Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Auxly Cannabis Group's Q3 2021 earnings call. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session from the company's financial analysts. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star then number two. Thank you. Julie Cannon, you may begin your conference.
Thank you, operator, and good morning, everyone. Thank you for joining us for Auxly Cannabis Group's third quarter 2021 financial results conference call. A replay of this call will be archived on the investor relations section of Auxly's website. We will start the call with a presentation and corporate update by our CEO, Hugo Alves, followed by a recap of our third 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. 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 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. With that, I'll turn it over to Hugo, our CEO, Hugo Alves.
All right. Thanks, Julie. Always tough to follow such a scintillating introduction, but I'll just say welcome everyone to our Q3 earnings call. Look, we're excited to host you for this call and share with you the results of what's been another record quarter for Auxly. Let's get started. I am going to turn us to slide six in the presentation. We're gonna do our best to keep the presentations consistent quarter over quarter each year, so that you have a better basis upon which to assess our progress. As you know, during the calendar 2021 year, we're trying to achieve five key strategic objectives, maintain our leadership in 2.0, build to leadership in dried flower and pre-rolls, become a top five licensed producer by share of market, improve our margins and grow revenues, and achieve adjusted positive EBITDA.
In terms of our 2.0 market leadership, we continue to be the number one 2.0 in the company in the country. We grew our market share this quarter to 15.6% of overall markets, up slightly from Q2. We continue to dominate in the vape segment and increased our share of market by more than a full percentage point over the quarter. We finished with 24.7% of the national vape market. We're also making tremendous inroads into the concentrates category, one of the fastest-growing categories in the industry, where we're now the fourth ranked licensed producer nationally. The big story this quarter is really the tremendous progress that we've made to building to leadership in dried flower and pre-rolls.
Look, I wanna coach the discussion by saying Auxly's still building its base portfolio in flower, right? We grew our SKU count during the quarter at the OCS to a whopping 7 SKUs, and I think that's an important point for you to note because our competitors have multiples of those SKUs, right? They have flower portfolios that they've built over years that have 30, 40, in some cases over 50 SKUs in their portfolio. We're still building our base portfolio in dried flower. Because we've stayed keenly focused on the consumer, we've built the most efficient dried flower portfolio in the market on a sales per point of distribution basis. That means our SKUs sell more dollars per SKU than any other flower portfolio in the country.
Over the quarter on a national basis, we increased our position from 12 to the number 9 LP nationally, growing our share to 2.7% of overall market. In order to really get a flavor of how our launch has gone, you have to double-click into Ontario, because Ontario is really our home, our test market. It's where we have our full SKU portfolio launched. When you take a close look at, to home in Ontario over the last 12 weeks, ending October 30, it paints a different story. In Ontario, we've moved into the 5th spot overall in dried flower, and pre-rolls tells a similar story. Nationally, we increased our standing from the number 19th producer to the number 11th.
In our test market of Ontario, which notably was the only market that had our Back Forty 40s product during the quarter, Auxly is now the third largest supplier of pre-roll products. Our thesis in 1.0 is working, and the results have been very encouraging. As at the end of Q3, we were not yet a top five licensed producer. We exited the quarter as the sixth LP by overall recreational cannabis market share. We grew that share from 4.9% to 5.6% as at the end of Q3. We've continued to gain share month-over-month. I'm very happy to report that we finished the month of October with 7.3% share of overall market, and we did move into the fifth spot.
We're confident that we're gonna continue to increase share over the coming months through increased distribution of our dried flower offering. As we recently announced on November 10, we have 18 incredible new SKUs that we're adding to our product portfolio over the course of Q4. We remain on track to finish the year with between 7% and 9% of national market, and we're confident that we can exit the year in the number five spot or higher. Brian, on the financial metrics, Brian is going to give you a lot more color later in the presentation, but I'll note here that we organically grew net revenues from recreational cannabis sales to CAD 24.5 million, and we managed to keep spending relatively flat. However, we did encounter some operational challenges during the quarter, which negatively impacted our gross margin.
Those challenges were related to the scale up of dried flower in pre-roll operations, and especially, delays out of our control in the delivery and commissioning of key automation equipment, which resulted in lower than anticipated volumes and higher than anticipated production costs. While we have improved and will continue to improve in navigating those operational challenges, we do expect some of them to persist throughout Q4 and part of Q1, 2022. Regrettably, that will impact our Adjusted EBITDA target. I'm going to leave that to Brian to discuss with you in greater detail during his part of the presentation.
