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Auxly Cannabis Delivers Second-Quarter Loss as It Prepares for the Launch of Derivatives

Sean Williams, The Motley Fool

Marijuana projects to be a big-money business, with various Wall Street pundits forecasting anywhere from $50 billion to $200 billion in annual worldwide sales in a decade. Growth like that is hard to ignore, which is why pot stocks garner so much attention. The big question, of course, is which cannabis stocks will stand out?

One of the more intriguing players in the group is Auxly Cannabis Group (OTC: CBWTF), which just so happened to report its second-quarter operating results on Friday, Aug. 16. While the company's quarterly net loss widened a bit from the year-ago quarter, excitement is building as Auxly prepares for marijuana legalization 2.0 in December.

A gloved processor using scissors to trim a cannabis flower.

Image source: Getty Images.

Auxly Cannabis Group Q2 results: The raw numbers

Metric Q2 2019 Q2 2018 Change
Net sales CA$2.76 million  CA$0 N/A
Net income CA$13.99 million CA$11.88 million (18%)
Earnings per share (CA$0.02) (CA$0.03) 33%

Data source: Auxly Cannabis Group. Data reported in Canadian dollars (CA$). 

As you can see from the figures above, Auxly didn't report any revenue from the year-ago period but generated 2.76 million Canadian dollars in sales in the second quarter. Most of this revenue came from its wholly owned research contract subsidiary KGK Sciences, which was responsible for CA$2.32 million in revenue. That's a 342% improvement over the sequential first quarter, although the company notes that contract revenue recognition can be lumpy from one quarter to the next.

The remainder of sales came from dried cannabis flower totaling CA$0.44 million, a 52% increase from the sequential first quarter. If you're wondering why dried marijuana flower sales aren't higher, the company has previously noted its intention to hold back product for derivative production (i.e. edibles, vapes, and concentrates), which is set to launch by mid-December.

Auxly's net loss of CA$13.99 million is modestly higher than the CA$11.88 million it lost in the year-ago period, albeit the company's net loss shrank to CA$0.02 per share from CA$0.03 per share. That has to do with Auxly having 125 million more shares outstanding now than in the year-ago quarter.

Rising expenses were attributed to Auxly's wider net loss, with rising employee headcount and higher depreciation and amortization pushing costs up.

A vape pen next to a vial of liquid and neatly arranged dried cannabis flower.

Image source: Getty Images.

What happened with Auxly Cannabis Group this quarter?

With the launch of derivative products just four months away, Auxly predominantly spent the second quarter getting its ducks in a row. Here are some of the biggest events you may have missed during and subsequent to the quarter:

  • The company continues to work on preparations for derivative production at its wholly owned Dosecann facility. Auxly plans to have vape pens, infused chocolates, chewable, oils and sprays, tablets, and capsules ready for sale by December 2019. The company is also working on expanding Dosecann's facility by 10,000 square feet to 52,000 square feet.
  • Auxly opened its first wholly owned Kolab retail store in Lloydminster, Saskatchewan on July 11. Although Auxly is predominantly focused on the growing, streaming, and processing side of the cannabis market, it does have a downstream presence with its wholly owned retail locations that it intends to capitalize on.
  • The company raised CA$123 million from a convertible debenture investment from tobacco giant Imperial Brands. In addition to improving its capital situation, Auxly will lean on Imperial Brands for its marketing and product-development expertise.
  • Auxly wound up harvesting 18 tons of hemp biomass that the company will process into cannabidiol (CBD) isolate. CBD is the cannabinoid that doesn't get users high and is best known for its perceived medical benefits.
A cannabis leaf lying atop a one hundred dollar bill, with Ben Franklin's eyes peering through the leaves.

Image source: Getty Images.

What management had to say

Even though Auxly's quarterly loss widened from the year-ago period, the company's management remains confident that Auxly is on the right path to benefit from the launch of higher-margin derivatives in four months' time. Here's what President Hugo Alves had to say about the quarter:

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.

Looking forward

The other big question is: What's next for Auxly Cannabis?

According to the press release, investors should be aware that the company's sales growth should be correlated with the launch of derivative products in December. This is a straightforward way of saying that sales may not improve much, if at all, in the sequential third quarter or much in the fourth quarter, with derivatives launching so late in the year. However, management has been clear that shareholders will appreciate Auxly's decision to lean toward higher-margin derivatives, rather than lower-margin dried flower.

The company will also continue to work closely with joint venture grow partner Sunens on the construction of its greenhouse facility. Construction is expected to be complete by December, with licensing for cultivation expected in early 2020, and cultivation beginning in the second quarter of 2020. Although Auxly has more than a dozen streaming cannabis deals, this joint venture with Sunens will directly help the company lower its per-gram costs, as well as boost output.

Investors will also see Auxly focused on getting its t's crossed and i's dotted with regard to its derivative product line. This means completing its Dosecann facility expansion and getting all production-line equipment in place for the December launch.

The cannabis industry is a marathon, not a sprint, and Auxly continues to take steps in the right direction.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Auxly Cannabis Group. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com