Zenabis Announces Third Quarter 2020 Financial Results

Q3 2020 net revenue from the Cannabis segment increased 61% to $19.0 million from $11.8 million in Q2 2020
Q3 2020 kilograms of cannabis sold increased 98% to 7,819 kg from Q2 2020
Q3 2020 Adjusted EBITDA of $3.5 million; third consecutive positive quarter
Q3 2020 consolidated net revenue of $23.7 million compared to $12.0 million in Q3 2019

VANCOUVER, BC, Nov. 13, 2020 /CNW/ – Zenabis Global Inc. (TSX: ZENA) (“Zenabis” or the “Company“) today announced its financial results for the third quarter ended September 30, 2020. All amounts, unless specified otherwise, are expressed in Canadian dollars.

Shai Altman, Chief Executive Officer of Zenabis, stated, “We are pleased to report that Zenabis continues to grow its cannabis revenue, with significant 61% quarter-over-quarter growth in this segment. This increase reflects the impact of new Cannabis 2.0 products launched in the quarter, growth in our international bulk channels, and continuing market share growth in the Canadian recreational market.

Adjusted EBITDA for the quarter was positive for the third consecutive quarter at $3.5 million, compared to $3.4 million in Q2 2020; the seasonal, $2.6 million decrease in the Propagation segment was offset by Adjusted EBITDA in the Cannabis segment increasing 141% or $2.2 million over Q2 2020 as a result of increased revenue, and a $450 thousand improvement in the Other segment as a result of cost containment. The Company continued to improve its balance sheet in the quarter with $7.6 million raised in September’s unit offering, with the proceeds used to repay debt and for the Company’s continuing growth. The Company expects revenue in the Cannabis segment to continue to grow by up to 10% in the fourth quarter of the year. Growth continues to be driven by increased consumer demand for, and distribution of, our products in the Canadian recreational channel resulting from a combination of our high product quality, competitive pricing, and growth in demand for our Cannabis 2.0 products. Based on this revenue estimate, Zenabis expects to record consolidated Adjusted EBITDA of $5 million to $7 million in Q4 2020.”

 Third Quarter 2020 Highlighted Financial Results

  • Cannabis segment net revenue increased 61.2% to $19.0 million from $11.8 million in Q2 2020;
  • Propagation segment net revenue increased to $4.7 million from $4.4 million in Q3 2019, the relevant comparator given seasonality in this segment, while falling from $15.6 million in Q2 2020, in line with historical segment seasonality;
  • Resulting consolidated net revenue for Q3 2020 totaled $23.7 million, compared to $27.4 million in the prior quarter;
  • Gross Margin before fair value changes to biological assets and inventories for the cannabis segment was $8.9 million or 46.9% of net revenue in Q3 2020, compared to $5.6 million or 47.4% of net revenue in Q2 2020, an increase of 59%;
  • Net revenue per gram of cannabis sold in the quarter was $2.43 compared to $2.98 in the previous quarter, reflecting the impact of significant growth in the Company’s wholesale bulk channel. Wholesale bulk sales are typically at lower selling prices than consumer sales but generate higher margins due to lower fulfillment and packaging costs;
  • Cost of goods sold per gram of cannabis sold in the quarter was $1.29 compared to $1.57 in the previous quarter;
  • Cost to internally produce a gram of cannabis sold was $0.76 compared to $0.70 last quarter;
  • Consolidated Adjusted EBITDA for the quarter totaled $3.5 million, compared to $3.4 million last quarter, reflecting a substantial improvement in the Cannabis segment due to increasing revenue, offset by a seasonal decrease in the Propagation segment. Consolidated Adjusted EBITDA was marginally lower than the Company’s guidance for the quarter as a result of slightly higher operating costs than expected to support the Company’s continuing growth; and
  • Consolidated net loss for Q3 2020 totaled $17.0 million or $0.03 per share, fully diluted, compared to $15.7 million or $0.04 per share, fully diluted, in Q2 2020. This consolidated net loss included a significant number of non-recurring and non-cash components, including:
One-time ChargesQ3 | 2020Explanation
Impairment of inventory and write-off of materials and supplies$2.1 million Impairment of certain inventory items where carrying value is below net realizable value as well as write-off of some obsolete materials and supplies
Impairment of assets held for sale and loss on sale of assets$2.1 million Write down of held-for-sale property to current market values and losses realized on sales of used equipment in the normal course of operations
Loss on remeasurement of royalty liability and on revaluation of embedded derivative asset$5.5 million Remeasurement of royalty liability due to not achieving “Trigger Payments” under Secured Debentures
Non-Cash Components of Certain Expenses
Net change in fair value of inventory sold less unrealized gain on changes in fair value of biological assets$5.2 million Prior recognition of inventory in biological assets was at prior, higher cannabis prices, resulting in a significant charge at the final point of sale, which was not offset by gains on the fair value of biological assets in this quarter
Non-cash component of interest expense$3.0 million Implied interest assigned to prepaid supply agreements, Secured Debentures and other indebtedness (non-cash charge)
  • Eric Rasmussen, Chief Financial Officer of Zenabis, added, “Significant one-time charges related to financial transactions as well as recognition of changes in the marketable price of cannabis and certain goods led to a net loss in Q3 2020. However, with Consolidated Adjusted EBITDA greater than cash interest expenses for the quarter, and strong forecast growth in cashflow from operations, the Company is now in a significantly stronger financial position.”

