Zenabis Provides Operations Update for July 2019
Vancouver, British Columbia – August 28, 2019 – Zenabis Global Inc. (TSX:ZENA) (“Zenabis” or the “Company”) is pleased to provide an update on its recent facility construction and licensing activities and its recent cannabis production results.
- With construction and licensing at Zenabis Atholville largely complete, Zenabis is now focusing on construction and licensing of Zenabis Langley. Zenabis Langley construction continues to be on track with prior guidance, with Zenabis’ total annual cultivation capacity expected to increase to 143,200 kg of dried cannabis on completion of licensing at Zenabis Langley.
- With respect to production results:
- Cultivation output in July 2019 was 1,238 kg of dried cannabis, which represents a 46.2% outperformance relative to original design capacity (the Performance Ratio1) and a 12.9% outperformance relative to revised design capacity2.
- Cultivation output of 1,238 kg of dried cannabis was 2.1% greater than Zenabis’ revised forecast output (as updated on August 6, 2019) of 1,212 kg of dried cannabis.
Andrew Grieve, Chief Executive Officer of Zenabis, stated, “Zenabis achieved strong cultivation results again in July. As a result of our cultivation success through June 2019, we revised our design capacity for Zenabis Atholville upwards by 35.0%. I remain extremely pleased with our cultivation team’s ability to refine our growing practices maximize yield from existing licensed space. Through to the end of October we expect the variety of cultivation approaches and rapid scale-up of the facility to result in significant room by room variance, after which we expect to achieve steady-state yields for each cultivar at Zenabis Atholville.”
Construction and Facility Update
Recently Completed Debt Financing and Extension of Secured Convertible Notes
On August 21, 2019, Zenabis announced the completion of $25.0m in new senior secured debt, which we expect to enable Zenabis to complete the expansion of its facilities to achieve an annual design capacity of 143,200 kg of dried cannabis. Additionally, Zenabis believes this financing is sufficient for Zenabis to become cashflow positive without the need to raise incremental debt financing, raise convertible debt, or issue incremental equity capital. In connection with the senior secured debt financing, Zenabis also:
- Issued warrants to R.C. Morris Capital Management Ltd. to acquire 902,514 common shares of the conversion price Company (equivalent to a five percent warrant coverage on the new senior secured debt);
- Revised the terms of its subordinated secured convertible notes (“the “Secured Convertible Notes”) such that:
- the maturity date was revised from October 17, 2019 to June 30, 2020;
- the conversion price was reduced from $1.6875 to $1.54635; and
- 30% of the principal amount of the Secured Convertible Notes was converted at the new conversion price, reducing the principal balance of the Secured Convertible Notes from $24.9 million to $17.4 million.
In consideration for consenting to the new senior secured debt, the holders of Secured Convertible Notes received warrants to acquire an aggregate of 1,373,712 common shares of the Company.
- Eliminated the conversion feature of the $4,150,000 convertible portion of the original senior secured debentures.
Zenabis has considered the current market terms for financings in the cannabis industry and in particular the total net dilution impact of these transactions. The total net dilution impact on Zenabis of the transactions is an increase of 2,593,312 shares, which represents less than a one percent increase in fully-diluted shares outstanding. A summary of the capitalization changes from these transactions is provided below.
|Shares Outstanding||Common Shares||Convertible Debt Shares||Warrants||Options||Fully-Diluted Shares|
|Secured Convertible Notes Conversion Price Revision||–||+1,344,944||–||–||+1,344,944|
|30% Conversion of Secured Convertible Notes||+4,823,782||(4,823,782)||–||–||–|
|Warrants Issued to R.C. Morris||–||–||+902,514||–||+902,514|
|Warrants Issued to Secured Convertible Noteholders||–||–||+1,373,712||–||+1,373,712|
|Elimination of Convertible Portion of Senior Debenture3||–||(1,027,857)||–||–||(1,027,857)|
|Net Dilution Impact||+2,593,312|
|Net Dilution Percentage Impact||+1.0%|
3 In conjunction with the amendment and restatement of the senior secured debenture for the $25.0m new senior secured debt, the conversion feature of the $4.2m convertible portion of the original senior debt at a conversion price of $4.04 per share was eliminated.
Zenabis Atholville (Indoor)
Construction is substantially complete4 at Zenabis Atholville. The facility is licensed to produce cannabis from 295,200 square feet with licensed annual cultivation capacity of 43,300 kg of dried cannabis. Zenabis is in the process of licensing the final phase at Zenabis Atholville consisting of four flower rooms (Phase 2C – Part 2). Zenabis submitted a license amendment for Phase 2C – Part 2 in early August which, once approved, will increase the licensed annual production capacity of Zenabis Atholville from 43,300 kg of dried cannabis to 46,300 kg of dried cannabis.
Having now received or paid nearly every invoice for Zenabis Atholville construction, Zenabis believes the project came in approximately $6 million below the previously disclosed budget, and the cost to complete as disclosed in our Q2 MD&A.
