Auxly Cannabis Group Inc.

Thank you, operator. And good morning, everyone.

Thank you for joining us for the Auxly Cannabis Group Second Quarter 2021 financial results conference call. A replay of the call will be archived on the Investor Relations section of Auxly’s website.

We will start the call with the presentation and corporate update by our CEO Hugo Alves, followed by a recap of our Second Quarter results by our CFO, Brian Schmitt, before opening the floor to questions from our financial analysts. I encourage you to follow along with the presentation slides, which are posted on our website under the Investors section, under presentation.

But before I turn the call over to Hugo, I'd like to remind everyone that our discussion today includes forward-looking statements that are based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from the views expressed today. Management can give no assurance that any forward-looking statements will prove to be correct.

Forward-looking statements during this call speak only as of 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 or to Canadian dollars, unless otherwise stated.

And with that, I'll turn it over to Hugo Alves.

Well, thank you, Julie. And good morning everyone.

I am delighted to welcome you all to Auxly's inaugural earnings call. And we're very excited to host you for this call and share with you the results of what has been a record quarter for Auxly across revenue adjusted EBITDA, and market share.

Let's get started. I will be using the slide deck as a reference tool here.

And with that, I would turn you to page 6 of the presentation. And I thought that it would be helpful to really start by grounding everyone in the 5 strategic objectives that Auxly is trying to accomplish during the calendar year 2021 and how those were advanced during Q2.

So in 2021 to recap, Auxly is focused on maintaining leadership in the 2.0 Product segment. Building to leadership in dried flower and pre-rolls, what's known as the 1.0 Product segment, becoming a top-five licensed producer by national share of the market, improving our margins and revenue with low to no overhead growth, and achieving positive adjusted EBITDA by year-end.

And I am very happy to report that we made substantial advances in Q2 towards achieving each of those objectives. In terms of 2.0 market leadership, we continue to be the number one 2.0 Company in the country with a 15.4% share of the total 2.0 market.

And we continue to extend our leadership in the vapor segment with a 23.4% share of the market in Q2, a percentage that continues to increase month-over-month. For reference, we finished the month of June in Q2 with a 25.6 share of the market.

We're also very excited about the progress that we've made in dried flower and pre-rolls. By leveraging our core capabilities of insights, innovation, branding, and route-to-market excellence.

We've quickly established one of the most efficient flower portfolios in the market. The test SKU's that we've launched under both Kolab Project and Back Forty Brands have enjoyed fantastic consumer success.

And now that we've launched an expanded flower portfolio nationally, with additions to both the Kolab project and Back Forty Brands portfolios. And of course, our much anticipated Back Forty forties pre-roll launch in Ontario last week, we should really start to feel the impact of those SKUs on our Earnings in Q3.

We are not yet a top 5 licensed producer, but we continue to move in the right direction. In 18 short months since the start of our commercial operations, we have risen to the number 7th-ranked LP by overall recreational cannabis market share, finishing the quarter with a 4.9% share of the overall market.

Importantly, we finished the quarter in the month of June, with a 5.4% share of the overall market, and moved into the number 6 slot, overall. Our goal is to be in the 7 to 9% share of market range by end of the year.

And consolidation notwithstanding, we believe that that will be sufficient for us to achieve our strategic target of being in the top 5. Brian Schmitt, our CFO, is going to give you more color on the financial metrics later in the presentation.

But we continue to improve the cash flows of the company. We significantly improved net revenues from recreation cannabis sales to $21 million, improved our margins to 38% and we continue to be laser-focused on cost optimization on a number of fronts, reducing the cost of goods through automation, optimizing supply chain efficiency, and of course, eliminating all non-value-adding costs.

We're working hard to contain costs and most importantly focus our spending on the capabilities and activities that are most impactful. And hand-in-hand with the continuing improvement in revenue and cost, we've also made significant improvements in our adjusted EBITDA.

We finished Q2 with an adjusted EBITDA loss of $3.3 million, a significant improvement over both Q2, 2020, and Q1, 2021. So we're getting close to our positive adjusted EBITDA target.

And we believe that we're on track to achieve this objective by calendar year-end. So with that high-level overview in mind, I'm going to turn us to page 8 of the presentation.

