SNDL Inc

F:VY4

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to Sundial Growers' Fourth Quarter and Fiscal Year 2020 Financial Results Conference Call. [Operator Instructions] Yesterday afternoon, Sundial issued a press release announcing their financial results for the year-end and fourth quarter ended December 31, 2020. This press release is available on the company's Web site at sndlgroup.com and filed with 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 Chief 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. Please go ahead.

[Zach George, Chief Executive Officer]

Thank you everyone for joining us on our full year and fourth 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. Our top priority remains the health and safety of our employees. 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 disruption or operations related to COVID-19.

Sundial recently completed its first two years of commercial operations and I celebrated my first year as CEO in February. As I joined the Sundial team in early 2020, we faced a number of internal and external challenges, including operational difficulties, excess leverage, inadequate cost control, a lack of focus on our core value proposition and rapidly evolving industry conditions.

During 2020, the Canadian market experienced rapid change. Consumers chased THC potency levels as a quality threshold, which resulted in an acceleration in price discounts, along with an over saturation of low quality supply in the market. This dynamic has forced Canadian licensed producers including Sundial to pivot to meet evolving consumer demands. The focus on value and a race to the bottom on pricing in several segments has impacted the path to profitability across the industry and Sundial has not been immune to this dynamic.

As a result, we redefined our strategy and made material changes to position Sundial for improved performance. We successfully restructured the entire organization by repaying all outstanding debt, improving our operating practices and targeting a sustainable cost structure with a simplified and focused business model.

The modular nature of our facility allows us to quickly readjust and deploy our capacity as market conditions dictate. While our financial strength has improved materially, we still have significant work to do in our core operations to achieve the goals that we've established for Sundial and our shareholders.

Sundial's last two quarters have been negatively impacted by the complete repositioning of our cultivation practices as we focused on data driven best practices to drive quality and potency results that meet evolving consumer preferences. While we are currently seeing many of our Canadian peers move away from cultivation, partially or entirely, due to their inability to deliver consistent cultivation outcomes, Sundial has renewed its commitment to cultivation in our modular indoor facility. We view this core competency as an opportunity for differentiation going forward. We are excited to see progress and these changes have accelerated improvements in quality, potency, yield and cost.

During Q4, we saw the highest average potency in terpene profiles at harvest in Sundial's inception. We also just pulled our highest ever potency harvest last month. In short, we believe that the dramatic changes we've made to our cultivation practices are starting to show concrete results and we are determined to continue to improve to meet consumer demand with manufacturing like consistency. We will continue to create strategic partnerships with retailers and increase points of distribution in key markets, including Ontario, British Columbia and Alberta. Andrew will provide more details on this progress in these areas momentarily.

As a result of a number of recent capital focused initiatives, Sundial is currently debt free and has an unrestricted cash balance north of 700 million. We continue to explore strategic opportunities to deploy our capital with a focus on maximizing shareholder value. A lot of you are wondering how we will use that capital. We have identified and executed on a number of investments and continue to evaluate a robust pipeline of opportunities, maximizing returns on deployed capital and corporate stewardship are key priorities for our board and management team.

Our investment program has yielded positive early results. To-date, Sundial invested 58.9 million late in the fourth quarter and a further 31.5 million subsequent to the end of 2020 in strategic cannabis related portfolio investments. We've already generated tax efficient realized investment income and fees subsequent to year-end of more than $9 million.

Sundial's high-quality cultivation and processing facility combined with our team's broad consumer packaged goods experience and strong financial position, reinforced management's confidence in our path to sustainable profitability. Thank you all.

I will now pass the call to Jim for commentary on our financial results.

[Jim Keough, Chief Financial Officer]

Thank you, Zach, and good morning to all who are listening in. I'd like to remind everyone that all amounts that I mention this morning are denominated in Canadian dollars unless otherwise stated.

Let's start with a review of the improvements that we've achieved in our liquidity and capital structure. In early 2020, we started the process of a complete financial restructuring, which was initially delayed by the impact of COVID.

