AUXLY REPORTS Q2 2023 FINANCIAL RESULTS

TORONTO, Aug. 14, 2023 /PRNewswire/ - Auxly Cannabis Group Inc. (TSX: XLY) (OTCQB: CBWTF) ("Auxly" or the "Company") today released its financial results for the three and six months ended June 30, 2023. 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.

Q2 2023 Highlights and Subsequent Events

• Total net revenues of $22.0 million in Q2 2023, a decrease of $2.0 million or 8% from the previous quarter and a decrease of $5.3 million or 20% compared to the same period in 2022;
• SG&A declined by $1.3 million or 13% from the previous quarter and $4.1 million or 32% from the same period in 2022 as the Company continues to focus its efforts on reducing costs;
• Adjusted EBITDA was negative $1.1 million, an improvement of $2.9 million as compared to the same period last year;
• Retained the #5 LP position in Canada with a 5.2% share of market and continued to improve sales in the pre-roll segment, one of the fastest growing product categories, finishing the quarter with 3.4% share of market up from 2.9% in the previous quarter1;
• Back Forty Wedding Pie grew to become the #1 non-infused pre-roll SKU nationally in the quarter1;
• Successfully streamlined operations by transitioning all remaining dried flower and pre-roll cannabis product manufacturing, processing and distribution activities to Auxly Leamington; and
• Further strengthened the Company's balance sheet by entering into an agreement with strategic partner Imperial Brands to extend the maturity date of the Imperial Brands convertible debenture by two years from September 25, 2024 to September 25, 2026.

Financial Highlights

Results of Operations

Hugo Alves, CEO of Auxly, commented: "The results for the second quarter of 2023 reflect our focus on simplifying and streamlining the business to improve operating efficiency and reduce costs. We have successfully consolidated our dried flower and pre-roll cannabis product manufacturing, processing and distribution activities, which was a key strategic goal for this year. While the transition had a temporary impact on the sales and financial performance during the quarter, we have already observed a positive impact of increased product throughput and improved product quality as a result of this consolidation. This is a part of a broader strategy to ensure Auxly can remain competitive against a backdrop of continued price compression and disproportionate taxation in the adult use recreational market. We believe that Auxly is well-positioned to compete in the current value-price driven environment given our brand portfolio, Auxly Leamington's cost structure and the automation investments we have made to our manufacturing processes. We remain focused on our key product categories of dried flower, pre-rolls and vape and will continue to introduce exciting new products across those product formats to satisfy our consumers' evolving preferences."

Net Revenues

For the three and six months ended June 30, 2023, net revenues were $22.0 million and $46.0 million as compared to $27.3 million and $50.0 million during the same period in 2022, a decline of 20% and 8% respectively. Revenues for the three and six months ended June 30, 2023 were comprised of approximately 50% in sales of dried flower and pre-roll Cannabis Products, with the remainder from oils and Cannabis 2.0 Product sales. Net revenues included wholesale bulk flower sales of approximately $1.9 million and $2.9 million during the three and six months ended June 30, 2023. Auxly maintained its position as a top 5 LP, by maintaining strength in sales of both Cannabis 1.0 and Cannabis 2.0 Products.

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

Gross Profit

Auxly realized a gross profit of $6.1 million and $13.9 million for the three and six months ending June 30, 2023 resulting in a 28% and 30% Gross Profit Margin respectively, as compared to $9.8 million (36%) and $13.5 million (27%) during the same periods in 2022. Excluding non-cash amounts, the Cost of Finished Cannabis Inventory Sold Margin for the three months ended June 30, 2023 improved to 27% versus 25% in the same period of 2022. This is primarily 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.

Inventory impairments during the second quarter of 2023 of $1.5 million were associated with certain slower moving SKUs and certain product not meeting quality specifications, a reduction of $0.3 million from the comparative period. The impairments recognized in the six months ending June 30, 2022 include impairments related to the closure of the Auxly Annapolis facilities.