Third Quarter Developments

  • The Company entered into a purchase agreement with Canveda Inc. to supply a minimum of 300 kg and a maximum of 1,000 kg of cannabis flower per quarter; and
  • The Company completed a $7.6 million equity marketed offering in September 2020, with proceeds primarily used to prepay and repay certain near-maturity debt.

 Selected Financial Data

The following selected financial data with respect to the Company’s financial condition and results of operations have been derived from the Consolidated Financial Statements of the Company for the three months ended September 30, 2020 and June 30, 2020, prepared in accordance with IFRS. The selected financial data should be read in conjunction with the Consolidated Financial Statements.

Key Quarterly Financial and Operating ResultsQ3 | 2020Q2 | 2020%
Change
Financial Results – Cannabis
Cannabis net revenue$19,017,746$11,796,17761
Consumer net revenue12,061,9088,486,62842
Wholesale bulk revenue6,882,2593,228,351113
Medical and other revenue73,57981,198(9)
Cost of sales and inventory production costs expensed(10,096,331)(6,202,815)63
Gross margin before FV adjustments on cannabis net revenue$8,921,415$5,593,36260
Gross margin before FV adjustments on cannabis net revenue (%)4747(1)
Balance Sheet
Total assets$296,240,901$303,766,103(2)
Property, plant and equipment191,694,670194,052,172(1)
Cannabis inventory and biological assets65,274,86268,034,580(4)
Total non-current liabilities$110,591,597$107,202,2083
Operational Results – Cannabis (i)
Grams of cannabis sold7,819,3723,954,38898
Net revenue per gram of cannabis sold$2.43$2.98(18)
Cost of sales per gram of cannabis sold1.291.57(18)
Cost to internally produce a gram of cannabis sold$0.76$0.708
(i) Refer to the “Non-GAAP Financial Measures” section for reconciliation to the IFRS equivalent.

Summary Third Quarter 2020 Financial Results

Cannabis Segment

Net revenue increased to $19,017,746 and $43,415,039 during the three and nine months ended Q3 2020, respectively, compared to $7,086,258 and $18,437,092 during the respective periods in the prior year due to increased sales to provincial customers and the continued shipments of bulk cannabis to other LPs. Net revenue during the three months ended September 30, 2020 increased by 61% from $11,796,177 during the three months ended June 30, 2020 as a result of increased recreation sales volume and increase bulk sales in the quarter.

Cost of sales and inventory production costs expensed increased to $10,096,331 and $23,894,234 during the three and nine months ended September 30, 2020, respectively, compared to $3,462,998 and $9,130,527 during the respective periods in the prior year due to increased sales. Cost of sales and inventory production costs expensed during the three months ended September 30, 2020 increased by 63% from $6,202,815 during the three months ended June 30, 2020 due to higher sales.

