Zenabis Announces Full Year and Fourth Quarter 2020 Financial Results

VANCOUVER, BC, March 31, 2021 /CNW/ - Zenabis Global Inc. (TSX: ZENA) ("Zenabis" or the "Company") today announced its financial results for the year and quarter ended December 31, 2020. All amounts, unless specified otherwise, are expressed in Canadian dollars.

Full Year 2020 Highlighted Financial Results

• Consolidated net revenue increased 95% to $59.3 million from $30.4 million in 2019;
• Gross margin before fair value changes to biological assets and inventories was $24.8 million or 41.8% of net revenue in 2020, compared to $13.7 million or 44.9% of net revenue in the prior year;
• Consolidated Adjusted EBITDA for the year totaled $3.5 million, compared to negative $38.7 million in 2019;
• Loss from operations of $2.3 million compared to $59.2 million in the prior year;
• Consolidated net loss from continuing operations totaled $54.9 million or $0.10 per share, fully diluted, compared to $72.6 million or $0.30 per share, fully diluted, in 2019;
• Consolidated net loss for 2020 totaled $70.5 million or $0.13 per share, fully diluted, compared to $127.0 million or $0.53 per share, fully diluted, in 2019;
• Loans and borrowing decreased $88.2 million from $153.9 million to $65.7 million;
• Net cash used in operations was $17.5 million compared to $78.6 million in 2019.

Shai Altman, Chief Executive Officer of Zenabis stated, "We are pleased to report that Zenabis has completed a successful second year of operations with substantial growth in revenue and a much improved balance sheet.  Net revenue increased 95% year-over-year with growth across all sales channels.  Sales into the Canadian recreational market grew 78% as the recreational market grew during the year, but more importantly, the Company's market share increased from 1.0% to 1.7%.  Sales in the wholesale bulk channel also grew substantially by 242% year-over-year, due in large part to the Company's entrée into export markets, notably Israel and Australia, during the year.

The cost reduction actions undertaken in the first quarter of the year and the continued focus on operational efficiency and excellence resulted in a 51% decrease in operating expenses in 2020, excluding the impact of impairment losses recorded in 2019.  Overall, the growth in revenue and the reduction in costs resulted in Zenabis recording adjusted EBITDA for the year of $3.5 million compared to negative $38.7 million in 2019.

The Company also completed a number of actions in 2020 to improve its balance sheet including the sale of non-core assets, notably Bevo Farms Ltd. and the Zenabis Delta facilty.  Overall, the Company was able to reduce its loans and borrowing during the year by 57% or $88.2 million from $153.9 million to $65.7 million.  This will have a positive impact on the Company in the future through reduced borrowing costs and increased operating and financial flexibility."

On December 31, 2020, Zenabis entered into a rental rebate, liability contribution and share purchase agreement to sell the Company's wholly-owned subsidiary, Bevo Farms Ltd. and its subsidiaries ("Bevo").  This transaction resulted in Zenabis deconsolidating Bevo as of December 31, 2020 and accordingly, classifying Bevo as a discontinued operation.  As a result, comparative periods have been re-presented to show discontinued operations separately from continuing operations.  Bevo was formerly the sole element of the Company's Propagation reporting segment.

Selected Financial Data

Consolidated Statements of Net Loss	Three months ended									Year ended
		Q4 | 2020			Q4 | 2019			Q4 | 2018			2020			2019				2018 ^(iii,iv)
Financial Results
Gross revenue	$	21,486,058		$	13,333,959		$	3,841,445		$	75,039,631		$	36,432,960			$	7,506,224
Net revenue ^(i)	15,887,792			10,907,517			3,403,089			59,302,831			30,437,987				6,985,756
Gross margin before fair value adjustments	5,291,789			3,551,859			1,710,273			24,812,594			13,678,753				2,454,037
Operating expenses	7,993,318			43,980,163			12,664,651			36,141,539			95,745,489				23,417,310
Operating income (loss)	192,685			(37,187,869)			(8,543,407)			(2,277,470)			(59,227,308)				(16,120,579)
Other expenses	(9,756,092)			(8,612,237)			(16,254,109)			(52,583,035)			(13,959,616)				(16,314,212)
Net loss from continuing operations	(9,919,216)			(46,210,335)			(24,884,485)			(54,874,435)			(72,570,382)				(32,521,760)
Adjusted EBITDA income (loss) from continuing operations ^(ii)	672,108			(11,231,553)			(5,947,942)			3,515,341			(38,731,598)				(13,758,227)
Loss from continuing operations per share, basic and diluted	$	(0.01)		$	(0.18)		$	(0.16)		$	(0.10)		$	(0.30)			$	(0.22)

