Summary
I had a chance to meet one-on-one with Dr. Anthony Holler, co-founder, Chairman and Chief Executive Officer and David Negus, Chief Financial Officer of Sunniva Inc.
The California campus is coming along well. Plants should be in by June/July and the first harvest should commence by September/October. The initial oil conversion testing has had excellent reviews.
The Canadian Federal Government arm representing the Oliver Indian Band is six months late in delivering a contract. To mitigate risk, Sunniva is doing due diligence on an alternative location.
National Health Services has 95,000 active patients suggesting market penetration of around 35%. NHS growth continues and made a significant contribution to revenue last year.
With the shifting political winds blowing in favor of cannabis recently, Sunniva sees a major opportunity in California, which it plans to go after in an aggressive manner.
On April 27, 2018, it was my good fortune to interview Dr. Anthony Holler, Chief Executive Officer, Chairman and Co-founder of Sunniva and David Negus, Chief Financial Officer of Sunniva (CSE: SNN) or (OTCQX:SNNVF).
Here are the highlights from that meeting:
An Update on California Operations: The structural construction at the California campus at Cathedral City is virtually complete. Work has commenced on the internal infrastructure. Propagation is expected to begin in June/July. Since crops take approximately three months, the first harvest should be ready in September/October.
The background is California was the wild, wild, west of cannabis in the United States. They are where Canada was around five to seven years ago. In the catch up process, some odd things have resulted. California approved medical marijuana many years ago and never required product testing. It was medicine but they didn’t require testing. Now that adult use cannabis is underway, they require testing. Random testing by various parties in years past have shown that around 85% of the cannabis is contaminated.
That’s a major advantage to Sunniva. We are going to have clean, pharmaceutical grade product, which explains why people want to distribute our product and others want us to provide white label product for them. So we are going to focus on supplying these people and building our brand as a trusted source of clean product.
With respect to the way we have structured out business, you must begin with the knowledge that the California regulations were set up to protect the small growers for five years. So the maximum size of a grow area, for example, is 22,000 square feet. Sunniva has made “convenience arrangements” with a group of tenants that will employ Sunniva to operate their grow rooms and sell us back their output. We identified the individuals, did the paperwork, we will provide all the services and buy the product when it is grown.
We supply them with a propagated plant of a certain strain and we take back a mature, fully grown plant. Each room has a different address, different license, its own power supply, water, and so on to comply with all the regulations. The fact is our structure complies fully with the California regulations and at the same time enables us to operate virtually as if we owned it all. At the end of the day, the difference to us is insignificant.
We announced recently we received all our temporary state licenses, which is actually a major accomplishment. We have worked very closely with the California regulators at each step along the way and our attention to communication resulted in a positive outcome. This is a strong indication that our business model is fully compliant and acceptable to the regulators. Next we have to do the filings for our annual state licenses and each one of those is very complex. But once they are done, as long as there are no unexpected operating problems, it becomes a routine renewal year after year.
We have heard the State of California has started sending out letters to those who haven’t filed for interim licenses and the threat is they can be shut down. The licensing is really a competitive advantage for an operator like Sunniva because we have the financial and human resources to deal with it.
The transactional flows in our business model that make it all work for us are complex and hard to duplicate. We suspect many smaller operators will either not be able to complete their applications or it will take them a long time. We’re really excited by the prospect of being the first major grower to get underway and we think this gives us an important advantage over the competition.
Sunniva’s other operation in Cathedral City is the oil conversion facility. We have two conversion licenses that are all for our own account: volatile (butane) and non-volatile (CO2). The licenses are for addresses that are beside each other in a small commercial mall. We have purchased some cannabis from others so we can test the operation.
We are running the butane system now and our people are extremely pleased with the results. Prospective customers are also very happy. Our CO2 conversions will be up and running in a month. We have third parties that have seen the output and the feedback is very positive. We have potential customers that want us to do their extraction for them. Income should start shortly.
Just to clarify one thing, the zoning from Cathedral City didn’t allow extraction on our grow site. As a result, we rented a facility for an oil extraction operation nearby. But state regulations had no objection to combining the two so the city is thinking if the state doesn’t care, maybe we shouldn’t either. So they are considering a zoning change. Down the road, we may have both facilities in the one location.
An Update on Canada: In Canada we looked at several sites for our location and the industrial park owned by the Osoyoos Indian band in Oliver, B.C., is a very good one. For us, though, timing is critical. We have to get going. We’re ready to start. The Osoyoos band is represented by the Federal Government through Indigenous and Northern Affairs Canada (INAC) and this has resulted in delays. INAC won’t let us break ground until the contract was signed and our contract was supposed to be ready six months ago - in November 2017.
As the delay continued, we concluded it was in the interest of our shareholders to look for an alternative site to mitigate risk. We looked at a few alternatives and settled on the former Weyerhaeuser site in nearby Okanagan Falls. We are doing due diligence and will announce a decision when we are satisfied. We should be ready within a few weeks.
If we decide to change the location, nothing else changes. The physical facility will remain exactly the same. In fact, the new opportunity is to purchase the land. So at OK Falls, we can own the property and that makes it a little easier to finance. The finance plan that we have talked about – bank financing and unsecured debt – is very much intact for either location. We expect to complete our due diligence by the middle of May. So far we have not uncovered any serious issues but we haven’t made a decision yet.
We deal with Health Canada regularly and we understand we are close to getting our letter. So that will be the next step.
