TORONTO - Auxly Cannabis Group Inc. (TSX.V - XLY) (OTCQX: CBWTF) ('Auxly' or the 'Company') today released its financial results for the three and nine months ended September 30, 2019.

These filings and additional information regarding Auxly are available for review on SEDAR at www.sedar.com.

Q3 2019 Highlights and Subsequent Events

Auxly closed a $123.0 million investment and R&D partnership with Imperial Brands

Sunens closed syndicated credit facilities and received debt financing in the aggregate amount of $84.0 million

Auxly announced the retirement of approximately 97% of the remaining 6% unsecured convertible debentures through the repayment of approximately $80.0 million of principal and the conversion of approximately $16.0 million into commons shares

Auxly signed a brokerage agreement with Kindred Partners Inc. to act as Auxly's sales agent for its adult-use cannabis products in Canada

Dosecann successfully submitted New Product Notifications to Health Canada for a total of 83 new derivative product formats

Kolab and Dosecann both received their amendments to their sales licences, authorizing each to sell cannabis extract, edible and topical products to the Canadian market as soon as legally permitted

Officially opened the Lloydminster store on July 11, 2019; Kolab is now able to commence local cannabis sales and province-wide e-commerce in Saskatchewan

Hugo Alves was appointed the Company's new CEO, replacing Chuck Rifici, who continues to serve as Chairman of Auxly's Board of Directors

Hugo Alves, CEO of Auxly, commented: 'This has been an incredible quarter for Auxly, having secured a strategic investment from Imperial Brands, closed the $84 million credit facility for Sunens and successfully repaid the majority of our outstanding Debentures, we are well capitalized moving into the new year. We have been working diligently on the highly anticipated rollout of our cannabis 2.0 product portfolio and are counting down the days until our branded, science-backed derivative cannabis products are in the hands of Canadian consumers at the end of this year. We are on track for executing on our strategic business objectives and positioning Auxly to be a leader in the derivative products market.'

Revenue

For the three and nine months ended September 30, 2019, Auxly recognized $1.5 million and $4.3 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 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.

Auxly recognized $0.1 million and $0.9 million of revenues from sales of dry cannabis products for the three and nine months ended September 30, 2019, respectively. Dry cannabis flower sales have been curtailed as a result of the Company's decision to allocate the bulk of its dried flower to the development and manufacture of derivative cannabis products in anticipation of Cannabis 2.0 sales mid-December 2019.

Gross Profit

Auxly realized a gross loss of $1.2 million for the three months ended September 30, 2019 and $1.1 million for the nine months ended September 30, 2019 following fair value adjustments. The gross loss for the three months ended September 30, 2019 is comprised of KGK and cannabis product revenues less expenses of $0.1 million, net of a $1.1 million impairment of inventory associated with final Inverell biomass product qualification and grading, a $0.1 million realized fair value change on other inventories, and a $0.1 million unrealized fair value loss on biological asset transformation. Gross loss for the nine months ended September 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, net of a $1.3 million fair value loss was recognized for an inventory net realizable value adjustment and a $0.7 million unrealized fair value loss on biological asset transformation.

Other incomes

Total other losses were $4.9 million for the three months ended September 30, 2019 and $2.4 million for the nine months ended September 30, 2019. For the three and nine months ended September 30, 2019, other losses are comprised of a fair value loss of $5.8 million and $6.2 million, respectively, from changes in promissory notes, investments, and securities held, and interest income of $0.9 million and $3.8 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 benefits, 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 nine months ended September 30, 2019, wages and benefits were $4.8 million and $13.1 million, respectively. This reflects an increase of $2.6 million and $7.9 million over the same period in 2018, primarily due to workforce increases in both 2018 and 2019. The increases were to support expansion and growth activities as a direct result of workforces added on acquisition of four entities and the corporate office. During the three months ended September 30, 2019, the Company increased workforce specifically related to product formulation and development, sales and marketing in order to prepare for the Cannabis 2.0 sales.

