Sundial Growers Inc (SNDL) Q3 2020 Earnings Call Transcript

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Sundial Growers Inc (NASDAQ:SNDL)
Q3 2020 Earnings Call
Nov 12, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Sundial Growers third-quarter 2020 financial results conference call. Yesterday afternoon, Sundial issued a press release announcing their financial results for the third quarter ended September 30, 2020. This press release is available on the company’s website at sndlgroup.com and filed on EDGAR and SEDAR as well. Presenting on this morning’s call, we have Zach George, chief executive officer; Jim Keough, chief financial officer; and Andrew Stordeur, president and operating officer.

Before we start, I would like to remind investors that certain matters discussed in today’s conference call or answers that may be given to questions could constitute forward-looking statements. Actual results could differ materially from those anticipated. Risk factors that could affect results are detailed in the company’s financial reports and other public filings that are made available on SEDAR and EDGAR. Additionally, all financial figures mentioned are in Canadian dollars, unless otherwise indicated.

I’d also like to note that we are conducting the call today from our respective remote locations. As such, there may be brief delays, crosstalk, or minor technical issues during this call. We thank you in advance for your patience and understanding. We will now make prepared remarks, and then we’ll move on to the question-and-answer session.

I would now like to turn the call over to Zach George.

Zach GeorgeChief Executive Officer

Thank you, everyone, for joining us on our third-quarter 2020 earnings call. As the COVID-19 pandemic continues to affect global markets and people around the world, we hope that everyone is staying safe during this unprecedented time. Health and safety continues to be a priority of Sundial. We remain committed to stringent procedures to ensure the protection of our employees and consumers while minimizing disruption to our operations.

To date, Sundial has not experienced any material disruptions related to COVID-19. As we enter the last month of 2020 and plan for the future, some context and perspective may be helpful. The Canadian cannabis industry is complex and still in its infancy. We are just two years into legalization and Sundial is about 22 months into commercial operations.

Much of our competition has had a multiyear head start on Sundial. In a short time frame, we have been able to connect with consumers, capture meaningful market share and quickly become competitive in a rapidly evolving marketplace. Following a change in our management team and subsequent financial restructuring, we have drastically improved our operating practices, targeting a sustainable cost structure and a simplified, more focused business model. We entered 2020 with optimistic projections and a severely challenged capital structure.

We have since taken aggressive steps to derisk our balance sheet. Through a combination of cash repayments, asset sales, and debt for equity swaps, a total of CAD 100 million in total debt has been eliminated on a year-to-date basis. We have also reduced annualized cash debt service obligations by approximately CAD 31 million. In addition, we currently have approximately CAD 60 million in cash on hand and access to capital, if required.

Our restructuring has required significant dilution, but we are well funded through 2021. We expect the current rate of dilution to decline into Q1 2021 as the last of our convertible debt is extinguished. Under current operating conditions, we do not require additional capital in the near-term unless we engage in a material strategic transaction. While I will not comment on the process itself, our previously announced strategic review is active and continues to be a focus.

Turning to our third-quarter results. We experienced a decline in revenue, partially due to our transition away from wholesale transactions. However, we are pleased with the progress we have made in terms of operating discipline and cost initiatives. We have also adjusted our inventory levels to better align our supply with expected demand and have taken related impairment charges.

In doing so, Sundial has repositioned itself to better capitalize on the current market environment. These initiatives will be discussed in more detail by Jim momentarily. Why did our revenue decline this quarter? There are several reasons. First, Canadian cannabis consumer preferences are evolving, but are currently biased toward high-THC potency.

We have had to rapidly adapt our cultivation processes to meet those demands over the last six months. However, the potency results this past quarter did not meet our standards for Sundial’s brands on a consistent basis. Another marginal factor was destocking at the provincial Board level as inventory management practices evolve. A third driver was our underestimation of weeks on-hand inventory on certain SKUs with select customers, which resulted in smaller reorders in the quarter as we continue to move through our inventory depletion.

