Auxly Cannabis : Q4 (2024 12 31 2024 MDA)
XLY.TO
AUXLY CANNABIS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2024
Dated March 20, 2025
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS.............................................................. 3
DESCRIPTION OF BUSINESS................................................................................................ 3
OUTLOOK.................................................................................................................................... 9
FINANCIAL HIGHLIGHTS AND KEY PERFORMANCE INDICATORS......................... 10
RESULTS OF OPERATIONS ................................................................................................. 12
SUMMARY OF QUARTERLY RESULTS ............................................................................ 15
FOURTH QUARTER RESULTS OF OPERATIONS .......................................................... 16
TRANSACTIONS WITH RELATED PARTIES .................................................................... 18
LIQUIDITY AND CAPITAL RESOURCES ........................................................................... 18
OUTSTANDING SHARE DATA ............................................................................................. 20
NON-GAAP MEASURES ........................................................................................................ 20
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS .............................. 22
CRITICAL ACCOUNTING ESTIMATES ............................................................................... 23
DISCLOSURE AND INTERNAL CONTROLS AND PROCEDURES .............................. 25
CHANGES IN ACCOUNTING POLICIES ............................................................................ 25
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT ............................................... 27
RISK FACTORS ........................................................................................................................ 27
FORWARD LOOKING STATEMENTS ................................................................................. 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") was prepared as of March 20, 2025 unless otherwise indicated. This MD&A reviews the operating results, financial position and liquidity of Auxly Cannabis Group Inc. ("Auxly", "we", "our", or the "Company"). All amounts are stated in millions of Canadian dollars unless otherwise noted, except common shares ("Shares"), options, warrants, and per Share amounts. This MD&A should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2024.
This MD&A may contain forward-looking information that is based on the Company's expectations, estimates and projections regarding its business and the economic environment in which it operates. Forward-looking information contained herein is made as of the date of this MD&A and is not a guarantee of future performance and involves risks and uncertainties that are difficult to control or predict. Readers should refer to the "Forward Looking Statements" section in this MD&A. This MD&A references certain financial measures, including non-GAAP measures and readers should refer to the "Non-GAAP Measures" section in this MD&A.
DESCRIPTION OF BUSINESS
Our Business
We are a leading Canadian consumer packaged goods company in the cannabis products market, headquartered in Toronto, Canada. Our mission is to help consumers live happier lives through quality cannabis products that they trust and love.
Our vision is to be a leader in branded cannabis products that deliver on our consumer promise of quality, safety and efficacy.
Canadian Market
On October 17, 2018, the Cannabis Act came into force, initially permitting the recreational sale of certain classes of cannabis products, including dried cannabis, fresh cannabis, cannabis plants, cannabis seeds, and cannabis oil (collectively referred to as "Cannabis 1.0 Products"). On October 17, 2019, edible cannabis, cannabis extracts and cannabis topicals were added to the authorized classes of cannabis (collectively referred to as "Cannabis 2.0 Products", and together with Cannabis 1.0 Products, collectively referred to as "Cannabis Products") and such Cannabis 2.0 Products were first available for sale on December 16, 2019. Since 2019, Health Canada undertook a consultation, established a Scientific Advisory Committee, and has been engaged in discussions regarding the possible legalization of Cannabis Health Products, which would permit the making of health claims in respect of cannabis products without the required oversight of a practitioner, such as a doctor, but such products are not currently permitted.
Canadian Strategy and Capabilities
Brand Portfolio and Product Offering
We have created a portfolio of brands designed for a broad market of cannabis consumers, with differentiation in price points across targeted consumer segments.
Based upon consumer insights, Auxly has developed a broad portfolio of Cannabis Products to meet the evolving needs and preferences of Canadian cannabis consumers. Our initial focus was on the development of Cannabis 2.0 Products and we were one of the first cannabis companies to distribute and sell Cannabis 2.0 Products across Canada following their legalization.
Auxly has maintained its position as a top-selling licensed producer of Cannabis Products, ranking as the 4th largest licensed producer in Canada by total recreational retail sales in the fourth quarter of 2024, as reported by Hifyre IQ ("Hifyre IQ")1.