In the second half of the year, through a combination of a number of cash repayments, asset dispositions, equity and equity-linked issuances and debt for equity conversions, Sundial eliminated aggregate debt principal of $227 million and exited the year completely debt free.

The December 31, 2020, Sundial had $60.4 million of unrestricted cash on hand and at March 15, 2021, we had approximately $719 million of unrestricted cash on hand.

To summarize our capital transactions, in the fourth quarter of 2020, we issued 712 million common shares for gross proceeds of $161 million under at the market equity programs and warrant exercises. We also closed strategic cannabis related portfolio investments of $59 million. And then subsequent to year end 2020, we've achieved the following. We issued an additional 741 million common shares for gross proceeds of $695 million under at the market equity programs, registered direct offerings and warrant exercises.

We entered into additional strategic cannabis related portfolio investments of $31.5 million. The portfolio investments generated approximately $9.3 million in realized gains, interest income and fees in the first quarter of 2021 to-date.

We regained compliance with the NASDAQ minimum bid requirement based on closing bid prices for our shares. And this week, we entered into an exciting strategic capital partnership with the SAF Group focused on cannabis related opportunities and investments in Canada and internationally. The first mandate of the joint venture is a Special Opportunity Fund with commitments from third-party limited partners and with an admission initial commitment of $100 million by Sundial.

While the share issuances and conversions of debt into equity have resulted in dilution, with 1.6 billion currently issued in outstanding common shares, it has seen the company transform from a precarious financial position to a position of financial stability and strength, including the ability to evaluate and execute on a robust pipeline of strategic opportunities through deployment of our meaningful cash reserves.

Now let's turn our focus to operating results starting with revenue. For full year 2020, our gross revenue increased by 10% when compared to 2019 to $73.3 million. In Q4 2020, net revenue for the three months ended December 31 increased to $13.9 million, an 8% increase over the third quarter of 2020 net revenue of 12.9 million.

Branded net revenue increased by 15%, from Q3 to Q4 to a total of $11.4 million. The corresponding shift from unbranded sales resulted in lower wholesale net revenues, which were down 18% to $2.4 million in Q4 2020. Branded net revenue represented 86% of total net revenue for the quarter.

Our inhalable products continue to be well received by the recreational cannabis consumer. Our dried flower and pre-rolls which comprise the majority of our recreational sales grew to $12 million for the quarter. Gross revenue from vape cartridge sales was $4.3 million, representing a 19% increase over the previous quarter.

Average gross selling price per gram equivalent of branded products, net provisions was $4.14 per gram in the fourth quarter of 2020, compared to $5.53 per gram in the prior quarter. This is reflective of price compression across the industry in response to supply conditions and consumer shifts to value segments.

Cost control has been an important focus for Sundial in 2020. And we realized meaningful cost savings due to realignment and right-sizing of our operating model, which is delivering substantial sustainable cost savings. In the fourth quarter cash used from operations decreased by 63% to $12.2 million when compared to the previous quarter.

General and administrative expenses were $6.5 million 9% lower in the fourth quarter than the previous quarter. For the full year 2020, we reduced our G&A expenses by 18% to $32 million, compared to 38.9 million for the previous year. The decrease of 6.9 million was mainly due to reductions in salaries, wages and consulting fees from workforce optimizations.

While we continue to focus on cost discipline throughout the year, we did ramp up investment in our brands, sales and marketing expenses for Q4 were $2.3 million, compared to 1.1 million in the previous quarter as we invested in our brand portfolio to meet consumer preferences. Sales and marketing expenses for 2020 were 5.7 million for the year, compared to 8.1 million for the previous year. The decrease of 2.4 million was largely due to a pause in certain marketing initiatives during constrained cash circumstances early in the year.

In Q4 2020, cash cultivation cost per gram sold was reduced to $1.11, a decrease of 6% over the previous quarter, reflecting continuing cost reductions and efficiency improvements. We recorded an adjusted EBITDA loss of 5.6 million for the three months ended December 31, 2020, compared to a loss of 4.4 million for the three months ended September 30, 2020 due primarily to investment in sales and marketing expenses and foreign exchange changes offset by higher net revenue.

