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

Good afternoon. My name is Anash, and I will be your conference operator today. At this time, I would like to welcome everyone to the Auxly Cannabis Group Annual General and Special Meeting Conference Call. [Operator Instructions] Ms. Young, you may begin your conference.

Thank you, operator. Good afternoon, everybody, 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 Genevieve Young, and I am the Chair of the Board of Directors of Auxly and I will act as Chair of this meeting. We'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 today on today's call are available on the Investors section of the Auxly website at www.auxly.com. Today's call is being recorded, and a copy of the recording will be available for playback on the Auxly website. Thank you so much for everyone's cooperation. I hereby appoint Ron Fichter, General Counsel and Corporate Secretary of Auxly, to act as Secretary of the meeting; and Yanne Yu of Computershare Trust Canada -- or Company of Canada (sic) [ Computershare Trust Company of Canada ] to act as our Scrutineer. To cover all business within a reasonable period of time, we have prearranged for some certain persons to move and second certain resolutions. Further, in an effort to make this virtual meeting as efficient as possible, we will not be taking questions over the phone. However, management will answer pre-submitted questions after the meeting following the corporate presentation. I have received an affidavit from an official of Compushare (sic) [ Computershare ] that proper notice of this meeting has been given on May 26, 2021. All shareholders of record as of May 17, 2021, were mailed a package containing 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 declare that 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 this meeting will be dispensed with. Pursuant to the bylaws of Auxly, business may be transacted at this meeting if there are 2 persons present in person or by telephonic or electronic means and who are each entitled to vote at the meeting and holding or representing by proxy not less than 5% of the votes entitled to be cast at the meeting. The scrutineer's report has been received and shows that notice of the meeting has been properly given and that there is quorum present. I declare that this meeting is regularly called and properly constituted for the transaction of business. Only shareholders of record as of May 17, 2021, or their properly appointed proxy shareholders -- or proxy holders are entitled to speak and vote upon matters of this 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 4 items: one, the nomination and election of directors for the ensuing year; two, the reappointment of the auditor for the ensuing year and the authorization of the directors to fix remuneration of that auditor; three, the approval of the matters contemplated by the amending agreements, including the implementation of the Imperial amendment; and lastly, four, the approval and adoption of the amended and restated Omnibus Incentive Plan of the company, will be done by a show of hands unless a vote by ballot is demanded. I now place before this meeting the audited financial statements for the year ended September 31, 2020, together with the report of the auditor of the corporation therein, and a copy of which has been mailed to shareholders who requested it. We will now proceed with the next item of business being the election of our directors. The nominees of management of the corporation identified in the management information circular mailed to all shareholders are: one, Hugo Alves; two, Genevieve Young; three, Troy Grant; four, Conrad Tate; and five, Vikram Bawa. I will now entertain a motion nominating these persons as directors.

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

I second the motion.

I now put the motion to the meeting. All in favor, signify by raising your hands. Any contrary? [Voting]

I declare the motion carried that Hugo Alves, Genevieve Young, Troy Grant, Conrad Tate and Vikram Bawa 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 the business is the reappointment of the auditor and the authorization of the directors to fix the auditor's remuneration.

Chair, I move that Ernst & Young LLP be reappointed 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.

I second the motion.

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

I declare the motion carried. The next item of business is the approval of the consummation of the matters contemplated by the amending agreement dated April 19, 2021, between the company and Imperial Brands plc to amend the company's existing convertible debenture and the investors rights agreement. Details with respect to this matter, including the proposed amendments and the proposed resolution, are set out in the management information circular of the corporation. An affirmative vote of a majority of the minority shareholders' votes cast in respect of this motion is required in order to approve this matter. I will now entertain a motion on this matter.

Chair, I move that the Imperial amendment resolution approving the consummation of the matters contemplated by the amending agreement, including the implementation of the Imperial amendments as further described in the management information circular of the corporation dated May 20, 2021, be and is hereby approved.

I second the motion.

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

I declare the motion carried. The next item of business is the approval and adoption of the amendment -- or amended and restated Omnibus Incentive Plan. 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 a majority of the votes cast in respect of this motion is required in order to approve this matter. I will now entertain a motion on this matter.

Chair, I move that the resolution approving and adopting the amended and restated Omnibus Incentive Plan of the corporation, as further described in the management information circular of the corporation dated May 20, 2021, be and is hereby approved.

I second the motion.

I now put the motion to the meeting. All in favor, signify by raising your hands. 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?

Chair, I move that this meeting be concluded.

I second the motion.

All in favor, signify by raising your hands. 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. I'd like to pass the call to Julie Cannon, Associate, Investor Relations and Corporate Development. Over to you, Julie.