Fortunately, the modular nature of our facility provides Sundial the ability to rapidly adapt to evolving market conditions, and we continue to be agile in our response. The scale and modular room design of Sundial’s cultivation facility make it one of the best in Canada. Since its inception, we have compiled a broad spectrum of cultivation statistics, including more than 600 harvests, including 243 in 2020 and 52 in the third quarter alone. Sundial has leveraged its data analytics capabilities to focus on key improvement areas.

I am proud to say that just last month in October, we generated the highest average potency results since Sundial’s inception. To continue to serve evolving consumer preferences, Sundial has also acquired an expanded library of genetics. We expect these genetics to have a financial impact in early 2021. Sundial’s commitment to data analysis and fact-based decisions has led to changes in the leadership structure and key personnel in the cultivation, processing, and demand planning teams.

Matching supply and demand right down to the SKU level is critical. This is an area of deep focus for us, and there’s still much work to be done. We have taken the time to better understand forecasted demand and to carefully optimize our production and supply chain. Subsequent to the quarter, we also undertook an initiative to materially rationalize SKUs across all brands and formats.

These changes will be vital to accelerating the momentum of improvements in quality, potency, and cost while building a sustainable organization as we scale. We exited Q3 with lower costs, greater efficiencies, and dramatic improvements to our balance sheet. Despite underperforming on revenue, we reached several key operating milestones. As we continue to improve our processes, we are also working to elevate our customer experience while driving long-term growth.

To develop a trusted cannabis brands that resonate with consumers, it is critical that we deliver consistent, high-quality products. Consumer-centric and committed to data-driven insights, Sundial is focused on delighting consumers as preferences evolve in the Canadian cannabis market. I would now like to turn the call over to our CFO, Jim Keough, provide further details on our Q3 financial results.

Jim KeoughChief Financial Officer

Thank you, Zach, and good morning to those listening in. I would like to remind everyone that all amounts that I mentioned this morning are denominated in Canadian dollars, unless otherwise stated, and that the comparative period is the sequential quarter, Q2 of 2020, unless I indicate otherwise. Let’s start with a review of our improved liquidity and capital structure. During the third quarter, we closed a brokered registered offering for gross proceeds of CAD 26.4 million, and we entered into a $50 million after market equity program.

Subsequent to quarter end, from October 1 to November 9, the company issued 121.9 million common shares for net proceeds of CAD 45.4 million under this program. For the year to date, through a combination of cash repayments, asset dispositions, equity, and equity-linked issuances, and debt for equity conversions, Sundial has correctly improved its over leverage and cash position. We eliminated CAD 100 million of debt in 2020 up to November 9, with a net debt reduction of CAD 72 million. We reduced our annualized debt service cost by CAD 31 million through the June 5 restructuring.

We raised gross cash proceeds of CAD 93 million since June 5. We received benefits under the Canada emergency wage subsidy, the CEWS program, of CAD 4.1 million. We amended and restated our syndicated credit agreement and converted our term debt facility to senior second lien convertible notes. At November 9, Sundial had CAD 127 million of indebtedness outstanding, down from CAD 199 million at the beginning of the year.

That includes CAD 55 million of aggregate principal amount of senior secured convertible notes and CAD 72 million of syndicated bank debt. We had 439 million common shares outstanding and we had an unrestricted cash balance of CAD 60 million. With the share issuances and the process of converting debt into equity, the resulting dilution and pressure on the trading prices Sundial shares significantly improved the company’s balance sheet and financial flexibility. Sundial shareholders have authorized orders and directors subject to required regulatory and stock exchange approvals to consolidate its outstanding common shares to ensure compliance with the NASDAQ’s continued listing standards, which provides access to a broad universe of investors, access to equity capital and access to trading liquidity.

Further details will be announced at a later date should the company elect to proceed with a share consolidation. As Zach described, the third quarter was challenging for Sundial from a revenue point of view. While net revenue declined 36% compared to the previous quarter, we did continue to achieve success in our focus on establishing branded sales, which comprised 77% of total net revenue, up 8% from the second quarter. Cash used from operations, not including changes in noncash working capital, financing and investing activities decreased by 63% to CAD 5.3 million for the quarter, down from CAD 14.3 million during the previous quarter.

