Auxly Reports Fourth Quarter and Full Year 2019 Financial Results and Provides Outlook for 2020

Auxly Cannabis Group Inc. (TSX.V - XLY) (OTCQX: CBWTF)

("

Auxly

" or the "

Company

"), a consumer packaged goods company in the cannabis products market, today released its fourth quarter and full year 2019 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.

2019 Highlights

• Successfully launched Cannabis 2.0 products when first legally permitted in December 2019
• Secured strategic partnership with Imperial Brands PLC and financing of approximately $123 million
• Secured $84 million in syndicated senior debt led by BMO to fund the approximately 1.1 million square foot Sunens project
• Established product distribution channels which included securing listings with all provinces (except Quebec) for Cannabis 2.0 products and signed a brokerage agreement with Kindred to act as the Company’s sales agent for its recreational cannabis products in Canada
• Received required licence amendments allowing Dosecann and Kolab to legally sell derivative product formats as soon as they were legally permitted
• Completed leadership transition with the appointment of Hugo Alves as the Company’s CEO, replacing Chuck Rifici, who continues to serve as Chairman of Auxly’s Board of Directors

(000’s)			December 31, 2019			December 31, 2018			Change		Percentage Change
Total revenues		$	8,352		$	747		$	7,605		1018	%
Net losses*			(102,574	)		(66,988	)		(35,586	)	-53	%
Adjusted EBITDA**			(31,248	)		(28,071	)		(3,177	)	-11	%
Cash and equivalents			44,134			211,707			(167,573	)	-79	%
Total assets			411,592			460,818			(49,226	)	-11	%
Debt			95,438			94,151			1,287		1	%
Average Shares outstanding			596,409,703			489,505,013			106,904,690		22	%

*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

Hugo Alves, CEO of Auxly, commented: “This past year was pivotal for Auxly.  We secured a $123 million investment from Imperial Brands and were selected as Imperial’s exclusive strategic partner for all cannabis activities globally, an incredible validation of our focus on the Cannabis 2.0 market. But the biggest milestone for Auxly in 2019 was successfully achieving our goal of launching our incredible suite of branded cannabis products into the Cannabis 2.0 market on the first day that those products were legally permitted in Canada. The entire Auxly organization is very proud of achieving these milestones and we are excited for the next phase of our growth in 2020 and beyond. Whereas 2019 was a year of building infrastructure, know-how and capacity, 2020 will be Auxly’s first year of commercial operations. We will continue to focus on our vision of being a global leader in branded cannabis products and constantly strive to better understand and delight our consumers and deliver on our consumer promise of quality, safety and efficacy. There’s never been a more exciting time at Auxly!”

Auxly’s Business

Auxly is a consumer packaged goods company in the cannabis products market, dedicated to bringing safe, innovative, effective, and high-quality cannabis products to the medical, wellness and recreational markets. The Company has established an experienced team of professionals from multiple disciplines including clinical and scientific research, product development and fast-moving consumer goods. The company has partnered with industry leaders and is developing assets to create trusted products and brands in an expanding global market.

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

Results of Operations

For the years ended:(000’s)	December 31, 2019			December 31, 2018
RevenuesResearch contracts and otherRevenue from sales of cannabis products Excise taxes	$	6,2622,287(197)		$  747--
Total Net Revenues		8,352		747
Cost of SalesResearch contracts and otherCosts of finished cannabis inventory sold Impairment on Inventory		5,7432,1623,244		1,078--
Gross loss excluding fair value items		(2,797)		(331)
Realized fair value loss on inventory Unrealized fair value gain / (loss) on biological transformation	(153)(761)			-143
Gross loss		(3,711)		(188)
ExpensesSelling, general, and administrative expenses Depreciation and amortization Interest expense		50,2918,57412,121		48,3732,06311,473
Total expenses		70,986		61,909
Other incomes / (losses)Fair value gain / (loss) for financial instruments accounted under FVTPLInterest income Impairment of long-term assetsImpairment of intangible assets and goodwillLoss on settlement of financial assets and liabilities Share of loss on investment in joint ventureForeign exchange gain / (loss)	(6,482)3,612(5,283)(29,631)(3,550)(2,081)(1,484)			2,6544,000-(8,800)(5,516)(309)546
Total other losses		(44,899)		(7,425)
Net loss before income taxIncome tax recovery		(119,59610,978)		(69,522)2,313
Net loss	$	(108,618)		(67,209)
Net loss attributable to shareholders of the Company Net loss attributable to non-controlling interest	$	(102,574)(6,044)		(66,988)(221)
Adjusted EBITDA	$	(31,248)		(28,071)
Net loss per common share (basic and diluted)	$	(0.17)		(0.14)
Weighted average shares outstanding (basic and diluted)		596,409,703		489,505,013

