Zenabis Announces Second Quarter 2020 Financial Results

Q2 2020 consolidated net revenue of $27.4 million compared to $19.9 million in Q1 2020
Q2 2020 Adjusted EBITDA of $3.1 million compared to $2.3 million in Q1 2020
Q2 2020 gross margin before fair value on cannabis net revenue of 47.4% compared to 39.7% in Q1 2020

VANCOUVER, BC, Aug. 14, 2020 /CNW/ - Zenabis Global Inc. (TSX: ZENA) ("Zenabis" or the "Company") today announced its financial results for the second quarter ended June 30, 2020. All amounts, unless specified otherwise, are expressed in Canadian dollars.

Kevin Coft, Interim Chief Executive Officer of Zenabis, stated, "We are pleased to report that the performance improvement measures implemented early in 2020, as well as the introduction of new products and sales channels during 2020, continue to result in improved financial performance for Zenabis. Adjusted EBITDA for the second quarter of $3.1 million represents a 31% improvement over the prior quarter, which itself was the first positive EBITDA quarter in the Company's history. Additionally, the continuing financial improvements are manifest in the Company's cash flows with cash used in operating activities in Q2 2020 of $3.9 million compared to $14.3 million in the prior quarter and $17.0 million in the second quarter of 2019. Finally, the Company has made significant strides in reducing its short-maturity debt through equity-for-debt conversions as well as the equity raise that was successfully completed in June. Current liabilities were reduced by $60.8 million in the quarter and total loans and borrowings were reduced in the quarter. The Company expects that increasing provincial demand for its products, driven by more aggressive pricing and the impact of new products together with growth in domestic and international bulk sales channels, will drive revenue, gross margin, and Adjusted EBITDA improvements for the balance of 2020 and into 2021. The Company anticipates growth in net cannabis revenue of 44% to 78% in the third quarter of 2020 versus the second quarter of 2020, which is expected to result in consolidated Adjusted EBITDA of $4 million to $6 million for the quarter."

Second Quarter 2020 Highlighted Financial Results

• Consolidated net revenue for Q2 2020 totaled $27.4 million, compared to $19.9 million in the prior quarter
• Cannabis segment net revenue decreased 6.4% to $11.8 million from $12.6 million in Q1 2020
• Propagation segment net revenue increased 112.8% to $15.6 million from $7.3 million in the prior quarter;
• Gross Margin before fair value changes to biological assets and inventories for the cannabis segment was $5.6 million or 47.4% of net revenue in Q2 2020, compared to $5.0 million or 39.7% of net revenue in Q1 2020;
• Net revenue per gram of cannabis sold in the quarter was $2.98 compared to $3.38 in the previous quarter;
• Cost of goods sold per gram of cannabis sold in the quarter was $1.57 compared to $2.04 in the previous quarter;
• Cost to internally produce a gram of cannabis sold was $0.70 compared to $0.63 last quarter; and
• Consolidated net loss for Q2 2020 totaled $15.7 million or $0.04 per share, fully diluted, compared to $7.8 million or $0.02 per share, fully diluted, in Q1 2020, with this increase primarily the result of significant non-cash charges related to the prepayment or conversion of convertible debt.

Second Quarter Developments

• Extended $50.0 million in Senior Debt that was to mature in June 2020, with the New Senior Debt maturing in March 2025;
• Zenabis Langley achieved full harvests from all licensed growing rooms in April with continuing cultivation across all licensed areas;
• Completed a $23.6 million marketed offering in June 2020 with proceeds primarily used to repay short-maturity debt; and
• Continued to implement significant cost-cutting measures, resulting in an overall 31% increase in Adjusted EBITDA, and a significant increase in the gross margin on net revenue in the Cannabis segment excluding fair value adjustments from 39.7% to 47.4%.

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 June 30, 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			Q2 | 2020				Q1 | 2020		% Change
Financial Results - Cannabis
Cannabis net revenue	$	11,796,177			$	12,601,116			(6)
Consumer net revenue	8,486,628				9,776,140				(13)
Wholesale bulk revenue	3,228,351				2,778,053				16
Medical and other revenue	81,198				46,923				73
Cost of sales and inventory production costs expensed	(6,202,815)				(7,595,088)				(18)
Gross margin before FV adjustments on cannabis net revenue	$	5,593,362			$	5,006,028			12
Gross margin before FV adjustments on cannabis net revenue (%)	47				40				19
Balance Sheet
Total assets	$	303,766,103			$	305,911,408			(1)
Property, plant and equipment	194,052,172				196,600,683				(1)
Cannabis inventory and biological assets	68,034,580				53,214,410				28
Total non-current liabilities	$	107,202,208			$	65,542,783			64
Operational Results - Cannabis ^(i)
Grams of cannabis sold	3,954,388				3,730,457				6
Net revenue per gram of cannabis sold	$	2.98			$	3.38			(12)
Cost of sales per gram of cannabis sold	1.57				2.04				(23)
Cost to internally produce a gram of cannabis sold	$	0.70			$	0.63			12

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

Summary Second Quarter 2020 Financial Results

Cannabis Segment

Net revenue increased to $11,796,177 and $24,397,293 during the three and six months ended Q2 2020, respectively, compared to $7,251,861 and $11,350,834 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 June 30, 2020 decreased by 6% from $12,601,116 during the three months ended March 31, 2020 despite increased sales volume, due to one-time price discounts provided to the Company's provincial distribution partners at the point of price transitions, as well as a greater proportion of lower priced, but less costly, bulk sales in the quarter.

