Good morning, ladies and gentlemen, and welcome to the Auxly Cannabis Group Q3 2026 financial results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for an operator. This call is being recorded on Thursday, November 12, 2026. I would now like to turn the conference over to Hugo Alves. Please go ahead.
Good morning. I am Hugo Alves, Auxly's Co-Founder and Chief Executive Officer. I would like to welcome you all to Auxly Cannabis Group's Q3 2026 conference call and webcast. Joining me on the conference call today is Travis Wong, our Chief Financial Officer. Today, I will share highlights from the quarter, then we will open the call up to questions from analysts. 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 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 relations.
Our contact information can be found at the end of our earnings press release. Okay, diving into our financial results, our Q3 2026 financial results delivered quarterly records in net revenue, Adjusted EBITDA, and cash flow from operations before working capital changes. Net revenue reached CAD 49.5 million, an increase of 24% year-over-year. Gross margin on finished cannabis inventory sold was 56%, consistent with Q3 2025. Adjusted EBITDA was CAD 15.8 million, an increase of 29% year-over-year, and representing an EBITDA margin of 32%. Cash flow from operations before working capital changes reached CAD 14.8 million, an increase of 28% year-over-year, and representing a 94% conversion from Adjusted EBITDA. Our net revenue growth is driven by the continued success of Back Forty with the Canadian consumer.
Our value proposition is to deliver a high-quality cannabis product at a great value and provide innovative products to our consumers in the product categories that matter the most: dried flower, pre-rolls, and vapes. Our focused winning at home strategy is working. One recent example of success and innovation was the launch of a new cultivar under Back Forty this summer, Galactic Jack. As of October 2026, Galactic Jack was already the ninth top-selling flower SKU in the country and the 25th top-selling SKU across all categories. With Back Forty Liquid Imagination and Fire Breath maintaining leadership as the number one and number two top-selling SKUs in Canada, we are proud to say that Back Forty is the number one brand in both flower and pre-rolls.
Looking ahead, we remain focused on our consumer with more innovation planned under both Back Forty and Kolab Project, which I am thrilled to report is now the fifth-largest vape brand in Canada by dollars sold. We are also growing our premium South Point brand, recently launching Masterpiece, a new cultivar in Q4. Turning to gross margin, our Q3 2026 results reflect structural improvements across our operating footprint and strategic procurement initiatives. We held gross margin at 56% even as we invested behind new product innovations and the broader economy experienced inflation, which we view as a very strong result. Auxly again delivered operating leverage in Q3, with Adjusted EBITDA growing faster than net revenue. Most importantly, that profitability is translating directly into cash flow with a 94% conversion rate between Adjusted EBITDA and cash flow from operations before working capital changes.
Our balance sheet is strong, ending the quarter with over CAD 51 million in cash. In terms of our outlook, Auxly remains focused on delivering sustainable, profitable growth by building on our leadership in the Canadian cannabis market. We believe Auxly can continue to grow net revenue above market rates through product innovation, continued investment in distribution, and increased capacity at Auxly Leamington, and there are several factors that give us confidence. First, we anticipate total capital expenditures of up to CAD 30 million through the end of 2028 within Auxly Leamington's existing footprint, which are expected to increase production capacity by 30% from 2025 levels. We expect to commit between CAD 10 million and CAD 12 million of cash flow from operations to these projects in 2026, with a portion of the associated expenditures expected to occur in the first half of 2027.
Second, product mix continues to be an important growth driver. Back Forty is the number 1 pre-roll brand in the country. We earn a higher revenue per gram on a pre-roll product versus a flower product with a comparable gross margin. As consumers gravitate towards the convenience of pre-rolls over the long term, we believe our top line can continue to benefit from the scale and quality of our pre-roll capabilities and our leadership in pre-roll innovation. Auxly can also benefit from premiumization through brands like South Point, and our vape sales continue to grow, and we are not constrained by flower supply and have room to add capacity at Auxly Leamington. In addition to growing revenues, we plan to maintain profitability and generate strong cash flow supported by the structural improvements we continue to make in yields, manufacturing, and procurement, and continued cost discipline across our organization.