With that overview in mind, let's turn to slide eight of the presentation, where, as I've already stated, we remain the number one LP in 2.0 product segment, and we continue to be the undisputed leaders of the vape segment, close to 25% of total market. You know, one point that won't show up on this paper is that unlike our flower, where we're still building a base portfolio, we have a robust portfolio of vape SKUs. In Ontario, we have 21 SKUs. Just like our flower portfolio, even where we have an increased SKU count, we still have one of the most efficient portfolios in the country, right? Even with a robust portfolio of SKUs, our portfolio is highly efficient, and each SKU is very hardworking.
For example, in Ontario, our 21 SKUs represent 7% of the total category, vape category listings in Ontario. Our vapes represent 26% of all vape sales in the province. I think that's important to note because we're winning through quality and being consumer-centric rather than sheer quantity. At a more macro level, on the right, we exited the quarter as the number six licensed producer in the country. Year to date, no cannabis company in Canada has gained more market share than Auxly. That is a testament to our focused strategy, the tireless efforts of our people, and our commitment to putting the consumer first in absolutely everything we do. That winning formula continues to bear fruit because we continue to see increases in market share.
As I mentioned, we finished the month of October with 7.3% share of overall market, and we moved into the number five slot, and we continue to see strong consumer demand for our product. To give you a bit of color on that, most recently in our test market of Ontario, I can tell you that Auxly has just exited this past week in Ontario as having the number one flower SKU in the province, the number one pre-roll SKU in the province, the number one vape SKU in the province, the number one overall SKU in the province, and Auxly exited the week as the number one licensed producer overall in Ontario. We're heading in the right direction. Moving us to slide nine.
You know, driving a lot of our growth is our expansion into Cannabis 1.0 product formats, where our offering has enjoyed tremendous consumer success. As I mentioned, we are paying extra close attention to our flower performance in Ontario, as that is our home and test market where our entire seven SKU portfolio is listed. With that in mind, if you look at the 12-week period that ended October 30, and you compare it to the previous 12-week period in Ontario, right? Pre- and post-kind of Auxly flower, you start to get a sense really of the traction. During the most recent 12-week period, the overall flower category in Ontario grew about 10%. Auxly's flower portfolio during the same period grew 188% and accounted for 42% of total category growth.
For every additional CAD 1 in flower sales in Ontario that were incremental during the period, Auxly accounted for CAD 0.42 of that. On a brand basis, it's equally as impressive. Back Forty is now the fastest growing flower brand in Ontario. It's grown 191% over the last 12-week period. It's now the fourth largest flower brand by dollars in Ontario. Kolab Project, you know, it's a bit more sluggish. It only grew 175% during that same period and is now the 16th largest brand in Ontario. Pre-rolls tells a similar story, right? While we have launched our much awaited 40s product in Ontario, it's again important to stress that just like dried flower, we're building our base portfolio. We currently have four pre-roll SKUs in Ontario.
Our competitors have many more, like 2.5x-10x our SKU count. Just like flower, we have a highly efficient portfolio. Even with a tiny SKU count in Ontario, the only province where our forties product was available, we're currently the third-largest supplier of pre-rolls, and we believe our rankings would have been even higher but for the operational challenges caused by equipment delays. We do expect to see further share growth in the balance of the year as availability increases and we minimize out of stock positions. I'm going to move us to slide 10. This slide is intended to give you a fast visual representation of our market share progress in our chosen categories. I want to note here that this talks about national share, right? That you can see how we're performing across the country.
As you can see, we grew our share in every category that we participate in, except edibles, where we lost a bit of share. I would address that by saying. It's not something we're overly concerned with. Historically, we have not expanded our edibles portfolio. In fact, in Q4 of 2020, we scaled back on edibles SKUs to allow us to focus on the higher margin products like vape. We've now turned our attention back to the edibles category with new SKUs launching late Q3, performing very well, and some more SKUs launching over the balance of Q4. We intentionally back-end loaded our edibles innovation to Q4, and that was really to allow us to focus on our flower launch and also to address chocolate seasonality issues during the summer.
