Auxly Cannabis Group Inc. (TSX.V – XLY) (OTCQX: CBWTF) (“Auxly” or the “Company“) today released its financial results for the three months ended March 31, 2020. These filings and additional information regarding Auxly are available for review on SEDAR at www.sedar.com.
Q1 2020 Highlights and Subsequent Events
- Recorded net revenues of $9.9 million, an increase of over 1,100% compared to the first quarter of 2019, including $9.0 million in cannabis net revenues primarily comprised of Cannabis 2.0 product sales from Dosecann, and KGK research revenues of $0.9 million
- Established strong sales in British Columbia, Alberta and Ontario, which comprised more than 80% of revenues, with vapes accounting for more than 65% of the Company’s cannabis revenues
- Auxly’s wholly owned subsidiary Robinsons Cannabis Inc. received its sales license from Health Canada, expanding the Company’s product offering to include artisan hand-crafted flower, expected to be available this summer
- Secured up to $25 million convertible debenture standby financing, of which $3.3 million worth of convertible debentures have been issued through two separate tranches
- Entered into key partnerships and agreements with each of Medical Cannabis by Shoppers Drug Mart and OCAD University, and acquired exclusive global rights to omega-rich Ahiflower® oil from Natures Crops International
|(000’s)||March 31, 2020||March 31, 2019||Change||Percentage Change|
|Total net revenues||$||9,905||$||817||$||9,088||1112%|
|Weighted average shares outstanding||625,242,335||587,246,553||37,995,782||6%|
|*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|
|(000’s)||March 31, 2020||December 31, 2019||Change||Percentage Change|
|Cash and equivalents||21,355||44,134||(22,779)||-52%|
Hugo Alves, CEO of Auxly, commented: “In our first full quarter of operations we generated incredible results and are thrilled to report close to $10 million in net revenues, with $9.0 million of that coming from cannabis sales! These results are a culmination of focus and hard work by the tremendous team that makes up the Auxly family. We delivered on our promise to launch a compelling portfolio of cannabis products that deliver on our consumer promise of quality, safety and efficacy – and consumers across the country have responded with phenomenal feedback. We remain focused on the continued execution of our corporate strategy and are committed to expanding our capabilities, both nationally and internationally, as we continue to fuel growth and generate value for our stakeholders.”
Results of Operations
|(000’s)||Three months Ended|
March 31, 2020
|Three months Ended|
March 31, 2019
|Revenue from sales of cannabis products||$||10,467||$||292|
|Research contracts and other||901||525|
|Total Net Revenues||9,905||817|
|Cost of Sales|
|Costs of finished cannabis inventory sold||5,091||148|
|Research contracts and other||548||282|
|Impairment on Inventory||1,274||–|
|Gross profit excluding fair value items||2,992||387|
|Unrealized fair value gain / (loss) on biological transformation||(51)||(382)|
|Realized fair value loss on inventory||(180)||(194)|
|Gross Profit / (loss)||2,761||(189)|
|Selling, general, and administrative expenses||14,018||10,968|
|Depreciation and amortization||2,374||1,038|
|Other incomes / (losses)|
|Fair value gain / (loss) of financial instruments accounted under FVTPL||(115)||1,382|
|Impairment of intangible assets and goodwill||–||(1,800)|
|Gain on settlement of financial assets and liabilities||1,834||375|
|Share of loss on investment in joint venture||(785)||(180)|
|Foreign exchange (gain) / loss||1,644||(71)|
|Total other incomes||2,639||666|
|Net Loss before income tax||(13,191)||(15,063)|
|Income tax recovery||–||1,259|
|Net loss attributable to shareholders of the Company||$||(12,744)||(13,611)|
|Net loss attributable to non-controlling interest||(447)||(193)|
|Net loss per common share (basic and diluted)||$||(0.02)||(0.02)|
|Weighted average shares outstanding (basic and diluted)||625,242,335||587,246,553|
For the three months ended March 31, 2020, Auxly generated revenues through the sale of Cannabis 1.0 Products and Cannabis 2.0 Products to customers, and by providing research services for customers who are conducting human clinical trials.
During the first quarter of 2020, cannabis net revenues of $9.0 million were comprised of approximately 90% Cannabis 2.0 Products with the remainder from Cannabis 1.0 Products. Sales were strong in British Columbia, Alberta and Ontario comprising more than 80% of the Company’s revenues, with vapes accounting for more than 65% of its cannabis revenues.
Auxly recognized $0.9 million of research revenues from KGK for the three-month period ended March 31, 2020 as compared to $0.5 million generated over the same time frame in 2019. 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.
Gross Profit / Loss
Auxly realized a gross profit of $2.8 million following fair value adjustments during the first quarter of 2020, as compared to a gross loss of $0.2 million during the first quarter of 2019. Gross profits in 2020 were comprised of $3.2 million or approximately 35% from Canadian cannabis operations, $0.4 million from research operations, partially offset by an impairment of $0.8 million related to Inverell plant and biomass product qualification and grading, as compared to a gross loss of $0.4 million from cannabis operations and a gross profit of $0.2 million from research operations over the same time period in 2019.
Research revenues less expenses of $0.4 million were generated during the three months ended March 31, 2020 as compared to $0.2 million during the same period in 2019. During March of 2020, COVID-19 impacted KGK’s ability to conduct clinical trials and meet additional milestones. While new sales efforts continue, KGK has temporarily laid-off up to 50 employees as it seeks to complete milestones and reduce expenditures where possible during this period of uncertainty.