Turning to the market, we expect the Canadian market to continue to benefit from tailwinds, including increased social acceptability and the capture of market share from the illicit market, and we are encouraged to see provincial and federal governments recognizing the importance of our industry. In Ontario, Canada's largest cannabis market and our largest provincial customer, the government has announced its intention to introduce legislation giving the Alcohol and Gaming Commission of Ontario new tools to address illegal cannabis retailers, which it estimates account for approximately 30% of all cannabis sales in the province. That legislation has since been tabled as Bill 143, and we applaud the government of Ontario for this important and much-needed initiative. We also applaud the federal government for recognizing the importance of our industry in Budget 2026 and for taking meaningful steps to reduce unnecessary regulatory burdens.
The proposed common excise stamp would reduce the number of unique stamps from 13 to 6, which is a welcome first step. Of course, the real operational efficiencies and cost savings will come with a single national stamp, so we encourage all remaining jurisdictions to follow the federal government's lead and join the program. On international markets, we continue to see long-term potential and are actively evaluating export opportunities. Many of the most attractive international markets are still medical only, and their regulatory, consumer, and supply chain dynamics continue to evolve, so our deliberations are purposefully rigorous and measured to ensure that international activity is accretive to profitability and that our focus on winning at home is not compromised.
Our approach to capital allocation remains disciplined and returns-focused, investing in organic growth, pursuing selective inorganic opportunities, and repurchasing shares through our NCIB, as we continue to believe our share price does not yet reflect the intrinsic value we have built. Underpinning our framework is a commitment to a strong balance sheet so we can fund our priorities from our own cash and respond to compelling opportunities as they arrive. We believe that we can continue driving value for our investors. In July, we successfully completed our 14-to-1 share consolidation at a post-consolidation share price of CAD 2.52, and I'm delighted to say our shares have traded above that level ever since, which makes this one of the most successful consolidations in our industry to- date. Thank you to our shareholders for their support and belief in Auxly.
To conclude, Q3 was a great quarter, and it was made possible by an incredible organization. I want to thank each and every member of Team Auxly across Canada for their hard work and dedication. Their passion and commitment are the driving force behind our success. I would also like to thank our consumers, our retail partners, our vendors, and you, our shareholders, for your continued trust and support. We are building to last, and the best is yet to come. That concludes our prepared remarks. Operator, please open the call for questions from analysts. Thank you.
Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to remove your hand from the queue, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. Just a moment for your first question. And your first question comes from Ben Stonkus with Haywood Securities. Please go ahead.
Yeah. Hi, good morning. Thanks for taking my question, and congrats on the strong quarter. I wanted to start off on gross margins. 56% for the quarter was in line with last year, but up a fair bit from Q2. I just want to get a sense whether this was driven by some seasonality over the summer months, any promo activity, or efficiencies you are starting to realize at Leamington.
Yeah, I will turn this over to Travis.
Hi, Ben. Good to hear from you. Our 56% margin year-over-year remained stable. We typically see higher margins, as you have identified, in the backend H2 of the year because of those summer yields. But year-over-year, we did benefit from higher cultivation yields, improved manufacturing processes at Leamington, and continued efficiency gains at Charlottetown, as well as we did have some procurement initiatives that we were able to successfully undertake this year. And those gains, not one-time tailwinds, those are permanent deliberate investments to operations that will continue to sustain our higher margins. That being said, in the quarter, it was partially offset by lower B2B sales volumes and prices, and on a net-net basis, that is why margins remained at 56%.
Yeah, I appreciate that color. Just moving to SG&A, we are starting to see it come down as a percentage of revenue. In your prepared remarks, you mentioned that we are starting to see some operating leverage in the business. I just want to get a sense of whether we should think of the current spend as a new baseline going forward.
Yeah, I think we've always disclosed to the market, and we're quite confident that we're able to sustain the operating leverage that we've been able to maintain to date. We do track operating leverage on an annual TTM basis rather than quarter-over-quarter. That being said, yes, we do intend to target SG&A growth at the same rate as revenue growth.
Thanks. Just last one from me. Looking ahead to Q4, are you able to provide any color on what you've seen in terms of growth so far in the quarter? Anything you can share would be appreciated.