We think we're gonna be able to win back some share as our new edible products hit the shelves. I've already talked about flower and pre-rolls, so I won't say anything about those on this slide. I would note here on this slide that we continue to make very solid gains in concentrates, where we're now with one of the fastest-growing segments in the market. We're now the fourth largest producer nationally of concentrates, and we feel great about continued share expansion in this category. We recently launched our Live Terpene Sticks, another first to market innovation by the Auxly team. We're launching Caviar and Live Rosin Jam over the balance of the year, and we think that those will have tremendous consumer success, just like our Kolab diamonds product. We've also made tremendous strides in oils and capsules.
You know, we believe our Dosecann branded products are superior to similar products in the market in terms of potency, format, value, and benefit. We're quite bullish of the growth prospects for oils and capsules as we build distribution and as our consumers become more educated, right? Like, it's now been almost two years in 2.0, so people are starting to get a little bit more comfortable with these formats. Look, I'm gonna say a few quick words about our brand performance and our innovation pipeline, then I'm gonna turn you over to Brian. Slide 12. You know, one of our key aspirations is to build authentic connections with our consumers through our brands. We want our consumers to trust and love our brands, and we work hard to win our consumers' brand loyalty each and every day.
I'm delighted to report material progress on this front as well. You know, from a market share perspective, all of our brands are represented in the top 10 brands of each product segment that we participate in. Our three vape brands are all in the top five brands nationally, with Back Forty continuing to be the most relevant vape brand with 14% share of national market on its own. Back Forty and Kolab Project, as I mentioned, are the fastest growing brands in dried flower and pre-rolls. Our Dosecann brand is really gaining traction as we drive distribution for our oil and capsules products. While we believe it's still too early to draw definitive conclusions about brand health and brand relevance, we do believe that we've invested in the right capabilities to enable us to build meaningful brand connections with our consumers.
believe our brands provide us with excellent coverage among our targeted consumer segments, and that based on early signs, our brands are connecting with our consumers and building trust and loyalty. Turning to slide 13 in our innovation capabilities. Look, I think this slide speaks volumes not only about our innovation capabilities but our consumer insight strength. You know, by the end of this year, we will have launched 52 new SKUs into market. That's comprised of the 34 new SKUs already launched and then the 18 SKUs coming in Q4. That is a Herculean measure by any means, but it is even more impressive when you consider the nature of the innovation. We're not just adding a new size to an existing flower SKU and calling that innovation. We're listening to our consumers and then trying to address a particular problem, need, state, or occasion.
When you look at these 52 SKUs that we'll have introduced by the end of year, only 14 of those are line extensions, predominantly different sized vape cartridges. Thirty-eight of the SKUs are entirely new products, a new concentrate, and 10 of those 38 SKUs are first to market innovations, like our live resin gummies, our live terpene sticks. I've already noted earlier in my presentation the efficiency of each SKU on a spend per point of distribution perspective. When you combine those two things, you know, how prolific we are at innovation plus the success that each new product enjoys when it enters the market, it's not by luck. You know, this is the result of having a focused strategy, an obsession with our consumers, and then having the right people, assets, and capabilities to execute on that strategy. Slide 14.
I'm not gonna say much here. This is a visual representation of our product portfolio by brand, and it sets out the balance of innovations that we plan to release throughout the year. Unlike last earnings calls, where we left out some more commercially sensitive innovation SKUs, this chart is now complete. I know some of our investors like to use this slide as a checklist of sorts, so I've included it here again so they can follow along for the balance of the year. I'm gonna stop here and turn it over to our CFO, Brian Schmitt, to deliver the rest of the presentation. Thank you for your attention so far. Brian, over to you.
Thank you, Hugo, and good morning, everyone. If I could get everyone to turn to slide 16, I'd like to start with an overview of our revenues from continuing operations, where we are again excited to report another record quarter for Auxly, achieving CAD 24.5 million in net revenue, an increase of 95% year-over-year and 17% from the previous quarter. In Q3, we saw another significant jump in our Cannabis 1.0 sales, which accounted for approximately 31% of our total revenue, up from 20% the previous year as a result of our expansion initiatives into dried flower and pre-roll categories, while maintaining our leadership position in Cannabis 2.0 sales, which accounted for approximately 69% of our revenues. The next slide captures our gross margin, Adjusted EBITDA, and net losses for the third quarter.
