XLY Auxly Cannabis Group Inc

TORONTO, Aug. 15, 2022 /PRNewswire/ - Auxly Cannabis Group Inc. (TSX: XLY) (OTCQX: CBWTF) ("Auxly" or the "Company") today released its financial results for the three and six months ended June 30, 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.

• Total net revenues from sale of adult use cannabis in Canada of $27.3 million for the three months ended June 30, 2022, a 31% increase from the same period last year;
• SG&A remained relatively flat quarter-over-quarter as the Company continues to focus its efforts on reducing costs;
• Adjusted EBITDA improved to negative $4.0 million, an improvement of 37% as compared to the previous quarter;
• Auxly Leamington continues to contribute to positive gross margins through low-cost cultivation and increased yields;
• Continued to hold the #1 LP position in Cannabis 2.0 sales nationally as the Company continues to launch new and exciting cannabis products to the Canadian market;
• Successfully launched 27 new SKUs to the Canadian market in the first half of 2022 including five first-to-market products such as Dosecann's CBN capsules and two new unique dried flower strains, Sticky Monkey and Tranquil Elephantizer under Kolab Project;
• Further strengthened the Company's balance sheet with the sale of both Nova Scotia cultivation assets for total proceeds of $10.1 million to date.

Hugo Alves, CEO of Auxly, commented: "We continued to make meaningful progress towards our strategic objectives during Q2. With an increasingly competitive market, we have been able to maintain our position as the #1 LP in cannabis 2.0 sales, driven by our leadership position in the vapour category where we ended the first half of the year as the #1 LP in the category with over 17% share of market. We successfully increased revenues and gross profits during the quarter while maintaining our SG&A spending largely flat. We have also strengthened our balance through the sale of non-core assets for total proceeds of $10.1 million to date, which will support our continued growth. We remained focused on our consumers and their evolving needs and preferences by launching 27 new SKUs during the first half of the year and will continue to prioritize investments in innovations in key growth categories. Finally, as we enter the second half of 2022, we will continue to focus on cost control and margin enhancement through continue process improvements and investments in automation to further support our key objective of Adjusted EBITDA profitability in 2022."

For the three and six months ended June 30, 2022, net revenues were $27.3 million and $50.0 million as compared to $20.9 million and $30.0 million during the same period in 2021, an improvement of 31% and 66% respectively. Revenue in the second quarter of 2022 was comprised of approximately 40% in sales of dried flower and pre-roll Cannabis Products, with the remainder from oils and Cannabis 2.0 Product sales. Net revenues improved from the Company's expansion of its 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 second quarter of 2022 originated from sales to British Columbia, Alberta and Ontario.

Auxly realized a gross profit of $9.8 million and $13.5 million for the three and six months ending June 30, 2022 resulting in a 36% and 27% Gross Profit Margin¹ respectively, as compared to $8.0 million (38%) and $10.3 million (34%) during the same periods in 2021. Cost of Finished Cannabis Inventory Sold Margin¹ was 25%, 12% lower than the same period of 2021, however 2% greater than the first quarter of 2022.

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. The positive impact on gross profit is the result of a significant reduction in cultivation costs and increased product availability. 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 current period of $1.8 million are primarily a result of the write-off of certain third-party products, with year-to-date charges of $7.4 million inclusive of the closures of the Auxly Annapolis and Auxly Annapolis OG facilities.

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 $12.9 million during the second quarter of 2022, in line with the previous quarter and $1.8 million greater than the second quarter of 2021 primarily due to the inclusion of Auxly Leamington in 2022. Year-to-date expenditures of $25.6 million in 2022 are $5.5 million greater than the same period in 2021 primarily due to the addition of Auxly Leamington and expenditures associated with increased revenues.

Wages and benefits were $5.1 million during the second quarter of 2022, approximately $0.4 million higher than the same period of 2021, primarily due to the addition of Auxly Leamington partially offset by reductions associated with the Auxly Annapolis and Auxly Annapolis OG closures. Year-to-date expenditures of $10.7 million were higher than those of $8.9 million during the same period of 2021. The increases relate to the inclusion of Auxly Leamington and workforce additions to support dried flower and pre-roll sales, partially offset by cost reductions from the closure of the Auxly Annapolis and Auxly Annapolis OG facilities.

Office and administrative expenses were $2.6 million during the current quarter, decreasing by $1.0 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. For the first six months of 2022 expenditures were $6.2 million, approximately $0.5 million below the same period of 2021 reflecting reductions in the current quarter partially offset by the addition of Auxly Leamington.

Auxly's professional fees were $1.1 million during the second quarter of 2022 and $1.5 million year-to-date which were $0.4 million greater than the same periods in 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 June 30, 2022 and $0.2 million after six months, as compared to $Nil during the same periods in 2021. These expenses were nominal during the COVID-19 pandemic and primarily relate to acquisition, business development and travel related expenses which have increased modestly as a result of loosening restrictions and the resumption of business travel.

