Mr. Hugo Alves reports

AUXLY REPORTS FOURTH QUARTER AND FULL YEAR 2023 FINANCIAL RESULTS AND PROVIDES OUTLOOK FOR 2024

Auxly Cannabis Group Inc. has released its financial results for the fourth quarter and full year ended Dec. 31, 2023. These filings and additional information regarding Auxly are available for review on SEDAR+.

2023 highlights and subsequent events:

• Achieved record net revenues of $101.1-million in 2023, an increase of 7 per cent compared with 2022;
• Fourth quarter net revenues of $26.9-million, a $2.2-million increase year over year;
• Achieved positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.5-million and positive cash flow from operations of $8.2-million in 2023, including generating $7.8-million in cash from operating activities in Q4 2023;
• Industry-leading margins amongst peers in the adult-use recreational market with gross margin on finished cannabis inventory sold of 34 per cent in 2023 and securing 40 per cent in Q4 2023;
• SG&A (sales, general and administrative) expenses declined by over 17 per cent compared with the previous year while the company continued to enhance and expand its product portfolio;
• Exited 2023 as the fifth-largest LP (licensed producer) in Canada by share of market based on total recreational retail sales, securing 5 per cent of the total market;
• Maintained leadership in national vape sales, securing the No. 3 LP position in Canada and holding the top four all-in-one SKU (stock-keeping unit) positions in Ontario, with continued recognition and awards for its quality hardware and unique, first-to-market formats;
• Successfully expanded its product portfolio in the preroll and dried flower categories throughout the year as the company continued to win over consumers with its superior strains, innovative formats and product quality, with its Wedding Pie 0.35-gram prerolls (10 pieces per pack) becoming the No. 1 bestselling non-infused preroll SKU nationally;
• Subsequent to year-end, the company strengthened its financial position by entering into an agreement to amend and extend the maturity date of Auxly Leamington's credit facility to Dec. 31, 2025;
• Subsequent to year-end, substantially improved the company's balance sheet and financial position by securing the support of its strategic partner Imperial Brands PLC through Imperial's election to convert of $123.4-million of its debt, including accrued interest, outstanding under the 4 per cent unsecured convertible debenture of the company due Sept. 25, 2026, held by Imperial in exchange for 241,316,117 shares of Auxly, increasing its holdings to 19.8 per cent of Auxly.

Hugo Alves, chief executive officer of Auxly, commented: "Two thousand twenty-three was a pivotal year for Auxly. Thanks to a tremendous team effort, we achieved our profitability targets despite overall industry and macroeconomic headwinds. For the first time in our corporate history, we achieved full-year adjusted EBITDA profitability, broke $100-million in net revenue and generated positive cash flow from operations. We focused and optimized our business, resulting in meaningful cost savings and industry-leading margins, all done while delivering quality products and meeting the ongoing demands of our consumers. We also successfully strengthened our balance sheet and improved the financial position of the company, including, most recently, by securing the continued support of our secured lending syndicate through the extension of our Auxly Leamington credit facility and through the support of our strategic partner Imperial, who has elected to convert $123.4-million of debt owed under the Imperial debenture, which will increase its ownership in Auxly to 19.8 per cent. We are positioned to succeed in the current cannabis environment and to continue growing and thriving as the market matures. In 2024, we will remain focused on sustainable, profitable growth and passionately committed to our consumers."

Net revenues

For the year ended Dec. 31, 2023, net revenues were $101.1-million, as compared with $94.5-million during the same period in 2022, an increase of 7 per cent. Revenues for 2023 comprised approximately 61 per cent (2022: 42 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 $15.7-million during the year.

Consistent with prior periods, as the company does not directly participate in the Quebec market, approximately 82 per cent of cannabis sales in 2023 originated from sales to British Columbia, Alberta and Ontario.

Gross profit

Auxly realized a gross profit of $21.3-million in 2023, resulting in a 21-per-cent gross profit margin, as compared with $16.5-million, or 17 per cent, respectively, during the same period in 2022. The gross margin on finished cannabis inventory sold improved to 34 per cent versus 26 per cent in 2022 while increasing from 37 per cent in the first quarter of 2023 to 40 per cent in the fourth quarter as a result of the higher proportion of cannabis 1.0 products sold by the company that leverage the cost-efficiencies of the Auxly Leamington cultivation facility, the streamlining of certain cannabis 2.0 products, and the reduction in operating costs that includes input costs and overhead, especially in vapes, a key category for the company.

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.

Inventory impairments during the year of $10.5-million were associated with charges related to reductions in net realizable value of dried cannabis under the company's product specifications and obsolescence of certain retired products and packaging, a decrease of $200,000 from the comparative period. The impairments recognized in 2022 include impairments related to the closure of the Auxly Annapolis facilities.

