Bottom Line

Zenabis remains possibly the most interesting stock in the cannabis industry.

Management has chosen to push the balance sheet to the wall to fund an aggressive expansion effort that requires perfect execution from now on.

Zenabis is now on the clock with 9 months left to execute before C$67.5 million of debt comes due in June 2020.

Zenabis won’t have enough cash to pay off the debt so their only hope will be that positive EBITDA convinces the lenders to roll the debt, or another party to extend a loan that can be used to pay off the C$67.5 million owed to the other lender.

Without positive EBITDA (a proxy for cashflow), lenders would jump at the chance to push the company into default in order to take a larger ownership stake.

This is a scenario where Zenabis shareholders would likely lose even more than they already have.

However, if management can stay solvent and renegotiate the debt in June, this stock could easily be a 10 bagger (1,000% upside).

It seems too good to be true, so is it?

What Has to Go Right From Now to June 2020?

Zenabis needs to start generating EBITDA and soon.

We estimate that lenders will want to see no higher than 4x of debt over EBITDA by the time the C$67.5 million is due. With C$107 million of debt on the cannabis business that implies EBITDA of C$8 million by the June quarter of 2020 vs negative EBITDA in the third quarter.

This level of EBITDA would require 23,000 kg to be sold each quarter or 91,000 kg a year.

91,000 kg would require a 50% market share of the entire Canadian cannabis market.

Even if we assume sales double with the rollout of cannabis 2.0 products, Zenabis would still make up 25% of the market.

25,000 kg of the 91,000 is guaranteed due to contracts with Tilray and Starseed, but the remaining 64,000 would be at the whims of consumers.

With such a heroic ramp up in volumes required, we cannot in good conscience recommend anyone own Zenabis stock until we see how the next two quarters progress.

If Zenabis finds a way to hit its sales numbers, there will be more than enough upside left for investors to buy in at a later date.

There are going to be fireworks either way so buckle up, grab your popcorn and enjoy the show.

*We estimate market price falls 30% to $3.46/gram and production costs fall 22% to $1.80/gram.

Earnings Review

This week’s onslaught of quarterly earnings numbers continues to arrive, with Vancouver-based Zenabis Global Inc. (TSX: ZENA) today announcing the company is still operating at a loss but has narrowed loss numbers from the previous three months.

During the period ending Sept. 30, Zenabis more than doubled cultivation from the previous quarter, producing slightly more than 5,200 kg of dried cannabis and beating the company’s initial projections by 25%. 

Additional product was produced during the quarter after receiving new licensing and licensing amendments at existing sites such as Zenabis Langley and Zenabis Atholville. 

Despite that increased production capacity, gross revenue was actually down by 52% quarter over quarter, dropping from $25 million to $12 million from Q2 to Q3 2019. 

While actual cannabis sale numbers remained steady between quarters, the drop in revenue was caused by 75% lower propagation revenue in Q3 due to growing season activity changes and gaps in grow orders.

With high operational costs still going towards completing the company’s Langley grow facility, Zenabis reported a net loss of $5.8 million. That number is significantly down from the previous quarter’s $18.4 million loss, representing an estimated loss per share of around $0.03 compared to $0.09 in Q2. 

CEO Andrew Grieve issued this statement to investors today while discussing the company’s operations throughout the quarter: 

Zenabis expanded its capacity and cultivation yields, raised $65 million in financing, and submitted further license amendments that will increase annual cultivation capacity by over 300% compared to the Q2 of 2019. These license amendments, expansion into the Ontario market, and launch of new value brand Re-Up meaningfully improve our competitive position for the fourth quarter.

The company is aiming for increased revenue in the next report, with Zenabis already outpacing the Q3 shipment numbers so far this month. 

Construction at the Langley site and final licensing is due to wrap up by Q2 2020, with a target production capacity of 143,000 kg per year. 

Aside from producing standard dried flower, Zenabis is also preparing for the launch of value added “cannabis 2.0” products in Canada, entering into a definitive agreement this past quarter to acquire water soluble inputs that will be utilized for cannabis-infused beverages. 

Zenabis is additionally one of the companies selected to work with PAX Labs to supply cannabis extracts for PAX Era compatible vape pods when vaping products finally see legalized sales later this year.