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Auxly Cannabis Group's First-Quarter Loss Widens as It Focuses on Marijuana Derivatives

Whether you realize it or not, marijuana might be a once-in-a-generation growth opportunity. There aren't too many industries that can rightly say their global sales will grow fourfold to sixfold over the next decade, which is what makes the pot industry so exciting.

At the heart of this excitement is Auxly Cannabis Group (NASDAQOTH: CBWTF), a cannabis streaming company and cultivation farm operator that just so happens to have reported its fiscal first-quarter results on Monday, May 27. Although the company's net loss widened from the prior-year period, it remains laser-focused on the expansion of marijuana derivatives later this year.

A gloved processor with scissors trimming a cannabis flower.
A gloved processor with scissors trimming a cannabis flower.

Image source: Getty Images.

Auxly Cannabis Group Q1 results: The raw numbers

Metric

Q1 2019

Q1 2018

Percentage Change

Net sales

CA$817,000

CA$0

N/A

Net loss

CA$13.8 million

CA$10.5 million

(31%)

Earnings per share

(CA$0.02)

(CA$0.03)

33%

Data source: Auxly Cannabis Group. All data expressed in Canadian dollars.

As you'll note, Auxly had no revenue in the year-ago period, meaning the 817,000 Canadian dollars it logged in sales during the first quarter of 2019 were "infinitely" better than this time last year. In total, CA$525,000 in sales were derived from deferred service contracts, courtesy of KGK Sciences, which was acquired in August 2018. The remaining CA$292,000 came from Auxly's first sales of cannabis flower. The report notes that most dried flower is being held back for the production of derivatives (i.e., edibles, topicals, and concentrates), which Health Canada expects to legalize by October 2019.

Meanwhile, net loss climbed 31% to CA$13.8 million, although net loss per share declined to $0.02 from a loss of $0.03 per share in the prior-year period as the result of having more share outstanding in the recently ended quarter. The primary culprits of this larger loss were a CA$3.2 million increase in selling, general, and administrative expenses; a CA$1.3 million increase in interest expenses associated with the issue of convertible debentures; and a $1.8 million impairment taken on its now-severed joint venture with FSD Pharma (NASDAQOTH: FSDDF).

A dog tag with the word edibles written on it, along with a cannabis leaf, laid atop cookies and brownies.
A dog tag with the word edibles written on it, along with a cannabis leaf, laid atop cookies and brownies.

Image source: Getty Images.

What happened with Auxly Cannabis Group this quarter?

As evidenced by the CA$817,000 in total sales, the first quarter, ending March 31, 2019, was predominantly spent advancing projects. Here are some of the most notable highlights during the quarter.

  • The biggest achievement has to be Auxly's first sale of dried cannabis flower, even if it only totaled CA$292,000. As noted by the company, dried cannabis flower sales have been curtailed, because the company prefers to use this flower to develop derivative cannabis products in anticipation of Health Canada legalizing new consumption options by October. These derivative products generally have juicier margins than dried flower.

  • Auxly continued to work with its joint venture partner Sunens on the construction of its greenhouse facility, which is expected to be complete by December 2019. Once fully operational, this facility should be capable of more than 100,000 kilos of annual output.

  • The company made progress at wholly owned subsidiary Dosecann with regard to product research and development, formulation, and the manufacturing of derivative products. Auxly points out that headway has been made in creating cannabis resins from dried flower and in the development of edible product formulations.

  • As noted earlier, Auxly also announced the termination of a joint venture with FSD Pharma in February. In mid-January, Auxly provided notice to FSD of certain contract breaches, which FSD Pharma failed to remedy, leading to the dissolution of the joint venture weeks later.

An up-close view of a cannabis concentrate.
An up-close view of a cannabis concentrate.

Image source: Getty Images.

What management had to say

Despite a widening net loss, CEO Chuck Rifici is happy with the progress his company has made, and believes it's well-positioned to thrive once derivative products are legalized. Said Rifici:

In the first quarter of 2019, we made significant progress toward our goals for the year: We advanced product development at Dosecann, made progress toward the construction of key infrastructure, advanced licensing and sales at Robinsons, and had our first sales of dried cannabis flower to the market. We are well on track to have our initial range of derivative cannabis products completed and available for sale into the upcoming legal market later this year. With the combination of our cultivation supply, R&D, product development and manufacturing capabilities, and our relentless focus on science and innovation, we look forward to bringing the best cannabis products, brands and experiences to the medical, wellness, and adult-use markets.

A person holding up a puzzle piece with a large question mark drawn on it.
A person holding up a puzzle piece with a large question mark drawn on it.

Image source: Getty Images.

Looking forward

The big question, of course, is what's next for Auxly Cannabis Group?

The big target right now is the expected legalization of derivative products in October 2019. Auxly is going all in on alternative consumption options and betting that the higher margins associated with these derivatives will lead to healthy profits in the years to come. The company's press release makes specific mention that "material revenue generation will coincide with the legalization and regulatory approvals for derivative cannabis products."

Beyond derivatives, Auxly will remain focused on helping its joint venture partner Sunens complete its cultivation facility, as well as on building awareness for its marijuana brands.

Additionally, Auxly will be looking to increase its opportunity to sell cannabidiol (CBD) -- the nonpsychoactive cannabinoid best known for its perceived medical benefits -- in international markets. Auxly owns a majority stake in Inverell and a 100% stake in Inverell's sister company Zeratol, both of which have hemp-growing operations in Uruguay. Hemp is rich in CBD, making it perfect for extraction purposes.

In other words, Auxly is revving its engine at the starting line, and the real race looks to begin by October.

More From The Motley Fool

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.

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