Auxly Cannabis Group Inc. (TSX.V - XLY) (OTCQX:
CBWTF) ("
Auxly" or the
"
Company") today released its financial results
for the three and six months ended June 30, 2020. 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.
Q2 2020 Highlights and Subsequent
Events
- Total net revenues of $8.6 million for the three months ended
June 30, 2020, an over 200% increase from the same period last
year, comprised of $6.8 million of cannabis net revenues and
research revenues from KGK of $1.8 million
- Launched Robinsons brand in Ontario and Nova Scotia, with four
distinctive strains, all grown with care at the Robinsons indoor
facility in Kentville, Nova Scotia
- Auxly’s joint venture Partner Sunens, received its cultivation
licence for the first phase of its fully automated, purpose-built,
1.1 million sq ft. greenhouse facility, which includes
approximately 360,000 sq ft of cultivation, processing and storage
space
- Entered into a manufacturing agreement to produce dosistTM
products in Canada
- Dosecann received its Cannabis Research Licence from Health
Canada, which permits Dosecann to administer cannabis extracts,
edible cannabis and cannabis topicals to human subjects for
purposes of palatability and sensory testing
- Auxly’s Kolab Project announced partnership with Greentec on
industry-wide vape recycling program for all cannabis
retailers
- Secured $25 million convertible debenture standby financing, of
which the Company has completed four tranches totaling $9.25
million
Q2 Highlights
(000’s) |
Three monthsended June 30,2020 |
Three monthsended June 30,2019 |
Change |
PercentageChange |
Six monthsEnded June 30,2020 |
Six monthsEnded June 30,2019 |
Change |
PercentageChange |
Total
revenues |
$ |
8,564 |
$ |
2,762 |
|
$ |
5,802 |
|
210 |
% |
$ |
18,469 |
|
$ |
3,579 |
|
$ |
14,890 |
|
416 |
% |
Net losses* |
|
(27,917) |
|
(13,987 |
) |
|
(13,930 |
) |
-100 |
% |
|
(40,661 |
) |
|
(27,598 |
) |
|
(13,063 |
) |
-47 |
% |
Adjusted EBITDA** |
|
(7,804) |
|
(8,042 |
) |
|
238 |
|
3 |
% |
|
(15,965 |
) |
|
(15,410 |
) |
|
(555 |
) |
-4 |
% |
Weighted Average Shares outstanding |
|
627,821,967 |
|
592,208,342 |
|
|
35,613,625 |
|
6 |
% |
|
626,517,977 |
|
|
589,730,772 |
|
|
36,787,205 |
|
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) |
June 30, 2020 |
December 31, 2019 |
Change |
|
Percentage Change |
|
Cash and
equivalents |
20,724 |
44,134 |
(23,410 |
) |
-53 |
% |
Total assets |
378,487 |
411,182 |
(32,695 |
) |
-8 |
% |
Debt |
104,062 |
95,438 |
8,624 |
|
9 |
% |
Hugo Alves, CEO of Auxly, commented: “We are
excited to have another successful quarter of cannabis sales behind
us, with Q2 bringing in $6.8 million of cannabis net revenues, and
$8.6 million in total net revenues. Despite a decline in sales as
compared to Q1 2020, due in part to temporary store closures as a
result of COVID-19 and new competitor value brands entering the
market, we have taken immediate and deliberate steps to align our
Company to reflect current consumer demands and market
conditions. We have already seen improved velocity of sales
for our key brands from the pricing adjustments we made earlier
this quarter, and are adding new product profiles that appeal to
the fast-growing value segment, such as our Foray and Kolab
Project’s 1g vape cartridge. Additionally, we have seen a
tremendous consumer response to the recent launch of our Robinsons
and Kolab dried flower offerings. As we move forward in
executing our business strategy, we are committed to doing so with
the highest degree of fiscal discipline.”
