CALGARY, AB, Nov. 11, 2020 /CNW/ - Sundial Growers Inc.
(NASDAQ: SNDL) ("Sundial" or the "Company") reported its financial
and operational results for the third quarter ended September 30, 2020. All financial information in
this press release is reported in millions of Canadian dollars,
unless otherwise indicated.
THIRD QUARTER 2020 FINANCIAL AND OPERATIONAL
HIGHLIGHTS
- Branded net cannabis sales increased to 77% of total cannabis
sales from 69% in the previous quarter as Sundial continues to
transition from reliance on wholesale to branded retail sales
- Net cannabis revenue for the third quarter of 2020 was
$12.9 million, a decrease of 36% over
the second quarter of 2020 due primarily to focus on branded retail
sales
- Branded product average gross selling price for the quarter
remained relatively stable at $5.53
per gram equivalent from $5.67 per
gram equivalent in the previous quarter
- Principal amount of debt outstanding decreased by $23 million during the third quarter. A total of
$100 million of debt has been
eliminated year to date and current cash on hand stands at
$60 million
- Cash used from operations decreased by 63% to $5.3 million for the quarter, not including the
change in non-cash working capital, financing and investing
activities, from $14.3 million during
the previous quarter
- Dried bulk cost per gram sold was $1.18, a decrease of 12% from the previous three
months ended June 30, 2020.
Management is working towards a target cash cost of $0.69 per gram
- General and administrative costs were reduced by 7% from
$7.7 million to $7.2 million in the third quarter of 2020 when
compared to the previous three months ended June 30, 2020
- Capital raises provided gross proceeds of $26.4 million during the quarter and $48.1 million subsequent to the end of the
quarter
- A total of $4.1 million was
received under the Canada
Emergency Wage Subsidy (CEWS)
- Net loss was $71.4 million in the
third quarter; adjusted EBITDA loss increased by 13% over the
previous quarter to $4.4 million from
$3.9 million
- A property, plant, and equipment impairment provision of
$60 million was recorded on the Olds
facility and an inventory impairment provision of $19.9 million was recorded on dried cannabis and
cannabis extracts
"While our third quarter revenue decreased, we are pleased with
the demonstrated improvement in operating discipline, successful
cost optimization initiatives and a material reduction of our
debt," said Zach George, Sundial's
CEO. "Following the announcement of our financial restructuring in
June of this year, we have accelerated improvements in our
operating practices targeting a sustainable cost structure and a
simplified business model that will better enable us to focus on
delighting consumers."
"Having entered 2020 with a challenged capital structure, and a
disparate business model, our team has moved aggressively to focus
our operations and product portfolio to get the very best from our
high-quality people and assets," added Mr. George. "We faced some
challenges with our cultivation processes this past quarter, but
the modular nature of our indoor facility enabled Sundial to
quickly adapt to rapidly evolving market conditions and consumer
preferences in today's Canadian cannabis market. We firmly believe
that the changes we've made to the business these past four months
will position Sundial for future success."
THIRD QUARTER 2020 KEY FINANCIAL METRICS
|
Gross
Revenue
|
Net
Revenue
|
Gross Margin
(1)
|
Net
Loss
|
Adj.
