Zenabis (ZENA.T) has taken on an additional $25M loan in secured debt financing, bringing their senior secured debt load to $50M.

This new loan bears interest at a rate of 14% per annum, amounting to $7M annually, and will have a maturity date of June 30, 2020 according to the Zenabis press release.

Additionally, Zenabis has paid R.C. Morris Capital Management, which it got the latest $25M from, a 5% structuring fee amounting to $2.5M.

Wow, lot’s to unpack. So Zenabis paid a cool $2.5M to R.C. Morris to structure the debt they’ve taken on. Furthermore, the company will pay an additional $7M in interest payments on the loan every year, but they’ll have to pay it back when it matures in less than one year anyways.

Here’s what the company said about their reasons for raising said capital:

“These developments ensure we have a surplus of capital to complete the expansion of our facilities to achieve an annual design capacity of 143,200 kg of dried cannabis and become cashflow positive upon completion of our current capital program. In addition, we note that Zenabis does not intend to raise incremental debt financing, raise convertible debt, or issue incremental equity capital in order to pursue the expansion of our cultivation capacity. Instead, the next priority of Zenabis is the replacement of the Senior Debt and the Convertible Notes with standard bank financing.

–Andrew Grieve, CEO of Zenabis

On that front, we wish them the best.

Here’s the problem: Zenabis has a god-awful quick ratio, a neat little metric used to establish whether or not a company can cover its liabilities.

A good quick ratio would be twice as much cash, short term receivables and other liquid assets to total liabilities.

But Zenabis has $8.6M in cash, $1.6M in short term investments and $18M in accounts receivable as of Q2 2019. Anyone who has ever owned a business before will tell you that classifying accounts receivable as a ‘liquid asset’ is laughable, but we’ll throw it in there.

As for liabilities, Zenabis has $176.3M in total. Sure, Zenabis just took on an additional $25M cash, but we can just add that onto their liabilities!

Here’s some more. The company has $87.7M worth of obligations—we’re talking loans, leases, accounts payable, etc—due in less than one year.

What the hell is this company thinking? Paging Zenabis’ management…YOU’VE GOT NO CASH!

Dear reader, you might be wondering how we got to this point. And, frankly, you’ve probably already plotted the company’s trajectory in your head.

Weedco X promises big things, pumps out a laundry list of news releases and even gets a celebrity endorsement or two. But, the market is soft and with enthusiasm diminishing, they run out of ways to raise capital.

I assure you, while that may be true, Zenabis’ management have more than their fair share of blame in this situation.

Here’s one example: On Jan. 22, 2019, Zenabis acquired Topgro Holdings, a “Canadian company which operates agricultural land.” Now that’s a sales pitch /s.

On the acquisition date the Company, through its subsidiary Bevo Farms Ltd., acquired all the issued and outstanding shares of Topgro for total consideration of $12,067,928 comprised of cash of $9,401,096, a loan settlement of $2,691,582 and working capital adjustments of $(24,750).

The kicker with Topgro is that the company “accounted for $nil in revenues and $347,366 in net loss. If the acquisition had been completed on January 1, 2019, the Company estimates that  revenues and net loss for the six months ended June 30, 2019 would remain the same.”

But Topgro was purchased to supplement Zenabis’ vegetable and floral propagation business. Doesn’t seem like much supplementing has been done all year.

Zenabis has $62M on its balance sheet from intangible assets and goodwill. The company paid $1.8M in salaries and benefits to key management personnel (its CEO was paid $661K).

The company paid $6M in salaries for the quarter, $3M in G&A, $3.4M in professional fees (gotta love those professionals) and $1.2M on “small tools & supplies.” I don’t even know what that is.

So we’ve got a company with a ton of debt, awful liquidity and $87M in contractual obligations which are coming due in under a year in addition to another $25M due by June 2020. Meanwhile, the company did $26M in revenue for the quarter and is valued at $252M.

Plus, R.C. Morris got 902,514 warrants at an exercise price of $1.38 to sweeten the deal.

With ZENA trading at $1.24, that’s a big middle finger to shareholders in my opinion. ‘Hey, our moving average has the trajectory of a paper airplane in an underground bunker. Why don’t we water down your share price some more?!’

No wonder nobody takes this sector seriously.

–Ethan Reyes