The battle is heating up between Sundial Growers Inc. (Nasdaq: SNDL) and Zenabis Investments Ltd. (OTC: ZBSIF) as it appears that Sundial is looking to capture Zenabis by becoming its creditor. Sundial’s subsidiary special purpose vehicle owns $51.9 million of the aggregate principal amount of senior secured debt of Zenabis Investments, which is a subsidiary of Zenabis Global Inc. Zenabis made a principal payment of $7.0 million on December 31, 2020 in accordance with the terms of the Senior Loan. Despite that payment, a notice of default was delivered to Zenabis, and is arguing that it isn’t in default.
Sundial Attempts Forced Acquisition
The maneuvering began on December 30, 2020, when Sundial said it had made a strategic investment in Zenabis’ senior lender, which Zenabis said was an attempt to coerce Zenabis into being acquired by Sundial. In a statement, Zenabis said, “Prior to Sundial’s acquisition of the Senior Lender, the company had been in late-stage discussions with the Senior Lender relating to the extension of its obligation to repay $7 million of the principal amount of debt on December 31, 2020. Contrary to the discussions with the Senior Lender prior to the point at which it was acquired by Sundial, the Senior Lender substituted the soon to be consummated extension with a demand that the $7 million principal repayment be made on December 31, 2020 accompanied by a forbearance agreement.” Zenabis also said that the forbearance agreement required it to enter into exclusivity arrangements with the Senior Lender in relation to any sale of the company and also required Zenabis to accept significant potential financial penalties in excess of the outstanding balance of the debt owed to the Senior Lender.
On December 31, 2020, Zenabis entered into a letter agreement to sell $7 million of dried cannabis to another major Canadian licensed producer of cannabis and used that money to make the $7 million loan payment. Zenabis said that after making the payment it was alleged that there were a variety of defaults under the terms of the amended and restated debenture dated June 28, 2020.
The company said that none of the alleged defaults are for failure to make payments of principal or interest. In Zenabis’ statement, “The company believes the Senior Lender’s allegations to be spurious and without merit and intends to vigorously defend against what it considers to be an ill-disguised attempt to circumvent a fair and competitive process to acquire the company by improperly foreclosing the equity of the company or compelling Zenabis to enter into a transaction with Sundial.”
Zenabis Has Another Buyer
While Zenabis is fighting desperately to keep Sundial from taking over the company, it says it has started talks with another significant licensed cannabis producer. “There can be no assurance that these discussions will result in a binding agreement or the completion of a transaction. No further details regarding such discussions, including the identity of the counterparty, will be disclosed at this time,” said the company in a statement.
In June, Zenabis Global reported that it had entered into an agency agreement with a syndicate of agents co-led by AltaCorp Capital Inc. and Eight Capital and including Canaccord Genuity Corp., Haywood Securities Inc. and PI Financial Corp. for the sale of up to 157,643,875 Units at a price of $0.13 per Unit for gross proceeds of up to $20,493,704. Zenabis said it planned to use the net proceeds of the offering for general working capital and corporate purposes, the partial repayment of subordinated secured notes, the partial repayment of the Company’s unsecured convertible debentures, the partial or full repayment of it’s $7,000,000 third tranche of senior secured debt and the payment of an extension fee on the remaining balance of Tranche 3, if applicable.
Zenabis has been unable to get ahead of its losses. In March 2020, it was 1 am when Zenabis
issued its press release reported that its 2019 net revenue was $66.5 million, while its net loss for the year was $127 million or $0.53 per share. The net revenue did increase 850% over 2018’s $7 million, but the net loss for 2019 ballooned from 2018’s net loss of $32.5 million or $0.22 per share. The company has blamed declines in wholesale pricing as the reason for pressure on its revenue. Zenabis has not reported any earnings since the first quarter results for the period ending March 2020. At that time Zenabis said that its net losses dropped dramatically to $1.5 million in the first quarter from the fourth quarter’s net loss of $98 million.