Auxly realized a gross profit of $0.3 million for the three months ended June 30, 2019 and $0.1 million for the six months ended June 30, 2019.
VANCOUVER, British Columbia, Aug. 16, 2019 (GLOBE NEWSWIRE) — 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, 2019. These filings and additional information regarding Auxly are available for review on SEDAR at www.sedar.com.
Q2 2019 Highlights and Subsequent Events
Auxly welcomed $123.0 million investment and R&D partnership with Imperial Brands. Sunens entered into a term sheet for a syndicated credit facility and expects to receive debt financing in the aggregate amount of approximately $84.0 million.
Dosecann entered into a definitive agreement with Capsugel Inc. to provide Dosecann with a complete line of equipment for capsule filling and sealing, including a state-of-the-art LEMS® machine, Lonza’s proprietary liquid-filled Capsugel® Licaps® capsules, and rights to its capsule filling and sealing LEMS® technology.
In addition, Dosecann and Lonza will work collaboratively on new product formulation for cannabis capsule productsKolab had its official store opening in Lloydminster, Saskatchewan; Kolab is now able to commence local cannabis sales and province-wide e-commerce throughout SaskatchewanInverell harvested 18 tonnes of hemp biomass to be converted into CBD isolate
*attributable to shareholders of the Company ** comparable period is December 31, 2018
Hugo Alves, President of Auxly, commented: “This quarter has been instrumental in ensuring our growth and success as we prepare for the launch of our derivative products later this year. With our first retail store now open in Saskatchewan, licenses received at Robinsons and critical strategic partnerships in place with innovative and trailblazing companies such as Imperial Brands, we are well prepared to execute on our plans to lead the next phase of the cannabis industry.”
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.
Vision and Strategy
Auxly’s vision is to be a global cannabis leader focused on providing branded cannabis products backed by science and innovation.Since the Company’s inception, it has worked closely with its partners to develop a secure, cost-efficient and diversified source of cannabis. To accelerate market participation in the medical and wellness cannabis market, and prior to the legalization and creation of the adult-use cannabis markets in Canada in October 2018, Auxly invested in cultivation opportunities, more commonly referred to as “streaming” transactions, with the goal of supply diversification and efficient use of capital.
These cultivation partners remain important to the Company’s predictable supply of diverse, cost efficient raw cannabis.With its cultivation platform largely in place and in anticipation of the legalization of derivative adult-use products for October 2019 (namely, concentrates, edibles and topicals as contemplated by the Cannabis Act and its current and proposed accompanying regulations) (“Phase two”), Auxly has been focused on product formulation and development at its wholly owned subsidiary, Dosecann Inc. (“Dosecann”).
Auxly was a first mover in 2018 with the acquisition of Dosecann. Its state-of-the-art processing facility and its highly-skilled team give the Company the ability to turn raw cannabis into a variety of derivative cannabis products under one roof. Further, Auxly’s acquisition of KGK Science Inc. (“KGK”) provides additional scientific and clinical bench strength to Dosecann’s ability to develop and produce safe, effective and high-quality cannabis products.The Company continues to develop strategic distribution channels to expand its exposure to new and existing markets, including health care providers, provincial boards and retailers, and its wholly-owned retail outlet with province-wide e-commerce capabilities in Saskatchewan.
Auxly has also invested in hemp cultivation and extraction in Uruguay through its 80% ownership of Inverell S.A. (“Inverell”) and its 100% ownership of its sister company Zeratol S.A. and is constantly evaluating other international cultivation and distribution opportunities.
Results of Operations
For the three and six months ended June 30, 2019, Auxly recognized $2.3 million and $2.8 million of research revenues from KGK, respectively. These revenues are in support of third-party research contracts which can fluctuate significantly during 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. KGK is a critical component in Auxly’s overall strategy to develop safe, effective and high-quality consumer cannabis products while continuing to conduct leading edge research for third party clients.
Auxly recognized $0.4 million and $0.7 million of revenues from sales of dry cannabis products for the three and six months ended June 30, 2019, respectively. Dry cannabis flower sales have been curtailed as a result of the company’s decision to use the dry flower to develop derivative cannabis products in anticipation of Phase two legalization.
