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Report on Business Cannabis Professional Zenabis rejected 554 kilos of pot from supplier ‘due to quality issues’

Zenabis Global Inc.’s cannabis sales fell several million dollars short of the company’s own quarterly sales target, after Zenabis had to return or reject 554 kilograms of cannabis from a third-party supplier “due to quality issues,” and dropped its prices to compete for market share.

The company also incurred a $3-million loss due to a fire at its facility in Langley, B.C. the company disclosed on Wednesday. The fire “had no impact on the Company’s cannabis production or cannabis supply commitments,” Zenabis said.

The company sold $7.6-million worth of cannabis in its second quarter, up from $4.6-million in the preceding quarter. However, it fell short of the $10-million to $12-million sales target it set back in May.

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The company attributed the shortfall to three factors:
  1. Selling price: Zenabis dropped its selling price to provincial wholesalers in July to try to increase market share. “This resulted in an approximate retroactive reduction of $790,000 in net revenue for the quarter,” the company said in its MD&A.
  2. Logistical problems: “Due to logistical issues, certain shipments totaling approximately $310,000 were delayed into the month of July,” the company said.
  3. Poor quality pot from suppliers: Zenabis said that it had to “return or reject” 554 kilograms of cannabis from an unnamed third-party “due to quality issues.” Due to the bad batch, Zenabis said it held back some of its own recently grown product “in order to provide consistent supply to provincial counterparties beyond June of 2019.” Zenabis said it has provided a notice to terminate the supply agreement with the “the third-party who shipped the cannabis that was not saleable.”

Zenabis did a total of $25-million in sales in the quarter, $18.1-million of which came from its vegetable propagation business in Langley. It posted a $7.9-million loss from operations, and a net loss of $18.5-million.

The non-operational contributors to the net loss included $3-million in damage and clean up costs associated with the fire, and a $4.6-million loss due to the revaluation of derivative liabilities, related to convertible debt, “which was the result of fluctuations in the Company’s share price.”

On the cannabis side, metrics generally improved. The cost of goods sold per gram declined to $2.13 from $2.90, and the cost to produce a gram of cannabis declined to $0.78 from $1.70.

The improvement in growing costs has led to the company to lower the projected growing costs at its Langley facility from $0.75 per gram to $0.50 per gram, which would make it one the lowest cost producers in the industry.

Net revenue per gram sold declined to $4.22 from $5.92.

“The Company expects increased competition in the cannabis market, which will result in further declines in the wholesale price of cannabis in 2020,” Zenabis said.

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