Yeah, I would say the color would be general. This is the seasonally stronger half of the year. In Q3, you get the benefit of the summer months. In Q4, you get the benefit of the holidays. Historically, both have been excellent quarters for Auxly, where Q4 has been a bit better than Q3. We continue to see very, very strong demand for our products across our three product formats, dried flower, pre-roll, and vapes. Sales are going great. We expect it to be a strong quarter.
Thanks for that. I'll pass the line.
Your next question comes from Reece McCauley with Acumen Capital. Please go ahead.
Hi, good morning. I was just wondering, in terms of margins on your vapes, if you guys have found a level on there or if that compression is expected to continue?
Hi, Reece. It's great to hear from you. No, it's a great question. I think for us, vapes has been, I would argue in some ways, a tailwind for the business year to date in 2026. We've seen strong momentum in this year in terms of sales volumes. Particularly, we're seeing strength in not just the Back Forty brand, but as well as our Kolab brand. Specifically on margins, we continue, like I said, to invest in the Charlottetown facility. We've been able to obtain some efficiencies at the facility, which is translating into higher gross margins in the vape category. Then the final thing I'll point to is that there has been some industry compression in the input costs of the vape material, so particularly the distillate.
We've been able to benefit as a tailwind this year, which has supported the stronger margins in 2026. Looking forward, we do note that as a potential. We're looking at ways to mitigate that if the price does go back up on the distillate. That being said, based on what we know, there is still quite a bit of supply in the market.
Yeah, Reece, I think the only additional color I would add there is that the price compression in vape products highlights the importance of our strong innovation. As prices on all-in-one vapes compressed over the course of the year, we were able to innovate and introduce a higher-priced boosted vape. Also, I think as I mentioned in my prepared remarks, Kolab Project is now the fifth-largest vape brand in the country. That is a more premium, higher-priced project. We look at it on a category basis, and vapes is the most challenged format out of the three we participate in from a margin perspective because there's the fewest barriers to entry. But we believe that through our strong brands, strong distribution, and superior innovation, that we can maintain our category gross margins within our margin envelope.
That's great. No, awesome. Thank you. Then another one, just could you guys maybe comment on the trend on pre-rolls versus dried flower?
Yeah, sure. I think we're starting to see our long-term thesis play out, which is that over the long term, as quality and convenience resonate with consumers, that there will be a shift from dried flower consumption to pre-roll consumption. We started to see that this year, where pre-rolls have overtaken dried flower as the number one format in the market and continue to grow. I think that plays into our strength. It plays into our strengths from a growth perspective because we get greater gross margin dollar contribution from a gram of flower in a pre-roll versus a gram of flower in a bag. Also, we've invested heavily over the last six-plus years to develop what we believe is the highest throughput, highest quality pre-roll manufacturing in the industry.
As that format continues to grow, we have capacity to support that growth, and we believe we have one of the highest quality products in the market at the best value. It is a trend that plays into our competitive strength.
Perfect. Thank you. I just had one more. Just looking at some industry data on retail trends and year-over-year growth, it seems like it has been trending up pretty strong. I am just wondering if you guys had any commentary on if that is expected to continue or if you think that is more of a one-off.
Can you unpack that a little bit for me? What is it, the growth or our growth at retail?
The retail growth year-over-year for consumer spending.
Yeah, no, listen, we think we are in a great market, right? As we are focused at winning at home because we think the Canadian market is a great place to be. It is continuing to grow. We believe on average, kind of grows 5% a year between here and 2030, getting us to that sort of CAD 6 billion or CAD 7 billion market. Apart from just the growth, it is a stabilizing and mature market, right? Regulatory dynamics are stable here. Not only are they stable, they are improving, whereas in other jurisdictions, they are still evolving and there is a lot of uncertainty. Consumer dynamics, I think brands are starting to matter more here.
This is a stable, profitable market where we believe we can continue to grow and capture market share and generate strong profitable returns. We think we can grow faster than that 5% rate of market growth given our strong capabilities, innovations, and brands.
That is great. I appreciate it. I will pass it along. Thank you.
Great. Thank you very much, Reece.
As a reminder, if you have a question, please press star then one. There are no further questions at the time. This time, I would like to turn the call back over to Mr. Hugo Alves.
Thanks, operator. I just want to thank everyone for joining us today, and please do not hesitate to contact us if you have any questions. Our contact information's at the end of our earnings press release. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. We thank you so much for your participation. You may now disconnect.