. Each shareholder of the corporation is entitled to 1 vote for each share held. It is proposed that the voting today with respect to the nomination and election of directors for the ensuing year, the appointment of the auditor for the ensuing year and the authorization of the directors to fix the remuneration of the auditor, the reapproval of the equity incentive plan and the authorization and approval of the continuance of the corporation from the Business Corporations Act British Columbia to the Business Corporations Act Ontario will be done by show of hands, unless a vote by ballot is amended. I now place before the meeting the audited financial statements for the year ended December 31, 2019, together with the report of the auditor of the corporation thereon, a copy of which has been mailed to shareholders who requested it. Are there any questions related to the financial statements? We will now proceed with the next item of business being the election of directors. The nominees of management of the corporation identified in the management information circular mailed to shareholders are Hugo Alves, Chuck Rifici, Troy Grant, Genevieve Young and Conrad Tate. I will now entertain a motion nominating those persons as directors.

Mr. Chairman, I nominate for election as directors of the corporation for the ensuing year the 5 persons you have just presented.

Mr. Chairman, I second the motion.

I now put the motion to the meeting. All in favor, signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the motion carried. And that Hugo Alves, Chuck Rifici, Troy Grant, Genevieve Young and Conrad Tate are elected directors of the corporation to serve until the close of the next Annual Meeting of the Shareholders or until their successors have been elected or appointed. The next item of business is the appointment of the auditor and the authorization of the directors to fix the auditor's remuneration.

Mr. Chairman, I move that Ernst & Young LLP be appointed as the auditor of the corporation until the next Annual Meeting of the Shareholders or until its successor is appointed and that the directors of the corporation be authorized to fix the remuneration of such auditor.

Mr. Chairman, I second the motion.

I now put the motion to the meeting. All in favor, signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the motion carried. The next item of business is the confirmation and reapproval of the equity incentive plan, which was last approved by shareholders at the Annual Meeting of Shareholders held on August 26, 2019. Details with respect to this matter and the proposed resolution are set out in the management information circular of the corporation. An affirmative vote of the majority of the vote cast in respect of this motion is required in order to approve this matter. I will now entertain a motion on this matter.

Mr. Chairman, I move that the resolution confirming and reapproving the equity incentive plan of the corporation, as further described in the management information circular of the corporation dated June 5, 2020, be and is hereby approved.

Mr. Chairman, I second the motion.

I now put the motion to the meeting. All in favor, signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the motion carried. The next item of business is the authorization and approval of the continuance of the corporation from British Columbia to Ontario. Details with respect to this matter are set out in the management information circular of the corporation. An affirmative vote of 2/3 of the vote cast in respect to this motion is required in order to approve this matter. I will now entertain a motion on this matter.

Mr. Chairman, I move that the resolution authorizing and approving the continuance of the corporation from British Columbia to Ontario, as further described in the management information circular of the corporation dated June 5, 2020, be and is hereby approved.

Mr. Chairman, I second the motion.

I now put the motion to the meeting. All in favor, signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the motion carried. Unless there is any further business to come before the meeting, would someone please move to conclude this meeting.

Mr. Chairman, I move that this meeting be concluded.

Mr. Chairman, I second the motion.

All in favor, signify by raising your hand. [Voting]

Any contrary? [Voting]

I declare the motion carried. I hereby declare the formal part of this meeting concluded. We will now give a corporate presentation, followed by answers to select previously submitted questions. And I'd like to pass the call to Carla Nawrocki, Vice President, Investor Relations. Thank you.

Thank you, Chuck, and good afternoon, everyone. Thank you for joining us for our Annual and Special Meeting of Auxly Shareholders. And joining me now to provide a corporate update and present on Auxly's slide deck as well as answer some of your previously submitted questions is our CEO, Hugo Alves; and our CFO, Brian Schmitt. I encourage you to follow along the presentation slides, which are posted on our website under the Investors section under Events of the AGM Management Presentation. Before I turn the call over to Hugo, I would like to remind everyone that our discussion today includes forward-looking statements that are based on assumptions that are subject to risks and uncertainties, and 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 Auxly's disclosures. I note that all references on this call are to Canadian dollars, unless otherwise stated. And with that, I'll turn the call over to our CEO, Hugo.

