SNDL CEO Zach George’s Long Form Q&A Hosted by Pablo Zuanic

It’s always great to hear more from the leaders of SNDL, particularly CEO, Zach George. Zach has always come off as well prepared, forward thinking, and a class act. So, this longer Q&A session with Pablo Zuanic, Managing Partner of Zuanic & Associates, was expected to be very informative, as Pablo is one of the most knowledgeable analysts covering the cannabis industry, and they delivered. I’ve done my best, below, to type up a transcript of the Q&A, because the audio version on Twitter/X may not be available long-term, many people aren’t able to access that recording because they don’t have an account there, and the closed captions are almost never accurate there or on Youtube. This should make it easier for anyone who wants to read along or who finds it easier to share quotes without having to type them yourself, as well as provide a searchable place for quick reference.

All numbers in parentheses refer to my thoughts at the bottom after the Q&A portion is over. I strongly recommend listening to the recording if you can, because tone is important. Some of these quotes can seem short, sarcastic, or off-putting without that context. The general tone of the Q&A was friendly, but professional.

Zach George and Pablo Zuanic Q&A

Pablo Zuanic: Good afternoon, everyone. Thank you for joining us and special welcome to Zach George, CEO of SNDL Inc. Zach, welcome.

Zach George: Thank you, Pablo. This is actually my first ever appearance on Spaces. Thanks so much for having me.

Pablo Zuanic: Alright, yeah, and I think that so far things are going smoothly on the tech side (1), although, Twitter/X – it’s somewhat unpredictable sometimes. Look, let’s just start on a personal note, just brief, you know: your career background, how you came to cannabis, and specifically, of course, how you came to SNDL? Thanks.

Zach George: Thank you, Pablo. So, without putting you to sleep, my background. I’m originally from Texas. I was born in Houston. I grew up in the U.K. and I am a dual citizen of both the U.S. and Canada. I graduated from Simon Fraser University in Vancouver and shortly after headed to law school in New York, passed the New York Bar and never practiced, was originally trained as a credit analyst and then spent almost two decades in the alternative investments space – mainly focused on event driven and activist investing opportunities.

I served on about a dozen public company boards and became a student of restructurings and turnarounds, and when it comes to cannabis, I was asked by some friends that were running a boutique investment advisory business in Toronto to look at joining the board of SNDL – and this was late 2019 – which was experiencing difficulties and was then named the CEO about 2 months after joining as a director, so February, 2021 would have been my first month as CEO (2).

So, in terms of Cannabis, I’ve been a casual consumer for some time, and I witnessed the medicinal benefits firsthand as my father was actually prescribed cannabis oils when he was being treated for Leukemia, before passing in 2017.

Pablo Zuanic (PZ from now on): Sorry to hear about that. So, and then you joined SNDL soon after that?

Zach George (ZG from now on): That’s right. I joined as a director at the very end of 2019 and became CEO in Q1 of 2020.

PZ: Alright, thank you, Zach, So, look, we have a lot to cover, and obviously we want to touch on all the divisions of SNDL, particularly the Sunstream USA piece, right? -Which we see as a significant catalyst, but, obviously, you have a number of catalysts across your portfolio of businesses, but let’s just do some recent history. If we go back, you know, to the heavy days of late 2020, early 2021, remind us of the funds that you were able to raise and describe how you’ve made use of those funds since then.

ZG: Absolutely, so, just trying to paint a picture here, again, my CEO journey started in early 2020. I think it would be helpful to construct a picture of what I actually stepped into. At that time, SNDL faced multiple class action lawsuits, it was burning cash aggressively, and its covenant breaches forced the company into the purview of the special loans groups at ATB and BMO who were pushing us toward CCAA. And, to put this into perspective, only about 4% of borrowers who go into special loans ever survive and exit, which made this a significant achievement for us later in 2020. By the middle of that year, we had found a concurrent set of solutions to restructure the business, including the sale of Bridgefarm, which was the largest glass house in the United Kingdom, a large debt for equity swap, and a very expensive rescue financing that would ensure we could continue to operate into 2021.

Then, in late 2020 and into 2021, SNDL became a meme stock, for lack of a better term, which has coincidentally resurfaced in the last few days. But, there were three days during that period where we were actually the highest volume traded name on NASDAQ, with the largest day seeing over three billion shares traded in a single day. Because the company had been poorly positioned and only narrowly escaped CCAA in Canada, we knew that we had to drive change and that a hard reset was required for the business. So, we were able to take advantage of the extreme volumes and the meme dynamic through a series of private placements and the usage of our ATM, and in doing so we raised about 1.2 billion, Canadian, and were able to pay down all of our debt, which had peaked at almost a quarter billion dollars.

And then, really lifted our heads up and asked the question of where economic returns could be found within the cannabis industry. And, it was clear that in the more mature markets, particularly in the U.S., that the vertically integrated models were – and they would typically be in limited license states – were more profitable and that the financing of cannabis businesses was in many cases far more profitable than actually cultivating or selling cannabis. So, based on these observations, I had pitched our board on a two-pillar strategy, with the first pillar focused on a vertical operation in Canada, and the second on building an investment business that could take advantage of the industry’s very high cost of capital (3).

