Mr. Hugo Alves reports

AUXLY REPORTS Q1 2023 FINANCIAL RESULTS

Auxly Cannabis Group Inc. today released its financial results for the three months ended March 31, 2023. These filings and additional information regarding Auxly are available for review on SEDAR. All amounts are Canadian dollars except common shares (shares) and per-share amounts.

Q1 2023 highlights

• Total net revenues of $24.0-million in Q1 2023, an increase of $1.3-million or 6 per cent compared with the same period in 2022;
• The company achieved the first quarter of positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in its history;
• Retained the No. 5 LP position in Canada with 5.7 per cent share of market and continued to improve sales of Cannabis 1.0 products, finishing the quarter with 4.6-per-cent share of market up from 3.7 per cent in the previous quarter;
• The cost of finished cannabis inventory sold margin was 37 per cent during the quarter, increasing from 23 per cent during the first quarter of 2022 and 30 per cent from the fourth quarter of 2022;
• Cash from continuing operating activities was $3.2-million during the current quarter, as compared with a use of cash of $7.0-million during the first quarter of 2022.

Hugo Alves, chief executive officer of Auxly, commented: "We are very pleased to have achieved the company's first quarter of positive adjusted EBITDA. The results for the first quarter of 2023 continued to build upon the gains made in the fourth quarter of 2022, despite historical revenue headwinds in the first calendar quarter of the year. The shift in sales mix towards the dried flower and preroll products categories allowed us to better leverage Auxly Leamington's cost structure and contributed to further improvements in the cost of finished cannabis inventory sold margin to 37 per cent. During the quarter we completed the full buildout of our new internal sales team, and we are working hard on increasing distribution and new sales channels. We are encouraged by our recent achievements and remain dedicated to delivering further improvements in financial performance. I want to thank our talented team members for their continued commitment to Auxly's success."

Net revenues

For the period ended March 31, 2023, net revenues were $24.0-million as compared with $22.6-million during the same period in 2022. Revenues for the period were comprised of approximately 55 per cent in sales of dried flower and preroll cannabis products, with the remainder from oils and cannabis 2.0 product sales. Net revenues included wholesale bulk flower sales of approximately $1.0-million during the first quarter of 2023. Auxly maintained its position as a top five LP, by maintaining strength in sales of cannabis 2.0 products while increasing its share of market for cannabis 1.0 products to 4.6 per cent from 3.7 per cent in the previous quarter.

Consistent with prior periods, as the company does not participate in the Quebec market, approximately 85 per cent of cannabis sales during the period originated from sales to British Columbia, Alberta and Ontario.

Gross profit

Auxly realized a gross profit of $7.9-million in the first quarter of 2023, an increase of $4.2-million as compared with the same period in 2022, which includes the impacts of non-cash impairments and fair value adjustments. The gross profit margin for the first quarter of 2023 was 33 per cent versus 16 per cent in the same period of 2022. Excluding non-cash amounts, the cost of finished cannabis inventory sold margin improved to 37 per cent versus 23 per cent in the same period of 2022, while increasing from 30 per cent in the fourth quarter of 2022 as a result of a higher proportion of cannabis 1.0 products sold by the company utilizing low-cost cannabis cultivated at Auxly Leamington, and the streamlining of certain cannabis products and operating costs.

Realized and unrealized fair value gains and losses reflect accounting treatments associated with Auxly Leamington cultivation activities and sales and are influenced by changes in production, sales and net realizable value assumptions.

Biological and inventory impairments during the first quarter of 2023 of $700,000 were associated with certain slower moving SKUs (stock-keeping units) and certain product not meeting quality specifications, while impairments in the first quarter of 2022 were primarily related to the closure of the Auxly Annapolis facilities.

Total expenses

Selling, general and administrative expenses (SG&A) comprise wages and benefits, office and administrative, professional fees, business development, and selling expenses. SG&A expenses were $10.1-million during the first quarter of 2023, a $2.5-million or 20-per-cent decrease over the same period of 2022.

Wages and benefits were $4.7-million for the first quarter of 2023, as compared with $5.7-million for the same period of 2022. The net decrease is primarily due to measures taken after the third quarter of 2022 to reduce overhead in the organization.

Office and administrative expenses were $2.3-million for the period ended March 31, 2023, decreasing by $1.3-million compared with the same period in 2022. The decreased expenditures primarily relate to higher product cost absorption, reduced waste, and the timing and cost associated with product innovation.