Thanks, Carla, and good day, everyone. Thanks for joining us on the meeting albeit under different circumstances, given the unusual times we find ourselves in. I'm going to be referring to the slides on our slide deck that are posted on our Investor page, so hopefully you can follow along. But -- okay. I think this past year has been instrumental for Auxly as we executed and achieved our goal of becoming a leader in the cannabis 2.0 market across Canada. We delivered on our promise to launch a compelling portfolio of cannabis products across the country. And in our first quarter of operations, I think we generated incredible results with over $8 million in net revenues coming from cannabis 2.0 sales, and that was the highest of any other LP in Canada. So as noticed -- noted on Slide 3 of our deck, our vision is to be a global leader in branded cannabis products that deliver on our consumer promise of quality, safety and efficacy. That vision and our focus on our consumers really informs everything that we do at the company, from which products we choose to produce, how we develop and test those products and, of course, how we brand and communicate with our consumers. So 2019 was an incredible year. And as we look forward to the second half of 2020 and belong -- and beyond, we're going to look to continue to build our brands, ramp up our production and increase our revenues on our path to profitability. So with that, right, I'll move you to Slide 4, where you'll see a snapshot of our company. This is a very brief note on our operating assets, and I'm not going to [indiscernible] it because I'll cover it in more detail throughout the course of the presentation. So I'll take you to Slide 5 now. And I started this presentation by really noting our vision of being global leader in branded cannabis products. And an ambitious vision requires an ambitious team to execute against it. And I believe that we've assembled one of the best teams in the business. And some of our team members are highlighted on Slide 5. We focused on hiring the best available talent with specialized expertise across all areas of a business. And while many members of our senior teams such as myself, Greg Boone, our Dosecann CEO, and of course, our Head of Regulatory Affairs, Vlad Klacar, have significant experience in the regulated cannabis industry. The one thing that really unites our management team is that we've all acquired significant experience at leading organization in our chosen field. And we've all been top performers and added value to those organizations at the senior level. So our team members all share a desire to win, and it's that winning spirit that really drives culture at Auxly. Now turning to Slide 6. So as some of you know, when Auxly entered the industry as a company in August of 2017, we had a different business model. And when we made the decision to pivot and really focus on the cannabis 2.0 market in early 2018, it was driven by a simple thesis. That if Auxly could launch a compelling portfolio of products, nationally on day 1 of the 2.0 market, we would insert ourselves into the conversation of leading companies in that market segment. And we knew that there would be a lot of other players, many larger and better capitalized than us. But we believe that if we could be at the starting line on day 1, our products would be competitive. And that's exactly what we did. We delivered a compelling portfolio of derivative products on the first day of 2.0 legalization. And we've received incredible feedback from consumers and control boards, some of which we've included here on Slide 6. But turning over to Slide 7, really, some of the results of our 2.0 product launch. And as I mentioned, because of the focus and dedication to the cannabis 2.0 market, we were able to meet our objective and enjoy a very successful product launch. We launched the largest portfolio of products of any market participant on day 1 with 83 SKUs submitted and over 250 product listings. We launched that portfolio nationally in all provinces other than Québec, which as most people that has been a bit slower and more restrictive in their 2.0 product regulation rollout. But perhaps most importantly, our products have been a hit with consumers who routinely champion the quality, consistency and efficacy of our products as the reasons why they choose our brands over others. And because of that strong consumer demand, our products can now be found in over 90% of cannabis retail stores in Canada, where we've now shipped -- I see the deck has a 1.3 million unit shipped number. So that hasn't been updated for our Q2 numbers, but it's significantly north of that. Moving over to Slide 8, provides you a bit of an overview of how we're doing from a market share perspective in the product categories that we participate in. And I guess just a quick proviso here, you'll notice that this information is derived primarily from Ontario, Nova Scotia and Prince Edward Island. And that's not us cherry picking jurisdictions. That really is simply a function of those 3 provinces currently offering the most robust sort of point-of-sale in wholesale pull-through data. But the picture is fairly consistent across the nation. And we're generally on a brand-by-brand basis. Our brands are generally in the top 5 in market share with our Kolab and Foray brands, and we're particularly strong in vapes, which is a primary revenue driver for us. And we believe that we can beat these market share numbers when we're in a better production through point -- [indiscernible] environment in the third quarter of this year, which is when the second floor of our Dosecann facility is fully completed in-licensing and our production capacity there effectively triples. Turning to Slide 9. It's just a highlight of some of our Q1 financials, which we released on June 1. And I assume most of the shareholders are well familiar with these, so I'll just be quick here. It was the first quarter -- it really represents the first quarter of Auxly as an operating entity. And we were very happy with the results. We achieved total net revenues of $10 million, with approximately $8.2 million of that coming from cannabis 2.0 sales. And of course, importantly, we posted the highest sales relative for 2.0 products amongst our peers, including much larger players. So we're quite proud of that achievement. Slide 10, I want to throw in there, as you can see, currently, our 2 main proprietary brands that are in the market, our Kolab Project and Foray, which I'll discuss a little bit later in the presentation, with our Dosecann brand following later this year and our Robinsons brand, I'm very happy to report, just launched this month. Yesterday was the first day that you could legally buy Robinsons product, in this instance, in Nova Scotia. And we expect our Robinsons dry flower offering to hit