So, in terms of the deployment of that capital, Pablo, we closed the acquisition – and this was sort of our first step toward a vertically integrated model – we closed the acquisition of a retailer called Spiritleaf in July of 2021. That was approximately a $130,000,000 acquisition at the time. Alcanna was acquired in March of 2022, and that was what really gained our exposure to liquor distribution and also came with a stake in Nova, which at the time was a very disruptive discount retailer of cannabis in Canada (4). That transaction was about $320,000,000. And then, in January of 2023, we closed on the acquisition of Valens, which was, again, a transaction with consideration just over $130,000,000 Canadian in stock (5). Beside those operating transactions that were Canadian based, we formed Sunstream, which is a joint venture, in early 2021, and we have deployed more than $600,000,000 Canadian into U.S. cannabis credits through that joint venture since then. Our core strategy is to win within the Canadian regulated products marketplace and use our experience to build a leading global cannabis company.

PZ: So, look, there’s a couple of things there I want to touch on, I mean, in terms of that liquidity, you know, obviously, back then in 2021, as you said, you were one of the most liquid stocks in the space and there’s significant value to having that liquidity, right? We see several MSOs, you know, trading $4-5,000,000 a day at best, you know, 2 or 3, most of them trade well below 1 million. But, more recently, I was looking at the last thirty days, you know, Canopy Growth trading about $190,00,000 on average the last thirty days Tilray, Aurora, about $87,000,000 and SNDL only about $19,000,000. So, what can you do to – and I think, I mean, I double checked these numbers, of course – so, what can you do on your side help to the liquidity get back to, you know, higher levels of the Canadian group? Any quick thoughts on that before we move on?

ZG: It’s a great question. I’m sure this wouldn’t surprise you, Pablo, but we’re spending a lot of time focused on our operations and focused on building a growing and profitable business, not spending a lot of time worried about trading liquidity. I know that the short interest and algorithmic trading can be at times an obsession with our retail base. That’s not something we spend a lot of time sort of navel-gazing on. We have our work cut out for us. We’re making a lot of products (progress?) in the business. We see a lot of opportunity. When you look at the comparable trading liquidity, I think we’ve gone through, in the last month, a very prolific period. You mentioned Canopy, for example. They actually had recently a day where over a billion dollars traded in a single day. So, those numbers are slightly skewed by improvement in that activity, and we’ve caught some of that. Where, I believe our average volumes are sitting around six million shares a day.

But, when you look at our current capital structure today, we certainly have access to both equity and credit capital. We have a debt free balance sheet. We have sufficient liquidity, and, for our size, a reasonably large unrestricted cash balance. And so, I think getting to reach our growth objectives will broaden out our investor base, ultimately, and create significant equity value which may in the future drive greater liquidity. But, there’s also a flip side to that, where, if you saw, you know, even just half a dozen institutions start take material positions that could actually reduce liquidity in the stock, theoretically, right? So, again, not something we can control and we’re heavily focused on the controllables.

PZ: Yeah, no, understood. Look, and I’m going to make – also in the same context of these conversations specifically- I’m going to make a comment and I’d like to hear your thoughts, here. You know, after you raised capital in early 2021, you have not raised capital again (6). Obviously, I mean, you’ve issued stock for some of the acquisitions like Valens, and Alcanna, I believe. But, for the most part, you know, in the context of most of the Canadian LPs have been forced to dilute their shareholders, your dilution has been minimal other than a couple of acquisitions, right? So, in that sense, that’s something that maybe gets lost in the discussion here that people should be paying attention to. Any thoughts on that?

ZG: It’s a great point. You know, we’ve repeatedly made sure that our quarterly press releases include mention that we have not raised cash through equity offerings since July of 2021 (7). You know, we believe in earning the right to take risk. We believe that the disciplined deployment of capital is one of the best ways that we can earn the trust of our investors in the marketplace. And, so, we are really focused on intelligent and disciplined, you know, deployment of our existing cash balances and we are also expecting that capital base – or that unrestricted cash – to actually grow with some of the credit exposure we have amortizing or being monetized back to us, you know, over the next 12-24 months (8).

PZ: Right, understood. And, you know, in the space there’s been, maybe, some questionable acquisitions by some players here and there. But, just before we move on, maybe brief rationale of the acquisitions you’ve made, you know, Valens and Alcanna, just brief rationale of the deals you’ve made on the M&A side.

ZG: Absolutely, and look, just as a preface here, we’re commercial partners with most of the top operators both upstream and downstream in Canada. So, those commercial relationships are really critical to us, whether it’s on a B2B basis, or whether we are distributors of their brands and products. So, I don’t want to overstate this, or sort of spike the football, but I would ask the question: When you look across the landscape and you look at some of the acquisitions that have occurred in the space, you know, who has more to show for their M&A activity at the end of the day? And, I think, when you look at the last three years for us where, clearly, most of our revenue growth, which, as of year-end, you know, our compounded annual growth rate of revenue was over 120%. That has come largely through acquisitions, but this isn’t a case where we acquired market share which then collapsed on us, so to speak. These are real operating businesses. Clearly, in Canada right now, retail is a great place to be. It’s garnering superior economics relative to where upstream operators are sitting. That will likely evolve and change over time. But, really, the progression for us on M&A is a function of that commitment to a strategy on building a compliant vertical model, and, so, you saw us acquire retail.

