I'd like to introduce our next presenter here at the Planet MicroCap Showcase Toronto in partnership with MicroCapClub. Joining us right now from Auxly is Hugo Alves.
Thank you. Is this on? We're good? All right. First, thank you very much for your time today and for your interest in Auxly. My name is Hugo Alves and I'm the Co-Founder and CEO of Auxly. Maybe before we begin, I'll give you a few introductory remarks about myself. I've been in regulated cannabis since the beginning, since the regs were introduced in 2013. Before Auxly, at that time I was a Senior Partner at Bennett Jones, a national law firm where I practiced regulatory and commercial law, and my team really helped structure a lot of the early deals in cannabis as companies were just starting to become capitalized.
In my journey in cannabis, through Auxly and Bennett Jones, I've also been fortunate to play a role in the evolution of cannabis policy in this country, most recently as the Chair of the Cannabis Industry Forum, which was an economic and industry advisory panel to the federal government. I'm passionate about cannabis, I'm passionate about the cannabis industry, and most of all, I'm passionate about Auxly. I'm delighted to be here today to tell you a little bit more about our company and why we're excited for the future. Maybe before, you know, please note our standard disclaimers here on forward-looking information and the use of non-IFRS measures. Auxly, at a glance, we are a publicly traded Canadian cannabis company headquartered here in Toronto. We trade on the TSX and the OTCQB exchanges. We're a strong and passionate team, 410 team members strong.
We specialize in the cultivation and manufacturing of cannabis products that we sell here in Canada under a portfolio of owned brands. We're currently the third largest producer of cannabis products by market share, 6.2% share of total market. Our flagship brand, Back Forty, is the number one brand in cannabis by dollars sold. It is trusted and loved by consumers from coast to coast. You can find our products in 97% of all retail locations because we focus on the product categories that matter the most: dried flower, pre-rolls, and vapes. That's what we're great at. Those three product formats collectively account for about 90% of all market sales. Most importantly, I'm very proud to say that Auxly is a cannabis company that is growing profitably. We've delivered strong top-line growth since 2020 when we started commercial sales, 60% CAGR.
More recently, as at Q2 over the trailing 12 months, we've generated CAD 139 million in net operating revenue, CAD 38 million in adjusted EBITDA, and CAD 28 million of net income. We're excited about where we've gotten the company to and where it's going to go in the future. We think that we're in an excellent spot to continue delivering year-over-year growth and strong profitable results. You start with the Canadian market where we operate. This is a growing market. More and more Canadians are choosing cannabis as their preferred form of recreation. More and more of those consumers are choosing to purchase their cannabis from safe, regulated sources like Auxly, as opposed to the dangerous, illicit market. It is a growing market. Demand for our products is at an all-time high, continuing to grow. Not only is it a growing market, it's a stable market.
As weaker players have exited the market, some have converted to an asset-light model and others have focused outside of the country. That has created better pricing dynamics for producers like us. We are getting a better price for our product. We expect those dynamics to continue given that we are in a strong demand environment and the capital cost and time, if you can raise the capital to bring quality cultivation online. We're excited about Canada and the growth potential here. Beyond Canada, there's an international market that continues to grow and evolve and provides Auxly with a bigger market to grow into. I want to be clear, our focus is to win at home. We have always said there's got to be a reason to believe that you can compete internationally. Our vision as a company is to be a global leader.
We think we're very well positioned to execute on that vision, first and foremost because we are winning at home. We are making brands and products consumers genuinely trust and love. The assets and capabilities that we've developed, which I'll talk about in a minute, give us real advantages that position us to continue winning at home and competing on a global scale when the time is right, including we have a strategic partnership with Imperial Brands. They're our largest shareholder. They own 19.9% of our business, so very aligned with our success. For those of you who may be not as familiar with Imperial Brands, they're the world's fourth largest tobacco company and one of the world's truly global CPG companies. They operate in over 120 different countries, including all of the countries that have a pathway to legalization. They are our strategic partner and largest shareholder.
They will help us grow into those markets when the time is right. I also talked about our assets. I think our assets, our purpose-built strategic assets, give us a real edge in terms of cost and quality. I'll start with Auxly Leamington. This is our 1.1 million square foot cannabis cultivation facility located in Leamington, Ontario, currently producing about 100,000 kg of high-quality dried flowers. This is one of the largest and most advanced cannabis cultivation facilities on the planet. We designed and built this facility in partnership with one of the largest greenhouse manufacturers in North America. Every single aspect of this facility is purpose-built for cannabis. We believe that this gives us a real advantage in terms of sale and cost without sacrificing quality.
