Siddharth Rajeev, B.Tech, MBA, CFA
Anthony de Ruijter, BA. Econ
May 9, 2018
2018 Fundamental Research Corp. “15+Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com
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Sunniva Inc. (CSE: SNN / OTCQX: SNNVF) – FY2017 Revenue and EPS Beat Forecasts, Significant
Progress in Facility Development
Sector/Industry: Cannabis www.sunniva.com
Market Data (as of May 9, 2018)
Current Price $8.55
Fair Value $39.49
Rating* BUY
Risk* 4
52 Week Range N/A
Shares O/S 31,735,410
Market Cap $271.34 M
Current Yield N/A
P/E (forward) N/A
P/B 8.1
YoY Return N/A
YoY CSE 17.3%
*see back of report for rating and risk definitions
Highlights
Sunniva Inc. (“Sunniva”, “company”) released end of year financials
for 2017 on April 30, 2018.
The company reported revenues of $16.07 million and a net loss of
$18.70 million, reflecting EPS of -$0.74 per share.
Revenues grew 28.39% QoQ, to $5.86 million in Q4-FY2017. There
are no comparable YoY figures.
The growth in revenue was attributable to continued patient and clinic
growth in the company’s subsidiary, Natural Health Services (“NHS”).
Total patient count now exceeds 95,000, representing 35.25% of total
ACMPR patient registrations in Canada.
The company has made significant strides in the quarter. Notable
developments include the breaking of ground of the planned 700,000
square-feet Sunniva Canada Campus in Okanagan Falls, British
Columbia, the signing of a 90,000 kg supply agreement with Canopy
Growth Corp. (TSX: WEED) (“Canopy”), construction progress on the
Sunniva California Campus, the closing of a $27.8 million bought-deal
financing, and continued progress of NHS and Full-Scale Distributors
(“FSD”), the subsidiary of the company that operates its Vapor
Connoisseur (“VC”) brand.
The company’s share price has appreciated 27% since our initiating
report.
Key Financial Data (FYE - Dec 31)
(C$) FY2016 FY2017 FY2018E FY2019E
Revenue $ 38,000 $ 1 6,072,000 $ 4 8,215,000 $ 2 95,134,821
Net Income $ -6,887,000 $ -18,472,000 $ -3,639,440 $ 5 9,805,323
EPS $ -0.41 $ -0.74 $ -0.11 $ 1.88
Cash $ 9 ,613,000 $ 1 1,424,000 $ 2 3,905,766 $ 5 5,792,709
Working Capital $ -1,625,000 $ -1,207,000 $ 2 6,289,335 $ 7 1,937,928
Debt $ 9,669,000 $ 2 9,877,000 $ 140,615,000 $ 1 40,615,000
Total Assets $ 25,663,000 $ 7 3,948,000 $ 211,864,198 $ 3 00,908,553
Shareholders' Equity $ 14,245,000 $ 3 3,340,000 $ 6 2,319,335 $ 1 29,503,028
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Events &
Developments
Since Initiation
Sunniva California Campus Developments
On April 12, 2018, the company announced that its U.S. subsidiaries received all necessary
state temporary cultivation licenses for phase one and phase two of the Sunniva California
Campus. The state of California currently only offers temporary cannabis cultivation licenses,
whilst they develop more permanent annual licenses in the coming months. The temporary
licenses will allow Sunniva to cultivate and process cannabis at the Sunniva California
Campus, and allow them to lease cultivation bays to tenants who will also hold licenses.
In the state of California, the government has enforced a 22,000 square-foot cultivation limit
on licenses available to prospective producers, with the intent of protecting small businesses.
In order to maintain the scale of their future production operations, whilst remaining
compliant, Sunniva has qualified and selected seven licensed cultivation tenants. Sunniva's
U.S. subsidiaries hold eight 10,000 square-foot cultivation licenses, two manufacturing
licenses, one 22,000 square-foot cultivation license, one 22,000 square-foot nursery license,
and one 10,000 square-foot nursery license. Selected tenants will produce within Sunniva’s
facility, under their own licenses, and sell their product to Sunniva. Sunniva will provide
turnkey infrastructure, and white label services to these brands, according to management.
The terms of Sunniva’s leasing arrangements with its tenants are undisclosed.
In addition to the above, the company also gave an update regarding construction of the
Sunniva California Campus:
Rough grading: 100% complete.