Adjusted EBITDA from cannabis operations was a loss of 26.1 million for full year of 2020, compared to a loss of 30.1 million for the previous year. The decreased loss reflects reduced G&A expenses related to cost reduction initiatives during the year partially offset by lower net revenue and the impact of the production of higher cost product categories.

Adjusted gross margin before inventory impairment and fair value adjustments for the three months ended December 31, 2020 was 3.2 million, compared to 2.6 million for the previous quarter as a result of higher revenue and improved margin mix. Adjusted gross margin for the year ended December 31, 2020 was 9.2 million, compared to 16.8 million for 2019. This decrease in gross margin was mainly due to reduced pricing and a higher cost product mix. Sundial continues to analyze and adjust its operations to optimize margins.

We fully completed construction of our cultivation facilities in Olds in early 2020 and our processing facilities in the latter half of the year and have been limiting capital expenditures to essential expenditures and maintenance capital. Total capital expenditures in 2020 were $3 million. We have budgeted $5.7 million in capital expenditures for 2021 related to processing automation, minor facility improvements and maintenance.

Now I would like to invite Andrew Stordeur, President and COO of Sundial to provide some further remarks related to operations.

[Andrew Stordeur, President and Chief Operating Officer]

Thank you, Jim. While the industry will continue to see volatility, we remain committed to cultivation excellence is Sundial's core competency. Our continued focus on inhalable products provides the best opportunity for long-term sustainable growth.

Let me update you on some of the progress Sundial made in 2020 and the fourth quarter. At the beginning of the year, we announced that we would change our sales mix strategy and focus on driving better market penetration with our brand new product offering relative to the wholesale channel.

We made good progress in this area and increased our branded net cannabis sales to 75% of total cannabis sales in 2020 from only 20% in the previous year. A crucial change made in 2020 included the restructuring of our cultivation processes. To deliver on our small batches scale promise, we need to continue to develop capability and competency in cultivation. Several of our competitors have recently divested from cultivation, because it's challenging to do it consistently and at the same time continue to evolve product offerings that the consumer wants. We've made significant progress improvements in cultivation over the past 12 months, we still have work to do. I'm proud of our team's accelerated improvements in quality, potency yield and cost throughout 2020.

Since our cultivation restructuring efforts started; quality metrics have consistently improved. In the first half of 2020, our average weighted potency was in the mid to upper teens as we adapted to consumer preferences. In the last three months of the year, we achieved the company's highest weighted average potency in its history above 20% THC, and we still continue to see increased results.

In order to consistently deliver on our Top Leaf brand promise, we made the decision to improve key quality processes, including hand dried, hand manicured and only hand bottling our flower offerings. We've also recently completed R&D on several new cultivars that we are excited to bring to the market in the second half of 2021.

To ensure we continue to provide the highest quality products, our quality assurance team has recently begun performing potency testing on our cannabis plants during their growing cycle. We anticipate this will help identify the sweet spot for harvest, ensuring consumers get the freshest and highest quality products available.

We have also simplified our supply chain and rationalized our SKUs across all brands and formats. Given the current market dynamics, we took a proactive approach with customers to limit SKU proliferation and maximize shelf space and way to sale with an optimized portfolio approach.

We went from more than 100 SKUs at the beginning of 2020 to less than 40 SKUs at the beginning of this year. The company continues to develop a robust innovation pipeline.

We continue to diversify our product mix and ramped up our pre-roll formats or we increase production by over 200% in the fourth quarter and into 2021 to meet consumer demand. We also added solventless extracts in the fourth quarter 2020 with the launch of our Top Leaf bubble hash. We entered into a license agreement with simply solventless concentrates for the processing and manufacturing of a suite of solventless cannabis concentrates.

Finally, we added edibles to our portfolio in the fourth quarter 2020 through a sales and distribution agreement with chocolate and Alberta based chocolatier. Industry wide price compression remained a challenge headwind for our business in 2020. We took the decision to monetize a portion of our inventory at lower prices in order to right size, the composition and mix of our portfolio products. We continue to focus on competing in the premium segment and generate greater margins.

