Q1 2020 Earnings Call

Good morning, and welcome to Sundar growers first quarter 2020 financial results Conference call.

Morning, Sundial issued a press release announcing our financial results for the first quarter ended March 31 2020.

That's press releases are available on the company's website attached NGL group Dotcom and filed on Edgar and SEDAR as well.

Presenting on this morning's call, we haven't Saks, George Chief Executive Officer, Jim Kelly, Chief Financial Officer, and enter starter President and Chief operating Officer.

Please note there will not be a question answer session on today's call.

Before we start I would like to remind investors that certain matters discussed in todays conference call could constitute forward looking statements actual results could differ materially from those.

Risk factors that could affect results are detailed in the Companys financial reports and other public filings.

That are made available on SEDAR and Edgar.

Additionally, all financial figures mentioned are in Canadian dollars unless otherwise indicated.

I would now like turn the call a purchase acts tranche.

Thank you operator, and thanks, everyone for joining us on our first quarter earnings call.

I join sundial on January Thirtyth, and a lot has happened in the last three and a half months.

We have made solid progress on advancing our core objectives, including improving our financial flexibility narrowing our operating focus and lowering our cost structure.

All the while operating in a very challenging macro environment.

The legal cannabis market continues to mature more slowly than originally expected with ongoing regulatory delays and strong competition from the OLED market.

Most recently Cobot 19 has added a new set of challenges that has impacted us all in different ways.

Before we discuss our operations and our first quarter results I want to take a moment to thank our staff.

He was outstanding dedication encourage have never wavered over the past few months, they've adapted to new processes and procedures often involving more work prefer them. While also remaining focused on producing some doubts high quality products.

While the totality of risks facing sundial due to covert 19 are currently unclear other than an increase in employee absenteeism, our operations have not been materially impacted to date, the health and safety of our people is our top priority and we remain fully committed to ensuring their protection along with achieving minimal disruption.

To our operations and cash flow.

The improvements we haven't made over the past few months have helped position sundial for long term profitability.

Sundial strategy is centered around three key initiatives.

Delivering industry, leading best in class products with a focus on inhalable.

Optimizing asset utilization and reducing costs.

An improving working capital and our overall liquidity.

As part of our focus on long term profitability, we completed a detailed evaluation of our assets product lines and potential opportunities. This review clarified and confirmed our core focus on the inhalable segment of the recreational canvas market.

We have achieved some strong results in this segment over the past few months and Andrew will provide more detail on those in a moment.

Our work on optimizing asset utilization and cost reduction has progressed well with the conditional celebrates farm another noncore assets, allowing us to focus on our core business operations in Canada.

We've also made significant changes in our operations, including a focus on selling current inventory on hand, and a temporary curtailment of cultivation and harvesting activities, while maintaining current processing levels to meet anticipated demand.

In addition, we made the difficult decision to reduce our workforce to better align with current market conditions.

These changes are expected to result in annualized net cost reductions of approximately $28 million.

These asset optimization and cost reduction efforts also assist sundial and improving working capital and overall liquidity by improving cash flow and reducing debt.

Well, we've made significant progress we know there's still more to do.

I'm confident in our team and our ability to achieve our goals. We have best in class facilities in Canada that produce high quality products and established and growing brand presence and engaged and talented employees that are also shareholders.

We remain focused on customer delight and sustainable profitability.

I'd now like to turn the call over to Jim Keogh sundial CFO to provide a financial update.

Thank you Jack and good morning, everyone I'd like to remind everyone that all amounts that are used. This morning are expressed in Canadian dollars, unless otherwise stated and the comparative quarters Q4, 2019, unless I indicate otherwise.

I'd like to start off by addressing the transaction, we announced earlier today I'm very pleased to advise that earlier today, we entered into a binding purchase and sale agreement subject to buy or financing and our lenders approvals to sell bridge farm and all related assets for $90 million.

The transaction, we consummated where the company affiliated with the former management sellers that were parties to the original acquisition.

This is a noncash transaction the proceeds of the sale, we used to reduce indebtedness under our term debt facility by $45 million. This debt being assumed by the purchaser with the balance of proceeds used to extinguish the remaining earn out and make whole provisions under the terms of the original bridge farm acquisition, which took place on July 2nd 2019, but.