Steel erection, greenhouse glass and glazing: 100% complete.
Blackout screening install: 60% complete.
Fire suppression equipment: 60% complete.
Header house roof panels: 30% complete.
Utility work: 10% complete.
Recent Progress of the Sunniva California Campus: Greenhouse Structure
Source: Company
The company anticipates that plant propagation materials will be onboarded in late Q3-2018.
This implies a first harvest in Q4-2018, which falls in line with our forecasts.
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Sunniva Canada Campus Developments
On May 3, 2018, the company confirmed the location in Okanagan Falls, British Columbia,
of a 126-acre industrial-zoned parcel of land, and subsequently broke ground on their Sunniva
Canada Campus - a planned 700,000 square-foot cGMP greenhouse and manufacturing
facility. The company has agreed to purchase the entire land package for a price of $7
million. The transaction is expected to close on or about June 15, 2018, upon the completion
of further due diligence. The company had previously considered the leasing of land from the
Osoyoos Indian Band in Oliver, British Columbia, but had chosen Okanagan Falls as the
superior choice. We believe that the Okanagan Falls relocation is a strategically sound
decision, given the company’s ownership of the land versus a leasing agreement, and the
availability of land for future expansion.
The company also announced the following companies had been selected to develop the
Sunniva Canada Campus facility:
Certhon Projects B.V.: supplier of the greenhouse superstructure, electrical, irrigation
systems, lighting system and heating, cooling and CO2 systems.
EllisDon Corporation: construction management.
MQN Architects: architecture consulting.
Urban Systems Ltd.: civil and landscape engineering.
Management have advised that the build-out schedule of the Sunniva Canada Campus
has not changed, and we maintain our expectation of a first harvest in Q1-2019.
The company had already pre-sold, and de-risked its future production, even before
confirming the location of its yet to be built Canadian production facility. On February 21,
2018, Sunniva entered into an agreement with Canopy, the world’s largest cannabis company
by market capitalization. Under the terms of the agreement, Canopy will purchase up to 45,000
kilograms of dried cannabis annually. Canopy and Sunniva will share in the revenues as
product is sold through Canopy's distribution network including its online marketplace, Tweed
Main Street and via provincial distribution channels. The revenue share will be based on the
strain, sales channel and other relevant factors. The supply agreement has an unspecified
commencement date in Q1-2019, and neither company has specified the proposed pricing of
the agreement.
The supply agreement between the two parties is a huge milestone for Sunniva, who are
committed to de-risking their future cannabis production in Canada via long-term supply
agreements. Whilst the agreement is for a relatively short period of two years, we believe that
the supply agreement demonstrates confidence in Sunniva’s future production, and the
duration is comparable to supply agreements that have already been announced.
Furthermore, the supply agreement is one of the largest announced supply agreements
in the Canadian cannabis industry to date. The agreement for 45,000 Kg dried cannabis
per annum covers approximately 45% of what we expect the Sunniva Canada Campus to
produce in annual dried cannabis production (100,000 Kg).
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Financials
Sunniva Closes a Bought Deal Financing for Proceeds of $27.8 Million
On March 27, 2018, the company announced that it had closed a previously announced bought
deal equity offering. Gross proceeds from the raise totaled $27.80 million, with a total of 2.85
million units being issued to participants in the financing. Units comprised a common share
at a deemed price of $9.75 per share, and a half warrant with a strike price of $12.50 per share
for a period of 24 months.
Proceeds from the equity raise are intended for use in initiating the build-out of the Sunniva
Canada Campus, equipment purchases for their California-based Sun Oil extraction facility,
enterprise platform development for NHS patient acquisition, and general working capital.
The company has provided an updated CAPEX estimate for the Sunniva Canada
Campus of $120 million (which we have adopted into our valuation models, to be
discussed below), implying that the company will need to raise more money in the near
future. However, we believe that the company will seek to maintain their tight capital
structure, and will attempt to finance the facility build-out with a mix of traditional debt
financing and secured corporate debt issuances. Our assumptions are covered in the valuation
section of this report.
NHS and FSD Developments
Currently, the only operating segments of the company, NHS and FSD (which is the subsidiary
that operates Vapor Connoisseur, the company’s custom vaporizer wholesaler) continued to
demonstrate impressive performance in the quarter and for the year-ended. NHS reported
revenues of $3.89 million in Q4-FY2017, and $11.29 million for FY2017. FSD reported
revenues of $1.97 million in Q4-FY2017, and $4.78 million for FY2017. More in-depth
financial analysis of the company’s subsidiaries is provided in a below section.
