Sundial Growers earnings release.

Sundial has added a new trinket to their portfolio in the Q. Inner Spirit on August 4, 2021: PP $119 million. Goodwill & Intangibles $125 million or 105% of purchase price.

They will be adding Alcanna as well.

What I said last Q:

• Impaired Olds, Alberta campus by $60 million knocking PPE backwards 54% to $53 million
• Gross cannabis sales increased by 8% but Net Cannabis Sales decreased 7%, as excise almost doubled
• Seven Q’s in a row of negative Gross Margin
• SGA $11 million while GM is negative
• EBITDA slid further to -$11 million (my version not theirs)
• Cash on hand $885 million

This Q:

• Cannabis revenue net of excise +$5.2 million to $14.4 million, ISH was $6.1 million of that increase. So, all of it.
• GM on cannabis, including ISH, was -$4.5 million. 8 Qs in a row of negative GM.
• SGA, even with ISH, decreased $0.6 million
• Finance business evidenced a negative contribution of -$4.8 million
• Plenty of cash on hand at $629 million net of restricted.
• aEBITDA from cannabis operations -$7.8 million versus their corporate figure of +$10.5 million.

Open up the fins and MDA and follow along.   

Income Statement Drivers and Implied Breakeven: Trend

Sales Table:

Cannabis Revenue net of excise was $14.4 million, a +57% or +$5.2 million QoQ increase.

The entirety of increase was the addition of ISH, who recorded revenue of $6.1 million for the partial Q it was onboard. ISH will be on board for the entire next Q and will add five incremental weeks of revenue.

Gross Cannabis Sales from cultivation (before excise tax deduction… and the driver of the above tables and segmentation) were $11.0 million a decrease QoQ of -13% or -$1.7 million.  Sales remain well under previous record of $24 million from Q1 F20.

• $10.1 million was sold through provincial boards versus $10.9 million last Q, a -7% decrease, but it is -10% net of excise. 
• Revenue from other LP’s decreased $0.9 million or -51% to $0.9 million for the Q. 
• Medical is nonexistent

By segment

• Flower totaled $9.2 million -5% to last Q.
• Vapes totaled $1.2 million down a further -9%. Lowest since 2.0 launch.
• Oil dropped $1.3 million to a negligible amount.  I am thinking this is what they might have sold wholesale last Q.
• Edibles and concentrates increase $0.3 million to $0.5 million.

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 increased by 37% to $3.23/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 $14.9 million.  We might have to send SNDL down to the Tier 2 group.

Gross Margin: Peer and Trend:

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

As I said last Q: 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.

Yup.

Cultivation generated -$8.1 million in GM versus -$2.0 million last Q. Impairments were present at $4.5 million. ISH generated $3.6 million in GM, good for 24% of retail sales, good for 24% of retail sales when royalties and millwork are removed . All in cannabis GM was -$1.2 million.

Netting ISH inventory and sales, cultivation is sporting a 4.2:1 Inventory to Sales ratio and they packed 1,817 KGs more inventory versus what they sold in the q as well. I would expect impairments next Q too.

They have a projected yield of 5,386 KGs vs this Q sales of 3,416 KGs this Q.  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 still losing money.

Gross Margin: Larger Peer Group

Sundial stays in the basement with negative 8% 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 gets better with adding ISH revenue.

G&A decreased by $0.5 million to $9.6 million and decreased to 75% of sales from 110% QoQ on the sales increase from ISH. Salaries increased $1.1 million, as did professional fees by $1.3 million, offset by a $2.5 million reduction if office and general.

Selling expense was stable at $1.3 million and decreased to 9% of sales from 14% QoQ.   

SGA were well controlled even with the ISH addition.

SBC was $1.95 million for the Q, a decrease from $4.5 million last Q.    

R&D was $0.7 million versus $0.8 million previous Q.

Depreciation was $2.4 million in non-production assets versus $0.9 million last Q.   The addition of ISH stores likely the reason.

Total Opex was $15.8 million down from $17.6 million last Q.

Net Operating Profit before IFRS voodoo was negative $17 million versus negative $20 million last Q. Opex increasing was the driver.

