Zenabis Announces First Quarter 2020 Financial Results

Q1 2020 Adjusted EBITDA of $2.3 million compares to an EBITDA loss of $10.4 million in the prior quarter
Q1 2020 net cannabis revenue increased 18% to $12.6 million from $10.6 million in Q4 2019
Q1 2020 gross margin on cannabis net revenue of 40% compared to 32% in Q4 2019
Q1 2020 consolidated gross revenue increased 10% to $22.4 million from $20.3 million in Q4 2019

VANCOUVER, May 19, 2020 /CNW/ - Zenabis Global Inc. (TSX:ZENA) ("Zenabis" or the "Company") today announced its financial results for the first quarter ended March 31, 2020. All amounts, unless specified otherwise, are expressed in Canadian dollars.

Kevin Coft, Chief Executive Officer of Zenabis, stated, "we are pleased to announce that the transformation of Zenabis continues with the company posting its first ever EBITDA positive quarter.  Revenue in the cannabis segment continues to grow and this growth is expected to continue during the balance of 2020 and beyond as the company continues to grow its provincial distribution penetration and expands its presence in international markets.  This continued growth, together with the cost reduction initiatives implemented in the quarter, have enabled Zenabis to achieve this milestone.  Cultivation, production and operating costs continue to decrease as we drive efficiencies through all aspects of the Company.  These cost reductions have so far yielded savings of approximately $10 million per quarter while continuing to grow our business. The full benefit of these cost reductions will not be realized until the second quarter of 2020.  I am thankful for the team's focus and efforts on continuing to drive the Company's performance."

First Quarter 2020 Highlighted Financial Results

• Consolidated net revenue for Q1 2020 totalled $19.9 million, compared to $17.9 million in the prior quarter
• Cannabis segment increased 18.5% to $12.6 million from $10.6 million in Q1 2020
• Propagation segment increased to $7.2 million from $7.1 million in the first quarter of 2019
• Gross Margin before fair value changes to biological assets and inventories for the cannabis segment was $5.0 million or 39.7% of net revenue in Q1 2020, compared to $3.4 million or 31.6% of net revenue in Q4 2019
• Net revenue per gram of cannabis sold in the quarter was $3.38 compared to $2.87 in the previous quarter
• Cost to internally produce a gram of cannabis sold was $0.63 compared to $0.97 last quarter
• Consolidated net loss for Q1 2020 totaled $1.5 million or $0.00 per share, fully diluted, compared to $127.0 million or $0.53 per share, fully diluted, in Q4 2019
• Adjusted EBITDA of $2.3 million, versus an Adjusted EBITDA loss of $10.4m in the prior quarter of 2019
• Q1 2020 reflected cost savings of approximately $15 million relative to Q4 2019 on the cannabis side of the business
• The full impact of cost savings measures will be realized in Q2 2020. While the full quarterly impact of all cost-savings measures is uncertain at this time prior to Q2 completion, payroll costs have been reduced by an estimated $2.8m from Q1 2020 to Q2 2020.

First Quarter Developments

• Executed the first production run of vape cartridges for the PAX Labs Inc. ("PAX") Era vaporizer device range with the initial production run being immediately sold out to three provincial distributors;
• Received an export license from Health Canada to export cannabis to the EU in the first quarter, with the initial shipment to its Malta partner subsequently completed in April;
• Received an initial purchase order for bulk dried cannabis from a certified importer located in Israel with the order subsequently being shipped in May 2020;
• Reduced its workforce by approximately 22% across its cannabis and head office operations to align the Company's cost structure with its revenue;
• Completed the partial conversion of $6.0 million of the Company's subordinated secured convertible notes at a conversion price of $0.155 per common share, resulting in the issuance of 38,968,874 common shares; and
• Completed a $7.0 million financing with its Senior Lenders, maturing on July 20, 2020, but with automatic extension to November 15, 2020 if certain conditions are met.