The other challenge we face is with a NASDAQ listed entity that’s operating in the cannabis space, we face really aggressive costs when it comes to everything from D&O insurance to Sarbanes Oxley compliance, so it was just never going to be the case that a model like this could be successful with us just being a craft grower of high-quality cannabis. We needed scale, and so, the Alcanna transaction was particularly interesting in that regard, because not only did we acquire scale with a business that’s generating about $600,000,000 in revenue, but we also got a very experienced team with multiple decades of experience distributing regulated products. As you’re well aware, you know, the same regulators in these provinces are regulating, for the most part, both cannabis and liquor and so, there were relationships that came with that, retail IQ and experience that came with that, and also scale, which was important to our model (9).

PZ: Understood. Look, let’s just move on to the evaluation argument. I don’t think you had this slide in your latest – in your first quarter – investor deck, but you had it before, where you made the sum of the parts analysis and you show, you know, how attractive the evaluation of SNDL is. Can you expand on that, here, for the listeners? Thanks.

ZG: Absolutely, and this was a slide that was quite important to me, and I think it’s a good illustration of where we sit today. It’s a good reference point for valuation, whether you think the stock is cheap or expensive. And, we did include it. Actually, this time, we actually put out two investor decks. There’s a shorter deck, which I think you’re referring to, which is more of a tool for analysts, and we actually walked through that on the call, but we have the larger deck that goes into some more depth and some of the sum of the parts analysis is contained in that – in that larger deck. So, just trying to evolve our presentation materials and think of new ways to be transparent with our investors. But, I would suggest that the sum of the parts analysis really does need to be done on the enterprise value basis.

And, I’ll kind of walk through this on a high-level, and just to remind you, I’ll do so in our reporting currency, which is Canadian dollars. So, on a CAD dollar basis, we have a market cap of approximately $885,000,000. We have no debt, and unrestricted cash of approximately $190,000,000, which would reflect an enterprise value of around $695,000,000. We just provided a quarter-end Sunstream portfolio evaluation at about $560,000,000 CAD, which suggests that our operating businesses in Canada that are generating a run-rate revenue of north of $900,000,000 are worth no more than about $135,000,000, and that includes award-winning retail banners and a retail network with more than 360 brick and mortar doors, as well as significant real assets oriented towards cultivation and processing. So, we believe that our valuation today is not demanding in any regard. We’re still trading at about 75% of book value, which in U.S. dollar terms – that’s the only time I’m going to reference U.S. dollars, but on U.S. dollar terms – at Q1, our book value stood about $3.35, approximately, per share, versus today’s stock at around $2.50. So, you can use peer multiples to look at values for these assets or look at a simple measure like book value. But, I think the point is, even though our stock is up more than 80% in the last three months, we’re still trading at -we’d still need to see, you know, 33-35% move up to reach book value, which I think is significant.

PZ: Of course, and then just on that point, the $560,000,000 valuation for Sunstream, is that like the book value of the loans there? Or how do you get to the $560,000,000?

ZG: That’s correct, so you’ll see an equity investees line item on the balance sheet, that’s effectively a portfolio evaluation. We don’t consolidate the results of the borrowers, obviously, which would be highly problematic, from a regulatory and NASDAQ standpoint, but that is a fluid measure. And so, we’ve actually written that loan book down over time, accounting for multiple factors, including the dramatic change in rate environment since 2021, but also, in certain cases, the deterioration of credit quality where needed. So, we’ve written that book down by just over $130,000,000 over time, and we even have some of our performing loans that we expect to be paid back in full marked in that NAV, below par. And so, maybe worth noting that any upward revisions to this NAV over time, whether that’s due to say, change in the rate environment, or a change in a state operating environment, would have a direct impact on our reported book value, and that would be the same case whether it’s up or down (10).

PZ: Understood. Before we go on, for the listeners, you know, the approach here: I ask most of the questions, right, but I take your questions by email or through the twitter feed, right? I pay attention to that, and I try to weave them in as we go or also towards the end, but we try to address most of your questions that have come up. Just, before we go on, Zach, just one thing, I mean obviously you’ve referenced…. (Stream failed and picked back up)

Hi, Zach, sorry, apologies for that, so let’s just move on here – the discussion – I was just asking the question, and again apologies to our listeners and thank you for rejoining. I was going back to the meme issue, right, it’s a bit of a blessing and a curse, right? You had the stock up significantly yesterday; the volatility may be an issue. How do you think about that and how do you deal with that, if in any way? And then, we’ll move on. Just a brief answer on that.

