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Description of Certain Risks Related to Our Business and Our Common Shares
Investing in our securities involves a high degree of risk. You should carefully consider the risk factors described below and in our annual
report on Form 20-F for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the SEC ) on March 31, 2020 (together with any material changes thereto
contained in subsequent filed quarterly and current reports on Form 6-K) and those contained in our other filings with the SEC.
Risks Related to our Business
all or any of the anticipated benefits of our investment in Zenabis.
On December 30, 2020, we completed an investment into Zenabis
Investments Ltd., ( Zenabis ) a subsidiary of Zenabis Global Inc. (the Parent ), whereby we acquired $58.9 million in aggregate principal amount of senior secured debt of Zenabis (the Senior Loan ). The Senior
Loan bears interest at a rate of 14% per annum and has a maturity date of March 31, 2025, with principal repayments due under certain circumstances over time, including $7.0 million that was payable on December 31, 2020. Following
this payment, as of December 31, 2020, $51.9 million is outstanding under the Senior Loan.
The Senior Loan is subject to liquidity, market
value, credit, interest rate, reinvestment and certain other risks, which is increased because the Senior Loan is a below investment grade asset. As a non-investment grade loan, the Senior Loan is considered
speculative in nature and may become a defaulted obligation for a variety of reasons. On December 31, 2020, pursuant to the terms of the Senior Loan, we delivered a notice of default to Zenabis with respect to certain defaults not related to
principal non-payment, which Zenabis is disputing. Should the Senior Loan become a defaulted obligation as a result of the foregoing notice of default or otherwise in the future, it may become subject to
either substantial workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest rate, a substantial write-down of principal, and a substantial change in the terms, conditions and covenants of
the Senior Loan. Such negotiations or restructuring may be quite extensive and protracted over time, which may detract the attention of our management from other matters and result in substantial uncertainty with respect to the ultimate recovery on
the Senior Loan. In the event of default, the liquidity for the Senior Loan may be limited, and to the extent that it is sold, it is highly unlikely that the proceeds from such sale will be equal to the amount of unpaid principal and interest
The fact that the Senior Loan is secured does not guarantee that we will receive principal and interest payments according to its terms, or that
we will be able to collect on the Senior Loan should we be forced to enforce our remedies. There is also a risk that the assets securing the Senior Loan may decrease in value over time, carry liabilities for which we may be responsible should we
take possession of collateral, be difficult to appraise or liquidate and may fluctuate in value based upon the success of Zenabis business and market conditions, including as a result of the inability of Zenabis to raise additional capital or
otherwise as a result of deterioration of its financial condition and prospects.
Furthermore, pursuant to the terms of the Senior Loan, Zenabis will, on
a quarterly basis for 32 quarters, also pay us a royalty (the Royalty ) based on quarterly sales revenue from its medical, recreational and wholesale cannabis lines, net of value added or sales taxes ( Net Cannabis Revenue ), at
a rate that will vary from 3.5% to 2.0% based on the volume of such Net Cannabis Revenue in the quarter. The payment of the Royalty is subject to certain Net Cannabis Revenue targets and the maintenance by Zenabis of certain debt service ratios. If
the Royalty is not payable in a given fiscal quarter because of failure to meet such targets, the term of the Royalty is extended for another quarter. As a result, part of the value of our investment is dependent on Zenabis ability to
effectively maintain and grow sales of the products subject to the Royalty. Zenabis ability to do so is subject to the risks applicable to its business and there can be no assurance that it will achieve the revenue targets required to trigger
Royalty payments in the near-term or at all. Should Zenabis be unable to maintain or grow sales of its products, we may not be able to realize all or any anticipated revenues from the Royalty.
On January 22, 2021, we received a notice from Zenabis stating its intention to repay the full
principal amount and interest outstanding under the Senior Loan on February 4, 2021. We believe that any repayment of the Senior Loan does not affect the recurring payments owed under the Royalty by Zenabis to Sundial, although Zenabis disputes
the matter. The parties are in ongoing discussions about the possibility of full settlement of the Senior Loan and the Royalty. As of the date of this prospectus, no repayment of the Senior Loan or settlement of the Royalty has been made. There can
be no assurance that Zenabis will repay the Senior Loan and/or settle the Royalty in the foreseeable future or at all.
