Zenabis Revenue Falls Short of Expectations

Zenabis Global Inc. [stock_market_widget type="inline" template="generic" color="default" assets="ZENA" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] saw net revenue fall short of expectations in Q2 2019 after it was forced to reject poor quality cannabis from a third-party.

The firm expected net revenue on cannabis sales to hit $10 million to $12 million during the three months to June 30, 2019. However, it only managed to achieve $7.25 million in the end.

Third-party producers failed to supply 554 kg of cannabis at a saleable quality, forcing Zenabis to return or reject it. It then had to hold back certain products it had produced in May and June. It has now terminated its contract with the producer that let it down.

Zenabis also slashed prices in a bid to become more competitive and seize market share in certain provinces. This brought revenue down by $790,000 during the quarter, while delayed shipments cost it a further $310,000.

Total net loss stood at $18.5 million during Q2, widening from just $4 million during the previous quarter. Net revenue was $25 million, with $7.25 million from cannabis and the rest coming from propagation.

Gross margin before fair value adjustment totalled $8.4 million. Total operating expenses for the three months were $18.9 million, which is broadly in line with the previous quarter, but loss on the revaluation of derivative liability was $4.6 million in Q2 2019, compared to a gain of $7.9 million for Q1. This was down to fluctuations in Zenabis’ share price.

ZENA was trading at $3.62 on Mar. 1, 2019, and it had decreased to $1.88 by the end of Q2.

Cash on hand decreased from $17 million on Dec. 31, 2018, to $8.7 million at Jun. 30, 2019.

During Q2, Zenabis cultivated 2,473 kg of dried cannabis flower, which exceeded its forecast by 40%. It now expects its Atholville facility to achieve production capacity of 54,000 kg on an annualized basis, while it said it remains on course for total production to reach 143,200 kg per year across its entire estate.

The Atholville facility produced cannabis at a cost of $0.78 per gram during Q2, and it believes it can achieve $0.50 per gram at its Langley campus.

“We executed at or above plan in the second quarter and, in so doing, continued to make significant progress towards our goal of becoming one of the largest licensed producers of medical and adult-use recreational cannabis in Canada,” said chief executive Andrew Grieve

He expects Atholville to yield 16,100 kg and Langley to produce 1,650 kg in the second half of 2019, which should drive meaningful sequential revenue growth for the remainder of the year.

Zenabis was formed through the merger of Sun Pharm Investments Ltd. and Bevo Agro Inc. in January 2019, and it has increased its licensed capacity by nearly 600% since then. It has facilities in Atholville, New Brunswick; Delta, Aldergrove, Pitt Meadows, and Langley, British Columbia; and in Stellarton, Nova Scotia.

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Martin Green
Martin Green is an experienced journalist with a strong focus on the cannabis, alcohol, and gambling industries. He is particularly interested in the political issues affecting the global marijuana trade, and he has a keen focus on regulation changes and legal topics. He holds a BA English Literature, MA Creative Writing and a National Qualification in Journalism diploma. He has worked in journalism since 2009 and written for a broad range of newspapers, business titles and magazines, including The Sun, The Metro, The Journal, Livestrong, Drinks Retailing News, Harpers, Sportsbook Review, Vital Football, Essex Live and Surrey Live. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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