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Auxly Cannabis Group Inc
Symbol XLY
Shares Issued 749,712,690
Close 2021-04-26 C$ 0.355
Recent Sedar Documents

Auxly Cannabis Group loses $85.42-million in 2020

2021-04-26 09:16 ET - News Release

Mr. Hugo Alves reports

AUXLY REPORTS FOURTH QUARTER AND FULL YEAR 2020 FINANCIAL RESULTS AND PROVIDES OUTLOOK FOR 2021

Auxly Cannabis Group Inc. has released its fourth quarter and full-year 2020 financial results. These filings and additional information regarding Auxly are available for review on SEDAR.

2020 highlights:

  • Recorded net revenues of $50.8-million in 2020, including $46.6-million in cannabis net revenues, an increase of 508 per cent compared with 2019;
  • Fourth quarter net cannabis revenues of $18.3-million;
  • Achieved the No. 1 licensed producer (LP) position in Canada for cannabis 2.0 product sales in 2020, with approximately 14-per-cent market share in the category;
  • Expanded into the cannabis 1.0 market with the launch of Robinsons premium dried flower and Kolab Project growers series collaborations with Lotus Cannabis and Safari Flower Co.;
  • Continued efforts to reduce selling, general and administrative expenses, which were below $10-million in the fourth quarter;
  • Further strengthened the company's balance sheet with financing transactions.

Hugo Alves, chief executive officer of Auxly, commented: "Auxly saw tremendous growth in its first full year of commercial operations, with 508-per-cent growth in our net revenue year over year. As one of the first LPs to offer cannabis 2.0 products upon legalization and one of the largest, most widely distributed 2.0 product portfolios on the market, we have successfully secured our position as one of the top cannabis companies in Canada. Going forward, we will look to build off the success of our first year, developing deeper connections with our consumers through continued insights and innovation, explore growth opportunities that are consistent with our corporate strategy, and maintain our efforts on improving cash flow to ensure we can execute on our vision of being a global leader in branded cannabis products."

Revenue

For the year ended Dec. 31, 2020, cannabis revenues were $57.2-million as compared with $2.3-million in the same period in 2019. Net cannabis revenues of $46.6-million during the period comprised approximately 80 per cent cannabis 2.0 products, with the remainder from cannabis 1.0 products, and represented a significant increase over 2019 where cannabis 2.0 sales began in December. During the year, approximately 75 per cent of cannabis net revenues originated from sales to British Columbia, Alberta and Ontario, led by strong market shares in vapes and edibles, resulting in Auxly being the top LP for cannabis 2.0 sales nationally. Sale of cannabis 1.0 products were led by the launch of Kolab Project flower and prerolls and Robinsons dried flower in the summer of 2020.

Research and other revenues of $4.1-million for 2020 were $2.1-million lower than 2019 primarily as a result of the COVID-19 pandemic and its disruptive impact on the completion of clinical trials, partially offset by the introduction of new regulatory advisory services. Revenues in support of third party research contracts 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.

Gross profit/loss

Auxly realized a gross profit of $11.1-million for 2020, compared with a gross loss of $3.7-million in 2019. Cannabis gross profits for the year ended Dec. 31, 2020, were $9.7-million, resulting in a 21-per-cent margin (27 per cent before impairment and fair value adjustments), with research and other gross profits of $1.4-million and a related margin of 34 per cent. Impairment of inventory of $3.4-million was $200,000 greater than 2019 and relates primarily to the charges related to the cessation of Inverell operations and approximately $1.1-million of aged cannabis 2.0 products associated with the SKU rationalization undertaken in the third quarter of 2020.

Auxly realized a gross loss of $3.7-million for the year ended Dec. 31, 2019, following fair value adjustments. The gross loss for the year ended Dec. 31, 2019, primarily comprised inventory-related adjustments of approximately $4.1-million (a $1.8-million impairment of inventory associated with final Inverell biomass product qualification and grading, a $1.4-million impairment of inventory associated with spoilage and obsolescence in mass production of cannabis 2.0 products at Dosecann, a $100,000 realized fair value loss on other inventories, and an $800,000 unrealized fair value loss on biological asset transformation), partially offset by KGK revenues less expenses of $500,000 and cannabis product revenues less expenses of $100,000, net of $200,000 of excise taxes.

Total expenses

Selling, general and administrative expenses comprised wages and benefits, office and administrative, professional fees, business developments, share-based payments, and selling expenses.

For 2020, selling, general and administrative expenses were $48.9-million, a decrease of $1.4-million from 2019.

