Sundial CEO Zachary George joins Yahoo Finance to discuss the overall outlook for the marijuana industury and how being caught up in the meme trade impacted Sundial.

Video Transcript

- So let's dive right in with a company that has definitely gotten some attention from retail investors. It's a marijuana company based in Canada called Sundial Growers, that has a cannabis business as well as an investment business. Zachary George, the CEO of Sundial Growers, joins me now. And Zachary, you guys, like a lot of the other so-called meme stocks, for lack of a better word, you caught the attention of retail investors, really, earlier in this year.

You saw a spike in your stock. Since then, there have been other sorts of spikes here and there, as you've gotten the attention of retail investors. But let's take a step back, first of all, and talk about your business, right? So you guys are in the marijuana business. You operate in Canada. What are you looking for, in terms of your growth progress, growth trajectory going into 2022? What do you want investors to know?

ZACHARY GEORGE: Thanks, Julie. Thanks for having me on the show. So we're effectively, we should be looked at as a three-year-old startup in the cannabis industry, or a Canadian domiciled corporation with a NASDAQ listing. And the retail interest in Sundial and in our shares likely would not be there without that NASDAQ listing. It's a key feature we can talk about.

But our business is integrated. So we have what is the largest pure indoor cultivation facility, which is located in Olds, Alberta. And in July of this year, we just acquired what is the largest individual retail network, which is a combination of both corporate and franchise locations. And we have about 113 locations across Canada today.

And then, the second pillar of our strategy, away from our core cannabis operations, is really focus on our investment activities. And we launched a joint venture with Alternative Investment Partners in Calgary, focused on capital deployment into the cannabis sector more broadly, and we've built a credit portfolio with significant US exposure, that is compliant in non-plant touching. That's over $300 million in size.

- And Zach, the Canadian cannabis business has been pretty wild, since the inception, right? There were a lot of hopes placed on it. There was somewhat of a rocky rollout, in terms of regulation, in terms of getting stores open, and getting the industry up and running initially. There's a lot of competition there. Where are we in terms of the life cycle, in terms of the stability of the industry in Canada?

ZACHARY GEORGE: I would say we're in the first or second ending of a true distress cycle. So you're absolutely right, in terms of the factors you're referencing, but we saw a massive bubble emerge in the days running up to legalization. We're now three years into Canadian legalization.

And this industry has been plagued by poor capital allocation, oversupply, both in terms of flower as well as licensing itself. And when you combine that with a certain amount of regulatory dysfunction, which is very, very idiosyncratic to the Canadian industry, you sort of get what we have today, where there are many companies that are failing to reach profitability. And we see 2022 as a year that's going to be somewhat of a reckoning in the space, where you're going to see attrition, some consolidation, and quite a bit of bloodshed as well.

- And speaking of idiosyncrasies, we have that here, south of the border, as well, in terms of, obviously, state by state the rules differ. There are some hopes riding on national legalization, but that has not materialized. You talked about your investments in the US. But obviously, there are regulatory hurdles for cross-border commerce as well. Are there plans, though, for you guys to get involved in a more concrete fashion in the US? What would need to change from a regulatory perspective?

ZACHARY GEORGE: So without a federally legal backdrop, we are not going to be engaged in any plant-touching activities in the US. We're big believers in earning the right to take risk. And we are working hard every day to build what we believe could be a dominant business in the Canadian landscape. And if we're successful with that objective, we think that a lot of doors will open up.

But for the time being, we're not chasing opportunities internationally on the operation side. We're really focused on building a solid and profitable, sustainable model in Canada. But the opportunity, in terms of capital deployment, was really too interesting to ignore. And so we've been able to invest in secured and structured credit, on a compliant basis, where we're not engaged in plant-touching activities, but we're able to partner with some of the highest quality operators in the US, to help them fund their growth and other M&A aspirations.

- So Zach, you guys report having 2 and 1/2 million individual shareholders. Now that is an incredible number. That's from back in July. Is that the latest data that you have, and why do you think that Sundial is one of the companies that caught retail investors' attention?

ZACHARY GEORGE: It's a great question. And we did disclose that in connection with our AGM. So that's the latest data we have. So I'd say it's about 2 and 1/2 million. Interestingly, there are over a million accounts with Robinhood, specifically, that hold Sundial shares. So the retail participation, and really, dominance, in terms of our shareholder register, is very real.

- And how have you court-- I was just curious, how have you courted them specifically, as well, since that happened? I mean, we looked at your stock chart. We saw that spike. We've seen the shares come down. Do you feel like you have to catch the interest again? Are there, there are benefits, obviously, from a capital perspective to having the stock go up.

ZACHARY GEORGE: It's a great question, Julie. The way I would explain this is that, no, we did not seek this. We did not court this activity. I'm actually a CEO that's largely off the grid when it comes to various social media channels. So this has been a very unique experience, to say the least. But what I would say is if you look at the life cycle and history of Sundial, we were an August 2019 IPO. The IPO process went very poorly.

The business was focused internationally and had a significant cash burn rate, requiring it to be restructured. And I was brought in in 2020 to lead that restructuring. So I've been in this seat almost two years at this point. But in 2020, we had to take some aggressive measures, including orchestrating debt for equity swaps, and also raise a significant amount of equity capital.

And that dilution, which was required in order to save the business, actually drove more liquidity. So the way that I think about this retail interest, number one, I think it's important to note that the support that we've had from our retail investors is absolutely an essential ingredient in the survival and success of the business thus far. It's enabled us to survive some less than ideal decision-making.

And we've pivoted, and our strategy has evolved significantly, to this two-pillar strategy that I mentioned previously. But I think about it in terms of interest and access. And so, if you look across the monthly reports, for example, and I just use Robinhood as an example, because it's a great indication and barometer for retail interest. But you can see very clearly that, when you look at the top 10 securities held within Robinhood accounts, from time to time, there's been a reasonably strong presence of cannabis-related equities.

So you have a demographic, however you want to collar that, that is enamored of cannabis generally. And so there you have the interest, which is also driven by both the volatility and trading liquidity of the shares themselves. And then access is also critical, as well. And when you compare us to other companies, you see a lot of US MSOs, for example, that cannot access US listings. And so they are listed either on the CSC or the TSX, for example.

We chose in early days, prior to my arrival, to list on NASDAQ. If we hadn't done that, our path and this story would be very different, and I probably wouldn't be here today. But on the backs of that interest, we were able to raise over a billion dollars Canadian, which enabled us to create a debt-free balance sheet and build out a very attractive investment portfolio to support our operations.

And we're still sitting on north of half a billion in cash. So very well positioned to take advantage of distress in the sector.

- Yes, definitely, so really great to catch up with you, Zach. Hope to have you on again to talk about where you are, month to month, three months from now. Zach George is Sundial Growers CEO. Thanks again for being here, Zach.