After delaying the timeline on completing construction of the Zenabis Langley facility to preserve cashflow, Zenabis Global Inc. (TSX: ZENA) today announced a rights offering intended to raise up to $20.8 million. 

Zenabis is doing this raise to make sure they can pay for operations until cannabis sales are expected to generate cashflow in mid-2020.

The deal has lots of moving parts so we have provided a guide below to help investors figure out their options.

 

What are the Economics

There are two classes of investors here, those who own Zenabis stock today and those who don’t.

If you own Zenabis stock you have two options:

  1. Sell your right in the open market and pocket the cash.
  2. Pay $0.15 for a new share betting you can sell it for a bigger profit than in option 1. 
    Subscribe for a New Share If:
    (Current share price – $0.15) is greater than (the price of the right x 1.5x)

If you don’t own Zenabis stock you have two options:

  1. If you can go short, short the shares, then buy 1.5x that number of rights in the open market and pay for your new share. Once you have the share in hand use it to close out your short position and pocket the difference.

This is what hedge funds are doing with Zenabis right now and is a zero risk way to make money. At a stock price of $0.30/sh the rights should trade for $0.10/sh. Any cheaper and a profitable long/short trade can be put on generating a risk-free profit.

  1. If you can’t short the stock your next best option would be:
    Buy the Rights If
    (Price of the right x 1.5 + $0.15) is less than the price of the stock.

We know this is complicated, but complication creates opportunity.

With the stock only trading for $0.30, selling a right for even $0.03 is still a 10% gain.

We think current investors will be happy to sell their rights starting Oct. 30, creating a situation where bargains will be found.

Mark your calendars for the 30th and have your trading screens open because there could be some fireworks.

 

Explaining the Rights Offering

Under the terms of the offering, any current holder of a common share will gain a transferable right. One and a half rights can be used to purchase a common share for $0.15, over 70% below where the stock was trading at the beginning of the day. 

Shareholders who don’t wish to take part in the offering can take no action and allow their rights to expire, or those rights can instead be sold on the Toronto Stock Exchange.

We don’t see why any investor would let rights with real value expire worthless so we expect any active owners of Zenabis stock will either sell their rights or subscribe for new shares at $0.15.

If the offering is fully subscribed 139 million new shares will be issued, increasing the current share count by 66%.  

If the full offering isn’t bought out by current shareholders, Chief Executive Officer Andrew Grieve and Director Natascha Kiernan have committed legally to purchase 800,000 shares or 0.6% of the total offering.

Other insiders, in a non-binding fashion, said they will buy 41 million of the shares or 29.5% of the offering.

Insider backing of this deal is important to show investors management is willing to put more skin in the game to keep Zenabis solvent.

The rights will begin trading on the TSX on Oct. 30 and will stop trading at 12 noon on Nov. 27.

Anyone who wants new shares needs to deliver the rights and $15 for each 1.5 rights to their broker by 5:00pm EST on Nov. 27.

Commenting on attempting a less dilutive way of raising additional capital the company said:

Liquidity is an important resource given the current state of the Canadian cannabis market. Although Zenabis does not currently need the proceeds from the rights offering to deliver on its revised business plan, the company believes having excess cash on hand is in the best interest of shareholders.

That revised business plan included the announcement about slowing construction on the Langley facility, as well as revealing the existing Zenabis Atholville facility actually produced more product than initially projected. Atholville’s cultivation output last month hit 2,089 kg of dried cannabis. 

In other company news, Zenabis recently inked a cultivation deal with Tantalus Labs Ltd. Under the terms of that newly-inked deal, Zenabis will grow cannabis from clones provided by Tantalus, after which Tantlus will handle the drying and packaging processes before product is shipped to retail outlets. 

Joining the ranks of major licensed producers such as Organigram, Aphria, Aurora, and The Supreme Cannabis Company, Zenabis was additionally selected as a partner to provide PAX compatible vape pods for PAX Labs, Inc. 

Vape and edible products are expected to begin hitting shelves in December after final regulations were handed down from Health Canada.