Zenabis Global Announces Third Quarter 2019 Financial Results

VANCOUVER, Nov. 14, 2019 /CNW/ - Zenabis Global Inc. (TSX:ZENA) ("Zenabis" or the "Company") today announced its financial results for the third quarter ended September 30, 2019. All amounts, unless specified otherwise, are expressed in Canadian dollars.

Key Highlights

During the three months ended September 30, 2019, Zenabis:

• Cultivated 5,239 kg of dried cannabis, outperforming revised design capacity by 25.7%, and representing a kilogram yield increase of 112% over the previous quarter;
• Increased licensed annual production capacity by 147% from 23,100 kg to 57,000 kg as a result of receiving several key license amendments at Zenabis Atholville and the cultivation license at Zenabis Langley Site A Part 1;
• Submitted a license amendment application for Zenabis Langley for additional growing areas totaling 101,300 sq. ft. Once approved, this is expected to increase Zenabis' licensed annual production capacity by 39,400 kg to 96,400 kg - representing a 69% further increase in annual production capacity;
• Increased net revenue per gram of cannabis sold by 13% to $4.75 from $4.22 in Q2 2019. This increase is related to the sales mix discussed below.
• Achieved an internal production cost of dried cannabis sold of $1.14 per gram compared to $0.78 per gram in Q2 2019. Cost per gram is impacted by the sales mix between dried flower and dried trim where a gram of dried flower is assigned a higher cost than a gram of dried trim. Lower sales of bulk trim in the quarter resulted in a higher internal production cost per gram of dried cannabis sold.

Andrew Grieve, Chief Executive Officer of Zenabis, stated, "In this quarter, Zenabis substantially expanded its licensed capacity and cultivation yields, raised $65 million in new financing, and submitted further license amendments that, once approved, will increase annual cultivation capacity by over 300% compared to the second quarter of 2019. These license amendments at Zenabis Altholville and Zenabis Langley, expansion into the Ontario market, and the launch of a new value brand Re-Up meaningfully improved our competitive position for the fourth quarter and beyond."

Mr. Grieve added, "We continue to make substantial progress toward achieving our planned licensed annual production capacity of 143,200 kg. By the end of 2019, we expect to have 111,200 kg of capacity licensed or submitted for licensing. In addition, we resolved our packaging challenges in September of 2019. As a result, October provincial recreational shipments increased by 93% to 830 kg versus 430 kg in September of 2019, and primary dried flower packaging output per day increased by 101% to an average of 10,636 units per day in October 2019 versus 5,282 units per day in September 2019. Over the first 10 days of November, this figure increased to an average of 18,099 units per day."

"I am pleased to say that Zenabis shipped more product in the first half of the fourth quarter of 2019 than was shipped during the entirety of the third quarter. We believe this reflects consumer appreciation for our high-quality, high-value products, and market appreciation for our ability to compete with the illicit market on price with our value brand, Re-up."

"We continue to focus on construction and licensing of Zenabis Langley and have modified the construction plan for Part 2C to be substantially complete in the first quarter of 2020. We believe this is a prudent, responsible approach to reaching our target total annual cultivation capacity of 143,200 kg of dried cannabis upon completion of licensing at Zenabis Langley, which is anticipated for the second quarter of 2020."

Third Quarter 2019 Highlights and Recent Developments

Construction and Licensing

• Increased the licensed annual production capacity of dried cannabis by 147% to 57,000 kg as at September 30, 2019, from 23,100 kg as at June 30, 2019;
• Substantially completed construction and licensing activities at Zenabis Atholville, at approximately $6 million below budget;
• Added an additional 9,900 kg of licensed annual production capacity at Zenabis Langley Site A - Part 1, after receiving a cultivation license from Health Canada;
• Construction of Zenabis Langley - Part 2A was substantially complete as at end of September;
• Zenabis submitted a cultivation license amendment application for Zenabis Langley – Part 2A in September 2019. This includes additional growing areas totaling 101,300 sq. ft., which would increase Zenabis' licensed annual production capacity by 39,400 kg to 96,400 kg once approved by Health Canada; and
• Submitted a sales license application for Zenabis Stellarton which will increase the Company's fulfilment capacity.