Our gross margin declined to 19% in the quarter, which included an impairment charge related to packaging materials no longer in use. Year-to-date gross margins were 27%, an improvement over 2020, and in line with our gross margin target of 30%. There were a number of factors impacting gross margin during the quarter, including product mix changes, higher costs associated with delayed automation and additional efforts to commission certain machinery resulting in lower realized sales volumes and costs associated with new product production, including greater percentage of units falling below finished goods specifications and additional labor charges per unit sold. 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 few quarters.
An Adjusted EBITDA loss of CAD 6.5 million improved nominally over the same period in 2020 as a result of increased profits, partially offset by higher SG&A. SG&A, excluding non-cash share-based compensation, increased over the previous quarter by approximately CAD 400,000, which included additional selling expenditures to support store openings and higher Health Canada fees directly attributable to increased revenues. Net losses for the quarter improved by CAD 4.2 million as compared to the same period in 2020.
In addition to previous comments regarding Adjusted EBITDA, total other losses were lower in 2021, primarily as a result of nominal losses on the settlement of assets and liabilities and other expenses, and a gain of CAD 1.4 million related to the disposition of Curative following the application of proceeds against the remaining net assets after impairment charges reflected in the second quarter. Next, slide 18 outlines our seven quarters of progress made since the company commenced cannabis sales, showing an ongoing strong positive trend in share of market. That is a key indicator of the company's performance. With an adult use recreational focus, Auxly's revenues ultimately follow our success as represented by share of market. However, they are influenced by our wholesale partners' buying patterns.
Our share of market for 2020 was 3.1%, which increased to 5.6% for the third quarter. In October, Auxly's share of market improved again to 7.3%. While Adjusted EBITDA has been more volatile on a quarterly basis, continued revenue growth supported by increased automation, scale, and operational efficiencies will also lead to further meaningful improvements over time. As we turn to slide 19, we updated the company's revenue multiple relative to its immediate peers and continue to see an opportunity for multiple expansions as the company increases share of market through continued execution against our plan. While revenue multiples may be influenced by other factors, the Canadian adult recreational space has seen some dramatic changes in share of market over the past few quarters, and Auxly is one of the winners.
Auxly has successfully retained its leadership position and maintained its share of market in 2.0 products with a greater than 15% market share and has increased sales in Cannabis 1.0 products with a total of just 11 flower and pre-roll SKUs to capture an additional 0.7% total market share in the third quarter. We close out the year with continued product expansion and innovation that has proven to resonate with our target consumers. We believe we will continue to see gains in our market share in both Cannabis 1.0 and 2.0 categories, leading to higher adult use recreational sales that accelerate our revenues, securing our top five LP position and leading to meaningful share appreciation and multiple expansion. With that, I'll turn it back over to Hugo for closing comments.
Yeah. Thanks, Brian. Look, I'm gonna bring things to conclusion here and then open up the floor for Q&A. We hope we've been able to give you a clearer picture of the way we see our business in the market, and most importantly, why we're excited and confident about our future. At a high level, this was a very encouraging quarter. We demonstrated the advantages of having a focused strategy. We demonstrated that by leveraging the same capabilities that have made us the leader in 2.0, we can quickly build to leadership in 1.0, and that's exactly what we've done this quarter.
You know, by staying focused on our consumer, we've entered the dried flower and pre-roll segment, and in a few short months, with a tiny SKU portfolio, we've been able to outperform and capture more market share than our larger competitors, all of whom have been in the 1.0 segment since day one. We still have lots of room for improvement, lots of ways that we can get better and more efficient. That, in part, drives our optimism and excitement about the future. We know we're on the right path. We know that as we continue to invest in and refine our asset base and capabilities, we're gonna increase throughput and availability. We're gonna optimize costs, increase profitability, and build deeper brand loyalty.
We know that as our operations scale, coupled with our focused strategy, that we can be the number one cannabis company in the country. As I mentioned, in Ontario, our home market, we exited last week number one flower SKU, number one vape SKU, number one pre-roll SKU, and as the number one licensed producer overall. That ability to win in our home market is very encouraging sign to us. That concludes our earnings call, and I'm now gonna turn it over to Julie to open up the floor for Q&A. Before I do that, I wanna take one second to thank the entire Auxly team for their tireless efforts over the quarter, and also a massive thank you to our customers, our partners, our shareholders, and especially our consumers. Over to you, Julie.
