Mr. Hugo Alves reports
AUXLY REPORTS THIRD QUARTER 2020 FINANCIAL RESULTS
Auxly Cannabis Group Inc. has released its financial results for the three and nine months ended Sept. 30, 2020. These filings and additional information regarding Auxly are available for review on SEDAR.
and subsequent events:
Total net revenues of $13.4-million for the three months ended Sept. 30, 2020, comprising $12.6-million of cannabis net revenues, an 85-per-cent increase from the previous quarter, and research revenues from KGK of $900,000;
Selling, general and administrative expenses (SG&A) decrease to $11.4-million;
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) improves to negative $6.8-million;
The company continued to introduce new products to drive future growth with the launch of the Back Forty brand, Foray's Hard Maple Caramels, Dosecann's omega-rich Ahiflower oil capsules and Kolab Kalifornia dried flower, positioning the company as the No. 1 licensed producer in national edible and vape sales year to date, with a blended 18-per-cent market share;
Strengthened its board of directors with independent director Genevieve Young assuming the role of chair and welcoming a new independent director, Vikram Bawa;
Increases cash position by $20-million with recently announced $12-million bought deal offering and $8-million non-dilutive financing.
Hugo Alves, chief executive officer of Auxly, commented: "Our team entered Q3 committed to driving sales growth, reducing costs and improving product availability. Our efforts resulted in a quarter-over-quarter increase in net revenues of approximately $5-million and a reduction in SG&A of approximately $2-million. Our improved performance was driven primarily by continued improvements in operational and supply chain capabilities, expanding distribution, better alignment of our resources with our commercial objectives, and, of course, our continued focus on understanding our consumers and delivering cannabis products that delight them. We believe that our efforts are resonating with consumers and that Auxly has quickly established itself as one of the leading cannabis companies in Canada."
For the three months ending Sept. 30, 2020, cannabis revenues were $15.2-million, as compared with $100,000 in the same period in 2019. Net cannabis revenues of $12.6-million during the period comprised approximately 80 per cent cannabis 2.0 products, with the remainder from cannabis 1.0 products, and represented a sequential increase of $5.8-million, or approximately 85 per cent, over the second quarter of 2020. During the third quarter of 2020, approximately 75 per cent of cannabis net revenues originated from sales to British Columbia, Alberta and Ontario. Net revenues improved from higher vape product sales as a result of pricing adjustments initiated in the second quarter, new product offerings such as one-gram vape cartridges, the launch of Robinsons dried flower, expansion of dried flower and prerolls under the Kolab Project brand, and revenues from the sale of dosist products. Net cannabis revenues of $28.4-million year to date reflect strong cannabis 2.0 product sales in the vape and edible categories as well as the third quarter impact of dried flower and dosist product sales.
Research and other revenues of $900,000 for the third quarter of 2020 and $3.5-million year to date decreased by approximately $600,000 and $800,000 during the comparable periods in 2019. 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. The decline in revenues year to date are due to the impact of the COVID-19 pandemic and the completion of clinical trials, partially offset by the introduction of new regulatory advisory services.
Auxly realized a gross profit of $3.9-million following fair-value adjustments during the third quarter of 2020 and $9.4-million year to date. This compares with gross losses of $1.2-million and $1.1-million in the comparable periods of 2019. Gross profits for the three months ended Sept. 30, 2020, comprised $3.5-million and a 28-per-cent margin from Canadian cannabis operations and $400,000 and a 41-per-cent margin from research operations. Cannabis gross margins improved slightly over the second quarter of 2020 in part due to strong dried flower margins, partially offset by inefficiencies associated with the reconfiguration of product manufacturing at the Dosecann facility following the completion of the second-floor expansion. During the nine months ended Sept. 30, 2020, gross profits comprised $8.6-million from Canadian cannabis operations and $2.2-million from research operations, partially offset by impairment charges of $1.4-million primarily related to Inverell's stored biomass.
Selling, general and administrative expenses (SG&A) comprise wages and benefits, office and administrative, professional fees, business developments, share-based payments, and selling expenses. For the three and nine months ended Sept. 30, 2020, SG&A were $11.4-million and $39-million, respectively, or a decrease of $5.2-million and an increase of $100,000 over the same respective periods in 2019. SG&A during the quarter declined by $2.3-million as compared with the second quarter of 2020.
For the three and nine months ended Sept. 30, 2020, wages and benefits were $5.3-million and $19.3-million, respectively, or an increase of $500,000 and $6.3-million over the same respective periods in 2019. The nine-month increase of $6.3-million was primarily driven by work force increases to support cannabis product sales, primarily related to the operations and commercial teams, the absorption of employees arising from the foreclosure of Curative, and compensation and severance accruals recognized during the period. Expenses in the third quarter of 2020 reflect severance accruals in conjunction with SG&A savings announced in October, 2020, offset by unfilled vacancies that occurred in the second quarter of 2020, employee wage subsidies received by KGK and reduction of Inverell staffing.
Office and administrative expenses of $3-million in the third quarter of 2020 increased by $100,000 and by $2.4-million to $8.5-million year to date compared with the same periods in 2019, primarily as a result of increased operating costs associated with the development and sale of cannabis products in 2020 and the implementation of an organizationwide ERP (enterprise resource planning) system.
Auxly's professional fees were $400,000 and $2.3-million for the three and nine months ended Sept. 30, 2020, as compared with $2.4-million and $5.3-million over the same respective period in 2019. Professional fees incurred during the periods primarily related to accounting fees, regulatory matters, reporting issuer fees, continuing legal proceedings, recruiting fees in conjunction with hiring, consulting fees as well as 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 $200,000 in the third quarter of 2020 decreased by $800,000 and $1.9-million to $1.2-million year to date as compared with the same periods in 2019. The decreases are primarily due to a reduction in acquisition- and travel-related expenses.