A summary of the changes in Zenabis' licensed annual production capacity between June 30, 2019 and September 30, 2019 is provided below:

		Licensed Annual Production Capacity (kg)
		Zenabis Atholville			Zenabis Langley			Zenabis Stellarton			Zenabis Delta			Total
Q2 | June 30, 2019		22,300			—			800			—			23,100
Receipt of Zenabis Atholville Phase 2C - Part 1 License Amendment		9,800			—			—			—			9,800
Receipt of Zenabis Langley Site A - Part 1 Cultivation License		—			9,900			—			—			9,900
Zenabis Atholville Capacity Amendment ^(1)		11,200			—			—			—			11,200
Receipt of Zenabis Atholville Phase 2C - Part 2 License Amendment		3,000			—			—			—			3,000
Q3 | September 30, 2019		46,300			9,900			800			—			57,000

(1)	Net based on 22,300 kg (Zenabis Atholville licensed annual production capacity as at June 30, 2019) plus 9,800 kg (licensed annual production capacity from the Phase 2C - Part 1 license amendment) multiplied by 1.35 (1 + 35%, the outperformance from the second quarter of 2019 as described Zenabis' MD&A for the three months ending June 30, 2019).

Business Development

• Entered into a definitive agreement with a Canadian beverage technology company that will supply Zenabis with water soluble, odourless, flavourless and colourless cannabis-infused inputs, which the Company plans to use in the production of cannabis-infused beverages and other cannabis-infused products;
• Entered into a supply agreement with the Ontario Cannabis Retail Corporation to supply adult-use recreational cannabis to retailers throughout the province;
• Launched Re-up, Zenabis' low cost, high value, cannabis brand offering various cannabis products to consumers at a price competitive with the illicit market (www.reupcannabis.ca);
• Entered into a definitive agreement with PAX Labs, Inc. ("PAX"), under which Zenabis will supply cannabis extracts for PAX Era Pods designed for use with the PAX Era vaporizer device; and
• Entered into a cultivation agreement with Tantalus Labs Ltd. ("Tantalus Labs"), pursuant to which Zenabis will grow and harvest cannabis plants from clones provided by Tantalus Labs.

Financing

• Raised $30 million in non-dilutive financing via a pre-paid supply agreement with High Park Holdings Ltd.("High Park"), a wholly-owned subsidiary of Tilray, Inc.;
• Raised $10 million in non-dilutive financing via a pre-paid supply agreement with Starseed Medicinal Inc.("Starseed");
• Raised $25 million in new senior secured debt financing; and
• Announced a rights offering to holders of its common shares that is intended to raise up to $20.8 million, with insiders of Zenabis committing to acquire ~30% of the common shares available under the rights offering for a total of $6.2 million in proceeds.

Selected Financial Data

Financial Results	Q3 | 2019				Q2 | 2019				% Change		Q3 | 2018 ^(4)(6)
Gross revenue	$	13,423,175			$	26,470,481			(49)		$	3,663,817
Net revenue ^(2)	12,001,692				25,049,709				(52)		3,581,705
Gross margin before fair value adjustment	5,060,709				8,383,766				(40)		794,095
Operating expenses	18,993,084				18,925,521				—		4,727,986
Operating loss	(980,967)				(7,902,956)				N/A		(2,352,414)
Other (expenses) income	(5,018,699)				(9,048,313)				(45)		210,798
Net loss	(5,831,279)				(18,498,388)				(67)		(2,141,616)
Adjusted EBITDA ^(5)	(9,201,192)				(6,296,335)				46		(2,971,878)
Loss per share, basic and diluted	$	(0.03)			$	(0.09)			(67)		$	(0.01)
Balance Sheet
Total assets	$	378,441,665			$	329,244,361			15		$	69,258,202
Inventory	28,344,946				17,943,802				58		4,427,029
Biological Assets	13,814,139				$	8,047,081			72		1,294,563
Operational Results - Cannabis
Grams of cannabis sold ^(3)	1,491,729				1,720,262				(13)		N/A
Grams of internally produced cannabis sold ^(3)	1,240,916				1,387,741				(11)		N/A
Net revenue per gram of cannabis sold ^(5)	$	4.75			$	4.22			13		N/A
Net revenue per gram of cannabis flower, oil and pre-rolls sold ^(5)	5.12				4.97				3		N/A
Net revenue per gram of cannabis trim sold ^(5)	2.25				2.25				—		N/A
Cost of goods sold per gram of cannabis sold ^(5)	2.32				2.13				9		N/A
Cost to internally produce a gram of cannabis sold ^(5)	$	1.14			$	0.78			46		N/A