Thank you, Genevieve, and good day, everyone. Thank you for joining us for our Annual and Special Meeting of Shareholders. Joining me now to provide a corporate update and present an Auxly slide deck as well as answer some of your previously submitted questions is our CEO, Hugo Alves; and CFO, Brian Schmitt. I encourage you to follow along with the presentation slides, which are posted on our website under the Investors section under Events, Auxly AGM. 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 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 will 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 it over to our CEO, Hugo Alves.

Thanks, Julie, and good afternoon, everyone. I want to start by saying that I'm sorry that we're having to connect for our Annual Meeting of Shareholders virtually again. The best part of these meetings is always seeing our shareholders in person and discussing our business in person. But regrettably, due to securities laws, we had to set the meeting date and location and make all the preparations for the AGM well in advance, and it was at the height of the COVID restrictions in Ontario. But with the encouraging progress being made across the country with vaccinations and the decreased number of COVID cases, hopefully, this is the last year we'll have to do this and we will see you all in person next year. Okay. I'm going to just reference slides in this short deck. So right now, I'm on Slide 3, the one titled 2020 In Review. And our thesis -- I'd start off by saying that our thesis when we made the strategic choice to focus initially on the 2.0 formats, it was relatively simple. At the time, the 1.0 market was very crowded, super competitive with all of the big larger players dominating and a consumer base that still really hadn't figured out what it actually wanted. And our view at the time was that given the industry structure, the consumer dynamics and the competitive landscape and of course, our own nascent capabilities at the time, keeping in mind that this is 2018, it would have been difficult for us to win in 1.0 at that time. So we thought that if we could be at the starting gate of the 2.0 industry with a compelling portfolio of products that we'd be able to insert ourselves into the conversation of leading companies in that segment and then start to get traction for our portfolio, for our brands and for our company, and I think 2020 was a year of validation for that approach. It was the first year in which 2.0 products were legally available for sale, and I think our results in 2020 speak for themselves. We were not a leading company in the segment. We were the leader in the segment, period. We achieved a 12% share of market nationally in edibles and a 19% share of market nationally in vapes. That equated to an industry-leading 14% share of the overall 2.0 market nationally, beating out much larger, more established competitors like Aphria, Canopy, Tilray, HEXO. And in addition, but very importantly, during the year, we also started to selectively release 1.0 product formats, dried flower and pre-rolls. But we did this with the distinct benefit of superior consumer insights. Market is more mature. We have better visibility into what our targeted consumers really want from flower. Our own evolved capabilities, our cultivation facilities are now up and running and able to provide us with a consistent delivery of quality product at a price point that allows us to properly tailor our offerings to our chosen consumers and commercial leverage, right? Because of the popularity of our products, Auxly has developed one of the broadest distribution footprint of any cannabis company in the country, and we've used that to win the highly competitive dried flower listings. And again, I think our push into 1.0 in 2020, the results speak for themselves, right? Our Kolab grower series is consistently among the top-selling flower SKUs in the 3.5-gram format. More recently, we just launched our Back Forty SKUs to tremendous market traction. Our Back Forty flower offerings rose to the fifth top-selling SKU by dollars in Ontario total market in the first month of their launch. And I think it's important to note that while we have added 1.0 product formats to our portfolio, we're remaining very committed and focused on maintaining and extending our lead in the 2.0 segment. We've now firmly overtaken Tilray and Aphria, the combined entity, in terms of vapor market share. This month -- month-to-date, total market nationally, Auxly represents 25% of the total vape market. Our Back Forty brand, the brand by itself, with 3 flavors of vapes, has clearly established itself as the leading vapor brand in Canada. This month, Back Forty as a brand in and of itself in the vapor segment has a 14.5% share of total market nationally. And we've also continued to show leadership in product innovation, leveraging our consumer insights and innovation capabilities to bring new compelling products to market. And we've done that in vapor, where we were the first to market in the 1-gram cartridge size, where we launched our hugely disruptive Back Forty vapor cartridges. And then more recently, we've introduced live terpene cartridges to our Kolab lineup. We've also done it with other existing product formats like edibles, where we launched the first hard candy in the legal market and launched the most innovative chocolate product in the market today, our Kolab Cherry Cola Pop Rock Chocolate. In oils, we've also continued to innovate there, where we've launched our proprietary Dosecann capsules using ahiflower oil to provide consumers with the benefit -- or the added benefit, I should say, of omegas. And we've also launched some flavored oil products. And we've -- aside from our 2.0 formats and dried flower, we've also expanded into some new product formats. We've released a Dosecann daily-release CBD topical and concentrates where our Kolab Diamonds product has launched to universally positive consumer acclaim. I'm going to turn the page now, so this will be the next slide, and setting out some challenges because, of course, 2020 was not all success and good news. It was also a year of unprecedented