Zenabis Langley (Greenhouse)
The first phase of Zenabis Langley is now complete and licensed for cultivation activities (Zenabis Langley Site A – Part 1). Zenabis is currently converting the second phase of the first 10 acres at Zenabis Langley (Zenabis Langley Site A – Part 2).
Site A is divided into six flower zones, which are similar to those in an indoor facility, but much larger in size. A summary of construction status by phase is provided below:
|Site A – Part 1||
|Site A – Part 2||
Zenabis is currently in the process of constructing an extraction, post-processing and analytical testing lab at Zenabis Delta. This construction project is expected to be complete by the fourth quarter of 2019.
Zenabis is currently in the process of various licensing activities for Zenabis Delta, Zenabis Atholville, Zenabis Stellarton and the Zen Craft Grow program as outlined in the table below:
|License Submission||Submission Month||Annual Design Capacity|
|Zenabis Delta – Analytical Testing||June 2019||N/A|
|Zenabis Stellarton – Processing License||July 2019||N/A|
|Zen Craft Grow – Grower 1||July 2019||350 kg|
|Zenabis Atholville Phase 2C – Part 2||August 2019||2,200 kg|
|Zenabis Langley Site A – Part 2||September 20195,6||86,200 kg|
5 Expected submission timeline subject to receipt of prior license or license amendment for each facility.
6 Expected submission timeline for the next amendment for Site A – Part 2
Zenabis is currently using Zenabis Pitt Meadows, Zenabis Aldergrove and Zenabis Langley for our propagation and floral business, as well as hemp cultivation activities. All hemp cultivation at Zenabis Aldergrove that uses greenhouse space is in space currently not being used by the propagation and floral business. As a result, this will not have a negative impact on Zenabis’ propagation and floral business. Hemp cultivation will neither interfere with the planned cannabis cultivation activities at Zenabis Langley, nor will it reduce the cannabis cultivation design capacity of Zenabis Langley.
Cannabis Production Summary
In July 2019, Zenabis realized a total harvest weight of 1,238 kg of dried cannabis.
The amount harvested for the three months ending July 31, 2019 exceeded the original design capacity of the flower rooms by an average of 41.1%, compared to 35.5% in the three-month period from April 2019 through June 2019. A month-to-month comparison of actual harvests compared with harvest forecast based on original design capacity between January 2019 and July 2019 is provided in the table below.
|Original Design Capacity Performance||Jan 2019||Feb 2019||Mar 2019||Apr 2019||May 2019||June 2019||July 2019||Total|
|Actual Harvest Weight||474 kg||480 kg||518 kg||809 kg||908 kg||756 kg||1,238 kg||5,183 kg|
|Original Design Capacity Harvest Weight7||372 kg||495 kg||463 kg||616 kg||672 kg||537 kg||847 kg||4,002 kg|
|Difference (kg)||102 kg||(15 kg)||55 kg||193 kg||236 kg||219 kg||391 kg||1,181 kg|
|Difference (%) – Original “Performance Ratio”||27.4%||(3.0%)||11.9%||31.3%||35.1%||40.8%||46.2%||29.5%|
7 The Design Capacity Harvest Weight is based on the “design capacity” yield that Zenabis has disclosed to date. This figure was derived by converting the actual square footage of flower room space and the forecast canopy for each specific flower room into a kilograms per room per day figure based on Zenabis’ historical yield data at the Zenabis Atholville facility through September 2018 for original design capacity and based on the yield performance in the three months ending June 2019 for revised design capacity. The Design Capacity Harvest Weight in the table above is the harvest weight that would have resulted if the Design Capacity Yield Per Day for a room was multiplied by the Effective Flower Room Equivalent Days, as defined under “Performance Ratio.
The amount harvested for the three months ending July 31, 2019 exceeded the revised design capacity of the flower rooms by an average of 7.2%, compared to the three-month period from April 2019 through June 2019, where the amount harvested was approximately equal to the revised design capacity. A month-to-month comparison of actual harvests compared with harvest forecast based on revised design capacity between January 2019 and July 2019 is provided in the table below.
|Revised Design Capacity Performance||Jan 2019||Feb 2019||Mar 2019||Apr 2019||May 2019||June 2019||July 2019||Total|
|Actual Harvest Weight||474 kg||480 kg||518 kg||809 kg||908 kg||756 kg||1,238 kg||5,183 kg|
|Revised Design Capacity Harvest Weight8||467 kg||643 kg||539 kg||796 kg||895 kg||716 kg||1,097 kg||5,153 kg|
|Difference (kg)||7 kg||(165 kg)||(21 kg)||13 kg||13 kg||40 kg||141 kg||30 kg|
|Difference (%) – Revised “Performance Ratio”||1.5%||(25.3%)||(3.9%)||1.6%||1.5%||5.6%||12.9%||0.6%|
8 Zenabis has revised its design capacity at Zenabis Atholville upwards by 35% (equal to Zenabis Atholville’s Performance Ratio for the three months ended June 30, 2019) from 34,300 kg per annum to 46,300 kg per annum. In order to preserve reporting continuity, Zenabis has shown outperformance relative to original design capacity (the kg/day figure utilized to derive the 34,300 kg design capacity) and relative to revised design capacity (the kg/day figure utilized to derive the 46,300kg design capacity).