Ontario shelves later this month. Currently, our product formats or primary product formats are vapor, chocolate, chewable with a limited dry flower and pre-rolls offering. We do have our innovation pipeline [ booked ] for the remainder of 2020 and the first half of 2021. And we're extremely excited to launch new product formats later this year, including capsules, lozenges, tablets and topical product formats. And also getting our oil-based product production into full swing. So while we do have some oil products on the market, it is important to note that we made the decision to really share that production space with chocolates. So now as chocolates moves into its permanent home on the second floor, oil production gets back into full swing. And in terms of what to keep your eyes on next, we have 2 exciting things happening in the month of July. The first, I already mentioned, is the launch of our Robinsons branded premium flower offering. And secondly, we're expanding our chews line with some new flavor profiles. And then following this month, you can expect to have new product formats and our product SKUs hitting the market virtually every month through the remainder of the year. Turning to Slide 11. Cannabis products all start with cannabis. So I think it's important to note that we own or control a portfolio of cultivation assets that will supply us with over 100,000 kilograms of cannabis per year. And also important to note, in light of current circumstances, that our cultivation platform has been very tailored to our vision of becoming a leader in branded cannabis products. So we focused on one highly automated greenhouse, which is Sunens, our Leamington greenhouse joint venture project with Peter Quiring of Nature Fresh Farms. And strategic outdoor growers, both in our Robinsons OG, our outdoor grow in Annapolis Valley, Nova Scotia, and the PEI hemp cooperative that we were financial sponsor for. And this is really to provide us with the low-cost, consistent feedstock that we need for extraction and derivative product development. And then we've, in a few instances, have a small indoor craft cultivation, notably Robinsons, our premium crop cultivator in Kentville, Nova Scotia and our partner Lotus, a premium craft cultivator in Okanagan Valley. And these smaller indoor craft crop growers provide us with the high-quality craft flower that we need to build brand bona fides in those few instances where we offer dried flowers a product. But turning over to Slide 12, the vast majority of our cannabis ends up at Dosecann, the heartbeat of our company, located in Charlottetown, Prince Edward Island. And this is where all derivative product development occurs, from formulation all the way through to manufacturing. Dosecann is a 52,000-square foot state-of-the-art license processor, and it really focuses on 4 things exclusively. Extraction and purification. We currently have supercritical CO2 and cold ethanol extraction capabilities, which when fully completed, will give us about 180,000 kilograms of extraction throughput capability. And we continue to work in accordance with our extraction plan on isolate and more niche extraction methodologies like hydrocarbon extraction to facilitate future product innovation. Dosecann also does testing and analytical method development. So we have a full analytical testing capabilities in-house. And we are a leader in creating our own validated testing methodologies for cannabis products. A lot of R&D and product formulation work goes on at Dosecann. We have a world-class team of food scientists and product development experts there. And of course, product manufacturing, a big part of Dosecann is commercial manufacturing of product. And at Dosecann, we have commercial manufacturing capabilities to produce vapor, edible, topical and oil-based formats. Now because cannabis products have been Auxly's focused since early 2018, we've been able to acquire the people assets and partnerships that we believe will be necessary to win in the 2.0 market and beyond. And we've set some of these partnerships there on Slide 13, if you're following along. And one of the key benefits to our focus is that it's allowed us to be strategic in who we take on as partners and why. And the questions that we always ask are, does this advance our vision of being a global leader in branded cannabis products and/or does it better enable Auxly to deliver on its consumer promise of quality, safety and efficacy. On Slide 14, highlights some of our key partnerships that we believe uniquely position Auxly to achieve its vision and deliver on its consumer promise. I'm going to defer talking about Imperial Brands until the next slide. But the key here is that we've assembled the partnerships that we feel we need to win in the 2.0 market and what comes after the 2.0 market. We focused on strong route-to-market partners like Inner Spirit and Kindred to help ensure that our products get to market effectively today. And partners like Lonza and Capsugel and Natures Crops to access the tools that we'll need to engage in more advanced product formulations to access the next market for cannabis products with some people call it cannabis 3.0, and which we believe will be a robust market in cannabis health products. Turning to Slide 15. Let me just touch on our Imperial Brands partnership. This is our cornerstone strategic partnership, where we are the exclusive cannabis vehicle for one of the world's largest fast-moving consumer goods company. And the key aspects of this partnership are really that it enhances our ability to execute on our business strategy, and it accelerates our growth plans by providing Auxly the significant capital injection, which was at premium to our trading price at the time of the deal, a global license to Imperial's expensive vapor IP and access to its vapor innovation business in Nerudia, and the ability to leverage the capabilities and expertise of Imperial in scaling our global business in highly regulated environments. And on Slide 15 are 5 key ways that we're currently working with Imperial. I think the first is governance, generally, both at a corporate level, where we have seasoned Imperial executives now sitting on our Board of Directors, one in a voting capacity and one in the nonvoting observer capacity. And importantly, on our safety board, where Imperial's Head of Science is a key member. Vapor IP, we are actively collaborating and always discussing with Nerudia the next wave of vapor technology to help ensure that we're on the vanguard of that technology and its applicability to cannabis so that we can differentiate our products and better deliver on our consumer promise in the vapor category. Commercial execution. This is kind of a bit more mundane, but hugely important. This is where we're working with Imperial's markets and intelligence teams