Today TSX-listed Zenabis Global (TSE: ZENA) announced a partial conversion of its $17.4 million of secured debt.
The lender has agreed to convert $6 million of the principal amount to shares leaving $11.4 million outstanding.
This partial conversion is positive news for the company.
This debt is due in June of 2020 so it increases the chances Zenabis is able to pay off or renegotiate all of the debt coming due this summer.
The company has a long road ahead, however, with about $58 million of debt coming due in June 2020 even if this secured lender converts the other $4 million to shares.
Investors should understand that what they are betting on is not that Zenabis can pay off all the debt in June, but that the company is able to grow production enough by then to negotiate a more traditional type of financing (debt with a big bank) and use this cash to pay off the June maturities.
Yes Zenabis is diluting shareholders further with all of these extra warrants, but if the company can muddle through June, there should still be upside to the stock.
Zenabis is one of the lowest-cost producers in Canada and is ramping up production rapidly.
If they are successful selling to consumers with Cannabis 2.0 products, the company will see an explosion in EBITDA and will be in a good position to deal with post-June 2020 debt maturities.
Details of the Conversion
The lender also has the option to convert another ~$4 million of the loan to shares, cutting the loan balance down to $7.4 million.
The conversion of a portion of the debt to shares will see Zenabis issue 39 million new shares and 20.1 million new warrants exercisable at $0.20.
If the lender converts the other $4 million of the loan, another 26 million shares and 1.3 million warrants for a grand total share issuance of 86 million shares it will mean an increase of about 40% to the current share count.