Sundial Growers (NASDAQ:SNDL) now has a new lease on life as a Canadian cannabis company that has yet to prove it can make a profit. On Nov. 30, several days after my recent article on Sundial Growers stock, the company said it now has $85 million Canadian in cash.
In my article, I pointed out that as of Sept. 30, it had just 26 million CAD. (All dollar figures in this article are in Canadian dollars even though the stock is listed on NASDAQ).
So somehow, even though Sundial Grower is unprofitable, it was able to raise an amazing amount of capital. The Nov. 30 statement said the cash came in as a result of “recent material warrant exercises.”
As a result of this and several other maneuvers, Sundial Growers stabilized its precarious financial situation.
How Sundial Stabilized Its Finances
However, it is hard to believe that the warrants were actually “in-the-money.” I suspect some insiders or financial institutional investors exercised the warrants to buy shares, despite knowing the shares were underwater. In any case, Sundial Growers stock immediately shot up after this announcement.
For example, on Friday, Nov. 20, the stock was at 25 cents per share on NASDAQ. Since the announcement on Nov. 30, Sundial Growers stock spiked to 81 cents and is still up 74% at 44 cents, as of Friday, Dec. 18.
So maybe the warrant holders suspected that this would happen when the company publicly released its new cash balance. That is why they were willing to exercise their unprofitable “out-of-the-money” warrants.
In any case, the company also announced on Nov. 30, that 73.2 million CAD in second lien convertible debt had converted into equity. This lowered the company’s debt to just $72 million CAD in senior secured term debt.
Moreover, on Dec. 11, Sundial Growers issued a statement that it paid down $50 million CAD of the $72 million CAD in senior secured debt. Now it has just $22 million CAD in senior secured debt. However, Sundial Grower still has $39 million CAD in unrestricted cash.
This is even better news. For example, the company says it will have $2.5 million CAD in lower interest costs. As a result, the company said it now had flexibility.
Therefore, it can now “focus on a path to positive cash flow from operations, refining our capital structure, and potential future strategic opportunities.”
Hopefully, this means the company will focus on making profits in its cannabis business.
What’s Next With Sundial Growers Stock
The problem most investors have right now is that they can’t see how the company will get profitable. Note, however, that the company said in its statement that it wants to make a positive cash flow from operations (CFFO).
I consider that even more important, and a better financial outcome than net income profitability. CFFO less capex is free cash flow (FCF). So if the company can keep its capex under control it has a chance of making positive FCF.
It certainly sounds like it will try to do this. Moreover, I believe that its bankers, who provided the non-revolving term credit facility, are working closely with management.
Nevertheless, it is still hard to estimate the underlying value of Sundial Growers stock. We need to see at least one good financial quarter or even have enough information to forecast it.
Here is the bottom line. Sales have to increase and CFFO has to get profitable or close to it. The fact is, until Covid-19-related restrictions are lifted in Calgary, where Sundial Growers is located, it might be a while. People simply are not going to buy cannabis, or even CBD type products as they used to until lockdowns lift.
Therefore, most investors will likely take a wait-and-see approach with Sundial Growers stock. Only the most risk-averse or those willing to put a portion of their resources in a gambling-type investment will buy the stock.
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.