XLY Auxly Cannabis Group Inc

TORONTO, May 16, 2022 /PRNewswire/ - Auxly Cannabis Group Inc. (TSX: XLY) (OTCQX: CBWTF) ("Auxly" or the "Company") today released its financial results for the three months ended March 31, 2022. These filings and additional information regarding Auxly are available for review on SEDAR at www.sedar.com. 

• 147% increase in net sales compared to Q1 in 2021 - recorded net revenues of $22.6M for the three months ended March 31, 2022;
• SG&A of $12.8M in Q1 2022 decreased slightly quarter-over-quarter with the full quarter consolidation of Auxly Leamington;
• Adjusted EBITDA improved year-over-year by approximately 14%;
• Continue to hold the #1 LP position in Cannabis 2.0 sales nationally;
• Back Forty remains the #1 vape brand in the country and became the #4 flower brand nationally in the quarter;
• Maintained its position as one of the top 5 LPs in Canada in total cannabis sales with 6.9% market share;
• With growing competition in vapes, the largest 2.0 product category, Auxly continued to hold the #1 LP position in national sales with 20% market share;
• Successfully launched 10 new SKUs into the market in the quarter, including solventless live rosin vapes, new infused pre-roll strains and the first-to-market Live Rosin Chew all under Kolab Project brand;
• Recorded non-cash impairment of approximately $25.7M related to the closure of Auxly Annapolis and Auxly Annapolis OG cultivation facilities.

Hugo Alves, CEO of Auxly, commented: "Amid intense and growing competition and seasonal buying trends in the Canadian cannabis market, Auxly continued to see strength in sales, increasing revenues 147% year-over-year.  Though this quarter presented some ongoing supply chain and operational challenges preventing us from meeting consumer demands for our branded cannabis products, we believe we have taken the necessary steps to correct these issues for the coming quarters, allowing us to increase fill rates and continue with our exciting new product launches throughout the year.  We continue to lead the market in cannabis 2.0 products and remain focused on building to leadership in dried flower and pre-rolls and improving our business to achieve our goal of reaching adjusted EBITDA profitability." 

For the three months ended March 31, 2022, net revenues were $22.6 million as compared to $9.2 million during the same period in 2021, an improvement of 147%. Revenue in the first quarter of 2022 was comprised of approximately 61% in Cannabis 2.0 Product sales, with the remainder from Cannabis 1.0 Product sales. Net revenues improved as a result of the Company's expansion into Cannabis 1.0 Products and continued leadership in Cannabis 2.0 Products. Consistent with prior periods, as the Company does not participate in the Quebec market, approximately 85% of cannabis sales during the first quarter of 2022originated from sales to British Columbia, Alberta and Ontario.

Auxly realized a gross profit of $3.7 million resulting in a 16% Gross Profit Margin¹ for the quarter ended March 31, 2022, compared to $2.3 million (26%) during the same period in 2021. Gross profits were impacted by the biological assets and inventory impairments of $5.0 million associated with the closure of the Auxly Annapolis and Auxly Annapolis OG facilities as announced on February 7, 2022. Cost of Finished Cannabis Inventory Sold Margin¹ was 23%, 2% lower than the same period of 2021, however 3% greater than the fourth quarter of 2021, inclusive of the impact of Auxly Leamington.

Following the acquisition of Auxly Leamington, the Company recognizes gross profit or loss from Auxly Leamington only as product is sold to the Company's customers after being further processed by Auxly Ottawa or Auxly Charlottetown. During the first quarter of 2022, the Company realized approximately $1.5 million of additional gross profit from the sale of finished cannabis inventory sold. Prior to the acquisition of Auxly Leamington in November 2021, the net earnings of Auxly Leamington were recorded in other income and expenses on an equity basis in proportion to the Company's ownership in the joint venture.

Biological and inventory impairments of $0.7 million and $4.9 million respectively were attributable to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities. 

Unrealized fair value gains and losses on biological assets and realized fair value gains and losses on inventory in the first quarter of 2022 primarily relate to Auxly Leamington. In 2021, prior to the acquisition, Auxly Leamington was accounted for under the equity method.