ZG: Look, it’s a great question. I think that we’ve really shown how we think about that when you dial back and look at our approach that was taken the first time around. So, there’s no question that the dynamic that occurred in late 2020 and 2021 was a material driver for our ability to build the business we have today. You must take a view on the valuation of the company. The company is not the stock, etc. We don’t believe in growth for the sake of growth. We believe in protecting the per share value of the company, but in the event that we start to see, I mean – just compared to the last time around – for a cup of coffee the company was worth $6,000,000,000. So, if we see an outrageous valuation for a company that never earned a single dollar of net income or free cash flow, are we going to take advantage of that and issue equity? You don’t just have to ask it. We did it, and we would probably do it again.

I think this is different this time around, and what I would say is that when you look at some of the valuations in the space – and I don’t want to get into specific names, or be critical, but – I actually prefer our position. Again, so we’ve moved up 80% over the last three months, and we’re still trading below book value, so I think we’re in a good position. If we were standing on a precipice, where we were subject to extreme volatility, with an unsustainable valuation, it may be a great ride for certain traders, but not necessarily great for long term investors or the company itself. So, I think our posture and positioning is very attractive amidst this and again, we’re focused on the fundamentals and being best in class operators, not, you know, benefitting from potential windfalls.

PZ: Alright, thank you. So, Zach, look, we’re going to move on now and touch on the four divisions, and I don’t want to put words in your mouth, but you know, we think about four pieces, right: liquor retail, cannabis retail, the cannabis operation, itself, and then the Sunstream Bancorp, particularly in terms of the U.S. opportunity. It seems to me, of those four, the U.S. opportunity is the biggest – but, please correct me if I’m wrong – I think that’s where the investor attention is. And, we want to touch on all four of them, but am I missing something when I say that -that the bigger opportunity is there? And then, perhaps, in Canadian rec. and international, less so in retail, in liquor. And, cannabis retail, I guess – very competitive – but, again, your thoughts in terms of your portfolio there, and then we’ll delve, specifically, into each piece. Thanks.

ZG: Thanks, Pablo. I think that’s absolutely correct, and I think that’s the consensus view, largely driven by the size of that opportunity, the total addressable market, scale within individual states and sort of the wave of regulatory reform that’s sweeping the U.S. and other international markets. So, when we look at priorities in terms of capital deployment, I would say that the two stand-out opportunities that we really see today are within Canadian retail, on the cannabis side, and also, deployment of capital into the U.S. So, I think that’s absolutely a fair comment.

PZ; Okay, understood, and let’s just start on the U.S. right away, right? So, maybe, I know you cannot talk specifically about the operations of Skymint and Parallel, but just some general thoughts about what’s inside that portfolio you can share with us.

ZG: Yeah, absolutely, so the portfolio has been somewhat static after a period of quite rapid growth in the initial 12-24 months. We have five credits today. We have exited two. So, today, you’ll see exposure to Ascend, Jushi, Cannabist, and then also, Skymint and Parallel, with those last two names in the midst of restructurings, which we anticipate will be completed later in this year.

PZ: Right, understood. And then, just to be clear, and again, I realize there’s only so much you can say given litigation and issues that are ongoing, but, based on your disclosure and your slides, when you put the total revenues of SNDL plus Sunstream USA, I think you can make the argument that you are like a number four, number five MSO. If I try to, you know, subtract this and the LPs, we’re talking about, I think, about $270,000,000 in sales for the U.S operation. Does that sound about right? And, of course, if that is the number, it is significant, right? That’s the size of Jushi and the size of other mid-tier MSOs, but some color that you could add there would help.

ZG: Yeah, I think that’s a good synopsis. But, in terms of that revenue base, I’d say that that’s really just attached to the companies going through reorganization today, and would exclude the performing credits at this time.

PZ: Okay, understood. Understood. And look, I want to stay on this piece, and again, answer only what you can, but in the case of Parallel, it’s Florida, of course, very attractive – Parallel, one of the biggest operators in Florida – they also have operations in Massachusetts, which is a more competitive state, but I think they have a very strong store in Brookline. They have Texas. What happened to the Pennsylvania piece? Is that something you have a right to, also, in terms of a license, or your totally out of that?

ZG: So, the Pennsylvania exposure has been exited. That was a noncompetitive position, where an exit under a restructure actually increased the free cash flow of the business. So, that was a purely economic decision, and really, each of these set of operations has shown up in a very different state. The regulatory environment is part of that, the operating strategy would be another. But, as you point out, I mean, Massachusetts has one of the worst regulatory structures of many states, most challenging from a number of standpoints. And, as you point out, Florida has been very attractive and generated strong economic profits for a number of top operators there (11).

PZ: Right, and again, you know, and Zach, I realize, I even said you’re limited in terms of what you can say, but I mean, some of these U.S. assets could be very valuable, you know, down the line, again, especially Florida, right? But, is the idea that you build from that through M&A and become a larger MSO, or is it, you know, to look for an exit at some point and just sell to other operators? I’m talking about the U.S. operation – or the future U.S. operation.