As already stated, we remain the number one LP in the 2.0 Products segment with 15.4% of the total 2.0 market. And it's worth noting that we have beat out much larger competitors, maintained leadership, and continued to expand market share organically and not through consolidation.

And we've done this by having a focused strategy and investing heavily in the capabilities that we believe are necessary to win in the consumer market. And because of that focus and strategy, and because of the complementary and reinforcing capabilities that we've developed, we've seen our market share continually increase.

It's already stated we finished the quarter with a 5.4% share of the market, moving us into the number 6 spot overall. And we believe if we hit our target of between 7% and 9% share of the market by end of the year that we will be able to move into the top five.

Moving us to slide 9, this slide is really to give you an idea of how we're performing across our key categories, and also to help set some baselines for you to consider moving forward. So as you'll note here, we rank very highly in vapes and edibles, the formats that we've been in the longest.

Moving us to concentrates, at the beginning of the year, we resolved to test launch into concentrates as we viewed it as an attractive growth category amongst certain consumer segments that we target with our brands. And we're very pleased with the results of our tests.

We think we've gotten a value proposition for our Kolab consumers spot on. Our Kolab Project, a diamond product, was launched to universal consumer acclaim, and as quickly propelled us to the number 5 spot nationally in concentrate and that's with just one skew.

You can expect to see us launch some exciting new innovations in this category, over the balance of the year, as we try to push deeper into this category. And, of course, dried flowers and pre-rolls, where we're just getting started.

And these numbers are really included here as more of a baseline to enable you to see how our market share improves in these formats over the balance of the calendar year 2021. I would point you in particular to our pre-roll market share, which we expect to jump significantly over the balance of the year.

One final point before I leave this slide is about our continued focus on driving distribution for our portfolio. We work tirelessly with our distributor, Kendra every single day to increase the breadth and depth of our distribution both in terms of the total number of stores and the number of SKUs within each store.

And over the quarter, our products are now sold in approximately 2,000 retail locations across the country, representing approximately 92.5% of all retail locations across Canada, excluding Quebec. And that growth in the quarter represented a quarter-over-quarter increase of about 28% in distribution.

Moving us to Slide 10. I'm not going to dwell here as most of you are familiar with this data.

But what the data here underlined is some of our confidence in our ability to continue capturing market share. On the left hand of the slide, what it shows is we really believe that our leadership in the 2.0 segment will result in a material share of market gains over the course of the next 3 to 4 years as the 2.0 market continues to become an increasingly larger part of the overall market.

And then of course, now that we are building a portfolio of dried flower and pre-roll products, we're also very well positioned to address the 1.0 segment which still accounts for over 70% of the market. So moving us along, I'm going to wrap things up here for my portion of the presentation by giving you a very high-level overview of our brand performance in our innovation pipeline for the balance of 2021.

So let's turn your attention to Slide 12. Though as some of you may know, one of our key aspirations at Auxly is to build brands that our consumers love and trust.

Our brands are targeted at specific consumer segments, and then we work very hard to stay close to our targeted consumers, build authentic connections with them through our brands, and then evolve our brands as our consumers evolve in order to maintain that connection. As I've already stated, consumer understanding is a core capability that we've invested heavily in while we do use a variety of agencies and services for data and consumer research, we've also invested heavily in bringing key insights and data analysis functions in-house, so that we are always keenly focused on our consumers wants and needs present and future.

And I'm delighted to report that our efforts are slowly but surely paying off. I am going to use the vapor segment here as a proxy, only because as many of you know, the vape category is uber-competitive, with lots and lots of SKUs, and brands, and market participants across the country, so it's every bit as the dried flower segment is.

But yet, we've been able to continually increase our share of the market in that segment and maintain the relevance of all three of our Vape brands. At the end of Q2, all three of our Vape brands were in the top 5 brands nationally for vape.

Our Back Forty brand being the clear market leader in Vape market share with a whopping 13.3 share of the total market as a brand. Kolab and Foray ended the quarter fourth and fifth-ranked brands nationally with 4.6 and 4.4 shares of market respectfully (sic).