Operating income for the segment decreased to $(7,043,047) and increased to $953,438, respectively for the three and nine months ending September 30, 2020, compared to operating losses of $3,049,147 and $6,433,669 for the corresponding periods of 2019. The decrease for the three months ended is due to certain one-time costs incurred at the facilities and non-cash, the significant improvement in operating income for the nine months ended is the result of higher sales volumes and cost cutting measures implemented by the Company.

     Propagation Segment

Net revenue, excluding inter-segment amounts, increased to $4,704,636 and decreased to $27,577,412 during the three and nine months ended September 30, 2020, respectively, compared to $4,493,893 and $29,078,148 during the respective periods in the prior year due to the effects of the COVID-19 pandemic, resulting in changing trends in the demand for flower and vegetable products.

The remaining gross margin components, being cost of sales and inventory production costs expensed, realized fair value amounts included in inventory sold, and unrealized gain on changes in fair value of biological assets should be analyzed together for the Propagation segment due to the quick turn-over of plants in the Propagation segment and the short growing period. These component totals increased to $3,327,167 and decreased to $19,272,754 during the three and nine months ended September 30, 2020, respectively, compared to $3,020,732 and $21,300,943 during the respective periods in the prior year due to changes trends in demand and sales as a result of COVID-19.

Operating income for the segment decreased to $445,645 and increased to $6,710,269, respectively, for the three and nine months ended September 30, 2020 compared to $709,350 and $4,708,702 for the corresponding periods of 2019. The improvement in operating income is the combined result of improved margins realized in 2020 in comparison to 2019 as well as operational cost reductions.

Outlook

Considering the factors described below and based on quarter-to-date (unaudited) results, Zenabis anticipates recording consolidated net revenue in Q4 2020 in the range of $25-29 million, comprised of $19-21 million for the Cannabis segment and $6-8 million for the Propagation segment. The Company anticipates recording consolidated Adjusted EBITDA in the range of $5-7 million for Q4 2020.

Operational outlook

Zenabis believes that the Canadian recreational market is positioned for continued growth over the remainder of 2020 and through 2021 as a result of additional retail store openings planned for Ontario, British Columbia and other provinces. Additionally, the Company also expects the increasing availability of edible and derivative products to significantly expand the Canadian adult-use recreational market.

Market ComponentStrategy and Outlook
Namaste – Premium recreational cannabisZenabis has focused on bringing new, in-demand genetic strains to market, with a focus on higher-THC products, while maintaining its premium product quality. The Company currently has national distribution for this product line and strong market acceptance, and as a result the Company expects revenue to grow with market expansion.
Re-Up – Low-cost recreational cannabisZenabis has significantly expanded its low-cost recreational cannabis offering, including with the introduction of a 28 g format, resulting in strong growth in Re-Up revenue. The Company expects revenue to grow faster than market expansion in this category, as demand outstripped availability of packaged cannabis in Q3 2020.
Vaporizing cartridgesZenabis has initially focused on vaporizing cartridges for PAX Era and 510-threaded vaporizing devices. Zenabis expects significant growth in revenue from these product formats, as prior revenue was constrained by a lack of available distillate.
Cannabis-infused gummiesZenabis expects to be able to launch its line of cannabis-infused gummies in late Q4 2020 or during Q1 2020 upon completion of all due diligence and quality assessments of the third-party manufacturer.

Zenabis continues to focus on achieving and maintaining operational excellence in 2020, and will maintain this focus through 2021. The Company has implemented various initiatives that have resulted in positive Adjusted EBITDA, significant growth in net revenue, expansion of overall market share, strengthening brand, and growth in consumer demand. To continue these positive advances, Zenabis maintains a consistent and active review of our operational processes, focusing on continually driving down costs, optimizing procedures and expenditures in our supply chain, and continuing to work closely with our customers to ensure our production is optimized to the market demands.

