Auxly Q4 Revenue Bounces

Auxly Reports Fourth Quarter And Full Year 2022 Financial Results And Provides Outlook For 2023

TORONTO, March 31, 2023 /PRNewswire/ – Auxly Cannabis Group Inc. (TSX: XLY) (OTCQB: CBWTF) (“Auxly” or the “Company”) today released its financial results for the three and twelve months ended December 31, 2022. 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.

2022 Highlights

• Total net revenues of $94.4 million in 2022, an increase of $10.6 million or 13% compared to 2021;
• Made significant improvements to Adjusted EBITDA in the fourth quarter to negative $0.8 million, due to improved margins and lower SG&A, with momentum continuing into 2023;
• Fourth quarter total net revenues of $24.7 million, approximately $4.6 million lower than the same period in 2021, however $4.9 million or 20% greater than Q3 2022;
• Retained the #1 LP position in Canada for Cannabis 2.0 product sales for the third consecutive year, while improving sales of dried flower and pre-roll products, exiting the year with positive momentum as the #5 LP¹ by share of market;
• Successfully integrated Auxly Leamington and continuously improved product quality during 2022; and leveraged Leamington’s large-scale cultivation to introduce new successful strains to the market while continuing to drive down costs to become one of the lowest cost facilities in the country;
• Rationalized assets and product SKUs to improve financial performance and used non-core asset sale proceeds to further strengthen the balance sheet;
• Recorded non-cash impairment of approximately $25.7M related to the closure of Auxly Annapolis and Auxly Annapolis OG cultivation facilities during Q1 of 2022 and $45 million in the third quarter of 2022 related to impairment of goodwill and other assets.

Financial Highlights

Results of Operations

The Canadian cannabis industry faced numerous challenges in 2022 and Auxly was not immune to their impacts. To better position the Company within current industry realities, we adapted our strategy in the third quarter by streamlining our focus to the three largest Canadian product categories of dried flower, pre-rolls, and vapes, leveraging our large-scale Leamington facility to deepen our competitive advantage and refining our cost structure.

Hugo Alves, CEO of Auxly

Our efforts have yielded positive results, including our first significant wholesales of bulk dried flower from Auxly Leamington, improved net revenues and blended margins, and reductions in SG&A during the fourth quarter.

He added, “We also internalized our sales team to improve relationships with retailers, strengthen distribution, and obtain new dried flower and pre-roll listings to increase category breadth and set the stage for further growth in 2023. We are encouraged by our recent achievements and remain dedicated to delivering further improvements in financial performance. I want to thank our talented team members for their continued commitment to Auxly’s success.”

Net Revenues

For the year ended December 31, 2022, net revenues were $94.5 million as compared to $83.8 million during the same period in 2021. Revenues for 2022 were comprised of approximately 42% in sales of dried flower and pre-roll Cannabis Products, with the remainder from oils and Cannabis 2.0 Product sales. Net revenues included wholesale bulk flower sales of approximately $3.2 million in the fourth quarter, contributing towards the Company’s overall shift to increased sales of Cannabis 1.0 Products, which represented approximately 48% of net revenues during the quarter. For the third year, Auxly continued its leadership in national sales of Cannabis 2.0 Products, while increasing its share of market for Cannabis 1.0 Products over the year from 2.5% to 3.7%¹.

Consistent with prior periods, as the Company does not participate in the Quebec market, approximately 85% of cannabis sales in 2022 originated from sales to British Columbia, Alberta and Ontario.

Gross Profit

Auxly realized a gross profit of $16.5 million in 2022, a decrease of $2.8 million as compared to 2021, which includes the impacts of non-cash impairments and fair value adjustments. The Gross Profit Margin for 2022 was 17% versus 23% in 2021. Excluding non-cash amounts, the Cost of Finished Cannabis Inventory Sold Margin improved to 26% versus 25% in 2021, while increasing from 23% in the first quarter of 2022 to 30% in the fourth quarter as a result of a higher proportion of Cannabis 1.0 Products sold by the Company utilizing low-cost cannabis cultivated at Auxly Leamington, and the streamlining of Cannabis 2.0 SKUs and operating costs.