And in our largest market, Ontario, on a rolling 12-week basis at the end of Q2. All 5 of the top 5 selling vapor SKUs in the province were Auxly branded SKUs.

So the takeaway here is really that while it's still too early in the market to draw definitive conclusions about brand health and brand relevance. We believe that we've invested in the right capabilities to enable us to build meaningful brand connections with our consumers and help us win that first moment of truth.

Believe that our brands provide us excellent coverage among our targeted consumer segments. And we believe that early signs are very encouraging in terms of our brands working towards our aspiration of building trust, and the admiration of our consumers.

Turning us to Slide 13, 1 of the key ways that we're going to continue building brand relevance and share of the market is by leveraging our innovation and manufacturing capabilities to bring new and exciting products to market under each of our four brands. I'm not going to point to any individual product or brand on this chart because as it clearly illustrates, we're launching exciting new innovations across all of our brands.

But I will point out 3 quick things here. First, is really this is not an exhaustive list of the products we anticipate launching during the balance of 2021.

We have purposely left out a number of products here because we consider the information competitively sensitive. 2nd, not all of these products will launch nationally at the outset.

As with all of our new product innovations, we will soft launch some of these in select markets to gain consumer feedback, refine, and improve our concept before we scale up production and distribution. But then finally, and it should come as no surprise that like our brand development, our product development is targeted to specific consumers that we address under each brand.

Whether it's our Back Forty brand, where we focus on simple quality inhalable and edible products for consumers who are looking for quality at affordable prices. Our Kolab Project, premium products that focus on higher potencies and true to plant experiences.

Foray where we create approachable, balanced, convenient products focused on the novice consumer. And of course, Dosecann where we really target wellness, And of course, Dosecann, where we really target a wellness consumer.

And so even though this chart it's not an exhaustive list, what you can see is that we have a very robust innovation pipeline planned for the remainder of 2021, with lots of first-to-market products. And we believe that our innovation and manufacturing capabilities, our ability to take consumer insights and turn them into product differentiation, is one of our keys to success.

We think we do better than any other cannabis company on the planet, and we think it's the key reason why we're confident that we will continue to win with consumers and continue to capture market share. So I'm going to stop there and turn it over to our CFO, Brian, to deliver the rest of the presentation.

Brian, over to you.

Thank you Hugo and good morning. It's a pleasure to be presenting today on our first earnings call, being able to report record results for the quarter.

We couldn't be more thrilled and look forward to continuing to deliver even more in the future. Before we continue with a review of the quarter, please note that as a result of the KGK disposition, historical results have been retrospectively restated to remove the impact of KGK from individual financial statement line items and have been aggregated into discontinued operations.

As such, operating results and cash flows from continuing operations may differ from previously reported public results. Now, turning to revenues in -- from continuing operations on slide 19, we are excited to report the achievement of nearly $21 million in revenue.

Up significantly from the second quarter of 2020, and more than double the previous quarter. Consistent with our strategy to increase sales of Cannabis 1.0 products, revenue for the current quarter was comprised of approximately 25% of these product sales, increasing from 10% the previous year, while maintaining leadership in Cannabis 2.0 product sales.

With the expansion of Ontario store openings, our revenues from BC, Alberta, and Ontario increased by 5% to approximately 85% for the quarter. However, please note that we do not presently sell products in the province of Quebec.

The next slide captures our gross margin adjusted EBITDA and net income performance for the second quarter, all reflecting significant improvements. Gross margins grew to 38% during the current quarter, double the same period in 2020, and 34% year-to-date.

In addition to contributions from newer products, such as our success to date in concentrates, gross margin improvements were driven by production cost reductions through further automation, streamlining processes, larger batch sizes, and volumes, and lower input costs from cannabis, gaining efficiencies on our in-house extraction methodologies, reducing packaging costs, and logistics management, were all contributing factors. While Cannabis 1.0 product margins were nominal during the quarter, we anticipate improvements in gross profit from dried flower and pre-roll products as automation is implemented and volumes increase over the next 2 quarters.

