Auxly Cannabis Group Inc. (TSX.V - XLY) (OTCQX:
CBWTF) ("
Auxly" or the
"
Company") today released its financial results
for the three and nine months ended September 30, 2019. These
filings and additional information regarding Auxly are available
for review on SEDAR at www.sedar.com.
Q3 2019 Highlights and Subsequent
Events
- Auxly closed a $123.0 million investment and R&D
partnership with Imperial Brands
- Sunens closed syndicated credit facilities and received debt
financing in the aggregate amount of $84.0 million
- Auxly announced the retirement of approximately 97% of the
remaining 6% unsecured convertible debentures through the repayment
of approximately $80.0 million of principal and the conversion of
approximately $16.0 million into commons shares
- Auxly signed a brokerage agreement with Kindred Partners Inc.
to act as Auxly’s sales agent for its adult-use cannabis products
in Canada
- Dosecann successfully submitted New Product Notifications to
Health Canada for a total of 83 new derivative product formats
- Kolab and Dosecann both received their amendments to their
sales licences, authorizing each to sell cannabis extract, edible
and topical products to the Canadian market as soon as legally
permitted
- Officially opened the Lloydminster store on July 11, 2019;
Kolab is now able to commence local cannabis sales and
province-wide e-commerce in Saskatchewan
- Hugo Alves was appointed the Company’s new CEO, replacing Chuck
Rifici, who continues to serve as Chairman of Auxly’s Board of
Directors
Q3 Highlights
(000’s) |
Three months Ended September 30, 2019 |
Three months Ended September 30, 2018 |
Change |
Percentage Change |
Nine months Ended September 30, 2019 |
Nine months Ended September 20, 2018 |
Change |
Percentage Change |
Total revenues |
$ |
1,617 |
$ |
818 |
$ |
799 |
98% |
$ |
5,196 |
$ |
818 |
$ |
4,378 |
535% |
Net losses* |
|
(17,255) |
|
(9,595) |
|
(7,660) |
80% |
|
(44,853) |
|
(31,697) |
|
(13,156) |
42% |
Cash and equivalents** |
|
186,526 |
|
211,707 |
|
(25,181) |
-12% |
|
186,526 |
|
211,707 |
|
(25,181) |
-12% |
Total assets** |
|
568,090 |
|
460,818 |
|
107,272 |
23% |
|
568,090 |
|
460,818 |
|
107,272 |
23% |
Debt** |
$ |
187,443 |
|
94,151 |
$ |
93,292 |
99% |
$ |
187,443 |
|
94,151 |
$ |
93,292 |
99% |
Average
Shares outstanding |
|
594,591,824 |
|
544,626,362 |
|
49,965,462 |
9 % |
|
590,718,186 |
|
459,488,849 |
|
131,229,337 |
29% |
*attributable to shareholders
of the Company** comparable period is December 31, 2018Hugo Alves,
CEO of Auxly, commented: “This has been an incredible quarter for
Auxly, having secured a strategic investment from Imperial Brands,
closed the $84 million credit facility for Sunens and successfully
repaid the majority of our outstanding Debentures, we are well
capitalized moving into the new year. We have been working
diligently on the highly anticipated rollout of our cannabis 2.0
product portfolio and are counting down the days until our branded,
science-backed derivative cannabis products are in the hands of
Canadian consumers at the end of this year. We are on track for
executing on our strategic business objectives and positioning
Auxly to be a leader in the derivative products market.”