challenges in our industry and beyond. At the most macro level, the market was smaller than originally anticipated. And key contributors to this were a slower-than-anticipated retail rollout, which was really exacerbated by COVID-19. That, in turn, resulted in a slower rate of consumer conversion from the illicit market to the legal market as consumers remained with familiar sources of supply rather than getting to go out and explore new regulated dispensaries. And that also contributed to a slower rate of migration from 1.0 products to other formats, which are newer and less familiar to consumers. So where consumers can't go and interact with these products in the dispensary, ask questions, they tend to stay with what they know. Now we did obviously react to these challenges and took some steps to try and mitigate their impact. And I think, first and foremost, we accelerated the launch of our dried flower product offerings. This allowed us to increase the breadth of our portfolio and address a broader portion of the market. But importantly, it also allowed us to start winning the coveted product listings with our customers, our provincial control boards, to position us, to prepare us for deeper penetration into the 1.0 segment of the market. And we also focused intently on distribution, right, working very closely with our distribution partner, Kindred, to really drive breadth and depth of distribution so that we can be on more store shelves than any other company in the country. There were also a very pronounced capital markets pullback. With COVID-19, the smaller-than-anticipated market and then the resulting impact on financial results of our more mature peers, which really range from missing analyst expectations all the way to insolvency, it had a deep chilling effect on equity and debt markets. I mean simply put, access to capital ground to a halt. So we had to get very creative and be very patient with finding sources of capital. And we were able to secure some accounts receivable financing, and we did manage to raise some equity and convertible debt, which was very difficult to do in a tough market. Very materially, we also reorganized our business and our organization, and we managed to trim approximately 25% of our total cost through headcount reductions and greater financial controls. We've also engaged in successfully disposing of some noncore assets, which included some investment securities and a couple of projects that we no longer viewed as essential. And of course, I would be remiss if I didn't mention Imperial Brands' very generous accommodation on the extension through the term of our debenture and the deferral of interest, which thankfully obtained the required shareholder approval earlier during this meeting. Finally, I would point out that the consumer market also experienced some price volatility, and this was primarily driven from one competition. When we entered the market or when people -- first movers usually enter the market, you price in a vacuum. You don't really know what price point the products are going to maintain. But as new entrants come into the market, increased competition -- and we saw during COVID much more value-priced products gain immediate traction with consumers. So in order to address that, we did everything within our power to accelerate investment in manufacturing automation and -- all the way to restructuring terms with key suppliers and vendors so that we could likewise reduce our cost of goods. And because we were successful in doing that, we were able to launch our Back Forty branded products, which appeal to a more youthful, value-minded consumer. And we think that we got the brand right in many respects, including pricing and price slope relative to our other brands as it's now the #1 brand in Canada and will be one of our cornerstone brands in the dried flower and pre-roll segments. But important to note as well, we didn't just address price volatility by reducing our price. We also addressed it through differentiation. An example of this would be the introduction of the 1-gram vapor cartridge to the market. We did this because our consumer insights told us that consumers wanted larger-format offerings after their initial trial period where the smaller formats were preferred, and our insights were right. The 1-gram vapor cartridge is now the leading format in the market, and virtually all of our competitors have followed suit with their own 1-gram offerings. Let's flip the slide here to the next slide that says 2.0 Market Leadership. And before passing over the microphone to Brian, I'd conclude by saying that 2020 was both a very challenging and very exciting year for Auxly. Yes, there were rough waters to navigate. But in true Auxly fashion, we put our heads down, one foot in front of the other, adapted quickly and got to work. And we've been able to maintain and in fact, extend our leadership in the 2.0 market as it's become more competitive. And make no mistake, the 2.0 segment is now as competitive as the flower market, especially in vapor. And yet, we've been able to maintain and extend our leadership there, really demonstrating the sustainability of our competitive advantage. And I think that's really a testament to our strategy and the uniqueness of capabilities. We believe that we've been able to build sustainable competitive advantage in the 2.0 market. And we believe that by bringing that same rigor to the 1.0 segment of the market that we're going to be able to build the leadership there as well. And make no mistake about it, our intention is to win. We are currently the sixth largest LP in the country by total market, that's 1.0 and 2.0, and gaining fast. Our goal this year is to be a top 5 licensed producer nationally total market. And we're confident that we're going to meet or exceed that goal. But we are not going to be satisfied until we are #1, and we truly believe that we can get there. The market is growing. Our capabilities get stronger every day, and we're just getting started. So on that note, I'm going to pass it over to our CEO (sic) [ CFO ], Brian Schmitt, to speak about our path to profitability. Thanks. Brian, over to you.

