XLY Auxly Cannabis Group Inc

Auxly Cannabis Group Inc. (TSX.V - XLY) (OTCQX: CBWTF) ("Auxly" or the "Company") today released its financial results for the three and nine months ended September 30, 2020. 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 2020 Highlights and Subsequent Events

• Total net revenues of $13.4 million for the three months ended September 30, 2020, comprised of $12.6 million of cannabis net revenues, an 85% increase from the previous quarter, and research revenues from KGK of $0.9 million.
• Selling, General and Administrative expenses decrease to $11.4 million.
• Adjusted EBITDA improves to ($6.8) million.
• The Company continued to introduce new products to drive future growth with the launch of the Back Forty brand, Foray’s Hard Maple Caramels, Dosecann’s omega-Rich Ahiflower® Oil Capsules and Kolab Kalifornia dried flower, positioning the Company as the #1 LP in national edible and vape sales year to date, with a blended 18% market share (1).
• Strengthened its Board of Directors with Independent Director, Ms. Genevieve Young, assuming the role of Chair and welcoming a new Independent Director, Mr. Vikram Bawa.
• Increases cash position by $20 million with recently announced $12 million bought deal offering and $8 million non-dilutive financing.

Q3 Highlights

(000’s)	Three months ended Sept 30, 2020		Three months ended Sept 30, 2019		Change		Percentage Change	Nine months Ended Sept 30, 2020		Nine months Ended Sept 30, 2019		Change		Percentage Change
Total revenues	$	13,449	$	1,617	$	11,832	732%	$	31,918	$	5,196	$	26,722	514%
Net losses*		(17,799)		(17,255)		(544)	-3%		(58,460)		(44,853)		(13,607)	-30%
Adjusted EBITDA**		(6,783)		(11,056)		4,273	39%		(24,213)		(26,804)		2,591	10%
Weighted Average Shares outstanding		631,949,685		594,591,824		37,357,861	6%		628,341,762		590,718,186		37,623,576	6%
*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

(1) Source: Headset Canadian Insights as of October 31, 2020

(000’s)	Sept 30, 2020		December 31, 2019		Change		Percentage Change
Cash and equivalents	$	13,573	$	44,134	$	(30,561)	-69%
Total assets	$	381,598	$	411,182	$	(29,584)	-7%
Debt	$	112,358	$	95,438	$	16,920	18%

Hugo Alves, CEO of Auxly, commented: “Our team entered Q3 committed to driving sales growth, reducing costs and improving product availability. Our efforts resulted in a quarter over quarter increase in net revenues of approximately $5 million and a reduction in SG&A of approximately $2 million. Our improved performance was driven primarily by continued improvements in operational and supply chain capabilities, expanding distribution, better alignment of our resources with our commercial objectives and, of course, our continued focus on understanding our consumers and delivering cannabis products that delight them. We believe that our efforts are resonating with consumers and that Auxly has quickly established itself as one of the leading cannabis companies in Canada.”

