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Zenabis Global Inc
Symbol ZENA
Shares Issued 901,283,161
Close 2021-05-14 C$ 0.12
Recent Sedar Documents

Zenabis has $9.13-million continuing ops profit in Q1

2021-05-14 22:52 ET - News Release

Mr. Shai Altman reports

ZENABIS ANNOUNCES FIRST QUARTER 2021 FINANCIAL RESULTS

Zenabis Global Inc. has released its financial results for the quarter ended March 31, 2021.

First quarter 2021 highlighted financial results:

  • Quantity of cannabis sold totalled 4,753 kilograms in Q1 2021, which was 27 per cent greater compared with 3,730 kg in Q1 2020.
  • Consolidated gross revenue totalled $16.2-million in Q1 2021, 8 per cent 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 per cent of net revenue in Q1 2021, compared with $5.0-million or 39.7 per cent of net revenue in Q1 of the prior year.
  • Consolidated adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter totalled a loss of $1.9-million, compared with loss of $768,000 in Q1 2020.
  • Consolidated net income for the quarter totalled $9.1-million or one cent per share, fully diluted, compared with a loss of $7.8-million or two cents 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 [European Union] joint venture, obtaining its EU [good manufacturing practice] certification in February and its licence from the Malta Medicines Authority in mid-May. As well, the company substantially increased the amount of cannabis sold compared with the same quarter of 2020.

"We are also pleased that the company's shareholders overwhelmingly approved the proposed merger with Hexo [Corp.] 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 Dec. 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. This transaction resulted in Zenabis deconsolidating Bevo as of Dec. 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 second quarter 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 under which Hexo will acquire all of Zenabis's 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. 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 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 prepaid supply agreement. Pursuant to the settlement agreement, the company paid $12.5-million to settle the customer deposit balance of $25,428,780.
  • In March, 2021, the company closed the previously announced sale of Bevo Farms dated Dec. 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 Bank of Montreal (BMO) under Bevo Farms' credit facility with BMO.
  • In January, 2021, the company announced that it had secured a committed $60-million revolving credit facility from a Canadian private debt fund 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 per cent or Toronto-Dominion Bank's prime rate plus 7.55 per cent compared with the current senior notes payable, which bear interest at 14 per cent 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 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 $19.5-million, bearing interest at 8 per cent per annum and scheduled to mature in February, 2023. The debentureholder also has the option to convert the principal and accumulated interest to shares at a price equal to the five-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-million 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 preroll multipacks for its Re-up brand in both indica and sativa formats.
  • During the quarter, the company introduced three new high-tetrahydrocannabinol 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:
                       CONDENSED CONSOLIDATED INTERIM STATEMENTS OF NET INCOME (LOSS)

                                                                   Q1 2021            Q1 2020            Q1 2019
Financial results
Gross revenue                                                  $16,178,869        $15,048,030         $5,077,104
Net revenue (i)                                                 12,418,793         12,601,116          4,350,828
Gross margin before fair value adjustments                       2,669,937          5,006,028          2,288,083
Operating expenses                                              10,370,486          7,993,318         17,300,601
Operating (loss) income                                         (4,823,474)           192,685        (12,365,720)
Other income (expenses)                                         13,994,643        (11,571,369)         6,386,482
Net income (loss) from continuing operations                     9,133,819         (9,414,910)        (4,958,616)
Adjusted EBITDA (loss) from continuing operations (ii)          (1,852,841)          (767,915)        (7,862,300)
Income (loss) from continuing operations per share, basic             0.01              (0.03)             (0.03)
Income (loss) from continuing operations per share, diluted           0.01              (0.03)             (0.03)
                                                              ------------       ------------       ------------

(i) Net revenue represents total gross revenue exclusive of excise taxes levied by the Canada Revenue Agency 
(CRA) on the sale of medical and recreational cannabis products, effective Oct. 17, 2018.
(ii) Note the non-generally accepted accounting principle financial measure.

Summary first quarter 2021 financial results

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

Gross margins before fair value adjustments were $2,669,937 during Q1 2021, compared with $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 per cent in the quarter compared with 39.7 per cent in the first quarter of last year.

Consolidated operating costs were $10,370,486 in Q1 2021 compared with $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 with 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 totalled $9.2-million or one cent per share, fully diluted, compared with a loss of $7.8-million or two cents 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 a 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's focus is to continue increasing 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-million 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 continuing operations or financial condition. All of the company's facilities continue to be operational, and the company continues to monitor and adjust operating procedures as needed based on the guidance of various levels of government agencies for the regions it operates in. Although there have not been significant impacts to the company's continuing 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 has had an unknown impact on continuing sales.

The situation is dynamic, and the ultimate duration and magnitude of the impact on the economy and its business are not known at this time. Future impacts could include an impact on the company's ability to maintain operations and to obtain debt and equity financing, impairment of investments, impairments in the value of the company's long-lived assets, or potential future decreases in revenue or the profitability of the company's continuing operations. The company continues to work diligently to ensure operations continue and product is delivered while continuing to emphasize the safety of its 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 have significantly reduced near-term maturities and maintained working capital availability through the ramp-up of adjusted EBITDA.

About Zenabis Global Inc.

Zenabis is a significant Canadian licensed cultivator of medical and recreational cannabis. Zenabis employs staff coast to coast across facilities in Atholville, N.B.; Langley, B.C.; and Stellarton, N.S. Zenabis currently has 111,200 kilograms of licensed cannabis cultivation space across three licensed facilities in Canada, together with its cannabis import, export and processing joint venture, ZenPharm, operating from Birzebbuga, Malta.

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