Revenue

For the year ended December 31, 2019, Auxly generated revenues by providing research services for customers who are conducting human clinical trials and from the sale of Cannabis 1.0 products and Cannabis 2.0 products to medical and recreational customers.

Auxly recognized $6.3 million of research revenues from KGK for the year ended December 31, 2019 as compared to $0.7 million in the previous year primarily due to the full year impact in 2019 of the acquisition completed on August 29, 2018. These revenues are in support of third-party research contracts which can fluctuate significantly during the term of the contract. Revenues are driven by the achievement of milestones on existing and new contracts and are therefore deferred to be only recognized as performance criteria are met, resulting in timing differences of when revenues are recognized.

Net revenues of $2.1 million were generated on the sales of Cannabis 1.0 products and Cannabis 2.0 products in 2019, mainly attributable to the sales of Cannabis 2.0 products between December 16 and December 31, 2019. During 2019 dry cannabis flower sales were curtailed as a result of the Company’s decision to allocate the bulk of its dried flower to the development and manufacture of Cannabis 2.0 products which were only permitted for sale on December 16, 2019.

Gross Loss

Auxly realized a gross loss of $3.7 million for the year ended December 31, 2019 following fair value adjustments. The gross loss for the year ended December 31, 2019 is primarily comprised of inventory related adjustments of approximately $4.1 million (a $1.8 million impairment of inventory associated with final Inverell biomass product qualification and grading, a $1.4 million impairment of inventory associated with spoilage and obsolescence in mass production of Cannabis 2.0 products in Dosecann, a $0.1 million realized fair value loss on other inventories, and a $0.8 million unrealized fair value loss on biological asset transformation), partially offset by KGK revenues less expenses of $0.5 million and cannabis product revenues less expenses of $0.1 million, net of $0.2 million of excise taxes. This compares with a gross loss of $0.2 million recognized during the year ended December 31, 2018 comprised of a net gross loss on KGK research contracts of $0.3 million and an unrealized fair value gain on biological asset transformation of $0.1 million.

Total expenses

Selling, general and administrative expenses are comprised of wages and benefits, office and administrative, professional fees, business developments, share-based payments, and selling expenses. Share-based payments were reported separately prior to 2019.

For the year ended December 31, 2019, wages and benefits were $17.9 million. This reflects an increase of $8.9 million over the same period in 2018, primarily due to workforce increases. The increases in employees across the organization were to support expansion and growth activities as a direct result of workforces from our seven subsidiaries and the corporate office. The Company increased its workforce during the second half of the 2019 fiscal year specifically related to product formulation and development and sales and marketing in order to prepare for Cannabis 2.0 product sales beginning in December 2019.

Office and administrative expenses of $8.0 million in 2019 increased by $3.7 million compared to the same period in 2018. The increase in expense is comprised of product development, formulation, R&D and testing to prepare for Cannabis 2.0 product sales with the remainder related to the implementation of an organization wide ERP system and the additional expenses associated with the operations of its subsidiaries.

Auxly’s professional fees were $6.7 million during the year ended December 31, 2019, as compared to $7.1 million same respective period in 2018. Professional fees for 2019 primarily related to accounting fees, regulatory matters, ongoing legal proceedings, recruiting fees in conjunction with hiring and preparedness for Cannabis 2.0, consulting fees associated with construction and product development, and fees associated with financing activities, whereas these expenses in 2018 primarily related to acquisition activities, leading to a decrease over the comparable year.

