Sundial's Losses Higher Than Revenues, Explores Strategic Options, Stock Plunges

Sundial Growers Inc. (NASDAQ: SNDL) reported that its revenues were rising and then quickly followed up with an offering. the stock fell from $0.70 to $0.51 on the news for a drop of over 25%.

First, the Canadian-based Sundial said its net cannabis revenue increased 44% sequentially in the second quarter of 2020 to $20.2 million. The company also delivered a net loss of $31.6 million, which was trimmed slightly from the first quarter’s net loss of $38.4 million. The company said the decreased loss of $6.8 million was primarily due to improvement on loss from operations, partially offset by provisions against the company’s inventory and biological assets to reflect current and rapidly evolving market conditions.

Zach George, Chief Executive Officer of Sundial said, “While we are pleased to be one of a small group of Canadian LP’s able to post quarterly revenues greater than $20 million, we remain focused on the intense competitive landscape and the need to gain greater scale to reach sustainable profitability.  We have made good progress in streamlining our business over the past six months, having eliminated non-core initiatives, reduced costs, and improved operating efficiencies. We still have significant work to do as we look to deliver on innovation, improve capacity utilization, and reduce our cost of goods sold. These initiatives, along with continued strong consumer demand and increased sales levels to date in 2020, should position us well for the balance of the year.”

Strategic Initiatives

In its press release, the company said that its board of directors had authorized management and its external advisors to consider a broader range of strategic alternatives, including a potential sale of the company, merger or other business combination, investments in other Canadian cannabis companies, including dispensaries and other retail outlets, dispositions of discrete brands and related assets, optimizing its assets, including the potential sale of its Rocky View and Merritt facilities. It is also looking at selling limited quantities of inventory at or below cost and entering into long-term supply agreements with other licensed producers, licensing or other strategic transactions involving the company, or any combination of the foregoing. Sundial has engaged a financial advisor to assist with these efforts.

Sundial also said that it secured an amendment to its $79.3 million syndicated credit agreement deferring all material financial covenants other than maintaining a minimum cash balance of $2.5 million and securing additional equity financing of US$10 million on or prior to December 1, 2020. The company also said that with regards to the Bridge Farm Group, $45 million of its term debt facility was extinguished with the remaining $73.2 million converted into non-interest-bearing convertible notes.

Offering Priced

Sundial followed the earnings announcement with a registered offering of 25,820,000 Series A Units sold at a price of US$0.50 per Series A Unit and each Series B Unit will be sold at a price of US$0.50 per Series B Unit, minus US$0.0001, and the remaining exercise price of each Series B Warrant will equal US$0.0001 per common share. Sundial’s gross proceeds from this offering are expected to be approximately US$20 million. The offering is expected to close on August 18, 2020. 

Subsequent to the quarter-end, Sundial filed a registration statement for a mixed shelf prospectus allowing it to issue common shares in an amount up to US$100 million at its discretion and intends to establish an At-the-Market (“ATM”) equity program covering issuances of up to US$50 million.

Revenue Details

Sundial reported that the average gross selling price per gram equivalent of branded products was $5.67 per gram in the second quarter of 2020, including net provisions, compared to $5.11 per gram in the prior quarter.  The change in average gross selling price was primarily due to an increase in vape sales. Average gross selling prices for unbranded flower in the second quarter were $2.82 per gram up from $2.74 per gram in the previous quarter despite competitive pressures in the wholesale market as a result of industry-wide increased inventory levels.

The gross revenue from vape cartridge sales was $6.3 million in the second quarter of 2020 representing a 44% increase from the previous quarter. The company sold 5,997 kilogram equivalents of cannabis in the second quarter of 2020, a 35% increase over the previous quarter sales of 4,437 kilogram equivalents.

Branded net cannabis sales in the second quarter of 2020 were $14.0 million compared to $7.6 million in the first quarter of 2020, an increase of 84%, supporting Sundial’s strategy to focus on increased sales to Provincial Boards.

The cost of goods sold per gram of bulk dried cannabis was $1.34 in the second quarter, an increase of 11% over $1.21 per gram in the prior quarter. The company said that the increase was due to a decrease in production capacity utilization and consequent allocation of manufacturing overhead over fewer grams.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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