Selling expenses for the three and nine months ended Sept. 30, 2020, were $1.4-million and $3.8-million, respectively, as compared with nominal fees recognized over the same respective periods in 2019. The increase is directly attributable to cannabis sales activities comprising brokerage fees earned by Kindred Partners and marketing initiatives for cannabis products.
For the three and nine months ended Sept. 30, 2020, share-based compensation was $1.2-million and $3.9-million, a decrease from the $5.4-million and $11.1-million over the same respective periods in 2019. The reduction in expenses in 2020 reflects the impact of significantly fewer option grants and the impact of lower share prices.
Depreciation and amortization expenses were $2.3-million in the third quarter of 2020 and $7.1-million year to date, as compared with $1.5-million and $4-million during the same respective periods in 2019. The increase in expense is primarily as a result of greater use in capital projects and additional capital expenditures in 2020. During 2019, several of these projects remained under development.
Interest expenses were $3.7-million for the three months ended Sept. 30, 2020, and $9.2-million for the nine months ended Sept. 30, 2020. Interest expenses are driven by interest charges of 6 per cent on the then outstanding 2018 convertible debentures, 4 per cent on the Imperial Brands convertible debentures, 7.5 per cent on 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.
Fair-value changes on financial instruments included in this section arise on changes in value of promissory notes and level 2 securities held. For the quarter ended Sept. 30, 2020, the company reported an insignificant fair-value loss, as compared with a $5.8-million loss in the previous year. For the nine months ended Sept. 30, 2020, the company reported a $4.7-million fair-value loss, as compared with a $6.2-million fair-value loss in the previous year. Fair-value changes reflect losses on promissory notes and level 2 securities held. All promissory notes were repaid or fully impaired as at Dec. 31, 2019.
The company recorded interest income of $400,000 during the third quarter for 2020 and $800,000 year to date, which is a decrease from $900,000 generated during the third quarter of 2019 and $3.8-million year to date for 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 Sept. 30, 2020, the company recognized an impairment gain on long-term assets of $100,000 and an impairment loss of $4.4-million year to date, which represents the impairment of the company's Latin America cash-generating unit (CGU), Inverell, as reported in the second quarter of 2020.
Losses on settlement of assets and liabilities and other expenses for the three months ended Sept. 30, 2020, were $3.3-million, primarily relating the reversal of a gain on non-monetary inventory transfers with another licensed producer, which was recorded in the first quarter of 2020. The inventory was returned during the quarter also resulting in the recognition of a liability of approximately $5-million in accounts payable and other liabilities and an asset held in inventory. The company anticipates that this liability will be settled during the first half of 2021. Year-to-date losses of $3.9-million also include accrued legal settlements related to a commercial lease agreement with 346 Spadina Inc. and a credit loss provision.
The loss on investment in joint venture of $1.2-million for the three months ended Sept. 30, 2020, and $3-million year to date, increased by $400,000 and $1.6-million over the comparable period in 2019. These amounts reflect the company's proportionate share of Sunens earnings. Sunens has received its cultivation licence and processing licence and was cultivating cannabis during the third quarter of 2020. Sunens anticipates having product available for sale to other licenced producers in the fourth quarter of 2020.
Auxly is exposed to foreign exchange fluctuations from the U.S.-dollar-to-Canadian-dollar exchange rate primarily related to Inverell. During the three and nine months ended Sept. 30, 2020, the company reported a foreign exchange loss of $500,000 and a gain of $100,000, respectively, as compared with foreign exchange losses of $100,000 and $1-million over the same respective periods in 2019.
Net losses attributable to shareholders were $17.8-million, with a net loss of three cents per share on a basic and diluted basis, in the third quarter of 2020 and $58.5-million, with a net loss of nine cents per share on a basic and diluted basis, year to date. This compares with a net loss of $17.3-million attributable to shareholders and a loss of three cents per share on a basic and diluted basis and a net loss of $44.9-million and a loss of eight cents per share on a basic and diluted basis over the same respective periods in 2019. The increase in net losses of $500,000 during the third quarter and $13.6-million year to date, over the comparable periods in 2019, was primarily attributable to a tax recovery of $11.5-million recorded in the third quarter of 2019.
Adjusted EBITDA improved by approximately $4.3-million to negative $6.8-million and improved by $2.6-million to negative $24.2-million for the three and nine months ended Sept. 30, 2020, as compared with the same period in 2019. The increase was primarily driven by gross profits from cannabis sales, partially offset by SG&A.
While Auxly has established itself as a market leader in cannabis 2.0 products, with its current product offering achieving leading national market shares, the company is also seeing increasing success with its dried flower product offerings. The launch of the premium Robinsons flower offering, Kolab's curated Grower Series collaborations and Kolab prerolls have firmly established the company as an up-and-coming player in the dried flower market. The company's objectives for the remainder of 2020 and the first half of 2021, which may be impacted by the COVID-19 pandemic (see further discussion in the management discussion and analysis), continue to be concentrated on Canadian operations. Broadly, the company's objectives for the period are as follows:
Continued leadership and strength in the cannabis 2.0 products market;
Focused expansion of cannabis 1.0 products;
Finish remaining construction and equipment commissioning at Dosecann and continue to refine and improve related processes and throughput capabilities;
Manage SG&A to the scale of operations;
Continue to take measures to improve cash flows and finance the business.
Auxly will continue to evaluate opportunities to bring new and exciting products to consumers as the company continues to realize its vision of becoming a global leader in branded cannabis products that deliver on the consumer promise of quality, safety and efficacy.
About Auxly Cannabis Group Inc.
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.
We seek Safe Harbor.
© 2021 Canjex Publishing Ltd. All rights reserved.