XLY Auxly Cannabis Group Inc

Auxly Cannabis Group Inc. (TSX - XLY) (OTCQX: CBWTF) ("Auxly" or the "Company"), a leading consumer packaged goods company in the cannabis products market, today released its financial results for the three and nine months ended September 30, 2021. These filings and additional information regarding Auxly are available for review on SEDAR at www.sedar.com. All amounts are Canadian dollars except common shares (“Shares”) and per Share amounts.

Q3 2021 Highlights and Subsequent Events

• Total net revenues of $24.5 million for the three months ended September 30, 2021 improved by approximately 95% year over year and 17% sequentially.
• Adjusted EBITDA of negative $6.5 million, improved modestly over the same period in 2020, however, increased over the previous quarter primarily as a result of higher cost of sales associated with changes in product mix and additional costs associated with the introduction of new products.
• Continued growth in national recreational cannabis sales, maintaining the #1 LP position in Cannabis 2.0 sales with 15.6% market share and securing the #6 LP position in total national recreational cannabis sales in the quarter, with continued growth in the month of October moving the Company into the #5 LP position with 7.3% share of market1.
• Continued leadership in new product innovation with the launch of new and differentiated SKUs throughout the quarter, including the introduction of Back Forty 40s, and Kolab Project 132 Series Live Resin Black Cherry Punch Soft Chews, Canada’s first cannabis-infused live resin edible.
• Strengthened its Board of Directors with the appointment of Murray McGowan, Chief Strategy and Development Officer for Imperial Brands.

1 Source: Headset Canadian Insights as of November 2, 2021

Q3 Highlights

For the three months ended:(000’s)	Sept 30, 2021			Sept 30, 2020				Change			Percentage Change
Total net revenues	$	24,493			$	12,587			$	11,906	95	%
Net income/(losses)*		(13,527	)			(17,799	)			4,272	24	%
Net income/(loss) from continuing operations*		(13,527	)			(17,597	)			4,070	23	%
Adjusted EBITDA**		(6,485	)			(6,684	)			199	3	%
Weighted Average Shares outstanding		825,612,944				631,949,685				193,663,259	31	%

For the nine months ended:(000’s)	Sept 30, 2021			Sept 30, 2020				Change			Percentage Change
Total net revenues	$	54,511			$	28,462			$	26,049	92	%
Net losses*		(15,363	)			(58,460	)			43,097	74	%
Net income/(loss) from continuing operations*		(27,519	)			(58,085	)			30,566	53	%
Adjusted EBITDA**		(16,481	)			(24,580	)			8,099	33	%
Weighted Average Shares outstanding		767,844,307				628,341,762				139,502,545	22	%

*Attributable to shareholders of the Company**Adjusted EBITDA is a Non-IFRS financial measure.  Refer to the Non-IFRS Financial and Performance Measures section in the MD&A for definitions

(000’s)	Sept 30, 2021		December 31, 2020			Change					Percentage Change
Cash and equivalents	$	37,215		$	21,214		$	16,001			75	%
Total assets	$	393,428		$	378,963		$	14,465			4	%
Debt	$	106,826		$	114,825		$	(7,999	)		-7	%

Hugo Alves, CEO of Auxly, commented: “We are proud to report another record revenue quarter for Auxly.  We continued to see growth in our Canadian cannabis recreational sales in the quarter, driven by our expanding product offering in dried flower and pre-rolls as well as our continued leadership of the 2.0 product segment where we maintained our #1 overall position driven by our dominance in the vapor segment where our consumers rewarded us with 24% of total national market share. We have continued to prudently invest in the people, assets and capabilities that we believe are necessary to win in our chosen consumer segments and product categories and our success in the consumer market is a testament to our focused strategy and our commitment to putting our consumers first and foremost in everything we do.  As we finish building our asset base, we will increase focus on cost optimization and increasing operational throughput efficiencies to enhance margins and increase profitability. We will continue to work tirelessly to serve our consumers by offering them innovative, quality products at a great value under brands that they can trust and love. We are just getting started and we could not be more excited for the future.”  

