CALGARY,- Sundial Growers Inc. (Nasdaq: SNDL) (“Sundial” or the “Company”) reported its financial and operating results for the year ended December 31, 2019, as well as provided an update on its liquidity and strategic initiatives.
“Sundial grew quickly in 2019. We expanded and received licencing for our state-of-the art operating facilities, successfully launched four product lines and built a strong following with our core consumers,” said Zach George, Sundial’s Chief Executive Officer. “Despite our successes in 2019, we also faced a number of internal and external challenges, including operational difficulties, excess leverage, poor cost controls, a loss of focus on our core value proposition, regulatory delays, and rapidly evolving industry conditions. These combined factors led to fourth quarter results that were below our expectations. As a result, we are making material changes to our business to position Sundial for improved performance, while also negotiating with our lenders in an attempt to restructure our credit facilities. We are in the midst of an in-depth portfolio review and will assess each business opportunity and partnership in an objective manner as we evaluate the economic viability of each initiative. We intend to update investors on the outcome of this portfolio review along with our first quarter results.”
Credit Facility Restructuring
At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the full principal amount of the Term Debt Facility were classified as current liabilities on the Company’s statement of financial position. Additionally, based on the Company’s most recent financial projections management is forecasting that it will be in violation of the Syndicated Credit Agreement financial maintenance covenants as at March 31, 2020, June 30, 2020 and September 30, 2020.
Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for the corresponding breach and other administrative breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that set out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million under the Syndicated Credit Agreement was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April1, 2020 to April 20, 2020.
In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar relief in the past; however, there is no guarantee that we will be able to do so in the future.
The Company will require additional financing in the near term and has engaged financial advisors and is in advanced negotiations with potential capital providers including sources of debt and/or equity. These negotiations have been negatively impacted by the effects that the COVID-19 pandemic is having, and is expected to continue to have, on the overall business environment and financial markets generally. The Company continues to advance these initiatives; however, there is no certainty as to their ultimate completion or the timing thereof.
Cash and cash equivalents, including restricted cash, was $61.2 million on December 31, 2019. As at February 29, 2020, the Company had cash and cash equivalents, including restricted cash, of $43.1 million, including the $10.0 million of cash that was subsequently paid out to lenders under the Syndicated Credit Agreement on March 30, 2020.
Outlook
Sundial has made significant changes in early 2020 to position the Company for the next stage of its development. Sundial’s management team is focused on driving long-term profitable growth and has defined its primary objectives for 2020 as:
The potential impact of the COVID-19 pandemic on Sundial’s operations, capital markets and the cannabis industry is currently unclear; however Sundial is fully committed to the health and safety of its employees and focused on ensuring minimal disruption to its operations and cash flow.
Deliver industry-leading, best-in-class products with a focus on inhalable products
The majority of the Company’s harvests are now testing above 18% THC with several harvests testing well above 20%, proving that its “craft-at-scale” modular growing approach is working.
Furthermore, the Company has seen the following improvements in its market results:
The recent Alberta Gaming, Liquor and Cannabis approval permitting cannabis vape sales in Alberta is expected to drive further growth.
Sundial launched a total of 105 SKUs in the adult-use market in the first quarter of 2020 to date, representing a 72% increase versus the fourth quarter of 2019. New launches represent 74 flower SKU’s and 31 vape SKU’s under the Top Leaf, Sundial Cannabis, Palmetto and Grasslands brands. The Company plans to launch additional products in 2020 in Canada under its existing brand portfolio based on market conditions, customer feedback and data analytics. These are expected to include multiple tailored offerings of strains and product formats. While the Company’s product portfolio is expected to include edibles, sublingual oils and topical cannabis products, Sundial’s focus will be on premium inhalable products, including flower, pre-rolls and vape cartridges. The Company is currently scaling production of multiple new strains to commercial quantities and introducing new strains that will be marketed and sold under its brand portfolio.
Although Sundial’s primary sales growth is targeted to branded sales, the Company continues to enter into agreements to supply other licensed producers in Canada as part of its unbranded sales strategy. The Company has recently executed a wholesale agreement with one of the top five licensed Canadian producers, representing estimated net revenue of $9.3 million to be realized in the first half of 2020.
Optimize asset utilization and reduce costs
Following legalization, there was a shortfall in supply in the Canadian adult-use cannabis market leading to increased prices, increases in out-of-stock products and the consumers opting to buy cannabis on the illicit market. Sundial and other licensed producers responded by increasing capacity; however, in the fourth quarter of 2019, the increase in production combined with slower than expected retail store growth resulted in over-supply in the Canadian adult-use market. As a result, the Company and other licensed producers experienced pricing pressure and lower margins. The Company’s primary near term strategy is to optimize the use of its production capacity to match demand for its cannabis products.
