Zenabis Announces Fourth Quarter and Year End 2019 Financial Results
2019 gross revenue grew 870% to $72.8 million from $7.5 million in 2018
Q4 2019 net cannabis revenue increased 52.4% to $10.8 million from $7.1 million in Q3 2019
2019 gross margin on cannabis net revenue of 46.9%
Vancouver, British Columbia – March 30, 2020 – 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.
Summary Fourth Quarter 2019 Financial Results
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.
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.
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 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:
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. Zenabis currently has 96,400 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 its Zenabis Atholville, Zenabis Stellarton and Zenabis Langley facilities to be in steady state production in 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, 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 Company’s organizational and strategic review and forecast of demand; the Company’s focus on aligning its resources to meet the needs of consumers; the expected timing and completion of current and planned conversion, expansion and optimization of our facilities, including 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; our expectations for our extraction projects, equipment and capacity; our expectations for processing output; our expectations regarding our packaging equipment; 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. 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.