Key developments for NHS since our initiating report include:
Impressive Patient Acquisition and NHS Network Growth: the company reported
that active patient registrations through NHS had grown to 95,000. Total patient
registrations in Canada, as per recent ACMPR market data, numbered 269,502 at the
end of 2017, implying that the company’s patient network comprises 35.25% of total
Canadian ACMPR patient registrations.
Clinic Expansion: facilitating the growth in patient acquisition is the recent expansion
of NHS’ clinic network into Ontario and Manitoba. NHS now operates seven clinics
throughout Canada, with a team of 21 physicians and 2 nurse practitioners.
Proprietary SPARK Software: connecting patients to Licensed Producers (“LP”),
the software service has expanded its database of LPs to 27. SPARK is an important
component of NHS that allows the company to acquire and retain ACMPR patients.
For the year ended December 31, 2017, the company reported revenues of $16.07 million,
with $5.86 million in revenues recorded during Q4-FY2017. This is versus revenue of $4.56
million recorded in Q3-FY2017, reflecting revenue growth of 28.39% on a QoQ basis. The
company significantly beat our forecasts of FY2017 revenues of $13.62 million, with
actual FY2017 revenues beating our forecasts by 18%. The tables below outline the
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company’s segmented revenues, associated revenue growth, and consolidated income
statements:
Source: FRC, Financial Statements
Source: FRC, Financial Statements
We believe the outsized revenue growth was due to:
Further revenue recognition from the company’s NHS and FSD acquisitions.
Rapid growth in NHS’ patient network.
Segmented Revenues Q3-FY2017 Q4-FY2017 QoQ Growth FY2017
NHS
Revenue $ 3,287,000 $ 3,891,000 18.38% $ 11,291,000
COGS $ 1,453,000 $ 1,314,000 -9.57% $ 4,783,000
Gross Profit $ 1,834,000 $ 2,577,000 40.51% $ 6,508,000
Gross Margin 55.80% 66.23% 57.64%
% of Total Revenues 72.05% 66.43% 70.25%
FSD
Revenue $ 1,275,000 $ 1,966,000 54.20% $ 4,781,000
COGS $ 1,381,000 $ 2,039,000 47.65% $ 4,606,000
Gross Profit $ - 106,000 $ -73,000 -31.13% $ 175,000
Gross Margin -8.31% -3.71% 3.66%
% of Total Revenues 27.95% 33.57% 29.75%
Total Revenues $ 4,562,000 $ 5,857,000 28.39% $ 16,072,000
Total COGS $ 2,834,000 $ 3,353,000 18.31% $ 9,389,000
Total Gross Profit $ 1,728,000 $ 2,504,000 44.91% $ 6,683,000
Total Gross Margin 37.88% 42.75% 41.58%
STATEMENTS OF OPERATIONS
(C$) - YE Dec 31st FY2016 FY2017
Revenue 38,000 1 6,072,000
COGS 12,000 9 ,389,000
Gross Profit 26,000 6,683,000
EXPENSES
SG&A Expense 3 ,596,000 14,390,000
Leaseback Payments
Share-based Compensation 3,981,000
EBITDA - 3,884,000 - 11,688,000
Depreciation 2,526,000
EBIT - 3,884,000 - 14,214,000
Financing Costs 854,000 313,000
EBT - 4,738,000 - 14,527,000
Non-Recurring Expenses 2,149,000 5,933,000
Taxes - 1,988,000
Net Profit (Loss) - 6,887,000 - 18,472,000
FOREX Translation - 33,000 - 230,000
Net comprehensive Profit (Loss) - 6,920,000 - 18,702,000
Shares outstanding 16,782,306 25,128,623
EPS $ -0.41 $ -0.74
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Expansion of the NHS clinic network to seven clinics across Canada.
Despite beating our revenue forecasts for FY2017, we are lowering our FY2018 revenue
forecast to $48.22 million from our previous forecasts of $52.18 million. Note that we have
increased our revenue forecasts for NHS and FSD, but overall revenue forecast has decreased
to reflect changes in our pricing assumptions regarding the production side of the company.
We believe our original pricing assumptions were aggressive, and have revised them to more
accurately reflect the company’s focus on a de-risked, largely wholesale business model. We
discuss the new assumptions in a below section.