to better understand how we can leverage point-of-sale data and trade marketing programs so that we can be better partners to our key accounts and improve the visibility and relevance of our products in retail environments. Manufacturing. Tobacco companies have become experts at squeezing every bit of efficiency out of their manufacturing infrastructure, everything from feedstock preservation to automated packaging solutions, Imperial has given us access to their know-how and processes, and important, giving us access to their technology providers to help us solve some of the manufacturing hurdles that are unique to cannabis. And then finally, but importantly, consumer and market insights, where we actively work with Imperial to better understand the segment consumers and emerging jurisdictions, and also evaluate Imperial's existing infrastructure and sales and distribution reach in those jurisdictions so that we are better prepared to launch products more efficiently and effectively in those jurisdictions when we decide to enter those markets. Turning to Slide 16. So up to this point, we've talked a little bit about Auxly's ability to make products and how we leverage partnerships to help us make better and more compelling product. But in order to achieve our vision, we need to be hyper-focused on our chosen consumer segment and then apply a high degree of rigor of how we develop brands that consistently delight those specific consumers. Of course, that starts with marketing consumer research to understand consumer usages and attitudes and how they are likely to evolve over time. Segmenting consumers and then choosing the consumer segments that we want to speak to and continually working to better understand those consumers, their need states and how they make purchasing decisions. So when we segmented the market in early 2019 and then we refreshed our segmentation work in 2020 after a full year of utilization, we found that the current and future cannabis users could be broadly segmented into 6 different types of consumers, and we chose to target 4 of those segments, which we believe represent the largest base of current users and the biggest consumer growth potential. Turning the page to Slide 17. We have -- just pause here for a second. So we have 4 proprietary brands currently that target those 4 specific consumer segments. And everything we do within those brands, from the visual language to the product specifications to our trade marketing programs, is tailored to speak to and delight those specific consumers. Now in the interest of time, I'm not going to cover all 4 of our offerings in detail, but I thought that it would be helpful if I quickly highlight a couple of the brands to illustrate how we look at our chosen consumer segments and then how we tailor things that we do within that brand to speak to those things. So if you turn the page to Slide 18, let's take a look at our Kolab Project brand, which is really a brand to dedicating and supporting and celebrating the process of creation. And the consumer segment that this target is the cannabis enthusiast, the largest current segments in the market. And these are consumers who are actively using cannabis regularly and have an above-average degree of knowledge about cannabis. And within that segment, you'll find our Kolab consumer, they're hip, urban, sophisticated, open-minded and enthusiastic about cannabis. These are worldly intellectually curious consumers. They appreciate uniqueness and authenticity. And they value creativity, culture and design and look for brands that speak to those interests. And the meaning of the brand or the meaning behind the brand is often more important to them than any perceived notion of status with the brand in parts. So how do we speak to this consumer within the Kolab brand? Well I think, first, we have a very design-driven brand language. So for those of you who have picked up a Kolab product and you don't really see our logo, we have a name, and then we have a parts code system that people can drill down and try and decipher. We have more sophisticated and aggressive flavor profiles, which really speak to the Kolab consumers' desire for uniqueness. We collaborate with culturally relevant creators in terms of product formats, merchandise and our design language. And of course, then we actually support creation. We recently announced a 5-year partnership with the Ontario College of Art and Design, one of the world's leading art and design universities, to support the next generation of creators and importantly, access the next generation of creative influencers and get them familiar and invested in the Kolab brand. Now turn the page to Slide 19, and we can talk about our Foray brand and sort of compare and contrast a little bit. So our foray brand is an entry point brand that's really targeted at a novice consumer segment, which is one of the fastest-growing segments in the market today. And the Foray consumer has some knowledge of cannabis, and they are curious about both the physical and mental effects of cannabis. But they also have apprehensions and questions. They don't want to lose control. These are slightly older and more suburban consumers than Kolab, and they're generally more focused on managing the day-to-day responsibilities of life: kids, careers and finances. So they're busy people, and they tend to view cannabis as something to help them unwind and relax as opposed to use throughout the day and enhance their experience. So some of the ways that our Foray products speak to our Foray consumers are, we have an increased focus on education in these states. So everything from our marketing programs to our brand language is geared at educating the Foray consumer who see cannabis differently. We start with the need state, for example, relaxation. And then we educate the consumer on which product types and which product attributes can help them achieve those need state and why. We offer more familiar flavor profiles here. You'll notice that they're a little less exotic in Foray, and that's really to provide the Foray consumer with an element of familiarity. We're making a new product purchasing decision. We have slightly lower THC formulation. We generally dial down the THC concentration of our main products by a few percentage. And we offer more micro dosing options in our Foray edible products in order to help ensure that the Foray consumer can stay in control, enjoy a positive cannabis experience and then come back for a repeat purchase. And we have a lower price point of these products. So these consumers are a little older, usually with more financial responsibilities and value for their purchase is more important to them. So I'm going to stop there. And now I'll pass it over to Brian Schmitt, our CFO, to wrap things up with a few words about our path to profitability.