To maximize our product mix and deliver better value to the consumer. We are going to be purposeful on how we engage in the ramp of price compression that continues to challenge profitability in the industry. This may lead to lower top-line growth in 2021. But a stronger product mix supporting our beliefs that higher quality products that deliver against our brand promise will be preferred by consumers and customers in the long-term.

Now in the first quarter of 2021, we are seeing a softening industry in key provinces. This can be attributed to both retail sales and provincial boards managing inventory and SKU rationalization efforts. We do anticipate this dynamic to impact most of the Canadian industry license holders.

In the first half of 2020, we had to curtail our cultivation harvesting activities to match market demand. While this decision certainly impacted our business results, we were able to increase our throughput while also reducing our costs. We increased the number of cases delivered on a monthly basis from 12,853 cases in January to 24,847 cases in December of 2020.

Cultivation and production costs were reduced by 75% from 22.4 million in the fourth quarter of 2019 to 5.7 million in fourth quarter 2020, compared to a 48% reduction in grams harvested in the comparative quarters.

We continue to increase our investment in our portfolio brands to targeted sales and marketing initiatives. As a key priority for us include increasing points of distribution to facilitate consumers' access to Sundial products, we are currently in the process of scaling our own internal sales force for the majority of the provinces, while we run a broker model in Quebec.

Given our management team's expertise in developing route to market capability, we are betting on our ability to drive sustainable ROI through breadth and depth of coverage through our in-house sales expertise. We are already seeing progress in this investment as we drive distribution along with price and promotion learnings with key customers across the country.

We certainly had a transformative 2020 on foundational areas of our operation. These changes improvements take time. And we're far from done on several fronts. Challenging the expected and learning from doing supports a culture of continuous improvement at Sundial. While we understand, we still have work to do on driving a sustainably profitable business; we remain encouraged in the progress made this past year.

With that, I'd like to turn the call back to Zach for closing remarks.

[Zach George, Chief Executive Officer]

Thanks, Andrew. This past year was a remarkably difficult year and not just because of the pandemic. Sundial had to make many difficult decisions under new management in 2020 to ensure survival and greater stability. We're now able to lift our heads up and think longer term and strategically versus last year when we were largely forced to play defense. It's been a privilege to work alongside the Sundial employees whose dedication and commitment has never wavered. Together, we have made tremendous progress. I think our team for their efforts, I thank our customers for their trust and I thank our shareholders for their continued support. I believe that Sundial is better positioned for success today than at any time since inception. Thank you for joining us today. And please stay safe. I'll now turn it back over to the operator for the question period. Thank you.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tamy Chen of BMO Capital Markets.

[Tamy Chen, BMO Capital Markets]

Zach, I was wondering if you could elaborate a bit more on this robust pipeline that you referenced when it comes to additional strategic investments, whether it's types of businesses or structures of the agreements or geographies and markets that you'll have in this pipeline? And then, broadly speaking, just wondering why, Sundial kind of taking this bit of a additional strategy to kind of embark on these additional investments and what is kind of the end game or thinking on the strategy?

[Zach George, Chief Executive Officer]

So we're not going to give a lot of in depth commentary on the specific transactions that we're working on today. But what I can tell you is that generally speaking, the pipeline that we're looking at, falls into two main categories. One would be more vanilla M&A. And the second would be direct or structured investments. And in terms of your question as to why we're deploying capital in this manner? We view the cannabis sector, not just in Canada but internationally as well as a sector where capital is in certain cases being significantly mispriced. And so any sector where you have the banking community, either on the sidelines or not participating and inefficiencies within the credit markets, you tend to see very interesting and attractive risk adjusted return opportunities. And we're very attracted to these opportunities and started to execute in capital deployment in that direction.

[Tamy Chen, BMO Capital Markets]

Understood. Okay. And my second question is just noticing this quarter also has some inventory write downs. And that's been occurring through the past year. So I'm just wondering why the ongoing write downs, what are they a result or is it just ongoing market pricing changes and resulting in you taking continued write downs? Thanks.