Our commitment to cost control is yielding immediate and meaningful results. General and administrative expenses were CAD 7.2 million, equivalent to 7% lower in the third quarter than the previous quarter. We reduced our G&A expenses by 42% compared to CAD 12.4 million in the same quarter of 2019. Another area of very positive improvement is our combined cultivation and production costs.

We’ve decreased these costs by 19% over the previous quarter to CAD 8.1 million from CAD 10 million and have decreased them by 50% when compared to Q1. These savings are significant, and the team has done a tremendous job of bringing greater efficiencies to our cultivation and processing operations, and that work continues. Cash cultivation cost per gram sold was reduced to CAD 1.18, a decrease of 12% over the previous quarter. We are working toward a target cash cost of CAD 0.69 per gram.

We recorded an adjusted EBITDA loss of CAD 4.4 million for the third quarter, which was an increase from CAD 3.9 million in Q2. Our net loss from continuing operations amounted to CAD 71.4 million, primarily reflecting noncash charges related to fair value adjustments and to inventory and asset impairment provisions. We recorded an inventory impairment provision of CAD 19.9 million on dried cannabis and cannabis extracts and a property, plant, and equipment impairment provision of CAD 60 million was recorded on the old facility. On average, our gross selling price per gram equivalent and branded products remained relatively stable at CAD 5.53 per gram in the third quarter of 2020 compared to CAD 5.67 per gram in the prior quarter.

Average gross selling prices for unbranded flower in the third quarter was CAD 0.84 per gram, down from CAD 2.22 per gram in the previous quarter. The decrease was due to the monetization of bulk flower and shake inventory at a discounted price. Our adjusted gross margin before inventory impairment and fair value adjustments for the three months ended September 30, 2020, was 20% compared to 14% for the three months ended June 30. This 6% increase was mainly due to efficiency gains realized through decreased cost of goods sold and to incremental value-added product mix.

As we have discussed previously, we have fully completed construction of our cultivation facilities and Olds, and are limiting capital expenditures to essential expenditures and maintenance capital. As such, we are reviewing alternatives for our planned extraction and processing facility Olds, where the largest part of our 2020 capex budget was allocated. From a maintenance capex standpoint, we anticipate spending about CAD 500,000 per quarter to maintain current capacity. I will now invite Andrew Stordeur, president and COO of Sundial, to provide some further remarks related to operations.

Andrew StordeurPresident and Operating Officer

Thank you, Jim. As mentioned, our top line declined this past quarter versus Q2 2020, while we continue to make significant progress on our cost structure. Let me update you now on some of the progress on Sundial is making. We continue to be consistent on our sales mix strategy as we focus on driving better market penetration with our branded product offering versus relying on the wholesale channel.

Our Q3 branded net sales increased to 77% versus 69% in Q2 2020. This keeps us on track to our target for an 80% branded and 20% wholesale business mix by year-end. To deliver our craft-at-scale promise, we need to continue to develop capability and competency in cultivation. Over the past 22 months, we have completed hundreds of harvests, enabling our team to leverage this robust set of cultivation statistics and implement action plans to improve our cultivation consistency.

Since implementing these actions, we have achieved the highest average potency results in our company’s short history. To further support our cultivation expertise, Sunbelt has acquired an expanded library of genetics that will better serve evolving consumer preferences with a specific focus on higher potency products. We are excited to bring these unique cultivars to market in 2021. The company’s decision to prioritize larger pack formats and flower during the early stages of COVID-19 resulted in a slower-than-expected ramp in pre-roll production.

Demand for Sundial’s pre-rolled products remains strong. And as such, we’ve made significant events in in our operations to remove capacity constraints. The pre-roll segment is critical to our inhalables focus, and we will be doubling down in 2021 to accelerate our pre-roll offerings to meet market demand. Our national market share increased from just 0.6% in Q3 2019 to 3.3 in Q3 2020.