We think we're the lowest cost or one of the lowest cost producers in the cannabis industry, but low cost alone is not going to be very meaningful if consistency and quality suffer. That is where Auxly Leamington really shines because this facility consistently produces high quality, high potency cannabis that consumers love and the fruit is in the result. Back Forty is the number one brand. Back Forty is the number one brand in dried flower. As a flower brand, it is growing at 91% on a rolling 12-month basis. Our two most popular SKUs, our Back Forty Liquid Imagination and Fire Breath 28 g bags, are respectively the number one and number two top selling SKU total market. Auxly Leamington delivers on flower, and Auxly Leamington also houses our automated pre-roll capabilities where, again, our approach is much the same as in flower. Consistently deliver high quality at scale.
Through our partnership with Imperial Brands and a five-year R&D collaboration with the world's largest manufacturer of high-throughput tobacco equipment, we have developed the most advanced high-speed cannabis pre-roll filling and packaging capabilities in the industry and unrivaled operational and technical knowledge. This allows us to consistently deliver a high quality of product while giving us scale and cost advantages in pre-rolls, one of the most important consumer categories in cannabis today and for the future. Our focus on pre-roll and these capabilities have yielded excellent results to date. Our Back Forty slims have become a national consumer favorite, propelling Back Forty to be the number one brand in non-infused pre-rolls. In fact, out of the top 10 non-infused pre-roll SKUs total market, five of them are a Back Forty slims product. Back Forty as a pre-roll brand is growing at a rate of 41% on a rolling 12-month basis.
We are starting to innovate into larger formats, into infused formats, to continue winning category share like we did this summer with the introduction of our Back Forty Backpackers product, which is a larger size pre-roll. We introduced it in the summer. It was a tremendous success, exceeded our expectations. We are excited about our ability to continue growing in pre-rolls. Going to vapes, you get to Auxly Charlottetown, our center of vapor innovation and manufacturing located in Charlottetown, Prince Edward Island. We got to PEI because of the deep talent pool in science and biotechnology. The PEI government has worked really hard over the last decade and a half to promote the biotech sector, and they have done an incredible job in attracting some of the world's top biotech companies and talent to the province. We have been able to assemble an incredible team at Auxly Charlottetown.
I think they are unmatched in terms of cannabis vapor innovation in this country. They have released more first-to-market vape innovations than any other team, including last year when they introduced the all-in-one vape to the Canadian cannabis market and really changed the face of the vape category. The all-in-one vapes are now one of the fastest growing, most popular segments in cannabis, and Back Forty dominates there. 23% share of segment, over 10,000 points of national distribution, really showing the popularity of these products. As a vape brand, Back Forty has always been one of the top vape brands. That's where we got our start day one. Continues to grow at a rate of 30% on a rolling 12-month basis.
Auxly Charlottetown delivers again on innovation, and we are going to continue to lean into our culture of innovation because it is that combination of innovation leadership in our core categories plus operational excellence that helps drive our strong gross margins and financial results. Whether it's the next great cultivar, pre-roll, or vape, our culture of data-driven consumer insights and innovation ensures that we stay focused on what matters most and that we continue to evolve and grow with our consumers, bring great new products to market, and winning market share. I'll recap here just for a second. We think that our strong product focus, we focused on the right products coupled with the assets and capabilities I just discussed and the fact that we operate in a growing market, gives us a lot of confidence that we can continue to deliver strong financial results.
Most recently, we delivered our Q2 2025 financials up until the end of June, and it was a record quarter. CAD 38.8 million in net revenue, a 33% increase year over year. We expanded gross margins to 52%, which was 11 percentage points better than the previous year and obviously had a great impact on EBITDA with CAD 11.6 million of adjusted EBITDA, a 123% improvement over the previous year, and translated into a 30% EBITDA margin. We're delighted with the year-over-year improvements. Those year-over-year gains were driven by improvements in our throughput and quality at our facilities, which we funded organically through our own cash flows, increased demand for our products, innovation and product mix, and of course, some of the better pricing that I alluded to earlier.