Results of Operations
(000’s) |
|
Three monthsEnded June 30,2020 |
|
|
Three monthsEnded June 30,2019 |
|
|
|
Six monthsEnded June 30,2020 |
|
|
Six monthsEnded June 30,2019 |
|
RevenuesRevenue from sales of cannabis products
Research contracts and other Excise taxes |
$ |
8,3201,763(1,519 |
) |
|
4442,318- |
|
|
$ |
18,7872,664(2,982 |
) |
|
7362,843- |
|
Total Net Revenues |
|
8,564 |
|
|
2,762 |
|
|
18,469 |
|
|
3,579 |
|
Cost of SalesCosts of finished cannabis inventory
soldResearch contracts and other Impairment on Inventory |
|
5,029274668 |
|
|
2282,090- |
|
|
|
10,1208221,942 |
|
|
3762,372- |
|
Gross profit excluding fair value items
|
|
2,593 |
|
|
444 |
|
|
5,585 |
|
|
831 |
|
Unrealized fair value loss on biological transformationRealized
fair value loss on inventory |
|
201(15 |
) |
|
(155(1 |
)) |
|
|
150(195 |
) |
|
(537(195 |
)) |
Gross Profit / (loss) |
|
2,779 |
|
|
288 |
|
|
5,540 |
|
|
99 |
|
Expenses Selling, general, and administrative
expenses Depreciation and amortization Interest expense |
|
13,6382,4393,356 |
|
|
11,3251,4371,897 |
|
|
27,6564,8135,555 |
|
|
22,2932,4755,431 |
|
Total expenses |
|
19,433 |
|
|
14,659 |
|
|
38,024 |
|
|
30,199 |
|
Other incomes / (losses)Fair value gain /
(loss) of financial instruments accounted under FVTPL Interest
incomeImpairment of long-term assets Impairment of intangible
assets and goodwill Gain on settlement of financial assets and
liabilities Share of loss on investment in joint venture Foreign
exchange (loss) / gain |
|
(4,521345(4,506-(2,387(996(1,056 |
))))) |
|
(1,8122,019--(250(372(869 |
)))) |
|
|
(4,636406(4,506-(553(1,781588 |
)))) |
|
(4302,979-(1,800125(552(940 |
)))) |
Total other losses |
|
(13,121 |
) |
|
(1,284 |
) |
|
(10,482 |
) |
|
(618 |
) |
Net Loss before income taxIncome tax recovery |
|
(29,775567 |
) |
|
(15,6551,464 |
) |
|
|
(42,966567 |
) |
|
(30,7182,723 |
) |
Net Loss |
$ |
(29,208 |
) |
$ |
(14,191 |
) |
|
$ |
(42,399 |
) |
$ |
(27,995 |
) |
Net loss attributable to shareholders of the
Company Net loss attributable to non-controlling
interest |
$$ |
(27,917(1,291 |
)) |
$$ |
(13,987 (204 |
)) |
|
$$ |
(40,661(1,738 |
)) |
$$ |
(27,598(397 |
)) |
Adjusted EBITDA |
$ |
(7,804 |
) |
$ |
(8,042 |
) |
|
$ |
(15,965 |
) |
$ |
(15,410 |
) |
Net loss per common share (basic and diluted) |
$ |
(0.04 |
) |
$ |
(0.02 |
) |
|
$ |
(0.06 |
) |
$ |
(0.05 |
) |
Weighted average shares outstanding (basic and
diluted) |
|
627,821,967 |
|
|
592,208,342 |
|
|
626,517,977 |
|
|
589,730,772 |
|
Revenue
Over the first half of 2020, Auxly generated
revenues through the sale of Cannabis 2.0 Products and to a lesser
extent Cannabis 1.0 Products to customers, and by providing
research services for customers who are conducting human clinical
trials.
During the three and six month periods ended
June 30, 2020, cannabis net revenues of $6.8 million and $15.8
million were comprised of approximately 90% Cannabis 2.0 Products,
with the remainder from Cannabis 1.0 Products. During the second
quarter, approximately 80% of cannabis net revenues continued to
originate from sales to British Columbia, Alberta and
Ontario. Sales declines as compared to Q1 2020 were primarily
concentrated in Ontario due to new competitor value brand offerings
entering the market, temporary store closures, the shift to online
sales through the OCS, and the impact of downward pricing
adjustments made by the Company near the end of the quarter, which
have improved the velocity of sales of key brands to date. Vape
products continued to account for more than 60% of cannabis
revenues.