Thanks, Hugo. Operator, we're ready for Q&A.
Thank you. Ladies and gentlemen, we will now take questions from the company's financial analysts. If you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, simply press star followed by two. If you're using a speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you have a question. Your first question will be from Rahul Sarugaser at Raymond James. Please go ahead, Rahul.
Good morning, Hugo, Brian, Julie. Thank you so much for taking our questions, and congratulations on the quarter. Really well done on the revenue ramp. My first question is, you know, given that much of that strong revenue has come from flower and you recognize that, the margin impact was driven by sort of some scaling of dry flower and automation, as you mentioned, Hugo.
Given that, the input costs of flower are relatively higher as a proportion of total cost relative to your historical, potentially or your cannabis 2.0 products, which have historically driven pretty strong margins, how do you see, you know, sort of your blended margin profile moving going forward, particularly as, you know, flower grows as a proportion of sales and then, of course, as the input costs of that flower are relatively higher?
Yeah, great question, Rahul, and I'm gonna let Brian answer that. I mean, before I would just add the color, like our target is 30% blended gross margin. That hasn't changed because of the sort of mix. You know, just like when we launched our 2.0 products, demand has been really strong. You know, these are new people, new processes, new products, so it takes a while for the gears to click in from an operational perspective. We were, you know, really impacted by delays in the shipment of equipment, which is just part of the sort of global supply chain issues that are happening currently. I think. Look, we know that from a production manufacturing perspective, we'll get a lot more efficient.
From a cost of input perspective, our Sunens facility is now, you know, it's firing. It will only get better. You know, we're still really at kind of like half ramp there. But the facility is doing great. It's growing incredible product. There is no flower that's in higher demand than our Wedding Pie strain. So we feel really good about our ability to drive low production costs. This is a purpose-built, highly automated facility. So no reason why we can't have similar cost profiles to some of the larger cultivators that have been in production for a while. I'll turn it over to Brian to give more color.
Thank you, Hugo. I would just add that certainly when we created our objectives for the year, certainly the automated machinery was in our plans for the third quarter, and consequently we sought out those listings early on. Unfortunately, as Hugo's indicated, it hasn't gone perfectly with respect to the equipment, so that has caused some pressure in the short term with respect to our gross margins. Some of the equipment, to be a little more specific, is essentially delayed six months. Some of the equipment that we expected in July and then moved to August, September is now effectively going to be commissioned in January, so in Q1. We do expect, you know, net net, a little extra pressure, if you will, on gross margin in the short term.
Coming out of Q1, we would anticipate improvement once that additional automated machinery is up and running in the first quarter.
Great. Thanks, Hugo, Brian, that's some great color. Now just sort of moving to SG&A, you had trimmed those SG&A costs sort of end of last year, beginning of this year, and they've sort of climbed a little bit. My assumption is that because that is sort of commensurate with your rapidly ramping revenue and market share. How should we be thinking about SG&A going forward, specifically as you know, in balance and relative to a ramping revenue?
Brian, go ahead.
Oh, okay.
This is in your wheelhouse here.
For sure. Rahul, I think what we're seeing here is if you look at the detailed notes of the financial statements, you know, the ramp is really in the selling expenditure category. We've spent a little more resources this year in respect of store opening related marketing initiatives, point-of-sale materials. As stores open, we launch new SKUs. Then, in our case, we classify the flat Health Canada fee under selling expenses, so that one's directly proportional to our revenue increases. We will provide additional guidance with our Q4s in respect of 2022. For the fourth quarter, I would anticipate a similar SG&A number as Q3.
Terrific. If you wouldn't mind, I'll just ask one more question then. Given that really strong market share profile that we're seeing in Canada punching well above your weight, could you maybe give us some insight into your international view and how you plan to sort of leverage what you've learned in Canada and your ability to drive revenue market share here in other markets?
Yeah. Look, why don't I take that one, Brian. I would say that until you win in your home market, it's hard to find a case as to why you think you're gonna win in an international market. We're focused on winning in our home market, Ontario, Canada, you know, winning nationally. When we go international, you know, then we have something that has value, right? We have brand equity, we have that that's proven to resonate with consumers. We have product formulations and know-how that are proven to address a consumer segment need. You know, the other thing that I think you know doesn't get a lot of play in international circuits is we you know we have a full like we have an open market in Canada. You know, there's no limited licensed state.
