Thank you. Good morning.

I am Hugo Alves, Auxly's cofounder and chief executive officer. I would like to welcome you all to Auxly Cannabis Group's Q2 26 conference call and webcast.

Joining me on this call today are Travis Wong, our chief financial officer, and Mark Charbonneau, our head of investor relations. Today, I will share highlights from the quarter, and then we will open up the call to questions from analysts and answer some questions that have come through the investor relations inbox over the last few days.

Before we begin, I would like to remind you that our remarks may contain forward looking information, and actual results could differ materially. Forward looking information is subject to many risks and uncertainties.

Certain factors or assumptions applied in the forward looking information can be found in our latest annual information form and management discussion and analysis. These documents are available on our website and at sedarplus.ca.

More generally, if you have questions once the call is complete, please reach out to our investor relation. Our contact information can be found at the end of our earnings press release.

Moving on to our financial results. Our Q2 26 financial results represented a quarterly record in net revenue adjusted EBITDA, and cash flow from operations.

Net revenue reached 45.8 million an increase of 18% year over year. Gross margin on finished cannabis inventory sold increased to 55% up from 52% in Q2 25.

Adjusted EBITDA was $14.3 million an increase of 24% year over year representing an EBITDA margin of 31%. And cash flow from operations before working capital changes reached 13.4 million.

An increase of 31% year over year and representing a 94% conversion from adjusted EBITDA. Our net revenue growth is driven by continued strong demand for our core portfolio led by Back Forty strength in flower pre rolls and vapes.

Our gross margin reflects continuing improvements across our operating footprint strategic procurement initiatives, and a favorable product mix. And we believe that the operating leverage we are delivering is structural.

We have the operating assets, the scale, and cost discipline to deliver best in class margins, and these results demonstrate that. Our improved profitability is translating directly into cash flow with a 94% conversion rate between adjusted EBITDA and cash flow from operations before working capital.

Our balance sheet remains strong. With $38 million in cash and $44 million in long term debt.

This cash balance also reflects the deployment of $5.7 million in the quarter to repurchase 2.6 million post consolidation shares through our active NCIB program. And, of course, in July, we completed our 14-to-1 share consolidation.

An important step forward in aligning our market profile with the quality of the business we have built. We are encouraged by the response from shareholders and the confidence that has been reflected in our share price performance since the consolidation took effect.

Looking forward, our outlook for 2026 is unchanged. We believe Auxly can continue to grow net revenue above market rates through investments in distribution, innovation, and increased quality and capacity at Auxly Leamington.

In July, we launched a new sativa cultivar under our Back Forty brand, Galactic Jack. And the early consumer response has been tremendous.

We have additional innovations across our core categories planned for the seasonally stronger back half of the year. We continue to invest in operational efficiency and maintain rigorous cost control across the organization to support continued profitability and we expect improved cash conversion through the reduction of interest expense and working capital to remain similar to last year with modest increases to support net revenue growth.

In the outlook section of our Q2 MD&A, we have outlined a longer term capital program of approximately $30 million over the next 3 years to increase yield at Auxly Leamington by approximately 30% over 2025 levels. This program includes the $10 to $12 million we had previously guided towards for 2026.

We are undertaking this expansion because of the continued strong demand we are seeing for our products and the investments are expected to be funded comfortably from our cash from operations. Even with our improved capital markets posture, we believe our share price does not yet reflect the intrinsic value we have built.

We have sufficient capacity and available cash from operations to continue repurchasing shares under our NCIB program as part of our disciplined capital allocation framework and we are committed to earning the confidence of our shareholders through execution and results. To conclude, the Auxly team is focused and aligned in our pursuit of quality, innovation and profitability.

We are delighted with our record Q2 2026 results, and seeing continued strong demand for our products as we head into the back half of the year. And I would like to thank our teams in Leamington, Charlottetown, and Toronto whose commitment passion, and resilience are the driving force behind Auxly's emergence as an industry leader.

We are also grateful for the continued support of our shareholders, vendors, and partners. We are building to last.