Additionally, all shares held by and obligations owed to the former management sellers will be cancelled. This includes approximately 2.7 million shares.

Our lenders require the sales to be closed on or before June 1st 2020.

Further condition of our lenders requires that the remaining $70 million an outstanding principal under the term debt facility will be exchanged for noninterest bearing convertible notes secured by a second lien on our assets.

We've been working collaboratively with our lenders to resolve breaches of covenants under our credit agreements under the terms of amended and restated waivers in agreements that we received yesterday the lenders have agreed to waive all defaults and cross defaults until June one 2020.

On or before that date, some dollars required to provide the following to our lenders first duly executed amendment in restatement of the credit agreement with our syndicated lender.

Second a refinancing of our term debt facility.

Third the duly executed amendment in restatement of our Intercreditor agreement.

Enforce closing the sale of the bridge farm asset.

We're in advance stages of completion of all of these required milestones and are working diligently toward the June one 2020 <unk> timeframe.

The net effect of these transactions would be a significant deleveraging of our balance sheet.

Reduction of our debt service requirements, and an improved ability to seek additional capital.

Turning to our Q1 2020 results.

On a consolidated basis that revenue amounted to $23 million well adjusted EBITDA was negative 13.9 million on.

On a comparative basis net revenues were 21.6 million and our adjusted EBITDA loss was 19.7 million in Q4 2019.

Overall for the first quarter 2020, we reported a net loss of $44 million or 41 cents per share.

Included in that net loss or nonrecurring charges for the following an asset impairment of 5.7 million relating to our marriage B C facility.

Inventory impairment and obsolescence provisions of 14 point, Fourmillion and restructuring charges of 2.7 million.

I'll now turn to Academy segment results.

The first quarter, we harvested approximately 10300 kilograms and sold approximately 4400 kilograms of cannabis.

This compares to last quarter, where we harvested approximately 11000 kilograms sold nearly 4300 kilograms.

As we indicated previously we are driving the composition of our sales mix towards a high proportion of sales under sundial brands to provincial boards with a decreasing proportion to other license producers.

This was a case this quarter sales to provincial boards were approximately 54% of that kind of as revenues compared to last quarter, where sales to provincial boards represented approximately 33% of total net cannabis revenues.

During the quarter, we shipped a products to eat different provinces.

Average selling prices during the first quarter were four daughters, and 76 cents per gram for branded flour and $2.74 program for unbranded flower.

This compares to 615 program and 315 program for branded and Unbranded flower respectively. In Q4 2019.

The second the sequential decline can be attributed to brand and product mix variation as well as industry pricing pressure.

These prices were also impacted by increased provisions for future returns.

Net cannabis revenues amounted to 14 million in Q1 2020 compared to 14.7 million in Q4 2019.

Gross margin before fair value adjustments for Q1, 2020 was negative 7.2 million compared to negative half million in the fourth quarter of 2019 I.

Our gross margin this quarter was impacted by 14.4 million inventory obsolescence provision that was recorded primarily against bulk shake and bulk winterized oil inventory.

Excluding this provision I gross margin before fair value adjustments would have been positive half a million dollars.

We reported an adjusted EBITDA loss from kind of its operations of 11.3 million in the quarter and this compares to the adjusted EBITDA loss of 17.9 million in Q4 2019.

I'd also like to provide an update on our efficiency and cost savings initiatives. We expect the initiatives. We are undertaking to result in more than 28 million in annualized cost savings as of yesterday, we made the difficult decision to further reduce headcount in response to prevailing market conditions. We've now adjusted head count by just over 50% in 2020.

Moving to our balance sheet as at March 31, 2020, we had cash and cash equivalents, including restricted cash of 26.5 million will total debt stood at 189 million.

Subsequent to closing the bridge farm transaction and term debt facility restructuring on a pro form pro forma basis, we will have 70 million under our syndicated credit agreement and 70 million in noninterest bearing secured convertible notes.

These changes to our capital structure will substantially reduced our cash interest payments to approximately $900000 per quarter and reduce our principal repayments to approximately 2.1 million per quarter.