Results of Operations

For the periods ended:	Three months			Three months			Nine months			Nine months
(000’s)	Sept 30, 2021			Sept 30, 2020			Sept 30, 2021			Sept 30, 2020
CONTINUING OPERATIONS
Revenue
Revenue from sales of cannabis products	$	35,817		$	15, 243		$	77,520		$	34,030
Other revenues		-			-			-			70
Excise taxes		(11,324	)		(2,656	)		(23,009	)		(5,638	)
Total Net Revenues		24,493			12,587			54,511			28,462
Cost of Sales
Costs of finished cannabis inventory sold		19,471			9,536			39,380			19,656
Inventory (gain)/impairment		716			(312	)		1,070			1,630
Gross profit excluding fair value items		4,306			3,363			14,061			7,176
Unrealized fair value gain/(loss) on biological transformation		352			172			922			322
Realized fair value gain/ (loss) on inventory		(1	)		2			(1	)		(193	)
Gross Profit		4,657			3,537			14,982			7,305
Expenses
Selling, general, and administrative expenses		11,562			10,924			32,833			37,274
Depreciation and amortization		2,223			2,076			6,829			6,653
Interest expense		3,932			3,651			13,320			9,170
Total expenses		17,717			16,651			52,982			53,097
Other incomes / (losses)
Fair value gain/(loss) for financial instruments accounted under FVTPL		223			(34	)		414			(4,670	)
Interest and other income		436			392			1,283			798
Impairment of long-term assets		(60	)		144			(11,426	)		(4,362	)
Gain/(loss) on settlement of assets and liabilities and other expenses		41			(3,453	)		21,104			(3,639	)
Gain/(loss) on disposal of subsidiary		1,355			-			1,355			-
Share of gain/(loss) on investment in joint venture		(3,095	)		(1,214	)		(6,048	)		(2,995	)
Foreign exchange gain/(loss)		633			(466	)		(546	)		122
Total other income/(losses)		(467	)		(4,631	)		6,136			(14,746	)
Net Loss before income tax		(13,527	)		(17,745	)		(31,864	)		(60,538	)
Income tax recovery		-			90			4,330			657
Net loss from continuing operations	$	(13,527	)	$	(17,655	)	$	(27,534	)	$	(59,881	)
Net income/(loss) from discontinued operations		-			(202	)		12,156			(375	)
Net income/(loss)	$	(13,527	)	$	(17,857	)	$	(15,378	)	$	(60,256	)
Net income/(loss) attributable to shareholders of the Company	$	(13,527	)	$	(17,799	)	$	(15,363	)	$	(58,460	)
Net loss attributable to non-controlling interest		-		$	(58	)	$	(15	)	$	(1,796	)
Adjusted EBITDA	$	(6,485	)	$	(6,684	)	$	(16,481	)	$	(24,580	)
From continuing operations	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.09	)
From discontinued operations		-			(0.00	)		0.02			(0.00	)
Net income/(loss) per common share (basic and diluted)	$	(0.02	)	$	(0.03	)	$	(0.02	)	$	(0.09	)
Weighted average shares outstanding (basic and diluted)		825,612,944			631,949,685			767,844,307			628,341,762

Revenue

For the three months ended September 30, 2021, net revenues were $24.5 million as compared to $12.6 million during the same period in 2020 and were comprised of approximately 69% Cannabis 2.0 Products sales, with the remainder from Cannabis 1.0 Product sales. Net revenues improved during the third quarter of 2021 by $11.9 million over the same period of 2020 and by $3.6 million over the second quarter of 2021. Likewise, net revenues year-to-date were $54.5 million, an improvement of $26.0 million over the same period of 2020 primarily due to increased retail cannabis sales by the Company nationally, achieved through continued leadership in Cannabis 2.0 Product sales and continued expansion into Cannabis 1.0 Products. Consistent with prior periods, as the Company does not participate in the Quebec market, approximately 85% of cannabis sales during the third quarter of 2021 originated from sales to British Columbia, Alberta and Ontario.

Gross Profit/Loss

Auxly realized a gross profit of $4.7 million resulting in a 19% margin during the three months ended September 30, 2021, compared to $3.5 million (28%) during the same period in 2020. Gross profits as reflected in margin declined during the current period primarily as a result of product mix changes and higher additional costs associated with the production of new products, while margins related to Cannabis 1.0 Products remained nominal. Gross profits on a year-to-date basis improved by approximately $7.7 million to $15.0 million as compared to the same period in 2020, resulting in a 27% margin, which is slightly better than 2020.

Inventory impairment was $0.7 million for the third quarter and $1.1 million year-to-date 2021, primarily driven by packaging materials no longer being used by the Company. In 2020, impairment of inventory was higher on a year-to-date basis due to additional charges associated with Inverell’s operations.

Total Expenses

Selling, general and administrative expenses (“SG&A”) are comprised of wages and benefits, office and administrative, professional fees, business developments, share-based payments, and selling expenses. SG&A expenses were $11.6 million during the third quarter and $32.8 million year-to-date 2021, an increase of $0.6 million and a decrease of $4.5 million as compared to the same periods in 2020.

Wages and benefits were $4.0 million and $12.9 million for the third quarter and year-to-date of 2021 respectively, decreases of $1.3 million and $5.0 million, over the same periods in 2020. The decrease for the third quarter of $1.3 million was primarily driven by workforce reductions which were implemented following the third quarter of 2020 which have continued to have a positive impact to date. Year-to-date decreases of $5.0 million are primarily related to workforce reductions at Inverell of approximately $1.2 million with the remainder of the savings coming from headcount reductions and absorption changes in the rest of the Company.