We have lost market share in the latest 13 weeks as the value segment accelerates nationally aggressively across all formats. We’ve recently expanded our Palmetto brand coast to coast. Palmetto’s dried flower format recently launched in spec and was sold out within two weeks, indicating early resonance with consumers in a rapidly expanding and competitive market. We’ve significantly increased our investment in our portfolio of brands through targeted sales and marketing initiatives, including launching a comprehensive holiday campaign that will be in select retailers across the country starting this month.

We’ve been deliberate in our launch of 2.0 products. Sundial’s innovation pipeline continues to strengthen as we have begun commercial production of our Top Lead [Inaudible] rates that will begin to ship in Q4. We also announced earlier this week that we have entered into a sales and distribution agreement with Choklat, a Health Canada licensed chocolatier company focused on offering decadent infections with high-quality flavor. As part of the contractual arrangement, Sundial and Choklat will launch a cannabis infused confectionary brand, offering a selection of chocolate bars, drinking chocolates, and infused sugar.

We expect to scale the collaboration across the country with first product targeting to be in stores ahead of the holiday season in Alberta. Building a sustainably profitable business centered around the consumer requires time to develop our brand portfolio and thoughtful choices in where and how we invest for future growth. While we understand we still have a lot of work to do, we remain encouraged on the progress made in Q3 and positioning ourselves for success in the future. With that, I’d like to turn the call back to Zach for closing remarks.

Zach GeorgeChief Executive Officer

Thank you, Andrew. In conclusion, our team has moved aggressively to focus our operations and product portfolio to get the very best from our high-quality people and assets. I’m proud of the entire team’s ability to take decisive action to improve our business while navigating this unprecedented time. I will now turn the call back to the operator for the question period.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Tamy Chen of BMO Capital Markets. Please go ahead.

Tamy ChenBMO Capital Markets — Analyst

Thanks for the question. First, just wondering if you could quantify, you mentioned that this October was sort of the highest average THC that you’ve achieved. Could you quantify what that range was?

Andrew StordeurPresident and Operating Officer

Hey. Good morning, Tamy. It’s Andrew here. Yes.

So obviously, the market dynamics have changed, as Zach mentioned, pretty aggressively over the last 12 months. But we’re seeing products consistently now launch above kind of the 19.5% to 20% range on all of our cultivars. And obviously, as we get into the market, we’re seeing a significant rate of sales change on streams that are above that 20% cultivar. That’s kind of where we’re going.

So that’s the range. And that’s moved over the last 12 months from when we started to 15%, 16%, all the way, punching above 20% now. So we’re feeling pretty good about the progress.

Tamy ChenBMO Capital Markets — Analyst

And I also wanted to understand a bit better. You called out one of the factors to the sequential sales decline of provinces sort of adjusting their inventory management and ordering. I think we’ve heard others mention that, though it sounded like this adjustment in how they ordered becoming more smaller orders, but more frequently sort of happened a while ago. So I guess I’m still not fully understanding what — how that sort of impacted your Q3, especially when we look and the industry as a whole, revenues in the third quarter were really increasing, which I assume is from the Ontario storing.

So can you just elaborate on that a bit more? Thank you.

Andrew StordeurPresident and Operating Officer

Yes. So I think a couple of things there. I think when you look at the timing of kind of when we ramped up some par levels or weeks on-hand inventory to particular provincial boards in June, I think we went pretty heavily on inventory. And I think that was specific to Western Canada.

So I think some of that is timing. So we saw a board going a little bit heavier in that June time frame. We’ve since adjusted kind of our demand-planning cadence to really understand kind of how we can manage those par levels better. I think the provincial boards have done that as well.

So it’s a work in progress, but I think some of that Q2 number late June impacted us getting off the ground in Q3, which accelerated some of that smaller orders more quick. And as you move through that inventory and that weeks of coverage at select boards, that was particularly Western Canada, Tamy.

Tamy ChenBMO Capital Markets — Analyst

Got it. OK. Thank you.

Operator

Our next question comes from Vivien Azer of Cowen and Company. Please go ahead.