There's no regulatory moat where we control an entire ecosystem or, you know, two or three companies control an entire ecosystem. This is, you know, open market competition at its finest. We'll also have, you know, the proven ability to not only win share, but then protect share in a highly competitive environment. We're focused on winning in Canada. We're focused on building brands that our consumers love and trust, selling more products to recreational consumers in Canada than any other company. We have defined entry plans into other jurisdictions, but those are the type of things that we will leverage, right? We'll leverage the strength in results that we've achieved at home from a brand equity perspective, from an IP and know-how perspective, and from a sort of operational perspective. We're not, you know, planning to go and buy assets in other jurisdictions.
Terrific.
Brian, I don't know if you have anything else to add, but if you do, go ahead.
No, I think you touched on, we're obviously exploring other jurisdictions and staying on top of legalization as legislation changes.
Great. Thanks again for taking our questions, and congratulations again on the impressive market share.
Thanks, Rahul.
Thank you. Next question is from Frederico Gomes at ATB Capital Markets. Please go ahead.
Hi, good morning, Hugo and Brian. Thanks for taking my question. So, first, just on your Adjusted EBITDA, maybe could you clarify your guidance there? You guys mentioned that you're having difficulties reaching that target, but I think that in your MD&A, in your PR, you mentioned achieving + EBITDA by the end of this year. So is that still part of your outlook? Is that still the case?
Yeah. Look, Brian, you can take this. It's still part of what we're trying to achieve, Frederico, for sure. Now, you know, we wanna be transparent with you and with the community. We're, like, having temporary operational challenges. Look, I don't wanna say it's a good problem to have. I would much rather not be having them. You know, the consumer demand for our product has been tremendous. You know, our quarter could have been much better had we been able to fill all of the demand. We're just gonna work really hard, get through the operational challenges, improve every day as we have been to try and increase volumes and availability.
You know, until we can get out of this much more manual type of process, you know, it is going to impact gross margins. That ties into our Adjusted EBITDA, obviously. You know, we wanna be upfront with people to say we're experiencing some challenges. We're gonna work really hard to still try and achieve that goal, but, you know, it is at risk. Brian, over to you.
Yeah, I would add, you know, our goals, we kept them the same. Our goals are not changing. That caused some confusion in the MD&A. We apologize for that. We attempted to add some color below our goals. Our goals have been consistent quarter-over-quarter. As Hugo has indicated and as I indicated in respect to the last question, yes, our equipment is delayed at least six months from the original expected delivery date. As I indicated, it's in Q1 at this point. We're also not sure what's gonna happen here in Q1 with sales. Obviously, all the LPs last year experienced, I would say, substantial drops from Q4, calendar Q4 into calendar Q1.
We're not sure what's gonna happen here, with some of the provincial boards that have March 31st year-end inventory counts. We monitor our sales on hand, our inventory levels on hand, and we're hopeful that there will be no significant pullback given our inventory levels, particularly since we launched new SKUs. There shouldn't be really a holdback, a pullback in Q1, but we're not sure where Q1 is gonna end up. We are sort of targeting the first half of 2022 for an Adjusted EBITDA target to be positive at this point.
Okay. No, no, thanks. That's helpful. Your maybe can we get an update on your efforts to enter Québec? Today we had a competitor, LP, announcing an acquisition there. Just wondering, would you guys consider doing something similar, acquiring a player in Québec to enter that market faster? Thanks.
Yeah, I'll take that one, Frederico. We did see the announcement today. We know both parties obviously, but look, like getting into Quebec is a strategic objective for next year. We have a sort of timeline as to when we would like to launch product there. We have been in discussions with the SQDC now for a year. We have lots of activity in Quebec, lots of people that we're talking to, and we're confident that we can, you know, enter the Quebec market. It's how we enter the Quebec market that we're, you know, we wanna make sure we do it the right way. We are going to watch how this Pure Sunfarms acquisition of ROSE plays out, and what it means for Pure Sunfarms product in the province.
We're committed to engaging policymakers in the province to understand their objectives, you know, by not allowing 2.0 products. We're continuing to meet with the SQDC to understand how we can bring value to their assortment, and we've engaged local firms on those efforts. We do feel that we need to be in Quebec in the near term. That is one of our key objectives. Would we consider buying a facility in Quebec? We would consider it under the right circumstances. You know, I've done lots of business in Quebec over my professional life and going in and buying a facility and thinking you're from Quebec, you know, isn't in my view the successful way to go about it. We will likely partner with people in Québec to bring our product to market, and you can expect to see that in 2022.