Business development fees of $4.8 million for the year ended December 31, 2019, were lower by $2.3 million, as compared to $7.1 million incurred over the same period in 2018. Business development activities, inclusive of travel and related expenses were greater in 2018 with the acquisitions of Inverell, Dosecann, Robinsons and KGK.

For the year ended December 31, 2019, share-based compensation was $12.6 million, compared to the $20.4 million over the year ended December 31, 2018. During 2019, 7,980,000 options were granted compared to 25,390,968 granted over the same period in 2018. Further, during the year ended December 31, 2019, 3,659,837 Shares were issued to non-executive employees of the Company as compensation, as part of their employment agreements related to services performed in 2019. 5,913,334 Shares were issued in 2018. Included in share-based payments were the fair value of the Shares issued for compensation of $3.3 million in 2019 and $6.0 million in 2018.

Depreciation and amortization expenses were $8.6 million for the year ended December 31, 2019 an increase of $6.5 million over the same period in 2018. The increase is primarily due to capital projects and intangible assets becoming ready for use during 2019.

Interest expenses were $12.1 million for the year ended December 31, 2019, a decrease of $0.6 million over the same period in 2018. Interest expenses are driven by interest charges of 6% on the outstanding 2018 convertible debentures and 4% on the Imperial Brands convertible debentures and the non-cash accretion of placement and other related fees being recognized over the terms of the respective debentures. Further, the Company has capitalized $1.1 million of interest expense incurred on borrowings used to fund construction projects.

Total other 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 year ended December 31, 2019, the Company reported a $6.5 million fair value loss, as compared to a $2.7 million dollar gain in the previous year. Fair value changes in 2018 reflected market optimism and rising prices of actively traded securities. Fiscal 2019 saw a market decline in the cannabis sector. Further, Auxly recorded a fair value loss of $5.7 million on the debt obligation receivable in product equivalent from Beleave as reported earlier in the year.

Interest income was $3.6 million for the year ended December 31, 2019 as compared to $4.0 million over the previous year. Interest income is generated on notes receivable balances as well as interest on cash and cash equivalents.

During the year ended December 31, 2019, the Company recognized an impairment loss on long-term assets of $5.3 million and an impairment loss on intangible assets and goodwill of $29.6 million. The Company’s LATAM cash generating unit (“CGU”), Inverell, represents its operations dedicated to the cultivation and sale of cannabis products within LATAM. Management determined that a liquidation approach was most appropriate in determination of the recoverable amount of the CGU due to regulatory delays causing uncertainty in the timing of sales and lack of cannabis product sales data in the industry. The impairment test concluded that the carrying value was higher than the recoverable amount by $23.9 million. Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. Management allocated $14.9 million of impairment losses towards the indefinite life intangible asset, $5.3 million of impairment losses towards long-term assets, including property, plant and equipment, and $3.7 million of the impairment losses towards goodwill.

The Company’s Research CGU, KGK, represents its operations dedicated to providing research services for customers who are conducting human clinical trials. The impairment test concluded that the carrying value was higher than the recoverable amount by $7.6 million. Management allocated the impairment loss based on the relative carrying amounts of the CGU’s assets at the impairment date, with no individual asset being reduced below its recoverable amount. Management allocated $6.9 million of the impairment to goodwill with $0.7 million towards the patent intangible asset.

An impairment charge of $1.8 million related to the intangible value of the FSD Pharma Inc. (“FSD”) streaming agreement was taken during the first quarter as a result of previously announced contract breaches. The Company is currently evaluating next steps with respect to such contractual breaches and retains all its rights at law or in equity with respect thereto. Other impairment charges on intangible assets include a $1.1 million loss on the 2368523 Ontario Inc. (d/b/a Curative Cannabis) (“Curative”) supply agreement due to the Curative foreclosure and a $0.5 million loss related to the Green Relief offtake agreement.