This will also allow us to pursue opportunities to raise new capital, including other sources of subordinated debt or equity inventory liquidations long term supply agreements with other Lps or continuing to monetize noncore assets.

During Q1, we sold one non core real estate asset for $2.1 million.

As we continue to evaluate and rationalize our entire portfolio capital expenditures had been limited to a central expenditures. This will include extraction and processing equipment and maintenance Capex.

Capital expenditures are expected to fall somewhere in the $68 million range for the remaining three quarters of this year.

Well, we made significant process on our initiatives to improve our liquidity and capital positions. We will remain steadfast in further strengthening our balance sheet put sundown more stable footing as we drive towards sustainable run sustainable run rate profitability in 2020.

I would like to mentioned that we received a noncompliance letter from NASDAQ. This week as the closing bid on Sunday stock price did not meet the minimum one dollar per share a threshold for 30 consecutive business days as a result, we have until December 28, 2020 to regain compliance through either share price improvement or share consolidation.

At our E. G M on May Twentyth 2020.

The board will be authorized to consolidate the company shares if required.

No I understood or something else, President and Chief operating Officer <unk> review some of the key operational milestones that sundial has achieved to date.

Thank you Jim and good morning, everyone.

Look Q1 was a challenging quarter for some doubt.

However, despite the significant headwinds and industry uncertainty, we continued to focus on delivering high quality cannabis products to our consumers and customers.

Now I realize there's a tremendous amounts of heavy lifting required and that's why we announced our plan focused on achieving sustainable profitability last quarter.

The plan was designed to streamline our operations.

Focus on best in class Inhalable products.

Optimize our assets, while reducing costs and improve working capital along with overall liquidity for the business.

So now let me update you on some of the operational progress the team is making.

Since the beginning of the year, we made the difficult decision to reduce our labor force by about 50%.

This decision coupled with our temporary reduction in cultivation and harvesting activities.

Our solid evidence that management is committed to turning the corner in achieving sustainable profitability.

Despite this temporary reduction we expect the current capacity level supplemented with inventories on hand will be sufficient to meet anticipated demand in the short term.

We are taking complexity out of our supply chain.

This will be accomplished by focusing on larger format in the short term.

A revised simplified product portfolio for the balance of the year and optimizing throughput with a focus on label in exercising.

[noise] a team has done a great job it overcoming some significant processing headwinds during the first quarter.

As evidenced by our recent on time in full metrics that have now surpassed 90%.

We've been consistent on or sales mix strategy over the past few quarters as we focus on driving better market penetration with branded Canada sales versus supplying the wholesale channel.

Our Q1 brand in net sales increased to 54% versus 33% in Q4 2019.

And we remain on track to achieve 80% branded sales mix by year end.

We believe our brands top leaf sundial, Palmetto and grasslands are well position to meet the diverse needs of candidates consumers and we continue to see improved market share nationally.

We're very pleased with our brand performance to date.

And top lease continues to perform well amongst the highest pricing tiers across Canadian retail.

[noise] since Q1 2020, we successfully launched additional sq use nationally under a brand portfolio, consisting a flower deep and oil offerings.

Our qubec launch has been significant and well executed its first shipments starting in April.

Replenishment orders continuing weekly.

Continuing growth in Quebec will be a key part of our commercial strategy for it.

Our veight product offerings have been well received by consumers and customers as we push for leadership position in this high growth segment.

Recently, we've seen double digit share within the big segment for sundial and talking to.

Great and key markets across the country.

As you can see we are moving the pace to quickly implemented our plan.

And are starting to see glimpses of sustainable progress.

Well I'm confident in our team and the plan, we're beginning to execute against it will not happen overnight.

The decisions we have made these past few months or the right decisions and success of the company, but we're not easy and not taken lightly.

We know this is the right path to ensure sunbelt is fit for purpose in today's marketplace.

And with that I would like to turn the call back Zach for closing remarks.

Thank you Andrew.

In conclusion, we remain focused on our strategic plan and are continuing to make progress in an uncertain environment.

Transparency as a core value with sundial and we will continue to update you as we work to deliver for all of our stakeholders.

Thanks, everyone for joining the call take care of yourselves and stay safe I'll now turn the call back over to the operator.

[noise]. Thank you. This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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