Any of the foregoing could cause
us not to realize all or any of the anticipated benefits of our investment in Zenabis and may result in our taking an impairment charge related to such investment, which may materially adversely affect our financial position, results of operations
We may make investments into equity or debt securities of other companies, or provide credit to other companies, and we may not
obtain the anticipated level of return on such investments, or any return at all.
We have made in the past, and may in the future continue to
make, investments into the equity or debt securities of other companies, including by subscribing for such companies common shares, preferred shares, convertible debt or other securities. We may also provide revolving or non-revolving credit
facilities or other types of loans to other companies.
Any such investment will be subject to liquidity, market value, credit, interest rate,
reinvestment and certain other risks, which will be increased if we invest in securities or instruments which are not investment grade assets. The companies that we invested into in the past have had, and companies we may invest into in the future
may have, poor financial performance, liquidity and results of operations.
Non-investment grade assets are considered speculative in nature and, if such
assets represent debt securities or credit instruments, they may become a defaulted obligation for a variety of reasons. If such debt securities or credit instruments become subject to either substantial workout negotiations or restructuring, this
may entail, among other things, a substantial reduction in the interest rate, a substantial write-down of principal, and a substantial change in the terms, conditions and covenants of such instruments. Such negotiations or restructuring may be quite
extensive and protracted over time, which may detract the attention of our management from other matters and result in substantial uncertainty with respect to the ultimate recovery on the instrument. In the event of default, the liquidity of our
investments may be limited, and to the extent that they are sold, it is highly unlikely that the proceeds from such sale will be equal to the amount of unpaid principal and interest thereon.
The fact that any debt securities or credit instruments may be secured does not guarantee that we will receive principal and interest payments according to
their terms, or that we will be able to collect on such securities or instruments should we be forced to enforce our remedies. There is also a risk that the assets securing the securities or instruments may decrease in value over time, carry
liabilities for which we may be responsible should we take possession of collateral, be difficult to appraise or liquidate and may fluctuate in value based upon the success of the borrowers business and market conditions, including as a result
of the inability of such borrowers to raise additional capital or otherwise as a result of deterioration of its financial condition and prospects.
invest in equity securities of other companies, such companies may never declare dividends, or may declare dividends in amounts insufficient to generate a return on our investment. As such, our only means to earn a return on our investment may be to
sell the securities for a greater price than we paid for them, and there can be no assurance that we would be able to do so. The price of such securities may be volatile, and will be dependent on the business, financial position, results of
operations and prospects of the company in which we invested, which would be beyond our control as we do not anticipate becoming a controlling shareholder in any such company, as well as factors beyond our control or the control of the company in
which we invested, including, but not limited to, performance of the financial markets generally, investor perception of the company and its industry, and speculation about such company in the media, investor community or on the internet. The price
of such securities will in all cases be subject to the risks similar to those described below in Risks Related to Our Common Shares and risks applicable to the business and securities of the company in which we may invest. In the event
of liquidation of a company in which we invested, any interest we have in the company s common shares will be subordinate to the interests of holders of debt and preferred shares of the company, if any, and as a result, we may lose our entire
investment in the event of liquidation. If the company in whose equity securities we invest is private or ceases to trade on a stock exchange by virtue of de-listing following inability to comply with requirements of such stock exchange or
otherwise, the liquidity of our investment in equity securities may become limited or cease to exist, causing the value of our investment to decline or be eliminated. All the foregoing could cause us to fail to realize the expected or any return on
our investment in equity securities of another company.
If any of our investments provide for the payment of a royalty to us, then part of the value of
our investment will be dependent on the ability of the company in which we invested to effectively maintain and grow sales of the products subject to such royalty. Such company s ability to do so will be subject to the risks applicable to its
business and there can be no assurance that such company will achieve the revenue targets required to trigger royalty payments in the near-term or at all. Should the company be unable to maintain or grow sales of its products, we may not be able to
realize all or any anticipated revenues from any royalty arrangements.
Any investment we make will be subject to the risks applicable to the business,
securities and operations of the company in which we invested, which, if such company is public, will be disclosed in the company s filings with securities regulators in the applicable jurisdiction. You should read disclosure of any such risks
in the company s filings to assess the risk profile to which our investments may be subject.