ZG, Yeah, so given our structure today, we aren’t able to engage in plant touching activities. We have successfully deployed capital into the U.S. markets on a compliant basis with our NASDAQ listing, so that can continue to happen, again, we do have a debt free balance sheet with significant unrestricted cash, and so that’s an option. We do get asked this question a lot. The color I can provide to you is that the management teams of those businesses are working hard to improve operations and there’s a lot of low hanging fruit, some big opportunities. There’s no defined exit. We do have the opportunity to continue to grow and, potentially, kind of, climb the ranks in terms of becoming, at some point, a more meaningful MSO. But, again, getting the work right, serving consumers, and building a strong business creates optionality on both fronts. So, really, the work needs to be focused on improving operations. We are starting to get an increased volume of calls from, you know, potential or would-be suitors, or various M&A candidates that see our balance sheet and liquidity posture and experience as potentially a good source for partnership. But, there’s nothing concrete we can speak to today and would certainly disclose that if something material were in the works.

PZ: Right, and in terms of what you’ve disclosed, obviously, it’s a ring-fence structure, right? – exchangeable shares – So, SNDL, itself, keeps its NASDAQ listing, but you’re able to equitize those loans. That’s the way you explained it, correct?

ZG: Correct.

PZ: Okay, but, while we still do not have federal permissibility, and before you are able to fully consolidate those businesses, how are you able to further fund those businesses in the meantime, or you’re just not able to do that?

ZG: Well, a couple of things there, in terms of the specific question on funding, you know, that has already occurred, right? So, we’ve successfully deployed that capital. The activity, itself, and then the subsequent formation of a structure to hold reorganized equity has been reviewed by NASDAQ. So, I believe that, not just us, that other of our peers have also demonstrated that there is, clearly, an ability to deploy capital. Now, do we want to do that if it’s simply nursing cash consuming businesses? That’s not that attractive at the end of the day. It may be attractive if it was for growth purposes or strategic investment, and that’s something that we’re reviewing on an ongoing basis. But, we’re confident that should the opportunity arise that is supported by our leadership teams and board, that we will absolutely be able to execute against it.

PZ: Alright, understood. And, just to be 100% clear on that point, so, I think that’s important for people to understand that once, as you take control of the Parallel operations, specifically in Florida, right? While we still don’t have federal permissibility, if Parallel decides to expand in Florida, because of the great opportunity there, with your ring-fence structure, SNDL would still be able to participate or support in that way with fresh, new capital, that expansion? Is that true, or am I missing something there?

ZG: The only correction I would provide is you used the word, “control”, and so, that’s sort of a bright line test. So, in terms of “control”, in terms of “influence”, in terms of voting reorganized equity, none of that is permissible, right? We cannot have, say, an officer, such as myself, or a director from SNDL, serve on the boards or in the C-Suites of these companies. So, they are very much independent, and required to be so under the framework that’s been reviewed and supported by NASDAQ.

PZ: Right, look, and before we move on to the other divisions, so obviously the other loans are current. I guess, nothing to talk about there, but in the event that something happened with any of those loans, what’s your protection? Or, can you negotiate, you know, swapping the assets for another state, just in very general terms. Can you talk about, you know, your protection, your level of security in terms of collateral. Or, what are your options in case that something were to happen with the other three credits? And I’m speaking hypothetically, in general.

ZG: It’s a great question and you’ve got an insightful view, I would say. You can imagine that as some of the U.S. operators have looked to get leaner, improve their profitability, and despite some of the progress they’ve made, you still have this industry facing a high cost of capital, you know, really across the board, whether it’s equity or credit. And, so, every scenario that you would envision has been looked at in one form or another whether that’s exchanging or extinguishing debt in order to receive an asset, whether it’s restructuring of multiple credits to improve balance sheet health, push out maturities, reduce cost of capital, that’s something that our joint venture has looked at and had thoughtful conversations with borrowers over time. In some cases, we would be well positioned if there was an event of default, or an insolvency, to reorganize those businesses in a way that would be very attractive, but given the success those businesses are having, that’s potentially not a likely scenario and the return of our capital, you know, is likely in those cases (12).

PZ: Right, understood, look, and just a couple of more on the U.S, and again it’s because the focus is so much there, right. So, I think the way you explained it just now, all the options are on the table, right? You’re equitizing, obviously, the Parallel and the Skymint loans. What you do in the future, you may add to that portfolio in terms of M&A? Or you may look at (“or just take a call” sorry, hard to tell here) or will you just, actually, look for an exit? I think you’ve said that. In the event that you are looking at building a larger MSO, given the cash that you have right now and the low valuations, will it make sense for you to be doing other types of transactions in the U.S. at the moment, like, say like, again, hypothetically speaking, like brands, right? You had Canopy do an options deal with Wana, and with Jetty. Given your balance sheet and your cash, and where we are in the U.S. cycle, will it make sense for you to be adding, through options structure type agreement, other assets to that future U.S. ecosystem, or that will be too far – or that will be like doubling down and you don’t want to do that right now – at this point in time?

ZG: No, I think that is something we are actively looking at. The only distinction there is, you know, I would characterize what we’re doing as building the critical infrastructure to deliver, you know, THC oriented products to consumers. So, you’d be less likely to see us engage in some splashy transaction and paying a double-digit revenue multiple for some brand we think is going to, you know, go national and be massive, and much more likely to invest in automation, in retail expansion, and distribution infrastructure that can improve profitability.