Auxly realized a gross profit of $0.3 million for the three months ended June 30, 2019 and $0.1 million for the six months ended June 30, 2019. Gross profit for the three months ended June 30, 2019 is comprised of KGK revenues less expenses of $0.2 million and $0.2 million of revenues less expenses on the sale of cannabis products, net of a $0.1 million unrealized fair value loss on biological asset transformation.
Gross profit for the six months ended June 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. In addition, a $0.2 million fair value loss on inventory recognized on net realizable value and a $0.6 million unrealized fair value loss on biological asset transformation contributed to a reduction in overall gross profit over the six-month period ended June 30, 2019.
Total other incomes were $0.2 million for the three months ended June 30, 2019 and $2.5 million for the six months ended June 30, 2019. For the three and six months ended June 30, 2019, other incomes are comprised of a fair value loss of $1.8 million and $0.4 million, respectively, from changes in securities held and interest income of $2.0 million and $3.0 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 salaries, 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 six months ended June 30, 2019, wages and benefits were $4.2 million and $8.3 million, respectively. This reflects an increase of $2.4 million and $5.3 million over the same period in 2018, primarily due to workforce increases in both 2018 and 2019.
The increases were to support expansionary activities as a direct result of workforces added on acquisition of four entities and the corporate office.Office and administrative expenses of $1.5 million in the second quarter of 2019 increased by $0.1 million and $0.8 million to $3.2 million year to date compared to the same periods in 2018. Office and administrative expenses have remained relatively consistent year over year despite the increase in headcount due to cost savings initiatives at head office.
Auxly’s professional fees were $1.8 million and $2.9 million for the three and six months ended June 30, 2019, respectively, as compared to $2.0 million and $2.7 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 second quarter three-month period.
The overall growth of the Company resulted in additional accounting and recruiting fees over the six months ended June 30, 2019.Business development fees of $1.1 million in the second quarter of 2019 decreased by $1.4 million and $2.5 million to $2.1 million year to date as compared to the same periods in 2018, attributable to a lower volume of transactions.
The fees in 2019 were focused on exclusively securing opportunities for additional financing, while the fees in 2018 were focused on the acquisitions of Inverell, Dosecann, Robinsons, and KGK in additional to securing financing.For the three and six months ended June 30, 2019, share-based compensation was $2.7 million and $5.7 million similar to the $2.7 million and $5.6 million over the same respective periods in 2018. 1,440,000 options and 6,590,000 options were issued during the three and six months ended June 30, 2019, respectively.
Depreciation and amortization expenses were $1.4 million in the second quarter of 2019 and $2.5 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 charges on the Company’s property, plant and equipment.Interest expenses were $1.9 million for the three-month period ended June 30, 2019, a decrease of $0.9 million over the same period in 2018, and $5.4 million for the six-month period ended June 30, 2019, an increase of $0.4 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.
A foreign exchange loss of $0.9 million was recognized during the three months ended June 30, 2019, an increase of $0.9 million compared to the same period in 2018, driven by a decrease in the U.S. dollar to CAD dollar exchange rate.An impairment charge of $1.8 million related to the intangible value of the FSD streaming agreement was taken during the first quarter as a result of previously announced contract breaches. The Company is currently evaluating its next steps in this matter.
Net losses attributable to shareholders were $14.0 million with a net loss of $0.02 per Share on a basic and diluted basis in the second quarter of 2019, and $27.6 million with a net loss of $0.05 per Share on a basic and diluted basis year to date.
This compares to a net loss of $11.9 million and $0.03 per Share on a basic and diluted basis and $22.4 million and $0.05 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.
For the remainder of 2019, the Company expects to realize cannabis sales through its wholly-owned Kolab retail store in Lloydminster, Saskatchewan which opened on July 11th, sell dry cannabis flower and participate in the market for Phase two cannabis products, with an increasing part of its business dedicated to derivative cannabis product development, manufacturing and distribution.
As dry cannabis flower is being used in the development of derivative products, the Company expects that material revenue generation will coincide with the legalization and regulatory approvals for derivative cannabis products and the Company’s sale of such products to the market, presently anticipated to commence in December 2019. Over the long-term, Auxly believes shareholders will benefit from the higher profitability and anticipated strong growth of the derivative cannabis product market.
