An employee picks up a Sundial Growers Inc. Zen Berry brand cannabis flower container inside the … [+]
At the beginning of September, Sundial Growers — a Calgary-based pot purveyor — was the fourth most widely held stock on Robinhood and on September 3, at about 44 million shares, it was the 16th most active stock in the U.S., according to Trading View.
I do not understand why people find this stock so appealing. Sure its short-interest has increased — which could send the stock up if they can force short sellers to buy the stock to repay their loan.
But Sundial has traded below Nasdaq’s minimum required bid price of $1 for much of its more than two years as a public company and its revenues are plunging. If the people trading this stock want to make money, there are better places for them to plant their cash.
Here are three reasons I’m harshing their mellow:
- Dismal 2021 financial performance
- Burning through cash
- Renewed risk of delisting
(I have no financial interest in the securities mentioned).
The roller coaster ride of Sundial’s publicly-traded stock
Sundial Growers produces and distributes marijuana “flowers, pre-rolls and vapes.” Following its August 6, 2019 IPO — which sold 11 million shares for $13 a share — its stock has lost 94% of its value — closing on September 3 at about 77 cents a share — sporting a market capitalization of $1.6 billion.
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Sundial has had its ups and downs when it comes to short interest. As I wrote on January 11, in mid December 2020, about 66% of its shares were sold short — a 1,829% increase from mid-November 2020. About a month later, on February 10, I noted that its short interest had plunged to roughly 7% by the end of January.
The reason? Sundial — whose shares had been trading below $1 on the Nasdaq — had won a reprieve from a threat to delist its shares.
In December Nasdaq granted Sundial until June 26, 2021 to keep its stock above $1 a share for 10 days in a row. Sundial raised about $700 million by selling stock and making other moves — which increased its shares outstanding by seven-fold in three months — massively diluting its investors’ holdings.
This sent its shares up — as high as nearly $3 a share on February 6. And the stock remained above $1 long enough for Nasdaq to relieve Sundial of the delisting threat on February 17. As PRNewswire noted that day, “the matter is now closed.”
Dismal financial 2021 performance
Sadly for Sundial bulls, that closure was only temporary — thanks in part to its dismal first and second quarter 2021 financial reports.
For the first three months of 2021, Sundial revenue plunged, its net loss soared and its operations burned through cash.
More specifically, in the first quarter of 2021, revenue dropped 29% to $7.8 million. Sundial’s loss was a whopping $106 million — which included “the impact of share price volatility on accounting valuation of derivative warrants,” according to the company.
Things got worse for Sundial in the June-ending quarter. Its revenue fell 49% from the second quarter of 2020 to $7.5 million and its net loss increased about 88% to nearly $43 million, noted the Wall Street Journal.
Burning through cash
In addition, Sundial’s cash burn rate is increasing. For example, in the second quarter its operations consumed nearly seven times more cash — or about $75 million — than the $11 million it used up in the first quarter, according to the Journal.
Fortunately, Sundial was able to raise money earlier in 2021 and at the end of June it had $757 million in cash.
Sundial sees big challenges ahead — such as competing in an unstable industry, finding a path to profitability and providing better customer service.
As CEO Zach George told investors in an August conference call, “We’re focused not only on affecting change in the challenging and unstable Canadian cannabis industry landscape today but are charting the characteristics of a dominant and profitable business model in a more healthy and stable environment that we expect to evolve to within the next three years following necessary regulatory reform, industry consolidation and a greater balance between supply and demand. We remain focused on continuous improvement in our quest to delight consumers.”
Months from a possible Nasdaq delisting
Since January, short sellers have increased their bets that Sundial stock will fall further. The Journal reports that as of August 13, its short interest was nearly 27% — a big increase from the 7% short-interest at the end of January and a 3.3% increase from mid-July.
That increase may have been spurred by the May 25 news that the Nasdaq was threatening to delist Sundial shares unless it is able to “regain compliance with the $1 stock price minimum” by November 22, 2021, according to an SEC filing.
What prompted this unpleasantness — which undermined Sundial’s February claim that the matter was closed — is that from April 12 to May 24, its stock price stayed below $1.
Sundial said it would “actively monitor its closing bid price during the compliance period and intends to take appropriate measures to remedy the deficiency and regain compliance with the Minimum Bid Requirement.”
It is not clear what measures Sundial is taking to keep from being delisted. Nor is it obvious what evidence Nasdaq would require for it to get back in compliance. However, 10 days in a row of its stock closing over $1 was sufficient for Nasdaq in February.
To be fair, in June Sundial’s shares topped $1 for a few days. Since then, the stock has steadily declined.
One thing I think would help is if Sundial was able to grow faster than its own internal forecast when it reports its third quarter results in November.
Sadly, George lacks sufficient confidence to provide such guidance. As he said in August, “we don’t give forward guidance at this point in time, given the general lack of visibility in the industry.”
That lack of confidence does not scare those on WallStreetBets (WSB). On September 2, a commenter expected massive short covering, noting, “LISTEN UP YOU GAMBLING FREAKS. MARGIN REQUIREMENTS ARE GOING UP 2500% TOMORROW AT 10AM. GOOGLE
On September 3, Sundial stock fell about 3% — probably not the kind of big time short-covering WSB was expecting.