Total expenses

Selling, general and administrative (SG&A) expenses comprise wages and benefits, office and administrative, professional fees, business development, and selling expenses. SG&A expenses were $38.6-million in 2023, $8-million, or 17 per cent, lower than the same period in 2022, primarily due to measures taken to reduce overhead in the organization and lower selling expenditures.

Wages and benefits were $16.3-million for the year, as compared with $18.7-million for the same period of 2022. The decrease in expenses was related to the streamlining of operations and support staff as a result of a more focused product portfolio.

Office and administrative expenses were $10.4-million for the year, $1.2-million lower than the same period in 2022. The decreased expenditures primarily relate to streamlining of operations, reduced waste and insurance expenses, partially offset by a provision for bad debt related to Fire & Flower Holdings Corp. filing for creditor protection under the Companies' Creditors Arrangement Act.

Auxly's professional fees were $3-million during 2023, flat to 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 $500,000 for the year ended Dec. 31, 2023, as compared with $300,000 during the same period in 2022. These expenses primarily relate to business development and travel-related expenses.

Selling expenses were $8.4-million for the year ended Dec. 31, 2023, a decrease of $4.7-million over 2022, primarily as a result of cost reductions associated with the internalization of the company's sales team and reduced marketing initiatives, partially offset by higher Health Canada fees related to higher revenues.

Equity-based compensation for the year ended Dec. 31, 2023, was $1.6-million. In 2022, equity-based compensation was $4-million, primarily reflecting the impact of restricted share units (RSUs) granted in June, 2022, in respect of services provided by employees in 2021.

Depreciation and amortization expenses were $6.9-million for the year ended Dec. 31, 2023, representing a decrease of $7.9-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 $25.7-million for the year ended Dec. 31, 2023, an increase of $4.1-million over 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 from newly financed obligations and higher accretion expense on convertible debentures. Interest expense includes accretion on the convertible debentures and interest paid in kind on the Imperial debenture. Subsequent to year-end, Imperial elected to convert $123.4-million of indebtedness owing under the Imperial debenture, including accrued interest, increasing its holdings to 19.8 per cent of the equity of the company which, when closed, will result in substantially lower interest accretion expense in future periods. Interest payable in cash was approximately $9.4-million for the year ended Dec. 31, 2023, an increase of $2.7-million over the same period in 2022.

Total other incomes and losses

Total other incomes and losses for the year were a net income of $3.9-million, compared with a net loss of $66-million in the comparative period. Total other incomes and losses in 2023 included a gain due to the extension of the Imperial debenture and the unsecured promissory notes, partially offset by $35.9-million of impairment of other assets, noting that the company's market capitalization trades significantly below its shareholder equity. Other income and losses in 2023 also included the closure of the Auxly Ottawa facility, where the carrying value exceeded the fair-value less cost to sell, and the disposal of Inverell. Total other incomes and losses during 2022 included $45-million impairment of goodwill and other assets and $25.7-million of 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.

Net income and loss

Net loss for the year ended Dec. 31, 2023, was $44.5-million, representing a net loss of four cents per share on a basic and diluted basis. The change in net loss in 2023 as compared with a net loss of $130.3-million in 2022 was primarily driven by improved gross profits, lower expenses, and changes in total other incomes and losses in 2023 as compared with the other losses recorded in 2022.

Adjusted EBITDA

Adjusted EBITDA for the year ended Dec. 31, 2023, was $1.5-million, an improvement of $18.4-million over the same period of 2022, primarily as a result of improvements in gross profits and SG&A expenses.

Outlook

In 2023, Auxly committed to improving its earnings performance. The company is pleased to have achieved its goal of becoming adjusted EBITDA profitable for an entire fiscal year while maintaining its leadership position in the Canadian cannabis market. The company's high-level objectives for 2023 were:

• 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 the company's internal sales team:
  • In 2023, net revenues were $101.1-million, an increase of approximately $6.6-million, or 7 per cent, over 2022; this was driven by a focused expansion of cannabis 1.0 products and continued leadership in the cannabis 2.0 product category; in 2023, the company was the fifth-largest licensed producer in Canada by total recreational retail sales; highlights include:
    • Moved from the No. 9 licensed producer in dried flower sales in 2022 to the No. 6 licensed producer in 2023, securing 4.8 per cent share of market nationally;
    • Back Forty's Wedding Pie 0.35-gram prerolls (10 pieces per pack) established itself as the No. 1 bestselling non-infused preroll SKU nationally;
    • Moved from the No. 9 licensed producer in preroll sales in 2022 to the No. 5 ranked producer nationally in 2023, in large part driven by Back Forty 40s with its innovative, single-strain, straight-roll format;
    • Launched new Back Forty all-in-one vapes in Alberta, Ontario, Saskatchewan and Manitoba in November, which quickly secured the top four disposable vape SKU positions in Ontario by February, 2024.
  • Although the company did not meet its full growth ambitions, it made significant progress in optimizing its portfolio to expand margins by leveraging the company's competitive advantages in vapes, prerolls and dried flower products, the product formats that mirror how Canadians are choosing to consume cannabis, and represent, in aggregate, approximately 85 per cent of the adult-use recreational market.
• Continue to leverage Auxly Leamington's large-scale, low-cost cultivation facility and the company's manufacturing automation to increase blended gross margin on finished cannabis inventory sold to an average of 35 per cent to 40 per cent:
  • The shift in sales mix toward cannabis 1.0 products allowed the company to better leverage Auxly Leamington's cost efficiencies and contributed to the improved gross margin on finished cannabis inventory sold of 34 per cent in 2023. Notably, this margin increased to 40 per cent in Q4 2023, driven by permanent improvements in the company's preroll manufacturing capabilities, the benefits of consolidating functions previously conducted at its Auxly Ottawa facility into its state-of-the-art Auxly Leamington facility starting in Q2 2023 and the continuous operational improvements at its Charlottetown facility, where the majority of cannabis 2.0 product margins increased throughout 2023, including vape profitability, a key category for the company.
  • Despite price compression in the adult-use recreational market as consumer preferences have evolved to focus more on value offerings, the company has maintained industry-leading margins amongst its peers in the adult-use recreational market. The company is well positioned to compete in the value price segment given Auxly Leamington's cost structure and has taken steps to adjust product pricing to maintain distribution for its value offerings.
• Vigorously manage SG&A expenses as a percentage of net revenues to keep it below 40 per cent:
  • SG&A expenses were $38.6-million in 2023, representing 38 per cent of net revenue. Compared with the same period in 2022, SG&A expenses were $8-million, or 17 per cent, lower, primarily due to measures taken to reduce overhead in the organization and as a result of lower selling expenditures.
  • Focused efforts were made in 2023 to reduce overhead, which included consolidation of the company's preroll and dried flower manufacturing activities, streamlining of operations and support staff, and increasing efficiency, which included reducing waste and finding cost-efficiencies with product development.
  • Selling expenses in 2023 were $8.4-million, a decrease of $4.7-million over 2022, primarily as a result of cost reductions associated with the internalization of the sales team and reduced marketing initiatives, partially offset by higher Health Canada fees related to higher revenues.
• Prudently manage the company's balance sheet and streamline assets where possible:
  • The company raised additional capital of $8.4-million, including a private placement of shares in February, 2023, resulting in gross proceeds of $3.4-million, and an inventory financing in October, 2023, for gross proceeds of $5-million.
  • Subsequent to year-end, the company was able to strengthen its balance sheet by working with its strategic partner Imperial, which recently elected to convert $123.4-million of its indebtedness outstanding on the Imperial debenture, including accrued interest, increasing Imperial's equityholding in the company to 19.8 per cent.
  • Subsequent to year-end, the company entered into a definitive agreement with the syndicate of lenders led by BMO to extend the maturity date of Auxly Leamington's credit facility to Dec. 31, 2025.

The Canadian cannabis industry continues to face challenges posed by fierce competition and continued fragmentation, continuing price compression, oppressive taxation, a robust and increasingly sophisticated illicit market, and restrictive regulations that impede the company's ability to compete with the illicit market, which were further exacerbated by inflation, global conflict, negative macroeconomic impacts from the COVID-19 pandemic, global supply chain disruptions and constrained capital markets.

Despite these challenges, the company has seen improvements in its revenues, gross margins and material improvements in adjusted EBITDA resulting from significant reductions in its supporting cost structure. This has also improved the company's operating cash flows. Cash generated in operating activities in 2023 was $8.2-million, an improvement of approximately $10.7-million over 2022, primarily as a result of higher net revenues, gross profit improvements, lower SG&A expenditures, and improved inventory management practices. Operating cash flows improved throughout the year as the company successfully advanced its optimization strategy and grew gross margins. In Q4 2023, the company generated $7.8-million of cash from operating activities, which is a 208-per-cent improvement from the previous quarter.

In 2024, the company remains dedicated to sustainable growth, improved profitability and the excellence of its people. The company will prioritize focused and efficient growth in its key product categories of vape, preroll and dried flower and continue to optimize and improve distribution and sales of its products. It will continue to foster a collaborative team environment and pursue continued improvements in efficiency to reduce costs and deliver strong gross margins and increased profitability. The company will also continue to pursue opportunities to strengthen its balance sheet.

The company has a clear focus on its growth trajectory, and, as it continues to invest in its future, it stands on the strong foundation of its industry-leading capabilities, including state-of-the-art facilities, outstanding and dedicated employees, and Auxly's collective mission to help its consumers live happier lives by delivering quality products that they trust and love.

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 mission is to help consumers live happier lives through quality cannabis products that they trust and love.

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

We seek Safe Harbor.