Auxly’s priorities for 2019 and updates thereto are as follows:Complete product R&D, formulation and manufacturing activities at the Dosecann facility in preparation for the legalization of derivative cannabis products:Progress has been made in several areas including extraction of flower to cannabis resin and development of edible product formulations, with a full product suite consisting of vape pens, chocolates, chewables, oils/sprays, tablets, and capsules to be ready for sale in December 2019;Successful production of oil in a bottle, oil in a spray and cannabis oil capsules for sale upon receipt of relevant licenses; Expansion of the Dosecann facility by approximately 10,000 square feet to 52,000 square feet is well underway which will allow for larger production and extraction throughput capacity; and Completed the acquisition of vape pen hardware, capsule manufacturing equipment, derivative cannabis product packaging and related production equipment.
Complete construction of all ongoing cultivation assets, while continuing to work with Auxly’s joint venture partner Sunens as it substantially completes phase one of a state-of-the-art greenhouse facility in 2019:The first phase of the Sunens greenhouse is anticipated to cost approximately $150.0 million of which Auxly has contributed $60.5 million and provided a Letter of Credit for $21.4 million to be used for equipment purchases, as at June 30, 2019; Sunens has entered into a term sheet for a syndicated credit facility, with the Bank of Montreal (“BMO”) as Lead Underwriter and, subject to the satisfaction of certain customary closing conditions and the finalization of definitive loan documentation, expects to receive debt financing in the aggregate amount of approximately $84.0 million. The syndicated senior debt facility will be for $71.5 million for a three-year term together with a BMO $12.5 million leasing facility;Construction is anticipated to be substantially completed in December 2019, with licencing expected in early 2020 and cultivation commencing in Q2 2020; and Funding of the Curative facility continued in Q2 2019. Construction of the Curative facility is anticipated to be completed in 2019 along with an evidence package to be submitted to Health Canada for cultivation licencing.
Continue to support the rollout of Dosecann, Kolab, Robinsons and Foray:On April 5, 2019, Robinsons received its cultivation and processing licenses in Nova Scotia. Auxly anticipates receipt of the licence amendment to allow sales by the first quarter of 2020;On June 19, 2019 Dosecann entered into a definitive agreement with Capsugel Inc. to provide Dosecann with a complete line of equipment for capsule filling and sealing. In addition, Dosecann and Lonza will work collaboratively on new cannabis capsule products;The Company has established strong relationships with provincial boards during the second quarter of 2019 and anticipate signing supply agreements in Q3 2019;The Company has advanced the process for receipt of Dosecann’s and Kolab’s oil sales approval; and The Lloydminster store had its official opening on July 11, 2019, and Kolab is now able to commence local cannabis sales and province-wide-e-commerce in Saskatchewan.Opportunistically expand Auxly’s footprint in international markets to facilitate the sale of CBD, derived from its large-scale hemp cultivation operation in Uruguay:Corporate development and public relations activities in Uruguay progressed in April 2019; Inverell was awarded a licence for scientific research and development of cannabis strains for registration during May 2019;Seeds containing higher CBD are being registered for the 2020 planting season; and Continued to evaluate and explore options to access markets in Europe.In addition to the priorities noted above, the Company is extremely delighted to have secured and participated in financing activities in the past month amounting to more than $200.0 million. These funds along with any additional financing secured by the Company will be used to support and build the Company’s business in preparation for Phase two derivative cannabis products.ON BEHALF OF THE BOARD
“Chuck Rifici” Chairman & 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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Sarah Bain, VP External Affairs
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, licensing 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 timing and completion of Auxly’s proposed transaction with Imperial Brands, the anticipated closing date of the Sunens credit facilities, future legislative and regulatory developments involving cannabis and cannabis products, the timing of proposed research and clinical trials, 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 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, whether Auxly and Imperial Brands can complete the transaction on the anticipated terms and timeline; the ability to satisfy various conditions to the closing of Auxly’s transaction with Imperial Brands contemplated by the subscription agreement and the ability to obtain regulatory approval of the transaction; the satisfaction of the closing conditions relating to the Sunens credit facilities ; 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 Dosecann 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.