Wages and benefits were $22.6-million, an increase of $4.7-million over 2019. The increase of $4.7-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, partially offset by employee wage subsidies received by KGK and reduction of Inverell staffing.

Office and administrative expenses of $11.8-million in 2020 increased by $3.8-million compared with 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 organization-wide enterprise resource planning (ERP) system.

Auxly's professional fees were $3.2-million, lower by $3.6-million for the year as compared with 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 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 expenses were $1.4-million, as compared with $4.8-million in 2019. The decreases are primarily due to a reduction in acquisition, development and travel-related expenses.

Selling expenses for the year ended Dec. 31, 2020, were $5.6-million, $5.3-million greater than 2019 directly attributable to cannabis sales activities comprising brokerage fees earned by Kindred Partners and marketing initiatives for cannabis products.

For 2020, share-based compensation was $4.3-million as compared with $12.6-million over 2019. The reduction in expenses in 2020 reflects the impact of significantly fewer option grants, the impact of lower share prices, and expense reversals of approximately $1-million associated with the termination of options following the selling, general and administrative reductions announced on Oct. 1, 2020.

Depreciation and amortization expenses were $9.4-million in 2020, as compared with $8.6-million during 2019. The increase in expense is primarily a result of capital expenditures in 2020. During 2019, several projects remained under development and were not depreciated until completed.

Interest expenses were $13-million for the 12 months ended Dec. 31, 2020, and $12.1-million for the same period of 2019. Interest expenses in 2020 were primarily the result of interest expense and accretion on the $123-million 4 per cent 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. Interest expenses in 2019 were driven by interest charges of 6 per cent on the then-outstanding 2018 convertible debentures and 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.

Total other incomes and losses

Fair value changes on financial instruments arise on changes in value of promissory notes and level two securities held. For the year ended Dec. 31, 2020, the company reported a fair value loss of $4.4-million, as compared with a $6.5-million loss in 2019, which was primarily related to the writedown of the Beleave Inc. debt obligation receivable in product equivalent. Fair value losses in 2020 reflect changes in level two securities held as all promissory notes were repaid or fully impaired as at Dec. 31, 2019.

The company recorded interest and other incomes of $500,000 in 2020, which declined from $3.6-million in 2019, primarily as a result of lower cash and cash equivalents balances held throughout the year and a reversal of $1.3-million in accrued interest as part of the negotiation with Sunens in respect of offtake agreement modifications negotiated for the benefit of Auxly in the fourth quarter of 2020.

Impairment of long-term assets, intangibles and goodwill of $6.1-million in 2020 is primarily related to the impairment of the company's LATAM cash-generating unit, Inverell. Impairments of $34.9-million in 2019 included charges of $23.9-million and $7.6-million where carrying values were higher than recoverable amounts related to Inverell and KGK, respectively. In addition, impairment charges of $1.8-million related to the intangible value of the FSD Pharma Inc. supply agreement, $1.1-million loss on the 2368523 Ontario Inc. (Curative Cannabis) supply agreement due to foreclosure and a $500,000 loss related to the Green Relief offtake agreement.

Losses on settlement of assets and liabilities and other expenses were $10-million, primarily relating to 1) a $8.7-million impairment in the investment in joint venture associated with amendments made to forego interest until Jan. 1, 2023, on the promissory note in the principal amount of approximately $48.5-million owed by Sunens in consideration of certain offtake arrangement modifications made for the benefit of Auxly; and 2) a 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 resulting in the recognition of a liability of approximately $5.8-million in accounts payable and other liabilities and an asset held in inventory. Replacement product has since been shipped to the licensed producer in March, 2021, to settle this obligation. Losses of $3.6-million in 2019 primarily relate to a $2.5-million loss on the foreclosure over Curative, credit loss provisions and final expenditures of approximately $500,000 associated with the FSD project.

The share of loss on investment in joint venture of $7.4-million in 2020 increased by $5.3-million over 2019, reflecting the company's proportionate share of Sunens earnings. Sunens received its cultivation licence in 2020 and has scaled up operations to make product available for sale to other licenced producers in the first quarter of 2021.

Auxly is exposed to foreign exchange fluctuations from the United States-dollar-to-Canadian-dollar exchange rate primarily related to Inverell. During the year ended Dec. 31, 2020, the company reported a foreign exchange loss of $400,000 and $1.5-million in 2019.