(i)	Net revenue represents our total gross revenue exclusive of excise taxes levied by the Canada Revenue Agency ("CRA") on the sale of medical and recreational cannabis products effective October 17, 2018.
(ii)	Refer to the "Non-GAAP Financial Measures" section for reconciliation to the IFRS equivalent.
(iii)	Due to the accounting presentation resulting from the RTO, no comparable information is presented for the Other segment.
(iv)	No meaningful comparison can be drawn between the 2020 and 2019 periods and corresponding periods in 2018 due to the fundamental change in the nature of the Cannabis operations (moving from limited medical production to large scale commercial production for adult-use recreational and medical markets).

Summary Full Year 2020 Financial Results

Consolidated net revenue in 2020 was $59,302,831 compared to $30,437,987 during in the prior year with significant growth across all channels including consumer sales, exports and domestic wholesale bulk as well as the impact of new products commercialized during the year, specifically the Company's PAX and 510-threaded vaporizer cartridges.

Gross margins before fair value adjustments were $24,812,594 during year ended December 31, 2020, compared to $13,678,753 during the prior year due mainly to the increase in sales.  Gross margins as a percentage of sales were 41.8% compared to 44.9% in the prior year with the decrease mainly reflective of industry-wide reductions in end sales prices throughout 2020.

Consolidated operating costs were $36,141,539 in 2020 compared to $95,745,489 in the prior year with substantial reductions in all cost categories due to cost containment measures taken in the first quarter of 2020 and an ongoing focus on costs and efficiencies throughout the year.

Consolidated loss from operations was $2,277,470 for the year, compared to operating losses of $59,227,308 in 2019, mainly due to increased revenue and reduced operating costs.

Fourth Quarter 2020 Highlighted Financial Results

• Consumer net revenue increased 10% to $13.2 million from $12.1 million in the prior quarter and 59% from $8.3 million in the fourth quarter of 2019;
• Wholesale bulk revenue decreased 63% to $2.5 million from $6.9 million in Q3 2020 as a result of regulatory changes in some of the Company's export markets with shipments to these markets expected to resume by Q3 2021, but increased 15% from $2.2 million in Q4 2019;
• Consolidated net revenue decreased 16% to $15.9 million from $19.0 million in Q3 2020 but increased 50% from $10.6 million in the fourth quarter of the prior year;
• Gross margin before fair value changes to biological assets and inventories was $5.3 million or 33.3% of net revenue in Q4 2020, compared to $8.9 million or 46.8% of net revenue in Q3 2020 and $3.4 million or 32.1% in Q4 2019;
• Consolidated Adjusted EBITDA for the quarter totaled $672 thousand, compared to $3.1 million last quarter and negative $11.2 million in Q4 2019, with the decrease from the prior quarter resulting from the lower revenue in the period together with the impact of the higher proportion of consumer net revenue. Consolidated Adjusted EBITDA was lower than the Company's guidance for the quarter, excluding the impact of the Bevo, as a result of lower than expected wholesale bulk revenue due to regulatory changes in certain, important export markets;
• Consolidated net loss from continuing operations for Q4 2020 totaled $11.4 million or $0.01 per share, fully diluted, compared to $16.6 million or $0.03 per share, fully diluted, in Q3 2020 and $45.8 million or $0.18 per share, fully diluted, in the fourth quarter of 2019;
• Consolidated net loss for Q4 2020 totaled $30.1 million or $0.05 per share, fully diluted, compared to $17.0 million or $0.08 per share, fully diluted, in Q3 2020 and $98.7 million or $0.34 per share, fully diluted, in Q4 2019. The consolidated net loss for Q4 2020 included a significant number of non-recurring and non-cash components, including:

		Q4 | 2020				Explanation
One-time Charges
Loss on sale of discontinued operations	$	18.2 million				Excess of net assets disposed of $30.8 million over consideration of $12.3 million
Loss on sale of assets	$	1.2 million				Loss recognized on sale of Zenabis Delta
Loss on remeasurement of royalty liability	$	1.3 million				Remeasurement of royalty liability due to increase in long-term revenue projections
Non-Cash Components of Certain Expenses (Income)
Net change in unrealized gain on changes in fair value of biological assets  less fair value of inventory sold	$	3.0 million				Increase in value of biological assets in excess of fair value of biological assets sold
Non-cash component of interest expense	$	1.7 million				Implied interest assigned to prepaid supply agreements, Secured Debentures and other indebtedness (non-cash charge)
Loss on early conversion of debt	$	4.0 million				Conversion of convertible debt into equity

Summary Fourth Quarter 2020 Financial Results

Consolidated net revenue was $15,887,792, compared to $10,907,517 during the fourth quarter of 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 December 31, 2020 decreased by 16% from $19,017,746 during the three months ended September 30, 2020 as a result of decreased wholesale bulk sales to some export markets which were temporarily delayed due to regulatory changes, partially offset by increased in recreation sales.

Gross margin before fair value adjustments were $5,291,789 compared to $3,551,859 in the fourth quarter of 2019 due main to the increase in sales. Gross margin before fair value adjustments during the three months ended December 31, 2020 decreased by 35% from $8,921,415 during the three months ended September 30, 2020 due to lower sales as well as a lower proportion wholesale bulk sales which are at higher margins that consumer sales.

Consolidated operating income was $192,685 for the three months ending December 31, 2020, compared to operating losses of $37,187,869 for the corresponding periods of 2019. The increase for the three months ended December 31, 2020 compared to the prior quarter loss of $7,532,415 is mainly due to changes in the fair value of biological assets and lower general and administrative costs, partially offset by the impact of  lower sales and the shift from wholesale bulk sales to consumer sales.

First Quarter 2021 Quarter Developments

• The Company entered into a credit agreement with a Canadian private debt fund, as agent on behalf of certain lenders, in respect of a committed revolving credit facility in a principal amount of up to $60 million, subject to borrowing base requirements based on eligible receivables, inventory and real estate (the "Facility"). Advances made under the Facility will bear interest at a rate per annum equal to the greater of 10% or the Toronto Dominion Bank's prime rate, from time to time, plus 7.55%, calculated daily and payable monthly.
• In February 2021, the Company filed a petition with the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the Senior Debt and to obtain discharges of the Senior Debt and related security. The purpose of the petition is to seek determination of the correct calculation of the amount required to exercise an option to buy out the amended royalty provided for in the Senior Debt, whether the royalty is secured by the same security charging the Senior Debt as well as related security, and whether certain prepayment amounts and default fees are payable under the Senior Debt. The Company intends to use the funds from the Facility to repay and discharge the Senior Debt.
• In February 2021, the Company announced that it has entered into a definitive arrangement under which "Hexo" (Hexo Corp.) will acquire all of Zenabis' common shares at an approximate value of $235 million under which Zenabis shareholders will receive 0.01772 of a Hexo common share in exchange for each Zenabis common share. The transaction was unanimously approved by the board of directors of each HEXO and Zenabis, and the board recommends that the shareholders vote in favour of the transaction. The shareholders vote will take place in May 2021.
• The Company has established an at-the-market equity program that allows the Company to issue up to $15,000,000 of common shares from treasury to the public from time to time, at the Company's discretion. Subsequent to December 31, 2020, the Company has issued from treasury to the public 36,956,000 common shares for aggregate gross proceeds of $6,304,487.
• Zenabis announced that its wholly-owned subsidiary Zenabis Ltd. has entered into a Settlement Agreement and Release with a customer (the "Settlement Agreement"), pursuant to which the parties have agreed to withdraw from the arbitration proceedings between the parties, and release the other party from all past, present and future claims of the parties arising out of the pre-paid supply agreement relating to subsequent deliveries of cannabis product. Pursuant to the Settlement Agreement, the Company has paid $12,500,000 to settle customer deposit liabilities of $25,428,780.