[Zach George, Chief Executive Officer]

Yes. So first of all, let me just say that our team is working aggressively to bring greater efficiency to our cultivation processes and outcomes. And so number one, we see this historic performance as unacceptable. But we have been operating against the backdrop where, for example, if you look -- if you rewind to the beginning of 2020, flower with potency, in the mid teens would move in the marketplace and was quite liquid. And with the changing consumer preferences and this potency chasing behavior that we've witnessed, by the end of the year, product that even at 20% potency, would be less liquid and be very difficult to move through retail.

So we've been making aggressive changes to improve outcomes and ensure that we're delivering and delighting consumers. And that has led to us having certain product that needed to be impaired from an accounting perspective, to the extent that our terpene profiles and potency on average harvest, increase as they have those write down should diminish substantially. And it's a key focus for the team going forward.

You also have pricing impacting that dynamic as a lever. And, as you will know, the value segment is really on its way to effectively sort of blacking out the Sun in the space north of 50% of the industry in Canada's in the value segment. And we continue on a weekly basis to see prices dropping. And so for example, we saw prices over the last year, for 20 gram value packs, for example, in certain instances dropped by 50% over the course of 12 months. So that's been a dynamic that's also forced us to take another look at our inventory evaluations.

[Operator]

Our next question comes from Vivien Azer of Cowen.

[Vivien Azer, Cowen]

I wanted to follow up first on the pricing question, please. So clearly price deflation in value sounds like there's even price softening at a 20% THC potency level. So is there any potency level where we're pricing is holding up?

[Zach George, Chief Executive Officer]

Andrew, do you want to take that?

[Andrew Stordeur, President and Chief Operating Officer]

Yes. Hi, good morning, Vivian. Thanks for the question. Yes, look, I think it's moved very quickly. So exactly, mid teens at start of the year, I think you're seeing 20% midway through last year. And then as you get into the back half of 2020, 23%, 24% to play in that premium segment, is really where the markets going.

So I think the question that we're trying to answer right now, too, is what is the unconstrained demand when you think about potency and you think about the premium segment value is moved so quickly, it's such a large part of the mix right now, by retailers, by boards, it's hard to get a grasp on looking at that premium segment on a pro forma basis, but we do look at other industries other more established markets in the U.S. And we're seeing that potency will obviously start to level off at some level. And we will see premiums start to play its role and we forecast to be 30% to 35% of the industry segment over time, certainly in the area we play in on inhalables. But potencies moving fast anything 23, 24 right now and above is doing very, very well. And I don't see that stopping anytime soon.

[Vivien Azer, Cowen]

Okay, understood. And given the restructuring, which is obviously very appropriate, your cultivation practices. Do you have a sense for when we might see a revenue base that looks a little bit more like you were doing call it 2Q of '20, obviously, the mix being very different. How much longer do you need to continue to kind of vet your cultivation practices dial in that data driven approach to actually really scale your revenues?

[Zach George, Chief Executive Officer]

Yes. Look, I'll take that. I think you said a key point there, right, I think on mix, and I think we've been pretty consistent on our focus in 2020 was to make that transition to branded sales versus wholesale. And we did this, 75% of our total revenue mix was in branded, versus just 20%, in 2019. So when you're looking at year-over-year comparisons, not all revenues created equally. And I think that the key one Vivien, if I was to kind of point you in a direction around how we're thinking about it, is that branded product sales grew exponentially, actually, by 410% when you think about 2019, versus 2020, that's solid. And that we're seeing the benefits of that from penetrating the market. And we're also mindful of the fact that, as I stated, not all revenue is created equally, so got to be really mindful of not getting into that rat race, when it comes to price compression and contributing to the consistent price deflation that we're seeing. So we're, we're going to continue to stay focused on the premium segment, the core segment, we see value in that over time, certainly cultivation and potency is going to help drive that we've also, significantly invested in our in health sales, breadth of coverage, which I mentioned in my opening remarks. So we're putting the elements in place, foundational to that is cultivation excellence. And we feel pretty confident about that. But I just think that mix piece that you mentioned, is super critical to understand the transformation we've made from '19 to '20. And we're going to continue to do that.