Net losses

Net losses were $87.4-million, with a net loss of 14 cents per share on a basic and diluted basis, in 2020, and $108.6-million, with a net loss of 17 cents per share on a basic and diluted basis, in 2019. The improvement of $21.2-million in 2020 was primarily the result of a gross profit increase of $14.8-million, total expenses consistent with the prior-year amounts, lower impairment losses and total other losses of $16.9-million, partially offset by lower income tax recoveries of $10.3-million.

Net losses of $108.6-million in 2019 were primarily driven by an increase in total other losses and depreciation and amortization expenses, partially offset by income tax recoveries.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA)

Adjusted EBITDA improved by approximately $7-million to negative $30.3-million in 2020, as compared with the same period in 2019. The increase was primarily driven by gross profits from cannabis product sales, partially offset by selling, general and administrative, excluding non-cash share-based compensation. In 2019, the company's adult-use cannabis product sales commenced in December, 2019.

Sunens update

On April 16, 2021, Sunens received a notice of default from the Bank of Montreal in its capacity as lender, administrative agent and syndication agent under the Sunens credit agreement with respect to, among other things, Sunens's failure to satisfy recently established revenue milestones for the first quarter of 2021. As part of such financing provided by the syndicate, the company has guaranteed payments up to $33-million in the event of default.

Although the lenders have reserved their rights under the credit agreement, they are continuing to advance financing which Sunens will use to finance its day-to-day operations. Sunens commenced cultivation within the licenced area upon receiving its licence in June, 2020, and, during the first quarter of 2021, has sold products to the company and other licensed producers. Sunens may require additional financing for working capital until production and revenue from sales reach expected levels. Discussions with the lenders with respect to a formal credit amendment and/or forbearance agreement are continuing in a collaborative and positive manner, although there can be no assurance that an agreement with the lenders will be reached. Further information is provided in the cultivation supply -- Sunens section of the management's discussion and analysis.

Outlook

Having launched a strong initial portfolio of cannabis 2.0 products in December, 2019, Auxly was well positioned going into its first full year of cannabis product sales in 2020. The company's objectives for 2020 were to:

  • Become a leader in the Canadian cannabis 2.0 products market:
    • Auxly has had a tremendously successful year; the company was able to leverage its position as one of the first cannabis companies to distribute and sell cannabis 2.0 products in Canada, becoming the top licensed producer of cannabis 2.0 products nationally in 2020;
  • Complete remaining construction and licensing of all Canadian operations to leverage existing assets and increase revenues:
    • The company completed the second-floor expansion at its Dosecann facility, which enabled increased production, fulfilment rates and sales of cannabis 2.0 products;
    • Converted the Kolab facility from cultivation to a manufacturing, processing and distribution facility for the company's preroll and dried flower cannabis products, in anticipation of the strategic expansion of the company's cannabis 1.0 products;
    • The company's subsidiaries obtained numerous Health Canada licences, including processing licences for Sunens and Robinsons OG, as well as an institutional cannabis research licence for KGK, which provide the company with enhanced commercial flexibility;
  • Work with the Sunens team to secure supply of input materials for use in the company's product offerings in 2020:
    • Despite some COVID-19-related delays, Auxly was able to accelerate licencing of the facility such that Sunens was able to cultivate cannabis and make it available for sale to Auxly and other licenced producers in Q1 2021;
  • Collaborate with strategic partners to move toward commercialization of a small number of products for sale internationally or, if and when permitted, as part of the cannabis 3.0 products market:
    • While international product sales did not materialize, the company has, through its continued execution of its product development strategy, made significant progress toward the commercialization of products for the cannabis 3.0 products market, if and when legally permitted.

Looking ahead to 2021, Auxly is focused on building upon its success as a market leader in cannabis 2.0 products, while continuing to advance the company's focused expansion of its dried flower, preroll, oil and capsule product offerings. The company's overall objectives for 2021, which may be impacted by the COVID-19 pandemic (see further discussion in the management's discussion and analysis under COVID-19 pandemic), are as follows:

  • Continued leadership and strength in the cannabis 2.0 products market;
  • Focused expansion of cannabis 1.0 products;
  • Continue to take measures to improve cash flows and finance the business;
  • Leverage the Sunens facility to establish a secure supply of cannabis and reduce reliance on open market purchasing;
  • Explore possible cannabis market entry strategies in regulated international markets, on an asset light basis.

The company will continue to evaluate opportunities to bring new and exciting products to consumers as it continues to realize its vision of becoming a global leader in branded cannabis products that deliver on its consumer promise of quality, safety and efficacy.

About Auxly Cannabis Group Inc.

Auxly is a leading Canadian cannabis company dedicated to bringing innovative, effective and high-quality cannabis products to the 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.

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