Outlook

Zenabis believes that the Canadian recreational market has opportunities for continued growth in 2021, with the continued addition of retail stores throughout the country, providing increased access to cannabis products in each province. Additionally, the increasing availability of derivative products is also expected to significantly expand the Canadian adult-use recreational market.  Additionally, the Company believes that shipments will recommence in the second quarter of the year into export markets as the Company addresses the new regulatory requirements in those markets that were introduced in the fourth quarter of 2020.

Zenabis is focused on building on the moves towards operational excellence it accomplished in Fiscal 2020  by focusing on core operations and assets while divesting from non-core operations and monetizing non-core assets, such as the sale of the Propagation segment and the Zenabis Delta facility. The Company successfully implemented various initiatives that resulted in positive Adjusted EBITDA in 2020, significant growth in net revenue, reductions in operating expenses, strengthening brand recognition, and growth in consumer demand. To continue this positive momentum, 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. The Company continues to aggressively manage its capital allocation decisions and will be guided by market conditions and demand in any and all capital expenditures.

During 2020, the Company took multiple steps to reduce the overall debt load of the company through debt conversions, early repayments and the divestiture of non-core assets. From December 31, 2019 to December 31, 2020 the Company successfully reduced its loans and borrowing by $88.2 million. The various steps taken in relation to the Company's debt have been done to ensure working capital flexibility, to execute its strategic plan, and achieve success in 2021 and beyond. The ongoing strategic plan consists of continuing to grow revenue, maintain product profit margins, focus on key product categories, operating efficiencies, and moving to lower cost financing. As with any plan, its success continues to be dependent on dutiful execution by the Company and navigating the ever changing landscape of the Cannabis industry. Zenabis believes that the changes undertaken during the current year have positioned the Company to be able to react and adapt in a timely manner to any changes, obstacles, and opportunities as they arise.

Financial outlook

Over the course of 2020, the Company has reduced total debt outstanding by $88.2 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)
Secured Debentures	51.9				March 31, 2025				14.0% / $1,800
RDC Mortgage	2.0				August 31, 2027				6.0% / $30
Unsecured Convertible Debentures	3.8				September 27, 2021				6.0% / $58
Secured Convertible Note	0.1				March 31, 2021				11.0% / $3
Unsecured Convertible Note	7.8				June 30, 2021				6.0% / $117
Total		65.6							$2,008

