The continuing saga of Sundial and Zenabis got more interesting with Sundial posting the loan agreement, that Molly and I could not track down previously, on Edgar.
We believe Sundial made overtures to merge with Zenabis and was rebuffed. The purchase of the lender by Sundial that made the loan to Zenabis appears to be the first volley in a hostile takeover, a takeover approach with lots of hair.
It is important to understand the distinction that Sundial bought the lender, whose only asset was the Zenabis loan, and not the loan. As loan was restricted from transfer as per 8.11 of the Loan Agreement.
|8.11||Successors, Assigns and Participation, etc.|
“Neither the Corporation nor the Lender shall assign or transfer all or any part of its rights or obligations hereunder or under any other Instrument to which it is a party without the prior written consent of the other party.“
A clause like this is fairly standard in a loan agreement, as you do not want a competitor to buy your loan and then pressure you once you are in default. What Zenabis lawyer failed to do is restrict the Special Purpose Vehicle that held the loan from being sold without Zenabis consent.
Sundial, as lender and secured party, hold a General Security Agreement “over all personal property of the Corporation and the Subsidiary Guarantors”. This means every asset: Accounts receivable, inventory, PPE including mortgages, all intangibles and goodwill, brands, trademarks… owned or acquired thereafter…… There are “Permitted Encumbrances” (check the definition section if you are interested) but they are largely statutory carve outs to those that would be in priority position in any event (think the tax man). Here are two Permitted Encumbrances, non statutory, that are called out separately:
|the existing security in favour of Regional Development Corporation as to inter alia the property at Atholville NB, provided the priority of the same is capped at $2,000,000 (excluding any further re-advances) plus interest plus any protective disbursements;|
|security in favour of Murans LP (or its general partner Murans GP Inc. in such capacity), 9870229 Canada Ltd., and/or Agentis Capital Partners (or any of its partners in such capacity), provided the same is subordinated to the Security Documents by a subordination agreement acceptable to the Lender;|
It looks like the latter one is subordinate (eg. behind in priority) to the Sundial loan. So, Sundial is sitting in priority position to this loan and the other loan is like a second mortgage. In a second mortgage situation the Lender can buy out the first mortgage position by paying off the existing debt and thereby becoming the first secured lender. That will likely not be happening here.
- “Default” means any event which, but for the lapse of time, giving of notice or both, would constitute an Event of Default.
Defaults do not become “Events of Default” until one or more of sections 7.1 gets triggered. And then “Enforcement” is in 7.3.
One of the Defaults would be breaching a “Negative Covenant” 6.2 or “Financial Covenant” 6.3.
- 6.2: So long as this Debenture remains outstanding, the Corporation and each Subsidiary Guarantor covenants and agrees to:
- 6.2 (g) Prepaid Supply Agreements. Enter into or be party to any prepaid supply agreement other than (i) the prepaid supply agreement dated July 2, 2019, between High Park Holdings Ltd. and Zenabis Ltd. and (ii) the prepaid supply agreement dated July 17, 2019, between Starseed Medicinal Inc. and Zenabis Ltd., unless approved by the Lender.
That $7 million last minute supply agreement to pay the principal payment due at December 31, 2020… Default.
- 6.2 (b) Sell. Other than in connection with the proposed sale of the assets and licenses of Zenabis Annacis Ltd. (which sale may be completed with the consent of the Lender), remove, destroy, lease, transfer, assign, sell or otherwise dispose of (other than to another Subsidiary Guarantor) any of the Secured Property, except for sales in the ordinary course of business, sales of obsolete equipment, and sales of other assets not in excess of $1 million in the aggregate in any fiscal year.
Not sure if selling Bevo tripped this one.
- 6.3: So long as this Debenture remains outstanding, at all times the Corporation and each Subsidiary Guarantor covenants and agrees to:
- (e) EBDA. The Corporation will achieve EBDA of at least break even by September 30, 2020, $250,000 or more per month from October 1, 2020 to November 30, 2020 and thereafter to the level of the Lender-approved management forecasts appended as schedule 6.3.
- “EBDA” means revenue (net of any value added and sales taxes) from all sources less variable production costs, fixed costs and interest costs. The calculation of EBDA will exclude any wholesale revenue, and associated costs, earned, or incurred, in relation to the existing prepaid agreements with Tilray and/or Starseed.
I cannot imagine they are not in Default there.
It is important to understand that a Default is not necessarily and Event of Default, as there are cure periods. Here are a few related to above to keep in mind:
|7.1||Events of Default|
The occurrence of any of the following events shall constitute an Event of Default under this Debenture:
|(a)||If default occurs in payment when due of any principal amount payable under this Debenture.|
|(b)||If default occurs in payment when due of any interest, fees or other amounts payable under this Debenture and remains unremedied for a period of three Business Days after the receipt by the Corporation of notice of such default.|
|(c)||If default occurs in payment or performance of any other Obligation (whether arising herein or otherwise) and remains unremedied for a period of 30 days after the receipt by the Corporation of notice of such default.|
|(d)||If default occurs in performance of any other covenant of the Corporation or any Guarantor in favour of the Lender under this Debenture and remains unremedied for a period of 30 days after the receipt by the Corporation of notice of such default.|
I have not included (e-m).
So, they make the payment which removes 7.01 a as an Event of Default, but they do so by violating a covenant which has a 30-day clock. Zenabis could have been in financial covenant violation dating back for awhile as well, initiating the 30-day clock earlier.
Sundial has issued a notice of default but did not indicate what the default is on January 6, 2021.
I will put some popcorn on and let you know where this Cannabis Soap Opera is heading when more surfaces.
Will the unknown LP that funded the prepaid supply agreement arrive in time to untie Zenabis from the train tracks? Will the dastardly Sundial (twirls handlebar mustache) allow our fair maiden to be run over by the oncoming train if she does not agree to the marriage? Will a carpetbagging lawyer intervene?
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 has no position in Sundial or Zenabis nor intends to start one in the next five days.