[Vivien Azer, Cowen]

Great. And I'll try to squeeze in one more on because you mentioned the sales force. So appreciate your confidence in management competencies around being able to run an internal sales function. We've seen some of your competitors actually move in the opposite direction. Are there KPIs that you're monitoring, so there are that would perhaps inform a move away from that? Because it tends to be certainly more SG&A intensive to run your own sales operations? Thank you.

[Jim Keough, Chief Financial Officer]

Great question. Look, we pretty much went through 2020 with a fairly light retail approach across the country. We are running a hybrid model. So we do run a broker model in the province of Quebec. We feel that's appropriate. We've seen good progress in that region. And then we decided for balance of English candidates to run our in-house. And look by far the number one metric we're looking at is distribution. We're looking at, how do we cover the retail expansion happening in key markets like Ontario. So, we've got tremendous experience in-house on ability to drive world class field sales management. And we have every intention to doing that. And we view it as an investment not cost and that investment needs to pay out. But put it in perspective, over the last, probably four weeks here, we've increased our breadth of coverage across the country in our in-house sales force by close to 50%. So we're anticipating, we are going to be able to add value to retailers over time here that we just have not had a chance to get to back last year. So we're excited about that. We're optimistic and we are seeing some very good initiatives with regards to distribution in the early part of 2021 here.

[Operator]

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

[David Kideckel, ATB Capital Markets]

Congrats on the quarter. I want to go back to the strategy here, considering Sundial's a licensed producer and also think some of the pretty impressive deals you're striking right now. We're considering this as also an investment vehicle, which is arguably a big part of the reason what the disconnect between valuation and softness. So I'm wondering Zach and team, if you can maybe just, what's stopping short of getting guidance? Can you give some goalposts to us for how do we look at this because in our opinion, the street is just not taking your investment vehicle side of the business into account to attribute value? So any color you can give, I think, could help us how we understand how you're moving forward with that strategy. Thanks.

[Zach George, Chief Executive Officer]

Thanks, David. Look, we'll do our best to answer the question. I would just say that as you are well aware, there's no shortage of bold claims and promotional statements that have been made in this industry historically. And we're working really hard to quickly get to profitability. And let the results and fundamentals speak for themselves. I can tell you that we expect to be able to update you and the rest of the market on some of our initiatives in the coming months, even within the next 30 to 60 days.

So we have a quite a bit going on at Sundial. When you point to valuation, I would just make two simple points. Clearly, there is a lot of interest in the growth of the sector, in Canada and beyond. So that's certainly impacting equity valuations across the board, not just for Sundial. And then additionally, when you think about our capital resources and cash balances, I would make the statement that if you look across the space and you look at where financings, both debt and equity are being struck today, you can quickly reach the conclusion that $1 of cash in this industry is actually worth more than $1 of cash. So I think those two factors in some combination are impacting the broader market and investors views of Sundial, but don't want to comment beyond that.

[David Kideckel, ATB Capital Markets]

Understood. Thanks for the color. And then, maybe I can just ask a question as well about one of the PRs you made this week with the JV and with the SAF Group as well. But specifically on the SPAC strategy here, given that some of their capital in the press release indicated that some of it will go towards the SPAC, I'm wondering which sector with or sub sector say within cannabis are you looking at? Is this relevant for a specific geography? And is this just one of many kind of your SPAC strategies that we can expect? Thanks.

[Zach George, Chief Executive Officer]

Sure, David. Just to clarify, working in reverse order. So we were not going to comment on the SPAC until we have appropriate filings made. So we've referenced it as a potential opportunity. And we're very clear about that in our public statements. And you should think about that as very separate and distinct as an opportunity from the Opportunity Fund, which we are launching currently. So what you have is a joint venture where the operating experience of Sundial and its principals have partnered with very deep and seasoned private equity experience at the SAF Group to tackle a number of initiatives in the space. And we look forward to updating you on those initiatives with much greater detail going forward. But in terms of this Opportunity Fund, we will be a lead investor, we will help manage the general partnership. And we expect to see, fee paying third-party capital in limited partner forum join us in that fund for those initiatives.