We are excited about the future. And believe the best is yet to come.

This concludes our prepared remarks. We are going to take calls from analysts, and then we will answer questions that our investors have sent to us over the last few days.

Operator, please open the call for questions.

Yes, thanks. Good morning, and congrats on a good quarter here.

Continues to look quite constructive and positive. Hugo, what maybe if you could expand on both what you referenced in the MD&A about the 30% yield in Leamington.

Like, sort of that is a pretty significant jump. What sort of things are you planning on doing to sort of achieve that?

Yeah, Neal, thanks. So as discussed before, it is to build out additional post harvest capabilities in Leamington and also to bring an additional grow zone online and you know, add to the infrastructure things like, you know, the HVAC that has to go into those pieces of infrastructure, but it is effectively additional cultivation and significant additional post harvest capabilities.

We are seeing very strong demand for our products. And I think as our as our demand picture becomes clear and our thinking evolves, we thought it was right to share our longer term ambitions with shareholders as they you know, are constantly asking us for sort of our longer term growth plans.

So we wanted to share those as they are baked into our strategic plan.

that is fair. Thank you for that.

So you say through to the end of 28. So will we still start seeing some of those yield improvements in 2027?

Yes. You know, through the end of 28 when we will have the whole thing kind of done, but you will see yield improvements throughout the course of that 3-year period, of course.

Great. Thanks.

Yeah. Maybe turn it to, like, the income statement here.

I think it is 5 quarters in a row, you are at an EBITDA margin of 31%. So clearly, it looks sustainable and clearly above most of the group in Canada.

So maybe elaborate a little bit on, you know, how you are able to achieve that, No. 1.

But No. 2, you know, do you feel that is continued to be sustainable?

it is it is quite a good level, but, you know, I imagine with of the dynamics in the market, there may be some challenges along the way. Maybe just talk a little bit about the puts and takes there between gross margin, operating leverage, and where you are achieving the EBITDA margin there.

Yeah. Sure.

Hi, Neal. it is Travis here.

Yeah. I think, you know, we break down the EBITDA margin overall as sustainable.

it is really driven, in our minds, by like 3 main components. Of course, net revenue being the first 1.

We will continue to guide that we will and target stronger than industry growth in that segment driven by our innovation our ability to read our consumers, We do believe that revenue growth rates will continue to be above industry guidance. And here's the margin, I think, where we really stand out.

A lot of the improvements in our gross margin are structural in nature. We continue to see higher cultivation yields from last year.

We have improved our manufacturing processes both at our Leamington facility and at Charlottetown facility. And then lastly, we have engaged over the last 18 months in strategic procurement initiatives, really lowering a lot of our input in our portfolio, including, for example, our vape API cost.

And then lastly, the SGNET is the final factor in protecting that EBITDA margin. We have always guided to maintaining SG&A growth at the same rate.

As revenue growth particularly on a on a on an annual basis. And we continue to target that.

We think that is that is achievable As we get bigger, we will invest in our in our sales and marketing group but we do think we kind of figure it out and right side our SG&A for the business we are growing.

Great. Thanks, Travis.

Last 1 for me, maybe just, you know, what your current thoughts on international are as far as-- obviously, you are executing great in Canada. I know that is going to be your or expect that is going to be your focus.

Any thoughts or plans on looking at the international markets?

Yeah. I mean, our I do not think our perspective on it has changed since the last time we spoke with shareholders.

We believe that in those markets, we believe sort of the long term potential and growth opportunity there. But we also believe that they are young markets, with their still very dynamic in terms of, their regulatory framework, and, things can change.

Dynamics can change very quickly. Including pricing.

So, our strategy is to win at home. You know, obviously, our vision is to 1 day be a global leader, so we do think it is a part of our future.

Right now, we are prioritizing the Canadian market. We are prioritizing winning at home.

We see very, very strong demand. As you noted earlier, we are generating you know, best in class margins.

So we are comfortable with our strategic focus. We will continue to advance our international ambitions in terms of learning by doing and establishing the partnerships and relationships needed to be successful there, but it we are not going to get distracted in terms of, you know, the market we are trying to win.