Adjusted EBITDA improved significantly, based upon the strength of revenues, gross margin, and measures taken to reduce SG&A as announced in October 2020. While SG&A excluding non-cash share-based compensation increased over the previous quarters, expenditures were $1.2 million below the second quarter of 2020, and are in line on a year-to-date basis with our quarterly cash-based SG&A target of $10 million.

Net Income, and yes, I did say Net Income, was positive for the quarter. Impacted by the strength of operations, however, improved further on a net basis as a result of 3 non-recurring transactions, including, the sale of KGK on June the 2nd, which resulted in a net gain of 12.1 million.

The sale, in July, of the vacant curative cultivation facility, resulting in a loss of $11.4 million, the impact of the Imperial Brands Convertible Debenture Amendments, which resulted in a net gain of 17.5 million, And lastly, the non-cash tax recoveries of $4.3 million associated with these transactions. Next on slide 21.

Slide 21 outlines our progress since the company commenced cannabis sales showing a positive -- a strong, positive trend in retail sales that is a key indicator of the Company's performance. With an adult-use recreational focus, Auxly's revenues are recognized and influenced by buying patterns of our channel partners.

Continued improvements in the share of the market inevitably lead to improved revenues, as noted by the strong current quarter performance. Positive revenue trends have also resulted in sharply increased adjusted EBITDA, which includes our efforts to improve gross margins and managed cash-based SG&A.

All of which we believe is a very encouraging venture. As we turn to slide 22 and consider the Company's earnings multiple relative to its immediate peers, we can see that there is an opportunity for multiple expansion as the Company's share of the market increases through continued execution against our plan.

As Hugo indicated earlier, Auxly's share of the market was 4.9% for the second quarter. For the month of July based on Headset Insights data, Auxly continued to improve its share of the market to 5.4% as we began to accelerate participation in the Cannabis 1.0 Products.

We'll be further supported by our recently launched bag flower and pre-roll offerings under the Back Forty brand. Auxly has successfully retained its leadership position and expanded its share of the market in cannabis 2.0 products with greater than a 15% market share, where those products account for approximately 20% of the total recreational market sales.

As Cannabis 1.0 is approximately four times larger in the equivalent share of the market for Auxly is an obtainable 4%, which we look to surpass. We feel this is an achievable objective and are targeting an overall share of the market between 7% and 9% by the end of the year.

This, we believe, will also coincide with our goal to be adjusted EBITDA positively in the fourth quarter. Throughout today's presentation, we have highlighted how we are differentiated from our peers in building success in the Canadian cannabis industry.

We believe the acceleration of revenues and net income supported by high growth adult recreational cannabis sales, and careful execution against our objectives will lead to notable margin -- market -- multiple expansions and share price appreciation in the coming quarters, as we move to be within the top five LP. And with that, I will turn it over to Hugo for concluding remarks.

Hey, thanks for that, Brian. Look, as that concludes our earnings presentation, we hope that we've been able to give you a clearer picture of our company, how we're doing in the consumer market, and why we're very confident about our future.

For us, it's all about having a focused strategy. One that is focused on winning in a defined playing field with a defined consumer and in a defined way.

And because of that focus, we've been able to identify and then build the capabilities that we think are necessary to win in the consumer market. We've been working tirelessly over the last 4 years to build those capabilities.

And now we're starting to see the fruits of those efforts. Our people, assets, and capabilities and how they work together and reinforce each other, are the reason why we're in the ascendancy in the consumer market.

And having proven the bona fides of our approach in the 2.0 market, we are now applying the same rigor, the same approach, and leveraging the same corp capabilities to stretch our brands into the 1.0 market and early results have been extremely encouraging. So I want to thank you listeners for your time today and your support of Auxly.

And I'm now going to turn it over to Julie to open up the floor for Q&A. Thank you.

Thank you, operator. Good morning, Hugo, Brian, and Julie.

Congratulations on the terrific quarter. So, my 1st question is, clearly, Auxly had for a long time had his priority focused on cannabis 2.0, always been punching well above its weight in that segment.

We'll park that for the moment. In terms of the push into 1.0 as you outlined, Hugo, this is of course, a very, very crowded market, difficult to be profitable.