PZ: Right, understood, look, and here, I’m now going to -I’m not going to ask you to speak for investors, right – but it just seems to me the way that the talks are behaving that right now, retail investors are giving more credit to Canopy Growth for their U.S. ecosystem than to SNDL, but your ecosystem is quite attractive, right? I don’t know if you want to make any comments there, just in general.

ZG: I’ll take that as a compliment –

-PZ: Yes, it is. –

ZG: Appreciate the comment, but I think the key, sort of phrase there, is the notion that retail investors are giving credit. I’m not actually sure that’s the case. Some of these massive days that you’ve seen in terms of trading volumes, and I’ll just look at Canopy, the real question is what percentage of that is just all high frequency and algorithmic based trading? So, some of these valuations, like, I think we can agree that over periods of time, markets can actually be highly inefficient. I think that would be the case in this sector, and there are a lot of sort of cross winds at play when it comes to the technical dynamics that drive security pricing.

PZ: Right, okay, understood, look, and then just briefly, on the other divisions, and again, I want to make sure I understood exactly what you said. You said the biggest opportunities in the portfolio right now are Sunstream – the U.S. operations, right, eventually – the cannabis retail piece, and then, I think you played down the liquor retail piece and the cannabis operation, themselves. But, maybe I misunderstood.

ZG: Look, I wouldn’t say, “downplay”, you know, we’re in the midst of a very important turn around in our upstream business, in cannabis, in Canada. I’ve been calling for a trough in the Canadian market for the last two quarters. We’re starting to see, sort of, all grades of biomass start to trade up a bit in Canada. I think we’ve seen the worst. And, so whether it’s export volume, increased consumption, disciplined cultivation practices, and of course the recent garnishment of excise by the CRA through the provincial boards. All these factors are helping to, I think, put a bottom in that market, and so, our cannabis operations segment, for the very first time since inception, put up both positive gross margins and operating income and our goals are a far cry from where we are today.

So, I don’t want to downplay, it’s a critical part of the improvements we expect to generate in the coming quarters, and we’ve also driven massive improvement in the liquor segment. We’re seeing margins today that have never been experienced in the history of that enterprise and that management team. So, getting a few things right, working on, you know, aggressively managing working capital and a number of other items that have improved results and we are certainly not done yet. We are in the middle of – the last several months, our management team, our executive leadership team has been – hard at work refreshing the strategic plan we intend to present to our board in June. And we’re still looking for ways to unlock value, and so, there really are no sacred cows here, as I think you’ve asked in the past in terms of potential spin-offs or sales, really, anything is on the table, and we’re looking at a number of options to unlock value for shareholders.

PZ: Understood, and then just if you can expand on the cannabis retail piece, right, I think Value Buds just entered British Columbia, very competitive sector, but rife for consolidation, so, probably there are a lot of opportunities there. Remind us of why you are excited about that segment – that part of your business portfolio – and what are the plans there for cannabis retail? Thank you.

ZG: Great, so I think you are very familiar, Pablo, but maybe some of the U.S. based audience is not, but, in Canada, in this moment in time, when you look at the complete supply chain, the best economics, on average, are being earned by downstream operators in retail that have scaled portfolios. And, so you’ve seen in the cases of a Nova or a High Tide that they’ve already posted positive EPS and free cash flow. The Licensed Producer set, to date, has largely been a zero economic exercise, and that is changing. I think it will change quite rapidly over the next twelve months, but there’s a lot of catch up to do there. So, it’s an attractive place to be. When you combine – when you really look at this – in a market where the only way, in a legal framework, that the consumer can access THC products is through these retail licenses, it really becomes an important chokepoint. And, you combine that with the complete lack of marketing access that our brands have in Canada, it’s even more critical to where – this will change over time – but, to date, even branded product has become largely commoditized, and in some sense, the retail banner, itself, gets more exposure than anything. So, the dominant themes in that landscape, in retail, have been, really, convenience and value, which is why the early sort of discount retailers were able to be so disruptive, running lower margins, driving higher volumes, on small footprint stores. And, of course this will evolve over time, but if you want to own the consumer relationship, you really have to do it at retail in the Canadian context.

PZ: Right, and just staying there, in terms of what you have disclosed in the past, right, the plan was to acquire, fully, Nova, right, and then later spin-off, I believe, the retail piece to your investors. That changed because the Nova deal did not go through, so how are you thinking about that going forward now? Or, is the Nova deal still on the table down the road?

ZG: It’s a great question. We don’t have a definitive answer for that. We’re looking at options today. We’ve supported Nova with capital. The management team there has done a great job. We were able to successfully help that portfolio grow to a hundred doors, with more to come. And, what’s really been interesting is the impact that our Canadian credit portfolio has had on that business. We’ve, I think now, we’ve been involved in four different CCAA processes where we’ve pulled licenses out of bankruptcy and then been able to add them to our network, and that would have been the case for this recent transaction in B.C. The issue in B.C. is that you’re capped to a maximum license holding of eight, so quite difficult to gain scale in that marketplace, but we believe that those regs. will likely change by the end of 2025, where that cap will get increased.