Thank you, Hugo, and good afternoon, everyone. Turning to Slide 22, our path to profitability. We're also keenly focused on increasing our company's validation. Historically, Auxly had a different focus, which made it difficult for capital markets to understand and support. In 2018, we pivoted away from that model. And in 2019, we made significant progress towards our goals for cannabis 2.0, which included the decision to limit cannabis revenues during the year so we could be ready for our product launch in December. As Hugo outlined, we have had success thus far in 2020, and we look to build upon that base in the coming quarters. One of our objectives is to be cash flow positive in the second half of 2021, in part due to increase in revenues facilitated by the second floor expansion of the Dosecann facility. This expansion will be completed and licensed this quarter and will increase production areas significantly. In the first quarter of 2020, we achieved gross margins of 43% and with fair market value adjustments, 35%. New equipment being installed in the Dosecann facility will allow for further product throughput and automation, reducing labor costs. This, coupled with actions taken to reduce further future packaging and hardware costs, will allow us to achieve our targeted gross margins. Lastly, historically, capital expenditures and project investments were significant. As we look forward into 2021, our capital expenditures are forecast to be substantially lower. The Dosecann facility will be complete in 2020, with some remaining extraction costs continuing into the first quarter of 2021, with additional investments in Robinsons outdoor grow in anticipation of the 2021 harvest. We continue to be on track to meet our objectives for 2020 and our products continue to enjoy very strong market share in each category that we compete in, enabling us to move towards our target of positive adjusted EBITDA and cash flow by the second half of 2021. Now I'll turn it back to Hugo to conclude the presentation.