[David Kideckel, ATB Capital Markets]

Understood, okay. Thanks for the color. And if I can just squeeze one more quick one in here. Just back to your revenue mix for the quarter we're looking at the numbers here about 25% of overall revenue was from vapes, obviously, higher margin than dried flower, which was about 70% product mix. Just wondering, do you expect for the next quarter? Is this a similar revenue mix here? Or do you expect for example, vapes to increase share or decrease for that matter? Thanks.

[Andrew Stordeur, President and Chief Operating Officer]

That's a good question. Andrew, here, I'll just address the vape question. Look, inhalables obviously is a key part of the strategy we've been pretty clear on that. We were early to the game, laid-in in 2019, when kind of phase two came out. And we came out with a really great offering on vape under our Top Leaf and Sundial brands. So we're really happy with, the first part of that launch. And we saw good traction in the mix there. And you might say from a mix standpoint, it is accretive for us.

That said, there's been a tremendous amount of competition coming into the space again, vape is like any of those segments were in, it's facing a lot of new industry players. And they're differentiating by price and I think that's going to create a bit of a headwind for us, in regards to how we continue to compete at the prices in the value equation for the consumer that we're looking to obtain. And I don't see that stopping, because, we're seeing, again, more entrants coming into that space. But here's a point I would make, as we think about, the next evolution of vape. We do have some very exciting innovation that we're looking to launch in 2021 in vape segments and we've done what we need to do with regards to competing in value with one gram vape, but it's certainly not a key focus that will be lying primarily with Top Leaf and Sundial. And we're currently in two formats of extraction on that vape, which is ethanol and CO2. And as you know, there's certainly more opportunities there, certainly on the hydrocarbon side, to provide further differentiation. And we intend to do that which should drive better value for consumers and obviously be accretive to our margin mix. So excited about that offering, but certainly competitive early part of 2021, we're seeing that in the numbers.

[Operator]

[Operator Instructions] Our next question comes from Doug Miehm of RBC Capital Markets.

[Doug Miehm, RBC Capital Markets]

Couple of questions. When you think about the invested capital between the two areas let's say, between M&A to build the business, and then, I guess what you call your investment side of the business? What do you expect that the mix to be there?

[Zach George, Chief Executive Officer]

Doug, that's a great question. We're working actually on a number of live M&A files. There are elements of timing and a lack of certainty on execution, which could cause a swing in that answer by hundreds of millions of dollars. So this is not something that we have set in stone or budgeted out We are underwriting and chasing opportunities that we think are highly strategic for Sundial. And the timing and quantum ultimately, is something that we're not going to give guidance for today.

[Doug Miehm, RBC Capital Markets]

Okay. When you think about what you're growing today and your ability to get to that 23% to maybe 25% potency, can you tell me what percent of the crop that you're growing is getting to those levels? Because one of the things that I think we should all be concerned about is, are we going to see regular write offs that actually should be included in your cost of goods if you can't meet the 22% or 23%?

[Jim Keough, Chief Financial Officer]

Yes. I'll take that. So you're right, you're right, Doug, is something -- it's a key focus for us, with our core operations. And as we've said, we've made tremendous progress in terms of our -- the potency of our average harvest, particularly, starting in the fourth quarter. We've also brought in some new genetics that were -- that are showing very, very promising results. But we are working to avoid some of the poor cultivation outcomes that plagued the company earlier on. And it's absolutely essential to getting our cost down and ensuring that we are not wasting capital when it comes to our cultivation activities. So it is a key focus and it's a great question.

[Doug Miehm, RBC Capital Markets]

Yes, but can you give us an idea that is half of your growth not meeting the sort of hurdle, or is it a lot lower than that?

[Jim Keough, Chief Financial Officer]

Yes, I would say in rough magnitude at our worst in early 2020. And you can see this through the impairment analysis, yes, roughly half at our worst. No, was not suitable, not meeting the objectives that that our consumers have in terms of product, potency, but that number has been reduced and continues to be reduced quite materially. And we're going to be able to talk more about that in the coming quarters. But given the fact that we just revamped all of our cultivation practices in the back half of 2018 that number is still improving and is not static.