Financial outlook

Over the course of 2020, the Company has reduced total debt outstanding by more than $50 million through debt conversions and early repayments, while at the same time extending the majority of its remaining debt outstanding. The various steps taken in relation to the Company’s debt has significantly reduced near-term maturities and maintained working capital availability through the ramp-up of Adjusted EBITDA. The below table provides current principal outstanding as of this date, together with estimated quarterly interest payments:

Debt ComponentPrincipal Outstanding ($ million)Maturity DateInterest Rate / Quarterly Interest Payment (thousand)
BMO Financing – Bevo Farms Ltd.42.5January 21, 2022Floating / $340
Secured Debentures51.4March 31, 202514.0% / $1,800
New Secured Debentures7.5December 31, 202014.0% / $261
RDC Mortgage2.0August 31, 20276.0% / $30
Unsecured Convertible Debentures3.8September 27, 20216.0% / $58
Secured Convertible Note0.3March 31, 202111.0% / $8
Unsecured Convertible Note9.1June 30, 20216.0% / $133
Total116.6$2,630

Consolidated Adjusted EBITDA for both Q3 2020, and for the forecast Q4 2020 period, are significantly greater than forecast ongoing interest expense.

Non-GAAP Financial Measures

ADJUSTED EBITDA

Adjusted EBITDA is not a recognized, defined, or standardized measure under IFRS and may not be compared to similar measures presented by other issuers. Adjusted EBITDA is a metric used by management, calculated as net loss before fair value adjustment to inventory and biological assets; impairment of inventory; write-off of materials and supplies inventory; restructuring costs; share-based compensation; depreciation and amortization; impairment of assets held for sale; ZenPharm pre-commercialization costs; loss on revaluation of embedded derivative asset; loss (gain) on revaluation of derivative liabilities; finance and investment (income) expense; interest expense; (gain) loss on sale of property, plant and equipment; loss due to an event; insurance proceeds; loss on deconsolidation of subsidiary; government subsidies; loss on early conversion of debt; loss on extinguishment of debt; loss on remeasurement of royalty liability; other expense; current income tax expense; and deferred income tax (recovery) expense. Management believes adjusted EBITDA is a useful financial metric to assess the Company’s operating performance before the impact of non-cash items and acquisition related activities. The following is a reconciliation of adjusted EBITDA to net loss, being the closest GAAP financial measure, for the periods outlined:

Three months ended
Q3 2020Q2 2020 (i)Q3 | 2019Q3 2018
Net loss$(16,975,019)$(15,781,932)$(5,831,279)$(2,141,616)
Changes in fair value of inventory sold and other
charges19,114,86319,252,0576,760,956748,576
Unrealized gain on changes in fair value of
biological assets(13,947,009)(24,222,690)(19,712,364)(2,330,053)
Impairment of inventory250,314508,759
Write-off of materials and supplies inventory1,851,536
Restructuring costs483,890
Share-based compensation1,266,9861,012,8982,004,544662,205
Depreciation and amortization911,0151,490,6802,726,639299,808
Impairment of assets held for sale1,571,026
ZenPharm pre-commercialization costs306,118362,188
Loss on revaluation of embedded derivative asset2,070,19394,256
Gain on revaluation of derivative liabilities(497,789)
Finance and investment (income) expense(9,695)(7,095)173,986(277,565)
Interest expense5,850,3968,009,6764,689,12469,617
Loss (gain) on sale of assets504,658(482,067)21,675(2,850)
Loss due to an event2,33020,1671,186,692
Insurance proceeds(445,268)(25,000)(492,995)
Loss on deconsolidation of subsidiary
Government subsidies(1,963,465)(3,319,621)
Loss on early conversion of debt4,331,680
Loss on modification and extinguishment of debt10,653,156
Loss on remeasurement of royalty liability3,440,868
Other (income) expense(799,303)167,745(61,994)
Current income tax expense359,6421,102,590342,758
Deferred income tax recovery103,391(214,083)(511,145)
Adjusted EBITDA income (loss)$3,463,577$3,437,254$(9,201,192)$(2,971,878)
(i)Figures have been updated to reflect current period presentation.

About Zenabis

Zenabis is a significant Canadian licensed cultivator of medical and recreational cannabis, and a propagator and cultivator of floral and vegetable products. Zenabis employs staff coast-to-coast, across facilities in Atholville, New Brunswick; Aldergrove, Pitt Meadows and Langley, British Columbia; and Stellarton, Nova Scotia. Zenabis currently has 111,200 kg of licensed cannabis cultivation space across four licensed facilities. Zenabis has 3.5 million square feet of total facility space dedicated to a mix of cannabis production and cultivation and its propagation and floral business.

