Sundial Growers (SNDL) has become the luckiest cannabis stock this year. The company was on the brink of bankruptcy after breaching the debt covenant and needed restructuring. However, after a debt-for-equity swap and a miraculous rally driven by factors other than business fundamentals, the company has issued a whopping 1.3 billion shares since the end of September as the uncanny stock market seems to have an insatiable appetite for penny stocks. Sundial is following the path of Aurora Cannabis (ACB) and we think investors should heed its recent movement. There are plenty of fundamentally solid companies in the U.S. and Canada as better investments, rather than speculation. On the other hand, Sundial has secured its future with $600M of cash raised from the public markets (it only had $21M cash in Q3) so there is no near-term risk of failure anymore. Very lucky indeed.
The Gift from The Market
Sundial was facing severe liquidity and solvency issues by early 2020 and had to restructure its debt and capital structure in June 2020. Its shares were trading above $12/share in 2019 before falling to $0.14 in late 2020. The company was on the brink of distress when it breached its debt covenant and included a going-concern warning in its Q3 2020 filings. As a result, the company took a few steps to shore up its finances including selling its Bridge Farm. Recall that Sundial acquired UK-based Bridge Farm in 2019 for $77M in cash, 2.4 million shares, and earn-out for a max of 1.6 million shares. In May 2020 when Sundial sold Bridge Farm back to its original owners, it also received no cash proceeds but instead, the buyer will take over $40M of debt and cancel the remaining earn-out considerations. The outcome of the transaction was not ideal and created substantial losses for the company. The company also took on $115M of term loan which led to its balance sheet issues. The entry into the UK market did not turn out the way it had hoped and by the end of 2020 Sundial was facing an existential crisis with its shares hovering around $0.50 per share.
At the end of September, the company only had $21M of cash and $72M of debt outstanding. In the filing, the company mentioned a few ways it planned to raise additional liquidity. It filed a registration statement for a mixed shelf prospectus for up to US$100M and established an ATM program with the ability to issue up to US$50M shares which were later upsized.
However, things took a turn for the better when Sundial's stock began a miraculous rally in 2021. The stock closed at $0.60 on Jan 27, 2021, and one week later it closed at $1.21 on Wednesday, rising over 100%. The stock is up more than 150% since the beginning of 2021 and the company took full advantage of the opportunity to issue a massive amount of equity. Below are just a few of the notable raises among many more and the ATM program:
On Feb 2, announced a US$75M equity offering at US$1.0/share
On Feb 2, raised US$100M at US$0.75/share
On Dec 21, Sundial announced that it has repaid its remaining secured debt, rendering the company debt-free
o demonstrate the craziness of both the speed and amount of equity Sundial issued, one just needs to think about the fact that its shares outstanding increased from 206 million on Sep 30 to 1,520 million on Feb 2. Sundial issued a whopping 1.3 billion shares which increased its share count by more than 7x in a span of ~4 months. With a share price of US$1.21, the company has a market cap of US$1.8B/C$2.3B which is higher than HEXO (HEXO) and Aurora Cannabis. The market cap of Sundial looks very rich given it implies an EV/Sales of 28x and Sundial is unprofitable and was on the brink of collapse just a few months ago. Sundial posted merely $72M of revenues in the last four quarters and it remains unprofitable on an EBITDA basis.
undial operates three facilities and it focuses on indoor modular cultivation with the main cultivation facility in Alberta. The company sold 5,819 kg of cannabis in Q3 2020, with ~40% sold to the DTC channels and ~60% in the wholesale market to other LPs. Sundial also recorded an average selling price of $2.67, with $5.53 for DTC and $0.84 for the wholesale market. Clearly, Sundial's sales mix is not ideal and its sale to other LPs are done at very low prices, either due to inferior product quality or a lack of distribution channel into the provinces. Either way, Sundial's business is similar to the large number of small Canadian LPs with limited upside. It would be hard to justify its recent rally and market cap based on its financials and growth outlook.
Conclusion
Sundial seems to be the chosen one among retail investors and its shares have surged ~800% since reaching a 52-week low in late 2020, including a 150% rally in 2021 so far. One of the reasons that Sundial attracted investor interest was its Nasdaq listing and its highly depressed share price after losing ~99% of its value since the August 2019 IPO at US$13/share. However, investors should understand that the company was in distress merely a few months ago and had to restructure its debt to amend its covenant breach and shed liabilities. Its miraculous 100% rally in 2021 YTD was likely driven by the recent phenomena of short squeeze among highly shorted stocks. Sundial was also included in the list of stocks with trading restrictions by Robinhood. The stock's fundamental looks challenging but its colossal equity raises have secured over $600M of cash that will ensure its survival for the foreseeable future. The stock is simply too speculative at this point and has detached from fundamentals in our view.
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