Our Cannabis Products available during the fourth quarter of 2024 are described below by brand and product format:
Our Cannabis Products have been well received by consumers. We plan to further strengthen our brand recognition by using consumer insights to drive innovation as we continue to introduce new Cannabis Products to the Canadian market, with an emphasis on expanding our dried flower, vape and pre-roll offerings. The Company's upcoming product offerings are presented below:
1 HiFyre IQ as at February 14, 2025.
Distribution
Given the current provincial legislative framework in Canada, we have pursued a multifaceted strategy to gain access to Canadian consumers. This includes supply arrangements with provincial control boards and distributors, medical cannabis sales channels and relationships with major Canadian retailers. We have secured listings and sold our Cannabis Products in all Canadian provinces, including recently Quebec, the Yukon and Northwest Territories. The Company is supported by an internal sales team.
The Company also engages in wholesale bulk cannabis transactions with various licensed producers in Canada. Most of these wholesale transactions serve domestic end consumers, with a small portion reaching international markets. As part of its growth strategy, the Company is actively exploring opportunities for direct international wholesale bulk cannabis sales. This includes establishing new partnerships to meet the increasing demand for high-quality cannabis products in emerging international markets.
Cannabis Operations: Cultivation, Product R&D and Manufacturing
The Company has assessed the current tariff environment between the United States and Canada and does not anticipate a material impact on its business operations or financial performance. We continue to monitor trade developments and will adapt the Company's strategies as necessary to mitigate any potential risks.
Auxly Charlottetown
The Company's primary Cannabis 2.0 Product development, manufacturing and R&D activities are conducted by its subsidiary Auxly Charlottetown Inc. ("Auxly Charlottetown") at a purpose-built, GMP-compliant cannabis processing facility located in Charlottetown, Prince Edward Island. Auxly Charlottetown holds licences for processing, analytical testing and research under the Cannabis Act. The full perimeter of the 52,000 square foot facility is licensed under the Cannabis Regulations for the production, storage and sale of Cannabis Products.
Product development is led by Auxly Charlottetown's team, who have experience in the pharmaceutical, food, scientific research and product development fields. This facility provides the Company with the ability to be responsive to changing industry regulation and evolving consumer preferences. Auxly Charlottetown is authorized to conduct broad in-house analytical and sensory testing, incorporating consumer input and feedback on attributes such as flavour, aroma, texture or mouthfeel, to better evaluate later-stage product formulations. In 2022, the Company also obtained a research licence to conduct sensory testing at its head office in Toronto.
In 2023, the Company entered into contract manufacturing agreements for the production of certain of its Cannabis Products with the aim of using an adaptive third-party sourcing model to further streamline the Company's operations and to reduce costs where possible.
In 2024, the Company made $0.1 million expenditures towards automation initiatives at the Auxly Charlottetown facility to increase production efficiency. The Company anticipates that expenditures of approximately $nil-0.5 million will be made towards further automation initiatives at the Auxly Charlottetown facility in 2025.
Auxly Ottawa
Auxly Ottawa Inc. ("Auxly Ottawa") holds licences for cultivation and processing under the Cannabis Act, and conducts the Company's primary dried flower and pre-roll manufacturing, processing and distribution activities out of its own licensed space at the Company's Auxly Leamington Inc. ("Auxly Leamington") facility. This includes the production of the Company's Cannabis 1.0 Products, including dried flower, pre-rolls, and milled flower.
In 2023, Auxly announced the transition of the Company's dried flower and pre-roll cannabis product manufacturing, processing and distribution activities from the Auxly Ottawa facility in Carleton Place, Ontario to the Auxly Leamington facility, and the Auxly Ottawa Carleton Place facility was subsequently closed. In 2024, the Company sold its Auxly Ottawa facility for $1.7 million and applied the proceeds from the sale to support its ongoing operations.