Thank you, Hugo, and good afternoon. If we turn to Slide 6, before recapping 2020 and our path to profitability, I thought it would be beneficial to review the national cannabis market sales estimates and product sales by category for 2020. While total Canadian market sales estimates vary significantly, the chart on the left differentiates the major cannabis categories over a 5-year horizon, clearly suggesting strong industry tailwinds with continued strength in cannabis 1.0 but with further acceleration in 2.0. The relative weighting of categories over time is consistent with what we've seen from mature U.S. markets as they have evolved. So we are confident that there will be significant tailwinds for a number of years for those market participants, such as Auxly, who are successful in developing leading brands and products. As Hugo indicated, 2020 was the first full year of cannabis sales for Auxly. And in that first year, we achieved total revenues of $50.8 million with $46.6 million from cannabis sales. This was accomplished by primarily participating in approximately 19% of the total market. Cannabis 2.0 is represented in the graph to the right by topicals at the top of the chart and then clockwise to vapes, excluding capsules and oils. In 2020, Auxly did not materially participate in the 75% of the total market represented by dried flower and pre-rolls. However, those markets are a key focus for the company in 2021 and beyond, as Hugo will outline later in the presentation. Now turning to the next slide. Following a strong start in the first quarter of 2020, with only $9 million in retail sales and $9 million in reported revenues as our provincial customers built up their inventories and a minor dip in Q2 with the initial impacts of COVID-19, revenues sharply increased the remainder of the year. The addition to our wholly owned Dosecann manufacturing facility was completed in the third quarter, significantly increasing capacity, but more importantly, reducing stock-outs, which had previously given consumers a reason to trial other products. On October 1, 2020, we established a goal to reduce SG&A by approximately 25% to $10 million on a cash basis for 2021. I'm pleased to say that over the past 3 quarters SG&A has, in fact, declined and is now well below the target we established for ourselves. Revenue increased further in the fourth quarter as Auxly's market share increased, particularly in vapes, which has seen tremendous success with consumers who have routinely chosen our brands over others. In fact, despite increased competition in the category, Auxly's market share has continued to grow in 2021. Our path to profitability in 2021 started slower than anticipated. While Auxly's retail sales were strong, topping $29 million, reported revenues in the first quarter suffered primarily due to provincial board buying patterns. However, gross margins and continued reductions in SG&A contributed to an adjusted EBITDA that held in well for the period. For the balance of the year, our path to profitability is based upon continued leadership in cannabis 2.0, but also leveraging those successes to gain listings in cannabis 1.0 market through our strong relationships with provincial boards and consumer-focused product innovation. A key goal for the year is to significantly accelerate participation in the dried flower market, which we -- as we saw, accounted for 75% of retail sales, not only leveraging our Sunens cultivation facility dried flower offerings under the Back Forty brand, but also to attack the pre-roll market with fully automated large-scale filling and packaging machines. At the start of the third quarter and into the fourth quarter of this year, we will begin to significantly ramp up production with both of these product offerings expected to improve gross margins and to contribute to cash flows with little additional SG&A. We anticipate that our revenue profile for the year will significantly increase quarterly as it did in 2020 as a result of these initiatives; first, with dried flower and later with pre-rolls. Through further automation and lower input costs, we believe our products will continue to enjoy very strong market share with reasonable margin expectations of 30%. We believe these initiatives will enable us to move forward towards positive adjusted EBITDA in the latter part of the year. And in conclusion, I should also note, our cash flows will be strengthened further in 2021 with prudent, focused capital expenditures estimated between $7 million to $10 million and through the deferral of interest related to the $123 million Imperial convertible debenture. With that, I'll turn it back to Hugo to speak more about our objectives for 2021.