Thank you. Appreciate it. Congrats on the quarter. I'll hand it back to you.
Thanks.
Thank you. Your next question will be from John Chu at Desjardins. Please go ahead.
Good morning. Maybe just on the gross margin, it looks like you're gonna have 18 new SKUs being introduced into the quarter. Can you remind me how many you had in the third quarter? I'm just trying to understand how much of a headwind introducing new SKUs can be for the fourth quarter.
Yes, sure. Look, I'll take that one. I think there is kind of new SKUs that are our 2.0 SKUs. I think if you look at, John, our press release of November tenth, you'll see that, you know, it's kind of a lot of edible SKUs, concentrate SKUs, and then some flower SKUs.
Mm-hmm.
You know, a lot of the automation challenges really come around the pre-roll segment and in, you know, dried flower packaging. It's really in pre-rolls where, you know, automation makes a big difference, right? Like, there's a lot of volume that goes through, so not having a piece of automated equipment really impacts the operations. We wouldn't anticipate Q4, like, you know, on our concentrate SKUs, on our vape SKUs, on our edible SKUs, to really have any headwinds, right? On our dried flower SKUs, these are not new pre-roll SKUs. These are kind of, you know, flower that's being grown at Sunens and then a couple of different sizes of existing SKUs, right? Our Wedding Pie and our Animal Mints, we have them in 28-gram formats in Ontario.
This is just giving us the 3.5-gram size. We would expect, you know, those operational challenges to be limited really to just the normal pressures you feel from increased volumes. We really don't see a worsening of the operational challenges. In fact, we see improvement every day, right? It's like anything else. If we don't have a piece of automated equipment, so people step in to fill the void, and then they get better at what they do, more efficient, you can start to pull out some of the other costs. We don't see a worsening of the headwinds. We see kind of the headwinds reducing, but you know, they're still being kind of a persistent breeze, if you will, as we wait for our automated equipment and get it commissioned.
Okay. Are you able to quantify the impact that these operational challenges had on your, number one, to your sales, and then secondly, to the margins? On the sales side, it sounded like you were sold out of some SKUs as a result, and you weren't able to meet the demand. Can you quantify that? Then obviously, if you had the automation, what were your expectations on what margins could have been? Just trying to notice that the jump in margins from last quarter to this quarter was pretty large. I'm just trying to understand maybe to get a sense of what it could have been.
Yeah. Look, Brian can address the margin point. In terms of what, you know, orders you left on the table, that is almost impossible to quantify because it has a knock-on effect, right? I got a purchase order, they want a lot of product, and I can't fill it all. That part you can quantify, right? Like, how much of the purchase order didn't you fill? What you can't quantify is the fact that you're not getting the reorder, right? The longer you wait to fill an order, the longer it takes for you to get your reorders. Like, that part, you can't really quantify, like what would've been the reorder timeline, what would've been the reorder cadence, et cetera. That's a bit harder.
Look, I think the way we develop products, the way we launch products is we let scale lag sales, right? We could have spent CAD 20 million to build out like, you know, a shiny spaceship, you know, thinking that this format we're gonna launch is going to have the type of demand that it's enjoyed. But if we got it wrong, you know, then there'd be all the problems with spending big before sales are big, et cetera, and you'd have, like, all these impairment charges, right? Like, I think that chapter in the cannabis industry is probably over. We've let scale lag sales. You know, we'll keep driving forward to get better and increase availability and fill. Brian, over to you on the margin point.
Yeah. Hi. Hi, John. On the margin, like, look, I think we've tried to articulate that, you know, our target margins were obviously predicated on the equipment being here. I think our goal would still be to have a blended 30% margin in the short term. Obviously, if flower sales ultimately flip to 75% of our portfolio, we will provide some further guidance in that respect. In the short term, there's gonna be additional pressure as we've discussed until that automation is fully deployed.
Okay. The last question with, especially in Ontario, with the stores opening up the foot traffic back in, I guess it was June. I mean, there's always been the view that for the 2.0 products, especially the customer really needed a budtender to really understand those products. Are you finding that the reopenings and that increased foot traffic and then being able to talk to a budtender, is that really starting to push up the 2.0 sales and is that something that you're seeing?
