Sundial Growers earnings release.

What I said last Q:

Hello, hedge fund!

• Raised $860 million during the Q and have a cash balance at presser of $970 million
• Cannabis sales take a big step back -30% QoQ
• GM is underwater for 6 consecutive quarters.
• Investment income surfaces its debut and pollutes EBITDA with realized capital gains in what is supposed to be an operational run rate metric versus a windfall metric.
• They made some realized gains on their investments but there is no detail if it was cannabis or some other portfolio.

This Q:

Open up the fins and MDA and follow along.   

Income Statement Drivers and Implied Breakeven: Trend

Sales Table:

Revenue net of excise was $9.1 million, a -7% QoQ decrease and lowest since March 31, 2019.

Gross Cannabis Sales (before excise tax deduction… and the driver of the above tables and segmentation) were $12.7 million an increase QoQ of +8%.  Sales remain well under previous record of $24 million from Q1 F20.

• $10.9 million was sold through provincial boards versus $9.0 million last Q, a +20% increase, but it is +2% net of excise. 
• Revenue from other LP’s decreased $0.9 million or -32% to $1.9 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 2021 will make that worse.  Given they received $0.93/gram (versus $2.43/gram last Q), coupled with huge increase in oil sales, I think they are selling oil.
• Medical is nonexistent

By segment

• Flower totaled $9.7 million flat to last Q.
• Vapes totaled $1.3 million down a further -9% after the prior Q -67% and well below $6.2 million from Q2 F20. Lowest since 2.0 launch.
• Oil totaled $1.4 million a sizable 679% or +$1.2 million increase.  I am thinking this is what they might have sold wholesale. We will see if this stays up next Q or retreats.
• Edibles and concentrates reduces -38% or $0.2 million to $0.3 million.

Sales channel pressurization versus sell through is a story told often in Canadian cannabis.  No different here with sales levels in a segment dropping from peaks.

Net Adult Use revenue was $7.3 million a hair better than last Q which was the lowest since March 2019.

Net revenue per gram sold decreased by 20% to $2.35/gram as wholesale KGs was larger percentage of the sales mix the previous Q than this Q.

Income Statement Drivers and Implied Breakeven: Peer

Sundial would rank as 7^th largest LP in the above peer with sales at $9.1 million.  We might have to send SNDL down to the Tier 2 group.

Gross Margin: Peer and Trend:

Negative Gross margin seven Q’s in a row.  Only Cronos’ eight Q’s of negative GM beats Sundial. Organigram at five Q’s, is trying to catch up.

Gross Margin improved from negative $3.3 million to negative $2.0 million in the Q.  Another $1.7 million inventory obsolescence was the driver.  Reversing that impairment still leaves them in negative GM.  They are at 3.8 Q’s of inventory to sales, so we might see impairments going forward given they are harvesting more than they are selling.

They have a projected yield of 3,482 KGs.  Compare that before they throttled the grow at March 31, 2020 with a projected yield of 13,100 KGs.  THEY CANNOT MAKE MONEY AT CURRENT PRODUCTION VOLUME. Doubling would likely see them losing money.

Gross Margin: Larger Peer Group

Sundial stays in the basement with negative 22% GM.

Now this is the point in Sundial statements where they inserted Interest & Fee Revenue and Investment Return.  I will be placing these below NOP and discussing below.

SGA & SBC as % of Sales: Trend

Ugly trend here.

G&A increased by $3.0 million to $10 million and increased to 110% of sales from 72% QoQ on the sales decrease. Office and General were the biggest contributor with an increase of $2.0 million to $3.3 million in the Q.

Selling expense increased to $0.3 million to $1.3 million and increased to 14% of sales from 10% QoQ.  What I said last Q: Not sure how they are going to sell more product with cuts to selling expense. Yup!

SBC was $4.5 million for the Q, an increase from $3.5 million last Q.  Stock price increase is the reason. If you think this seems high relative to results, you would not be alone.

R&D was $0.8 million up from $0.2 million.