Great. Thank you, Brian. I'm flipping the page now to Slide 8. And look, even though this is a shareholder meeting, in respect of the 2020 fiscal period, I thought that it was important to clearly set out what it is that Auxly is trying to achieve in 2021. I know that shareholders, understandably, have a thirst for company news and insight and I also understand that this is an area where some shareholders believe we should be doing more, so I want to make it very clear and simple to all of our shareholders what our 2021 objectives are. So broadly speaking, Auxly is trying to accomplish 5 things in 2021. We want to maintain leadership in 2.0. So that means we're going to continue to be the #1 LP in the 2.0 segment of the market and continue to increase our market share in the 2.0 product formats that we participate in. We are going to build to leadership in dried flower in pre-rolls, like we're not -- we don't think we're going to go out of the gate and be #1 right away. We've set a target for ourselves of being in the top 10 of all producers nationally selling dried flower. Becoming adjusted EBITDA positive remains a goal for us by the end of calendar 2021 to be adjusted EBITDA positive as the next step towards profitability. We want to be a top 5 licensed producer by total market in recreational cannabis sales. So -- we're #6 now. We think that #5 is well within our sights. And just keep in mind that is by recreational cannabis sales, okay? We're not going to buy a beer company to try -- or a produce company to try and boost total revenues. We're just focused on selling recreational cannabis. And of course, hand in hand with those goals, we want to improve our margins and grow revenue with low-to-no overhead growth, as you just heard Brian talk about. So we're going to continue to prudently manage our capital and try and achieve all of these strategic objectives without spending more. And those are our objectives for 2021. Please keep those in mind. Of course, look, there are a multitude of tactics that we will employ to try and achieve those objectives. But generally speaking, we don't comment on tactics other than what we're legally required to disclose and that's for a very simple reason. Those tactics are competitively sensitive, and we don't want to disclose them to our competitors as well. But that being said, this is a meeting of Auxly shareholders, so let's turn the page on the deck to Slide 9, and I will say a few words about how we intend to achieve some of our 2021 objectives. And I think -- but first and foremost, it's about staying true to our consumers and meeting their demands. You'll often hear me say that at Auxly, the consumer is the boss. And we're obsessed with getting close to our consumers, understanding their needs and then creating branded products that are responsive to those needs. So when we release a new product into the market, every aspect of that product, from the type of product, specifications, the branding, the packaging, it's all being carefully designed with our consumer always at the fore. So with that in mind, we are going -- we intend to continue releasing new and innovative products into the market in 2021, some of which you may have already seen and some of which I've already touched on, so I'll be quick here. In vapor, as already mentioned, we've recently rolled out our live terpene vapor product and we have some additional innovations that we're going to be looking to bring to market. This is going to include both line extensions. So for example, a new vape flavor under one of the brands and also some exciting formulation and format innovation. So we're very much going to continue to push the envelope in vape. In edibles, throughout 2020, we actually reduced the number of edible SKUs that we offered and that we did that in order to ease some of the supply chain challenges that were exacerbated by COVID-19. So reducing the edible SKUs allowed us to increase our throughput and our fill rates of our most strategically important SKUs. But now the edible SKUs that we did keep in market have performed exceptionally well, and we're now looking to expand that portfolio. So I've already touched on some of those product innovations that we made with hard candy and chocolate. You can expect to see a new chocolate and a new gummy innovation arriving to market early in Q3 of this year. And I have to admit, I'm especially excited about our new gummy. I think it's the best chewable product we've ever made. In dried flower, we've talked a lot about it. We're going to push hard into the dried flower segment. This is going to include both an expansion of the product offerings under our Kolab brand as well as a significant expansion of our Back Forty offerings. And yes, let me say clearly, for those shareholders who are very curious about the status of Sunens, our push into dried flower is very much driven by the incredible cultivation outcomes that we're seeing at our Sunens facility. Very soon, you're going to have access to 2 exciting new strains from Back Forty. And I can confirm for you that both of these strains are grown at Sunens, and I can't wait to get the product into the market and into your hands. Pre-rolls. I'll say a few words about pre-rolls here because I don't think as a company we've really been more excited for anything than our pre-roll launch. It's taken a huge group of people at our company, 2 years of really working with our strategic partner, Imperial Brands and their technology and equipment suppliers, to develop what we believe is the world's first truly automated pre-roll manufacturing line. And we've done all of this, again, with a very keen focus on solving the format issues that our consumers repeatedly identify with respect to quality, format and price. So we are coming with a better format. It's a cylinder instead of a cone to address the running and clogging issues that the cone presents. We're coming with a best-in-class package that we designed. It's fully sustainable, and it addresses the issues of moisture loss in the supply chain. Everything on this pre-roll has been designed and branded to our specifications. Everything from the wrapping paper to the filter has been engineered to deliver a consistent, high-quality user experience. And then, of course, the very high throughput, automated process, allowing us to target specific price points and ensure that we have the throughput to meet demand. So you're going to start to see this product hit the market in Q3, and then it's really going to ramp as we get deeper into Q3 and early into Q4 when our automated packaging equipment is fully commissioned. And we think there's going to be tremendous demand for the product, and we believe that we should have the capabilities to fill that demand and capture significant market share in the segment. With topicals and oils, we continue to make strides in the development of wellness-focused products under our Dosecann brand. As already mentioned, we've released a topical product. You will start to see that product in Ontario over the summer and flavored CBD oil product. And we intend to launch some additional SKUs with higher CBD concentration. So for example, we'll launch a 50-milligram CBD capsule. And then finally, concentrates, where we intend to build on the tremendous success of our concentrates launch under our Kolab brand. So we'll both launch new products and we'll also increase the throughput of our wildly popular Kolab Diamonds product. We have not seen this type of consumer response to any product that we're seeing with the Kolab Diamond product. It's been universally applauded by consumers. It's brought a ton of focus and credibility to our Kolab brand amongst the most discerning and vocal consumer segment, the cannabis enthusiasts. And importantly, I think the Diamonds product is a perfect example of how we listen to consumer insights. In this case, our Kolab consumers telling us that they want higher-potency products. And then we leverage our infrastructure and innovation capabilities to turn insights into differentiation and deliver a product to market that resonates heavily with our targeted consumer. So we intend to build on that success and capture additional share in what is a very rapidly growing concentrate segment. So I'm going to flip the page to the one that's all black, the end page, and just say that that really concludes our presentation for today. I want to thank all of our shareholders for their continued support of Auxly. We're going to continue to build off the successes of a challenging but encouraging first year and work tirelessly to achieve the 5 strategic objectives that I've outlined for you today. And to recap, 2021, we are seeking to maintain leadership in the 2.0 segment, build to leadership in dried flower and pre-rolls, become adjusted EBITDA positive by end of calendar 2021, become a top 5 licensed producer by total market share in recreational cannabis sales and improve margins and grow revenue with low-to-no overhead growth. So thanks to everyone again for listening in. And now we're going to answer a few selected questions that were submitted by shareholders prior to our meeting. And I'm going to turn the microphone over to Julie to kick us off. So Julie, over to you.