PZ: Understood, look, I know we’re going to be running out of time here, but just the last question on the Sunstream USA structure. Just a reminder for the audience here, in terms of what are the next steps. And, I understand that the timetable is not exact, but in general terms, right – I’m not. I mean, the restructuring still has to be completed, but big picture, Zach, if you can. Just very big picture.

ZG: Sure, yeah, so, as we’ve stated, we are now working to close these restructurings. Having the NASDAQ review completed was a really important step. We need the license transfers to occur, and a smattering of other closing conditions to be met in order to close. But, as it stands today, we expect both Skymint and Parallel to close later in the 2024 calendar year. And, these restructurings have taken an enormous amount of time, and yes, we’ve had litigation and other challenges along the way. Parallel, specifically, you would be challenged to invent a more complex capital structure than what was put together in that situation. And, as I try to remind people, if these businesses, which are still federally illegal, could avail themselves of the federal bankruptcy court regime, these restructurings likely could have been wrapped up in three to five months. In the case of Parallel, it’s been over two years, and we’re still not done. So, are we blazing trail to some extent? Yes. But, the legal cost and the brand damage involved in getting even where we are today has been nothing short of brutal, and the good news is that we can see the light at the end of the tunnel now.

PZ: Right, thank you. Look, and I’m not going to get into the subject of litigation, but in terms of what’s public information, I think Green Market Report talked about a settlement in Florida with Knight. Was SNDL involved in that, or that’s totally separate? Again, if you can answer, only.

ZG: I’m sorry, a settlement in Florida with… I’m not sure I heard you.

PZ: I believe, Green Market Report talked about some settlement between various parties around Parallel in Florida, but okay, you’re not familiar with that. So, it’s fine. I’m not going to delve into that in detail, but there was of – I’m trying to, I thought I had it in front of me, here, but in terms of two parties agreeing on something – Okay, I’m going to find it here, but, yeah, I’m sorry.

ZG: So, what I’d say here, Pablo, is, just to maybe disarm the question a little bit, as I mentioned at the beginning of the call, I walked into a situation that had multiple class actions – resolved them. There hasn’t been a moment in time over the last four years when we haven’t faced some litigious challenge from some party. When you’re dealing with restructurings, reorganizations, when you’re dealing with an industry that’s gone through and is still going through as much stress as cannabis is, the way that we refer to this is that it really is full contact capitalism. And so, this stuff is all expected. It’s par for the course, and we continue to work through it and have been successful in doing so.

PZ: Thank you. Look, I mean, again, I know we’re running out of time. I want to just read you brief questions from the audience, here, but just brief answers. How do you plan to become top five in cannabis in Canada? How do you achieve that and where are you right now? Just brief answers.

ZG: It’s a great question. Clearly, we need to improve the distribution of our branded product mix, as well as becoming – well, we’re already a trusted B2B partner for many of the top LPs, we’d like to grow that business as well – And, additionally, increase the scale of our retail network, and that will be a big driver for reaching goals to become a member of what we think in the future will be an oligopoly in Canada.

PZ: Right. In terms of international, you know, what are the plans there, and are you too late?

ZG: Are we too late? That’s a great question. I don’t think so. You know, as would be the case for most things in CPG, kind of, you know, better usually beats first. There are still a number of markets that are in very, very early phases of development. What’s really interesting, you know, from a Canadian lens, is that when you look at a new market like Germany, the majority of the flower that you’ll find in Germany is actually Canadian, today (13). So, Canada has been a very interesting export partner, and when you look at the volume of, sort of, distressed sales of biomass and flower, and the amount of flower that is sold below the marginal cost of production, that pain really accrues to the benefit of the nations that are looking for reliable, regulated supply, and I think those channels will get even more interesting over time. So, we are looking at select opportunities, but as I think you’ve helped point of through this questioning, we do have a lot on our plate, and winning in North America is key for us.

PZ: Okay, look, I’m reading here, some brief questions. Just brief answers. Someone asking about the 25% stake in Pathway Rx.

ZG: Immaterial.

PZ: Immaterial, okay. How are – I guess – How are you pleased with the performance of Valens, since acquisition, or versus your expectations, or challenges you’ve faced since the deal?

ZG: So, we’ve certainly encountered challenges. We’ve got great leadership with Tyler Robson as our President of that segment. Really, Valens was all about capability. They did not have a demonstrated track record of long-term profitability by any stretch, but this was an opportunity for us to move away from noncompetitive, high-cost grow, and lean into a team that had demonstrated great capabilities when it comes to all material product segments in cannabis, but also had a very aggressive procurement strategy. And, when you look at our Q1 results, in my opinion, it really validates the strategy to pursue and acquire Valens, because we’re seeing the benefit of it today, and I believe that’s going to grow materially over time.

PZ: Right. Somebody’s asking whether, does Valens, is it going to play in drinks in cannabis drinks. Is that a part of the strategy? I mean, just a short answer on that.