Auxly Leamington
Auxly Leamington, a wholly owned subsidiary of the Company, is comprised of a 1.1 million square foot automated greenhouse in Leamington, Ontario, which holds licences for cultivation and processing under the Cannabis Act, authorizing the cultivation, processing, storage and sale of Cannabis Products. Auxly Leamington holds a Control Union Medical Cannabis Standard GAP ("CUMCS-GAP") Certificate, issued by the independent verification body Control Union Global, and confirming compliance with the World Health Organization guidelines on Good Agricultural & Collection Practices for medicinal plants. CUMCS-GAP is a leading international standard for medical cannabis propagation, cultivation, and post-harvest processes.
Auxly Leamington provides the Company with a secure and cost-efficient source of dried cannabis, milled flower and extraction materials. Auxly Leamington utilizes a perpetual harvest methodology resulting in a continuous supply of cannabis and flexibility to adjust production capacity to demand as required. The total area of the licensed perimeter at Auxly Leamington for cultivation, processing and storage stands at 876,270 square feet. Auxly Leamington is producing award-winning cannabis strains, all of which are sold to and used by the Company in its full suite of Cannabis Products across all Auxly brands. In addition, Auxly Leamington possesses an extensive genetic library and continues to evaluate all opportunities to acquire new cultivars suited for Auxly's portfolio of Cannabis Products.
In 2024, expenditures of approximately $0.5 million were made towards capacity expansion, equipment and post-harvest automation. We expect to incur expenditures of approximately $1.5-2.0 million towards capital projects throughout 2025 to implement building enhancements to support higher and consistent output from the facility.
Over the past several years, the Company undertook new capital projects to increase pre-roll production through the purchase, installation and commissioning of automated manufacturing and packaging equipment. All pre-roll equipment is operational, and the Company saw increased production starting in 2023. In 2024, expenditures of approximately $2.2 million were made towards pre-roll automation initiatives. We expect to incur expenditures of approximately $nil-0.5 million in 2025 for final payments owing for the currently operational automated pre-roll manufacturing and packaging equipment.
Funding for Auxly Leamington's initial project budget was provided by the Company in the form of an equity contribution and a subordinated promissory note totaling approximately $98.5 million provided prior to 2020, and an $84.0 million secured credit facility underwritten by a syndicate of lenders led by the Bank of Montreal ("BMO"). The Company's contribution along with the credit facility comprised the required expenditures for the initial budgeted construction of the facility. Concurrently with the Auxly Leamington acquisition, the Company and Auxly Leamington amended and restated the secured credit facility with BMO and the same syndicate of lenders thereby remedying the defaults noted by BMO on April 16, 2021. Under the amended and restated secured credit agreement ("ARCA"), Auxly made a $15.0 million cash payment towards the outstanding principal balance of the credit facility and the maturity date of the credit facility was extended to September 30, 2023. The obligations of Auxly Leamington under the credit facility also continue to be supported by an unsecured $33.0 million limited recourse guarantee provided by the Company.
Between September 29, 2023 and December 28, 2023, the Company received three interim extensions of the maturity date of the ARCA from September 30, 2023 to January 31, 2024, as the Company and the lenders worked towards a formal credit amendment. On January 31, 2024, the Company and the lenders entered into a definitive agreement to amend and restate the ARCA, in order to, among other things, extend the maturity date by two years until December 31, 2025.
As at December 31, 2024, Auxly Leamington was in compliance with its covenants under the credit facility, including all financial covenants. Upon filing the Company's financial statements for the year ended December 31, 2024, the Company was in breach of certain reporting covenants under the ARCA due to the inclusion of going concern qualifications. The Company has received a waiver from the syndicate of lenders for such breach.