Office and administrative expenses of $3.3 million for the current period and $10.0 million year-to-date in 2021 increased by $0.5 million and $1.0 million compared to same periods in 2020. Expenditures during the third quarter of 2021 included increased product testing, supplies and waste resulting from increased innovation and product development activities, and Dosecann rent, partially offset by reduced expenditures of $0.3 million at Inverell and a number of other reductions throughout the Company. Year-to-date increased expenditures of $1.0 million primarily relate to increased operating costs associated with the development and sale of Cannabis Products, TSX listing fees, and Dosecann rent, partially offset by approximately $0.8 million of reduced expenditures at Inverell.

Auxly’s professional fees for the three months ended September 30, 2021, were $0.8 million, higher by $0.5 million as compared to 2020 primarily due to increased legal expenditures associated with certain corporate activities. Year-to-date expenditures of $1.9 million were lower by $0.3 million as compared to 2020 primarily as a result of greater consulting expenditures in 2020 related to the development of the Company’s ERP system and costs incurred by Inverell during 2020. Professional fees incurred during the periods primarily related to accounting fees, regulatory matters, reporting issuer fees, and legal fees associated with certain corporate activities. Professional fees can vary significantly based upon transactional activities from period to period.

Business development expenses were $0.1 million for the three and $0.2 million for the nine months ended September 30, 2021, as compared to $Nil and $0.5 million during the same periods in 2020. The year-to-date decrease is primarily due to a reduction in acquisition, business development and travel related expenses primarily a result of the on-going COVID-19 pandemic.

Selling expenses for the period ended September 30, 2021, were $3.3 million and $6.7 million year-to-date, an increase of approximately $1.9 million and $2.8 million respectively over the same periods in 2020, as a result of cannabis sales activities comprised of brokerage fees earned by Kindred Partners, Health Canada fees related to higher revenues, and marketing initiatives for Cannabis Products.

For the three months ended September 30, 2021, share-based compensation was $0.1 million and $1.2 million year-to-date primarily as a result of options granted in 2021, net of terminations.  The year-to-date reduction in expense of $2.7 million as compared to 2020, reflects the impact of lower share prices and aging outstanding options.

Depreciation and amortization expenses were $2.2 million for the three months ended September 30, 2021, and $6.8 million year-to-date, $0.1 million and $0.2 million greater respectively, as compared to the same periods of 2020. The change in expenditures during the current period and year-to-date is primarily related to additional capital expenditures, partially offset by amounts related to Inverell in 2020.

Interest expenses were $3.9 million and $13.3 million for the third quarter and year-to-date of 2021 respectively, increases of $0.3 million and $4.1 million over the same periods in 2020. Interest expenses in 2021 were primarily the result of interest expense and accretion on the $123 million Imperial Brands Debenture and changes related to the Amendments thereof, 7.5% on the convertible debentures issued in 2020, the non-cash accretion of placement and other related fees being recognized over the terms of the respective debentures, leases and short-term financing. Interest expenses in 2020 were primarily driven by the Imperial Brands Debenture, 7.5% on the convertible debentures issued in 2020 to date, and by leases.

Total Other Incomes and Losses

Fair value changes on financial instruments arise on changes in value of promissory notes and level two securities held. For the three and nine months ended September 30, 2021, the Company reported a fair value gain of $0.2 million and $0.4 million respectively. The $4.7 million loss for the nine months ended September 30, 2020 was the result of more significant valuation reductions and a larger securities portfolio during 2020.

The Company recorded interest and other incomes of $0.4 million and $1.3 million for the three and nine months ended September 30, 2021, with increases over the same periods of 2020 primarily due to changes in interest accretion on the promissory note from the Company’s Sunens joint venture.

Impairment of long-term assets of $11.4 million on a year-to-date basis in 2021 relate to the sale of Curative where the carrying value exceeded the proceeds of sale. During 2020, the Company recognized an impairment loss on long-term assets of $4.5 million related to Inverell. The current period gain on disposal of subsidiary of $1.4 million relates to the final accounting of the Curative sale transaction for assets that were not classified as sold during the previous quarter prior to the closing of such transaction in July 2021.

Gains and losses on settlement of assets and liabilities and other expenses was a gain of $Nil during the current quarter and $21.1 million year-to-date 2021 which primarily relate to a $16.6 million gain associated with the Imperial Brands Debenture Amendments and a $4.2 million first quarter gain on the settlement of a $5.8 million liability associated with a non-monetary product exchange with another licensed producer. The loss of $3.5 million in the third quarter of 2020 and $3.6 million year-to-date primarily relate to the aforementioned licensed producer transaction which had been reversed following the return of the product by the purchaser. The transaction was fully satisfied in 2021.