(2)	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.
(3)	Includes oil sales. Oil sales are converted at a standard rate of 9 milliliters per gram for recreational oil.
(4)	Due to the accounting presentation resulting from the RTO, no comparable information is presented for the Propagation and Other segments. For prior period information please refer to the financial statements previously filed by Bevo Agro Inc. on SEDAR.
(5)	Refer to the "Non-GAAP Financial Measures" section for reconciliation to the IFRS equivalent.
	No meaningful comparison can be drawn between 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).
(6)	No meaningful comparison can be drawn between 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).

Adjusted EBITDA Reconciliation ⁽⁷⁾

	Q3 | 2019		Q2 | 2019
Net loss	$      (5,381,279)		$   (18,498,388)
Changes in fair value of inventory sold	6,760,956		10,013,747
Unrealized gain on changes in fair value of biological assets	(19,712,364)		(12,652,546)
Share-based compensation	2,004,544		2,142,433
Depreciation and amortization	2,726,639		2,102,987
(Gain) loss on revaluation of derivative liabilities	(497,789)		4,551,807
Finance and investment expense (income)	173,986		98,557
Interest Expense	4,689,124		3,751,166
Loss (gain) on sale of assets	21,675		184,249
Loss due to event	1,186,692		3,083,793
Insurance proceeds	(492,995)		(2,683,541)
Foreign exchange (gain) loss	(61,994)		62,282
Current income tax expense	342,758		521,371
Deferred income tax (recovery) expense	(511,145)		1,025,748
Adjusted EBITDA	$      (9,201,192)		$     (6,296,335)

(7)

Adjusted EBITDA is net income (loss) before interest expense; finance and investment income; gain (loss) on revaluation of derivative liability; loss on sale of assets; income taxes; depreciation and amortization; share-based compensation; acquisition costs; and the fair value adjustment to biological assets and inventory.

Summary of Third Quarter 2019 Financial Results

The Company's financial results for the third quarter ended September 30, 2019, are presented in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board, applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. As this is Zenabis' second quarterly financial report since the public listing of its shares in January 2019, periodic financial results comparisons are sequential.

For the three months ended September 30, 2019, Zenabis recorded net revenue of $12.0 million, comprised primarily of $7.1 million and $4.5 million in the Cannabis and Propagation segments, respectively. Comparatively, in the three months ended June 30, 2019, the Company recorded net revenue of $7.3 million and $17.4 million in the Cannabis and Propagation segments, respectively. The sequential decrease in net revenue in the Cannabis segment was driven by a reduction in bulk shipments of trim and packaging issues reducing product available for provincial counterparties in August and September. The sequential decrease in net revenue in the propagation business was expected and driven by the varying levels of activity in the growing cycles of the vegetable greenhouse crops, the bedding plant and flower seasons as well as the timing of customer orders, the varying cycles of the greenhouse vegetable industry and the seasonality of the customer's planting season.

Gross margin before fair value adjustment totaled $5.1 million during the three months ended September 30, 2019, and included $3.6 million and $1.1 million in Cannabis and Propagation gross margin before fair value adjustments, respectively (51% and 24% of net revenue by segment, respectively). Comparatively, in the three months ended June 30, 2019, the Company recorded Cannabis and Propagation gross margin before fair value adjustments of $3.6 million and $4.5 million, respectively (50% and 25% of net revenue by segment, respectively).

Total operating expenses for the three months ended September 30, 2019, were $19.0 million, compared to $18.9 million in the three months ended June 30, 2019. Gain on the revaluation of derivative liability was $0.5 million in Q3 2019 compared to a gain of $4.6 million for Q2 2019, which was the result of fluctuations in the Company's share price.