Q2 was also fantastic on the bottom line, CAD 8.3 million of net income, and we generated about CAD 4 million of cash flow from operations. It was a strong CPG-like performance, and we think the company's in a really good spot to continue growing and enjoying strong operating leverage. Given our largely fixed cost base, continued improvements in revenue should flow largely to our bottom line. We're mindful of the fact, and we believe that EBITDA is not as meaningful unless it's converting to cash flow. As at the end of Q2 over the 12-month period, we've generated about CAD 21.5 million of cash flow on CAD 38 million of EBITDA. That's converting to a very healthy 56% conversion rate of EBITDA to cash flow. The company is generating significant cash flows to help fund our future growth. Importantly, immediately subsequent to quarter, we recapitalized and transformed our balance sheet.
We're excited to show the impact of that on our Q3 print. With strong support from our lending syndicate led by BMO and our strategic partner Imperial Brands, we eliminated CAD 21 million of debt from our balance sheet. We reduced our debt servicing cost by about CAD 700,000 a year. Importantly, we flipped our working capital from a working capital deficit to about CAD 35 million in pro forma working capital. It was transformative, and it gives us a strong, flexible balance sheet where we can now start allocating capital to opportunities that will improve our business, generate a very strong return, and create enduring shareholder value. I'm going to wrap it up there. If it hasn't gotten across, we're excited. We're excited about the future of the company. We really do believe we are just getting started. We operate in a growing market.
We believe we focused on the right products and developed assets that give us real strategic advantages. I think the proof is in the results. The company is growing profitably. We're generating strong cash flows. Now with the recapitalized balance sheet, we have the flexibility to start allocating capital to high return opportunities. We're excited. The executive leadership team is excited. We're a small team, six individuals. We've all been with the company either as founders or day one early employees. We've stuck together and navigated the well-documented headwinds of the Canadian cannabis industry. We're battle-hardened. I think what you can expect from us is we're going to continue to prioritize profitability and cash flow, and we're going to be very prudent with the allocation of our capital and make sure it's going to our best and highest return opportunities. I'll stop there.
Thank you again for your time and interest in Auxly. I know we have some time left, so I'm happy to answer any questions now. I look forward to meeting as many of you as I can over the next day and a half. Thank you.
1.1 million square feet at Leamington, how much of that is actually growing in the space?
660,000 square feet. 660.
Of your 100 kg, the kilos that you grow, how much of that is used for your actual products and how much do you sell off?
85/15 split is what we target. 85% B2C, 15% B2B.
So 85%?
85% goes into our own brands, our own branded products. We will use more of that. We prioritize B2C. We prioritize the building of our brands, but we do participate in the B2B market.
Sell off?
Yeah, look, I would say when you're thinking about our capacity, we're at 100,000 kgs a year dried. This year we improved output by about 10% on a very capital-light basis. We're about CAD 2.5 million of CapEx this year. We believe there continue to be lots of capital-light ways for us to get similar improvements year over year for the next few years, improving yields by 8%- 10%. I don't look at it that way. I think that there are probably four large-scale cultivation facilities in Canada that are in the same league as Auxly Leamington. They focus, I've been in all of them, they focus on different things. They've spent money in different places. Again, where Auxly Leamington, I think, shines is it's been purpose-built from the ground up to be nothing but a cannabis facility and with a really strong focus on quality. Right?
We're not really a greenhouse. It's more, the HVAC controls in this facility are equivalent to any indoor facility. Where we get is scale and cost advantages. Given the scale, given the yields that we're able to get without compromising quality, like I said, low-cost product is great, but not if you want to be number one in dried flower, not if you want to win with consumers. So far, yeah. Thanks, Kirk.
What did you do for your cannabis?
We refinanced. It was kind of like, think of it as a two-stage transaction. Part of it involved Imperial Brands. Part of it involved our senior lending syndicate. With Imperial Brands, our strategic partner, we effectively gave them CAD 9 million of equity and they, for CAD 2 1 million. They wrote off part of the debt and the rest they converted into effectively like an anti-dilution instrument. It's a paid-up warrant. On the back, it was the remainder of the debt that they put in by way of investment. They converted CAD 123 million last year into equity, and this was the remaining picked interest that wasn't converted at that time. On the back of that support, BMO restructured our loan.
Inside of?