Thanks, Hugo. First question is, would you be able to provide some color on the need for continued equity raises and further shareholder dilution over the past several months?

Sorry, I was muted there. Thanks, Julie. I know that this is a question on investors' mind. And look, I want to start by acknowledging that as shareholders, management is always concerned about the impact that equity financings have on dilution and share price. We're shareholders too, and we care very much about the share price. However, we also operate in a very dynamic and often volatile market where things can and do change rapidly. So we are always monitoring capital needs and financing options to ensure that we have the capital that we need to accomplish our goals and get the company to profitability. So with that said, let me start by addressing the need portion of the question, and this part is relatively easy. We had a slower-than-anticipated Q1, which I'll discuss later in the Q&A, and we had larger-than-anticipated capital needs to fund our push into dried flower and pre-rolls, including some additional working capital needs at our Sunens facility as it became operational. In terms of the frequency of the financings, that's also relatively straightforward and effectively boils down to availability. So generally, of course, our preference would be to do one large transaction as opposed to multiple smaller transactions. However, with bought-deal financings, the underwriter is buying the entire offering and then has to take on the risk of selling that offering to their own account, okay? So it's very different than a best efforts financing. So it's the undertaker's risk tolerance that drives the quantum of the financing. They're only going to commit to the size of the offering that they are relatively certain they're going to be able to place. And in a tough market, coming off 18 months of headwinds, underwriters are understandably more conservative in the risk they're willing to bear. So that's what drove the size of the financing and the frequency, and I hope that answers the question. And I know -- look, I know shareholders are keenly focused on the share price, as they should be. I just want to conclude that management is also focused on share performance. And of course, we want the share price to do better. But we also believe that the path to better share price performance is to stay keenly focused on delivering our strategic objectives, which I outlined earlier in our presentation. Julie, over to you.

Thanks, Hugo. Second question is, why was Auxly's Q1 so poor? And are you still on track to be adjusted EBITDA positive this year? And also, why doesn't Auxly provide any forward-looking guidance?

Thanks, Julie. Well, there are really 3 questions there. So let me break them down. And let me start with Q1 2021 as I think it's an important question to answer for our shareholders. So as it's been well documented by industry analysts, there was an overall industry pullback in Q1 of 2021 really as a result of 3 things. One is just seasonality, a general lull in retail sales during the first 6 weeks of the year. The second one would really be about COVID-19 impacts, right? Bricks-and-mortar retailers being closed during lockdown, and this was especially pronounced in Ontario, which is our largest market. And finally, the inventory management practices of the largest control boards, BC, Alberta, Ontario, all of whom have March 31 year-ends. So these are really control boards selling through their inventories during that period without reordering in order to ensure that they had low inventory values at their own financial year-ends. And Auxly was impacted by the pullback and in some provinces, the impact was greater than that experienced by our peers as customer inventories of key SKUs were completely depleted and reordered but not permitted to be delivered until April 20 -- April 1, 2021, that caused increased stock-out positions in some of our key SKUs. I'll give you an easy example, our Kush Mint 1-gram vape cartridge, which is the #1 vape cartridge in the entire Canadian market, was almost completely out of stock -- was completely out of stock in Alberta and Ontario for almost 1/3 of the entire quarter. But overall, it looked like there was a dip in our net operating revenue, but the overall picture remains very positive and we're not really concerned about the Q1 pullback. I think, first, compare retail sales during equivalent periods. So retail sales in Q1 2020, our first full quarter of operations, were approximately $9.9 million at the TILT, right? So what consumers paid for Auxly products at the Retail TILT. In Q1 2021, it was close to $28 million, so 170%-plus growth, demonstrating that while market dynamics impacted bookable sales to our customers, there's been tremendous growth at the consumer level. And most importantly, Q2 sales have been robust, and we expect to see our Q2 results put us back on an upward trajectory. In terms of the second question, are we still on track to be adjusted EBITDA positive by the end of the year? Yes. As set out in the management presentation, it's one of our 5 strategic objectives in 2021, and we're going to push as hard as possible to meet it. And then finally, on the issue of why we don't provide financial guidance. And as shareholders are aware, it's currently our practice to not give formal forward-looking financial guidance. We're operating in a nascent industry. It's still developing. And in our view, there's still too much volatility quarter-over-quarter to really be able to provide meaningful guidance, right? The whole legal industry is less than 3 years old. Auxly has been in commercial operations for coming up now in 18 months. So we're still learning and trying to understand the nuances of the market to be able to provide real guidance. And I think Q1 2021 is a perfect example. We had never experienced seasonality or the impact of key customers destocking inventories in the lead up to the year-ends because there had only ever been one other Q1 in the 2.0 industry. That was Q1 2020. And that quarter didn't have the same dynamics because it was the first quarter that these products were legally available sales, so customers had 0 inventories. And naturally, they had to build up those inventories during the Q1 period irrespective of their own year-end. So 2020 didn't provide us with any visibility into January seasonality or customer ordering habits during that period. And had we provided guidance for Q1 2021, it would have been wrong. So we think we need at least one more full year of commercial sales to give a really credible guidance. But that being here -- but that being said, we hear shareholders loud and clear. In a recent interview that I did with our Cantor Fitzgerald analyst, I had indicated that we would start hosting earnings calls by Q3 of this year. And we are going to do one better and commit to hosting our first earnings call with the release of our Q2 earnings. So we're moving it up a quarter. Julie, I think that covers all 3. So I'll turn it back over to you for the next question.

