Auxly Cannabis Group Inc., a leading consumer packaged goods company in the cannabis products market, today released its financial results for the three months ended March 31, 2024. These filings and additional information regarding Auxly are available for review on SEDAR at www.sedar.com.
Q1 2024 Highlights and Subsequent Events
- Auxly achieved its best Q1 in its history across key metrics of revenue, margin and adjusted EBITDA;
- Record net revenues for a fiscal Q1 of $25.2 million, an increase of 5% compared to the same period in 2023;
- Achieved Gross Margin on Finished Cannabis Inventory Sold1 of 38% in the quarter, a record for historical Q1 periods;
- Record Adjusted EBITDA1 for a fiscal Q1 of $2.2 million, an improvement of 1,523% or $2.1 million year-over-year;
- Continued reductions in SG&A through ongoing efforts to decrease overhead costs, resulting in an 11% decline quarter-over-quarter and a 15% decline compared to the same period in 2023;
- Further strengthened its balance sheet with the Imperial Brands plc conversion of over $123 million of debt into shares, resulting in 19.8% ownership of the Company and completed the extension of the Auxly Leamington credit facility between its syndicate of lenders led by BMO to December 31, 2025 with an option to extend a further year by making a $2.5 million principal repayment;
- Maintained its top 10 LP position in Canada by share of market based on total recreational retail sales, securing the #6 LP position with 5% of the total market;
- Maintained its leadership position in the competitive vapour category, while continuing to hold the top four all-in-one SKU positions in Ontario with its Back Forty all-in-ones for three consecutive months;
- Back Forty remains the #1 non-infused pre-roll brand in Ontario3, with only seven SKUs currently listed, and has quickly become a consumer favourite brand in dried flower, ranking #6 in national sales after seeing a boost with its recently launched strain, Liquid Imagination;
- Subsequent to quarter end, the Company expanded its branded product offering to the province of Quebec, with its products now available in all Canadian provinces as well as the Northwest Territories and Yukon.
- Subsequent to quarter end, the Company introduced its advanced, fully automated for precision, 0.75g three pack pre-rolls under its Back Forty brand. These three packs use Auxly’s latest top performing cultivar, Liquid Imagination, that was developed at Auxly Leamington’s advanced greenhouse.
Net Revenues
For the period ended March 31, 2024, net revenues were $25.2 million as compared to $24.0 million during the same period in 2023, an increase of 5%. Revenues for 2023 were comprised of approximately 59% (2023 – 54%) 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 $4.2 million during the period. Approximately 76% (2023 – 85%) of cannabis sales during the period originated from sales to British Columbia, Alberta and Ontario.
Gross Profit
Auxly realized a gross profit of $9.5 million in the first quarter of 2024 resulting in a 37% Gross Profit Margin, as compared to $7.9 million or 33%, respectively, during the same period in 2023. The Gross Margin on Finished Cannabis Inventory Sold improved to 38% versus 37% in the same period of 2023 as a result of a higher proportion of Cannabis 1.0 Products sold, and the streamlining of Cannabis 2.0 Products and operating costs. Inventory impairments during the first quarter of 2024 of $0.5 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 $0.2 million from the comparative period.
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 $8.6 million in the first quarter of 2024, $1.5 million or 15% lower than the same period in 2023, primarily due to measures taken to reduce overhead in the organization.
Wages and benefits were $4.3 million for the first quarter of 2024, as compared to $4.7 million for the same period of 2023. 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 $1.4 million for the first quarter of 2024, $0.9 million lower than the same period in 2023. The decreased expenditures primarily relate to streamlining of operations, the transition of the Company’s dried flower and pre-roll cannabis product manufacturing, processing and distribution activities to the Auxly Leamington facility, and reduced insurance expenses.
Auxly’s professional fees were $0.5 million during the first quarter of 2024, $0.3 million lower than the same period in 2023. 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 $0.1 million for the first quarter of 2024, flat to the same period in 2023. These expenses primarily relate to business development and travel related expenses.