Other notable income & expenses include

Finance Revenues: aggregates -$4.8 million versus +$9.4 million last Q.

• Interest and Fee Revenue of $3.3 million versus $3.3 million last Q.  They include the interest from their cash hoard here and do not back it out of EBITDA. SMH. 
• Investment Revenue of -$18 million versus +$2.4 million last Q. Unrealized gains make up $24 million of the revenue for this Q. They back this out of corporate aEBITDA.  I don’t know about that. They are bagholding, bought at market highs and premium and are asking investors to ignore the unrealized losses.  Q1 bounty of $12.9 million 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 $9.9 million versus $3.7 million last Q. This is largely the Sunstream Bank lending/investing JV.

Other Income and Expenses: This Q +$20 million and last Q -$41 million

• Impairment of Olds Campus by $60 million last Q versus nil this Q
• Transaction costs of $5.2 million for ISH (see… if you want me to back out transaction costs from Adj EBITDA show it on the income statement) versus $0.8 million Q.
• $24 million gain on the warrants issued in conjunction with equity raises versus a gain last Q of $20 million.

They also received a $10 million tax recovery in the Q.

All in Net Comprehensive Income was +$11 million versus negative $52 million last Q.  The $60 million Olds impairment last Q was the biggest reason.

SGA & SBC as % of Sales: Peer

Second 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.

• They added back $24 million in unrealized gains on investment revenue to get to +$10 million.

I decided to simply do an aEBITDA on cannabis operations (versus on Corporate as I have some issues with how they are calculating same) and did not add back any financial revenue or losses. I get aEBITDA of -$7.8 million.  This is an improvement from -$11 million last Q. Improvement stems from non-impaired GM improvement and reduction in SGA and R&D.

+EBITDA:

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

Balance Sheet Items of Note:

Cash

• Cash decreased in the Q by $256 million to $629 million. $85 million for acquistions and $135 million contributed to SAF JV are the largest elements.
• Restricted cash decreased -$19 million to $33 million, as they look to self insure (like Hexo) Directors & Officers of $19 million and have pledged securities as collateral for option trading margin cover of $14 million  
• Marketable securities, which includes their cannabis investments, are $120 million + $22 million in the Q.

“Gas in the Tank” Trend

Plenty of inventory relative to sales even with the continued impairments at $36 million +$1 million QoQ.  But I don’t have a clue if it is FG or not as all Sundial discloses is Harvested Cannabis. 

The cultivation inventory to cultivation sales is over the magical 4.0 inventory to sales at 4.21, where impairments happen.  They have impaired inventory for seven consecutive Q’s.  Looks like number 8 might be next Q.

“Waterfall” Trend

That low harvest is killing them on Gross Margin, as they used to harvest greater than 10,000 KGs.

Harvest decreased 1,008 KGs QoQ to 5,233 KG.  Sold dropped 1,996 KGs to 3,416 KGs. Harvest to Sales delta was 1,817 KGs and went into inventory.

Sold vs Harvest & Sales vs Inventory

• Sundial has 4.2x Q’s of cultivation inventory to cultivation sales on hand up from 3.6x last Q.   

• Investments in subleases lands on the books at $16 million from ISH.

• Goodwill and intangibles re-appear on balance sheet at $124 million from ISH.

• Equity accounted investee increases by $139 million to $220 million.  This their portion of the Sunstream Bancorp JV. Hello, hedge fund.

• Derrivative liabilities increase by $24.1 million (same number as from Income statement) to $29.9 million.  These are the warrants from the raises earleir in 2021.

• Lease obligations of $20 million come onboard from ISH.

• Share capital increases $29 milion to $2,032 million with issuance to ISH.

In closing

What I said last two 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:

They add ISH this Q but their cannabis business is still negative GM.

Announce the acquisition of Alcanna at a 39% premium.

Announce a share buy back of up to 5% of the outstanding after publishing Q3 last night.

The stock is up 24% today on THESE RESULTS. Are we in for another February 2021 run? Because these are not impressive numbers.

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.