Vivien AzerCowen and Company — Analyst

Good morning. Thanks for the questions. My first one has to do with your shelf space and your outlook for being able to preserve that. It strikes me that with inability to fulfill even, if they are just smaller, the provincial level, plus some cultivation that wasn’t coming in to your standards from a potency perspective, it seems like perhaps the dialogue that you’re having with the provinces is probably not all that constructive if you have to continue to apologize for misses there.

So where does your shelf space stand today? And then what is your outlook for your shelf space? Thanks.

Andrew StordeurPresident and Operating Officer

Yes. It’s Andrew. Thanks for the question, Vivien. I think it’s a good one.

Look, the shelf is obviously a battle. And we’re conscious about. We’ve had good market share growth over the latest 52 weeks. And as I mentioned in the opening, we’ve seen that a little [Inaudible] over the last 13 weeks.

So look, what are we doing about it? Look, I think the key thing is, as we mentioned, starts with cultivation. So we’ve addressed a lot of those areas, specifically to ensure we have more consistent kind of high potency quality product get out in our brand formats. But I think another one for us is we kind of slowed down our investment really in our portfolio. I think in Q3, we saw a two times increase on our sales marketing spend for our brands.

That’s going to help. You don’t get that benefit in the first month. So when we start to attack the shelf, when you start to look at the way the scale [Inaudible] with the retailers and the provincial boards, they’re asking what is the integrated holistic program you’ve got on your brands. I think as of Q3, we’ve really started to ratchet that up accordingly.

So I anticipate we’ll see better awareness and better rate of sale coming through that as we improve our cultivation. And I think the other thing that we’re doing that I think Zach mentioned is really the SKU optimization begin. And I think as we think about the retail shelf, and we think about having so many offerings in certain formats. And particularly, in our case, vape, we’ve launched a significant portfolio of vape products across all the provinces.

Some of that is cannibalizing our own shelf space to be quite honest. So we’re working very collaboratively with the retailers and the boards to simplify the SKU mix. We’re expecting a lot of that volume that we have in those products right now, even though we’re going to take down some of those SKU offerings, to move into or stay in that brand. And I think that’s usually what you see in SKU optimization exercise.

So it continues to be a big focus for us. We’ve increased our distribution. So the anticipation of having cultivation come back online, the investment in the sales and marketing on our brands. It takes [Inaudible] we’re going to see that continue to be strong, but there’s some short-term work that we need to be doing for sure.

Zach GeorgeChief Executive Officer

Vivien, just to add to that, I wouldn’t say that our relationship, our conversations with our provincial board partners are not constructive. They’re absolutely constructive. We’ve certainly gone through growing pains earlier this year when we were encountering issues with the renewal and extension of our credit facility. We had a significant drop in sales and marketing spend.

And we’re just coming out of that now. So you can see that having ramped in the quarter, and we expect to see benefits in the coming quarters. And I would also say that whether it’s Sundial or other LPs you’re seeing, you have seen quarter to quarter quite a bit of volatility, both in terms of market share, products that have worked or not, where there have been some misses and some recoveries to the upside as well. So we think we understand the factors.

Some are self-inflicted, but we’ve moved beyond them and found solutions. So we’re pretty excited about the coming quarters.

Vivien AzerCowen and Company — Analyst

Got it. That’s helpful. Thanks. And then my follow-up, dovetailing off of that.

So it sounds like the calculus you guys are making is spend now, hopefully, the market share recovers, the revenue shows up. And we hope that is the driver of operating leverage. Is that kind of the right way to think about it? And so then if sales and marketing benefits don’t kick in immediately, is it fair to assume that the magnitude of your adjusted EBITDA loss in the fourth quarter, probably it doesn’t improve and perhaps gets a little bit worse.

Zach GeorgeChief Executive Officer

Yes. Look, I would say, just speaking very cleanly about the current run rate. We need to be running at about twice the current size to get to profitability. We have a path to get there.

There’s really two means of arriving at profitability. One is through organic growth, the other is through M&A activity. And I think, as you’re aware, we’re really focused on both paths. So I wouldn’t draw the conclusion that we’re going to see EBITDA necessarily fall out of bed.

