Sundial Reports First Quarter 2020 Financial Results

Sundial Growers Inc. reported its financial and operational results for first quarter 2020 ended March 31, 2020.

First Quarter 2020 Financial and Operational Highlights

• Strategic shift away from “Heal, Help and Play” strategy to concentrate on Canadian recreational cannabis with a focus on inhalable products.
• Continued progress made on business optimization initiatives with annualized net cost reductions of approximately $28 million in 2020.
• Net revenue of $23 million, an increase of 7% over the prior quarter.
• Net cannabis revenue of $16.5 million, excluding provisions of $2.5 million, an 18% increase over the prior quarter
• Branded net cannabis sales increased to 54% of total net cannabis sales in the first quarter of 2020 vs. 33% in the fourth quarter of 2019.
• Overcame significant processing challenges and improved supply chain capabilities during the quarter; recently, ‘On Time In Full’ (OTIF) metrics have surpassed 90%.
• Inventory write-down of $14.4 million, on dried cannabis and cannabis extracts, primarily driven by product price compression due to broader trends of oversupply in the Canadian market.
• Since January 2020, the Company has reduced its workforce by 51% to optimize its cost structure to align with market conditions. Sundial currently has 420 employees.

“We have made significant progress in improving our cost structure and liquidity in the past few months,” said Zach George, Chief Executive Officer of Sundial. “The agility of our “craft-at-scale” cultivation strategy also became evident as we quickly aligned our operations with market conditions, by temporarily curtailing cultivation activities to adapt to current demand levels.  We are pleased to have made progress towards the sale of Bridge Farm and the subsequent restructuring of our secured debt. These steps are critical in order to improve Sundial’s financial health.”

“The COVID-19 pandemic has brought many challenges over the past few months and our team has shown outstanding commitment and courage, working tirelessly despite these new demands,” added George. “We truly appreciate their efforts and their health and safety continues to be a priority for Sundial. As we move forward, we remain focused on achieving sustainable profitability and will continue to pursue opportunities to drive improved efficiency.”

FINANCIAL AND OPERATING HIGHLIGHTS

Operational Highlights:

• Average gross selling price per gram of branded flower of $4.76 per gram in the first quarter of 2020 compared to $6.15 per gram in the prior quarter. The average gross selling price per gram difference was due to price discounts and return provisions. Average gross selling prices for unbranded flower in the first quarter was $2.74 per gram down from $3.15 per gram in the previous quarter due to competitive pressures in wholesale market as a result of industry-wide increased inventory levels.
  
  
• The Company’s focus remains on delivering industry-leading, best-in-class products with a focus on inhalable products, including flower, pre-rolls and vape cartridges. Gross revenue from vape cartridge sales were $4.4 million in Q1 representing 26% of the cannabis sales mix and an increase of $3.9 million over Q4 2019. Sundial continues to build strong consumer adoption with its vape portfolio with several new launches in Q1 2020 and a strong innovation pipeline planned for the balance of year.
  
  
• The Company harvested 10,254 kilograms of cannabis in the first quarter of 2020 which was about flat compared to the kilograms of cannabis for the three months ended December 31, 2019.
  
  
• The Company has seen continued commercial success in April 2020 with more than $9 million in net branded sales to provincial boards, which can be attributed to its strong recreational launch in the Province of Quebec, supply chain optimizations and continued market share penetration within the inhalable products segment nationally.
  
  
• Cost of sales per gram sold for the three months ended March 31, 2020 were $3.04 compared to $2.41 for the three months ended March 31, 2019. The increase of $0.63 was due to lower production cost of bulk flower, offset by an increase in production cost of vape products.
  
  
• Net loss from cannabis operations for the three months ended March 31, 2020 was $36.4 million compared to a net loss of $16.7 million for three months ended March 31, 2019. The increased loss of $19.7 million was primarily due to non-recurring inventory valuation provisions ($14.4 million), restructuring costs ($2.7 million) and asset impairment ($5.7 million), partially offset by increases in revenue, foreign exchange gain and lower share-based compensation expense.
  
  
• Adjusted EBITDA from cannabis operations was a loss of $11.3 million for the three months ended March 31, 2020 compared to a loss of $5.5 million for the three months ended March 31, 2019. The increase loss was due to the following:
  • Increase in cost of sales due to an increase in kilogram equivalents sold
  • Increase in general and administrative expenses due to increases in salary and wages, office and general and professional fees
  • Increase in sales and marketing expense due to general marketing expenses
    
    
• In addition, the loss was partially offset by the following:
  • Increase in gross revenue due to the Company expanding its provincial distribution network and launching additional brands and product formats

Refinancing Initiatives

On May 14, 2020, the Company obtained amended and restated waivers and agreements from its senior lenders for all events of default and cross default. Under the terms of the waivers and agreements, the Company agreed that on or before June 1, 2020 it will (i) execute an amended and restated credit agreement under its Syndicated Facility, (ii) execute a refinancing transaction under its Term Debt Facility, (iii) execute an intercreditor agreement, and (iv) close the sale of Bridge Farm. Failure to execute any of these transactions will constitute an event of default.

These requirements, combined with the accumulated losses to date, indicate the existence of a material uncertainty that casts substantial doubt on the Company’s ability to continue as a going concern. The Company continues to be in active dialogue with its lenders to finalize these amendments to its loan agreements. Any failure or delay in completing these amendments would have a significant negative impact on the Company’s liquidity and further impact the Company’s ability to operate as a going concern. In such a case, the Company would look to alternative sources of financing, delay capital expenditures and/or evaluate potential asset sales, and potentially could be forced to curtail or cease operations or seek relief under the applicable bankruptcy or insolvency laws

Sundial Receives Nasdaq Letter Regarding Non-Compliance with Minimum Bid Price Requirement

Sundial was notified on May 12, 2020 by the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) that the closing bid price of the Company’s common stock for the last 30 consecutive business days from March 30, 2020 to May 11, 2020 did not meet the minimum bid price of $1.00 per share (the “Minimum Bid Requirement”).  The notice has no immediate effect on the trading of the Company’s common shares on Nasdaq and the Company has until December 28, 2020 to regain compliance with the Minimum Bid Requirement.

Sundial will actively monitor its closing bid price during the compliance period and intends to take appropriate measures to remedy the deficiency and regain compliance with the Minimum Bid Requirement.

COVID-19 Update

The Company is monitoring 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. Sundial did not experience a material impact to sales in the first quarter from 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 as 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.

Adjusted EBITDA table