Following the acquisition of Auxly Leamington in November 2021, the Company recognizes gross profit or loss from Auxly Leamington as part of the costs of finished cannabis inventory sold only as product is sold to the Company’s customers after being further processed by Auxly Ottawa or Auxly Charlottetown. Realized and unrealized fair value gains and losses reflect accounting treatments associated with Auxly Leamington cultivation and sales. Prior to the acquisition of Auxly Leamington, the net operating results 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 during the year were $11.4 million as compared to $3.3 million in 2021, primarily as a result of charges related to the closure of the Auxly Annapolis facilities of $5.0 million in the first quarter of 2022, certain third-party product write-offs, and as a result of SKU rationalization and run-off, and product not meeting quality specifications.

Total Expenses

Selling, general and administrative expenses (“SG&A”) are comprised of wages and benefits, office and administrative, professional fees, business development, and selling expenses. SG&A expenses were $46.7 million during 2022, a $2.4M or 5% increase over 2021, which includes the full year impact of the addition of Auxly Leamington expenditures.

Wages and benefits were $18.7 million for the year, as compared to $17.8 million for the same period of 2021. The net increase is primarily due to the addition of Auxly Leamington, partially offset by reductions associated with the closure and sale of the Auxly Annapolis and Auxly Annapolis OG facilities and measures taken after the third quarter to reduce overhead in the rest of the organization.

Office and administrative expenses were $11.6 million for the year, decreasing by $2.0 million compared to the same period in 2021. The decreased expenditures primarily relate to higher product cost absorption, reduced waste and the timing and cost associated with product innovation, partially offset by the inclusion of Auxly Leamington.

Auxly’s professional fees were $2.9 million for 2022, the same as the prior year. Professional fees incurred primarily related to accounting fees, regulatory matters, reporting issuer fees, and legal fees associated with certain corporate activities.

Business development expenses were $0.3 million for the year ended December 31, 2022, consistent with the same period in 2021. These expenses have been nominal during the year due to the COVID-19 pandemic and primarily relate to acquisition, business development and travel related expenses.

Selling expenses were $13.1 million for 2022, an increase of $3.5 million over 2021, as a result of cannabis sales activities comprised of brokerage fees, Health Canada fees related to higher revenues, and increased marketing initiatives for Cannabis Products.

Equity-based compensation for the year ended December 31, 2022, was $4.0 million, an increase of $2.6 million over 2021, primarily reflecting the impact of restricted share units (“RSU”) granted in June 2022, in respect of services provided by employees in 2021. The RSU charge is primarily determined by the number of units granted, vesting periods and forfeiture assumptions, and the Share price at the time of grant. Equity-based compensation includes expenses related to options which are primarily determined as a function of the number of grants, the weighted average aging of the grants and the share price at the time of grant.

Depreciation and amortization expenses were $14.8 million for the year representing an increase of $2.3 million over 2021, primarily related to additional capital expenditures and the inclusion of Auxly Leamington in 2022.

Interest expenses were $21.6 million in 2022 as compared to $17.7 million during the prior year. The increase in expense is primarily a result of the inclusion of Auxly Leamington and the impact of rising interest rates where such obligations are subject to variable charges. 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 $6.7 million for the year.

Total Other Incomes and Losses

Total other incomes and losses for the year were a net loss of $66.0 million primarily due to the third quarter impairment of goodwill and other assets of $45 million, comprised of $24.8 million towards goodwill, $13.2 million towards intangible assets, $2.2 million towards other receivables, and $4.8 million of impairment losses towards long-term assets, including property, plant and equipment. In addition, during the first quarter of 2022, an impairment of long-term assets of $12.9 million and intangible assets and goodwill of $10.8 million related to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities, respectively, where the carrying value exceeds the fair value less cost to sell.

In 2022, foreign exchange gains were $0.9 million as compared to a loss of $0.8 million in 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.

Net Income and Loss

Net losses attributable to shareholders of the Company for the year ended December 31, 2022 were $130.3 million, net of income tax recoveries of $6.3 million, representing a net loss of $0.15 per share on a basic and diluted basis. The change in net loss in 2022 as compared to 2021 was primarily driven by changes in total other incomes and losses in 2022 as compared to net gains recorded in 2021.

Adjusted EBITDA

Adjusted EBITDA during the year ended December 31, 2022 was negative $16.9 million, an improvement of $4.8 million over the same period of 2021, primarily as a result of improvements realized during the fourth quarter of 2022.

Discontinued Operations

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.