We think that these investments in sales and marketing are going to benefit our brands and business for many quarters to come, and we’re looking at this on a slightly longer-term basis than just Q4.

Vivien AzerCowen and Company — Analyst

Got it. Thanks very much.

Operator

Our next question comes from David Kideckel of ATB Capital Markets. Please go ahead.

David KideckelATB Capital Markets — Analyst

Good morning. Thanks for taking my question. So my first, I just wanted to dig a little bit deeper into your previous answer with regarding SKU optimization. So I’m just trying to understand now as you guys exit wholesale and look to improve product mix 80/20 from branded product to wholesale.

Why exit wholesale right now when revenue from branded products and vapes, in particular, have actually gone down? And then as well associated with that, given some of the improvements you’re trying to make in the market, I mean, do you have market research to support, for example, even the pre-roll market, I think the comment was made that you’re doubling down on that with the craft cultivation. So do you have indicators that will tell you actually what consumers are looking for there? Thank you.

Andrew StordeurPresident and Operating Officer

David, it’s Andrew. Just on the — if you can just repeat the first one real quick on the SKU optimization. I just want to make sure I understand the question a little bit.

David KideckelATB Capital Markets — Analyst

Sure. I’m just trying to understand on SKU optimization, how you’re trying to improve that, especially in a market with vapes, where that’s a key differentiator for you, and it’s already a very crowded market.

Andrew StordeurPresident and Operating Officer

Got it. Yes, a couple of things on that. I think we have to simplify our supply chain. And I think our retailers and customers are asking for that.

They don’t have limited or unlimited shelf space to kind of house 55 different vape offerings. So I think what we’re really trying to do is, obviously, the early days we were attempting to monetize as much of the inventory that we have inclusive of for some of the oil. We put that into our vape portfolio. But I think what we’ve seen in the data is we have great repeat purchase on our vape products, but we’ve got a lot of them.

And we’re seeing kind of that Pareto principle play out with regard to the 80/20 rule on a lot of our sales are coming from a core set of SKUs. So as opposed to having that inflicted upon us by retailers, we’re taking a proactive approach with them, and certainly the provincial boards to really get the right assortment at store level. And I think when we do that, we’re going to see that consumer that’s really enjoying in part of that brand story with Top Leaf, or Sundial, or Palmetto even, stay in the brand as we give them a more selective assortment. So we’re optimistic that the SKU rationalization is the right call.

And particularly, to your point on vape, we think it’s necessary, but we’re also seeing it as an opportunity for us longer term. I think in regards to your question the wholesale, I think we’re still in that plan around 80-20. So we’re not fully walking away from the wholesale channel. I think it’s an important part of our business, albeit, if you look at Q3 2019 versus Q3 2020, more than 90% of our sales a year ago were in the wholesale channel.

So to make that move into a branded space and to make that shift, we’re almost 80-20 right now. That’s a pretty big move, and we’ve been consistent on that kind of from day one in 2020. So we’re not walking fully from it. We’re just going to be really selective about it.

And part of that is pricing. And part of that is our desire to make sure that if we have great product that’s coming on those brands, we’re putting them in our own brand product and driving market share and obviously, relationships with retailers and consumers. And last one on pre-rolls. So look, I think Zach mentioned, we made some early decisions, early part of the year, on larger formats given the COVID situation and really that impacted our pre-roll capacity.

So we’ve aggressively made some moves here over the last two to three months, and you see that in our mix of our portfolio. So in Q2 pre-rolls represented just over 2%, 2.5%, give or take, of our mix. In Q3, that was 8.5%. To answer your question on data, the segment in pre-rolls in Canada is about 15%.

So we’re under indexed, and it certainly is our focus on a premium inhalables player. Pre-rolls are big part of that. So we have to be better on pre-rolls. We’ve got great demand.

We have great product that’s in the market. And that’s the good thing. We kind of make sure we can meet production and demand accordingly. And I think that’s our plan moving forward into Q4 and obviously into ’21.

David KideckelATB Capital Markets — Analyst

OK. Thank you.