EBITDA
|
Reported
|
15,525
|
12,865
|
2,606
|
(71,397)
|
(4,409)
|
% Change Q2
2020
|
-36%
|
-36%
|
-9%
|
-117%
|
-13%
|
% Change Q3
2019
|
-46%
|
-54%
|
-66%
|
16%
|
29%
|
(1) Gross margin before
inventory impairment and fair value adjustments
|
THIRD QUARTER 2020 BUSINESS & OPERATIONAL
HIGHLIGHTS
The decrease in net revenue in the third quarter of 2020
can be attributed to:
- Changes to the Company's processes as it continues to adapt its
cultivars to meet consumers' expectations, including high THC
potency
- The Company's decision to prioritize larger pack formats in
flower during the early stages of COVID-19, resulted in a slower
than expected ramp-up in pre-roll production. Demand for Sundial's
pre-roll products remains strong and capacity constraints have been
removed, which should benefit product mix in subsequent
quarters
- Many provincial boards have adjusted their inventory stocking
and re-ordering practices in response to short-term market demand
and inventory management
- Sundial underestimated on-hand inventory on certain SKUs at
select customers, which resulted in smaller re-orders in the
quarter as the Company continues to move through its inventory
depletion
In response to these factors, Sundial is implementing critical
changes that have enhanced the Company's cultivation results:
- The modular room design of Sundial's facility has rapidly
created a broad set of cultivation statistics. Since inception the
company has completed over 600 harvests, including 243 in 2020 and
52 in the third quarter. Sundial has leveraged its data analytics
capability to focus on key improvement areas within cultivation.
Recently improved cultivation processes have led to Sundial's
highest average potency results since inception. Sundial expects to
realize benefits from those products in early 2021
- Sundial's commitment to data and science-based decisions has
also been supported by the restructuring of our cultivation teams.
These changes will be vital to accelerate the momentum of
improvements in quality, potency, and cost
- Sundial acquired an expanded library of genetics to better
serve evolving consumer preferences and cultivate higher potency
products
GROSS MARGIN
Gross margin before inventory impairment
and fair value adjustments for the three months ended September 30, 2020 was 20% compared to 14% for
the three months ended June 30, 2020.
The increase in the gross margin percentage of 6% was mainly due to
efficiency gains realized through decreased cost of goods sold and
one large LP order.
GROSS SELLING PRICE
Average gross selling price per
gram equivalent of branded products was $5.53 per gram in the third quarter of 2020,
including net provisions, compared to $5.67 per gram in the prior quarter.
Average gross selling price on branded products held firm despite
price compression seen in the market and a decrease in vape sales.
Average gross selling price for unbranded flower in the third
quarter was $0.84 per gram down from
$2.22 per gram. The decrease was
due to the monetization of winterized oil, trim and shake inventory
at a discounted price.
REVENUE BY FORMATS
Sundial remains focused on
delivering premium products with an emphasis on inhalable formats,
including flower, pre-rolls and vape cartridges. Gross
revenue from vape cartridge sales was $3.6
million in the third quarter of 2020 representing a 43%
decrease from the previous quarter. The decrease in vape sales was
due in part by Sundial's SKU increase in the segment along with
significant price compressions. Gross revenue from dried flower
sales was $11.6 million in the third
quarter of 2020 representing a 28% decrease from the previous
quarter. Gross revenue from oil sales was $319,000 in the third quarter of 2020
representing an 84% decrease from the previous quarter. The
decrease in oil sales was due to a one-time bulk sale to a licensed
producer. Sundial was under indexed in the pre-roll format and will
increase production in the fourth quarter and into 2021 to meet
consumer demand. Sundial is currently undertaking a proactive SKU
optimization initiative to ensure top selling SKUs replace less
popular products. The Company continues to diversify its product
mix with plans for the addition of solventless extracts by the end
of the fourth quarter of this year.
KILOGRAMS SOLD
The Company sold 5,819 kilogram
equivalents of cannabis in the third quarter of 2020, a 3% decrease
over the previous quarter sales of 5,997 kilogram equivalents.
NET BRANDED SALES
The Company continues to focus on
increasing its sales to Provincial Boards through continued brand
portfolio penetration coast-to-coast, the addition of new formats
and supply chain optimization. Branded net cannabis sales in the
third quarter of 2020 were $9.9
million compared to $14.0
million in the second quarter of 2020, a decrease of
29%.
COST OF GOODS SOLD PER GRAM EQUIVALENT
Cultivation
costs per gram of bulk dried cannabis were $1.18 in the third quarter, compared to
$1.34 in the previous quarter. Total
cost of goods sold per gram including packaging, shipment and
fulfillment costs for the three months ended September 30, 2020 was $1.76 compared to $2.89 for the previous quarter. The
decrease of $1.13 per gram was
mainly due to a bulk sale to an LP that had a low per gram
cost.