Thanks, Brian. And I want to say thanks to all our shareholders for their continued support as we move forward in executing on all those strategy, becoming a global leader in cannabis products. We remain focused and committed to delivering on our focus and look forward to continuing success that we've achieved to date over the year ahead. So at this time, I'm going to answer a few questions that were submitted to shareholders -- by shareholders prior to the meeting today, and I'm going to pass it back over to Carla to read out the first question.

Thanks, Hugo. You started the call mentioning the interesting times we're in. Has there been any impact on the company due to COVID-19? And as a follow-up to that, a lot of Canadians have had to tighten their belts on their spending due to the pandemic. How are you helping Canadians get access to your products during this time?

Thanks, Carla. I mean, that's a great question. COVID-19 has had a tremendous impact on so many people and businesses around the world. We've taken extreme precautionary measures to ensure that we reduce the impact to our company and operations as much as we can. And I'm very happy to report that to date, our risk mitigation strategies have been very successful. We've established contingency plan to implement in the event that business or market conditions continue to deteriorate, although prolonged period of time. And then we're taking near-term measures where we have enforced -- implemented and enforced safety measures at all of our facilities to comply with federal and provincial regulations and guidelines. And that's enabled us to remain open and operational on extended shifts with very few instances of employee absenteeism or precautionary self isolation in a few instances where employees have traveled or cohabitating with frontline workers. So we have not experienced any material delays or issues with our supply chains, and we've taken all necessary steps to maintain sufficient inventories and supply required for production and sale of cannabis products. But we're constantly monitoring the global situation that continues to change rapidly, and we're committed to continue to operate our business while ensuring the safety and well being of all of our employees and consumers. In terms of Canadians and their spending habits, we absolutely understand that during this time, a lot of Canadians have had to make decisions on how they spend their money, especially on consumption products. So we have seen the value segment growing, both in terms of absolute dollars and share of overall market across Canada. And we feel that we can contribute there in a significant way. The cannabis that will be harvested at Sunens provides Auxly with a very consistent low-cost traceable and organic source of dried flower. We've already started cultivating at Sunens following the receipt of our cultivation license. And then this, coupled with the second floor of the Dosecann facility coming online and increasing our production capacity, really reduces our costs and gives us the pricing flexibility to play in the value segment of the market, which we haven't been able to do until now. So we're very excited about the possibility of bringing a value product offering to market once we have all of our infrastructure operational so that we can bring the value products to market while still meeting our consumer promise of quality, safety and efficacy.

Thanks, Hugo. You mentioned Kolab's partnership with during the presentation. Can you please comment on the annual $100,000 contributions for 4 years to OCAD University as part of the strategic and philanthropic collaboration?

Yes. Sure. So I mean I'm extremely excited for the Kolab Project brand to partner with OCAD. It was, I think, really, this is to support creation and it is to help our OCAD -- through the OCAD partnership, help us in collaborating development of design-focused working placements and also creating and supporting [ earning students ]. So we have a few great projects planned with OCAD, different faculties over the next few months including Visual Arts Contest called the Next 14 days, which will be available on the Kolab website for a few weeks, so we encourage everyone to check it out. The partnership really speaks to the heart of the Kolab brand. Kolab looks to produce meaningful and purposeful content with relevant creators. So what better opportunity to live our brand than with the support of one of North America's leading creative institute. So we're happy to be supporting OCAD in their continued contributions to the creative landscape and we're very excited to be working with them.

You and Brian mentioned Dosecann expansion on the call. What is the expected timing for completion of that expansion of the second floor? And when will that additional space be licensed and operational?

Yes. So we're quite happy with the efforts that we've put in on the construction, that was maintaining construction timing during COVID is -- it's the same as maintaining operations during COVID. There's a lot of additional measures that you have to put into place. And happy to report that construction on the second floor is ongoing, and we anticipate all construction and all related licensing amendments to be obtained in the third quarter of this year. I mean, as I already mentioned, once complete, not only does this give us a lot of additional storage space, which obviously [ smoothens out ] the operations, helps the operations, but also triple the total production capacity at Dosecann. So we can start to introduce new product formats, which is the ones I mentioned during the presentation, and also getting a higher throughput environment into our system.

So once the Dosecann facility is fully operational, do you have any plans to start white labeling for other LP?

Well we recently announced on June 24, an exciting agreement with dosist, where we'll be manufacturing their proprietary vape devices at Dosecann. We believe that the partnership with dosist is a great complement to our existing suite of products. But this was a strategic decision in terms of selecting a company with a track record of success and a leading brand in the U.S., one which we expect to have significant market participation in Canada. So while we don't have any immediate plans to expand our white label manufacturing, we will continue to explore opportunities that advance our vision of being a global leader in branded cannabis products. But of course, our priority is the development and success of our own in-house brands, Kolab, Foray, Robinsons and Dosecann. We will continue to focus on building brand awareness and driving consumer interest in our own suite of branded cannabis products.