The table below outlines our updated revenue forecasts for the company moving forward:
Source: FRC
Gross margins increased in Q4-2017 to 42.75%, compared to 37.88% in the previous quarter.
On an annual basis, the gross margin for FY2017 was 41.58%. NHS’ gross margin in Q4-
FY2017 improved to 66.23% (55.8% in Q3) and was 57.64% for FY2017. FSD’s Q4-FY2017
gross margin improved slightly over Q3-FY2017, but was still negative at -3.71%. However,
FSD’s gross margin for FY2017 was positive at 3.66%. We believe that FSD’s excess COGS
may be due to a lack of scale.
Source: FRC, Financial Statements
EBITDA margins also improved on a QoQ basis, from -146.25% of sales in Q3-FY2017, to -
46.88% of sales in Q4-FY2017. The improvement in the EBITDA margin in Q4-FY2017 was
due largely to the decrease in SG&A expenses compared to Q3-FY2017. The largest
contributor to the company’s negative EBITDA margin in the most recent quarter was share-
STATEMENTS OF OPERATIONS
(C$) - YE Dec 31st 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Revenue 48,215,000 2 95,134,821 468,318,771 551,210,530 638,130,461 718,998,006 795,061,388 867,680,903
COGS 17,557,813 1 02,169,141 166,670,410 195,322,946 224,925,366 255,772,369 288,228,246 322,744,542
Gross Profit 30,657,188 192,965,681 301,648,361 355,887,585 413,205,095 463,225,637 506,833,142 544,936,361
EXPENSES
SG&A Expense 1 4,464,500 7 5,377,433 119,608,614 140,779,169 162,978,520 183,632,091 203,058,678 221,605,703
Leaseback Payments 10,875,000 1 0,875,000 10,875,000 10,875,000 10,875,000 10,875,000 10,875,000 10,875,000
Share-based Compensation 4,821,500 7 ,378,371 11,707,969 13,780,263 15,953,262 17,974,950 19,876,535 21,692,023
EBITDA 496,188 99,334,877 159,456,778 190,453,152 223,398,314 250,743,596 273,022,928 290,763,636
Depreciation 817,000 6 ,891,150 7,967,905 7,721,597 7,510,418 7,336,033 7,200,537 7,106,512
EBIT - 320,813 92,443,727 151,488,873 182,731,555 215,887,896 243,407,563 265,822,391 283,657,124
Financing Costs 3,318,627 1 0,518,627 10,518,627 9,600,000 9,600,000 9,600,000 9,600,000 9,600,000
EBT - 3,639,440 81,925,100 140,970,245 173,131,555 206,287,896 233,807,563 256,222,391 274,057,124
Non-Recurring Expenses
Taxes 2 2,119,777 38,061,966 46,745,520 55,697,732 63,128,042 69,180,046 73,995,423
Net Profit (Loss) - 3,639,440 59,805,323 102,908,279 126,386,035 150,590,164 170,679,521 187,042,346 200,061,700
Q3-FY2017 Q4-FY2017 QoQ Growth FY2017
Total Revenues $ 4,562,000 $ 5,857,000 28.39% $ 16,072,000
Total COGS $ 2,834,000 $ 3,353,000 18.31% $ 9,389,000
Total Gross Profit $ 1,728,000 $ 2,504,000 44.91% $ 6,683,000
Total Gross Margin 37.88% 42.75% 41.58%
Total EBITDA Margin -146.25% -46.88% -72.72%
Total EBIT Margin -168.46% -46.68% -88.44%
Total Net Margin -144.87% 2.71% -114.93%
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based compensation of $3.98 million, which is a non-cash expense. EBITDA for FY2017 was
-$11.69 million, or -72.72% of sales.
The company reported net earnings of $0.16 million in Q4-FY2017, representing a net margin
of 2.71%, and EPS of $0.01 per share. This compares to a net loss of $6.64 million in Q3-
FY2017, representing an EPS of -$0.25 per share. The net profitability in the most recent
quarter was due to non-cash recoveries related to the decrease in the fair value of the
company’s convertible notes, amounting to $2.4 million, and a recovery of $1.4 million related
to the NHS acquisition. The net loss for FY2017 was $18.70 million, representing an EPS of
-$0.74. Our net loss forecast for FY2017 was $21.55 million (EPS: -$0.86). As we lowered
our revenue forecast, we are adjusting our FY2018 estimate from a net loss of $0.89
million (EPS: -$0.03) to a net loss of $3.69 million (EPS: -$0.11).