SALES, MARKETING AND GENERAL AND ADMINISTRATIVE
EXPENSES
General and administrative costs were further
reduced by 7% from $7.7 million to
$7.2 million in the third quarter of
2020 when compared to the prior quarter. The reduction in the
Company's workforce to adjust to market conditions and a focused
review of all spending resulted in this decline. Sundial is fully
committed to investing in its brands, and as a result sales and
marketing expenses increased to $1.1
million from $0.5 million in
the previous quarter. These investments will continue to increase
in upcoming quarters.
NET LOSS
Net loss from continuing operations for the
three months ended September 30, 2020
was $71.4 million compared to a net
loss of $32.8 million for three
months ended June 30, 2020. The net
loss included impairment charges related to inventory ($19.9 million) and property, plant and equipment
($60.0 million) of $79.9 million.
ADJUSTED EBITDA
Adjusted EBITDA from cannabis
operations was a loss of $4.4 million
for the three months ended September 30,
2020 compared to a loss of $3.9
million for the three months ended June 30, 2020. The increased loss was primarily
due to lower net revenue and higher sales and marketing expense,
partially offset by lower cost of sales and general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Through a combination of cash repayments, asset dispositions,
equity and equity-linked issuances and debt-for-equity conversions
in 2020, Sundial has greatly improved its leverage and cash balance
positions.
Highlights include:
- Eliminated $100 million of debt
in 2020 as of November 9, 2020. Net
debt was reduced by $72 million
- Reduced annualized debt service costs by $31 million through the June 5 restructuring
- Raised gross cash proceeds of $93
million since the June 5
restructuring and received unrestricted government subsidies of
$4.1 million, as of November 9, 2020
- As of November 9, 2020, Sundial
had $127 million of indebtedness
outstanding, including $55 million
aggregate principal amount of senior secured convertible notes and
$72 million dollars of syndicated
bank debt, 439 million common shares outstanding and an available
cash balance of $60 million
- The process of converting debt into equity has significantly
improved the Company's balance sheet, but has resulted in pressure
on the trading price of Sundial's common shares
- Sundial's shareholders have authorized the Board of Directors,
subject to required regulatory and stock exchange approvals, to
consolidate its outstanding common shares to ensure compliance with
the Nasdaq's continued listing standards, and to provide access to
a broad universe of investors, access to equity capital and trading
liquidity. Further details regarding a potential share
consolidation will be announced at a later date
STRATEGIC AND ORGANIZATIONAL UPDATE
Sundial remains confident in its overall strategy of building
sustainable, long-term shareholder value through reducing leverage,
improving liquidity and cost of capital while optimizing the
utilization and output of its production facilities.
- Subsequent to the end of the quarter, Sundial significantly
increased its investment in brands through sales and marketing
initiatives, including launching a comprehensive holiday campaign
in early November (Top Leaf, Sundial and Palmetto) as well
as increased its sales capacity with the addition of new sales
representatives from coast-to-coast
- Subsequent to the quarter, Sundial renegotiated terms with an
external manufacturing partner significantly reducing its costs by
over 60% on those products. Sundial expects annual savings in
excess of $2 million from this
updated arrangement
- Following the quarter end, Sundial has internalized some
processing operations that were previously performed by an external
manufacturing partner. Sundial expects annual savings in excess of
$2 million from this change. The
lower costs will enable Sundial to be more competitive with its
vape offering
- Following the quarter end, Sundial has undertaken an initiative
to further simplify its supply chain and rationalize its SKUs
across all brands and formats. The Company is taking a proactive
approach with customers to limit SKU proliferation, and maximize
shelf space and rate of sale with an optimized portfolio
approach
- Subsequent to the quarter end, Sundial entered a sales and
distribution agreement with local company Choklat Inc. The new
collaboration provides Sundial the opportunity to continue to
expand its product portfolio and enter the edible market
STRATEGIC ALTERNATIVES REVIEW
While Sundial remains focused on its core strategy, the Company
continues to review potential strategic alternatives to ensure that
all opportunities to maximize value are explored. There is no
assurance that this review will result in a transaction of any
kind, and the Company does not intend to provide any update or
additional comment on these matters until the Board approves a
specific action or otherwise concludes the review.