Outlook

In 2022, we committed to building on our success as a Canadian market leader. We planned on driving organic growth through continued innovation, increasing brand traction, and strengthening distribution, while prioritizing operational efficiencies and profitability. Our high-level objectives for 2022 were:

• Improve revenue and Gross Profit Margin to achieve positive Adjusted EBITDA
  • Our key priority in 2022 was to achieve Adjusted EBITDA profitability by continuing to grow top line revenue while enhancing Gross Profit Margins through leveraging the increasing flower output from our 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
  • We continue to be deeply committed to understanding our targeted consumers and to developing products and brands that help them live happier lives. Driven by deep consumer insights, we will continue to evolve our brand portfolio to earn and maintain the trust and loyalty of our customers and consumers and be the choice of consumers in-store. We will service the evolving preferences of our consumers by bringing new and innovative branded products to market and ensuring that our consumers can access those products broadly and reliably.

Looking back on the year, the Canadian cannabis industry continued to face challenges posed by increasing competition and fragmentation, oversupply of cannabis, high taxation, restrictive regulations, a robust illicit market and severe price compression which were further exacerbated by inflation, global conflict, negative macroeconomic impacts from the COVID-19 pandemic, global supply chain disruptions, and constrained capital markets.

In light of these challenges, we adapted our approach, and at the end of the third quarter, streamlined our product assortment to run off certain low-margin or low-demand SKUs and increased our focus on the dried flower, pre-roll and vape product categories. Concurrently, we reduced costs throughout the organization, and internalized our sales team providing us with a sales team that focuses exclusively on our brands and products when communicating with our retail partners. While we did not meet all of our objectives for 2022, we are pleased with the progress made during the year and, in particular, with the impact that our actions taken at the end of the third quarter have had on our business. We have seen improvements in our margins, our fourth quarter sales (even with fewer SKUs), especially in the key dried flower and pre-roll categories; and material improvements in our Adjusted EBITDA resulting from significant reductions in our supporting cost structure.

As a backdrop to the year ahead, we have been working hard on updating and expanding our dried flower and pre-roll product portfolio utilizing Auxly Leamington’s competitive advantage of high-quality, large-scale and low-cost cultivation. Starting in 2023, we have increased our listed flower SKUs by 60% and pre-roll SKUs by 50% as compared to September 30, 2022. We are entering 2023 with improved earnings performance, increased focus on key product formats, lowered costs and increased efficiency which we expect will yield positive results. With these actions in mind, our goals for the coming year are broadly defined below:

• Increase net revenues by 15%, with a focus on key product categories, enhanced by strategic expansion of our product portfolio, while supporting strong retail distribution through our internal sales team.
• Continue to leverage Auxly Leamington’s large-scale, low-cost cultivation facility and the Company’s manufacturing automation to increase blended Cost of Finished Cannabis Inventory Sold Margin to an average of 35-40%.
• Vigorously manage SG&A as a percentage of net revenues to keep it below 40%, further building upon savings realized in Q4 2022.
• Prudently manage the Company’s balance sheet and streamline assets where possible.

We believe we have an achievable plan built upon proven demand for our products, outstanding employees, top-tier assets and an underlying desire to continue to put our consumers first by delivering safe, effective, high-quality products that address their evolving needs and preferences and help them live happier lives.

Non-GAAP Measures

Please see the Company’s MD&A for the three and twelves months ended December 31, 2022, under “Non-GAAP Measures” for a further description of the following financial and supplementary financial measures.

Financial Measures

EBITDA and Adjusted EBITDA

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 adjustments. The definition may differ by issuer. The Adjusted EBITDA reconciliation is as follows:

Supplementary Financial Measures

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 net revenues.

Gross Profit Margin

“Gross Profit Margin” is defined as gross profit divided by net revenues. Gross Profit Margin is a supplementary financial measure.

Debt

“Debt” is defined as current and long-term debt and is a supplementary financial measure. It is a useful measure in managing our capital structure and financing requirements.

Conference Call

Auxly’s management team will host a conference call today, Monday, April 3, 2023, at 10:00 a.m. EST to discuss its financial results. Participants can access the conference call by telephone by dialing: 1-888-664-6383 or by audio webcast at: https://app.webinar.net/KV4LpqozBOn.

For those unable to participate in the conference call at the scheduled time, it will be available for replay on the Company’s website within 24 hours after the conclusion of the call.

About Auxly Cannabis Group Inc. (TSX: XLY)

Auxly is a leading Canadian consumer packaged goods company in the cannabis products market, headquartered in Toronto, Canada. Our focus is on developing, manufacturing and distributing branded cannabis products that delight our consumers.

Our vision is to be a leader in branded cannabis products that deliver on our consumer promise of quality, safety and efficacy.

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

_{¹ Headset Canadian Insights data, provided as of March 8, 2023}

Original Press Release

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