Zenabis Announces First Quarter 2021 Financial Results

VANCOUVER, BC,–Zenabis Global Inc. (TSX: ZENA) announced its financial results for the quarter ended March 31, 2021. All amounts, unless specified otherwise, are expressed in Canadian dollars.

First Quarter 2021 Highlighted Financial Results

• Quantity of cannabis sold totaled 4,753 kg in Q1 2021, which was 27% greater compared to 3,730 kg in Q1 2020;
• Consolidated gross revenue totaled $16.2 million in Q1 2021, 8% higher than $15.0 million in q1 2020;
• Gross margin before fair value changes to biological assets and inventories was $2.7 million or 21.5% of net revenue in Q1 2021, compared to $5.0 million or 39.7% of net revenue in Q1 of the prior year;
• Consolidated Adjusted EBITDA for the quarter totaled a loss of $1.9 million, compared to loss of $768 thousand in Q1 2020;
• Consolidated net income for the quarter totaled $9.1 million or $0.01 per share, fully diluted, compared to a loss of $7.8 million or $0.02 per share, fully diluted, in the same quarter of last year;

Shai Altman, Chief Executive Officer of Zenabis stated, “Zenabis continued to make substantial progress in the quarter with respect to improving its financial position.  In the first quarter of the year, the Company reached a settlement in respect of a disputed prepaid supply agreement for materially less than its carrying value, arranged a $60 million committed credit facility to enable it to repay its Senior Notes, the dispute with the Senior Lender over repayment terms notwithstanding, and closed the Bevo divestiture including the Company’s release from its guarantee of Bevo’s debt.  As a result of these initiatives, the Company posted its first ever quarterly net income and positive earnings per share.  Significant operational developments included ZenPharm, the Company’s EU joint venture, obtaining its EU GMP certification in February and its license from the Malta Medicines Authority in mid-May.  As well, as the Company substantially increasing the amount of cannabis sold compared to the same quarter of 2020.

We are also pleased that the Company’s shareholders overwhelming approved the proposed merger with HEXO (TSX: HEXO; NYSE: HEXO)  at yesterday’s shareholders’ meeting.  We are pleased to be joining the Hexo team and are confident that the combined company will be accretive to all of the Company’s stakeholders.”

On December 31, 2020, Zenabis entered into a rental rebate, liability contribution and share purchase agreement to sell the Company’s wholly-owned subsidiary, Bevo Farms Ltd. and its subsidiaries (“Bevo”).  This transaction resulted in Zenabis deconsolidating Bevo as of December 31, 2020 and accordingly, classifying Bevo as a discontinued operation.  As a result, comparative periods have been re-presented to show discontinued operations separately from continuing operations.  Bevo was formerly the sole element of the Company’s Propagation reporting segment.

Key First Quarter 2021 Developments

• In February 2021 the Company announced that its ZenPharm facility had received EU GMP certification. With ZenPharm having received EU GMP certification together with the most recent receipt of final licensing from the Malta Medicines Authority, Zenabis expects to commence recurring commercial exports to the European Union during Q2 2021 with the first shipment to be completed in May 2021.
• In February 2021, the Company announced that it entered into a definitive arrangement agreement (the “Arrangement Agreement”) under which Hexo Corp. (“Hexo”) will acquire all of Zenabis’ issued and outstanding common shares in an all-share transaction. Under the terms of the Arrangement Agreement, Zenabis shareholders will receive 0.01772 of a Hexo common share in exchange for each Zenabis common share held (the “Exchange Ratio”). Warrants and incentive securities of Zenabis will be adjusted to ultimately become exercisable to receive common shares of Hexo based on the Exchange Ratio. At the special meeting of the shareholders of Zenabis held on May 13, 2021, the shareholders approved the Arrangement Agreement with Hexo.
• In February 2021, the Company entered into a settlement agreement and release with a customer (the “Settlement Agreement”) pursuant to which the parties have agreed to withdraw from arbitration proceedings and release each other from all past, present and future claims arising out of the pre-paid supply agreement. Pursuant to the Settlement Agreement, the Company paid $12,500,000 to settle the customer deposit balance of $25,428,780.
• In March 2021, the Company closed the previously announced sale of Bevo Farms dated December 31,2020. Upon closing, Zenabis received approximately $8.79 million in cash proceeds. Following the closing of the sale of Bevo Farms, Zenabis has been unconditionally released from its prior guarantee of Bevo Farms’ obligations to the Bank of Montreal (“BMO”) under Bevo Farms’ credit facility with BMO.
• In January 2021, the Company announced that it had secured a committed $60,000,000 revolving credit facility from a Canadian private debt fund in order to refinance the Senior Notes Payable and provide additional capital into the Company. The revolving credit facility would bear interest at the greater of 10% or the Toronto-Dominion Bank’s prime rate plus 7.55% compared to the current Senior Notes Payable which bear interest at 14% plus other fees. To date, the Company has not drawn on this facility to repay the Senior Debt lenders. In February 2021, the Company filed a petition with the Supreme Court of British Columbia for a determination of the amount required to repay and terminate the Senior Notes Payable, including the Amended Royalty amount in order to draw on the revolving credit facility and repay the Senior Notes Payable.
• In February 2021, the Company issued an unsecured convertible debenture to a third party for gross proceeds of $19,500,000, bearing interest at 8% per annum and scheduled to mature in February 2023. The debenture holder also has the option to convert the principal and accumulated interest to shares at a price equal to the 5-day volume weighted average price.
• In February 2021, the Company established an at-the-market equity (“ATM”) program allowing the Company to issue up to $15,000,000 worth of common shares to the public. As of the date of filing, the Company has concluded the ATM program.
• In March 2021, Zenabis announced the launch of new 10 and 20 pack configurations of pre-roll multipacks for its Re-up brand in both indica and sativa formats.
• During the quarter, the Company introduced three new high-THC strains to market and continued development of four additional new strains which are expected to be commercialized in the second quarter of the year.