Maybe you can elaborate a little bit more in terms of both the ability to drive top-line and penetration, but also just as importantly, manage cost of goods such that you can continue to be profitable on the pushing of 1.0.

Hi, Raul, sorry. Snafu on the mute unmute.

Look I -- great question. I think first of all, when we made the strategic decision to focus on 2.0, it was with the knowledge that our cultivation assets would take a number of years to really get up and running and dialed in, so we didn't have the right capabilities to win in 1.0 at the time.

So, we focused on 2.0, that's the -- we built out the capabilities that we thought we needed to win in the consumer market, like consumer insight, branding. All of those route-to-market excellence, innovation, manufacturing.

But in the background, we were always building our cultivation facilities. Those facilities are now up, running, dialed in.

They're producing fantastic flower. We're very confident in our cost structure to be able to produce the value propositions that are specifically targeted to our consumers.

And that ranges, as I said out my presentation from our Back Forty brand to our Kolab brand. But for us it's going to be staying focused on our consumers, right?

We're only interested in our consumers, not all consumers; really continuing to build, invest in and leverage the capabilities that we have -- we believe are the reasons for our success and why we're enjoying success in the consumer market. And then continually refining our cultivation operations to be able to match our strategy.

But we think we have the assets to be able to compete in 1.0 category and our insights, we think we've gotten it right so far. So, I would -- we're very confident about the future in the 1.0 segment.

Terrific. Thanks very much.

And then a quick follow-up. You talked about 1.0, talked about 2.0, but sort of in the middle of the emergence and rapid emergence of the craft cannabis sector or sub-segment.

You obviously have this play through Robinson's and some through the Kolab partners. Maybe -- could you give us a little bit more color in terms of how Auxly's planning to penetrate the super-premium segment as well?

Yeah, thanks. Thanks for that.

I would say we're not penetrating the super-premium segment. That's a small segment in terms of overall market, it's very crowded, and it's not our consumer.

So, we do target a premium consumer through our Kolab branded project -- Kolab Project branded portfolio, we really focus on higher potencies, unique genetics, and through the plants experiences there. And I think our track record under that brand speaks for itself.

The Kolab grower series flower is always among the top 10 selling SKUs in its markets. So, Rahul, things you mentioned.

That is a brand where given the market dynamics that we were seeing, we really felt it was better -- that product was better suited for a Kolab Project value proposition. So, we're bringing it under the Kolab Brander.

We think it will have tremendous success there. And again, it allows us to focus our branding and marketing spend to get better traction among the remaining brands.

Terrific. Thank you so much as always for taking our questions.

I will get back in the queue.

Thanks, Rahul.

Thank you. And good morning, Hugo and Brian.

Congrats on a great quarter. Just had a question about your adjusted EBITDA goal turning positive by year-end.

This quarter, I think you guys spent close to 12 million in cash, and most of that came from changes in working capital. I'm just wondering about your expectations for turning cash-flow-positive at least from cash from operations perspective.

Just a sense of what are your expectations regarding working capital as you continue to grow the business? Thanks.

Thanks, Federico. I heard a couple of questions in there, so our immediate goal is adjusted EBITDA positive, not necessarily cash flow positive.

Cash flow positive would be after this year to hit the first milestone as we've outlined in the presentation. But I'll recap a little bit.

Some of the key drivers, of course, for the Auxly Company is adult [Indiscernible] sales. So, share of the market as we've outlined 7 and 9 things, we believe will give us the top-line revenue to achieve that goal.

We are targeting a 30% overall margin -- gross margin. And then SG&A, we're looking to hold it at the $10 million in all material respects.

As we outlined almost 9 months ago as our goal for 2021. That may change of course, as we complete our budgets into 2022, but for now, we think that's a reasonable goal.

And obviously as sales go up, there will be some incremental costs that weren't contemplated when we did that, but we feel pretty comfortable with those broad goalposts.

Thanks, Brian. And then in terms of -- I'm just curious about your Sunens facility and the flower supply coming from there.

I guess I read in your MD&A that close to 80% of the supply this year came from third-parties. I'm just curious, where do you sit in terms of around run-rate right now, of the flower coming from Suners and what can you tell us about the production there in terms of yield and costs related to what you can buy in the open market.