Total Expenses

Selling, general and administrative expenses ("SG&A") are comprised of wages and benefits, office and administrative, professional fees, business development, and selling expenses. SG&A expenses were $8.8 million during the second quarter of 2023, $4.1 million lower than the second quarter of 2022 primarily due to lower wages and benefits and selling expenses. Year-to-date expenditures of $18.9 million in 2023 are $6.7 million 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 $3.3 million for the second quarter of 2023, as compared to $5.1 million for the same period of 2022. The decrease in expenses was related to the streamlining of operations and support staff for a more focused product portfolio and adjustments to compensation accruals. Year-to-date expenditures of $8.0 million were lower than those of $10.7 million during the same period of 2022. The decrease is primarily due to measures taken after the third quarter of 2022 to reduce overhead in the organization.

Office and administrative expenses were $3.1 million for the period ended June 30, 2023, increasing by $0.6 million compared to the same period in 2022. The increased expenditures primarily relate to a provision for bad debt related to Fire & Flower Holdings Corp. filing for creditor protection under the Companies' Creditors Arrangement Act and the timing and costs associated with product innovation.

Auxly's professional fees were $0.6 million during the second quarter of 2023 and $1.4 million year-to-date which was $0.5 million and $0.1 million lower than the same periods in 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 $0.2 million for the three and six months ended June 30, 2023 as compared to $0.1 million and $0.2 million during the same periods in 2022. These expenses primarily relate to acquisition, business development and travel related expenses.

Selling expenses were $1.6 million for the three months ended June 30, 2023 and $3.9 million year-to-date, decreases of $2.5 million and $3.1 million over the same periods in 2022, primarily as a result of cost reductions associated with the internalization of the sales team, lower Health Canada fees related to lower revenues, and reduced marketing initiatives.

Equity-based compensation for the three and six months ended June 30, 2023 was $0.4 million and $0.8 million respectively. During the same periods of 2022, these amounts were $2.9 million and $3.1 million, 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 period ended June 30, 2023, and $3.4 million year-to-date decreasing by $2.2 million and $5.1 million respectively over the same periods 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 $6.5 million and $12.3 million for the three and six months ended June 30, 2023, an increase of $1.1 million and $1.8 million over the same periods 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 $2.6 million for the three month ended June 30, 2023, an increase of $0.9 million over the same period in 2022.

Total Other Incomes and Losses

Total other incomes and losses for the second quarter of 2023 was a net loss of $1.6 million primarily related to the closure of the Auxly Ottawa facility where the carrying value exceeded the fair value less cost to sell, partially offset by gains due to extensions on unsecured promissory notes. Total other income in the second quarter of 2022 was $0.9 million primarily resulting from the gains related to the sale of Auxly Annapolis and the extension of the unsecured convertible debentures partially offset by other losses.

Total other incomes and losses for the six months ending June 30, 2023 was a net loss of $1.7 million compared to a net loss of $23.1 million in the comparative period, which included first quarter losses associated with the closure of the Auxly Annapolis and Auxly Annapolis OG facilities.

Net Income and Loss

Net losses for the three months ended June 30, 2023 were $12.9 million, representing a net loss of $0.01 per share on a basic and diluted basis. The change in net loss in the second quarter of 2023 as compared to the same period of 2022 was primarily driven by changes in total expenses and reduced gross profits. The net loss of $54.1 million through six months of 2022 includes the net impact of approximately $25.7 million related to the closure of the Auxly Annapolis and Auxly Annapolis OG facilities during the first quarter of 2022.

Adjusted EBITDA

Adjusted EBITDA for the three months ended June 30, 2023 was negative $1.1 million, an improvement of $2.9 million over the same period of 2022, primarily as a result of improvements in SG&A partially offset by lower net revenues and increased costs of finished cannabis inventory sold.

Outlook

In 2023, we aim to continue to improve earnings performance, increase focus on key product formats, lower costs and increase efficiency, which we expect will yield positive results. With these actions in mind, our goals for 2023 are broadly defined below:

• Increase net revenues by 15%, with a focus on key product categories, enhanced by strategic expansion of our product portfolio, while supporting strong retail distribution through our 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 35-40%.
  