Selling, general and administrative expenses ("SG&A") are comprised of wages and benefits, office and administrative, professional fees, business development, share-based payments, and selling expenses. SG&A expenses were $12.8 million during the first quarter of 2022, slightly lower than the fourth quarter of 2021 with the full quarter consolidation of Auxly Leamington, and $3.6 million higher than the first quarter of 2021.

Wages and benefits were $5.7 million during the first quarter of 2022, approximately $1.5 million higher than the same period of 2021, primarily from workforce additions to support Cannabis 1.0 Product sales and in support of higher revenues, and the addition of the Auxly Leamington workforce of approximately $0.5 million.

Office and administrative expenses were $3.6 million during the current quarter, increasing by $0.5 million compared to the same period in 2021. The increased expenditures primarily relate to the addition of Auxly Leamington of approximately $0.7 million.

Auxly's professional fees were $0.4 million during the first quarter of 2022, which was consistent with 2021. Professional fees incurred during the period primarily related to accounting fees, regulatory matters, reporting issuer fees, and legal fees associated with certain corporate activities.

Business development expenses were $0.1 million for the three months ended March 31, 2022, as compared to $Nil during the same period in 2021. These expenses have been nominal during the COVID-19 pandemic and primarily relate to acquisition, business development and travel related expenses. 

Share-based compensation was $0.2 million for the three months ended March 31, 2022, which was consistent with the same period in 2021. The expense is a function of the number of option grants, the weighted average aging of the grants and the share price at the time of grant.

Selling expenses were $2.9 million for the three months ended March 31, 2022, an increase of $1.6 million over the same period in 2021, as a result of cannabis sales activities comprised of brokerage fees earned by Kindred, Health Canada fees related to higher revenues, and increased marketing initiatives for Cannabis Products.

Depreciation and amortization expenses were $4.6 million for the period ended March 31, 2022, $2.2 million greater than the same period of 2021. The increase in expense during the current period is primarily related to additional capital expenditures and inclusion of Auxly Leamington representing approximately $0.7 million.

Interest expenses were $5.1 million in the three months ended March 31, 2022, an increase of $0.5 million over the same period in 2021 primarily as a result of the inclusion of Auxly Leamington, which accounted for approximately $0.9 million. Interest expense includes accretion on the convertible debentures and interest paid in kind on the $123 million Imperial Brands Debenture. Interest payable in cash was approximately $1.4 million for the current quarter.

Total other incomes and losses for the quarter were a $23.9 million loss as compared to a gain of $3.5 million during the same period in 2021.

The impairment of long-term assets of $12.9 million and intangible assets and goodwill of $10.8 million respectively in the first quarter of 2022 relates to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities where the carrying value exceeds the fair value less cost to sell.

Gains and losses on settlement of assets and liabilities and other expenses in the prior year quarter were primarily associated with a gain on the settlement of a $5.8 million liability associated with a non-monetary product exchange with another licensed producer.

The share of loss on investment in joint venture of $0.5 million represents the Company's proportionate share of Auxly Leamington's earnings prior to its acquisition in November 2021, which results are presently consolidated into the Company's financial statements.

Auxly is exposed to foreign exchange fluctuations from the U.S. dollar to CAD dollar exchange rate primarily related to inventory, capital purchases and Inverell net assets. During the period ended March 31, 2022, the Company reported a foreign exchange loss of $0.4 million as compared to a loss of $0.6 million during the same period of 2021.

Net losses attributable to shareholders of the Company were $39.8 million for the three months ended March 31, 2022, representing a net loss of $0.05 per share on a basic and diluted basis. The loss of $29.4 million relative to the same period in 2021 was primarily related to the net impact of approximately $25.7 million related to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities during the period and a gain on the settlement of assets and liabilities and other expenses of $4 million in 2021.

Adjusted EBITDA of negative $5.6 million during the three months ended March 31, 2022 was $0.9 million better than the same period in 2021, primarily related to higher gross profits before fair value adjustments and impairment charges, partially offset by higher SG&A.