Adjusted EBITDA has continued to show a loss, primarily due to the operational costs incurred to build-out Zenabis' operational capacity to achieve the planned design capacity of its various facilities. Adjusted EBITDA has increased in comparison to the three months ended June 30, 2019, due to additional expenses. Q3 2019 adjusted EBITDA was ($9.2 million), compared to ($6.3 million) in Q2 2019.

The Company recorded a net loss for the three months ended September 30, 2019, of $6.0 million, or $0.03 loss per common share, compared to a net loss of $18.5 million, or $0.09 loss per common share, for the three months ended June 30, 2019.

Cash on hand increased from $17.0 million as at December 31, 2018, to $27.9 million as at September 30, 2019. The increase in cash was mainly attributable to cash used in operating activities of $45.3 million and investing activities of $92.3 million, offset by cash received from financing of $148.5 million. During the three months ended September 30, 2019, Zenabis secured $40.0 million in financing via pre-paid supply agreements with High Park and Starseed and raised $25.0 million in new senior secured debt financing in August 2019.

Cautionary Note Regarding Non-GAAP Measures

This news release refers to certain financial performance measures that are not defined by and do not have a standardized meaning under IFRS (termed "Non-GAAP measures"). These Non-GAAP measures are defined in the MD&A. Non-GAAP measures are used by management to assess the financial and operational performance of the Company. The Company believes that these Non-GAAP measures, in addition to conventional measures prepared in accordance with IFRS, enable investors to evaluate the Company's operating results, underlying performance and prospects in a similar manner to the Company's management. As there are no standardized methods of calculating these Non-GAAP measures, the Company's approaches may differ from those used by others, and accordingly, the use of these measures may not be directly comparable. Accordingly, these Non-GAAP measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Consolidated Financial Statements and MD&A

The results discussed herein are a summary and are qualified in their entirety by reference to the Company's unaudited interim condensed consolidated financial statements and accompanying notes (the "Financial Statements") for the three and nine months ended September 30, 2019 and 2018 and related MD&A (the "MD&A") of financial condition and results of operations, copies of which are available under the Company's profile on SEDAR at www.sedar.com and on the Investor Relations section of the Company's website at https://www.zenabis.com. Readers of this press release are encouraged to refer to the Financial Statements and the MD&A for complete details about Zenabis' financial results for the period ended September 30, 2019.

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. In addition to gaining technologically advanced knowledge of plant propagation, the recent addition of state-of-the-art greenhouses in Langley, Pitt Meadows and Aldergrove provides Zenabis with 3.5 million square feet of facility space that can, if fully converted, be dedicated to cannabis production.

If all facility space at Zenabis Atholville, Zenabis Stellarton and Zenabis Langley is fully converted and dedicated to production, Zenabis will own, and have access to 635,000 square feet of high quality indoor cannabis production space, as well as 2.1 million square feet of greenhouse cannabis production space at its Langley facility, with this production strategically positioned on Canada's coasts. Zenabis expects these facilities to have an licensed annual production capacity of 143,200 kg of dried cannabis by the second quarter of 2020. An additional 700,000 square feet of greenhouse space will be used to continue the existing propagation business and produce industrial hemp, and can be converted to cannabis production at such a time that is beneficial to the strategic position of the Company. The Zenabis brand name is used in the cannabis medical market, while the Namaste and Blazery 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 projected kilogram yield of licensed facility space and facility space in the process of, or scheduled for, construction and/or licensing; the estimated production capacity of our existing facilities; our expectations for future harvests; the expected timing and completion of current and planned conversion, expansion and optimization of our facilities, including Zenabis Langley; the licensing of our facilities and projected timing thereof; our plans for the production of cannabis-infused beverages and other cannabis-infused products; the funds to be raised under the rights offering; the expected participation of insiders in the rights offering; and our expectations for the wholesale cannabis market. 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. 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.

Media Relations: Email: [email protected], Phone: [phone]; Investor Relations, E-mail: [email protected], Phone: [phone]

Related Links

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