Speaking of brands, can you please comment on Auxly's licensing arrangement with Dixie Brands and its plans, if any, to bring Dixie branded products to the Canadian market?

Sure. Happy to provide some color. So we -- in the near term, we don't have any plans to utilize the Dixie Brand IP and associated trademarks. But we will maintain the optionality that it provides us with the duration of the exclusive agreement.

Thanks, Hugo. And do you have any plans to enter the beverage market?

We got asked that question a lot, Carla. And we spent a lot of time understanding the cannabis market and especially the 2.0 market, consumer attitudes and preferences to different product formats. This was in 2018 when we were making decisions as to which products to pursue. And then we constantly monitor that data. And what we've seen in the U.S., in states like California and Colorado, we came in the market, have a more mature fully record market than we do is that the beverage segment is not a huge segment in cannabis. So it generally accounts for less than 4% of the total market. So while we're sure there are going to be people to find success in the category, given the capital expenditure required, the logistical issues with manufacturing and shipping beverages, and of course, other very mature players that are already in the space whose primary businesses is beverages and they've gotten into cannabis now, we made the strategic decision to not focus on that product format for now. And instead, focus on the formats that we've seen excite consumers in other jurisdictions like vapes, chewables and chocolate. Of course, being a consumer-centric company, we are always looking for consumers to tell us what they're looking for in products, and we're always looking to improve upon our existing products and our product portfolio. So we're open to exploring the segment in the future, but it's certainly not something we're focused on in the near term.

Great. Thanks, Hugo. In June of last year, Auxly announced a strategic agreement with Lonza for liquid-filled capsules and fill and seal technology. When will that agreement be ready for use? And what exactly does it mean for Auxly's future product development strategy?

Yes, that's a great question. So I think, first, with respect to the Capsugel technology, I'm very happy to report that we expect the LEMS sealing machine as well as the proprietary liquid fill Capsugel Licaps to be online at our Dosecann facility by the third quarter of this year. So equipment's there. It's mounted, we've had manufacturing reps in to calibrate, et cetera. So very much looking forward to getting production online in Q3 of this year. And just as a refresher, this provides us with the capacity to fill and seal up to 200 million capsules per year. And also the ability to deliver new formulations, capsule-based formulations, with improved functionality. And I think that this technology and our partnership with Lonza and Capsugel will be a huge asset as we look beyond cannabis 2.0. As many may know, Health Canada is currently undertaking consultations and discussions regarding the regulation of cannabis health products, or CHPs, which would permit the making of health claims, in respect of cannabis products, that undergo sufficient levels of clinical safety and efficacy work and obtain registration with applicable regulatory authorities. So we are actively participating in those stakeholder discussions with Health Canada, and we're looking forward to the possibility of the authorized classes of cannabis being expanded to include CHP and other derivative product formats, which could happen as early as next year, in our view. So we have an incredible science team at Dosecann, as highlighted many times. And it's been -- we've been working hardly with some of our strategic partners to develop exciting CHP formats that use proprietary ingredients and intellectual property that will help differentiate our product and access new consumers and new distribution channels. And so as an example of this, we have the exclusive global rights to use ahiflower oil. It's exclusive and global. Ahiflower oil, for those of you who don't know, is a vegan source of Omega 3, 6 and 9. It's a super Omega. And our exclusivity extends to the use of our ahiflower oil in any cannabis formulation. So we'll look to combine ahiflower oil with cannabis and other ingredients, into a capsugel capsule for a product that will serve consumer needs in the wellness markets. And of course, with the help of KGK, our clinical research backbone, we can conduct the clinical work necessary to prove our product safety and product efficacy for indications that are important to consumers to use as the basis of CHP registrations when those regulations come into effect. So just like we are first to market in launching a compelling 2.0 portfolio, we expect to be at the forefront of cannabis 3.0 in the same way.

That sounds great. Thanks so much, Hugo. That's all the time we have today. Thanks for everyone for dialing into today's call, and I'll pass it back to the operator for closing remarks.

Ladies and gentlemen, thank you for joining on today's call. This does conclude today's conference call. And you may now disconnect.