SNDL Delivers Uneven Earnings: Big Revenue Gain, Big Losses

SNDL Inc. (Nasdaq: SNDL) reported its earnings in Canadian dollars for the full year and fourth quarter ended Dec. 31, 2022. Net revenue for the quarter was $240.4 million, an increase of 4% over the third quarter of 2022, with sequential growth in liquor retail, cannabis retail, and cannabis operations segments.

The net loss for the fourth quarter of 2022 was $161.6 million compared to $98.8 million in the third quarter of 2022.

Full Year

SNDL reported net revenue for 2022 of $712.2 million, an increase of 1170% over the previous year. The 2022 net loss was $372.4 million versus $226.8 million in the previous year. SNDL also reported a net loss in 2020 of $199 million.

The net loss for 2022 was largely driven by a fourth quarter non-cash charges including the impairment of goodwill related to the Alcanna Inc. transaction, including Nova. Despite improving fundamentals for Nova, the share price decline of 53% since the acquisition date warranted an $88 million non-cash adjustment.

The company noted that liquor retail includes operations for the period of March 31, 2022, to Dec. 31, 2022, and cannabis retail includes the operations of Nova Cannabis Inc. retail stores for the same period.

“2022 was another transformational year for SNDL. We increased the sustainability of our business model by achieving record-breaking revenue and gross margin as well as positive and increasing cash provided from operating activities in our two most recent quarters,” said Zach George, chief executive officer of SNDL. “Our vertical integration strategy is beginning to show its intended results, and we are working to gain stability in a challenging and dynamic industry. Our acquisition of Valens provides midstream capabilities in every material cannabis product category and the ability to selectively balance higher cost cultivation costs while taking advantage of the current massive oversupply in Canadian markets.

“We now expect to materially outperform our originally contemplated savings and are on target to realize more than $20.0 million in cost synergies. Despite the positive milestones and growth we have achieved, SNDL’s shares are trading at near all-time lows, well below our book value and materially less than 1X our annualized revenue.”

Sunstream

Sunstream was invested in Skymint, a Michigan operation that is currently in receivership and Parallel, a Florida operation has defaulted on its debt. The company noted in its filing that for Sunstream, the share of profit of equity-accounted investees for 2022 was a loss of $43.0 million compared to a gain of $32.9 million for 2021.

“The decrease of $75.9 million was due to fair value adjustments to the investments related to increased assessed credit risk in the US cannabis industry,” the company noted.

In the company’s letter to shareholders, it stated, “Through our joint venture partnership with the SAF Group, our investment vehicle SunStream Bancorp or ‘SunStream’ has underwritten opportunities to deploy credit capital into U.S. based cannabis companies and has built a credit portfolio that is valued north of C$500 million. We are keenly focused on unlocking value through the strategic positioning of this joint venture. We currently have six credit exposures in the SunStream portfolio. As previously disclosed, two of them are in active negotiation of restructuring.

“The combined expertise of SNDL and SAF positions us well to improve the quality of operations and financial results in cases where playing the role of a passive lender is no longer appropriate. We do expect in 2023 that, on a structured and compliant basis, SNDL may become a majority owner of one or more vertical operations in the U.S.”

The company will hold a conference call and webcast at 10:30 a.m. EST (8:30 a.m. MST) on Tuesday, April 25, 2023.

Cash Levels

Management said it believes its current capital resources will be sufficient to satisfy cash requirements for at least the next 12 months. As of December 31, 2022, the company had no outstanding bank debt or other debt. The accumulated deficit as of December 31, 2022, was $1.09 billion. The company has burned through its huge cash cushion. It ended 2021 with $558 million and by the end of 2022, cash had fallen to $279 million.

Net cash used in operating activities for 2022 was $6.7 million compared to $155.8 million in 2021. Net cash provided by operating activities for the fourth quarter of 2022 was a record $28.6 million, an increase of 233% when compared to $8.6 million in the third quarter of 2022.

Don’t Count Out Canada

The company didn’t mince words in its shareholder letter with regard to the U.S. cannabis market. It read:

For the last two years, I have heard consistent negative feedback and ridicule directed at Canadian cannabis companies by our US peers. I believe that Canada is now in a ‘troughing’ phase, having experienced a peak in competition, and an oversupply of licenses, retail doors and products. Many US states are several years behind in their cycles and are just now starting to experience price compression and margin degradation at the worst possible time. We see supposedly shocking headlines related to ounces of California dried flower selling at USD$50, while we have seen marginal prices lower than this in Canada for quite some time. This past year, I took time to visit dispensaries in regions like Massachusetts where the cheapest ounce of flower was selling for USD$300. It’s unlikely that the robust pricing experienced in many US states in either limited medical markets or brand-new adult-use markets will last. Many US operators were given a false sense of security due to these prices, but now they find themselves unable to access capital and are rushing to get lean to drive greater operating efficiencies.

The letter went on to state that American MSOs were behind on the technology that Canadian companies used. The letter said it stood behind enforcement against the illicit market and didn’t think that cutting taxes was the ultimate answer to the industry’s woes. Instead, it thinks the government should crack down on companies not paying taxes.