The share of loss on investment in joint venture of $3.1 million for the three months ended September 30, 2021 and $6.0 million year-to-date reflect the Company’s proportionate share of Sunens’ earnings. Sunens received its cultivation licence in June 2020 and has scaled up operations and made product available for sale to licenced producers, including Auxly beginning in the first quarter of 2021.

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 quarter ended September 30, 2021, the Company reported a foreign exchange gain of $0.6 million and a loss of $0.5 million year-to-date as compared to a loss of $0.5 million and a gain of $0.1 million during the same periods of 2020.

Net Income and Loss

Net losses attributable to shareholders of the Company were $13.5 million for the three months ended September 30, 2021, representing a net loss of $0.02 per share on a basic and diluted basis. Net losses attributable to shareholders of the Company were $27.5 million for the nine months ended September 30, 2021, representing a net loss of $0.04 per share on a basic and diluted basis from continuing operations and a net loss of $0.02 per share in total. The year-to-date improvement in net income and loss positions was primarily a result of net income of $12.3 million related to the sale of KGK, recognition of a gain from the Imperial Brands Debenture Amendments, improvements in continuing operating gross profits and income tax recoveries, partially offset by an impairment charge related to the Curative recoverable amount and losses on the investment in joint venture.

Adjusted EBITDA

Adjusted EBITDA of negative $6.5 million during the third quarter of 2021 improved nominally over the same period in 2020 primarily driven by greater gross profits and partially offset by higher selling related SG&A expenses. Year-to-date Adjusted EBITDA of negative $16.5 million in 2021 improved by $8.0 million as compared to the same period of 2020 primarily as a result of improved gross profits and lower SG&A.

Discounted Operations

On May 27, 2021, the Company announced that it had reached an agreement to sell KGK to Myconic Capital Corp. (now KetamineOne Capital Limited) (“KetamineOne”), and on June 2, 2021, completed the sale of KGK to KetamineOne. 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.

Outlook

In 2021, Auxly is focused on building upon the Company’s success as a market leader in Cannabis 2.0 Products, while continuing to advance the Company’s focused expansion of its dried flower, pre-roll, oil and capsule product offerings. The Company’s overall objectives for 2021, which may be impacted by the COVID-19 pandemic (see further discussion in the MD&A under “COVID-19 Pandemic”), are as follows:

• Continued leadership and strength in the Cannabis 2.0 Products market;
• Focused expansion of Cannabis 1.0 Products;
• Become a top 5 licenced producer in Canada by total market share in adult recreational cannabis sales;
• Continue to take measures to improve cash flows, and finance the business;
• Become Adjusted EBITDA positive by the end of the calendar year;
• Leverage the Sunens facility to establish a secure supply of cannabis and reduce reliance on open market purchasing; and
• Explore possible cannabis market entry strategies in regulated international markets, on an asset light basis.

During the quarter, the Company continued to execute against its objectives, securing the #6 LP position in national recreational retail sales with 5.6% market share. Despite delays in certain automation equipment at the Kolab facility, which would have contributed to further sales and cost reductions, the Company saw an increase in national retail sales in the month of October and moved into the #5 LP position with 7.3% share of market, successfully achieving the Company’s 2021 market share objective of 7-9% by the end of 2021.

While the quarter presented some challenges for Auxly, including additional expenditures as it scaled operations, commissioned new equipment, introduced new products and innovations to the base product portfolio and supported the opening of new stores in key provinces like Ontario, the Company is pleased with the continued revenue growth trend and believe its initiatives to improve the cost structure will lead to an increase in cash flows and near-term positive adjusted EBITDA.

Auxly remains focused on bringing innovative and differentiated cannabis products to Canadian consumers that deliver on its consumer promise of quality, safety and efficacy.

ON BEHALF OF THE BOARD"Hugo Alves" CEO

About Auxly Cannabis Group Inc. (TSX: XLY)

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/.

Investor Relations:

For investor enquiries please contact our Investor Relations Team: Email: IR@auxly.comPhone: 1.833.695.2414

Media Enquiries (only): 

For media enquiries or to set up an interview please contact:Email: press@auxly.com 

Notice Regarding Forward Looking Information:

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; 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 anticipated benefits of the Company's partnerships, joint ventures, research and development initiatives and other commercial arrangements; the expectation and timing of future revenues; expectations regarding the Company’s expansion of 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 ability of the Company to maintain and grow its market share; the relevance of Auxly’s current and proposed products; 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 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; 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, 2020 dated April 23, 2021.

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.