Sundial Will Run Out of Cash Without a Sales Turnaround

Sundial Growers (NASDAQ:SNDL) is a Canadian cannabis company that is fast running out of cash unless sales and cash flow turn around soon. SNDL stock is a penny stock listed on NASDAQ with lots of risks. Serious investors should avoid this stock like the plague.

Marijuana plants growing in a greenhouse.
Source: Shutterstock

You can see the problems that Sundial is facing first by just looking at its recent chart. For example, at the end of last year SNDL stock ended at $3.01 per share but now it trades for just 33 cents.

That represents a drop of 90% for the year-to-date. In addition, the stock is down slightly over 90% over the past year.

Most of this is because the company has been posting miserable sales, earnings, and cash flow reports.

Financial Issues

You know there is a problem when a company does not report its year-over-year sales, but instead its consecutive quarterly sales. For example, in its announcement on Nov. 11 reported Q3 earnings, Sundial said 12.9 million Canadian dollars ($9.88 million), a decrease of 36% over the second quarter.

However, in reality, its Q3 2019 sales from a year ago were $CA28 million. This means that the Q3 2020 sales of $CA12.9 million fell 54% from a year ago. This can only be found by reading the company’s financial statements which were listed in a separate release.

In other words, the company sort of wanted to hide this by saying that the quarter-over-quarter sales were just 36% lower. Of course, in both cases, this is a miserable situation.

However, the nine months sales for the company were down just 3.6% year-over-year. That is because Q2 sales were up 4.6% year-over-year, and also up 44% quarter-over-quarter.

More importantly, though, from a free cash flow (FCF) standpoint, the company is continuing to bleed cash. For example, the company’s Q3 financial statements show that Sundial had an outflow of $CA21.8 million for the quarter. This is the amount of cash flow from operations and cash flow used in investing activities.

Cash Balance and Capital Raise

This cannot keep up for very much longer. For example, at the end of Q2, the company had just $CA26.9 million in cash resources. So during Q3, it raised a net amount of $CA21.445 million through a share and warrants sale in U.S. dollars.

The problem is Sundial is basically back at where it was at the end of Q2. It now has just $CA26.3 million in cash.

Therefore if the company burns through another $CA22 million during Q3, it will effectively be out of cash. As a result, expect to see another highly dilutive capital raise or debt issuance sometime before the end of 2020.

This is why SNDL stock is down so much. You can’t fool the market. Unless some kind of massive sales turnaround is happening now, the company will be forced to issue more shares, sell some assets, borrow money or close up shop.

That is why penny stocks like Sundial are so risky. The company has no real good options.

What To Do With SNDL Stock

This is a death spiral situation unless sales and cash flow start to immediately turn around. The more capital it tries to raise the lower the stock price will fall.

I suspect that the company is counting on some of its warrant holders to exercise their warrants, thereby providing cash to the company. But this will still have a dilutive effect on the stock price. Moreover, the lower the price falls, the less incentive there is for warrant holders to pony up cash and exercise their warrants to buy stock.

Most of the decline in the past quarter or so was from lower demand rather than lower cannabis prices. A lot of that is likely due to the Covid-19 pandemic.

The problem is an inflection point in demand has not likely yet already been reached. I suspect that won’t happen until sometime next year.

So, good luck Sundial Growers, and good luck existing SNDL stock owners. If you think this is a bargain price, the odds are likely not good though. I would avoid SNDL stock for the time being until its liquidity and cash flow outlook becomes clearer.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.

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