Depreciation was $0.9 million in non-production assets versus $1.1 million last Q.   

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

Total Opex was $17.6 million up from $12.8 million last Q.

Net Operating Profit before IFRS voodoo was negative $20 million versus negative $16 million last Q. Opex increasing was the driver.

Other notable income & expenses include

• Impairment of Olds Campus by $60 million.  Over half.  OOF!
• Interest and Fee Revenue of $3.3 million versus $2.8 million last Q.  They include the interest from their cash hoard here and do not back it out of EBITDA. SMH.  This, I think as disclosure is poor, is from the Zenabis stealth attack on their loan.  They are still waiting for a judge to settle the royalty part of the Zenabis loan.
• Investment Revenue of $2.4 million versus $12.9 million last Q.  Unrealized gains makes up $1.8 million of the revenue for this Q.  Last Q’s bounty was on the Zenabis loan. I think it includes the Royalty, so they better hope the judge agrees.
• Share of profit of equity-accounted investees was $3.7 million versus nil last Q.
• Transaction costs of $0.8 million for ISH (see… if you want me to back out transaction costs from Adj EBITDA show it on the income statement)
• $19 million gain on the warrants issued in conjunction with equity raises versus a loss last Q of $130 million.

All in Net Comprehensive Income was negative $52 million versus negative $134 million last Q.  

SGA & SBC as % of Sales: Peer

Highest in peer group. 

+Net Operating Profit Breakeven Peer

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

EBITDA Trend and Peer

They took some liberties with their add backs and what they chose not to add back.

• Added back $1.8 million in unrealized gains on investment revenue, which means they did not add back the entire $2.4 million.  I added back the entire amount
• Did not add back the $3.3 million in interest fee and revenue nor the $3.7 million share of equity investee profit.  I get it… you think you are a hedge fund and investing is now a core operation.  I have to compare your cannabis operations to peers, so I am adding this back.
• Did not add back $0.2 million in F/x losses. I added them back.

I have them at negative $11.1 million a slide from -$8.5 million last Q.  My Adj EBITDA is $10.9 million lower than theirs.

+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 $12 million to $885 million.
• Restricted cash grew +$52 million as they look to self insure (like Hexo) Directors & Officers of $16 million and have pledged securities as collateral for option trading margin cover of $36 million  
• Marketable securities, which includes their cannabis investments, are $97 million.

“Gas in the Tank” Trend

Plenty of inventory relative to sales even with the continued impairments at $35 million +$2 million QoQ.  But I don’t have a clue if it is FG or not as all Sundial discloses is Harvested Cannabis. 

This is getting to the magical 4.0 inventory to sales at 3.8:1, where impairments happen.  Given they impair every Q, it should not grow much more.

“Waterfall” Trend

That low harvest is killing them on Gross Margin, as they used to harvest greater than 10,000 KGs. They removed disclosure of KGs in inventory.

Harvest went up 854 KGs QoQ and almost all of that increase went in the vault, as Harvest to Sales delta was 824 KGs.

Sold vs Harvest & Sales vs Inventory

• Sundial has 3.8x Q’s of inventory to sales on hand up from 3.6x last Q.   

• Equity accounted investee shows up at $192 million.  This their portion of the Sunstream Bancorp JV
• Share capital increases $327 million via ATM

In closing

What I said last Q:

I have no idea what they are doing here, and they may not either.

 If they are a hedge fund investing in:

• Indiva (who was a car going over a cliff) on February 16, 2021, 6 days after a record bull run across cannabis is odd.
• ISH, who they are buying $0.04/share off their February 10, 2021 all time high is odd, especially given lack of synergies.
• Stealthy acquiring Valens and driving its market cap to a high.

… is odd for timing and valuation alone.

As to running a cannabis company.  Nowhere in their history is there any evidence of operational prowess.  They have a cultivation facility three times larger than they need.  They show little signs of growing sales to use the facility more efficiently.

Unless you are a degenerate gambler, this is not an investment that I would hold for any length of time.

This Q:

The same, but with another Q of proof.

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.