On May 27, 2021, the Company announced that it had reached an agreement to sell KGK to Myconic Capital Corp. (now Wellbeing Digital Sciences Inc.) ("Wellbeing"), and on June 2, 2021, completed the sale of KGK to Wellbeing. As a result of the sale, results from operations and cash flows from KGK have been presented as discontinued operations, as applicable, on a retrospective basis.

In 2022, Auxly remains committed to building on its success as a Canadian market leader. The Company plans to drive organic growth through continued innovation, increased brand traction, and ubiquitous distribution, while prioritizing operational efficiencies and profitability. The Company's high-level objectives for 2022 are:

• Improve revenue and Gross Profit Margin to achieve positive Adjusted EBITDA
• • Auxly's key priority in 2022 is to achieve Adjusted EBITDA profitability by continuing to grow top line revenue while enhancing Gross Profit Margins through leveraging the increasing flower output from its Auxly Leamington facility, focused and differentiated brand and product offerings, increased depth and breadth of distribution, and cost optimization through investments in automation to increase production capabilities and efficiency and continuous improvement initiatives.
• Win with consumers and increase brand traction
• • The Company will continue to be deeply committed to understanding its targeted consumers and developing products and brands that help them live happier lives.  Driven by deep consumer insights the Company will continue to evolve its brand portfolio to earn and keep the trust and loyalty of its customers and consumers and be the choice of consumers in-store. Auxly will service the evolving preferences of its consumers by delivering new and innovative branded products to market and ensuring that its consumers can access those products broadly and reliably.

The Company is pleased with its first quarter results, with seasonality having had less of an impact on revenue as compared to the same period in 2021. However, it did encounter operational challenges throughout the quarter, such as lower winter yields at Auxly Leamington and hardware and packaging shortages due to supply chain disruptions.  The Company believes that those challenges are largely behind it, and is very encouraged by yield and overall product quality improvements that it has seen at Auxly Leamington, which it believes will better equip Auxly to meet the demand for its flower and pre-roll products.

The Company has and will continue to put its consumers first by addressing their evolving needs and preferences through its industry leading, insight-driven innovation pipeline. During the first quarter of 2022, Auxly successfully launched 10 of the anticipated 60 new SKUs planned to be launched throughout the year, to strong early results and consumer acclaim. Auxly continues to prioritize investing in innovations for key growth categories, while maintaining its standards for producing the high-quality products that are contributing to its growing consumer awareness and brand equity.

Finally, the Company remains focused on cost control and margin enhancement through continued process improvements and investments in automation.  While its first quarter SG&A now includes a full quarter of Auxly Leamington expenses for the first time, the Company was still able to maintain flat SG&A compared to the previous quarter and also continue to make improvements to Adjusted EBITDA.  The Company remains confident in its second quarter sales outlook and in its ability to achieve Adjusted EBITDA profitability in 2022.

Please see the Company's MD&A dated March 30, 2022, under "Non-GAAP Measures" for a further description of the following financial and supplementary financial measures.

These are non-GAAP measures used in the cannabis industry and by the Company to assess operating performance removing the impacts and volatility of non-cash and other adjustments. The definition may differ by issuer. The Adjusted EBITDA reconciliation is as follows:

Gross Profit Margin

"Gross Profit Margin" is defined as gross profit divided by revenue. Gross profit margin is a supplementary financial measure.

Cost of Finished Cannabis Inventory Sold Margin

"Cost of Finished Cannabis Inventory Sold Margin" is a supplementary financial measure and is defined as Cost of Finished Cannabis Inventory Sold divided by revenue.

ON BEHALF OF THE BOARD

"Hugo Alves" CEO

Auxly is a leading Canadian cannabis company dedicated to bringing innovative, effective, and high-quality cannabis products to the wellness and adult-use markets. Auxly's experienced team of industry first-movers and enterprising visionaries have secured a diversified supply of raw cannabis, strong clinical, scientific and operating capabilities and leading research and development infrastructure in order to create trusted products and brands in an expanding global market. 

