3 Warning Signs Sundial Investors Shouldn’t Ignore

IIt’s a big month for the Canadian pot producer Sundial producers (NASDAQ: SNDL). This is because the company publishes 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, as the earnings report nears, there are three warning signs investors should be wary of. They could indicate not only tough times ahead, but also a potentially problematic earnings report.

Image source: Getty Images.

1. Something is wrong with its deal to acquire Alcanna

On October 7, 2021, Sundial announced its intention to acquire the liquor store operator Alcannawho owns pot shops thanks to his investment in Nova Cannabis. The transaction could prove to be a promising way for Sundial to diversify its business while increasing its revenue. Initially, Sundial said the deal would be completed either in December 2021 or in the first quarter of this year.

Technically, the deal didn’t pass that deadline, but the company has issued several press releases since then regarding its status. None of them announced the closing of the transaction, but rather reiterated their commitment to the transaction and revised the initial consideration so that Alcanna shareholders would receive a combination of cash and shares (at originally it was an all-stock transaction). They announced that the deal would be completed no later than March 30.

What a company doesn’t say is often more important than what it says. While there are indications that this deal could fall through, there are far more question marks surrounding it than there were before. Either way, the deal isn’t going quite as well as Sundial’s previous deals. Investors should expect to see an update on this when Sundial releases its results later this month.

2. Income from culture has declined

Since entering the cannabis retail business, Sundial has separated its cultivation and retail revenue. Sundial’s revenue for the third quarter (ended September 30, 2021) totaled C$14.4 million and increased 57% from the second quarter. However, the rise in revenue was primarily driven by its retail sales, following its acquisition of cannabis retailer Inner Spirit Holdings.

The company’s cultivation and production revenue, which was previously its core business, was only C$8.2 million in the third quarter and lower than the Sundial’s C$9.2 million reported in the second quarter. , which were already down from C$9.9 million in cannabis revenue in the prior quarter. .

Sundial’s declining sales is an issue and an area 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 on the acquisition front to help bolster its top line. That could lead to stock offerings (and dilution) down the road, especially for a cash-consuming company like Sundial.

3. Cash burn is much higher than a year ago

Over the past 12 months, Sundial has spent C$173 million through day-to-day operations alone. The amount it burns has increased. In the third quarter, the C$56 million it spent was nearly three times the C$20 million it had used a year earlier. As the company deepens its business in the cannabis retail space with the acquisition of Alcanna later this month, that number may continue to grow.

For investors, this can be a troubling prospect. While Sundial may have declared C$571 million in unrestricted cash as of November 9, 2021, this balance could quickly be depleted if Sundial pursues more acquisitions and its cash burn accelerates. Unless the company can drastically turn things around, the pot stock could be headed for tough times ahead, and its return to $1 will be even less likely.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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