Selling expenses were $2.4 million for the first quarter of 2024, an increase of $0.1 million over 2023, primarily as a result of higher Health Canada fees related to higher revenues, partially offset by reduced marketing initiatives.
Equity-based compensation for the first quarter of 2024 was $1.9 million, primarily due to the impact of the increased closing price of the Company’s Shares as at March 31, 2024 on the value of Cash Settled RSUs. In the first quarter of 2023, equity-based compensation was $0.4 million.
Depreciation and amortization expenses were $1.2 million for the first quarter of 2024, representing a decrease of $0.5 million over the same period in 2023, primarily as a result of reductions in intangible assets and depreciation associated with disposed assets, including the transition out of the Auxly Ottawa Carleton Place facility.
Interest expenses were $6.9 million for the first quarter of 2024, an increase of $1.1 million over the same period in 2023. The increase in expense is primarily a result of the 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. Interest payable in cash was approximately $2.3 million for the first quarter of 2024, an increase of $0.3 million over the same period in 2023.
Total Other Incomes and Losses
Total other incomes and losses for the first quarter of 2024 were a net loss of $0.8 million compared to a net loss of $0.1 million in the comparative period. Other incomes and losses in the first quarter of 2024 were mainly driven by the loss on the adjustment to the provision related to the claim filed by Kindred Partners Inc. and foreign exchange losses. Other incomes and losses in 2023 were primarily due to foreign exchange losses.
Net Income and Loss
Net loss for the three months ended March 31, 2024 was $26.0 million, representing a net loss of $0.03 per share on a basic and diluted basis. The change in net loss in 2024 as compared to a net loss of $10.2 million in the same period of 2023 was primarily driven by the deferred tax expense on the conversion of Imperial Debenture into Shares, partially offset by improved gross profits and lower expenses.
Adjusted EBITDA
Adjusted EBITDA for the period ended March 31, 2024 was $2.2 million, an improvement of $2.1 million over the same period of 2023, primarily as a result of improvements in gross profits and SG&A.
Outlook
In 2024, Auxly 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, pre-roll and dried flower and continue to optimize and improve distribution and sales of its products. Auxly 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. It will also continue to pursue opportunities to strengthen its balance sheet.
Auxly’s results for the first quarter of 2024 reinforced its commitment to sustainable profitability. While the first calendar quarter of the year is typically impacted by greater seasonality and consumer purchasing trends, revenues for the quarter improved from the same comparative period in 2023. This improved result is due to a more balanced sales mix as its portfolio has expanded further into dried flower and pre-roll product sales, which represented approximately 59% of revenues for the period. Furthermore, vape volumes rebounded in the quarter, building off the launch of the innovative all-in-one vapes under its Back Forty brand in Q4 2023. The Company continues to improve its SG&A by reducing overhead across the organization, ending the first quarter with $8.6 million in SG&A expenses, which is 11% lower than Q4 2023 and 15% lower than the comparative period in 2023. The first quarter of 2024 reflects the first full quarter of results where it sold certain Cannabis 2.0 Products produced by the Company’s contract manufacturing partners, allowing for the streamlining of its operations and the reduction of overhead. The Company is pleased to have maintained its leadership position in the Canadian cannabis market as the 6th largest licensed producer in Canada by total recreational sales, while maintaining an industry-leading low-cost structure that resulted in another consecutive quarter of positive Adjusted EBITDA.
Alongside the improvements in revenues, gross margins, and material improvements in Adjusted EBITDA from the same comparative period in 2023, the Company continues to strengthen its balance sheet. Auxly worked closely with Imperial to convert $123.4 million of debt and interest outstanding under the Imperial Debenture, increasing Imperial’s equity holding in Auxly to 19.8%. The Company also extended the maturity date of Auxly Leamington’s credit facility by two years to December 31, 2025.
Looking ahead, Auxly will continue to grow sustainably and expect to see revenue expansion and gross margin improvements, driven by increased consumer demand in the summer months, and higher cultivation yields that continue to drive down operating costs. The Company believes that the impact of these factors, along with the stabilization of its SG&A, will improve its Adjusted EBITDA profile.
