Sun. Nov 17th, 2019

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Zenabis Rights Offering. My Understanding

Front Forums Due Diligence Library Zenabis Rights Offering. My Understanding

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      Abe Guenther
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      This is what I understood from the October 24th 2019 Zenabis Rights Offering:

      Every 1 common share you hold as of EOB October 31st will earn you 1 free Right.

      Here are your options with the Rights Offering:

      1. Use 1.5 Rights to buy 1 Common Share at 15 cents.
      2. Trade your Rights on the open market under ZENA.RT for an undetermined price beginning Thursday October 30th and ending the close of trading on Thursday November 27th (exactly 4 weeks).
      3. Do nothing with your rights and let them expire on November 27th.

      Let’s use Friday October 25th closing price of $0.26 for example:

      …I know most or all have higher averages but lets use this for the math to try and calculate the absolute lowest possible price the stock can go instigated by the Rights Offering.

      Being the owner of 1500 shares at $0.26 gives you 1500 rights which will allow you to buy 1000 common shares at 15 cents.

      Example calculation:
      $0.26 x 1500 = $390 (original cost)
      $0.15 X 1000 = $ 150 (rights exercised)
      By exercising your Rights Offer, you now own 2500 shares at and average share price of $0.216 cents.

      …The math is easy: 1500 divided by 1.5 = 1000 so regardless of how many shares you own take your total number of shares owned prior to October 31st and divide it by 1.5 to give you the number of extra shares you have a right to buy at 15 cents.

      REMEMBER the value here, only existing shareholders have this right!

      If we hypothetically say there is $0.00 value in the ZENA.RT, which is ridiculous, but using it as the worst case scenario and no dreadful news surfaces, it would make common sense that the minimum share price as a direct result of the Rights Offering is $0.216.

      However, it is crazy to believe this is a fair value considering the project 2019 sales to be $80 million.

      We have all seen crazy things happen with stock prices since legalization a year ago and especially over the summer with a steady down trend and still no clear end in sight. So this Rights Offer is not as bad as it looks at first considering the similar situation with the vast majority of businesses in the sector suffering through the same challenges.

      —————————————————————————————————————

      Please take a deep breath and reconsider your strategy before you set your stop loss too tight or hit the panic sell button.

      Total issued and outstanding shares details and math:

      There are currently approximately 208.63 million issued and outstanding Common Shares trading openly on the TSX.

      A maximum of 139,086,624 Common Shares will be issued pursuant to the Rights Offering, representing 66.6% of the currently issued and outstanding Common Shares. The Rights Offering will be open to holders of Common Shares of record at the close of business October 31st who are residents in Canada.

      Dilution:
      Adding the new number of shares through the Rights Offering, the new total of issued and outstanding Common Shares will increase to approximately 348 million.

      This diluting is strategically designed to minimize loss of share value as much as possible while achieving the goal of adequate financing at the same time. Choosing this method over other more aggressive Public Share Offerings or dilution through high interest financing or joint ventures is in my view honorable and sympathetic to existing shareholders who have take massive unrealized gains due to the increasing negative environment surrounding the cannabis sector since legalization. Designing a finance plan would be tough for any business in this competitive climate brought on by unexpected Health Canada regulations holding up growth and the black market continuing to thrive.

      The option they chose to raise capital and thereby diluting shares is not as bad as if they had chosen to flood the open market with shares anyone could buy. The Rights Offering at the very least gives current shareholders a fighting chance to average down their heavy bags.

      In my opinion the shareholder needs to remember why they bought the shares in the first place;

      – Did you believe in the company when you originally bought shares?
      – Did you not voluntarily pay for each share at a price you thought was fair at the time?
      – Did you weigh the risk vs reward?

      …These same questions apply to you today with the choice you have with the Rights Offering opportunity. As an investor we have to decide if there are any other better opportunities than this given the sentiment in the entire sector. Is Zenabis unique in their struggle?

      Ex CEO:
      Zenabis management feels they need to stop their Ex CEO from dumping his excessive number of shares on the open market; He has 23 million remaining shares to dump at his discretion, with the availability of 2.25 million additional shares every 19th of the month if my due diligence is correct.

      Potential Short Attack?
      I do not know who they feared would instigate a hostile takeover which led to management’s decision to instigate the Rights Offering AKA; Poison Pill, but if it was the Ex CEO who had millions of shares at his disposal, we could see an unprecedented short attack. Invoking a Short Attack by a single holder of an enormous number of shares is not unheard of. I have personally seen in happen numerous times to a number of stocks. It can be relentless and can last a long time to wear down shareholders until they feel forced to sell before the stock becomes worthless. Like I said, I have no idea if this is in the cards but I believe it’s worth being aware of. …It all depends on how “hostile” the situation is.

      Regardless of the current climate, the stock should eventually go up. So, please don’t let the price slide to 15 cents by panic selling just because you read this number.

      I have thought this offer over and over again attempting to figure out the absolute worst case scenario from this Rights Offering but before you make any decisions on what I have said, please read the full details of the Rights Offering for yourself and make your own decision.

      Remember, do your own due diligence to make your decision!!

      Copied and edited from another post which I believe will help explain the situation even more clearly:

      Panic selling or stop losses too tight:
      If you sell your shares right now at 26 cents, you are enabling someone else to lower their average instead of you taking advantage of the benefit! Look at the following example:

      If you sell 1500 Common Shares at the ridiculously low price of $0.26 before EOD October 31st, it will enable the buyer to obtain 1500 Rights free of charge which he/she can use to buy 1000 Common Shares at the discounted price of $0.15 thereby giving up your Right to exercise it yourself!!

      The math:
      – You sell 1500 shares $0.26 = $390
      – The buyer now has the “Right” to buy 1000 Common Shares for $0.15 = $150
      – Total cost for 2500 shares is $0.216
      – You have now made it possible for that person to sell his/her shares for any price between $0.216 and $0.26 without losing money

      Do you really think that even with approximately 348 million shares outstanding, assuming the Rights are all exercised, Zenabis Common Stock is not worth more than $0.216 cents? So then, why would you sell now unless you fear bankruptcy? But if bankruptcy is in the cards, then we have to ask ourselves why would management commit to purchasing an additional 41,059,486 shares for $6.2 million if they didn’t believe in the success of the company?

      If this was some sort of strategy to steal over $20 million, they would not be able to keep it. They would be criminally charged, get jail time and have to pay back every penny.

      Where I got that number:
As at the date of the announcement, the Insider Group claims to own 73,408,092 Common Shares (representing 35.2% of the issued 206.63 million shares). After exercising every Right, they will own an aggregate of 114,467,578 Common Shares (representing 32.9% or approximately 41 million shares of the new 348 million issued and outstanding shares)

      In my opinion, this offering is done strategically to save the company and to give back to existing shareholders a good chance to make a return on their investment.

      If you are a shareholder, consider all the logic and reconsider panic selling. Not only are you selling your Shares, you are also selling your Rights.

      Because many will not heed logical advice and chose to panic sell instead, expect the bears to work excessively to trigger every available stop loss before being satisfied they have covered their short position. Therefore, expect to see prices dip to 0.216 or maybe even slightly lower. If it does happen, it will happen quickly and as soon as people realize the bounce is complete and the price begins to rise, there will be massive FOMO!

    • #3304 Reply
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      Cannabis Investment Group [CIG]
      Keymaster

      Great analysis, thanks.

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