Inside, so Imperial owns about 19.9% to be exact, and then management owns 5%- 7%. Capital light, capital light, yeah. Capacity on pre-rolls, lots of capacity, right? We have three high-speed makers. Let's say two of them are, you know, we were the first to have them, but they're commercially available now. The large-speed one is the only one of its kind. It was just specifically designed for us. We have lots of throughput in pre-rolls. Again, in cultivation, we don't have a part of the facility that's off because we don't need it. We use the entire space. Where we can continue to make improvements is in post-harvest, right? That is usually the bottleneck to capacity growth, right? It's a mix of your processes and your genetics that you're using. There's a host of factors that go into it.
Like I said, we think we can increase output by 8%- 10% on a year-over-year basis for the next few years without announcing a major CapEx project like some of our competitors have. Yeah, Kirk, go ahead. Auxly Leamington, I don't know if I have a, like a, yeah, I don't have a picture of it here, but it's, so first think of it as it sits on a 100-acre parcel of owned land. That is kind of what boxes you in from a real property perspective. We have dedicated allocation of power. We're a Class A rate payer. We don't pay the global adjustment that, unfortunately, all Ontario energy users pay. We have our own dedicated line.
That was part of one of the reasons why we chose Leamington, this parcel had a new transmission line being built right next to it and had an allocation of 25 MW available to it. Having the power is also a big gating factor to expansion. 100 acres, got a lot of power. This facility was designed, the blueprints have another 660,000 square feet of glass, right? It was supposed to have, if you ever see a picture, it looks like an L shape. It was supposed to have the other half built in. We saw, as a two and a half year capital project, demand dynamics shifting dramatically. We were able to sort of halt construction of that second half of glass. A lot of the parts are, you know, we weren't able to stop all of the deliveries and stuff.
A lot of the parts, like the moving tables and stuff, are there. If you wanted to do a major CapEx project to significantly increase, you could double, more than double yields on that 660. Beyond that, you're into building more glass on your real property parcel. Theoretically, you could build another 660 and then another two of those facilities because the full envelope is 30 acres and we sit on a 100-acre parcel.
Is that CAD 50 million?
We would have to price it out, right? It'd be irresponsible of me to give you a range. I would say, you know, GrowCo, which is Cronos's JV facility in Leamington, Ontario, and not dissimilar in size than us. They just announced, you know, major expansion. It was about CAD 70 million that they quoted, right? We haven't priced out that type of expansion because, you know, frankly, again, we believe that we can increase output, you know, being a lot more conservative with our cash flow. We're also mindful of the fact that we don't want to get out ahead of our skis in terms of supply. We are now in a better supply-demand environment, but that is relatively new, right? That is over the last year. Before that, we were in an oversupply environment.
Frankly, we're going to be prudent with the allocation of our capital, make sure that we are going to get a good return on it. Yeah, great question. Look, I think we are still looking at all the opportunities. I think we are going to prioritize, I think, some continued improvements, like capital improvements, because that yields very strong returns and increases profitability. We'd also like to continue improving our balance sheet. We have a final piece of high-interest debt coming due at the end of this month. It's about a 20% cost of capital piece of debt. We're evaluating paying that out with our cash flows now. Beyond that, we have a host of opportunities that, again, we think yield very good returns for our shareholders and improve our business. Too early to comment on that now. Yes. It would be improvements.
No, we're not going to go, you know, like, no, no, no, we're going to be, look, like I said, we've been at this now since the beginning. It's been a tough industry, right? There's been a lot of ebbs and flows, a lot of headwinds. We're excited that we've gotten the company into this position where it's profitable, generating strong cash flows, but we are going to be prudent going forward. We're not going to start spending aggressively. The facility is CUMCS-certified. That's the Israeli certification. It's the equivalent of a GACP registration. We can ship internationally to non-EU GMP countries directly, to GACP countries. In GMP countries, we would need to use a third party to finish drying the product and packaging in GMP. That is, in terms of opportunities that we're looking at of where to allocate capital, very much on the agenda, right?
There have been changes in the GMP licensing regime over the last six months. I think companies that have had their GMP license renewal audits have been quite surprised. It's something that we continue to look at. On the international front, this is an evolving regulatory environment, right? We are going to be prudent. We're going to make sure that we have full transparency and understand what we're doing because there is overlap, right? There would be overlap in a capital project to EU GMP something and to improve output and quality at our facility. We want to make sure we get it right. Any other questions? No? Okay. Listen, thank you very much. Look forward to meeting you. Thanks for the time.