That's great. Thanks, Hugo. The last -- sorry, the third question here is, would you be able to provide an update on the Sunens joint venture? And is there any update on the default notice?

Yes. Well, what I can tell you is that a facility is pumping out some incredible flower, really impressive. We've been in lots and lots of cultivation facilities, and what's happening at Sunens is really unique. So in Ontario, you're going to start to see that product hit the shelves around August, kind of end of summer, under our Back Forty brand. Now with respect to the default notice, other than what I've already disclosed, we've already disclosed to the public in our filed documents, I don't have anything new to report. We are continuing to work closely with the lending syndicate and their advisers to find a mutually acceptable path forward with the project's financing. That process is moving forward very positively and productively, and we anticipate having something further to share with you before the end of the summer. Julie?

Thanks, Hugo. Next question is, why did you sell KGK?

Okay. Great question. I want to start off by saying that KGK are a fantastic group of professionals. They've been terrific to work with, and we intend to continue working with them in the future. And in fact, that was a big part of the transaction. So in order to ensure that we continue to get all the benefits of working with KGK when required, we entered into a preferred customer agreement with KGK, which provides Auxly with a $2.5 million service credit that we can use on any KGK service. And for the next 10 years, Auxly is always going to be granted priority service on its work and receive most favored nation's pricing on all of its work. So that's the first point I want to make clear. We no longer own KGK, but we will continue to work with them in the ordinary course. So nothing has changed in that regard. In terms of why we sold the asset, it all comes back to focus on our strategic objectives and our path to profitability. Over the course of our ownership of KGK, we determined that we actually didn't need to own the asset in order to get all of the great benefits of working with KGK. It also became clear to us that we really couldn't help KGK expand and grow its own core business of providing clinical services to the natural health product and nutraceutical industries. And we couldn't do that because in order to win in the cannabis market, you have to be hyper focused on the cannabis market 100% of the time and not on any other market. So as some -- we took all of those factors, and then we noticed that there's this trend in capital markets with the increase of -- in financing activities for companies in the psychedelic space. And we started to have a lot of reach out from those companies talking to us about KGK and their capabilities. So we worked with KGK leadership, and we began to have some of those discussions with interested companies. And we were able to -- eventually able to come to an agreement with Ketamine One for the sale of KGK at a valuation and on our terms that we consider compelling. So the end result of this is we were able to dispose of an asset that we consider to be noncore for an attractive valuation in the context of the market. We maintain the benefits of working with KGK on preferred terms. We were able to bring in additional nondilutive capital that we can now deploy into our core business. And we've reduced operating costs and increased organizational focus. So we're delighted with the transaction. And likewise, we think it's a great transaction for KGK and Ketamine One, and we wish them all the best. Julie, over to you.

Thanks, Hugo. Next question here is, does Auxly have any plans to expand into new jurisdictions?

Well, it's not on my list of priorities for 2021. But joking aside, look, as a company with global aspirations, we're always looking at emerging jurisdictions. And we look at it from a regulatory, consumer and strategic perspective. Yes, we are actively looking at opportunities that make sense in an -- from an Auxly perspective, but we are keenly focused on winning at home and earning the right to expand geographically. So while we're actively exploring various asset-light, route-to-market options in a few jurisdictions that we find attractive, our 2021 goals are very much domestically focused: maintain leadership in 2.0; build to leadership in flower and pre-rolls; be a top 5 LP by total market in Canada; adjusted EBITDA positive before the end of the calendar year; and of course, achieve all that, improve margins and grow revenues with low-to-no overhead growth. So that's what we're focused on. Julie, over to you.