Any of the foregoing could cause us not to realize all
or any of the anticipated benefits of our investments and may result in our taking an impairment charge related to such investments, which may materially adversely affect our financial position, results of operations and prospects. All of our
investment decisions will be subject to our discretion, and you will not be able to influence investment decisions with which you might disagree.
Risks Related to Our Common Shares
our common shares in public markets has experienced and may in the future experience extreme volatility and you may lose some or all of your investment in our common shares as a result.
The price of our common shares has experienced significant volatility since the time of our listing on the Nasdaq Global Select Market and has experienced
extreme volatility in recent days. On February 11, 2021, the closing sale price of our common shares as reported by Nasdaq Capital Market ( Nasdaq ) was US$2.3800. On January 12, 2021, the closing sale price of our common shares
as reported by Nasdaq was US$0.6680. Between February 11, 2020 and February 11, 2021, the closing sale price of our common ranged from US$0.1440 per share to US$2.9500 per share, and during the period between January 12, 2021 and
February 11, 2021, our share price varied from an intra-day low of US$0.4950 per share to an intra-day high of US$3.9600 per share. Other than the US$100,000,000
offering of units announced on January 29, 2021, and the US$74,500,000 offering of units announced on February 2, 2021 (together, the Unit Offerings ), there has been no recent change in our financial condition or results of operations,
such as our earnings, revenues, or other measure of company value that is consistent with the recent change in, and volatility of, our share price. In the absence of such recent changes, the recent increases in our share price are significantly
inconsistent with improvement in the actual or expected indicators of the value of the Company.
The market price for our common shares has been and may
in the future continue to be extremely volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following: (i) actual or anticipated fluctuations in our quarterly results of
operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to us; (iv) the addition or departure of our executive
officers and other key personnel; (v) the release or expiration of lock-up or other transfer restrictions on our common shares; (vi) sales or perceived sales, or expectation of future sales, of our
common shares or instruments convertible or exercisable for our common shares; (vii) significant dispositions, acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our
competitors; (viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or target markets; (ix) trading activity by investors which is not
motivated by or commensurate with changes in the actual or expected indicators of the value of our Company; (x) speculation in the press, in the investment community, or on the internet, including on online forums and social media, about our
Company, our industry or our securities; (xi) anticipated or pending investigations, proceedings, or litigation that involve or affect us, other companies in our industry, or other companies that investors deem comparable to us; and
(xii) the occurrence of any other risk identified in the risk factors included in our filings with the Securities and Exchange Commission.
markets have experienced significant price and volume fluctuations which have affected the market prices of equity securities of public entities. Companies in the cannabis sector have also experienced extreme volatility in their trading prices. In
many cases, these fluctuations, and the effect that they have on market prices, have been unrelated to the operating performance, underlying asset values or prospects of such entities. For example, certain companies, including ours, have recently
experienced extreme volatility and increases in share price due to trading activity by retail investors which was motivated primarily by a desire to influence the financial performance
of hedge funds, rather than changes in actual or expected value of the companies subject to trading activity. Accordingly, the market price of our common shares may decline rapidly and
substantially even if our operating results or prospects have not changed.
Additionally, these factors, as well as other related factors, may cause
decreases in asset values that are deemed not to be temporary, which may result in impairment losses to us. Furthermore, certain investors may base their investment decisions on considerations of our environmental, governance and social practices of
our industry as a whole, and our performance in these areas against such institutions respective investment guidelines and criteria. The failure to satisfy such criteria may result in limited or no investment in our common shares by those
institutions, which could materially adversely affect the trading price of our common shares. There can be no assurance that continuing fluctuations in the price and volume of equity securities will not occur and affect the trading price of our
Since we have never paid, and, for the foreseeable future, do not anticipate paying, dividends to holders of our common shares, your only
means of receiving any return on an investment in our common shares is to sell our shares for a price greater than that which you paid for them. Any of the foregoing risks may prevent you from doing so in the foreseeable future or at all, and you
may lose some or all of your investment. In addition, while the daily trading volume in our common shares has recently been significant, there can be no assurance that such volume will not decline, perhaps rapidly and substantially, limiting your
ability to sell our common shares and make a return on your investment on your desired timeline or at all.