Auxly Reports Fourth Quarter and Full Year 2021 Financial Results and Provides Outlook for 2022

TORONTO, March 31, 2022 (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 fourth quarter and full year 2021 financial results. 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.

2021 Highlights

• Recorded net revenues of $83.8 million in 2021, an increase of 79% compared to 2020;

• Fourth quarter net Cannabis revenues of $29.3 million, a 20% increase QoQ;
• Maintained the #1 LP position in Canada for Cannabis 2.0 product sales¹ in 2021, increasing its market share to approximately 15% (up from 14% in 2020);
• Continued to dominate national vapour sales with its award-winning portfolio, achieving 23% market share for the year (up from 19% in 2020), and securing the #1 LP position;
• Exiting 2021 as the 5^th largest LP in Canada by share of market based on total dollar sales, securing 7.4% in the fourth quarter;
• Successfully expanded its branded product offering into dried flower and pre-roll categories with the launch of new and exciting product formats that include the award-winning Back Forty 40s², as its dried flower portfolio led the growth in the category at OCS, growing 189% and securing the #7 LP position in national sales in Q4;
• Enhanced the Company’s cultivation capabilities and vertical integration with the acquisition of its joint venture project, Auxly Leamington Inc. (formerly Sunens);
• Strengthened its Board of Directors with the appointment of Murray McGowan, strategic partner Imperial Brands’ Chief Strategy and Development Officer;
• Strengthened the Company’s financial position with the sale of two non-core assets and extension of Imperial Brands $123 million convertible debenture;  
• SG&A remained relatively flat year-over-year while the Company continued to enhance and expand its product portfolio, increasing sales by almost 80%;
• Successfully grew national brand awareness across all four in-house proprietary brands³ as the Company continued to build deeper connections with its targeted consumers, delivering differentiated and innovative products that meet their growing needs and demands.

Year End Highlights

  *Attributable to shareholders of the Company
  **Adjusted EBITDA is a Non‐IFRS financial measure. Refer to the Financial Measures section in this press release for definitions

Hugo Alves, CEO of Auxly, commented: “2021 was an incredible year of growth for Auxly. Through the tireless efforts of our passionate and talented people, we were able to navigate unprecedented challenges, deliver record revenues and market share growth and emerge as a Canadian market leader. Auxly exited 2021 as the 5^th largest LP in Canada by share of market. Over the course of 2021 we were able to successfully extend our brands into Cannabis 1.0 formats, significantly enhance our cultivation capabilities and solidify our position within the top 10 licensed producers in both dried flower and pre-roll sales; all while maintaining our #1 overall position in the Cannabis 2.0 product segment and a dominant 23% share of market in vapes. On behalf of everyone at Auxly, I would like to thank our consumers. Our mission is to help you live a happier life and we are grateful for the trust you place in us every time you purchase one of our award-winning Back Forty, Kolab Project, Foray or Dosecann branded products. In order to serve you better, we successfully launched 51 exciting new SKUs over the course of 2021, including 10 first-to-market innovations, and we will continue to work relentlessly to keep you smiling in 2022 with 60 new product innovations planned for release over the course of the year. I am proud of the dedication that our team has shown – at every site and every facility – in pulling together as one organization and achieving these results and I am excited to carry the momentum that we’ve earned over the course of 2021 into the new year and continue to win with our customers and consumers.”

Results of Operations

Net Revenue

For the year ended December 31, 2021, net revenues were $83.8 million as compared to $46.7 million during the same period in 2020, an improvement of 79%. Revenue in 2021 was comprised of approximately 69% 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 throughout 2021 originated from sales to British Columbia, Alberta and Ontario.

Gross Profit

Auxly realized a gross profit of $19.3 million resulting in a 23% gross profit margin¹ during the year ended December 31, 2021, compared to $9.8 million (21%) during the same period in 2020. Gross profits improved over 2021 however they were impacted by the Company’s expansion into Cannabis 1.0 Products which presently have lower average profit margins as compared to Cannabis 2.0 Products. 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. For the six weeks to December 31, 2021, the Company realized approximately $0.4 million of additional gross profit as a result of the acquisition of Auxly Leamington. Prior to the acquisition of Auxly Leamington, 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.

Inventory impairment was $3.3 million for the year which was similar to the same period in 2020. For 2021, the amounts relate to the obsolescence of certain retired products and packaging, and reductions in the net realizable value of dried cannabis under the Company’s product specifications.

Unrealized fair value gains and losses on biological assets and realized fair value gains and losses on inventory in 2021 primarily relate to Auxly Leamington. In 2020, Auxly Leamington was accounted for under the equity method.

¹ Gross Profit Margin is a supplemental financial measure – See “Non-GAAP Measures” in this press release.

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 $45.7 million for 2021, which was approximately $0.9 million lower than 2020.

Wages and benefits were $17.8 million for 2021 approximately $3.4 million lower than the same period of 2020, primarily from workforce reductions at the Company’s discontinued cultivation project in Uruguay (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 $13.6 million in 2021 increased by $1.6 million compared to the same period in 2020. The increased expenditures 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 were $2.9 million in 2021, which was consistent with 2020. 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 $0.3 million for the year ended December 31, 2021, as compared to $0.5 million during the same period in 2020. The decrease of $0.2 million is primarily due to a reduction in acquisition, business development and travel related expenses primarily as a result of the on-going COVID-19 pandemic.

