Zenabis Global Inc. (TSX:ZENA) (“Zenabis” or the “Company“) today announced its financial results for the fourth quarter and fiscal year ended December 31, 2019. All amounts, unless specified otherwise, are expressed in Canadian dollars.

Kevin Coft, Chief Executive Officer of Zenabis, stated, “2019 was a transformative year for Zenabis with the substantial completion of the Company’s facility build-out.  In addition, the Company achieved significant growth in revenue throughout the year and in particular, in the fourth quarter with 49% quarter-over-quarter revenue growth. I am pleased and thankful for the team’s efforts and focus on delivering on our construction and sales results. Zenabis is now a significant licensed producer with Zenabis Atholville being one of the largest indoor facilities in Canada. Although the Canadian recreational market had its challenges, we believe that the continued growth in the Canadian cannabis market remains positive.  For 2020, the Company has pivoted from a facility construction focus to focussing on operational excellence as a consumer packaged goods company.  With significant capital expenditures behind us as well as recently announced cost reduction measures and opportunities to realize additional efficiencies, we feel confident that 2020 will be successful year for Zenabis.”

Fiscal 2019 Highlighted Financial Results

  • Consolidated net revenue for the year ended December 31, 2019 totalled $66.5 million, an increase of 850% from $7.0 million recorded in the same period of 2018
    • Cannabis segment increased 316% to $29.1 million from $7.0 million in 2018
    • Propagation segment increased to $38.6 million
  • Consolidated gross margin before fair value changes to biological assets and inventories was 34.2% compared to 35.1% in the prior year
    • Cannabis segment increased to 43.6% in 2019 compared to 35.1% in 2018
    • Propagation segment was 30.2%
  • Consolidated loss from operations in 2019 of $63.0 million compares to $16.1 million in 2018
    • Cannabis segment operating loss of $33.5 million compares to $16.1 million in 2018
    • Propagation segment operating income of $1.2 million
  • Consolidated net loss for 2019 of $127.0 million or $0.53 per share, fully diluted, compares to $32.5 million or $0.22 per share, fully diluted, in 2018, and included non-cash impairment losses of $9.3 million or $0.37 per share, fully diluted

Fourth Quarter 2019 Highlighted Financial Results

  • Consolidated net revenue for Q4 2019 totalled $17.9 million, compared to $12.0 million in the prior quarter
    • Cannabis segment increased 50.1% to $10.6 million from $7.1 million in Q3 2019
    • Propagation segment increased 55.5% to $7.0 million from $4.5 million in the prior quarter
  • Gross Margin before fair value changes to biological assets and inventories for the cannabis segment was $3.4 million or 31.6% of net revenue in Q4 2019, compared to $3.6 million or 51.1% of net revenue in Q3 2019, with the decrease in margin mainly due to adoption of full absorption costing for the Atholville, NB as that facility achieved full production in the quarter, as well as a greater proportion of whole sale bulk sales
  • Consolidated net loss for Q4 2019 totaled $98.7 million or $0.34 per share, fully diluted, compared to $5.8 million or $0.03 per share, fully diluted, in Q3 2019 and included non-cash impairment losses of $9.3 million or $0.37 per share, fully diluted

Fourth Quarter Developments

  • Entered into an agreement (the “Cultivation Agreement”) with Tantalus Labs Ltd. (“Tantalus Labs”), pursuant to which Zenabis will grow and harvest cannabis plants from clones provided by Tantalus Labs;
  • Completed a Rights Offering that was over-subscribed and resulted in gross proceeds of approximately $20.9 million;
  • Entered into an agreement with HYTN Beverages Inc. (“HYTN”) to produce a range of cannabis-infused beverages at Zenabis Stellarton; and
  • Announced Kevin Coft and Eric Rasmussen as Interim Chief Executive Officer and Chief Financial Officer, respectively.

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 and twelve months ended December 31, 2019 and 2018, prepared in accordance with IFRS. The selected financial data should be read in conjunction with the Consolidated Financial Statements.

Condensed Statement of Net Loss

For the three months ended

For the twelve months ended

Q4 | 2019

Q4 | 2018

%
Change

Q4 | 2019

Q4 | 2018

%
Change

Financial Results

(iii , iv)

(iii , iv)

Gross revenue

$

20,323,043

$

3,841,445

429

$

72,500,192

$

7,506,224

866

Net revenue

(i)

17,896,601

3,403,089

426

66,505,219

6,985,756

852

Gross margin before FV adjustment

5,441,426

1,710,273

218

22,762,775

2,454,037

828

Operating expenses

52,676,640

12,664,651

316

109,358,526

23,417,310

367

Operating loss

(43,817,16)

(8,543,407)

413

(62,995,957)

(16,120,579)

291

Other (expense) income

(61,968,126)

(16,254,109)

281

(71,588,057)

(16,314,212)

339

Net loss

(98,714,311)

(24,884,485)

297

(127,049,793)

(32,521,760)

291

Adjusted EBITDA

(ii)

$

(10,433,566)

$

(5,947,942)

75

$

(32,878,141)

$

(13,758,227)

139

(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 Propagation and Other segments. For prior period information please refer to the financial statements previously filed by Bevo Agro Inc. on SEDAR.