Update on Natural Health Services: Then there is Natural Health Services (NHS). The updated figures will be released in a couple of days with our financial statements so we can’t talk about specifics until then. (That report on April 30, 2018 showed 150,000 active patient files and 95,000 patients). The latest Health Canada figures reported around 270,000 registered patients so you can see how well NHS is doing. That’s about a 35% market share. We are pretty much the acknowledged leader in Canada by all the Licensed Producers. In addition, our patient retention rate is very good. What I can say is you will see NHS has continued to grow.
Our clients receive a full service. They are educated about cannabis. They spend time with a doctor and that doesn’t happen with all our competitors. Patients learn about different strains and choose a Licensed Producer. When all that is done, we push the button on the computer and all the necessary data goes to the LP and patients can get their cannabis as soon as the next day. Our patients have to go through all of these steps before we give them a recommendation. Then they come back to be seen again in three months for a reassessment. We offer a real medical experience.
Many doctors are reluctant to provide cannabis assessments for their patients because of the onerous paperwork that is required. Doctors with active private practices have told us they would go broke under the avalanche of paper. Of course, we have software that addresses this problem. Right now, our patient flow exceeds the ability of our doctors to process. It’s a wonderful business problem to deal with. Currently, we’re in a hiring mode with respect to doctors. We have a very good doctor training package. We are set up to engage doctors for one day a week or more. We’re very flexible.
Also with our software, we think we can expand outside our own clinics to other settings such as doctors' offices and pharmacies. This is one of the opportunities we are working on.
In a nutshell, NHS is doing very well.
Growth in the California market: We think the biggest change in our thinking of late is the Trump administration seems to have decided to leave the states alone and there is a lot of political pressure in support of that idea from both Democrats and Republicans. Up to now, the market was concerned about the possibility that Attorney General Jeff Sessions would do something negative out of the blue. We always had confidence in California and feel the prospective returns outweigh the risks.
Recent developments make us even more confident. California is huge, it’s fragmented and many operators are short of capital. We see this as an ideal opportunity for Sunniva to more aggressively pursue our strategy of growing rapidly to become a major entity in the market. Acquisitions will certainly be a part of that when the opportunity arises. We think all of a sudden, it’s a different world in California and perhaps the U.S. Other people don’t have as much to offer as they aren’t as developed as we are. So we happen to be in an ideal situation to take advantage of the changes and we plan to.
Shareholders in a difficult Market: It has been a tough market but our share price today is above where it was when we opened for trading in early January. Not many cannabis companies can say that. We have quite a loyal and experienced shareholder base. Many have invested with us in ID Biomedical, CRH Medical, Corriente, and so on. So they know it takes time to build a company. Many important investors were with us previously and they’re with us now.
Management is also committed to the long term at Sunniva. We have a voluntary escrow agreement. Our total focus is on the big picture. The long term. Building a great business. We believe we’re doing that and so do most of our shareholders.
Other: We would like to explain our delay in releasing our financial statements. We had our audit meeting and informed the auditor of our release date and everything was fine. Then at the last minute they came back and said they needed a few more days. Auditors are under a lot of pressure these days so if they’re not ready, they’ll delay you. So it wasn’t a big deal but we just want people to know how it came about.
For newer readers who are not familiar with Sunniva, please see my original Seeking Alpha report on the Company (here) and my Seeking Alpha updates (here), (here) and (here).
For a brief background on the participants:
Dr. Anthony Holler is a co-founder, chief executive officer (CEO), chairman and director. Holler, who is leading the SNN team, is the former CEO and founder of ID Biomedical, which was a leader in high quality, low-cost manufacturer of flu vaccines and was sold to GlaxoSmithKline (NYSE:GSK) in 2005 for $1.7 billion. Dr. Holler invests in and takes an active role in every company he works with. He is engaged full time with a focus on increasing shareholder value.
Dave Negus joined SNN in December 2017 as chief financial officer (CFO). Negus has over 20 years of financial leadership most recently as CFO of Luvo, Inc., a forward-thinking food company. Previously, Negus was vice president, corporate controller at Lululemon Athletica (NASDAQ:LULU) and led the finance team through their initial public offering. Mr. Negus received his Chartered Professional Accountant designation at Deloitte.
Conclusion: Here are my takeaways from the meeting:
- This was my first “in person” contact with Tony and Dave. They are both very well informed, strong leadership personalities. They are well suited for their respective jobs and I believe they will add substantial value in the years ahead.
- The California campus is well underway and we should see revenue start to flow in the second half of 2018.
- We can expect a strong flow of news from SNN in the near term. They made it clear that they are going after California aggressively and I think we will see reports as that happens.
- I like the National Health Services business and it continues to grow and contribute revenue. Of course, we can look forward to Canadian product being offered to patients along with the strains of other Licenses Producers.
- Subsequent to the interview, Sunniva reported revenue of $5.86 million for the quarter and $16.10 million for the year ended December 31, 2017. Although financial results at this point are not critical to my positive assessment of Sunniva as an investment, to provide some perspective Sunniva ranked seventh among Canadian public cannabis companies based on its recent quarter.
My favorite genre of investment is the one that looks more and more attractive each time I talk to management. That is the case with Sunniva. I think this stock belongs in every cannabis portfolio.
My favorite characteristic for an investment is one that looks more and more attractive each time I talk to management. That is the case with Sunniva. I think this stock belongs in every cannabis portfolio.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.