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 March 31, 2020 and 2019, 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	Q1 | 2020		Q4 | 2019		%  Change
Financial Results - Cannabis
Cannabis net revenue	$	12,601,116	$	10,638,035	18
Consumer cannabis net revenue	9,776,140		8,349,895		17
Wholesale bulk cannabis revenue	2,778,053		2,192,266		27
Other revenue	46,923		95,874		N/A
Cost of sales and inventory production costs expensed	(7,595,088)		(7,273,757)		4
Gross margin before FV adjustments on cannabis net revenue	$	5,006,028	$	3,364,278	49
Gross margin before FV adjustments on cannabis net revenue (%)	40		32		24
Adjusted EBITDA income (loss) ^(i)	$	2,343,955	$	(10,433,566)	(122)
Balance Sheet
Total assets	$	305,701,340	$	301,095,515	2
Property, plant and equipment	195,540,183		205,716,525		(5)
Cannabis inventory and biological assets	53,214,410		41,763,096		(61)
Total non-current liabilities	$	65,853,744	$	66,983,618	(2)
Operational Results - Cannabis ^(i)
Grams of cannabis sold	3,730,457		3,705,079		1
Net revenue per gram of cannabis sold	$	3.38	$	2.87	18
Cost of sales per gram of cannabis sold	2.04		1.96		4
Cost to internally produce a gram of cannabis sold	$	0.63	$	0.70	(10)

(i)	Refer to the "Non-GAAP Financial Measures" section for reconciliation to the IFRS equivalent.

Summary First Quarter 2020 Financial Results

Cannabis Segment

Net revenue increased to $12.6 million during Q1 2020 compared to $4.1 million during Q1 2019 due to increased sales to provincial customers, and the continued shipments of bulk cannabis pursuant to prepaid supply agreements and to other LPs. Net revenue during Q1 2020 increased by 18% from $10.6 during Q4 2019 due to increased bulk shipments and the Company's focus on higher value products

Cost of sales and inventory production costs expensed increased to $7.6 million during Q1 2020 compared to $2.0 during Q1 2019 due to increased sales. Cost of sales and inventory production costs expensed during Q1 2020 increased by 4% from $7.3 million, despite the Company realizing an 18% increase in net revenue.  This non-linear increase is attributable to the Company commencing the sale of higher margin 2.0 products during Q1 2020.

Operating expenses for the segment decreased to $7.7 million during Q1 2020 compared to $9.6 million in Q1 2019 due to the cost cutting measures put in place by the Company in addition to capitalizing more costs to inventory upon full utilization of facilities and the implementation of full absorption costing. The decrease gives credence to the effectiveness of the Company's cost-cutting measures as operating expenses have decreased despite the substantially larger cannabis operations in Q1 2020 compared to Q4 2019.

Operating income for the segment increased to $3.4 million in Q1 2020 compared to an operating loss of $4.8 million in Q1 2019. The significant improvement in operating income is the result of higher sales volumes and cost cutting measures implemented by the Company.

Propagation Segment

Net revenue during Q1 2020 was $8.1 million, which was consistent with that achieved in Q1 2019 of $7.5 million after adjusting for intercompany revenue of $0.8 million in Q1 2020 and $0.3 million in Q1 2019.

The remaining gross margin components, being cost of sales and inventory production costs expensed, realized FV amounts included in inventory sold, and unrealized gain on changes in FV of biological assets should be analyzed together for the Propagation segment. These component totals decreased to $3.2 million during Q1 2020 compared to $3.7 million during Q1 2019 due to a difference in product mix and associated growing costs between the two periods.

Operating expenses for the segment of $1.2 million in Q1 2020 remained comparable to $1.5 million in Q1 2019.  The Propagation segment has been operating in a steady state since acquisition and consistent operating expenses year-over-year are expected.

Operating income for the segment increased to $3.8 million in Q1 2020 compared to $2.4 million in Q1 2019. The improvement in operating income is the combined result of slightly higher sales and margins realized in Q1 2020.

Outlook

Zenabis believes that the Canadian recreational market is positioned for continued growth in 2020, 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.

Zenabis has initially focused on two product categories for the recently legalized derivative products: vaporizers and beverages. Initial shipments of vaporizer products occurred in Q1 2020 and Zenabis has continued to supply its cannabis concentrates in the form of vaporizing cartridges designed for use in PAX Era vaporizing devices. Further, Zenabis remains on track to launch cannabis-infused beverages in Q2 2020 with its initial launch of cannabis-infused sparkling water beverages. Additionally, Zenabis has continued to develop and produce in-demand genetic strains as well as focusing on higher THC products which are being sought after by consumers.