In July 2019, Zenabis completed six harvests at Zenabis Atholville and the average Performance Ratio for these harvests was 12.9% relative to revised design capacity and 46.2% relative to original design capacity.
2019 Harvest Forecast – Zenabis Atholville, Zenabis Stellarton and Zenabis Langley Site A – Part 1
For its existing licensed facilities of Zenabis Atholville, Zenabis Stellarton and Zenabis Langley Site A – Part 1, Zenabis expects to produce approximately 16,4679 kg of dried cannabis from August through December of 2019. The following table sets out Zenabis’ estimated monthly harvests for Zenabis Atholville, Zenabis Stellarton and Zenabis Langley Site A – Part 1 for the remainder of 2019.
|July 2019||Aug 2019||Sept 2019||Oct 2019||Nov 2019||Dec 2019||Total|
|Forecast9||1,212 kg||1,579 kg||1,731 kg||3,758 kg||5,199 kg||4,200 kg||17,679 kg|
|Actual||1,238 kg||1,238 kg|
9 This forward-looking estimate of future harvest results is based on the following material assumptions: (1) Zenabis Stellarton and Zenabis Langley Site A – Part 1 operate at their published design capacity on a room by room basis for the cultivation space that is licensed and in cultivation at the forward-looking periods noted; (2) Atholville rooms operate based on the current flower schedule and at revised design capacity (a 35% increase relative to original design capacity)); and (3) Cultivation commencement at Zenabis Langley Site A – Part 1 in September 2019.
Zenabis intends to provide a monthly cultivation forecast for Zenabis Langley Site A – Part 2 upon receipt of the cultivation license amendment for this phase.
The timeline from harvest to the point at which Zenabis completes a sale of that product ranges from a minimum of two weeks (in the case of a bulk sale to a licensed producer) to more than eight weeks (in the case of soft gel capsules which involve external extraction, processing, filling, packaging and shipment). Zenabis recognizes the revenue from completion of such sales in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
1 To better reflect the actual performance of its facilities, the Company reports a Performance Ratio, calculated as follows: after each harvest, Zenabis calculates the dry weight cannabis output for each room (the “Total Output”), taking into account the amount of days in production through a combination of: (1) the amount of flower room days used (including turnaround time) for that room; and (2) the amount of flower-room equivalent days required from other flower rooms in support of that harvest (together the “Effective Flower Room Equivalent Days”). Zenabis then divides the Total Output by the Effective Flower Room Equivalent Days in order to produce the “Effective Yield Per Day” for each room, and then divides the Effective Yield Per Day by the Design Capacity Yield Per Day for each room in order to determine actual performance versus the Design Capacity Yield Per Day (this ratio being the “Performance Ratio”). Zenabis believes that the Performance Ratio will provide investors with the best measure of actual cultivation performance versus Zenabis’ published design capacity.
2 Zenabis intends to update and publish updated design capacities for each of its facilities when a facility has harvested from all its flower rooms (with the update at that time reflecting the most recent performance from each flower room) and again, if required due to significantly different results, when a facility achieves consistent monthly performance at a level that is different from its published Design Capacity. Zenabis has revised its design capacity at Zenabis Atholville upwards by 35% (equal to Zenabis Atholville’s Performance Ratio for the three months ended June 30, 2019) from 34,300 kg per annum to 46,300 kg per annum. In order to preserve reporting continuity, Zenabis has shown outperformance relative to original design capacity (the kg/day figure utilized to derive the 34,300 kg design capacity) and relative to revised design capacity (the kg/day figure utilized to derive the 46,300kg design capacity).
4 Zenabis defines substantial completion as the ability to undertake (subject to licensing) all production activities within the design capacity of the facility.
Please view the following links for Zenabis operational update and corporate presentation:
Zenabis is a significant Canadian licensed cannabis 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 annual design capacity of 143,200 kg of dried cannabis under its existing capital plan. These facilities, if fully built out and converted for cannabis production, would have an annual design capacity to yield approximately 490,800 kg of dried cannabis annually, for both national and international market distribution. 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; our expectations for future harvests; the expected timing and completion of current and planned conversion, expansion and optimization of our facilities, including Zenabis Atholville and 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; the timelines projected for our internal post-processing capacities; the timelines projected for the commencement of cultivation at Zenabis Langley; the effect of hemp cultivation on our cannabis cultivation abilities; 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. 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.