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Sundial Growers Inc. beat analyst expectations on revenue, but posted a worse adjusted EBITDA loss than expected, partly due to $8-million worth of oil that the company sold at a loss.

The Alberta cannabis grower said Wednesday it did $33.5-million in sales in its third quarter, up 40 per cent from $19.3-million the preceding quarter, and ahead of many of its more established peers. Of this, $28-million came from cannabis sales: $25.8-million to other LPs on a wholesale basis and $2.9-million to provincial buyers as branded product. The other $5-million came from flower and herb sales from Bridge Farms, a U.K.-based greenhouse company that Sundial acquired in July.

The company’s adjusted EBITDA loss was $7.9-million, considerably higher than analysts expected. Sundial said this was due to a number of non-recurring costs related to its IPO, its acquisition of Bridge Farms and inventory management. It also posted a net loss of $97.5-million, which was largely due to the cost of buying out a royalty agreement it had signed with its executive chairman.

Here are key takeaways from the analyst call:

Negative oil margins

The most striking admission on the call was that Sundial actually lost money on its $8-million in oil sales. The company sent 3,100 kilograms of cannabis flower and trim to a third-party extractor. By the time it sold the product, Sundial had paid more to grow and process the cannabis than it could earn selling the oil.

"It was very slightly negative, under 10 per cent negative margin. So essentially a break even,” said Sundial CFO Jim Keough. “And that includes the cost of the bulk cannabis and the third-party extraction, which added a relatively significant cost to it.”

Sundial’s CEO Torsten Kuenzlen said the company pursued the negative-margin extraction as a way to manage older inventory.

"In the future as we in-source extraction obviously that creates more margin flexibility. This is not something that we're planning to do on an ongoing basis, it was a one-time adjustment to inventory," he said.

Maintaining wholesale numbers

While other LPs appear to be having difficulty in the LP-to-LP market, Sundial managed to post strong wholesale revenue growth. When asked how, Mr. Kuenzlen said that Sundial’s product was simply superior to most other product available.

“The reason why we’re continuing to sell really well to other LPs is that the quality that we can consistently deliver, many of the facilities in the country are simply not equipped for. And if some of the LPs have either reduced their own growing and or require certain products at quality levels or quantities or consistencies that they have committed to [provincial] boards and can’t meet, they are looking for the few people who can grow at scale consistently at high quality,” he said.

Move to branded sales

While most of Sundial’s sales are in the wholesale market, Mr. Kuenzlen said the company is shifting toward the branded recreational channel. Ahead of that pivot, Sundial has moved from growing only one strain – Shiskaberry – to growing 19 different strains.

"We expect up to 50 per cent of our product being sold through the provincial board channels in multiple brands and product forms by the middle of 2020," Mr. Kuenzlen said.

Buying out the executive chairman

The largest component of the company’s $97.5-million net loss was the cost of buying out a royalty agreement that the company had signed with its executive chairman Ted Hellard. The company recorded this transaction as a $59.6-million loss.

“With the exception of a cash payment of $9.5 million, the consideration paid by Sundial in this transaction was non-cash. The transaction eliminated a 10-year cash royalty obligation of 6.5 per cent of gross sales from certain portions of the Olds facility," Mr. Keough said.

Sell-in to AGLC slows

The company increased its overall sales into the rec market by expanding into new provinces. However, its sell-in to the AGLC slowed in the quarter. Mr. Kuenzlen explained it this way: “The initial inventory build was obviously significant… [Now] the inventory levels in general of the provincial boards have come down a little bit as they have more SKUs, so while the sell-through is positive, the sell-in in Alberta specifically in the third quarter was down a little bit.”

Shiskaberry’s falling popularity

Sundial focused exclusively on the shiskaberry strain to begin with. Now it’s moving away from the strain due to overproduction across the industry.

"When we look at shiskaberry as a whole, demand across the board is dropping, regardless of LP or provincial board,” said Ryan Hellard, the company’s chief experience officer.

“It was a strain that was widely available virtually by every company, because it is one of these strains that was initially available under the ACMPR, and therefore was widely distributed. Basically the boards have more than enough of it to last them, so at this point, really the demand for it is very low. And I think that’s passing through to the consumers. As the number of strains grew, demand for different genetics just became higher,” Mr Hellard said.

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