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
Charges
|
|
Q3 | 2020
|
|
Explanation
|
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 Results
|
Q3 | 2020
|
Q2 | 2020
|
%
Change
|
Financial Results
- Cannabis
|
|
|
|
Cannabis net
revenue
|
$
|
19,017,746
|
$
|
11,796,177
|
61
|
Consumer net
revenue
|
12,061,908
|
8,486,628
|
42
|
Wholesale bulk
revenue
|
6,882,259
|
3,228,351
|
113
|
Medical and other
revenue
|
73,579
|
81,198
|
(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
|
$
|
5,593,362
|
60
|
Gross margin before
FV adjustments on cannabis net revenue (%)
|
47
|
47
|
(1)
|
|
|
|
|
Balance
Sheet
|
|
|
|
Total
assets
|
$
|
296,240,901
|
$
|
303,766,103
|
(2)
|
Property, plant and
equipment
|
191,694,670
|
194,052,172
|
(1)
|
Cannabis inventory
and biological assets
|
65,274,862
|
68,034,580
|
(4)
|
Total non-current
liabilities
|
$
|
110,591,597
|
$
|
107,202,208
|
3
|
|
|
|
|
Operational
Results - Cannabis (i)
|
|
|
|
Grams of cannabis
sold
|
7,819,372
|
3,954,388
|
98
|
Net revenue per gram
of cannabis sold
|
$
|
2.43
|
$
|
2.98
|
(18)
|
Cost of sales per
gram of cannabis sold
|
1.29
|
1.57
|
(18)
|
Cost to internally
produce a gram of cannabis sold
|
$
|
0.76
|
$
|
0.70
|
8
|
|
|
(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
Component
|
Strategy and
Outlook
|
|
|
Namaste – Premium
recreational cannabis
|
Zenabis 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 cannabis
|
Zenabis 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
cartridges
|
Zenabis 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
gummies
|
Zenabis 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 $50 million
through debt conversions and early repayments, while at the same
time extending the majority of its remaining debt outstanding. The
various steps taken in relation to the Company's debt has
significantly reduced near-term maturities and maintained working
capital availability through the ramp-up of Adjusted EBITDA. The
below table provides current principal outstanding as of this date,
together with estimated quarterly interest payments:
Debt
Component
|
Principal
Outstanding ($ million)
|
Maturity
Date
|
Interest Rate /
Quarterly Interest Payment (thousand)
|
|
|
|
|
BMO Financing – Bevo
Farms Ltd.
|
42.5
|
January 21,
2022
|
Floating /
$340
|
Secured
Debentures
|
51.4
|
March 31,
2025
|
14.0% /
$1,800
|
New Secured
Debentures
|
7.5
|
December 31,
2020
|
14.0% /
$261
|
RDC
Mortgage
|
2.0
|
August 31,
2027
|
6.0% /
$30
|
Unsecured Convertible
Debentures
|
3.8
|
September 27,
2021
|
6.0% /
$58
|
Secured Convertible
Note
|
0.3
|
March 31,
2021
|
11.0% /
$8
|
Unsecured Convertible
Note
|
9.1
|
June 30,
2021
|
6.0% /
$133
|
Total
|
116.6
|
|
$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 |
2020
|
Q2 |
2020 (i)
|
Q3 | 2019
|
Q3 |
2018
|
Net loss
|
$
|
(16,975,019)
|
$
|
(15,781,932)
|
$
|
(5,831,279)
|
$
|
(2,141,616)
|
Changes in fair value
of inventory sold and other
|
|
|
|
|
charges
|
19,114,863
|
19,252,057
|
6,760,956
|
748,576
|
Unrealized gain on
changes in fair value of
|
|
|
|
|
biological
assets
|
(13,947,009)
|
(24,222,690)
|
(19,712,364)
|
(2,330,053)
|
Impairment of
inventory
|
250,314
|
508,759
|
—
|
—
|
Write-off of
materials and supplies inventory
|
1,851,536
|
—
|
—
|
—
|
Restructuring
costs
|
—
|
483,890
|
—
|
—
|
Share-based
compensation
|
1,266,986
|
1,012,898
|
2,004,544
|
662,205
|
Depreciation and
amortization
|
911,015
|
1,490,680
|
2,726,639
|
299,808
|
Impairment of assets
held for sale
|
1,571,026
|
—
|
—
|
—
|
ZenPharm
pre-commercialization costs
|
306,118
|
362,188
|
—
|
—
|
Loss on revaluation
of embedded derivative asset
|
2,070,193
|
94,256
|
—
|
—
|
Gain on revaluation
of derivative liabilities
|
—
|
—
|
(497,789)
|
—
|
Finance and
investment (income) expense
|
(9,695)
|
(7,095)
|
173,986
|
(277,565)
|
Interest
expense
|
5,850,396
|
8,009,676
|
4,689,124
|
69,617
|
Loss (gain) on sale
of assets
|
504,658
|
(482,067)
|
21,675
|
(2,850)
|
Loss due to an
event
|
2,330
|
20,167
|
1,186,692
|
—
|
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 debt
|
—
|
4,331,680
|
—
|
—
|
Loss on modification
and extinguishment of debt
|
—
|
10,653,156
|
—
|
—
|
Loss on remeasurement
of royalty liability
|
3,440,868
|
|
|
|
Other (income)
expense
|
(799,303)
|
167,745
|
(61,994)
|
—
|
Current income tax
expense
|
359,642
|
1,102,590
|
342,758
|
—
|
Deferred income tax
recovery
|
103,391
|
(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
Namaste, Blazery, 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.
SOURCE Zenabis Global Inc.