The Company has continued to see strong sales of its 'Re-Up' brand which focuses on high-value, low-cost cannabis. Under 'Re-Up', the Company has provided various cannabis products to consumers at a competitive price. Since initial launch in New Brunswick, the Company has expanded distribution channels of this brand to include Ontario, Alberta, British Columbia and Quebec, among other provinces.

The COVID-19 outbreak was declared a pandemic by the World Health Organization in 2020. The situation is dynamic and the ultimate duration and magnitude of the impact on the economy and our business are not known at this time. These 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. The Company continues to work diligently to ensure operations continue and product is delivered while continuing to emphasize the safety of our product and employees.

The Company believes that persistent competition from the low-cost illicit market, as well as new supply from competitor LPs as their facilities reach full production, is likely to result in continued declines in the wholesale price of cannabis in 2020 and beyond. However, Zenabis believes it is well-positioned to remain competitive, producing large-scale and high-quality products at a relatively low cost.

Zenabis' cost-saving initiatives included staff reductions in January and March of 2020. The impact of these staff reductions is not fully reflected in the financial results for the first quarter. Zenabis currently expects the second quarter of 2020 to see an increase in EBITDA relative to the first quarter of 2020.

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 interest expense; finance and investment income; gain (loss) on revaluation of derivative liability; gain (loss) on sale of assets; loss from event; insurance proceeds; current income tax expense; deferred income tax expense (recovery); depreciation and amortization; share-based compensation; acquisition costs; impairment of inventory, plant property and equipment, and intangible assets and goodwill; and the fair value adjustment to biological assets and inventory. 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
	Q1 | 2020		Q4 | 2019		Q1 | 2019		Q1 | 2018
Net loss	$	(1,509,362)	$	(98,714,311)	$	(4,005,815)	$	(2,595,887)
Changes in fair value of inventory sold	12,923,860		18,014,038		3,402,319		—
Unrealized gain on changes in fair value of
biological assets	(19,219,636)		(21,432,091)		(7,993,853)		—
Impairment of inventory	—		874,734		—		—
Acquisition costs	—		—		4,398,646		—
Restructuring costs	1,058,452		—		—		—
Share-based compensation	341,858		5,995,345		2,078,636		246,529
Depreciation and amortization	2,050,093		2,090,304		1,462,077		238,386
Impairment of property, plant and
equipment	—		27,841,265		—		—
Gain on revaluation of embedded derivative
liability	—		(22,993)		(7,891,451)		(110,286)
Finance and investment (income) expense	(6,544)		316,621		(1,116,320)		(97,598)
Interest expense (income)	6,306,284		(335,248)		4,553,288		251,460
(Gain) loss on sale of assets	(9,185)		(55,417)		7,402		—
Loss due to an event	25,567		982,560		—		—
Insurance proceeds	—		(520,526)		—		—
Loss on deconsolidation of subsidiary	99,892		—		—		—
Government subsidies	(713,373)		—		—		—
Other expense	298,907		122,880		—		—
Impairment of intangible assets and goodwill	—		61,480,249		—		—
Current income tax expense (recovery)	654,987		(126,856)		61,477		—
Deferred income tax expense (recovery)	42,155		(6,944,120)		(1,903,454)		—
Adjusted EBITDA	$	2,343,955	$	(10,433,566)	$	(6,947,048)	$	(2,067,396)

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; Delta, Aldergrove, Pitt Meadows and Langley, British Columbia; and Stellarton, Nova Scotia. Zenabis currently has 96,400 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 its Zenabis Atholville, Zenabis Stellarton and Zenabis Langley facilities to be in steady state production in 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, and the True Büch brand name is used for Zenabis' kombucha products.

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 relate, among other things, to: the Company's organizational and strategic review and forecast of demand; the Company's focus on aligning its resources to meet the needs of consumers; the expected timing and completion of current and planned conversion, expansion and optimization of our facilities, including Zenabis Langley; our plans for Zenabis Delta; the expected submissions of license amendment applications and site evidence packages; the licensing of our facilities and projected timing thereof; our expectations for our extraction projects, equipment and capacity; our expectations for processing output; our expectations regarding our packaging equipment; and the expected content of future operational updates. 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, a copy of which is 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.

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