Learn more at www.auxly.com and stay up to date at Twitter: @AuxlyGroup; Instagram: @auxlygroup; Facebook: @auxlygroup; LinkedIn: company/auxlygroup/.

This news release contains certain "forward-looking information" within the meaning of applicable Canadian securities law. Forward-looking information is frequently characterized by words such as "plan", "continue", "expect", "project", "intend", "believe", "anticipate", "estimate", "may", "will", "potential", "proposed" and other similar words, or information that certain events or conditions "may" or "will" occur. This information is only a prediction. Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking information throughout this news release. Forward-looking information includes, but is not limited to: the proposed operation of Auxly, its subsidiaries and partners; the intention to grow the business, operations and existing and potential activities of Auxly; proposed timelines for the build-out, licencing and commercialization of the Company's facilities and projects; the Company's response to the COVID-19 pandemic; the impact of the COVID-19 pandemic on the Company's current and future operations; the Company's execution of its innovative product development, commercialization strategy and expansion plans; the Company's intention to introduce innovative new cannabis products to the market and the timing thereof; the anticipated benefits of the Company's partnerships, research and development initiatives and other commercial arrangements; the anticipated benefits of the Company's acquisition of Auxly Leamington; the expectation and timing of future revenues and of positive Adjusted EBITDA; expectations regarding the Company's expansion of sales, operations and investment into foreign jurisdictions; future legislative and regulatory developments involving cannabis and cannabis products; the timing and outcomes of regulatory or intellectual property decisions; the relevance of Auxly's subsidiaries' current and proposed products with provincial purchasers and consumers; consumer preferences; political change; competition and other risks affecting the Company in particular and the cannabis industry generally.

A number of factors could cause actual results to differ materially from a conclusion, forecast or projection contained in the forward-looking information in this release including, but not limited to, whether: the Company will be able to execute on its business strategy; Auxly's subsidiaries and partners are able to obtain and maintain the necessary governmental and regulatory authorizations to conduct business; the Company is able to successfully manage the integration of its various business units with its own; there are not materially more closures or lockdowns related to the COVID‐19 pandemic; the Company's subsidiaries and partners obtain and maintain all necessary governmental and regulatory permits and approvals for the operation of their facilities and the development of cannabis products, and whether such permits and approvals can be obtained in a timely manner; the Company will be able to successfully integrate Auxly Leamington's operations with its own, and whether the expected benefits of the acquisition materialize in the manner expected, or at all; the Company will be able to successfully launch new product formats and enter into new markets; there is acceptance and demand for current and future Company products by consumers and provincial purchasers; the Company will be able to increase revenues and achieve positive Adjusted EBITDA; and general economic, financial market, legislative, regulatory, competitive and political conditions in which the Company and its subsidiaries and partners operate will remain the same. Additional risk factors are disclosed in the annual information form of the Company for the financial year ended December 31, 2021 dated March 30, 2022.

New factors emerge from time to time, and it is not possible for management to predict all of those factors or to assess in advance the impact of each such factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking information. The forward-looking information in this release is based on information currently available and what management believes are reasonable assumptions. Forward-looking information speaks only to such assumptions as of the date of this release. In addition, this release may contain forward-looking information attributed to third party industry sources, the accuracy of which has not been verified by the Company. The forward-looking information is being provided for the purposes of assisting the reader in understanding the Company's financial performance, financial position and cash flows as at and for periods ended on certain dates and to present information about management's current expectations and plans relating to the future, and the reader is cautioned that such forward-looking information may not be appropriate for any other purpose. Readers should not place undue reliance on forward-looking information contained in this release.

The forward-looking information contained in this release is expressly qualified by the foregoing cautionary statements and is made as of the date of this release. Except as may be required by applicable securities laws, the Company does not undertake any obligation to publicly update or revise any forward-looking information to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.

Neither Toronto Stock Exchange nor its Regulation Services Provider (as that term is defined in the policies of the Toronto Stock Exchange) accepts responsibility for the adequacy or accuracy of this release.

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SOURCE Auxly Cannabis Group Inc.