(iv)

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). 

Summary Fourth Quarter 2019 Financial Results

Cannabis Segment

Cannabis net revenue increased to $10.6 million in Q4 2019 compared to $7.1 million during Q3 2019 and $3.4 million in Q4 2018. The Company saw increases in both consumer and wholesale bulk revenues accompanied with a significant increase in overall kg of cannabis product sold. The Company was able to realize increases in revenue even with downward pressures on pricing in the adult-use recreational market as well as due to lower per gram revenue from wholesale bulk sales due to increasing demand for the Company’s products and the expansion of sales of value-added products such as pre-rolls.

During Q4, the Company completed construction and licensing of the Atholville Facility with entering steady state production at the end of the quarter. By entering steady state production, the Company will be able to focus on overall process and production efficiencies in order to realize cost optimization and reductions in the per gram cost to cultivate.

In Q4 the Company saw a reduction in realized gross margin before fair value adjustment to 31.6% from 51.1% in the prior quarter and 50.2% in Q4 2018. This reduction is due largely to the increase wholesale bulk sales as a percentage of overall sales volume as well as the downward pressure on adult-use recreational market product pricing. Given the increasingly competitive pricing in the overall cannabis market the Company has focused on overall cost reductions and production efficiencies going into 2020 in order to reduce the per gram cost to cultivate without impacting our ability to produce high quality cannabis products.

Propagation Segment

The Propagation segment achieved net revenues of $7.0 million in Q4 2019 and a gross margin before fair value adjustment of $2.6 million or 37.4% of revenue compared to net revenue of $4.5 million and gross margin before fair value adjustment of $1.1 million or 25.1% of revenue in Q3 2019.  Results from Propagation continue to be positive, with no interruption to existing Propagation customers during the conversion of greenhouses from vegetable and flower propagation to cannabis cultivation. The Company’s Propagation operating results are seasonal, 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, with the majority of revenue typically recorded in the second quarter of the year.

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. The legalization 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 has continued to supply its cannabis concentrates in the form of vaporizing cartridges designed for use in PAX Labs Inc.’s 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.

During 2020 the Company expanded its product offerings and brands to meet the evolving consumer demand. The Company 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.

In Q3 2020 the Company launched Re-Up, a high value, low cost cannabis brand. Under the Re-Up brand, the Company has provided various cannabis products to consumers at a competitive price. Since initial launching in New Brunswick the Company has expanded distribution channels of this brand to include Ontario, Alberta, British Columbia and Quebec among other provinces.

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 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.

Zenabis is focused on achieving and maintaining operational excellence and becoming cash flow positive in 2020. This means a consistent and active review of our operational processes, focusing on continuing to drive down costs and optimizing procedures and expenditures in our supply chain, and to also work closely with our customers to ensure our production is optimized to the market demands of the Canadian consumer. As an example of the various cost efficiency initiatives underway, in Q1 2020, Zenabis rightsized the Company’s workforce by reducing the size of the Vancouver head office and its facilities which has resulted in a cost reduction of approximately $2 million per quarter.  Additionally, construction activities at the Company’s various facilities has been largely completed as have ongoing material capital expenditures.  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.

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 income (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:

For the three months ended

For the twelve months ended

Q4 | 2019

Q4 | 2018

Q4 | 2019

Q4 | 2018

Net loss

$

(98,714,311)

$

(24,884,485)

$

(127,049,793)

$

(32,521,760)

Changes in fair value of inventory sold

18,014,038

1,734,445

38,191,060

2,483,021

Unrealized gain on changes in fair value of

biological assets

(21,432,091)

(4,145,416)

(61,790,854)

(7,325,715)

Acquisition costs

—

74,900

4,398,646

74,900

Share-based compensation

5,995,345

4,600,719

12,220,958

6,003,105

Depreciation and amortization

2,090,304

330,817

8,382,007

1,127,041

(Gain) loss on revaluation of derivative

liabilities

(22,993)

13,131,068

(3,860,426)

12,942,773

Finance and investment expense (income)

316,621

1,924,319

(527,156)

1,625,959

Interest (income) expense

(335,248)

1,193,367

12,658,330

1,742,975

(Gain) Loss on sale of assets

(55,417)

5,355

157,909

2,505

Loss due to event

982,560

—

5,253,045

—

Insurance proceeds

(520,526)

—

(3,697,062)

—

Foreign exchange (gain) loss

122,880

—

123,168

—

Impairment of inventory

874,734

—

874,734

—

Impairment of plant, property and equipment

27,841,265

—

27,841,265

—

Impairment of intangible assets and goodwill

61,480,249

—

61,480,249

—

Current income tax (recovery) expense

(126,856)

86,969

798,750

86,969

Deferred income tax (recovery) expense

(6,944,120)

—

(8,332,971)

—

Adjusted EBITDA

$

(10,433,566)

$

(5,947,942)

$

(32,878,141)

$

(13,758,227)