Sundial Reports Q2 Earnings with Significant Related Party Transactions

This morning Sundial Farms (NASDAQ: SNDL) reported their second quarter of financial earnings, here is a quick Deep Dive breakdown of the results.

About Sundial Farms

Sundial Growers (CNW Group/Sundial Growers)

Sundial is a cannabis and ornamental producer. They currently produce cannabis in two facilities in Alberta with a third facility currently under construction in British Colombia. They recently closed a transaction to acquire Bridge Farms, an ornamental producer in the United Kingdom who own 1.5M sq ft worth of indoor growing facilities, across three facilities with a fourth currently under construction. Sundial intends to use the facilities to cultivate hemp as part of a strategy to manufacture and distribute CBD products globally.

They priced the initial public offering at $13 per share and successfully raised $143 million at that price. However, Sundial’s stock closed its initial day of trading at $8.48, nearly 35% below its IPO price, which likely wasn’t helped by the timing of the CannTrust drama. The stock has since climbed back above $10 even after today’s earnings report.

Overall it was a strong quarter for Sundial operationally. They saw significant growth in cannabis sales and production. We compiled a breakdown of the quarter on quarter numbers below.

  Q1’19Q2’19% Change
Net Revenue $               1.5  $            19.3 1186.7%
Gross Margin $               0.7  $               8.9 1171.4%
Gross Margin % $               0.5  $               0.5   
Operating Income $          (17.5) $            (4.3)-75.4%
Adjusted EBITDA $            (5.5) $            (0.5)-90.9%
Net Income $          (16.7) $          (12.4)-25.8%
Inventory  $               5.0  $            12.8 156.0%
Biological Assets $               6.2  $            17.5 181.4%
Receivables $               2.5  $               3.7 48.0%
Payables $            33.8  $            54.7 61.8%
Operating Cash Flow $          (18.8) $            (9.7)-48.4%
Investing Cash Flow $          (22.2) $          (29.0)30.7%
Kilograms Harvested             1,896              9,551 403.7%
Kilograms Sold                 323              4,741 1367.8%

Related Party Transactions

Sundial has over 2 pages of related party transactions that make understanding the entire structure of the company a little fuzzy. These related party transactions include:

  • Various loans in the 0-2.5% interest rate range to officers for share purchases. In one case, 40,000 shares were purchased for a fair value of $2.97.
  • A credit agreement where a company controlled by the Chairman invested $10.9M in exchange for shares and a royalty payment of 6.5% on a facility which was later terminated for cash and shares (see Note 20 for full details). This deal worked out particularly well for the officer who converted his loan and royalty agreement for over 13M shares, 480k warrants, and a cash payment of $9.5M (which is to be made by Dec 31/2019, or it will accrue interest of 1% / month).
  • A company controlled by a shareholder, officer and director of Sundial was paid $1.1M for the first six months of 2019 for marketing, branding, R&D and promotional services.
  • Forgave a loan to a director, who later resigned of $20,000 and forgave another loan to a former director of $5,000.
  • A Board members law firm was paid $2.3M for professional fees in the first 3 months of 2019.

Sundial’s Warrants

The company currently has both simple warrants and performance warrants at strike prices well below market. The company has approximately 15.3M warrants and a current outstanding share count of approximately 75.8M shares.

Overall Thoughts

From an afternoon look at Sundial Growers, the firm had what appears to be a strong operational quarter in which they sold and harvested a significant amount of cannabis. Our concerns from looking at the financial statements would be the insider transactions. Management teams who perform these types of transactions don’t always put retail shareholders in their focus when making decisions involving capital structure.

Information for this briefing was found via Sedar and Sundial Growers. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.