[Operator]

Our next question comes from Shaan Mir of Canaccord Genuity.

[Shaan Mir, Canaccord Genuity]

The first one I got here is just on the market share. So it's declining again for a second straight quarter 2.7% in the quarter and that's down from above 5%, two quarters ago. So you're showing strong sales momentum on the vape side. And from prior commentary, it's pretty obvious that the market shift and value is a key driver here. And so keeping in mind Andrews commentary that, focus will be on the premium segment going forward. I was wondering if you could provide any commentary on how you see that market share shaping up in the short-term over 2021? And when internally, do you expect it to start ramping back?

[Andrew Stordeur, President and Chief Operating Officer]

Andrew here, I'll take that. So maybe I'll start with a bit of the industry kind of view here. And then I'll kind of filter it down into how we're looking at that for market share for Sundial branded products. So, look, I think when you look at the industry, when you look at an annual compound growth that continues to move in the right direction in this country and that's good. But it's like any other CPG business. There's seasonality and there's other headwinds and tailwind that are going to impact industry and rightfully so impact, the ability for some producers to penetrate the market.

So, when I look at Q1, it's soft across most provinces, Ontario, I was just on the phone this week with the Ontario leadership team and their performance is minus 17, industry versus December, February, March are showing slight growth, rolling 90, but coming off a very small base. And, they've been obviously having stores closed since November of last year. BC showing preliminary industry numbers at about minus seven decline in February, March, -- January, February in Alberta's, double-digit decline on the industry.

And I tell you that because I think it's important to understand that, you can still grow market share in a declining industry and in some of the markets, we're playing in certain some of the key markets, we weren't winning, we're seeing some prelim results that would tell us, we're moving in the right direction there. But, I think it's going to continue to be very, very competitive, I think we're at a point in the industry right now, where, you're having seven to nine new license holders being issued by Health Canada week. You've got, 100 LPs sitting in the province of Ontario, you've got a number of 200 coming in this year at some point that they're stating. So it's going to continue to be a big challenge to grow market share. But, I'm really confident in our ability to, now that we're investing in our sales and marketing, we are focused on a commitment to cultivation, we have some great brands, we have some great relationships with retailers.

And I'd also be mindful of when we're looking at these data sets, whether there are headset, or whether there are some proprietary retail platform that a retailer is putting out there that, you guys are looking at. There's other factors that are impacting what LPs are doing well on those retailers.

So from a holistic side, we're confident that we can grow market share, we're seeing good signs of that, there's certainly going to be high levels of competition. But it's a focus for the group and we're making the right investments into how we want to do that. And, we'll see that momentum continuing in 2021.

[Shaan Mir, Canaccord Genuity]

Thanks for the color there. And then, the second one was just on a brief update on what's happening with the chocolate arrangement. So have any products at the market there and if there's any commentary on how they've been received? And also just considering all the moving parts that are in the story now, can you speak to any pipeline or desire for adding on any other contract manufacturing partner?

[Andrew Stordeur, President and Chief Operating Officer]

I will take that again. So, last year we ended up signing two contract manufacturing partnerships. One as you mentioned with chocolates, whose local Alberta chocolatier makes phenomenal products. And we've seen consumer off take on that in the province of Alberta, do really well we launched that late last year by AGLC. And we're getting ready to put that into other markets this year and we're excited about that. So we'll continue to see good products being released under that partnership. There's some very cool innovation coming along those lines as well that chocolate is working on and we're excited to be working with them to bring those two Canadian consumers across the country.

We also signed a licensing arrangement with a company called Simply Solventless, out of our Rocky View facility and that's very much focused on concentrates. They're specialized in that. And we're going to look at the playing field, obviously, indeed investments that we made as well, in the early part of this year. And so we're going to continue to kind of look at the country around opportunities, but I would mention, our core competency will still remain largely in that inhalable focus. And we're very dedicated to cultivation being the foundational piece of that and we'll look at those opportunities that come up and they're certainly going to be more moving forward.

[Operator]

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

[Zach George, Chief Executive Officer]

Thank you. And thanks to everyone for joining our call today. Take care and stay safe.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.