Results of Operations

(000’s)	Three months Ended Sept 30, 2020		Three months Ended Sept 30, 2019		Nine months Ended Sept 30, 2020		Nine months Ended Sept 30, 2019
Revenue
Revenue from sales of cannabis products	$	15,243	115		$	34,030	851
Research contracts and other	862		1,502		3,526		4,345
Excise taxes	(2,656)		-		(5,638)		-
Total Net Revenues	13,449		1,617		31,918		5,196
Cost of Sales
Costs of finished cannabis inventory sold	9,536		59		19,656		435
Research contracts and other	511		1,453		1,333		3,825
Inventory (gain)/impairment	(312)		1,074		1,630		1,074
Gross profit excluding fair value items	3,714		(969)		9,299		(138)
Unrealized fair value gain/(loss) on biological transformation	172		(135)		322		(672)
Realized fair value loss on inventory	2		(48)		(193)		(243)
Gross Profit	3,888		(1,152)		9,428		(1,053)
Expenses
Selling, general, and administrative expenses	11,363		16,594		39,019		38,887
Depreciation and amortization	2,310		1,527		7,123		4,002
Interest expense	3,664		2,520		9,219		7,951
Total expenses	17,337		20,641		55,361		50,840
Other incomes / (losses)
Fair value loss of financial instruments accounted under FVTPL	(34)		(5,778)		(4,670)		(6,208)
Interest income	381		858		787		3,837
Gain/(impairment) of long-term assets	144		-		(4,362)		-
Impairment of intangible assets and goodwill	-		-		-		(1,800)
Loss on settlement of assets and liabilities and other expenses	(3,309)		(1,413)		(3,862)		(1,288)
Share of loss on investment in joint venture	(1,214)		(838)		(2,995)		(1,390)
Foreign exchange (loss) / gain	(466)		(75)		122		(1,015)
Total other losses	(4,498)		(7,246)		(14,980)		(7,864)
Net Loss before income tax	(17,947)		(29,039)		(60,913)		(59,757)
Income tax recovery	90		11,524		657		14,247
Net Loss	$	(17,857)	$	(17,515)	$	(60,256)	$	(45,510)
Net loss attributable to shareholders of the Company	$	(17,799)	$	(17,255)	$	(58,460)	$	(44,853)
Net loss attributable to non-controlling interest	$	(58)	$	(260)	$	(1,796)	$	(657)
Adjusted EBITDA	$	(6,783)	$	(11,056)	$	(24,213)	$	(26,804)
Net loss per common share (basic and diluted)	$	(0.03)	$	(0.03)	$	(0.09)	$	(0.08)
Weighted average shares outstanding (basic and diluted)	631,949,685		594,591,824		628,341,762		590,718,186

Revenue

For the three months ending September 30, 2020, cannabis revenues were $15.2 million as compared to $0.1 million in the same period in 2019. Net cannabis revenues of $12.6 million during the period were comprised of approximately 80% Cannabis 2.0 Products, with the remainder from Cannabis 1.0 Products, and represented a sequential increase of $5.8 million or approximately 85% over the second quarter of 2020. During the third quarter of 2020, approximately 75% of cannabis net revenues originated from sales to British Columbia, Alberta and Ontario. Net revenues improved from higher vape product sales as a result of pricing adjustments initiated in the second quarter, new product offerings such as 1 gram vape cartridges, the launch of Robinsons dried flower, expansion of dried flower and pre-rolls under the Kolab Project brand, and revenues from the sale of dosist products. Net cannabis revenues of $28.4 million year to date reflect strong Cannabis 2.0 Product sales in the vape and edible categories as well as the third quarter impact of dried flower and dosist product sales.

Research and other revenues of $0.9 million for the third quarter of 2020 and $3.5 million year to date decreased by approximately $0.6 million and $0.8 million during the comparable periods in 2019. Revenues are in support of third-party research contracts which can fluctuate significantly during the term of the contract based upon the achievement of milestones. Where milestones are not met, revenues are deferred on the balance sheet which may result in timing differences in earnings. The decline in revenues year to date are due to the impact of the COVID-19 pandemic and the completion of clinical trials, partially offset by the introduction of new regulatory advisory services.

Gross Profit/Loss

Auxly realized a gross profit of $3.9 million following fair value adjustments during the third quarter of 2020 and $9.4 million year to date. This compares with gross profits of $(1.2) million and $(1.1) million in the comparable periods of 2019. Gross profits for the three months ended September 30, 2020 were comprised of $3.5 million and a 28% margin from Canadian cannabis operations and $0.4 million and a 41% margin from research operations. Cannabis gross margins improved slightly over the second quarter of 2020 in part due to strong dried flower margins, partially offset by inefficiencies associated with the reconfiguration of product manufacturing at the Dosecann facility following the completion of the second floor expansion. During the nine months ended September 30, 2020, gross profits were comprised of $8.6 million from Canadian cannabis operations, $2.2 million from research operations, partially offset by impairment charges of $1.4 million primarily related to Inverell’s stored biomass.

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. For the three and nine months ended September 30, 2020, SG&A expenses were $11.4 million and $39.0 million respectively, or a decrease of $5.2 million and an increase of $0.1 million over the same respective periods in 2019. SG&A during the quarter declined by $2.3 million as compared to the second quarter of 2020.