Strategic Partner
Imperial Brands
In 2019, as part of a strategic partnership, Imperial Brands PLC ("Imperial") invested approximately $123.0 million in the Company by way of a 4% unsecured debenture, convertible into common shares of the Company at a conversion price of $0.81 per share (the "Imperial Debenture"). Auxly was granted global licenses to Imperial's vaping technology for cannabis uses, and access to its vapour innovation business, Nerudia. In connection with this strategic partnership with Imperial, the parties entered into an investor rights agreement (the "Investor Rights Agreement") which provides, among other things, that Auxly would be Imperial's exclusive cannabis partner, and that for so long as Imperial holds a partially diluted percentage of outstanding common shares in the capital of Auxly of not less than 15%, it is eligible to nominate one individual designated by Imperial for election as a director to Auxly's Board and one non-voting observer. Imperial's nominee, Murray McGowan, Chief Strategy and Development Officer for Imperial, who was appointed to Auxly's Board of Directors on November 1, 2021, resigned from the Board on July 26, 2023, and there is currently no Imperial nominee appointed to the Board, however Imperial retains its nomination rights under the Investor Rights Agreement.
In 2023, Imperial and the Company amended certain provisions of the Imperial Debenture in order to extend the maturity date of the Imperial Debenture by 24 months from September 25, 2024 to September 25, 2026.
In 2024, Imperial converted (i) $121.9 million of the principal amount outstanding under the Imperial Debenture at an exercise price of $0.81 for 150,433,450 common shares in the capital of the Company, and (ii) $1.5 million of accrued interest under the Debenture into 90,882,667 common shares in the capital of the Company at a price of $0.017, resulting in Imperial holding an equity position in the Company of approximately 19.8% (the "Imperial Debt Conversion"). Concurrently with the Imperial Debt Conversion, Imperial and the Company amended and restated the Investor Rights Agreement to, among other things, remove the existing requirement that Imperial will use the Company as its exclusive cannabis partner.
International Operations
Presently the Company does not have any active international operations. In 2020, the Company ceased all activities at its subsidiary Inverell S.A. ("Inverell") in Uruguay due to the slower than anticipated pace of cannabis-specific regulatory development in Latin America, and in 2023, the Company divested of all its shares in Inverell. We continue to monitor the progress of other jurisdictions towards recreational and medical cannabis legalization, including the United States and Europe. Leveraging our intellectual property and expertise developed in one of the world's most highly regulated cannabis markets, we are well positioned to capitalize on the increasing global demand.
OUTLOOK
As the Company looks ahead to 2025, it remains steadfast in its commitment to profitable growth. Building on a record-breaking year, the Company expects to further improve in 2025 through focused innovation, expansion of our distribution footprint and enhanced production efficiency.
At the core of the Company's strategy is its commitment to teamwork and the excellence of its people. The Company will continue to foster an inclusive, collaborative, high-performance culture with a shared commitment to quality, innovation and continuous improvement. The Company's people are the foundation of its success, and the Company will continue to invest in their development. By empowering the team with the tools, training, and leadership needed to excel, the Company will drive operational discipline, efficiency and success in all areas of the business.
The Company will continue to build on its track record of product innovation leadership. The Company's commitment to consumer insights and its culture of operational agility and speed to market in a sector where consumer preferences evolve rapidly will continue to support its excellence in this area. In 2024, the Company accepted several new genetics into commercial production from its dried flower research and development program. Two of these strains, Liquid Imagination and Fire Breath, were top selling flower products in Canada in 2024. In the pre-roll category, the Company was the first to introduce the extra large 0.75g format in the straight-cut pre-roll segment and developed in-house automation technology for coating infused pre-rolls, improving product quality and enhancing efficiency. The Company's Back Forty all-in-one vapes significantly grew the category and shifted the demand for new vape products, winning "Innovation of the year" at the KIND Industry Awards. All of these product innovations highlight Auxly's ability to achieve market-leading success across its key categories and underpins the Company's continued financial success in a market where consumer preferences are dynamic and still evolving. The Company's innovation leadership in the largest and fastest-growing product categories is a competitive advantage.
The Company anticipates continued market success across its core categories through focus and execution. This includes defending the leadership position of the Back Forty brand, which exited 2024 as the #1 brand in Canada by retail sales. The Company will expand its domestic distribution channels and continue to assess available options for sustainable international expansion. The Company will continue to deepen its relationships with retailers across the country to ensure that our products are always accessible. The Company will remain dedicated to consumer and competitor insights and will refine its proprietary business intelligence tools to maximize the value proposition of its product offerings.