Selling, general and administrative expenses are comprised of wages and benefits, office and administrative, professional fees, business developments, share-based payments, and selling expenses.
For the three-month period ended March 31, 2020, wages and benefits were $6.5 million, or an increase of $2.4 million over the same period in 2019. The increase was driven by workforce increases to support Cannabis 2.0 Product sales, primarily related to the operations and commercial teams. Increases of approximately $0.4 million were attributable to hiring at subsidiaries, including the absorption of employees arising from the foreclosure of 2368523 Ontario Inc. (d/b/a Curative Cannabis) (“Curative”).
Office and administrative expenses of $2.6 million in the first quarter of 2020 increased by $0.9 million compared to the same period in 2019. The increase in office and administrative expenses is driven by head office and Dosecann to support the product development, formulation, R&D and testing of Cannabis 2.0 Products through the first three months of sales. Other increases in fees were related to the implementation and development of an organization-wide ERP system. Further increases of approximately $0.1 million related to activities at Robinsons OG and Curative, with office and administrative expenses across the other subsidiaries decreasing by $0.2 million.
Auxly’s professional fees were $1.4 million during the three months ended March 31, 2020, as compared to $1.0 million over the same respective period in 2019. Professional fees incurred during the periods primarily related to accounting fees, regulatory matters, ongoing legal proceedings, recruiting fees in conjunction with hiring and preparedness for Cannabis 2.0 Products, consulting fees, and fees associated with financing activities. The increase in professional fees was driven by an increase in consulting fees associated with information technology, specifically the implementation and development of an organization-wide ERP system, commercial and sales activities, and infrastructure.
Business development fees of $0.8 million for the three-month period ended March 31, 2020 decreased by $0.2 million, as compared to $1.0 million incurred over the same period in 2019, primarily due to a reduction in acquisitions and travel related expenses.
Selling expenses for the first quarter of 2020 were $1.3 million as compared to $0.1 million for the first quarter of 2019. The increase is directly attributable to cannabis sales activities comprised of brokerage fees earned by Kindred Partners and marketing initiatives for Cannabis 2.0 Products.
For the three months ended March 31, 2020, share-based compensation was $1.4 million, compared to the $3.0 million over the three months ended March 31, 2019. 166,000 options were granted in 2020 compared to 1,440,000 granted over the same period in 2019.
Depreciation and amortization expenses were $2.4 million for the three-month period ended March 31, 2020, an increase of $1.4 million over the same period in 2019. Increased expenses primarily relate to additional capital expenditures and in use capital projects and intangible assets in 2020, whereas during 2019 several projects remained under development.
Interest expenses were $2.2 million for the three months ended March 31, 2020, a decrease of $1.3 million over the same period in 2019. Interest expenses are driven by interest charges of 6% on the then 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 interest expense used to fund construction projects of $1.4 million in the first quarter of 2020 and $0.5 million during the same period in 2019.
Total Other Incomes and 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 quarter ended March 31, 2020, the Company reported a $0.1 million fair value loss, as compared to a $1.4 million dollar gain in the previous year. Fair value changes in 2019 reflected gains on promissory notes that offset market losses on the level two securities held. All promissory notes were repaid or fully impaired as at December 31, 2019. As such, all fair value changes in 2020 were reflective of the impact of prevailing market conditions over corporate investments held.
Interest income of $0.1 million during the first quarter for 2020 decreased by $0.9 million from $1.0 million generated over the first quarter of 2019. Interest income is generated on notes receivable balances, investments in convertible debt, and interest on cash and cash equivalents.
During the first quarter of 2019, an impairment charge of $1.8 million related to the intangible value of the FSD Pharma Inc. streaming agreement was taken as a result of previously announced contract breaches. There were no impairment charges taken during the first quarter of 2020.
Gains on settlement of financial assets and liabilities for the three months ended March 31, 2020 were $1.8 million, primarily relating to a gain on non-monetary inventory transfers with another licensed producer, net of a credit loss provision of $0.6 million. Gains during the first quarter of 2019 were $0.4 million.
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 first quarter of 2020, the Company reported a foreign exchange gain of $1.6 million as compared to a $0.1 million loss over the same period in 2019.
Net losses attributable to shareholders improved by $0.9 million to $12.7 million, with a net loss of $0.02 per Share on a basic and diluted basis for the three-month period ended March 31, 2020. This compares to a net loss of $13.6 million and $0.02 per Share on a basic and diluted basis for the same respective period ended March 31, 2019. The decrease in net losses was primarily driven by the significant increase in gross profit, net of an overall increase in selling, general and administrative expenses used to support revenue generating activities.
Adjusted EBITDA decreased by $0.8 million during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, to $(8.2) million from $(7.4) million. The decrease was driven by an increase in selling, general and administrative expenses to support the commencement of cannabis product sales.
With the launch of the Company’s Cannabis 2.0 Products in December 2019, Auxly has established the foundation the Company plans to build on in 2020 to increase revenues and move towards positive cash flows. Auxly’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 its Canadian operations, with a view to international opportunities that may be profitable in the near to long term. Broadly, the Company’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 strategic 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.
The Company looks forward to continuing its success over the year ahead as it gets closer to realizing on its vision of being a global leader focused on branded cannabis products that deliver on Auxly’s consumer promise of quality, safety and efficacy.
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/.
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