  
• Vigorously manage SG&A as a percentage of net revenues to keep it below 40%, further building upon savings realized in Q4 2022.
  
  
• Prudently manage the Company's balance sheet and streamline assets where possible.

In the second quarter of 2023, the Company continued to focus on simplifying and streamlining its business to improve operating efficiency and reduce costs. The Company successfully transitioned all functions previously conducted at its Auxly Ottawa facility to its Auxly Leamington facility, and is in the process of winding down and disposing of Auxly Ottawa's assets. While the transition had a temporary impact on the Company's sales and financial performance during the quarter, it allowed the Company to better tailor its workforce and operations and has resulted in increased throughput and product quality which the Company believes will improve its pre-roll and dried flower product category performance in the near term. The results for the second quarter of 2023 were also negatively impacted by price compression in the adult-use recreational market as the customer and product mix evolved to focus more on value offerings, and by increased competition in the value price segment, particularly in the 28 gram dried flower format. The Company believes that it is well-positioned to compete in the value price segment given its brand portfolio and Auxly Leamington's cost structure and has taken steps to adjust existing product pricing where necessary and increase distribution for its Parcel branded products. Despite lower sales and gross profits in the second quarter compared to the first quarter, the Company made material improvements in its SG&A by reducing overhead in the organization and will continue to actively manage spending while looking for further cost reduction opportunities.

Non-GAAP Measures

Please see the Company's MD&A for the three months and six months ended June 30, 2023, 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 adjustments. The definition may differ by issuer. The Adjusted EBITDA reconciliation is as follows:

Supplementary Financial Measures

Cost of Finished Cannabis Inventory Sold Margin

"Cost of Finished Cannabis Inventory Sold Margin" is a supplementary financial measure and is defined as Cost of Finished Cannabis Inventory Sold divided by net revenues.

Gross Profit Margin

"Gross Profit Margin" is defined as gross profit divided by net revenues. Gross Profit Margin is a supplementary financial measure.

Debt

"Debt" is defined as current and long-term debt and is a supplementary financial measure. It is a useful measure in managing our capital structure and financing requirements.

Conference Call

The Company will not host an earnings conference call and the Company does not anticipate reinstating earnings conference calls until further notice. All investor inquiries should be directed to IR@auxly.com.

ON BEHALF OF THE BOARD
"Hugo Alves" CEO

About Auxly Cannabis Group Inc. (TSX: XLY)

Auxly is a leading Canadian consumer packaged goods company in the cannabis products market, headquartered in Toronto, Canada. Our focus is on developing, manufacturing and distributing branded cannabis products that delight our consumers.

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

Learn more at www.auxly.com and stay up to date at Twitter: @AuxlyGroup; Instagram: @auxlygroup; Facebook: @auxlygroup; LinkedIn: company/auxlygroup/.

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 and its subsidiaries; the intention to grow the business, operations and existing and potential activities of Auxly; 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 current and anticipated benefits of the Company's acquisition of Auxly Leamington; the intention of the Company to sell the Auxly Ottawa assets and the proposed use of any proceeds; the intention of the Company to sell the Auxly Ottawa assets and the proposed use of any proceeds; the expectation, timing and quantum of future revenues, Cost of Finished Cannabis Inventory Sold Margin, SG&A 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 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 or achieve its goals; Auxly's subsidiaries 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 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 continue 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 sell the Auxly Ottawa assets and achieve the anticipated cost savings from the closure of the facility; the Company is able to implement the Imperial Brands Debenture amendment on the proposed timeline, and whether the expected benefits of the amendment materialize in the manner expected, or at all; the Company will be able to sell the Auxly Ottawa assets and achieve the anticipated cost savings from the closure of the facility; 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 and maintain revenues, maintain positive Adjusted EBITDA, and/or achieve and maintain its target Cost of Finished Cannabis Inventory Sold Margin; 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, 2022 dated March 30, 2023.

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.

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SOURCE Auxly Cannabis Group Inc.