BZAM Ltd. Reports Second Quarter 2023 Results

BZAM Ltd., a leading Canadian cannabis producer, is pleased to announce its financial and operating results for the three and six months ended June 30, 2023.

Q2 2023 Highlights

• Achieved quarterly gross revenues of $30.0 million during Q2 2023, up 89% from Q2 2022;
• Achieved quarterly net revenues of $19.3 million for Q2 2023, up 66% from Q2 2022;
• According to Hifyre, the Company captured market share of 4.4% in Q2 2023, ranking as the 7^th largest producer in Canada;
• Executed on our post-merger plan to right-size our production platform, monetize redundant facilities, and reduce our cost base. This includes the sale of the Midway, BC facility (completed August 4, 2023) and the Maple Ridge, BC facility (expected to be completed in September 2023), which should produce an aggregate of approximately $7 million in gross proceeds.
• Incurred a non-cash impairment charge of $61.8 million, arising primarily from the write-off of goodwill and the market-wide reduction in cannabis property values, resulting in the Company recording a net loss of $65.5 million; and
• Achieved EU-EMP certification for the Company’s Ancaster Facility, allowing for international distribution of products. The Company also entered into a strategic distribution agreement with a UK based import and distribution company, expecting to supply 600kg of flower in each of the next two years.

Gross and net revenue: Gross and net revenue increased by 89% and 66% respectively in comparison to Q2 2022, primarily driven by the growth in the Company’s brand and product portfolio as the result of the merger between BZAM Holdings Inc. and The Green Organic Dutchman Holdings Ltd.  Relative to Q1 2023 however, gross and net revenue were 14% and 20% lower respectively.  Worth noting, in Q2 2023, the Company saw a 20% increase in sell through to retail stores from the Ontario Cannabis Store (“OCS”) (Ontario being the Company’s largest market), while recording lower wholesale Net Revenue from the province. This was largely driven by a quarter-on-quarter inventory drawdown at the OCS used to meet the increased retailer demand and non-provisioned returns from Q1 sales which are not expected to recur at the same level.  Taken together with an excise tax correction from Q1 2023 being recorded in Q2 2023 normalized Q2 gross and net revenues would be more in line with Q1.

Gross profit: Direct Gross Profit increased by 23% vs. Q2 2022. As compared to Q1 2023, Direct Gross Profit increased from 13% to 16% of net revenue, mainly as a result of reductions in production costs and improvements in yields in Q2 2023. Despite this, overall gross profit percentage was 9.5% in Q2 vs. 12% in Q1 2023 as a result of $1.1M higher fair value adjustments in Q2 2023.

Sales, General and Administrative Expenses (“SG&A”): SG&A increased by 68% in Q2 2023 vs. Q2 2022, commensurate with the Company’s overall growth.  As compared to Q1 2023, the Company reduced SG&A by $0.52M or 5% in Q2 2023, due to cost containment initiatives and operational synergies realized, including reductions in headcount, partially offset by an increase in sales and marketing expenses related to in-store activity to promote sales over the coming months. The Company expects to continue reducing SG&A through the balance of the year as it continues its cost control initiatives.

Loss from operations: Loss from operations for the quarter was $12.1M compared to $11.7M in Q1 2023. The slight increase in loss was driven by lower gross profit, and partially offset by the decrease in SG&A quarter-over-quarter.

Q2 Operational Highlights & Outlook
The Company is focused on growing its topline, improving margins and reducing SG&A costs in order to become cash flow positive in subsequent quarters. The Company is undertaking several initiatives through the year to expand revenues and control costs. During and subsequent to Q2 2023, the Company achieved the following: 

• Right-Sizing of Asset Base and Increasing Utilization Rate and Efficiency of Core Facilities: The Company is committed to concentrating activities and maximizing utilization at its two core facilities in Ancaster, ON and Pitt Meadows, BC. To achieve this, the Company has divested, or expects to divest, its Puslinch, ON facility (completed on June 30, 2023), Midway, BC facility (completed August 4, 2023), Maple Ridge, BC facility (expected to be completed in September 2023), and Edmonton, AB facility (listed for sale in August 2023). With these divestments, the Company expects to reduce borrowings, interest expense, COGS, and SG&A, without impacting future sales.
  
  
• Revenue Growth and Margin Expansion: The Company expects to launch 11 new SKUs in Q4 2023 and over 20 new SKUs in Q1 2024. At the same time, the Company continues to focus on selling higher margin products and improving margins on existing products. By way of example, the Company anticipates the closure of the Edmonton, AB facility and relocation of activities to Pitt Meadows, BC and Ancaster, ON will materially improve COGS company-wide by eliminating indirect fixed costs and overhead. The Company does not expect to incur expenses for unabsorbed overheads by 2024.
  
  
• Amended Credit Agreement: On June 30, the Company entered into a fifth amendment of its Amended and Restated Credit Agreement relating to its credit facility. The key amendments included: (i) that any repayment made in respect of the Base Facility Amount (currently $24 million) prior to the maturity date (each such repayment, a “Base Facility Prepayment”) shall permanently reduce the Base Facility Amount (but, for greater certainty, not the Maximum Revolving Facility Limit of $34 million) by an amount equal to such Base Facility Prepayment (for clarity, this does not reduce available credit); (ii) that on and after September 30, 2023, the Company shall make Base Facility Prepayments, on a monthly basis, in amounts to be determined by its lender acting reasonably; (iii) that the EBITDA financial covenant be amended to take effect for the month of July 2023; and (iv) that a requirement to remit to the lender no less than fifty percent of the proceeds of the sale of the Midway facility and no less than fifty percent of the proceeds of the sale of the Maple Ridge facility, for an aggregate amount that is greater than or equal to $3 million. Subsequent to June 30, 2023, in anticipation of a possible breach of the covenant requiring positive EBITDA for the month of July 2023, the Company requested a waiver on the covenant from its lender.
  
  
• Working Capital: As at June 30, 2023, the Company had a positive working capital of $9.6 million. The total cash position was $3.05 million, including $0.7 million of restricted cash. Subsequent to the quarter end, the Company secured an additional $1.325 million pursuant to a promissory note with Stone Pine Capital. This cash will be used primarily towards covering working capital requirements and operating costs as the Company moves towards achieving positive operating cashflow.
  
  
• Completed private placement with proceeds of $5 million, bolstering balance sheet: On June 9, 2023, the Company completed a non-brokered private placement, whereby it issued 22,222,223 Units at a price of $0.225 per Unit for gross proceeds of $5 million. Each Unit consisted of one Common Share and one Common Share purchase warrant (each, a “Private Placement Warrant”), with each Private Placement Warrant entitling the holder thereof to acquire one Common Share at an exercise price of $0.40 for a period of three years from the closing date.
  
  
• EU GMP Certification: On May 11, 2023, the Company announced that its Ancaster Facility had received EU-GMP certification. This certification permits the Company to export certain medical cannabis products to numerous international markets, and allows the Company to execute on existing strategic distribution partnerships which have already been established.