It's a big month for Canadian pot producer Sundial Growers (SNDL -2.50%). That's because the business is reporting its year-end results. Given how volatile its shares have been over the past year, there could be a big move when the report comes out -- the question is which direction the shares will go.
However, heading into the earnings report, there are three warning signs investors need to be wary of. They could indicate not only tough times ahead but a potentially problematic earnings report.
Image source: Getty Images.
1. Something may be up with its deal to acquire Alcanna
On Oct. 7, 2021, Sundial announced plans to acquire liquor store operator Alcanna, which owns pot shops through its investment in Nova Cannabis. The transaction could prove to be a promising way for Sundial to diversify its business while expanding its revenue. Initially, Sundial said the deal would close either in December 2021 or the first quarter of this year.
Technically, the deal hasn't gone beyond that time frame, but the company has issued multiple press releases since then regarding its status. None of them announced the closing of the transaction but instead reiterated commitment to the transaction and revised the initial consideration so that Alcanna shareholders would receive a combination of cash and stock (originally, it was going to be an all-stock transaction). They announced that the deal would close by March 30 at the latest.
What a company is not saying is often more important than what it is saying. While there are indications that this deal might fall through, there are many more question marks surrounding it than there were before. Either way, the deal isn't going as smoothly as Sundial's previous deals. Investors should expect to see an update on this when Sundial reports earnings later this month.
2. Cultivation revenue has been declining
Since getting into the retail cannabis business, Sundial has separated its cultivation and retail revenue. Sundial's revenue for the third quarter (ended Sept. 30, 2021) totaled 14.4 million Canadian dollars and was up 57% from the second quarter. However, the jump in revenue was primarily due to its retail sales, a result of its acquisition of cannabis retailer Inner Spirit Holdings.
The company's cultivation and production revenue, which previously made up its core operations, was just CA$8.2 million in Q3 and less than the CA$9.2 million Sundial reported in Q2, which was already down from CA$9.9 million in cannabis revenue in the quarter before that.
Sundial's declining sales are a problem and an area that investors should be careful not to overlook when its earnings numbers come out. Without strong sales growth, the company may need to be more aggressive in the acquisition front to help strengthen its top line. That could lead to share offerings (and dilution) down the road, especially for a cash-burning business like Sundial.
3. Cash burn is much higher than it was a year ago
Over the trailing 12 months, Sundial has burned through CA$173 million just from its day-to-day operating activities. The amount it is burning has been increasing. In Q3, the CA$56 million it burned through was nearly three times the CA$20 million it used up a year earlier. As the company goes deeper into the retail cannabis business with the acquisition of Alcanna later this month, that number may continue to grow.
For investors, that can be a troubling prospect. While Sundial may have reported CA$571 million in unrestricted cash as of Nov. 9, 2021, that balance could quickly get depleted if Sundial pursues more acquisition and its cash burn accelerates. Unless the business can drastically turn things around, the pot stock could be headed for some tough times ahead, and its path back to $1 will be even less likely.
