Sundial Growers earnings release.

What I said last Q: I really admire them for calling out QoQ performance, even when it is not flattering.

This Q:

Yeah, that’s gone. First time I have seen a presser that has a table for adjusted EBITDA but none for Income Statement and balance sheet.  They have not provided a standalone Q4 either in presser or MDA. Especially, when you include another $13.5 million in asset impairment  and $8 million in inventory impairment. I would not be surprised, with the stock taking a 5% hit today, if class action lawyers start sniffing around.  They have cash, boasting in presser of

Pretty gutsy move to raise between year end and release of year end financials without any guidance. 

Last Q: The couch cushions have been searched and new money from equity and resultant dilution is the only way out. 

This Q:

Wow, crystal ball there. Dilution was immense since year end.

I had to MacGyver the heck out of the fourth Q as none was provided. True ups did not work for many elements of the income statement.  I did not do to badly with my Net income coming in at -$63.8 million versus theirs of -$64.1 million,

Open up the fins and MDA and follow along.   

Income Statement Drivers and Implied Breakeven: Trend

Sales Table:

I had to calculate LP revenue for the year and then use Q4 as a plug to get the provincial board data.  So, the above is my best guess. 

Gross Cannabis Sales (before excise tax deduction) were $16.5 million an increase QoQ of 9%.  Sales remain well under previous record of $24 million from Q1 F20.

• $14.5 million was sold through provincial boards versus $12.6 million last Q, a +15% increase. 
• Revenue from other LP’s decreased -19% to $2.4 million for the Q.  Wholesale is under pressure industry wide.  Whereas good quality saleable flower might still attract buyers, trim and extract grade flower are competing against a glut of inventory and Croptober 2020 will make that worse.
• Medical is nonexistent

By segment

• Flower totaled $11.9 million up +2% from $11.6 million last Q and the second lowest this year.
• Vapes totaled $4.3 million up 20% from $3.6 million last Q but well below $6.2 million from Q2 F20
• Oil totaled $0.3 million flat QoQ but well below $2.0 million from Q2 F20

Sales channel pressurization versus sell through is a story told often in Canada.  No different here.

Net revenue per gram sold decreased by 14% to $2.33/gram as wholesale KGs is over 50% of all KGS sold. 

Income Statement Drivers and Implied Breakeven: Peer

Sundial would rank as 6^th largest LP in the above peer with sales at $16 million.  We might have to send SNDL down to the Tier 2 group.

Gross Margin: Peer and Trend:

Negative Gross margin five Q’s in a row.  Only Cronos’ six Q’s of negative GM beats Sundial.

Gross Margin decreased from negative $17 million to negative $5.2 million in the Q.  Another $8.3 million inventory obsolescence and impairment was the driver.  That is $46 million in impairments for the year.

Reversing the obsolescence would yield only an 21% GM versus the negative 38% they are sporting.

At September 30, 2020 they had projected Yield of 6,091 KGs (down from +13,000 KGs in the March 2020 Q), I imputed that they harvested 5,705 KGs not taking into considerations any purchases or destruction of inventory. This unabsorbed capacity will be a bit of a boat anchor on GM% until they re-ramp to previous yields. (This is the issue also facing Canopy and their unabsorbed overhead). Projected yield at December 31, 2020 was 5,507 KGs.

Gross Margin: Larger Peer Group

Sundial stays in the basement with negative 49% GM.

SGA & SBC as % of Sales: Trend

G&A decreased by $0.6 million to $6.5 million and decreased to 47% of sales from 56% QoQ on the sales increase. Salaries were the biggest contributor with a drop of $1.7 million to $1.6 million, which was countered with a $1.2 million increase in Professional fees.

Selling increased to $2.3 million from $1.1 million and increased to 17% of sales from 9% QoQ.

SBC was $2.3 million for the Q, an decrease from $3.1 million last Q.  Watch this bad boy balloon next Q.

R&D was negligible again.

Depreciation was $1.3 million in non-production assets versus $1.5 million last Q.   

I moved the restructuring and asset impairment to Other Expenses to keep peer set comparable.

Total Opex was $12.4 million a slide from $12.9 million last Q.