Results of Operations
(000’s) |
Three months Ended September 30, 2019 |
Three months Ended September30, 2018 |
Nine monthsEnded
September30, 2019 |
Nine monthsEnded September20, 2018 |
Revenues |
|
|
|
|
Research Contracts and other |
$ |
1,502 |
$ |
818 |
$ |
4,345 |
$ |
818 |
Revenue from sales of cannabis products |
115 |
- |
851 |
- |
|
|
|
|
|
Total Revenues |
1,617 |
818 |
5,196 |
818 |
|
|
|
|
|
Cost of Sales |
|
|
|
|
Research contracts and other |
1,453 |
306 |
3,825 |
306 |
Costs of finished cannabis inventory sold |
59 |
- |
435 |
- |
Impairment on Inventory |
1,074 |
- |
1,074 |
- |
Gross profit excluding fair value items |
(969) |
512 |
(138) |
512 |
|
|
|
|
|
Realized fair value change on inventory |
(48) |
- |
(243) |
- |
Unrealized fair value loss on biological transformation |
(135) |
3 |
(672) |
3 |
Gross Profit (loss) |
(1,152) |
515 |
(1,053) |
515 |
|
|
|
|
|
Other incomes |
|
|
|
|
Fair value gain for financial instruments, under FVTPL |
(5,778) |
6,202 |
(6,208) |
7,102 |
Interest income |
858 |
1,360 |
3,837 |
2,770 |
Total other incomes |
(4,920) |
7,562 |
(2,371) |
9,872 |
|
|
|
|
|
Expenses |
|
|
|
|
Selling, general, and administrative expenses |
16,594 |
16,004 |
38,887 |
34,238 |
Depreciation and amortization |
1,527 |
200 |
4,002 |
390 |
Interest expense |
2,520 |
2,814 |
7,951 |
7,775 |
Impairment of intangible assets |
- |
- |
1,800 |
- |
(Gain)/loss on settlement of financial assets and
liabilities |
1,413 |
(35) |
1,288 |
4,156 |
Share of loss on equity investment in joint venture |
838 |
173 |
1,390 |
173 |
Foreign exchange (gain)/loss |
75 |
445 |
1,015 |
396 |
Total expenses |
22,967 |
19,601 |
56,333 |
47,128 |
|
|
|
|
|
Net Loss before income tax |
(29,039) |
(11,524) |
(59,757) |
(36,741) |
Income tax recovery |
11,524 |
1,644 |
14,247 |
4,178 |
Net Loss |
$ |
(17,515) |
(9,880) |
$ |
(45,510) |
(32,563) |
|
|
|
|
|
|
|
Net loss attributable to shareholders of the
Company |
$ |
(17,255) |
(9,595) |
$ |
(44,853) |
(31,697) |
Net loss attributable to non-controlling interest
|
(260) |
(285) |
(657) |
(866) |
|
|
|
|
|
|
|
|
|
Net loss per common share (Basic and diluted) |
$ |
(0.03) |
$ |
(0.02) |
$ |
(0.08) |
$ |
(0.07) |
Weighted average number of shares outstanding (basic and
diluted) |
594,591,824 |
544,626,362 |
590,718,186 |
459,488,849 |
Revenue
For the three and nine months ended September
30, 2019, Auxly recognized $1.5 million and $4.3 million of
research revenues from KGK, respectively. These revenues are in
support of third-party research contracts which can fluctuate
significantly during the term of the contract and related
performance milestones. 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.
Auxly recognized $0.1 million and $0.9 million
of revenues from sales of dry cannabis products for the three and
nine months ended September 30, 2019, respectively. Dry cannabis
flower sales have been curtailed as a result of the Company’s
decision to allocate the bulk of its dried flower to the
development and manufacture of derivative cannabis products in
anticipation of Cannabis 2.0 sales mid-December 2019. Gross
Profit
Auxly realized a gross loss of $1.2 million for
the three months ended September 30, 2019 and $1.1 million for the
nine months ended September 30, 2019 following fair value
adjustments. The gross loss for the three months ended September
30, 2019 is comprised of KGK and cannabis product revenues less
expenses of $0.1 million, net of a $1.1 million impairment of
inventory associated with final Inverell biomass product
qualification and grading, a $0.1 million realized fair value
change on other inventories, and a $0.1 million unrealized fair
value loss on biological asset transformation. Gross loss for the
nine months ended September 30, 2019 is comprised of KGK revenues
less expenses of $0.5 million and $0.4 million of revenues less
expenses on the sale of cannabis products, net of a $1.3 million
fair value loss was recognized for an inventory net realizable
value adjustment and a $0.7 million unrealized fair value loss on
biological asset transformation.
Other incomes
Total other losses were $4.9 million for the
three months ended September 30, 2019 and $2.4 million for the nine
months ended September 30, 2019. For the three and nine months
ended September 30, 2019, other losses are comprised of a fair
value loss of $5.8 million and $6.2 million, respectively, from
changes in promissory notes, investments, and securities held, and
interest income of $0.9 million and $3.8 million, respectively.
Interest income is generated on notes receivable balances as well
as interest on cash and cash equivalents held.
Selling, general and administrative
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 three and nine months ended September
30, 2019, wages and benefits were $4.8 million and $13.1 million,
respectively. This reflects an increase of $2.6 million and $7.9
million over the same period in 2018, primarily due to workforce
increases in both 2018 and 2019. The increases were to support
expansion and growth activities as a direct result of workforces
added on acquisition of four entities and the corporate office.
During the three months ended September 30, 2019, the Company
increased workforce specifically related to product formulation and
development, sales and marketing in order to prepare for the
Cannabis 2.0 sales.
Office and administrative expenses of $2.9
million in the third quarter of 2019 increased by $2.0 million and
$2.8 million to $6.1 million year to date compared to the same
periods in 2018. The increase in expense is comprised of
approximately $1.7 million associated with product development,
R&D and testing to prepare for Cannabis 2.0 sales with the
remainder related to the implementation of an organization wide ERP
system.