COVID-19 UPDATE
The Company continues to monitor daily developments in the
COVID-19 pandemic and actions taken by government authorities. In
accordance with the guidance of provincial and federal health
officials to limit the risk and transmission of
COVID-19, Sundial continues to implement mandatory
self-quarantine policies, travel restrictions, enhanced cleaning
and sanitation processes and frequency, and social distancing
measures. Sundial believes that it can maintain safe
operations with these pandemic-related procedures and protocols in
place. The Company has not experienced a material impact
on its production and processing activities to date related to
COVID-19.
NON-IFRS MEASURES
Certain financial measures in this news release, including
adjusted EBITDA, working capital and gross margin before fair value
adjustments are non-IFRS measures. These terms are not defined by
IFRS and, therefore, may not be comparable to similar measures
provided by other companies. These non-IFRS financial measures
should not be considered in isolation or as an alternative for
measures of performance prepared in accordance with IFRS.
ADJUSTED EBITDA
Adjusted EBITDA is a non-IFRS measure which the Company uses to
evaluate its operating performance. Adjusted EBITDA provides
information to investors, analysts and others to
aid in understanding and evaluating the Company's operating
results in a similar manner to its management team.
Adjusted EBITDA is defined as net income (loss) before finance
costs, depreciation and amortization, accretion expense, income tax
recovery and excluding change in fair value of biological assets,
change in fair value realized through inventory, unrealized foreign
exchange gains or losses, share-based compensation expense, asset
impairment, gain or loss on disposal of property, plant and
equipment and certain one-time non-operating expenses, as
determined by management.
|
Q3 2020
|
Q2 2020
|
% Change
|
Q3 2019
|
% Change
|
Net loss from
continuing operations
|
(71,397)
|
(32,827)
|
-117%
|
(85,487)
|
16%
|
Adjustments
|
|
|
|
—
|
|
Finance (income)
costs
|
(18,197)
|
591
|
3179%
|
10,150
|
-279%
|
Loss on financial
obligation
|
—
|
—
|
0%
|
59,583
|
-100%
|
Depreciation and
amortization
|
1,480
|
1,277
|
16%
|
143
|
935%
|
Change in fair value
of biological assets
|
(194)
|
1,756
|
-111%
|
(11,675)
|
98%
|
Change in fair value
realized through inventory
|
2,447
|
6,213
|
-61%
|
5,875
|
-58%
|
Unrealized foreign
exchange (gain) loss
|
(243)
|
583
|
142%
|
(229)
|
-6%
|
Share-based
compensation
|
3,118
|
3,152
|
-1%
|
7,991
|
-61%
|
Asset
impairment
|
60,000
|
—
|
0%
|
—
|
0%
|
Loss on disposition of
PP&E
|
—
|
122
|
100%
|
19
|
-100%
|
Cost of sales non-cash
component (1)
|
1,289
|
1,549
|
-17%
|
1,072
|
0%
|
Inventory obsolescence
and impairment
|
19,897
|
10,026
|
98%
|
—
|
0%
|
Restructuring
costs
|
1,108
|
2,363
|
-53%
|
—
|
0%
|
Transaction costs
(2)
|
364
|
1,297
|
-72%
|
6,315
|
0%
|
Government
subsidies
|
(4,081)
|
—
|
0%
|
—
|
0%
|
Adjusted EBITDA
from continuing operations
|
(4,409)
|
(3,898)
|
-13%
|
(6,243)
|
29%
|
(1) Cost of sales non-cash
component is comprised of depreciation expense
|
(2) Transaction costs are
non-recurring costs related to financing
|
SUNDIAL CORPORATE VIDEO
Sundial launched its new corporate video available to watch on
https://www.sndlgroup.com/investors/corporate-video
CONFERENCE CALL
Sundial will host a conference call and webcast at 10:30 a.m.