Like, I think it depends on format, and product, right? Like, flower, people understand flower. I think where it does help is specifically, you know, 2.0 sales, especially you've seen, like, you know, in our presentation we had a marked increase in our oils and capsules formats, right? These are still formats where consumers have questions, how do you use it? How many drops, how many capsules do I take a day? Being able to go in, talk to an educated budtender and get some guidance is very helpful. Yes, you know, we do see it being helpful in 2.0 formats.
Okay. That's it. Thank you.
Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touchtone phone. Your next question will be from Pablo Zuanic at Cantor Fitzgerald. Please go ahead.
Yes. Good morning. Hugo, maybe this question is a bit simplistic, but you know, in the past we saw other companies gain share in flower very quickly. I mean, Aurora back in the day with a value format and then Canopy with Twd, right? We saw companies gain share aggressively because we're selling 28 g formats or pack sizes or very low prices. On the other hand, we saw other companies like Village Farms gain on the strength of a single strain, good quality, good price. I mean, help the uneducated observer characterize your market share gain in flower and pre-rolls. I mean, you don't share volume, so we can't really ascertain price points. But if I go through the Hifyre data in detail, I can see what's driving it.
It would be good from your side, you know, what's driving. Are you gaining a specific price segment? Are you gaining specific pack sizes? and why is the consumer responding to your flower? I mean, the question really is just understand, is this a temporary, you know, jump, or is it sustainable? Thank you.
Yeah, that's a great question. I would say when some of those companies captured all their market share, there was no competition, right? They haven't been able to maintain it. You know, we're not value priced. We're everyday premium priced, right? Look, why are we winning? We're here because we're here for the consumer, right? We wanna give them a great product at a great value that never disappoints their expectations, so that they can build loyalty and trust in our brand. We are the same price as the Pure Sunfarms product. You know, what we have is we pick the right genetics driven by consumer insights, and we have the right mix of potency and pricing.
The result is, you know, the product, you know, it was made for consumers, you know, with their needs in mind, at the quality that they demand and the value that they want, and it's resonating. I go back to the efficiency of each SKU, Pablo. You can go to Hifyre and you can cut up the data. It's pretty easy to do. We have seven SKUs. No one sells more on a per SKU basis than we do. Like I said, I think that's a testament to our insight, right? To being able to put out a product on the market that we've you know, we're putting it out for a reason, and the reason is, well, that's what we're growing or that's what we could buy. We're putting it out. We specifically select the genetics to meet the profile that we want.
We test it, we refine it, and then we, you know, grow what's been proven. I think that's the key to our success, is we can put out a product driven by insights that we have a high degree of confidence is going to get traction, and then we work really, really hard to ensure consistency, fill, and great customer service.
Right. On that point, again, you know, and some of these questions are maybe from the uneducated observer and maybe too high level. You know, on the one hand we hear some companies say, look, we've been farmers for 30 years, hence we can produce well, good quality, good price. Then we see other companies that are new to the game three years in, still struggling, right? Again, to understand the endurance of this platform, maybe more color on the cultivation side. What is it that you guys are doing so great, if you can share some color there? Again, the question comes from the angle of trying to understand why others are failing, you know, over the last three years, and why are you guys doing so well on the cultivation side, apparently. Thank you.
Well, look, I don't think it should be lost that our greenhouse was, you know, designed, built, you know, operation had been started by someone who is every bit a titan in the industry, in the produce industry as Pure Sunfarms, right? Nature Fresh Farms is as big or bigger than Village Farms. They're kind of, one's on the East Coast, one's on the West Coast. I would say from a cultivation know-how perspective and a facility that's been purpose-built to produce high quality cannabis at, like, really consistent and low cost per gram basis, you know, we have one of the top facilities in the world. Yes, cultivation is very important, as is, you know, your genetics. We're confident that this product is not a flash in the pan. We've got an amazing facility.
We've made huge investments in genetics and automation. We're only one year into Sunens operation. Like I said, the Wedding Pie flower is the number one flower SKU in Ontario. Our Wedding Pie pre-rolls are the number one pre-roll SKU in Ontario, and our Wedding Pie 28-gram is the number one SKU overall in Ontario. You know, it's going in the right direction.
Great. Congratulations. Thank you.
Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.