Office and administrative expenses of $2.9 million in the third quarter of 2019 increased by $2.0 million and $2.8 million to $6.1 million year to date compared to the same periods in 2018. The increase in expense is comprised of approximately $1.7 million associated with product development, R&D and testing to prepare for Cannabis 2.0 sales with the remainder related to the implementation of an organization wide ERP system.

Auxly's professional fees were $2.4 million and $5.3 million for the three and nine months ended September 30, 2019, respectively, as compared to $2.6 million and $5.3 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 third quarter three-month period. During the third quarter of 2019, professional fees were primarily attributable to legal expenses, regulatory matters, ongoing legal proceedings and consulting fees associated with construction and product development. Year to date professional fees also reflect incremental recruiting fees in conjunction with hiring and preparedness for Cannabis 2.0.

Business development fees of $1.0 million and $3.1 million for the three and nine months ended September 30, 2019, were lower by $0.2 million and $2.7 million respectively, as compared to the same periods in 2018. Business development activities in 2019 were lower when compared to activities in 2018 associated with the acquisitions of Inverell, Dosecann, Robinsons, and KGK.

For the three and nine months ended September 30, 2019, share-based compensation was $5.4 million and $11.1 million, compared to the $8.9 million and $14.5 million over the same respective periods in 2018. During the three and nine months ended September 30, 2019, 825,000 and 7,415,000 options were granted, respectively, with 6,080,000 and 17,083,468 options being granted over the same respective periods in 2018. Further, during the three months ended September 30, 2019, 3,659,837 common shares were issued to non-executive employees of the Company as compensation, as part of their employment agreements related to services performed in 2019. The fair value of the common shares issued for compensation was $3.3 million and was included in share-based payments.

Other Expenses

Depreciation and amortization expenses were $1.5 million in the third quarter of 2019 and $4.0 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 the Company's property, plant and equipment.

Interest expenses were $2.5 million for the three-month period ended September 30, 2019, a decrease of $0.3 million over the same period in 2018, and $8.0 million for the nine-month period ended September 30, 2019, an increase of $0.2 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.

An impairment charge of $1.8 million related to the intangible value of the FSD Pharma Inc. ('FSD') streaming agreement was taken during the first quarter as a result of previously announced contract breaches. The Company is currently evaluating next steps with respect to such contractual breaches and retains all of its rights at law or in equity with respect thereto.

Losses on settlement of financial assets and liabilities for the three and nine months ended September 30, 2019, primarily relate to credit loss provisions of $0.7 million and final expenditures of approximately $0.5 million associated with the FSD project.

Auxly is exposed to foreign exchange fluctuations from the U.S. dollar to CAD dollar exchange rate. During the quarter, foreign exchange losses were nominal and for the nine months ended September 30, 2019, foreign exchange losses were $1.0 million as compared to $0.4 million over the same period in 2018.

Net Losses

Net losses attributable to shareholders were $17.3 million with a net loss of $0.03 per Share on a basic and diluted basis in the third quarter of 2019, and $44.9 million with a net loss of $0.08 per Share on a basic and diluted basis year to date. This compares to a net loss of $9.6 million and $0.02 per Share on a basic and diluted basis and $31.7 million and $0.07 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.

Outlook

Auxly has made considerable progress this quarter and over the past 18 months, which has positioned the Company to be ready to enter the Cannabis 2.0 market on the first day sales are permitted, through a broad portfolio of branded cannabis products in Canada. The Company continues to secure listings for its derivative products with the provincial boards and expects to be able to sell products in all provinces except Quebec (where the regulations for Cannabis 2.0 products are more restrictive) beginning December 16, 2019. Auxly anticipates that revenues from the sale of such derivative cannabis products will commence in December 2019, when provinces begin accepting orders from licenced producers, with revenues increasing throughout 2020 as new consumers are attracted to the new product formats, existing consumers transition from dried cannabis to derivative cannabis products and as provincial retail infrastructure continues to develop and expand. Auxly will update priorities for 2020 along with the Company's results for 2019 in the first quarter of 2020.

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.

Contact:

Tel: 1.833.695.2414

Email: IR@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 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 of its 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 of future Company 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.

(C) 2019 Electronic News Publishing, source ENP Newswire