EDT (8:30 a.m. MDT) on Thursday, November 12, 2020. A current
investor presentation will be available on
http://sndlgroup.com/investors at that time.
CONFERENCE CALL ACCESS
Callers may access the
conference call via the following phone numbers:
Canada/USA Toll Free: 1-800-319-4610
International Toll: +1-604-638-5340
UK Toll Free: 0808-101-2791
Callers should dial in 5-10 minutes prior to the scheduled start
time.
WEBCAST
To access the live webcast of the call,
please visit the following link:
http://services.choruscall.ca/links/sundialgrowers20201112.html
REPLAY
A telephone replay will be available for one
month. To access the replay dial:
Canada/USA Toll Free: 1-800-319-6413 or International
Toll: +1-604-638-9010
When prompted, enter Replay Access Code: 5547 #
The webcast archive will be available for three months via the link
provided above.
ABOUT SUNDIAL GROWERS INC.
Sundial is a public company with Common Shares traded on Nasdaq
under the symbol "SNDL".
Sundial is a licensed producer that crafts cannabis using
state-of-the-art indoor facilities. Our 'craft-at-scale' modular
growing approach, award-winning genetics and experienced growers
set us apart.
Our Canadian operations cultivate small-batch cannabis using an
individualized "room" approach, with 470,000 square feet of total
space.
Sundial's brand portfolio includes Top
Leaf, Sundial
Cannabis, Palmetto and Grasslands.
Our consumer-packaged goods experience enables us to not just
grow quality cannabis, but also to create
exceptional consumer and customer experiences.
We are proudly Albertan, headquartered in Calgary, AB, with operations in Olds, AB,
and Rocky View County, AB.
Forward-Looking Information Cautionary
Statement
This news release includes statements containing certain
"forward-looking information" within the meaning of applicable
securities law ("forward-looking statements"), including, but not
limited to, statements regarding the Company's cost-cutting
initiatives, the cost savings expected to be achieved, the
Company's ability to obtain new financing and covenant
relief, operational goals, demand for the Company's products,
the Company's ability to achieve profitability, the
development of the legal cannabis market, future
financings and the maintenance of production levels. In
particular, any failure or delay in obtaining new financing
would have a material adverse effect on our liquidity and impair
our ability to operate as a going concern. In such a case,
the Company would look to delay investments or capital
expenditures and evaluate potential asset sales, but it could
be forced to curtail operations or seek relief under
bankruptcy or insolvency laws. In addition,
depending on the development of the cannabis market and the
Company's ability to capture any growth opportunities, future
liquidity issues may continue to arise, which could have a material
adverse effect on our business, results of operations and financial
condition. Forward-looking statements are frequently
characterized by words such as "plan", "continue", "expect",
"project", "intend", "believe", "anticipate",
"estimate", "likely", "outlook", "forecast", "may",
"will", "potential", "proposed" and other similar words, or
statements that certain events or conditions "may" or "will" occur.
These statements are only predictions. Various assumptions were
used in drawing the conclusions or making the projections contained
in the forward-looking statements throughout this news release.
Forward-looking statements are based on the opinions and estimates
of management at the date the statements are made, and are subject
to a variety of risks and uncertainties and other factors that
could cause actual events or results to differ materially from
those projected in the forward-looking statements. Please see "Item
3D Risk Factors" in the Company's Annual Report on Form
20-F, which was filed with the Securities and Exchange Commission
("SEC") on March 30, 2020, and the risk factors included in
our other SEC filings for a discussion of the material risk
factors that could cause actual results to differ materially from
the forward-looking information. The Company is under no
obligation, and expressly disclaims any intention or obligation, to
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except
as expressly required by applicable law.
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SOURCE Sundial Growers Inc.