Auxly's professional fees were $800,000 for the first quarter of 2023, approximately $400,000 greater than the same period of 2022. Professional fees incurred primarily related to accounting fees, regulatory matters, reporting issuer fees and legal fees associated with certain corporate activities, and as a result can fluctuate significantly from one period to the next.

Business development expenses were $100,000 for the period ended March 31, 2023, consistent with the same period in 2022. These expenses primarily relate to acquisition, business development and travel-related expenses.

Selling expenses were $2.3-million for the first quarter of 2023, a decrease of $600,000 over the same period in 2022, primarily as a result of cost reductions associated with the internalization of the sales team, partially offset by Health Canada fees related to higher revenues, and increased marketing initiatives.

Equity-based compensation for the three months ended March 31, 2023, was $400,000, an increase of $200,000 over the same period in 2022, primarily reflecting the impact of restricted share units (RSU) granted in June, 2022, in respect of services provided by employees in 2021.

Depreciation and amortization expenses were $1.7-million for the first three months of 2023 representing a decrease of $2.9-million over the same period in 2022, primarily as a result of reductions in intangible assets, completion of certain leases and right of use assets, and depreciation associated with disposed assets.

Interest expenses were $5.8-million in the first quarter of 2023 as compared with $5.1-million during the same period in 2022. The increase in expense is primarily a result of the impact of rising interest rates where such obligations are subject to variable charges. Interest expense includes accretion on the convertible debentures and interest paid in kind on the $123-million Imperial Brands debenture. Interest payable in cash was approximately $2.0-million for the period.

Total other incomes and losses

Total other incomes and losses for the first quarter of 2023 were a net loss of $100,000 primarily due to foreign exchange losses, as compared with a net loss of $23.9-million in the same period of 2022. Total other losses in the first quarter of 2022 were primarily related to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities, where the carrying value exceeded the fair value less cost to sell.

Net income and loss

Net losses for the three months ended March 31, 2023, were $10.2-million, representing a net loss of one cent per share on a basic and diluted basis. The change in net loss in the first quarter of 2023 as compared with the same period of 2022 was primarily driven by changes in total other losses, improved gross profits and lower total expenses.

Adjusted EBITDA

Adjusted EBITDA for the period ended March 31, 2023, was positive $100,000, an improvement of $6.5-million over the same period of 2022, primarily as a result of improvements in net revenues and reduced costs of finished cannabis inventory sold and SG&A.

Outlook

In 2023, the company aims to continue to improve earnings performance, increase focus on key product formats, lower costs and increase efficiency, which it expects will yield positive results. With these actions in mind, the company's goals for 2023 are broadly defined:

• Increase net revenues by 15 per cent, with a focus on key product categories, enhanced by strategic expansion of Auxly's product portfolio, while supporting strong retail distribution through its internal sales team.
• Continue to leverage Auxly Leamington's large-scale, low-cost cultivation facility and the company's manufacturing automation to increase blended cost of finished cannabis inventory sold margin to an average of 35 to 40 per cent.
• Vigorously manage SG&A as a percentage of net revenues to keep it below 40 per cent, further building upon savings realized in Q4 2022.
• Prudently manage the company's balance sheet and streamline assets where possible.

The results for the first quarter of 2023 continued to build upon the gains made in the fourth quarter of 2022. While the first calendar quarter of the year has historically been impacted by greater seasonality, revenues for the quarter declined only marginally from the fourth quarter of 2022. The company believes this improved result is due to a more balanced sales mix as Auxly's portfolio expanded further into dried flower and preroll product sales, which represented approximately 55 per cent of revenues for the period. The shift in sales mix toward these product categories allowed Auxly to better leverage Auxly Leamington's cost structure and contributed to further improvements in the cost of finished cannabis inventory sold margin to 37 per cent. Despite a slight increase in SG&A, which includes the full buildout of the company's new internal sales team, the company is very pleased to have achieved the company's first quarter of positive adjusted EBITDA.

Auxly believes that it is on track to achieve its full year plan, built upon proven demand forits products, outstanding employees, top-tier assets and an underlying desire to 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.

Conference call

Auxly's management team will host a conference call today, Monday, May 15, 2023, at 10 a.m. ET to discuss its financial results. Participants can access the conference call by telephone by dialling: 1-888-664-6383 or by audio webcast.

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

About Auxly Cannabis Group Inc.

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 its consumers.

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

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