Losses on settlement of financial assets and liabilities for the twelve months ended December 31, 2019 were $3.5 million, primarily relate to a $2.5 million loss on the foreclosure over Curative, due to the fair value of Curative’s net assets being lower than Auxly’s obligation due from the company. Other inclusions include a credit loss provisions of $0.7 million and final expenditures of approximately $0.5 million associated with the FSD project, net of a $0.1 million gain on settlement of the 6% convertible debentures. Auxly is exposed to foreign exchange fluctuations from the U.S. dollar to CAD dollar exchange rate primarily related to loans due from Inverell. During the year, foreign exchange losses were $1.5 million as compared to a $0.6 million gain over the same period in 2018.

Net Losses

Net losses attributable to shareholders were $102.6 million with a net loss of $0.17 per Share on a basic and diluted basis for the year ended December 31, 2019. This compares to a net loss of $67.0 million and $0.14 per Share on a basic and diluted basis for the year ended December 31, 2018. The decrease in net income was primarily driven by an increase in total other losses and depreciation and amortization expenses, partially offset by income tax recoveries.

Adjusted EBITDA

Despite an increase in net losses inclusive of non-cash adjustments, the 2019 full year impact in SG&A of acquisitions completed in 2018, net of increased gross profit, Adjusted EBITDA was $(31.2) million in 2019, and declined by $3.2 million, or 11% over the same period in 2018. This was primarily as a result of increased SG&A expenditures as the business prepared for initial sales of Cannabis 2.0 products in December 2019.

Outlook

The past year was pivotal in the Company’s development, as it successfully executed on its corporate strategy and became a leader in the derivative cannabis products market in Canada.

Despite challenges, particularly in the second half of 2019, including the slow pace of political and regulatory change in LATAM, delays in construction and licensing associated with Canadian cannabis operations, cannabis industry headwinds as a result of sector under-performance and the limited and slow rollout of retail stores in many provinces, the Company successfully executed on its goal of starting Cannabis 2.0 product sales on day one of Cannabis 2.0 in December 2019.

The Company has established the foundation which it plans to build on in 2020 to increase revenues and move towards positive cash flows. The Company’s objectives for 2020, 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, with a view to international opportunities that may be profitable in the near to long term.

Broadly, Auxly’s objectives for the year ahead are as follows:

• Be a leader in the Canadian Cannabis 2.0 products market.
• Complete remaining construction and licensing of all Canadian operations to leverage existing assets and increase revenues.
• Work with the Sunens team to secure supply of input materials for use in the Company’s product offerings in 2020.
• Collaborate with the Company’s partners to move towards commercialization of a small number of products for sale internationally or, if and when permitted, as part of the ‘Cannabis 3.0’ products market.1

Auxly looks forward to another successful year ahead that helps it get closer to realizing its vision of being a global leader in branded cannabis products that deliver on its consumer promise of quality, safety and efficacy. As the Company looks ahead, it must now consider new risks and challenges to its business posed by the COVID-19 pandemic. The global situation continues to change rapidly, but Auxly has been closely monitoring developments and is evaluating new information as it becomes available and as governmental responses to the pandemic evolve. The Company is committed to continuing to operate its business while ensuring the safety and well being of all employees and consumers and it has implemented a number of measures in response to the COVID-19 pandemic.

1 Health Canada is currently undertaking consultations and discussions regarding the possible legalization of Cannabis Health Products (“CHPs”), which would permit the making of health claims in respect of cannabis products without the required oversight of a practitioner such as a doctor. Auxly is actively participating in those discussions and is looking forward to the possibility that the authorized classes of cannabis will expand to include CHPs and other derivative product formats.

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: [e-mail]: 1.833.695.2414

Media Enquiries (only): 

For media enquiries or to set up an interview please contact:Sarah Bain, VP External Affairs Email: [e-mail] Phone: [phone]

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 are able to obtain and maintain all necessary governmental and regulatory permits and approvals for the operation of their facilities and the development of 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 of current and future Company products by consumers and medical professionals, 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 revised annual information form of the Company for the financial year ended December 31, 2017 dated May 24, 2018.

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.