Selling expenses were $4.1 million for the three months ended June 30, 2022 and $7.0 million year-to-date, increases of $2.1 million and $3.6 million over the same periods 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.

Equity-based compensation for the three and six months ended June 30, 2022 was $2.9 million and $3.1 million respectively.  During the same periods of 2021 these amounts were $1.0 million and $1.2 million. The charges for the current quarter reflects the impact of prior option grants and restricted share units ("RSU") granted in June 2022, in respect of services provided by employees in 2021. The expense related to options is primarily a function of the number of grants, the weighted average aging of the grants and the share price at the time of grant. 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.

Depreciation and amortization expenses were $3.9 million for the period ended June 30, 2022, and $8.5 million year-to-date increasing by $1.7 million and $3.9 million respectively over the same periods in 2021. The increase in expense during the current period is primarily related to additional capital expenditures and inclusion of Auxly Leamington in 2022.

Interest expenses were $5.3 million and $10.4 million for the three and six months ended June 30, 2022, an increase of $0.5 million and $1.0 million over the same periods in 2021 primarily as a result of the inclusion of Auxly Leamington. 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 $1.6 million for the current quarter.

Total other incomes and losses for the quarter were a net gain of $0.9 million inclusive of gains related to the sale of Auxly Annapolis and the extension of the unsecured convertible debentures, partially offset by other losses, as compared to a gain of $3.1 million during the same period in 2021, which were primarily driven in 2021 by a gain on the Imperial Brands Debenture extension agreement partially offset by an impairment related to the sale of a non-core asset.

Total other incomes and losses for the six months ending June 30, 2022 of $23.1 million include the first quarter losses associated with the closure of the Auxly Annapolis and Auxly Annapolis OG facilities where the carrying value exceeds the fair value less cost to sell.

The share of losses on investment in joint venture during 2021 represented 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 current period ended June 30, 2022, the Company reported a foreign exchange gain of $0.6 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 $14.3 million for the three months ended June 30, 2022, representing a net loss of $0.02 per share on a basic and diluted basis. The net loss of $54.1 million through six months of 2022 includes the net impact of approximately $25.7 million related to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities during the first quarter of 2022.

Adjusted EBITDA during the three months ended June 30, 2022 was negative $4.0 million, a decrease from the same period of 2021, however, improved by approximately $2.0 million over the most recent quarters.

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.

During the second quarter the Company made positive progress towards its strategic objectives. Despite operating in a challenging macroeconomic environment, the Company increased revenues and gross profits during the quarter. Coupled with largely flat SG&A spending, Auxly improved its Adjusted EBITDA by approximately 34% since the fourth quarter of 2021, bringing it closer to its objective of Adjusted EBITDA profitability in 2022.

The Canadian cannabis industry continues to evolve at an extraordinary pace. The challenges posed by increasing competition and fragmentation; oversupply of cannabis; high taxation and price compression have been exacerbated by inflation, global supply chain disruptions, and constrained capital markets. While the Company's share of market decreased across certain product categories during the quarter, it will continue to pursue growth in key categories by continuing to deliver high-quality, innovative products to our consumers.

Auxly remains focused on cost control and margin enhancement through continued process improvements and investments in automation. Auxly Leamington has quickly become one of the lowest cost cultivation facilities in Canada. The improvements made at Auxly Leamington positively impacted consolidated operating results through reduced cultivation costs and increased flower quality and availability. Further, the Company anticipates an increase in its dried flower and pre-roll capabilities, commencing in Q3, 2022 as its new automation equipment is commissioned and comes online, enabling it to continue to meet consumers growing demands for its expanding flower portfolio.

The Company has and will continue to put its consumers first by delivering safe, effective, high-quality products that address their evolving needs and preferences and help them live happier lives. The Company continues to be leaders in product innovation and during the quarter successfully launched 17 new SKUs, each delivering strong early performance. Auxly has now launched a total of 27 new SKUs in 2022 and will continue prioritizing investments in innovation in key growth categories. Finally, through its continued focus on insights-driven innovation, product quality and targeted marketing efforts, the Company's brands continue to gain the trust and loyalty of its consumers which allowed it to maintain leading market share positions in its key product categories.

Please see the Company's MD&A dated June 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 net revenues. 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 net revenues.

"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.

Auxly's management team will host a conference call today, Monday August 15, 2022, at 10:00 a.m. EST to discuss its financial results.  Participants can access the conference call by telephone by dialing: 888-664-6383 or by audio webcast at: https://app.webinar.net/ZxQ6J3oJ7nd.  

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.

ON BEHALF OF THE BOARD
"Hugo Alves" CEO

Auxly is a leading Canadian consumer packaged goods company in the cannabis products market, headquartered in Toronto, Canada. The Company's focus is on developing, manufacturing and distributing branded cannabis products that delight wellness and recreational consumers and deliver on its 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/.

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 Company's intention to introduce innovative new cannabis products to the market and the timing thereof; the anticipated benefits of the Company's partnerships, joint ventures, 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.