Share-based compensation was $1.4 million for the year ended December 31, 2021, as compared to $4.3 million during the same period in 2020. The reduction in expense of $2.9 million as compared to 2020 reflects the impact of lower share prices and the aging of outstanding options.

Selling expenses were $9.6 million for the year ended December 31, 2021, an increase of $4.0 million over the same period in 2020, 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 $12.5 million for the year ended December 31, 2021, $3.5 million greater than the same period of 2020. The increase in expense during the current period is primarily related to additional capital expenditures and inclusion of Auxly Leamington, partially offset by amounts related to Inverell in 2020.

Interest expenses were $17.7 million in 2021, an increase of $4.7 million over 2020 primarily as a result of interest expense and accretion on the $123 million Imperial Brands Debenture and changes related to the amendments thereof, increased leases and debt assumed as a result of the acquisition of Auxly Leamington.

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 year ended December 31, 2021, the Company reported a net fair value gain of $Nil. The $4.4 million loss for the year ended December 31, 2020 was the result of more significant valuation reductions and a larger securities portfolio during 2020.

The Company recorded interest and other incomes of $1.6 million for the year ended December 31, 2021, with increases over the same periods of 2020 primarily due to changes in interest accretion on the promissory note while Auxly Leamington was the Company’s joint venture.

Impairment of long-term assets of $11.4 million in 2021 relates 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 $6.2 million related to Inverell, its discontinued cultivation project in Uruguay.

Gains and losses on settlement of assets and liabilities and other expenses was a gain of $20.3 million in 2021 primarily related 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 gain on disposal of subsidiary in 2021 of $1.4 million relates to the final accounting of the Curative sale transaction for assets that were not classified as held for sale prior to closing the transaction in July 2021.

The share of loss on investment in joint venture of $4.7 million represents the Company’s proportionate share of Auxly Leamington’s earnings prior to the acquisition date.

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 year ended December 31, 2021, the Company reported a foreign exchange loss of $0.8 million as compared to a loss of $0.6 million during the same period of 2020.

Net Income and Loss

Net losses attributable to shareholders of the Company were $33.7 million for the year ended December 31, 2021, representing a net loss of $0.06 per share on a basic and diluted basis. The improvement of approximately $51.7 million relative to the same period in 2020 was primarily a result of net income of $12.2 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, losses on the investment in Auxly Leamington while it was recorded as a joint venture and higher interest and depreciation and amortization expenses.

Adjusted EBITDA

Adjusted EBITDA of negative $21.7 million in 2021 improved by approximately $6.9 million over the same period in 2020 primarily driven by greater gross profits and partially offset by higher selling and office expenses.

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. The results of operations for the discontinued operations are presented below.

Outlook

In 2021, Auxly remained focused on building on its success as a market leader in Cannabis 2.0 Products, while pursuing focused expansion of its Cannabis 1.0 Products. The Company’s objectives for 2021 were as follows:

• Continued leadership and strength in the Cannabis 2.0 Products market:
  • Auxly ended the year as the #1 licensed producer in Cannabis 2.0 Product sales in the country, with a 14.8% share of the 2.0 market and was a top 5 licensed producer across all Cannabis 2.0 Product categories that the Company participated in.
  • This was driven by Auxly’s leadership position in national vape sales, where it continued to lead the market; securing 23% share of market for the year, and maintaining the #1 licensed producer position in the category overall. All three of the Company’s vape brands – Back Forty, Kolab Project and Foray – secured a spot in the top 5 selling brands across the country, with Back Forty achieving the #1 brand position for the year with over 12% market share. Both Back Forty and Kolab Project brands received top honours at this year’s Kind Awards for “Best Sativa Cartridge” and “Best Indica Cartridge”, as determined by a panel of nearly 250 budtenders across the country.
  • The Company expanded its Cannabis 2.0 Product portfolio with the successful launch of concentrates in March 2021 and topicals in May 2021. Dosecann’s Daily Relief CBD Cream combines high-quality CBD extract with Natralipid^® Meadowfoam seed oil to deliver an industry-leading potency and unsurpassed stability to users and was recognized for its innovation at this year’s Kind Awards, winning the “Best Topical” category. Kolab Project’s potent, high-quality concentrates quickly became a favourite with Canadian consumers as sales propelled the Company into the top #4 licensed producer position for the year in the concentrates category.
• Focused expansion of Cannabis 1.0 Products:
  • Auxly successfully expanded its Cannabis 1.0 Product portfolio with the launch of new and exciting product formats, including Back Forty 40s, which after just a few months on the market were recognized as the “Best Indica Pre-roll” by the 2021 Kind Awards.
  • As two of the largest cannabis categories, Auxly focused its efforts on growing sales in both dried flower and pre-rolls throughout the year and saw tremendous results, including:
    • Moving from the #30 licensed producer in dried flower sales in 2020 to the #7 licensed producer in 2021, securing 5.1% share of market nationally.
    • Back Forty secured the #4 brand position in Ontario – a province with over 160 listed brands in the dried flower category – with over 5% share of market.
    • Back Forty’s unique strains became a consumer favorite, with its Wedding Pie 28g SKU quickly establishing itself as one of the best-selling flower SKUs in Ontario.
    • Moving from the #19 licensed producer in pre-roll sales in 2020 to the #8 ranked producer nationally in 2021, in large part driven by the launch of Back Forty 40’s where its innovative, single-strain, straight roll format quickly gained 3.6% share of the pre-roll market and became a consumer favourite.
  • The acquisition of Auxly Leamington materially enhanced Auxly’s cultivation capabilities and ensures surety of supply of low cost, high-quality cannabis, and genetic exclusivity for its consumer brands.
• Become a top 5 licensed producer in Canada by total market share in adult recreational cannabis sales:
  • Auxly became the #5 licensed producer in Canada by total market share by the end of 2021.
  • Through the Company’s continued dedication to its targeted consumers, the Company significantly increased its market share over the course of 2021, almost doubling its position year-over-year and ending the year with 7.4% share of market nationally.
  • Leveraging its deep consumer insights and differentiated product innovation to meet the growing and evolving demands of its consumers, the Company successfully launched 51 new SKUs into the Canadian market throughout the year including 14 line-extensions, 37 unique SKUs and 10 first-to-market products.
  • Auxly expanded its distribution footprint through its dedicated internal sales team and strategic partnership with Kindred, ending the year with presence in over 92% of retail stores across the country.
• Continue to take measures to improve cash flows and finance the business:
  • Cash flows and financing of the business improved dramatically with total net cash used of $5.9 million in 2021 as compared to a use of $22.9 million in 2020.
  • Cash used in operating activities before net working capital improved over 2020 by approximately $14.5 million primarily as a result of:
    • Significantly higher net revenues of $83.8 million in 2021 as compared to $46.7 million during the same period in 2020, an improvement of 79% primarily due to the Company’s expansion into Cannabis 1.0 Products and continued leadership in Cannabis 2.0 Products;
    • Gross profit improvements to $19.3 million. Despite product mix changes, gross margin improved to 23% for the year ended December 31, 2021 as compared to $9.8 million or 21% during the same period in 2020; and
    • SG&A expenditures were contained to $45.7 million in 2021 as compared to $46.6 million for the same period in 2020.
  • Deployed capital prudently, towards the purchase, installation and commissioning of automated manufacturing and packaging equipment, and prioritized near term benefits in support of net revenues and/or gross profit margin enhancement. During 2021, capital expenditures, excluding the impact of Auxly Leamington, were approximately $4.9 million as compared to $20.6 million in 2020.
• Become Adjusted EBITDA positive by the end of the calendar year;
  • As anticipated and previously communicated to shareholders during the Company’s earnings calls earlier this year, Auxly was unable to achieve positive Adjusted EBITDA during 2021. Global supply chain constraints, increased cost of goods, price compression and equipment delays constrained output and negatively impacted revenues and costs.
  • Despite these challenges, Auxly was able to move closer towards its target of becoming Adjusted EBITDA positive. For the year ending December 31, 2021, Adjusted EBITDA improved by approximately $6.9 million over 2020, an improvement of 24%, led by net revenues which were 79% higher than 2020 which contributed to improved profit margins, along with a SG&A decrease of $0.9 million, or 2%, inclusive of Auxly Leamington expenses post acquisition.
• Leverage the Auxly Leamington facility to establish a secure supply of cannabis and reduce reliance on open market purchasing;
  • Auxly simplified its cultivation supply chain through the acquisition of Auxly Leamington in November 2021, providing Auxly with enhanced cultivation capabilities.
  • Auxly Leamington provides the Company with a secure and cost-efficient source of dried cannabis, milled flower and extraction materials.
  • Auxly Leamington enhances the Company’s ability to remain focused on its consumers and be responsive to their increasing demand for the Company’s branded flower products by providing Auxly with exclusive access to its catalogue of over 150 unique cultivars.
• Explore possible cannabis market entry strategies in regulated international markets, on an asset light basis.
  • While the Company continues to be focused on the Canadian recreational market, it undertook an internal review in 2021 and has identified international markets of interest and considered preferred market entry routes to those markets. The acquisition of Auxly Leamington provides us the ability to explore international medical export opportunities while continuing to prioritize the fulfilment of domestic demand.

Looking ahead to 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
  • The Company’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.

Non-GAAP Measures

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.

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

Supplementary Financial Measures

Gross Profit Margin

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

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.com
Phone: 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; proposed timelines for the build‐out, expansion, licencing or 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 ability of the Company to maintain and grow its market share; 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 are able to 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.

  1)   Headset Canadian Insights data, Jan 1, 2021 – Dec 31, 2021
  2)   Recipient of the “Best Indica Pre-Roll” at the 2021 Kind Awards
  3)   Brightfield Group, all 4 brands increased in national brand recognition as reported between March 2020 – September 2021