In 2020, the Company commenced and continues to implement several streamlining and efficiency initiatives to align its cost structure and labor force costs with current market conditions. These initiatives include enhancement of facility workflows and processes, realignment of product lines and product formats to areas of stronger demand, workforce optimization and a heightened discipline in cost management. The efficiency improvements and cost saving initiatives are expected to result in annualized cost savings of approximately $10 to $15 million for fiscal 2020.
In light of current market conditions, the Company has temporarily suspended construction of its Merritt facility in British Columbia and is evaluating all options to maximize the value of its entire asset base. In March 2020, the Company sold its Kamloops, British Columbia, property for $2.1 million. Sundial plans to limit capital expenditures to essential expenditures required to complete its Olds facility subject to available capital resources and liquidity. Furthermore, the Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.
Improve working capital and overall liquidity
The Company has retained financial advisors to assist in evaluating its available financial alternatives and engaged with its lenders to obtain amendments and further relief from the covenants in its indebtedness. The Company’s financing options include, without limitation:
Sundial is also considering other ways of monetizing its assets to increase liquidity, including selling limited quantities of inventory at or below cost and entering into long-term supply agreements with other licensed producers.
As the legal cannabis market continues to evolve, Sundial has positioned its operations to adapt quickly. The Company’s craft-at-scale cultivation and modular growing approach allow for flexibility, while providing the high-quality products its customers have come to expect. Sundial believes the underlying fundamental drivers for long-term, sustainable growth in the cannabis industry remain strong.
As part of supporting these objectives, Sundial is undertaking a disciplined review of its portfolio of initiatives. Sundial will evaluate all assets, product lines and potential opportunities to ensure they fit with Sundial’s strategic direction and are expected to create value for shareholders.
FINANCIAL HIGHLIGHTS
Three months |
Three months |
Year ended |
Ten months |
|
($000s, except as indicated) |
2019 |
2019 |
2019 |
2018 |
Financial |
||||
Gross revenue |
23,069 |
34,181 |
79,225 |
— |
Net revenue |
21,550 |
33,512 |
75,860 |
— |
Gross margin before fair value adjustments |
1,437 |
8,690 |
19,713 |
— |
Loss from operations |
(124,978) |
(12,435) |
(159,221) |
(27,695) |
Net loss |
(145,086) |
(97,491) |
(271,629) |
(56,526) |
Per common share, basic and diluted |
($1.36) |
($1.06) |
($3.17) |
($0.82) |
Adjusted EBITDA (1) |
(19,733) |
(7,897) |
(33,609) |
(17,562) |
Cash Flows |
||||
Cash flow used in operations |
(55,881) |
(28,389) |
(112,736) |
(25,757) |
Cash flow used in investing |
(32,471) |
(129,524) |
(213,144) |
(66,039) |
Cash flow from (used in) financing |
(8,567) |
262,906 |
358,267 |
98,239 |
Balance Sheet |
||||
Cash and cash equivalents |
45,337 |
141,805 |
45,337 |
14,121 |
Biological assets |
14,309 |
14,539 |
14,309 |
876 |
Inventory |
59,942 |
28,420 |
59,942 |
1,234 |
Property, plant and equipment |
281,984 |
254,097 |
281,984 |
88,491 |
Total assets |
510,036 |
632,057 |
510,036 |
110,200 |
Operational – Cannabis |
||||
Kilograms harvested |
10,897 |
11,668 |
34,012 |
337 |
Kilogram equivalents sold |
4,285 |
7,944 |
17,293 |
— |
Average gross selling price per gram (2) |
||||
Branded flower |
$6.15 |
$6.34 |
$6.31 |
$0.00 |
Unbranded flower |
$3.15 |
$4.03 |
$3.89 |
$0.00 |
Average net selling price per gram (3) |
||||
Branded flower |
$4.54 |
$4.89 |
$4.66 |
$0.00 |
Unbranded flower |
$3.15 |
$4.03 |
$3.89 |
$0.00 |
Financial – Cannabis |
||||
Gross revenue |
16,262 |
28,690 |
66,927 |
— |
Net revenue |
14,743 |
28,021 |
63,562 |
— |
Sales to provincial boards (4) |
6,327 |
2,921 |
13,386 |
— |
Sales of medical cannabis |
9 |
7 |
24 |
— |
Sales to licensed producers (5) |
9,926 |
25,762 |
53,517 |
— |
Gross margin before fair value adjustments |
(516) |
7,771 |
16,841 |
— |
(1) |
These are non-IFRS measures. Please refer to the “Non-IFRS Measures” sections below. |
(2) |
Gross selling price per gram net of marketing fees, salvage fees and early payment discounts with respect to sales under Sundial’s supply agreements. |
(3) |
Average net selling price per gram net of excise tax. |
(4) |
Includes sales of branded flower, vapes and accessories. |
(5) |
Includes sales of unbranded flower, extracted oil and trim. |
Fourth quarter and full year 2019 consolidated financial and operational highlights
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.