Auxly Q3 Revenue Increases 95% to $24.5 Million

Auxly Reports Third Quarter 2021 Financial Results

Reports Continued Growth in Revenues and Canadian Recreational Market Share

TORONTO, Nov. 15, 2021 (GLOBE NEWSWIRE) — 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

We are proud to report another record revenue quarter for Auxly.

Hugo Alves, CEO of 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.

He added, “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

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.

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/.

Original Press Release

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