A Canadian marijuana producer has told investors that current market pressures led to a disputed rights offering that caused a dramatic drop in value for the firm.
To appease investor sentiment about the new financing, the executive team of Zenabis Global (TSX:ZENA) hosted a call with shareholders on Tuesday (October 29). During the call, CEO Andrew Grieve addressed the market’s reaction to the company’s recently announced rights offering.
The leading executive called the rights offering a prudent approach to current capital market conditions seen among cannabis players.
The executive admitted it’s been an extremely difficult year for shareholders of the firm. He then pointed to general realities in the Canadian cannabis market — primarily the competition seen by producers like Zenabis from unregulated cannabis players.
Grieve said equity in the cannabis space has reduced for licensed producers; now, he explained, these companies are pursuing alternative capital raises by way of convertible debt financings.
In his opinion, given current market valuations, Zenabis currently trades at a “significant discount” compared to its peers in the public market.
Effectively, Zenabis plans to raise C$20.8 million by way of a rights offering to current shareholders. The raise is being done as a way to balance the cash holdings of the company — a move that is “in the best interest of shareholders,” according to the producer.
Grieve said that, given the rules of the Toronto Stock Exchange, starting on Wednesday (October 30) common shares of Zenabis will stop trading with an entitlement to a right; instead, the rights will trade separately on the Canadian exchange.
He said the two top questions the company has received since announcing the rights offering are why this method was chosen and how Zenabis settled the price of the rights, which give holders a common share entitlement at C$0.15.
“Zenabis determined that it was not in the best interest of shareholders to raise incremental debt from non-traditional sources, given additional debt would’ve increased cash burn until it became cash flow positive (and) increased our overall leverage, and given the requirement to raise convertible debt would’ve been meaningfully dilutive to shareholders,” Grieve told investors during the call.
In a previous email statement to the Investing News Network, Jonathan Anthony, director of corporate communications with Zenabis, said the company was pleased with the vote of confidence the offering provides since insiders at the firm are participating.
“That commitment is a real vote of confidence in the future of the business and we believe investors will respond positively,” he said. He added that the response from the market is outside of Zenabis’ control.
Zenabis shares dropped nearly 40 percent when it announced its rights deal last Thursday (October 24).
On Monday (October 29), leading up to the call with investors, shares of the firm bounced back with a 14 percent spike in Toronto. The company eventually finished the trading day at a price of C$0.29, representing a 16 percent spike.
Year-to-date, shares of Zenabis have collapsed 95.25 percent, resulting in a loss per share of C$5.71.
“(The rights offering) was done to offer shareholders the most compelling opportunity possible to maintain their ownership in the business,” Grieve said.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.