Auxly’s professional fees were $2.4 million and
$5.3 million for the three and nine months ended September 30,
2019, respectively, as compared to $2.6 million and $5.3 million
over the same respective periods in 2018. Professional fees for
2019 primarily related to recruiting expenses, accounting fees, and
fees associated with financing activities, whereas these expenses
in 2018 primarily related to acquisition activities, leading to a
decrease over the comparable third quarter three-month period.
During the third quarter of 2019, professional fees were primarily
attributable to legal expenses, regulatory matters, ongoing legal
proceedings and consulting fees associated with construction and
product development. Year to date professional fees also
reflect incremental recruiting fees in conjunction with hiring and
preparedness for Cannabis 2.0.
Business development fees of $1.0 million and
$3.1 million for the three and nine months ended September 30,
2019, were lower by $0.2 million and $2.7 million respectively, as
compared to the same periods in 2018. Business development
activities in 2019 were lower when compared to activities in 2018
associated with the acquisitions of Inverell, Dosecann, Robinsons,
and KGK.
For the three and nine months ended September
30, 2019, share-based compensation was $5.4 million and $11.1
million, compared to the $8.9 million and $14.5 million over the
same respective periods in 2018. During the three and nine months
ended September 30, 2019, 825,000 and 7,415,000 options were
granted, respectively, with 6,080,000 and 17,083,468 options being
granted over the same respective periods in 2018. Further, during
the three months ended September 30, 2019, 3,659,837 common shares
were issued to non-executive employees of the Company as
compensation, as part of their employment agreements related to
services performed in 2019. The fair value of the common shares
issued for compensation was $3.3 million and was included in
share-based payments.
Other Expenses
Depreciation and amortization expenses were $1.5
million in the third quarter of 2019 and $4.0 million year to date.
This is comprised of $0.6 million amortization of intangible
amortization per quarter, primarily associated with acquisition
related non-competition features. The remaining depreciation
relates to the Company’s property, plant and equipment.
Interest expenses were $2.5 million for the
three-month period ended September 30, 2019, a decrease of $0.3
million over the same period in 2018, and $8.0 million for the
nine-month period ended September 30, 2019, an increase of $0.2
million over the same period in 2018. Interest expenses are driven
by interest charges of 6% on the outstanding convertible debentures
and the non-cash accretion of placement and other related fees
being recognized over 24 months. Further, the Company has been
increasing expenditures on construction projects and capitalizing
interest expenses incurred on borrowings used to fund such
projects.
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 of its rights at law or in equity with respect
thereto.
Losses on settlement of financial assets and
liabilities for the three and nine months ended September 30, 2019,
primarily relate to credit loss provisions of $0.7 million and
final expenditures of approximately $0.5 million associated with
the FSD project.
Auxly is exposed to foreign exchange
fluctuations from the U.S. dollar to CAD dollar exchange rate.
During the quarter, foreign exchange losses were nominal and for
the nine months ended September 30, 2019, foreign exchange losses
were $1.0 million as compared to $0.4 million over the same period
in 2018.
Net Losses
Net losses attributable to shareholders were
$17.3 million with a net loss of $0.03 per Share on a basic and
diluted basis in the third quarter of 2019, and $44.9 million with
a net loss of $0.08 per Share on a basic and diluted basis year to
date. This compares to a net loss of $9.6 million and $0.02 per
Share on a basic and diluted basis and $31.7 million and $0.07 per
Share on a basic and diluted basis, over the same respective
periods in 2018. The decrease in net income was primarily driven by
an increase in expenses, compounded by non-cash expenses and losses
during the period, partially offset by income tax recoveries.
Outlook
Auxly has made considerable progress this
quarter and over the past 18 months, which has positioned the
Company to be ready to enter the Cannabis 2.0 market on the first
day sales are permitted, through a broad portfolio of branded
cannabis products in Canada. The Company continues to secure
listings for its derivative products with the provincial boards and
expects to be able to sell products in all provinces except Quebec
(where the regulations for Cannabis 2.0 products are more
restrictive) beginning December 16, 2019. Auxly anticipates that
revenues from the sale of such derivative cannabis products will
commence in December 2019, when provinces begin accepting orders
from licenced producers, with revenues increasing throughout 2020
as new consumers are attracted to the new product formats, existing
consumers transition from dried cannabis to derivative cannabis
products and as provincial retail infrastructure continues to
develop and expand. Auxly will update priorities for 2020 along
with the Company’s results for 2019 in the first quarter of
2020.
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: IR@auxly.comPhone:
1.833.695.2414
Media Enquiries (only):
For media enquiries or to set up an interview please
contact:Sarah Bain, VP External Affairs Email:
sarah@auxly.com Phone: 613.230.5869
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 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 obtain and
maintain all necessary governmental and regulatory permits and
approvals for the operation of their facilities and the development
of its 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
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.
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