Sundial Reports Second Quarter 2020 Financial Results

CALGARY, AB, Aug. 13, 2020 /CNW/ – Sundial Growers Inc. (NASDAQ: SNDL) (“Sundial” or the “Company”) reported its financial and operational results for the second quarter ended June 30, 2020. All financial information in this press release is reported in millions of Canadian dollars, unless otherwise indicated.

All references to cannabis operations refer to the continuing operations of the Company. With the disposition of Bridge Farm on June 5, 2020, the ornamental flower operations have been represented as discontinued operations.

Net cannabis revenue for the second quarter of 2020 was $20.2 million, an increase of 44% over the first quarter of 2020

Branded product average gross selling price for the quarter increased by 11% to $5.67 per gram equivalent from $5.11 per gram equivalent in the previous quarter

Combined Sales, Marketing, General and Administration costs from cannabis operations decreased by 33% over the previous quarter to $8.3 million from $12.4 million

Branded net cannabis sales increased to 69% of total cannabis sales from 54% in the previous quarter

Dried bulk cannabis cost of goods sold per gram was $1.34 in the second quarter as compared to $1.21 in the previous quarter

Net loss from cannabis operations was $31.6 million in the second quarter; adjusted EBITDA loss from cannabis operations decreased by 67% over the previous quarter to $3.9 million from $11.6 million

Supply chain capabilities were improved with On Time In Full (OTIF) product delivery metrics above 90%

An extensive financial restructuring was executed resulting in reduced leverage and improved liquidity, including the sale of the Bridge Farm Group for $90 million

An inventory impairment provision of $13.4 million was recorded on dried cannabis and cannabis extracts

“August 1 marks Sundial’s one-year anniversary as a public company. In this limited timeframe, our team has executed on delivering branded product offerings to customers and captured market share with a narrow focus in the inhalables market,” said Zach George, Chief Executive Officer of Sundial.  “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. During this time, we also added new product offerings and reinforced our reputation as a high-quality cannabis producer.  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.” 

“While the COVID-19 pandemic continues to bring many challenges, we are grateful for the dedication and commitment our employees have shown,” added Mr. George. “Our employees’ health and safety continue to be the priority for Sundial and we continue to focus on our stringent prevention measures to limit the potential spread of the virus within our organization.”

The Company continues to monitor daily developments in the COVID-19 pandemic and actions taken by the government authorities. In accordance with the guidance of provincial and federal health officials to limit the risk and transmission of COVID-19, Sundial has implemented 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 did not experience a material impact on its production and processing activities in the second quarter related to COVID-19. 

Sundial’s overall strategy is to build sustainable, long-term shareholder value by reducing leverage, improving liquidity and cost of capital while optimizing the capacity and capabilities of its production facilities.

To achieve this, Sundial will continue its focus on:

• Meeting evolving consumer preferences by being a consumer-centric organization with data-driven consumer insights and analytics

• Delivering industry-leading, best-in-class brands and products with a focus on inhalables and potency levels of THC greater than 18%

• Innovating on genetics, products and processes and continuing to invest in the Company’s brands

• Driving quality in all aspects of the Company’s operation and delivering products that consumers want, when and where they want them

• Continuing to improve cost discipline and maintaining a variable cost structure and flexible production capacity to adapt to industry dynamics

Sundial expects 2020 to be a transition year as the Company has reset its strategic focus, streamlined its organizational structure, and implemented a comprehensive operational and supply chain productivity optimization program.

Following a review of its business, Sundial recently initiated and continues a process to explore strategic alternatives focused on maximizing shareholder value. Sundial’s board of directors (“Board”) has 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, 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.

Increase in net revenue

Decrease in general and administrative expenses

Decrease in sales and marketing due to a decrease in general marketing activities

Decrease in research and development

The decreased loss was partially offset by the increase in cost of sales due to extraction costs and an increase in kilogram equivalents sold.

Sundial 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.

Concurrent with the disposition of the Bridge Farm Group, $45 million of Sundial’s term debt facility was extinguished with the remaining $73.2 million converted into non-interest bearing convertible notes.

Sundial issued US$18 million in senior unsecured subordinated convertible notes with accompanying warrants to institutional investors for proceeds, net of original issue discount, placement agent’s fees and other expenses, of US$13.3 million. Subsequent to June 30, US$6,900,00 of the convertible notes were converted into 14,100,00 common shares.

Subsequent to the quarter end, Sundial has 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.

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. 

	Q2 2020	Q1 2020	% Change	Q2 2019	% Change
Net loss from continuing operations	(31,560)	(38,390)	18%	(12,350)	-156%
Adjustments
Finance costs	591	5,982	-90%	7,358	-92%
Loss on financial obligation	—	—	0%	725	-100%
Depreciation and amortization	1,277	657	94%	148	763%
Change in fair value of biological assets	1,756	(6,415)	127%	(12,174)	114%
Change in fair value realized through inventory	6,213	9,692	-36%	1,769	251%
Unrealized foreign exchange (gain) loss	583	(1,769)	133%	555	5%
Share-based compensation	1,885	1,236	53%	13,529	-86%
Asset impairment	—	5,659	-100%	—	0%
Loss on disposition of PP&E	122	(610)	120%	(15)	913%
Cost of sales non-cash component (1)	1,549	780	99%	—	0%
Inventory obsolescence and impairment	10,026	7,715	30%	—	0%
Restructuring costs	2,363	2,719	-13%	—	0%
Transaction costs (2)	1,297	1,101	18%	—	0%
Adjusted EBITDA from continuing operations	(3,898)	(11,643)	67%	(455)	-757%