ZG: We – today – we have material market share in the Canadian beverage market. The issue is that volumes are low. It’s a very small subset of the market and product prices are too high and need to come down with increase in volumes.

PZ: Right, and, the last one, in terms of the proprietary data licensing business you have, that’s standard for the retailers in Canada, right? High Tide sells data, FIKA and Fire and Flower also sell data, or is there something unique about that model in your retail cannabis business.

ZG: A few minor, unique elements, but you are absolutely correct that that is standard practice, and an offering that most of the best retailers offer to their Licensed Producer relationships.

PZ: Right, okay, so, look, I very much appreciate your time here. Apologizes to everyone, and to you, Zach, especially, of course, because of the technical issue we had midway through there. Closing remarks? Maybe just a reminder, why people should be looking at the stock, the valuation upside? And, I guess I want – I hope I’m phrasing this question properly – You know, to someone who’s never heard of SNDL and suddenly see it in the company of AMC and Gamestop, as meme stocks, what would you tell to those people? That, I guess, it’s good they are learning about SNDL, but maybe they should do their research first, and understand that there’s a little more to the story, right, than just a meme stock. But, closing remarks? And, if you can touch on some of those things there, Zach, and thank you, again.

ZG: Yeah, first of all, thank you, Pablo, for setting up this up. I guess we made it through, even with the slight disruption. Surprise, surprise, you know, X has issues as well. But, look, what would I say? This is not a company based on hype, right (14)? We have real fundamentals. We’re a real business. We’re doing what we said we were going to do. We have enormous opportunity. We have a valuation that’s not demanding. Do your diligence. Do your research. Understand this space. Understand these companies. Understand our platform. That would be my advice.

PZ: Yeah, no, thank you, very much. Again, thanks everyone for joining and we will put, I guess, chapter one and chapter two on twitter and online and again, thank you, Zack. Thank you, everyone. Have a good day.

ZG: Thanks, Pablo.

My Thoughts

(1) Nice foreshadowing of the technical issue halfway through.

(2) I can’t overstate, personally, how much having Zach George leading the company gave me confidence in SNDL’s ability to execute on its objectives. It’s one thing to have a good plan. It’s another to have someone in place who can be trusted to carry out that plan with appropriate foresight and focus, particularly with a business as complex as SNDL has become. Clearly, this has been a team effort and the whole team deserves credit for the turn around, but Zach’s leadership deserves special attention.

(3) So far, so good on both of these pillars. SNDL is the only cannabis operator in Canada with vertical operations at scale, not to mention they have the most retail doors of any retailer when including the franchise locations on Spiritleaf. As for the investment business, SNDL, through Sunstream, is going to have exchangeable shares of both Skymint and Parallel before the year is out, as well as three other performing credits in attractive companies, Ascend Wellness, Jushi, and The Cannabist, which at the very least should result in significant capital flow back to SNDL/Sunstream right as they will want it for expansion as deemed appropriate.

(4) It seems a lot of people are just now starting to catch on to the extra benefits of this transaction, particularly in regard to the liquor part of the business. But, Zach goes into detail about this later.

(5) This was another transaction that was not seen particularly positively by some curmudgeons in the space… But, is now proving to be a prescient move. More about Valens later.

(6) Despite what the award-winning Green Market Report says.

(7) If only quarterly press releases were public, so that “journalists” could report accurately… Oh wait (See number 6).

(8) I believe the first company coming up maturity date wise is Jushi toward the end of 2024.

(9) In my opinion, this is another misunderstood and underappreciated aspect of the business and strategy. I sometimes hear it phrased as, “You’ve also made a move into liquor, like other companies that are diversifying…” And while it is diversification, it’s still regulated product retail, which is an often-overlooked detail. Being able to acquire an amazing, and scaled, back of house all at once when talent acquisition was particularly difficult/competitive was a great move.

(10) The most obvious catalysts, so to speak, would be potential legalization of cannabis in Florida, as it is on the ballot this year, as well as both rescheduling and/or SAFER banking or some other banking bill.

(11) You can find much more information about Surterra’s, part of Parallel, improvements year over year both from my last post on my blog and my mostly weekly Linked In posts covering the topic.

(12) This fact really shows the true genius of the Sunstream plan. Through careful selection and forward-looking thinking, they were able to set themselves up for a win-win situation in the U.S. down the road while their competitors, for the most part, were overpaying for assets and acquisitions in Canada and the U.S. in an effort to have headline grabbing PR statements.

(13) Stay tuned for more information on this. SNDL is going through the process of re-certification that should be finished up in the summer. From what I understand, some SNDL products are already being sold internationally through wholesales sales with multiple well-known Canadian LPs, with an export deal to Israel through IMC being public knowledge already. It will be a boon to the cannabis operations once they are able to cut out the middleman and make those sales directly.

(14) I know some investors are always looking for more bombastic and regular PRs, but I appreciate SNDL’s focus on using PRs for important updates and leaving smaller updates to the various social media accounts.

Thank you to everyone who took the time to read this all the way through. I hope this has been helpful for you!