Thank you.

Yeah. Hi Federico, it's Hugo.

So, I will take that one. So, over the quarter, we actually reduced reliance on third-party off take to about 59%.

So, we would expect to continue leveraging [Indiscernible] facility to a greater and greater extent as operations there continue to be dialed in, yields continue to expand. And of course, our flower portfolio continues to grow, right?

So, we've tried to be very mindful in terms of our approach to not get out ahead of ourselves, and end up with a bunch of inventory that we can't move. We are focused and obsessed as an on quality.

And that includes our flower products, so we want to make sure that we're getting the best possible flower to the consumer. So, we think that our off take costs at Sunens are at a very, very favorable rate that put us in a great position to attack the market with the value propositions that we think are going to resonate with our consumers.

Thank you. That's helpful.

I'll hop back in the queue.

Thank you. Good morning and congratulations on the progress that you continue to make.

Look, just one first question, very simplistic maybe. So, you have about 5% market share 5.4%, I think you said for July targeting 7 to 9, I suppose that's going to come from pre-rolls and flower, right?

Because you already have 25% on vapes. Just talk about what gets you to a 7 and what has to happen to get to a 9.

Seems quite ambitious, doubling share almost, but by year-end. Just walk us through, please, for that.

Hi Pablo. Look, I think [Indiscernible] to lead the witness there a little bit with our slide showing how we're performing across our relative category.

So, we've obviously modeled out internally what our share of market from our various products will result in. I would say, looking at 2.0, we continue to expand the market share and we're not going to stop.

Right? We're -- that is a very busy innovation component for us at our Dosecann facility, where we think there's still a lot of great things to bring to consumers.

You've seen in concentrates, a growing category, 1 that we think is particularly relevant to our Kolab Project consumers. And I think there we've tested the waters, we refined our value proposition, we've had tremendous success.

So, you will start to see more concentrates -- products coming on the market, But then -- yes, there will be a lot of growth in dried flower and pre-rolls. You've seen the pre-rolls now, or if people haven't seen it, they can feel free to drop me a line and I'll make sure that you see them.

But we think that these are going to be big sellers in the market. They are highly differentiated.

Early feedback has been fantastic. And you saw our market share there.

We're the 19th rank player in the country nationally by pre-roll market share. And we think that we'll push up into that leading group by year-end.

So, we're comfortable on our 7 to 9 range target. And I think early indications, at least from the first week or 10 days now of our flower launch would continue to give us real cause for optimism in those estimates.

Great, that's very helpful. Thank you.

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

Thank you.

Look, it started we launched pre-rolls yesterday. We launched at the 10 pack of 3.5 --.35 gram slim rolled joints and they've launched at a retail price of $19.99, which is obviously tremendous value to the consumer.

Our automated filling machinery is in place. There are some additional throughout enhancing pieces that should be with us by before year-end.

Automated packaging line, which is really kind of allows you to use the throughput on the filling machine to its full potential arrives at our facility at late this month or early next month. What you'll start to see is the impact of the initial portions in dried flower and pre-rolls that launched last week.

We're only launching pre-rolls in Ontario for now. That is a lesson learned from our 2.0 launch.

We want to make sure that we're able to really test the value proposition in our biggest market and ensure high fill rates with our customer for that product. But yeah, you'll start to see some impact on our revenue lines from those 2 formats this quarter, keeping in mind that it's kind of less than half a quarter that you'll see.

And then in Q4, you'll start to see a lot of the efficiency gains, which should obviously impact margins and revenue to a greater extent.

That's great. And one last one, if I may.

Can you just give us a quick recap in terms of what's happening in the Vape market? Obviously, we have the data that gives a lot of details.

But we hear there's been significant price inflation in vape, as we saw in flower. People are now talking about live resin, which I suppose is more on the high end.

Just talk about in terms of what's happening in the Vape market. And obviously you continue to gain share, but it seems that there's been some evolution of the category, not just in terms of growth.

Thanks.

Yeah, sure. Listen, as I said, the Vape market I used as a proxy for our ability to leverage our capabilities and continue driving market share, even in a highly competitive market, because the Vape market is uber-competitive.