Zenabis expects Zenabis Stellarton, as Zenabis’ centre of excellence for Cannabis 2.0 products, to join Zenabis Atholville and Zenabis Langley in steady state production by the end of 2020. The Zenabis brand name is used in the cannabis medical market, the NamasteBlazery, and Re-Up brand names are used in the cannabis adult-use recreational market.

Forward Looking Information

This news release contains statements that may constitute “forward-looking information” within the meaning of applicable Canadian securities legislation. Forward-looking information may include, among others, statements regarding the future plans, costs, objectives or performance of Zenabis, or the assumptions underlying any of the foregoing. In this news release, words such as “may”, “would”, “could”, “will”, “likely”, “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate” and similar words and the negative form thereof are used to identify forward-looking statements. In this news release, forward-looking statements include, but are not limited to: the Company expects revenue in the Cannabis segment to continue to grow by up to 10% in the fourth quarter of the year as consumer demand and distribution for its products in its Canadian recreational market continues to increase due to our high quality and competitive pricing, as well as continuing growth of revenue of the Company’s Cannabis 2.0 products; based on this revenue estimate, Zenabis expects to record consolidated Adjusted EBITDA of $5 million to $7 million in Q4 2020; Zenabis believes that the Canadian recreational market is positioned for continued growth in 2020 and 2021, with additional retail store openings planned for Ontario, British Columbia and other provinces; additionally, the increasing availability of edible and derivative products is also expected to significantly expand the Canadian adult-use recreational market; the Company is currently re-evaluating its strategy with respect to beverages, which it will execute in due course; additionally, Zenabis expects to be able to launch its line of cannabis-infused gummies in late Q4 2020 or during Q1 2021, upon completion of all due diligence and quality assessments of the identified third-party manufacturer; the Company’s ability to continue in the normal course of operations is dependent on its ability to extend its debt maturing in Fiscal 2020 and Fiscal 2021; while the Company has been successful in renegotiating its debt in the past, there is no assurance that it will be successful in doing so in the future; future impacts could include an impact on our ability to maintain operations, to obtain debt and equity financing, impairment of investments, impairments in the value of our long-lived assets, or potential future decreases in revenue or the profitability of our ongoing operations; Zenabis believes it is well-positioned to remain competitive, producing large-scale and high-quality products at a relatively low cost; considering the factors described above and based on quarter-to-date (unaudited) results, Zenabis anticipates recording consolidated net revenue in Q4 2020 in the range of $25 million to $29 million, comprised of $19 million to $21 million for the Cannabis segment and $6 million to $8 million for the Propagation segment; and, the Company anticipates consolidated Adjusted EBITDA in the range of $5 million to $7 million for Q4 2020.

Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether, or the times at or by which, such future performance will be achieved. No assurance can be given that any events anticipated by the forward-looking information will transpire or occur. Forward-looking information is based on information available at the time and/or management’s good-faith belief with respect to future events and are subject to known or unknown risks, uncertainties, assumptions and other unpredictable factors, many of which are beyond Zenabis’ control. These risks, uncertainties and assumptions include, but are not limited to, those described in the shelf prospectus dated April 9, 2019 as supplemented by a prospectus supplement dated September 18, 2020 and the annual information form dated March 30, 2020, copies of which are available on SEDAR at

www.sedar.com

and could cause actual events or results to differ materially from those projected in any forward-looking statements. Furthermore, any forward-looking information with respect to available space for cannabis production is subject to the qualification that management of Zenabis may decide not to use all available space for cannabis production, and the assumptions that any construction or conversion would not be cost prohibitive, required permits will be obtained and the labour, materials and equipment necessary to complete such construction or conversion will be available. Forward-looking statements or information involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements or information contained in this news release. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this news release. Zenabis does not intend, nor undertake any obligation, to update or revise any forward-looking information contained in this news release to reflect subsequent information, events or circumstances or otherwise, except if required by applicable laws.

For more information, visit: https://www.zenabis.com.

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