For the three and nine months ended September 30, 2020, wages and benefits were $5.3 million and $19.3 million, respectively, or an increase of $0.5 million and $6.3 million over the same respective periods in 2019. The nine month increase of $6.3 million was primarily driven by workforce increases to support Cannabis Product sales, primarily related to the operations and commercial teams, the absorption of employees arising from the foreclosure of Curative and compensation and severance accruals recognized during the period. Expenses in the third quarter of 2020 reflect severance accruals in conjunction with SG&A savings announced in October of 2020 offset by unfilled vacancies which occurred in the second quarter of 2020, employee wage subsidies received by KGK and reduction of Inverell staffing.

Office and administrative expenses of $3.0 million in the third quarter of 2020 increased by $0.1 million and $2.4 million to $8.5 million year to date compared to the same periods in 2019 primarily as a result of increased operating costs associated with the development and sale of Cannabis Products in 2020 and the implementation of an organization-wide ERP system.

Auxly’s professional fees were $0.4 million and $2.3 million for the three and nine months ended September 30, 2020, as compared to $2.4 million and $5.3 million over the same respective period in 2019. Professional fees incurred during the periods primarily related to accounting fees, regulatory matters, reporting issuer fees, ongoing legal proceedings, recruiting fees in conjunction with hiring, consulting fees, and fees associated with financing activities. The decrease in professional fees was driven by the reduction in professional services and professional services contracts in 2020.

Business development fees of $0.2 million in the third quarter of 2020 decreased by $0.8 million and $1.9 million to $1.2 million year to date as compared to the same periods in 2019. The decreases are primarily due to a reduction in acquisition and travel related expenses.

Selling expenses for the three and nine months ended September 30, 2020 were $1.4 million and $3.8 million, respectively, as compared to nominal fees recognized over the same respective periods in 2019. The increase is directly attributable to cannabis sales activities comprised of brokerage fees earned by Kindred Partners and marketing initiatives for Cannabis Products.

For the three and nine months ended September 30, 2020, share-based compensation was $1.2 million and $3.9 million, a decrease from the $5.4 million and $11.1 million over the same respective periods in 2019. The reduction in expenses in 2020 reflects the impact of significantly fewer option grants and the impact of lower share prices.

Depreciation and amortization expenses were $2.3 million in the third quarter of 2020 and $7.1 million year to date, as compared to $1.5 million and $4.0 million during the same respective periods in 2019. The increase in expense is primarily as a result of greater in use capital projects and additional capital expenditures in 2020. During 2019, several of these projects remained under development. Interest expenses were $3.7 million for the three months ended September 30, 2020 and $9.2 million for the nine months ended September 30, 2020. Interest expenses are driven by interest charges of 6% on the then outstanding 2018 convertible debentures, 4% on the Imperial Brands convertible debentures, 7.5% on the convertible debenture tranches issued in 2020, and the non-cash accretion of placement and other related fees being recognized over the terms of the respective debentures.

Total Other Incomes and Losses

Fair value changes on financial instruments included in this section arise on changes in value of promissory notes and level two securities held. For the quarter ended September 30, 2020, the Company reported an insignificant fair value loss, as compared to a $5.8 million loss in the previous year. For the nine months ended September 30, 2020, the Company reported a $4.7 million fair value loss, as compared to a $6.2 million fair value loss in the previous year. Fair value changes reflect losses on promissory notes and level two securities held. All promissory notes were repaid or fully impaired as at December 31, 2019.

The Company recorded interest income of $0.4 million during the third quarter for 2020 and $0.8 million year to date, which is a decrease from $0.9 million generated during the third quarter of 2019 and $3.8 million year to date 2019. Interest income is earned on notes receivable balances, investments in convertible debt, and interest on cash and cash equivalents.

During the three-months ended September 30, 2020, the Company recognized an impairment gain on long-term assets of $0.1 million and an impairment loss of $4.4 million year to date which represents the impairment of the Company’s LATAM cash generating unit (“CGU”), Inverell as reported in the second quarter of 2020.