Efficiency remains a key priority as Auxly remains focused on profitable growth. In 2024, the Company successfully increased cultivation yields at its Auxly Leamington facility by increasing plant density and optimizing post-harvest processes. The Company has identified further areas to expand production in 2025 on a capital-light basis. The Company will leverage its culture of continuous improvement by improving its supply chain, enhancing inventory management, and building in-house capabilities for international market diversification.
Enhancing financial stability is a key piece of the Company's corporate strategy. The Company's disciplined approach to capital management has reduced overhead expenses and strengthened its balance sheet. In 2024, the Company reduced total debt by 56% and refinanced its debt facilities. In the coming year, the Company will maintain a sharp focus on reducing debt and its cost of capital, while working with its existing capital partners to ensure long-term stability and liquidity needed for continued profitable growth.
Looking ahead, the Company is confident in its ability to continue delivering exceptional results by focusing on innovation, operational excellence, and profitable growth in its key categories. By executing on its strategic priorities, the Company will reinforce its leadership in the Canadian cannabis market, fortify its foundations for continued profitable growth and create value for all of its stakeholders in 2025 and beyond.
FINANCIAL HIGHLIGHTS AND KEY PERFORMANCE INDICATORS
For the three months ended: (000's)
December 31, 2024
December 31, 2023
Change
% Change
Net revenues
$
34,626 $
26,909 $
7,717 29%
Gross Margin on Finished Cannabis Inventory Sold* Gross Margin on Finished Cannabis Inventory Sold (%)* Net income/(loss)
18,684
10,804
7,880 73%
54%
40%
14% 35%
4,423
(54,020)
58,443 108%
Adjusted EBITDA*
11,006
2,294
8,712 380%
Weighted average shares outstanding - basic
1,284,329,265
1,005,194,829
279,134,436 28%
For the years ended:
December 31,
(000's)
2024
December 31, 2023
Change
% Change
Net revenues
$
122,329 $
101,078 $
21,251 21%
Gross Margin on Finished Cannabis Inventory Sold* Gross Margin on Finished Cannabis Inventory Sold (%)* Net income/(loss)
55,861
34,295
21,566 63%
46%
34%
12% 35%
(16,348)
(44,511)
28,163 63%
Adjusted EBITDA*
26,705
1,471
25,234 1715%
Weighted average shares outstanding - basic
1,204,591,972
990,994,056
213,597,916 22% As at December 31: (000's)
Cash and cash equivalents Total assets
$
Debt*
2024 18,356 $ 261,530 54,683
2023
Change
% Change
15,608 $ 261,904 123,579
2,748 18%
(374) 0%
(68,896) -56%
*Non-IFRS or supplementary financial measure. Refer to the Non-GAAP Measures section for definitions.
Financial Year 2024 vs. 2023
For the year ended December 31, 2024, net revenues were $122.3 million, an increase of approximately $21.3 million or 21% over the same period of 2023. Sales increased primarily as a result of an increase in both volumes and price of dried flower, vape and pre-roll products.
The Gross Margin on Finished Cannabis Inventory Sold improved to 46% versus 34% in 2023, as a result of improvements made in our manufacturing process to reduce operating costs, increased pricing of products in the adult-used recreational market, and increased pricing of bulk flower product due to increased demand.
Net loss of $16.3 million for the year ended December 31, 2024 improved by $28.2 million over the same period in 2023. The net loss of $16.3 million for 2024 included $16.0 million of deferred tax expense on the conversion of Imperial Debenture into Shares. Excluding the gains on the extension of the Imperial Brands Debenture in the third quarter of 2023 of $46.9 million and the after-tax charges of $32.7 million related to the impairment of other assets during the fourth quarter of 2023, net income increased by $42.4 million primarily due to improved gross profits and reduction in expenses, including the operational stability as a result of the consolidation of the Company's dried flower and pre-roll manufacturing to the Auxly Leamington facility.
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Disclaimer
Auxly Cannabis Group Inc. published this content on April 01, 2025, and is solely responsible for the information contained herein. Distributed via , unedited and unaltered, on April 01, 2025 at 18:25 UTC.