For the three and six months ended June 30,
2020, Auxly recognized $1.8 million and $2.7 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 based upon the achievement of
milestones. Where milestones are not met revenues are deferred on
the balance sheet which may result in timing differences in
earnings. Revenues during the first quarter of 2020 were impacted
by temporary clinical trial suspensions due to COVID-19 and
revenues during the second quarter of 2020 were achieved in part
due to the ability of KGK to pivot to a virtual clinical trial
model to achieve milestones and through the introduction of new
regulatory advisory services.
Gross Profit/Loss
Auxly realized a gross profit of $2.8 million
following fair value adjustments during the second quarter of 2020
and $5.5 million during the first half of 2020. This compares with
gross profits of $0.3 million for the second quarter of 2019 and
$0.1 million for the first half of 2019. Gross profits for the
three months ended June 30, 2020 were comprised of $1.8 million or
approximately 26% from Canadian cannabis operations and $1.9
million from research operations. Cannabis gross margins declined
during the period in part due to lower vape sales, increased
freight costs and costs associated with temporary wages premiums.
During the six months ended June 30, 2020, gross profits were
comprised of $5.7 million from Canadian cannabis operations, $2.2
million from research operations, partially offset by impairment
charges of $1.4 million primarily related to Inverell’s
biomass.
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. For the three and six months ended June 30, 2020,
wages and benefits were $7.5 million and $14.0 million,
respectively, or an increase of $3.4 million and $5.7 million over
the same respective periods 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 $0.3 million and $0.7 million for the respective
three and six months ended June 30, 2020 were attributable to
hiring at subsidiaries, including the absorption of employees
arising from the foreclosure of Curative. Wages and benefits during
the second quarter of 2020 increased by $1.1 million from the first
quarter, primarily as a result of compensation and severance
accruals recognized during the period.
Office and administrative expenses of $2.9
million in the second quarter of 2020 increased by $1.4 million and
$2.3 million to $5.5 million year to date compared to the same
periods in 2019 primarily as a result of increased activities
associated with cannabis sales in 2020. During the second quarter
of 2020, office and administrative expenses were driven by head
office and Dosecann to support the product development,
formulation, R&D and testing of Cannabis 2.0 Products in
preparation for product innovation in conjunction with the second
floor expansion at the Dosecann facility. Other increases in fees
were related to the continued development and implementation of an
organization-wide ERP system.
Auxly’s professional fees were $0.5 million and
$2.0 million for the three and six months ended June 30, 2020, as
compared to $1.8 million and $2.9 million over the same respective
period in 2019. Professional fees incurred during the periods
primarily related to accounting fees, regulatory matters, reporting
issuer fees, 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
decrease in professional fees was driven by the reduction in
professional services and professional services contracts in
2020.
Business development fees of $0.2 million in the
second quarter of 2020 decreased by $0.8 million and $1.1 million
to $1.0 million year to date as compared to the same periods in
2019. The decreases are primarily due to a reduction in
acquisitions and travel related expenses.
Selling expenses for the three and six months
ended June 30, 2020 were $1.2 million and $2.5 million,
respectively, as compared to nominal fees recognized over the same
respective periods in 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 and six months ended June 30,
2020, share-based compensation was $1.3 million and $2.7 million, a
decrease from the $2.7 million and $5.7 million over the same
respective periods in 2019. 4,719,692 options and 4,885,692 options
were issued during the three and six months ended June 30, 2020,
respectively, as compared to 1,440,000 options and 6,590,000
options over the same respective periods in 2019.
Depreciation and amortization expenses were $2.4
million in the second quarter of 2020 and $4.8 million year to
date, as compared to $1.4 million and $2.5 million over the same
respective periods in 2019 primarily as a result of greater in use
capital projects and the associated additional capital expenditures
in 2020. During 2019, several projects remained under
development.
Interest expenses were $3.4 million for the
three months ended June 30, 2020 and $5.6 million for the six
months ended June 30, 2020. Interest expenses are driven by
interest charges of 6% on the then outstanding 2018 convertible
debentures, 4% on the Imperial Brands convertible debentures, 7.5%
of the convertible debenture tranches issued in 2020, and the
non-cash accretion of placement and other related fees being
recognized over the terms of the respective debentures.