Losses on settlement of assets and liabilities and other expenses for the three months ended September 30, 2020 were $3.3 million, primarily relating the reversal of a gain on non-monetary inventory transfers with another licensed producer which was recorded in the first quarter of 2020. The inventory was returned during the quarter also resulting in the recognition of a liability of approximately $5 million in accounts payable and other liabilities and an asset held in inventory. The Company anticipates that this liability will be settled during the first half of 2021. Year to date losses of $3.9 million also include accrued legal settlements related to a commercial lease agreement with 346 Spadina Inc., and a credit loss provision.

The loss on investment in joint venture of $1.2 million for the three months ended September 30, 2020 and $3.0 million year to date, increased by $0.4 million and $1.6 million over the comparable period in 2019. These amounts reflect the Company’s proportionate share of Sunens earnings. Sunens has received its cultivation licence and processing licence and was cultivating cannabis during the third quarter of 2020. Sunens anticipates having product available for sale to other licenced producers in the fourth quarter of 2020.

Auxly is exposed to foreign exchange fluctuations from the U.S. dollar to CAD dollar exchange rate primarily related to Inverell. During the three and nine months ended September 30, 2020, the Company reported a foreign exchange loss of $0.5 million and a gain of $0.1 million, respectively, as compared to foreign exchange losses of $0.1 million and $1.0 million over the same respective periods in 2019.

Net Losses

Net losses attributable to shareholders were $17.8 million with a net loss of $0.03 per share on a basic and diluted basis in the third quarter of 2020, and $58.5 million with a net loss of $0.09 per share on a basic and diluted basis year to date. This compares to a net loss of $17.3 million attributable to shareholders and $0.03 per share on a basic and diluted basis and $44.9 million and $0.08 per share on a basic and diluted basis, over the same respective periods in 2019. The increase in net losses of $0.5 million during the third quarter and $13.6 million year to date, over the comparable periods in 2019, was primarily attributable to a tax recovery of $11.5 million recorded in the third quarter of 2019.

Adjusted EBITDA

Adjusted EBITDA improved by approximately $4.3 million to $(6.8) million and improved by $2.6 million to $(24.2) million for the three and nine months ended September 30, 2020 as compared to the same period in 2019 The increase was primarily driven by gross profits from cannabis sales partially offset by SG&A.

Outlook

While Auxly has established itself as a market leader in Cannabis 2.0 Products, with its current product offering achieving leading national market shares, the Company is also seeing increasing success with its dried flower product offerings. The launch of the premium Robinsons flower offering, Kolab’s curated “Grower Series” collaborations and Kolab pre-rolls have firmly established the Company as an up-and-coming player in the dried flower market. The Company’s objectives for the remainder of 2020 and the first half of 2021, which may be impacted by the COVID-19 pandemic (see further discussion in the MD&A under “COVID-19 Pandemic”), continue to be concentrated on Canadian operations. Broadly, the Company’s objectives for the period are as follows:

• Continued leadership and strength in the Cannabis 2.0 Products market;
• Focused expansion of Cannabis 1.0 Products;
• Finish remaining construction and equipment commissioning at Dosecann and continue to refine and improve related processes and throughput capabilities;
• Manage SG&A to the scale of operations; and
• Continue to take measures to improve cash flows and finance the business.

Auxly will continue to evaluate opportunities to bring new and exciting products to consumers as the Company continues to realize its vision of becoming a global leader in branded cannabis products that deliver on the consumer promise of quality, safety and efficacy.

ON BEHALF OF THE BOARD"Hugo Alves" CEO

About Auxly Cannabis Group Inc. (TSX.V: XLY)

Auxly is an international cannabis company dedicated to bringing innovative, effective, and high-quality cannabis products to the medical, 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, proposed timelines for the build-out, licencing and 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 anticipated benefits of the Company's partnerships, joint ventures, research and development initiatives and other commercial arrangements, the expectation and timing of future revenues, 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’ and partners’ 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: Auxly’s subsidiaries and partners are able to obtain and maintain the necessary regulatory authorizations to conduct business, the Company is able to successfully manage the integration of its various business units with its own, 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 and sale of current and proposed products, and whether such permits and approvals can be obtained in a timely manner; the success of Dosecann and KGK’s research strategies, the applicability of the discoveries made therein, the successful and timely completion and uncertainties related to the regulatory process, the 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, 2019 dated May 13, 2020.

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 TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.