Sundial Growers (NASDAQ:SNDL), the Canadian cannabis grower, has decided to become a hard money lender even though it can’t afford to lose any money. Amazingly, SNDL stock has been inching higher as a result, even though this is a fairly risky move by the company.
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Here’s what happened. On Dec. 30., Sundial lent 58.9 million CAD to a division of a public Canadian company, Zenabis Global (OTCMKTS:ZBISF). Zenabis was supposed to repay 7 million CAD the very next day. So the net investment would be 51.9 million CAD.
Apparently, that repayment happened on time. However, for some reason, Sundial says that there was a default, even though the $7 million was repaid. Zenabis is disputing the default.
The Hard Money PartBut here is the interesting part. Even though the terms of the loan were for four years at a 14% interest rate, the land also includes another very steep provision. This is what makes the loan a “hard” money loan, as the term is known in the lending industry for any high-interest loan.
For example, on top of interest payments, the loan requires the Zenabis’s subsidiary to pay a 2.5% to 3.5% quarterly royalty to Sundial for 32 quarters, or eight years. The royalty rises from 3.5% on the first 25 million CAD of quarterly revenue to 2% for revenue above 37.5 million CAD.
And on top of all of this, SNDL stock gets complete collateral on all of the cannabis assets at Zenabis Global, the parent.
Now it turns out we can look up the financials for Zenabis on the Canadian version of the SEC database, called Sedar.
It turns out that as of Sept. 30, Zenabis had just 4.5 million CAD in cash and 85 million CAD in current liabilities, including 13.2 million CAD in current debt. It also had 100 million CAD in long-term debt, and had just lost 17 million CAD that quarter on 28.5 million CAD in sales.
Therefore, Zenabis is essentially insolvent without the 51.9 million CAD loan from Sundial. In fact, even though Zenabis’s sales are growing quickly, I suspect it is highly unlikely that the company can repay this loan within four years