GoBlue might have Sundial ($SNDL) as a fascination, me, I’ve got a couple. And Zenabis ($ZENA) is definitely one of them.

Our last Structure was of their first quarter of this fiscal year….it was also our first. And it was a complete bear. Took me almost a full day unto itself, and all I got out of it was a slight twinge of nihilism and a faint headache.

Since that Structure, they’ve shaken up the front office, managed to raise an incremental $6MM, and was able to convert some debt into shares (albeit at a 25% discount to market plus warrants – 50MM more shares to extinguish $1.5MM :O). As GoBlue alluded to in his eloquent Quarter in Pictures on Sundial, there can be much to glean from companies in distress – I think $ZENA’s a poster child in this regard.

To the financials!

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• And….sales increased for cannabis. But, gross margin got hammered as their ‘value’ offering in ‘Re-Up’ took up sales volume and price reductions on vapes reduced the wind available for their sales.
• Cash down to $4MM (they burned $11MM in the Q). SBC a crisp $2.6MM.
• Current liabilities $25.5MM, another $7MM note due on Dec 31st of this year, and $35MM in customer deposits remaining to service a massive prepay they took cash for, spent, and now still has to honour the obligation. This is an elephant in $ZENA’s room.
• And we have a winner – 780MM shares now in the float for next quarter end, 420MM (!) shot out the door in the past 11 months alone. Woot.
• Heavy seasonality in their (traditional) horticultural side, which saw sales fall hard. All as expected though, the winter is ramp for the nursery/propagation business. See below for more.
• And seasonal softness in their propagation lines will need to be supported by an increasing contribution from cannabis. The expansion of their value brand (and retail price drops) isn’t going to be terribly helpful next quarter.
• $13MM OPEX this quarter on $5MM of total gross margin. There’s lots of powerpoint slides and some promise of increasing sales and SKUs….yet despite how many there are of either…..this isn’t viable.

Ok. The remaining is a composite of mediocrity and stasis with the odd bright spot. Largely, it’s the same tale of the past 7 quarters, except now it has a capital structure and debt holdings that – for most purposes – looks like watching a teenage slasher flick that’s 3 hours too long.

Regarding their propagation business, $ZENA was kind enough to set expectations around sales, as the nursery business is definitely tuned to consumers planting ornamentals in the spring:

It’s hard to write about this outfit in several respects. Sure, I can detail cost of debt and optionality and fundamental prospects. With $ZENA, I’m hung up on their share capital, and just can’t get past it.

From a risk standpoint, given 2 companies struggling to gain revenue and market share, I’ll opt for the one with the less complex capital structure. All things equal, complexity introduces risk, which is often not quantifiable. Regarding $ZENA, the complexity in their corporate apparatus – for a company that sells bedding plants and weed – is ridiculously ornate. It really stems from their business plan & capital budgeting, which described gently, would be ‘horribly fucking wrong from the start’. Not unfamiliar in-sector, but these guys have been playing catch up since the first person ponied up and bought into the presentation.

I’ve alluded to $ZENA having good relations with creditors and large investors. That’s one reason why a company like this can end up with so much leverage in share capital…those relations keep money coming in. Another reason is an asset holder can continue to pledge assets against debt, provided there’s still some to pledge. That’s pretty much gone now: between RCM Capital and convertibles and debt, there’s not much silverware left in the household. <Notes 12 & 13 span 8 pages of borrowings. If interested, I recommend reading through Note 13(c) ‘Secured Convertible Notes Payable’ for texture. It reveals a Dutch auction for note-holders and an unbounded willingness by $ZENA to print shares>.

The Delta-3 asset they put up for sale at $12.75MM has sat on the market for 6 months, and the price has now been reduced to $8MM (a pretty sexy looking set up to be honest). This isn’t atypical either – there’s many grow assets of varying quality on the market, and they aren’t jumping off the shelves. $ZENA included a $1MM write-down of the asset for sale this quarter.

Subsequent events is as expected, with debt negotiations and financing consuming a fair chunk of management’s attention. Can’t pay right now? ‘Here….take these complimentary warrants …. and let me get you another coffee. Wait, there’s another guy at the door….hang on’:

Anyhow, like GoBlue, I believe there’s much to be learnt from companies facing challenges – both in if/how they adapt; and how good they are looking beyond the next few quarters. Regarding $ZENA, the resilience they’ve shown in keeping the thing going is really something else. I can’t seen any future for this outfit other than having it’s business peeled away from it bit by bit. A merger (with say, an ‘Emerald Health’ or similar mutt) might be in the cards, inasmuch as that resilience that’s been shown so far has been able to continue with narratives and continued operations. Hard to count that out.

Still, this thing’s a zombie.

Look for some of these signs of distress in companies you’re interested in…. or are invested in. They’re the signs that warn a driver they are on the wrong road. With $ZENA, their executive shakeup in September came a year late, even later than $FIRE’s restructuring of leadership. At least with $FIRE though, I see a faint hope. With these guys…..the only hope is that their creditors don’t stop believing. Or stop taking free warrants.

Their story is of when finance takes precedence over operations, and bad business planning loiters around a willing capital pool. There’s nothing more here than that.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $ZENA or $FIRE