Net Operating Profit before IFRS voodoo was negative $18 million versus negative $30 million last Q. Impairment being $12 million less was the biggest factor.

Other notable expenses include

• Restructuring charge -$0.3 million vs $1.1 million last Q and $6.4 million YTD
• Finance Income -$28 million versus +$18 million last Q.  This is a plug from Annual less 9 month YTD.
• Asset impairment of $13 million, after $60 million last Q, on their PPE facility which has been written down to $116 million
• Covid subsidy of minimal versus $4 million last Q.
• Cancellation of contracts appeared this q at a loss of $2.5 million

All in Net Comprehensive Income was negative $64 million versus negative $71 million last Q.  Discontinued operations adds another $4.8 million hit, bringing Comprehensive Income to -$69 million.

SGA & SBC as % of Sales: Peer

Second highest in peer group trailing Canopy.

+Net Operating Profit Breakeven Peer

Sundial has a negative GM, as such I cannot calculate the breakeven sales.

EBITDA Trend and Peer

EBITDA slid to negative $4.5 million from negative $4.1 million last Q.   Their number is -$5.6 million as it looks like the forgot to back out depreciation buried in CoGS.

Interest expense was $1.4 million the previous Q.  I cannot deduce this q, but given they paid out all debt (except leases) it would have decreased.

+EBITDA:

Sundial has a negative GM, as such I cannot calculate the breakeven sales.

Balance Sheet Items of Note:

Cash

• Cash increased in the Q by $39 million to $60 million.  Subsequent raises have them at $700 million in cash.  They are smaller version fo Cronos with no startegic partner and less EBITDA burn.
• Intangibles took a $13 million hit via impairment and are at a modest $5 million
• They invested $52 million in buting Zenabis debt which was paid out after Q end.  They belive they are still owed a royalty for 32 quarters.  We thumb nail that buy out at $13 million.

“Gas in the Tank” Trend

Plenty of inventory relative to sales even with the continued impairments.  But I don’t have a clue if it is FG or not as all Sundial discloses is Harvested Cannabis. 

“Gas in the Tank” Peer

Their inventory, which is not broken into WIP and FG, nor Oil and flower, is the lowest of the peer group.

“Waterfall” Trend

What I said last Q:

I guess they did not like me pointing out the potential Biomass Swap last Q…  They removed Harvests this Q.  So, I have had to impute harvest and assume they did not purchase or destroy any inventory.

Using an imputed harvest figure of 4,601 KGs versus sales of 5,819 KGs, they depleted inventory by 1,218 KGs this Q.  Looks like they are getting into balance.  But at a 20% GM without the impairment this operation does not look viable at present sales levels.

That harvest trend is killing them on Gross Margin.

This Q:

That harvest trend is killing them on Gross Margin. They did reduce KGs in inventory QoQ from 11,977 kgs to 10,335 kgs.

Waterfall Peer:

Sundial’s harvest for the Q was lowest in the group behind OGI whom is no longer inventorying trim.

Sold vs Harvest & Sales vs Inventory

• Sundial has 1.8x Q’s of inventory to sales on hand down from 2.4X last Q.   

• Last Q Current Portion of Long Term Debt increased by $63 million to $71 million as are offside on covenants. This Q they paid it and $86 million in debt and convertible debentures out.

Last Q: I cannot imagine the Secured Bank Creditors are taking kindly to the repaying of the convertible debentures ahead of their debt. I understand why Sundial is doing it as they are getting a discount on the debentures which a secured creditor would likely not give.  With an EBITDA covenant breach looming at Dec 31, 2020 I would not be surprised to see equity raised to pay down the senior secured debt.

This Q: Paid it all out.

In closing

20% GM would require sales of $45 million a Q to cover only existing SGA.  This would require them to triple sales, and their present trajectory is going in reverse. 

This is not a viable operating business.  Now they have $700 million in new shareholder equity to see if they can make a business out of this. This company is presently valued at over $2 billion, when cash of $700 million plus the value of the EBITDA positive $FIRE (+$200 million) is likley still reflective of overvaluation for SNDL.

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 nor intends to start one in the next five days.