Total Other Incomes/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 June 30,
2020, the Company reported a $4.5 million fair value loss, as
compared to a $1.8 million dollar loss in the previous year.
The current period loss is primarily the result of an assessment of
prevailing market conditions over investments held. For the six
months ended June 30, 2020, the Company reported a $4.6 million
fair value loss, as compared to a $0.4 million fair value loss 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.
The Company recorded interest income of $0.3
million during the second quarter for 2020 and $0.4 million year to
date, which is a decrease from $2.0 million generated during the
second quarter of 2019 and $3.0 million year to date 2019. Interest
income is earned on notes receivable balances, investments in
convertible debt, and interest on cash and cash equivalents.
During the three-months ended June 30, 2020, the
Company recognized an impairment loss on long-term assets of $4.5
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 $4.5 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 $3.3
million of the impairment losses towards property, plant and
equipment, and $1.2 million of the impairment losses towards other
assets.
Losses on settlement of assets and liabilities
and other expenses for the three months ended June 30, 2020 were
$2.4 million, primarily relating to accrued legal settlements and a
credit loss provision. On November 1, 2019, the Company entered
into a commercial lease agreement with 346 Spadina Inc. and
provided a security deposit of $0.6 million. In April, 2020 the
landlord terminated the lease and commenced a claim against the
Company for breach of the lease agreement for and aggregate claim
of $21.7 million. The Company has yet to file its defence; however,
it intends to dispute the landlord’s claims and termination of the
lease. As at June 30, 2020, the Company has recorded a
provision of $1.3 million relating to this claim. Year to date
settlements of lawsuits reflect offsetting gains primarily related
to non-monetary inventory transfers with another licensed
producer.
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 three and
six months ended June 30, 2020, the Company reported a foreign
exchange loss of $1.1 million and gain of $0.6 million,
respectively, as compared to foreign exchange losses of $0.9
million and $0.9 million over the same respective periods in
2019.
Net Losses
Net losses attributable to shareholders were
$27.9 million with a net loss of $0.04 per share on a basic and
diluted basis in the second quarter of 2020, and $40.7 million with
a net loss of $0.06 per share on a basic and diluted basis year to
date. This compares to a net loss of $14.0 million attributable to
shareholders and $0.02 per share on a basic and diluted basis and
$27.6 million and $0.05 per share on a basic and diluted basis,
over the same respective periods in 2019. The increase in net
losses was primarily attributable to total other losses recorded
during the second quarter, increased depreciation, interest
expense, partially offset by gross margins net of selling, general
and administrative expenses.
Adjusted EBITDA
Adjusted EBITDA improved by approximately $0.2
million to $(7.8) million during the three months ended June 30,
2020 as compared to the same period in 2019. The increase was
primarily driven by a combination of increasing gross margins
partially offset by higher selling, general and administrative
expenses.
Adjusted EBITDA decreased by $0.6 million during
the six months ended June 30, 2020 as compared to the six months
ended June 30, 2019, to $(16.0) million from $(15.4) million. The
decrease was primarily driven by an increase in selling, general
and administrative expenses during the six months ended June 30,
2020 to support the commencement of cannabis product sales,
partially offset by higher gross margins.
Outlook
With the launch of the Company’s Cannabis 2.0
Products in December 2019, Auxly has established the foundation it
plans to build on in 2020 to increase revenues and move towards
positive cash flows in 2021. 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. Broadly, Auxly’s objectives
for the balance of the year 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 strategic partners to move towards
commercialization of a small number of products for sale
internationally.
- Continue to take measures to improve cash flows and finance the
business.
Auxly looks forward to continuing the successful
execution of its corporate strategy as it gets closer to realizing
its vision of being a global leader focused on branded cannabis
products that deliver on the 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/.
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:Email: press@auxly.com
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 obtain and
maintain all necessary governmental and regulatory permits and
approvals for the operation of their facilities and the development
and sale of current and 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 and
demand for current and future Company products by consumers and
provincial purchasers, 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
annual information form of the Company for the financial year ended
December 31, 2019 dated May 13, 2020.
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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