Selected Financial Data

Summary First Quarter 2021 Financial Results

Consolidated net revenue in Q1 2021 was $12,418,793 compared to $12,601,116 in the same quarter of the prior year with the decline despite a  27% increase in the quantity of cannabis sold and despite an increase of 8% in gross sales.  Wholesale revenue increased 32% as a result of the Company’s continuing efforts to expand in this segment; however, this was offset by an 11% decline in consumer net revenue resulting from a shift in revenue mix towards the Company’s Re-up value brand, the impact of industry-wide sales price compression, and lower retail demand as a result of ongoing COVID-19 restrictions.

Gross margins before fair value adjustments were $2,669,937 during Q1 2021, compared to $5,006,028 during the same quarter of the prior year with the decrease due mainly to the change in sales mix and lower selling prices.  Gross margins as a percentage of sales were 21.5% in the quarter compared to 39.7% in the first quarter of last year.

Consolidated operating costs were $10,370,486 in Q1 2021 compared to $8,889,155 in Q1 2020 with substantial decreases in salaries and depreciation and amortization offset by increased professional and general and administrative expenses mainly incurred in relation to the Hexo arrangement agreement, settlement of a prepaid supply agreement, a dispute with the Company’s senior lender and the Bevo divestiture.

Consolidated loss from operations was $4,823,474 for the quarter, compared to income from operations of $2,227,751 in the first quarter of 2020, mainly due to lower revenue and gross margins as well as the higher operating costs.

Consolidated net income for Q1 2021 totaled $9.2 million or $0.01 per share, fully diluted, compared to a loss of $7.8 million or $0.02 per share, fully diluted, in Q1 2020. The consolidated net income for Q1 2021 includes a gain of $15.9 million on the settlement of customer deposit for a lesser amount than its carrying value and a $2.9 million gain on the remeasurement of the royalty liability related to the Company’s Senior Notes.

Outlook

Zenabis’ focus is to continue growing revenue through the introduction of new high-THC strains new product formats and development of domestic and international wholesale bulk channels while maintaining reasonable product profit margins, focusing on key product categories, operating efficiencies, and moving to lower cost financing. The Company secured a committed $60,000,000 revolving credit facility to refinance Senior Notes Payable, and upon conclusion of the court proceedings, the Company can leverage the revolving credit facility to reduce borrowing costs and allow additional working capital flexibility. As with any plan, its success continues to be dependent on dutiful execution by the Company and navigating the ever-changing landscape of the Cannabis industry.

The COVID-19 outbreak was declared a pandemic by the World Health Organization in 2020. For the three months ended March 31, 2021, the COVID-19 pandemic did not materially disrupt the Company’s ongoing 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 ongoing operations to date, certain projects have been delayed or cancelled due to the COVID-19 pandemic.  Additionally, due to the COVID-19 pandemic, the Company noted that the closure of cannabis retail locations in various provinces and territories have had an unknown impact on ongoing sales.

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.

Financial outlook

Over the course of 2020, the Company had reduced total debt outstanding by $88.2 million through debt conversions and early repayments, while at the same time extending the majority of its remaining debt outstanding. The various steps taken in relation to the Company’s debt has significantly reduced near-term maturities and maintained working capital availability through the ramp-up of Adjusted EBITDA. The below table provides current principal outstanding as of this date, together with estimated quarterly interest payments:

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; write-off of materials and supplies inventory; restructuring costs; share-based compensation; depreciation and amortization; impairment of assets held for sale; ZenPharm pre-commercialization costs; loss on revaluation of embedded 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 remeasurement of royalty liability; 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:

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: Zenabis expects to commence recurring commercial exports to the European Union during Q2 2021 with the first shipment to be completed in May 2021; Zenabis expects regional sales in Europe by ZenPharm to commence soon after receipt of final licensing; Zenabis’ focus is to continue growing revenue through the introduction of new high-THC strains new product formats and development of domestic and international wholesale bulk channels while maintaining reasonable product profit margins, focusing on key product categories, operating efficiencies, and moving to lower cost financing; the Company can leverage the revolving credit facility to reduce borrowing costs and allow additional working capital flexibility; and 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.  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 September 18, 2020 and the annual information form dated March 31, 2021, 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.

(This information is primarily sourced from Zenabis.  Highly Capitalized has neither approved nor disapproved the contents of this news release. Read our Disclaimer here).