Thanks, Hugo. Next question is, why doesn't Auxly host quarterly calls?

Well, it's an easy one because it's already covered. To date, we haven't done them because we've been really focused on navigating our first year of commercial operations during a global pandemic. But now that we're a TSX-listed issuer, we're approaching 6 quarters of operations on our belt, we know that shareholders and analysts would like us to do earnings calls, so we are going to start having them this upcoming quarter, Q2, we'll have an earnings call. Julie, back over to you.

That's great. Thanks, Hugo. Next question is, how does Auxly plan to drive market growth with the industry getting more and more competitive?

Thanks, Julie. Look, that's a question we get a lot, and it's a question I really like because people usually expect a complex answer, but the true answer is actually pretty simple. We're going to continue doing the same things that have gotten us to the #1 spot in the 2.0 market and the #6 spot total market in just 18 short months of commercial operations. And I don't want to sound kind of flippant about it because we're not naive about the difficulties posed by increased competition, but we are up for the challenge. And we're confident that we have the people, assets and capabilities to beat the competition and win with consumers, and that is because we have confidence in our winning formula. And the simple reason that we've been able to experience such tremendous consumer market growth in such a short period of time and why we're confident in our ability to meet the significant goals that we've set for Auxly in 2021 is because we've developed this winning formula over the course of the last 3.5 years. And it really starts with having a focused strategy, one that is focused on winning with defined consumers in a defined way. When we set our strategy in early 2018, we made a choice to focus on the cannabis 2.0 market and defer participating in the cannabis 1.0 market. And it was a big bet, and we were the first company in Canada to take that approach. We were the first company probably because we're regulatory experts, so we had the confidence to make that bet before these products were even permitted for sale or before there was even any enabling regulations allowing for the sale of those products. Thankfully, we were right in our approach. But because we had that focused strategy, we were also then able to build out the capabilities that we believed would be needed to win in the 2.0 market and create sustainable competitive advantage. And we did that not only from an infrastructure perspective, building all of the tailored facilities that we would need to operate, but most importantly, we did that from a people and capability perspective. So we built out deep capabilities and consumer understanding, right, so we could develop powerful consumer propositions. We could get close to our consumer, understand their needs and then develop products with a stronger consumer value proposition than those of our competitors. Then we invested heavily in product innovation so that we could take those insights and actually convert them into a differentiated product. And I don't think there's a company on the planet today that can take a consumer insight in cannabis, convert it into a differentiated quality product that's branded and put it on a shelf faster than Auxly. Brand development, a massive part of the capabilities that we invested in to really build brands that connect with consumers and then continually develop them over time to maintain that authentic connection. Quality, another core capability that we've invested a lot in, and this is not just as a compliance function to ensure that our products are always quality, but also as a corporate value and the expectation that we place on ourselves as professionals and on each other. Regulatory acumen, I already mentioned, was one of the reasons we were able to bet on 2.0 before any other company in Canada. But our regulatory acumen ensures that we're always in compliance with applicable regulations. But it also gives us something more than that. It gives us a clearer view on where the puck is heading from a regulatory perspective so that we can see the white space and we can plan better than our peers. And then route-to-market excellence, right, building the processes and structures at our company to really ensure that we are able to build distribution and work professionally and collaboratively with our customers and retail partners to increase consumer access to our products. So those are the capabilities that we've built out. And of course, the most important one is we believe we've assembled the absolute best people with specialized knowledge in their respective fields to really help us execute against our goals. And I could spend hours talking about our people, but I would just sum it up by saying they really exemplify our relentless pursuit of quality. Cannabis experience is nice, but we really only target top performers with a proven track record of success in their chosen fields. Now these are people where they have lots of options when it comes to employment, but they've chosen to join our team because they share in our values of teamwork, collaboration and they have a deep desire to win. So that's a long way of saying that our winning formula is really about we have a focused strategy with the right people and capabilities to execute against it and build really sustainable competitive advantage. And that's how we're going to continue beating the competition: by being hyper focused on our objectives and only our objectives; by continuing to invest in our unique set of capabilities, the combination of which makes us different than any other cannabis company in Canada; and by working tirelessly and collaboratively as one team committed to success in executing against our objectives. So -- and I would finish off by saying, make no mistake, we're up for the fight. We've been underdogs since the day we've entered the market and yet here we are, gaining fast on all the incumbents who are trying -- going to try and spend and consolidate their way into maintaining their diminishing first-mover advantage. And then while they work on that, we are heads down and focused against -- executing against our priorities and passing them by. So I hope that answers the shareholder's question. Back to you, Julie.

Thank you so much, Hugo. And that's all we have -- that's all the time we have for today. So we want to thank everyone for dialing in today's call.

This concludes today's conference call. Thank you for participating. You may now disconnect.