Zach GeorgeChief Executive Officer

David, just to add there, David. On the wholesale side, in terms of, as you phrased it, moving away from wholesale. Just to level set there. It’s always been Sundial’s strategy to connect directly with consumers with branded retail products.

But what’s happened in the wholesale market is not a function of Sundial’s decision-making or choices per se. So you’ve got a market today. If you look at our history, as you know, we’ve sold tens of millions of dollars of product to top LPs in Canada over time. That market is in a very different place today than it was 12 months ago, full stop.

So Canada is very long cultivation. Canada is very long supply. We believe that this is going to be somewhat cyclical, and you’re going to see that wholesale market evolve over time. But it’s in a pretty unique spot today.

We’ve seen demand for wholesale transactions at the margin be reduced in the near term, quite dramatically, while we’ve also seen other LPs come in and want to engage in longer-term supply agreements. And as you well know from covering the space, the history of sort of the sanctity of these contracts is extremely poor. So I think the industry is still evolving and maturing in terms of how to deal with these long-term supply agreements. Many LPs have had issues where they sign a wholesale deal, it gets broken, it gets retraded.

And our experience hasn’t necessarily been any different.

David KideckelATB Capital Markets — Analyst

So it’s not to say that we won’t be engaged in wholesale in the future, but it’s much less of an opportunity today as well. OK. That’s really great color. Both of you.

Thanks so much. My last question here is just going to your MD&A with your debt covenants and potential violation by December 2020, which I think is listed in there. So just a couple of points on that. I mean, by our calculations, your cash burn for the last quarter is just — it’s about CAD 21 million.

And then to satisfy the principal payments that you’re going to need for the principal repayment of your debt, it’s going to be about CAD 6 million a quarter. And so please do correct me if I’m wrong on those calculations. But assuming not, how confident and comfortable are you guys moving into the next, I guess, one to two quarters that you’re going to be able to satisfy, whether these conditions or just being able to finance even the principal repayments of your debt?

Zach GeorgeChief Executive Officer

OK. David, we don’t want to make any forward-looking comments here. I’ll let Jim speak to this. But what I can tell you is that we have a very close and productive working relationship with the banks.

Instead of making aggressive projections about what’s going to happen in the coming months, I would point to our track record with regard to these matters. I think we’ve raised and gotten access to more capital than many thought we would be able to and also have aggressively started to repair our balance sheet at a pace that has also surprised many to the positive. So we’re very constructive on the process. We’re laser-focused on it.

It’s not something that we’re going to wake up to in late December and start to work on. So I would just point to our track record this year in terms of dealing with these matters. And that’s what gives us confidence that we’re going to navigate this successfully.

David KideckelATB Capital Markets — Analyst

Understood. OK. Thanks very much for the color and congrats on the quarter.

Operator

Our next question comes from John Zamparo of CIBC. Please go ahead.

John ZamparoCIBC — Analyst

Thanks. Good morning. I just want to reconcile the top line performance and dive a little bit deeper there. The industry is growing quarter-over-quarter well into the 20% range, but you saw branded sales down, I think, nearly 30%.

But it’s clearly not pricing. Your pricing is well above most of your peers. So I mean the impact of that would be volume. I’m wondering if you could take a shot at quantifying how much of that decline was from not being in stock at retailers versus the cultivation challenges you referenced, versus consumers switching to value and maybe away from your premium or mainstream products? Just any commentary there would be helpful.

Zach GeorgeChief Executive Officer

John, I don’t have the quantifiable kind of out of stocks at hand here. I think we can follow-up on that. But I think, again, coming back to what we saw, we’re seeing a significant rate of sale increase. Some of the data that we’re looking at, John, is if you have a Top Leaf brand and it’s above 20% potency, we’re seeing a rate of sale increase 60%, 70% versus something that’s lower potency.

So as we put that product in the market, higher potency being the deciding factor, it’s selling out very, very quickly. So it’s kind of tied into can we produce that high potency regularly and in every harvest. And I think that’s what we mentioned in the opening, was there was some inconsistency there that led to kind of some of that lower ability to scale the pipeline on that potency. But I don’t have the quantification around what that line of stock looks like right now.