We think that serving the Canadian consumer is our highest return option right now.

And I would just, again, note that we have Imperial Brands as a strategic partner.

They are a global CPG company. And, you know, when the time is right and these markets are more mature, we can deploy capital there with greater certainty, you know, we will we will have a big advantage in those markets.

So we are not in a rush. Our view has not changed.

We continue to be focused on winning at home.

Okay. Great.

I appreciate that context and color. Thanks, Hugo, and congrats again on the quarter.

I will pass the line.

Hey. Thanks a lot.

Really appreciate it.

Hi, everyone. Mark Charbonneau here.

Just a few questions from investors. First on innovation, we have seen some new products in market.

Can you give us an update how your recent innovations are performing?

Yeah, Mark. Great question.

You know, innovation is a key driver of our growth. 1 of our core competitive advantages.

You know, we have taken innovation leadership in our core categories of pre rolls, flower, and vapes. And I think the results we are seeing from each of our recent launches and over the years that I think demonstrate that we understand our consumers and our customers and we are able to create great new products that are incremental to our existing portfolio.

And you know, I would innovation's a team sport at Auxly. It takes a whole organization to deliver great products to our consumers.

So I will use this as an opportunity to shout out again the great Auxly team for their continued performance. But, you know, Liquid Imagination has now been the top selling strain in Canada for over 2 years.

We recently, as I mentioned, launched Galactic Jack That was in mid June. it is our sales team has already won 1.4 thousand points of distribution, and the product is getting rave results, rave reviews from consumers.

South Point is already a top-40 flower brand nationally with 2 SKUs. And we are excited to be adding a new strain to the brand later this year.

And, of course, Back Forty pre-rolls have quickly become Canada's favorite pre roll, and I am really excited about, an innovation that we have launching imminently there. So innovation is performing great.

It is a core competency. it is a discipline at Auxly.

And I think 1 of our real key, competitive advantages.

Thanks, Hugo. Secondly, on profitability.

there is a decrease in net income, yet adjusted EBITDA and cash flow increased. Can you please review the factors that caused that?

Sure. This is why we focus primarily and guide investors to review our EBITDA cash flow as main KPIs.

Net income for the quarter was $7.7 million essentially flat to our 8.3 million last year in Q2 25. But if you exclude the noncash fair value adjustments on our biological assets, inventory, which are effectively noncash mark to market accounting entries.

That do reverse over time. Then our underlying net income would have improved meaningfully year over year.

Driven by the higher gross profits lower interest expense, that are that is partially offset by higher SG&A to support our growth Excluding these fair value swings, underlying net income would have improved $2.2 million And then on a year to date basis, net income would have improved by $8 million. Driven by those same underlying strengths higher gross profit, lower interest expense, offset by higher SG and A.

Thanks, Travis. And lastly, on capital allocation, how are you thinking about the NCIB going forward?

Are you going to use the whole 5%?

Yeah. Look.

I think as I mentioned, we have a disciplined framework for capital allocation, right, reinvesting in organic growth, pursuing selective inorganic opportunities, repurchasing shares through our NCIB. We are still going to prioritize our capital investments as those improve quality and profitability, as I noted, organic growth is our highest return option, but we you know, we still have capacity and budget room under our NCIB to continue purchasing.

The NCIB is an attractive, as we believe current prices do not reflect the intrinsic value that we have built and that repurchasing our own shares can generate a compelling return on capital at these prices. So at these prices, we are buyers of our shares, not as issuers.

However, look. As our share price increases, the return that we can generate from repurchases may decline.

So as I have I have stated previously, we are going to continue to evaluate our NCIB with the range of available opportunities that can advance our strategy and deliver returns in excess of our cost of capital. And I would also add that we are we are also committed to maintaining a strong balance sheet so that we can fund these initiatives, including the NCIB, from our own cash flow without the need to access equity markets.

So thanks for that, Mark. If there is no other questions, I want to thank everyone for joining us today.

And please do not hesitate to contact us if you have any questions. Thanks.