And I think that's driven by not only the popularity of the format, but the availability of third-party contract manufacturing, which allows some of these marketing entities to really not have to invest in licensed infrastructure to manufacture their own vapes. And yet we have been able to continually outperform the market, and we've done that through consumer insights, innovation, and really targeting what's next.

We were the first with the one-gram vape cart, our Kolab Project vape’s now with the live resin carts, there are further innovations in mature vape markets that will come to market here in Canada overtime. So I think for us it's really about breadth and depth of distribution, building our brands so the consumers trust and love our brands when it comes to Vapor.

They understand it's going to be quality at any price point. And we'll deliver on that second moment of truth when they get the product home.

But certainly, you need to stay very close to your consumer; you need to listen to their needs. You have to have the innovation muscle to be able to take those insights and figure out the scientific problems to convert it into differentiation.

And then you need to be able to wrap it in a brand that consumers will trust and get it on broad distribution so that they have access to the product whenever they want it. And then I would say, look finally, we also have a strategic partner that knows a thing or two about the Vapor segment that we work with on a regular basis to ensure that we're getting the right value propositions.

That's great Carlos (sic). Thank you.

Congratulations again.

Thanks, Pablo.

Hi. Good morning.

My first question is just on the sales. You had a really nice quarter-over-quarter jump, and I'm trying to understand the sustainability of that level.

And 1 of the things that you mentioned for -- as a key driver was just some [Indiscernible] restocking. We haven't seen much of that from some of the other cannabis players out there about the restocking in terms of the [Indiscernible] reporting.

And they are saying it could be more flattish to down quarter-over-quarter. So, I'm just trying to understand what your level of confidence is on that sustainability, and it just restocking their inventory to then, the quarter after that, it starts to pull back a bit because they're pretty well stocked up.

So if you can talk of that that would be great.

Yeah. Sure John.

Look, I think the restocking issue is more of an inventory management issue at our customers, than it is restocking. So, they worked through their inventory in Q1, leasing a week of -- weeks of safety stock on hand dramatically, so that they could end Q1 with a nice inventory number on the balance sheet.

And then what we've seen is back to, kind of, normal practices on the ordering. If any -- if next -- if last year was an indication which it wasn't in Q1 granted, we would expect to see strong pull for the remainder of the year.

And look our sales to-date in Q3 give us confidence in that assumption -- in that view.

Okay. That's very helpful.

And then just on the margins. Again, you posted really nice margins in the quarter, mostly driven from Cannabis 2.0, but there is a push into the 1.0 so does that product mix push your margins down because presumably the 1.0 is a lower margin than the 2.0?

Yeah, John, that's -- it's Brian. That's our assumption with an overall margin, target margin of 20%, we expect some lower margins in the 1.0 section of the market.

But again, we look to increase our margin from today through the automation that we've basically outlined in our public reporting and on the call today. And then for sure on a gross profit dollar basis, that incremental margin will drive to the bottom line.

And then maybe another question that's related to margins and sales as well. To what extent has cold data in the store restrictions, and really more so for your premium products like pulled out and Robinson's, how much has that impacted from a sales perspective and presumably on the margins too, given that I'm of the understanding that bartenders play a pretty important role in the sale of premium products, especially newer products.

So, can you just maybe talk a bit about that? And now it's obviously the stores reopening.

Is there a potential for a boost there [Indiscernible]

Yes. So, John, its Hugo.

I would say it's not really a margin issue for us. Right?

We sell into the provincial control board at a price so that the margin beyond that, is for someone else 's benefit. I would start by saying, look, we're absolutely excited to have all of our retail partners welcoming consumers back.

COVID's been hard on our retail partners and hard on the bud tenders, so, I think, first and foremost, we're happy to have them back and we're always looking for ways to help and support our retail partners and help us connect with our consumers. I wouldn't say it's a margin issue, but for sure, it allows us to get back closer with our consumers, work with our retail partners, work with our bartenders to drive visibility for our products, drive the brand narrative to consumers through retail, and increase the breadth and depth of our distribution, so we are delighted to have the stores reopened again.

But in terms of margin performance, it's not as applicable.

Okay. Thank you.