John ZamparoCIBC — Analyst

And then the comment in the press release about underestimating the inventory count at certain retailers. Just like to get a better understanding of what visibility the company has on that matter. Is there a way you can get data on this either real-time or close to it? How often are you talking with these retailers? It just seems — it seems like we’re two years into legalization. You would some of these issues would be ironed out by now.

So this came as a bit of a surprise. But just understanding that relationship better would be useful. Thanks.

Zach GeorgeChief Executive Officer

Look, I think it’s not just the retailers, and it’s certainly on us, too, with regards to making sure we have better demand planning to coincide with what consumers are looking for. So I think to say that it was sitting in the retailers, we’re not looking at that regularly. I think it’s not accurate. I think a lot of what we saw from the provincial boards and what we continue to see from the provincial boards, which is pretty consistent language that we’ve had, and I think some of our peers have had is they’re also figuring now how to manage their weeks of hand on certain SKUs.

So it’s still — it’s two years, but I think, honestly, it’s two years of learning on multiple ends, whether that you’re a retailer, whether that you’re a licensed producer, or whether you’re a provincial board running the distribution. So as far as data goes, this is part of the issue that we have in cannabis right now. There’s limited data at a provincial level. Some of the provincial boards are working aggressively to provide that.

So we can make better decisions and they can make better decisions on inventory. And there’s data programs right now with some of the retailers that we’re diving into on a regular basis. We’re looking on all that and trying to get a better read on what demand should be and how to forecast better so that we can manage inventory and obviously help our retailers make some money.

John ZamparoCIBC — Analyst

OK. That’s helpful. Thanks. And then the last question I had was on the value segment.

You mentioned Palmetto in your remarks. How aggressively does Sundial want to compete in the value category? And how do you expect your sales in value will compare to the overall industry’s in the medium or longer term?

Andrew StordeurPresident and Operating Officer

Yes. Good question, John. Look, I think compete is the key word you mentioned there. I think we want to compete.

We have to compete. There’s obviously a huge amount of consumers playing in that price range. And we’re obviously seeing that less than CAD six per gram kind of price partition aggressively grow. So our year-to-date number on grass lines, just to put it in context, John, for us, is we’re sitting at about 13.5% of our total mix sitting in Grasslands.

That’s about right. In Q3, we were about 12.5%. So we’re right in that range. We’ll see that kind of move as we get into Q4.

And obviously, I think pricing is going to continue to be a key driver, obviously. So if we can keep that mix kind of in that 15% to 20% range, John, I think we’re in exactly where we want to be. And when it comes to pricing, our strategy has been, and you mentioned it. We’ve kept our average sale price on our branded.

We have one of the strongest pricing structures in Canada, as you mentioned. We’re really proud of that. But we’re also mindful of the fact that we have to compete. So we’ve made some decisions on pricing.

And that’s inclusive of kind of all formats and all brands and what we’ll compete. But we’re certainly not going to lead price down. I think that’s a really slippery slope, and we’re seeing some others play that game. I think from the long term, in our view, that’s not healthy for the category.

It’s certainly not healthy for our business model. And I think that’s really why we’re focused on that core plus premium segment. And we’re seeing good things in that as well. But certainly, the acceleration of value has contributed aggressively.

15% to 20% is where we want to be and that’s where we are right now.

John ZamparoCIBC — Analyst

OK. That’s helpful. That’s all for me. Thank you very much.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Zach for any closing remarks.

Zach GeorgeChief Executive Officer

We’d like to thank everyone for attending and for the great questions by our analysts. Look forward to updating you soon. Stay safe. Thanks.

Duration: 43 minutes

Call participants:

Zach GeorgeChief Executive Officer

Jim KeoughChief Financial Officer

Andrew StordeurPresident and Operating Officer

Tamy ChenBMO Capital Markets — Analyst

Vivien AzerCowen and Company — Analyst

David KideckelATB Capital Markets — Analyst

John ZamparoCIBC — Analyst

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