Debra BorchardtLast week, Sundial Growers (OTC: SNDL) enjoyed some success in the courtroom when a case brought against the company by investors was dismissed. In May 2020, several investors had charged that Sundial made claims in investor presentations that weren’t true. However, U.S. District Judge Andrew L. Carter Jr. said that the various statements made in the presentations were either protected, forward-looking statements or weren’t all that misleading at the time the statements were made.
The issue stems back to 2018 when Sundial tried to raise $50 million in order to buy an agricultural company based in the UK called Bridge Farm. According to the court filing, the January Investor Presentation said that Bridge Farm had a hemp license that would allow for cultivation, processing, and export of finished products from the UK. It went on to say that Bridge Farm would “provide a platform for scalable growth with only ~C$20 mm in incremental Capex needed to facilitate CBD production and extraction” and that the “[o]peration enables us to produce and distribute at scale almost immediately and more quickly than competitors.” At the time, Sundial said it expected Bridge Farm to generate C$256 million in revenue and C$115 million of EBITDA in 2020.
Bridge Farm Plans
Then Sundial upped the fundraise and said it wanted $70 million versus the original $50 million. The investors say they ponied up $7 million in the pre-IPO round based on the projections of the Bridge Farm acquisition. In 2019, Sundial filed to go public and stated in Form F-1 that Bridge Farm’s hemp license would expire in December 2021. In August 2019, the company went public pricing its shares at $13 and netting $134 million. The investors were unable to sell their shares for the next six months.
Also in August, the case says that during an investor call Tamy Chen from BMO (one of Sundial’s IPO bankers) said “I know that there’s a couple of licenses, you’re waiting for before you can start really converting and growing hemp at Bridge Farm’s facilities.” BMO then issued a note stating that “Bridge Farm requires key licenses and we expect there will be a natural ramp and learning curve associated with the conversion of Bridge Farm’s greenhouses from growing herbs and ornamental flowers to growing hemp.” The lawsuit also stated that BMO wrote, “That there was no indication as to if, or when, Bridge Farm would receive the necessary licenses to extract CBD and/or to make over-the-counter CBD products.”
Then during its fourth-quarter earnings call for 2019, Sundial reported that its net loss for that quarter was C$145.1 million which was “primarily due to the impact of a non-cash impairment charge of $100.3 million related to the goodwill recorded upon the acquisition of Bridge Farm.” The Plaintiffs alleged that Sundial’s accountants determined that “(i) the goodwill the Company had attributed to the purchase price for Bridge Farm . . . was grossly inflated . . . and/or (ii) Bridge Farm’s ability to generate cash flows deteriorated such that the fair value of Bridge Farm’s goodwill dipped below its book value.” Not long after Sundial said its core management team was leaving the company and the stock continued to slide on negative news.
By March 2020, Sundial said it was selling the Bridge Farm property and in April 2020, the stock had slid from its offering price of $13 to just fifty cents. The investors believed that Sundial wasn’t being truthful when telling them about the Bridge Farm’s hemp licenses. They allege that Sundial used the Bridge Farm acquisition as a reason for people to invest in the company, but knew all along that it didn’t have the hemp licenses it said it had.
Judge Disagrees
However, Judge Carter said the investors didn’t demonstrate that Sundial didn’t believe the claims it had made in the presentations. The court order stated, “Corporate officials need
not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them.” It went on to say, “The Second Circuit has repeatedly stated that plaintiffs must do more than simply assert that a statement is false—“they must demonstrate with specificity why and how that is so.” The judge also pointed out that the company was covered by saying the claims about Bridge Farm were forward-looking statements, which were accompanied by cautionary language about risk.
The Judge said that the plaintiffs hadn’t proved that Sundial knew the statements were false.
The investment companies behind the complaint are SUN, A Series of E Squared Investment Fund LLC; E-Squared Capital Fund LP; S.H.N Financial Investments Ltd.; Flamingo Drive M&M LLC; and Stable Road Capital LLC.
Current Day Sundial
Sundial shares were lately trading at roughly 64 cents per share. In January, the company priced an offering in which it would receive approximately $100 million. The company said it planned to use the money for possible acquisitions of, or investments in, equipment, facilities, assets, equity or debt of other businesses, products or technologies and for working capital and general corporate purposes. The additional issuance of shares wasn’t viewed favorably by the market and the price of shares dropped. The company now has a whopping two billion outstanding shares
In August the company reported that its total net revenue for the quarter ending in June was just $18.6 million, while the net loss was $52.3 million. “Following Sundial’s restructuring in 2020, we have been able to rapidly reshape the business model to focus on a two-pillar strategy that we believe will position our shareholders for future success,” said Zach George, Chief Executive Officer of Sundial.
He went on to say, “Our second-quarter performance continued to be impacted by the liquidation of discounted inventory and our refusal to push sub-optimal product into the market. We have undertaken a significant retrenchment in our cultivation activities, which has included changes to our cultivation processes as well as workforce and other cost reductions. We have seen continuous improvement in our cultivation outcomes as we remain focused on best practices to deliver strong results in potency, yield and terpenes. In the last two months of the quarter, we experienced the highest successive average potency at harvest since operations began at Olds.”
Sundial did acquire the Inner Spirit and the Spiritleaf retail network on July 20, 2021. The company said in a statement, “Adding Canada’s largest cannabis retail store network will enable Sundial to reach consumers through an entirely new channel, generate a deeper understanding of consumer buying trends, and provide depth of data to enhance decision making around product and distribution strategies. System-wide retail sales through Spiritleaf stores reached $124 million on a trailing 12-month basis to March 31, 2021, the last reported period prior to acquisition. In July 2021, the retail network achieved its highest ever one-day and monthly sales since inception. Through the acquisition of a retail segment, Sundial now has direct access to more comprehensive customer data and expects revenue increases to be generated by the integration of our distribution channels commencing in the third quarter of 2021.”
