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HIGHLIGHTS
  1. Zenabis is looking to raise up to $20.8-million by giving shareholders the option of buying common shares at $0.15 per share.
  2. The company’s stock price nosedived, as nearly 17 million shares traded hands on Thursday.
  3. It’s the latest in a string of usual deals in the cannabis space by companies struggling to raise money in a bear market.

The price of Zenabis Global Inc. shares dropped 40 per cent on Thursday after the company announced plans to raise up to $20.8-million using a rights offering that priced common shares 73 per cent below the five-day average market price.

It’s the latest in a string of expensive and unusual deals across the cannabis space, as companies struggle to raise money amid a vicious sell-off.

The offering gives Zenabis shareholders the right to buy common shares at $0.15, compared the $0.49 closing price on Wednesday. Shareholders have a month to decide whether or not to exercise their rights and re-invest in the company. If all the rights are exercised, the total number of shares will increase by 66 per cent.

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Company insiders have already committed to buying $6.2-million worth of shares, Zenabis said in a news release. That did little to reassure investors who fled the company in droves, with nearly 17 million shares trading hands on Thursday.

"I understand that investors are getting hit very hard,” said Zenabis CEO Andrew Grieve in an interview.

“Our strong preference was to take equity rather than debt. Given we are investors and we all own a share of this business, and the founders and some of the senior leadership have all written seven-figure cheques to the company, and are putting in additional capital, we did not want to be in a position where we took on greater financial risk, in combination with operational ramp-up risk," he said.

Mr. Grieve defended the pricing of the deal in the context of a volatile and downward trending market.

"It could be that the market improves, or it could be that the market weakens, but if you have a market where you have observed meaningful sell-offs over short periods of time, then when pricing a rights offering you should price for the downside, rather than pricing aggressively, because you don't have the option of amending your price once you've gone to market," he said.

Zenabis isn’t the only company that has turned to insiders as the equity market has dried up. On Wednesday, HEXO Corp. said it would raise $70-million, selling convertible debentures. Company insiders, including CEO Sebastien St-Louis and board members Michael Munzar, Vincent Chiara, Nathalie Bourque and Adam Miron, among others, are expected to take roughly $8.7-million of the deal. The debentures carry an 8 per cent interest rate and were issued with a conversion price of $3.16, which was below the market price.

Other companies – Sundial Growers, Cresco Labs and Columbia Care, to name a few – have tried to bolster investor confidence by announcing voluntary lock-ups for managers and directors.

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For Zenabis, the offering comes on the heels of news that it is slowing its expansion plans, “in order to preserve cash flow given current market conditions and reduce ramp-up risk,” the company said in an operations update on Monday. The company is $4-million over budget on its current expansion, due to additional spending on HVAC equipment and automated tray tables, it said.

Zenabis has also had trouble getting products to market due to problems with packaging equipment. The company installed equipment over the summer that it thought could package 30,000 units per day. Instead it was only able to package an average of 6,276 units per day in September. (The average daily number was up to 11,643 units in the first half of October).

“Zenabis was not able to package, ship and sell all of its product cultivated in August and September that had been destined for provincial counterparties, causing a delay in achieving the Company’s expected revenues,” the company said in Monday’s statement.

The dramatic sell-off on Thursday is latest step in a nearly year-long decline in the price of Zenabis shares. The company’s stock surged after Zenabis went public last October, reaching a price of $6.75 in November. It has declined steadily since January.

When asked whether Thursday’s deal had destroyed shareholder value, Mr. Grieve tried to cast things in a positive light.

“I don’t believe it’s decimated shareholder value. I believe it has negatively impacted the market’s perception of shareholder value, but shareholder value in truth is an objective thing as opposed to something you see in the market. So the perception is that shareholder value has been eroded, but fundamental shareholder value from our perspective has been strengthened by a contribution of equity capital as opposed to debt,” he said.

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