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												Year ended
	Q4 | 2020				Q4 | 2019				Q4 | 2018				2020				2019				2018
Net loss from continuing operations	$	(11,381,181)			$	(46,210,335)			$	(24,884,485)			$	(54,874,435)			$	(72,941,610)			$	(32,521,760)
Changes in fair value of inventory sold and other charges	15,805,636				16,077,006				1,734,445				59,098,554				29,684,453				2,483,021
Unrealized gain on changes in fair value of biological assets	(18,699,850)				(19,317,441)				(4,145,416)				(68,150,029)				(52,523,881)				(7,325,715)
Impairment of inventory	1,146,230				874,734				—				1,905,303				874,734				—
Write-off of materials and supplies inventory ^(i)	—				—				—				1,851,536				—				—
Acquisition costs	—				—				74,900				—				4,398,646				74,900
Restructuring costs	—				—				—				1,542,342				—				—
Share-based compensation	1,093,347				5,995,345				4,600,719				3,715,089				12,220,958				6,003,105
Depreciation and amortization	516,145				1,095,189				330,817				2,520,624				4,609,317				1,127,041
Impairment of assets held for sale	—				—				—				1,571,026				—				—
Impairment of property, plant and equipment	—				21,231,483				—				—				21,231,483				—
ZenPharm pre-commercialization costs ^(ii)	617,915				—				—				1,738,366				—				—
Loss on revaluation of embedded derivative asset	—				—				—				2,164,449				—				—
(Gain) loss on revaluation of derivative liabilities	—				(22,993)				13,131,068				—				(3,860,426)				12,942,773
Finance and investment expense (income)	501,866				42,749				1,924,319				490,185				(638,307)				1,625,959
Interest expense (recovery)	4,900,994				(894,873)				1,193,367				23,802,642				9,017,047				1,742,975
Loss on sale of assets	1,245,336				218,456				5,355				1,186,264				213,599				2,505
Loss from loss of control of a former subsidiary	—				—				—				668,562				—				—
Government subsidies	(315,860)				—				—				(4,924,973)				—				—
Loss on early conversion of debt	3,967,788				—				—				13,924,271				—				—
(Gain) loss on modification and extinguishment of debt	(222,807)				—				—				10,430,349				—				—
Loss on remeasurement of royalty liability	1,307,007				—				—				4,747,875				—				—
Other (income) expense	(47,441)				63,840				—				93,411				22,645				—
Impairment of intangible assets and goodwill	—				9,205,058				—				—				9,205,058				—
Current income tax expense	(16,760)				571,704				86,969				16,034				798,750				86,969
Deferred income tax recovery	253,743				(161,475)				—				(2,104)				(1,044,064)				—
Adjusted EBITDA income (loss)	$	672,108			$	(11,231,553)			$	(5,947,942)			$	3,515,341			$	(38,731,598)			$	(13,758,227)

(i)	Amounts are included within the 'General and administrative' expense line item on the Consolidated Statements of Loss and Comprehensive Loss for the Cannabis segment.
Amounts are included within the 'General and administrative' and 'Salaries and benefits' expense line items on the Consolidated Statements of Loss and Comprehensive Loss for the Other segment.

About Zenabis

Zenabis is a significant Canadian licensed cultivator of medical and recreational cannabis. Zenabis employs staff coast-to-coast, across facilities in Atholville, New Brunswick; Langley, British Columbia; and Stellarton, Nova Scotia. Zenabis currently has 111,200 kg of licensed cannabis cultivation space across three licensed facilities in Canada, together with its cannabis import, export and processing joint venture, ZenPharm, operating from Birżebbuġa, Malta.

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 intends to use the funds from the Facility to repay and discharge the Senior Debt; Zenabis believes that the Canadian recreational market has opportunities for continued growth in 2021, with the continued addition of retail store throughout the country, providing increased access to cannabis products in each province. Additionally, the increasing availability of edible and derivative products is also expected to significantly expand the Canadian adult-use recreational market; the Company believes that shipments will recommence in the second quarter of the year into export markets as the Company addresses the new regulatory requirements in those markets that were introduced in the fourth quarter of 2020; the Company expects revenue to grow with market expansion; The Company expects revenue to grow faster than market expansion in this category, as demand outstripped availability of packaged cannabis in Q4 2020; and is well positioned to do so in 2021 when the Company makes the strategic decision to enter this product category; to continue this positive momentum, 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; the Company continues to aggressively manage its capital allocation decisions and will be guided by market conditions and demand in any and all capital expenditures; the ongoing strategic plan consists of continuing to grow revenue, maintain product profit margins, focus on key product categories, operating efficiencies, and moving to lower cost financing; as with any plan, its success continues to be dependent on dutiful execution by the Company and navigating the ever changing landscape of the Cannabis industry; and, Zenabis believes that the changes undertaken during the current year have positioned the Company to be able to react and adapt in a timely manner to any changes, obstacles, and opportunities as they arise.  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 31, 2021, 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.

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