Cost of sales and inventory production costs expensed increased to $6,202,815 and $13,797,903 during the three and six months ended June 30, 2020, respectively, compared to $3,658,369 and $5,667,529 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 June 30, 2020 decreased by 18% from $7,595,088 during the three months ended March 31, 2020 due to lower sales and cost reductions realized through corporate restructuring.

Operating income for the segment increased to $4,592,006 and $7,996,485, respectively for the three and six months ending June 30, 2020, compared to operating losses of $3,882,759 and $8,409,911 for the corresponding periods of 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, excluding inter-segment amounts, decreased to $15,559,432 and $22,872,776 during the three and six months ended June 30, 2020, respectively, compared to $17,377,866 and $24,584,255 during the respective periods in the prior year due to the effects of the COVID-19 pandemic, resulting in lower 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 decreased to $12,784,914 and $15,945,587 during the three and six months ended June 30, 2020, respectively, compared to $14,607,349 and $18,280,211 during the respective periods in the prior year due to lower demand and sales as a result of COVID-19.

Operating income for the segment increased to $2,509,044 and $6,264,624, respectively, for the three and six months ended June 30, 2020 compared to $855,600 and $2,926,447 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

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 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. Additionally, Zenabis made its first shipments of its Re-Up 510-Threaded vaporizer line in July 2020. Further, Zenabis expects to launch cannabis-infused beverages in Q3 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 highly 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. For the period ended June 30, 2020, the COVID-19 pandemic did not materially disrupt the Company's operations or financial condition. All of the Company's facilities continue to be operational and we continue to monitor and adjust operating procedures as needed based on the guidance of various levels of government agencies for the regions we operate in.

Although there have not been significant impacts to the Company's operations to date, certain projects have been delayed due to COVID-19 related travel restrictions, such as the delay in the receipt of a sales license amendment for the Zenabis Stellarton facility and the delay in the launch of the HYTN beverage operations. Additionally, as a result of COVID-19 the Propagation division saw lower demand and sales of floral plants during Q2 2020, resulting in a decrease in revenue in comparison to Q2 2019.

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. 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. 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 now has a significant number of products in-market under its 'Re-Up' brand that are at retail prices less than the average price of illicit market cannabis as reported by StatsCan.

Considering the factors described above and based on quarter-to-date (unaudited) results, Zenabis anticipates recording consolidated net revenue in Q3 2020 in the range of $22 million to $26 million, comprised of $17 million to $21 million for the Cannabis segment and $5 million to $6 million for the Propagation segment. The Company anticipates recording consolidated Adjusted EBITDA in the range of $4 million to $6 million for Q3 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 fair value adjustment to inventory and biological assets; impairment of inventory; restructuring costs; share-based compensation; depreciation and amortization; gain on revaluation of 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 revaluation of debt; 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
			Q2 | 2020				Q1 | 2020				Q2 | 2019				Q2 | 2018
Net loss	$	(15,781,932)			$	(7,702,835)			$	(18,498,388)			$	(2,899,772)
Changes in fair value of inventory sold and other charges	19,252,057				12,923,860				10,013,747				—
Unrealized gain on changes in fair value of biological assets	(24,222,690)				(19,219,636)				(12,652,546)				(850,246)
Impairment of inventory	508,759				—				—				—
Restructuring costs	483,890				1,058,452				—				—
Share-based compensation	1,012,898				341,858				2,142,433				493,652
Depreciation and amortization	1,490,680				2,050,093				2,102,987				258,030
Loss on revaluation of embedded derivative asset	94,256				—				—				—
Loss (gain) on revaluation of embedded derivative liability	—				—				4,551,807				(78,009)
Finance and investment (income) expense	(7,095)				(6,544)				98,557				76,803
Interest expense	8,009,676				6,306,284				3,751,166				228,531
(Gain) loss on sale of assets	(482,067)				(9,185)				184,249				—
Loss due to an event	20,167				25,567				3,083,793				—
Insurance proceeds	(25,000)				—				(2,683,541)				—
Loss on deconsolidation of subsidiary	—				668,562				—				—
Government subsidies	(3,319,621)				(713,373)				—				—
Loss on early conversion of debt	4,331,680				5,624,803				—				—
Loss on modification and extinguishment of debt	10,653,156				—				—				—
Other expense	167,745				298,907				62,282				—
Current income tax expense	1,102,590				654,987				521,371				—
Deferred income tax (recovery) expense	(214,083)				42,155				1,025,748				—
Adjusted EBITDA income (loss)	$	3,075,066			$	2,343,955			$	(6,296,335)			$	(2,771,011)

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 that increasing provincial demand for its products, driven by more aggressive pricing and the impact of new products, together with expected growth in domestic and international bulk sales channels, will drive revenue growth and continuing gross margin and profitability improvements for the balance of 2020 and into 2021; 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; the increasing availability of edible and derivative products is also expected to significantly expand the Canadian adult-use recreational market; Zenabis expects to launch cannabis-infused beverages in Q3 2020 with its initial launch of cannabis-infused sparkling water beverages; 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; 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; 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; 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 Q3 2020 in the range of $22 million to $26 million, comprised of $17 million to $21 million for the Cannabis segment and $5 million to $6 million for the Propagation segment. The Company anticipates consolidated Adjusted EBITDA in the range of $4 million to $6 million for Q3 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 June 19, 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.

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