The following table provides a summary of Sunniva’s cashflows:
Source: FRC, Financial Statements
At the end of 2017, the company had a cash position of $11.42 million and negative working
capital of $1.21 million, as well as a current ratio of 0.92. Furthermore, long-term debt
increased to $20.62 million in FY2017, with total debt increasing to $29.88 million. This is
versus a Q3-FY2017 debt position of $17.21 million, which were mainly promissory notes
issued for the acquisition of FSD and NHS.
Source: FRC, Financial Statements
Stock Options and Warrants: We estimate that the company has 4.17 million stock options
(weighted average exercise price of $4.94) and 1.95 million warrants (weighted average
exercise price of $9.51) outstanding. 4 million options and 0.66 million warrants are currently
in the money. The company has the potential to raise up to $21.40 million if all the in-themoney
options and warrants are exercised.
Summary of Cash Flows
($, mm) 2017 (9M) FY2017
Operating -$4.08 -$5.06
Investing -$10.28 -$22.38
Financing $5.45 $22.02
Effects of Exchange Rate $0.01 $0.23
Net -$8.90 -$5.19
Free Cash Flows to Firm (FCF) -$14.36 -$27.44
(in C$) - YE Dec 31st
Liquidity & Capital Structure FY2016 FY2017
Cash $ 9,613,000 $ 11,424,000
Working Capital $ -1,625,000 $ -1,207,000
Current Ratio 0.86 0.92
LT Debt $ - $ 2 0,615,000
Total Debt $ 9,669,000 $ 29,877,000
LT Debt / Capital - 0.33
Total Debt / Capital 0.40 0.47
EBIT Interest Coverage - 4.55 - 45.41
Total Invested Capital $ 14,301,000 $ 5 1,793,000
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Updated
Forecasts
Updated Revenue Forecasts
The following table shows our updated forecasts:
Sunniva California Campus Revenue Forecasts
Source: FRC
Updated assumptions include:
We have revised our price forecast from US$5 per gram of dried cannabis equivalent
to US$4 per gram. This reflects the company’s wholesale strategy.
We have adjusted our assumptions regarding cannabis oil production. We had
previously assumed 6 litres of cannabis oil extracted for every kg of dried cannabis
production. However, management have advised us that the equivalency is such that
the extraction yield on dried cannabis biomass is actually closer to 10%. However, this
is pure cannabis isolate, with extreme cannabinoid content. Actual cannabis extracts
available to the public are diluted to remain within compliant cannabinoid content
limits. Since the company intends to sell isolate on a wholesale basis, our pricing
estimates increased substantially, though estimated production decreased to reflect
lower yield.
Our models assume prices will decline at 5% p.a.
*US$ 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Dried Flower Production Capacity (KG) 10,500 42,000 70,000 70,000 70,000 70,000 70,000 7 0,000
Dried Flower Sales (KG) 1 ,575 8,400 21,000 28,000 35,000 42,000 49,000 5 6,000
Price per KG $ 4,000 $ 3,810 $ 3 ,628 $ 3,455 $ 3,291 $ 3,134 $ 2,985 $ 2,843
Dried Flower Revenue $ 6,300,000 $ 32,000,000 $ 76,190,476 $ 96,749,811 $ 115,178,346 $ 131,632,396 $ 146,258,218 $ 1 59,192,618
Cost per KG $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1 ,000
Dried Flower COGS $ 1 ,575,000 $ 8,400,000 $ 21,000,000 $ 28,000,000 $ 35,000,000 $ 42,000,000 $ 49,000,000 $ 5 6,000,000
Oil Production Capacity (L) 1,800 3,600 6,000 6,000 6,000 6,000 6,000 6 ,000
Oil Sales (L) 270 720 1,800 2,400 3,000 3,600 4,200 4 ,800
Price per L $ 60,000 $ 57,143 $ 54,422 $ 51,830 $ 49,362 $ 47,012 $ 44,773 $ 4 2,641
Oil Revenue $ 16,200,000 $ 41,142,857 $ 9 7,959,184 $ 124,392,614 $ 148,086,445 $ 169,241,652 $ 188,046,280 $ 204,676,223
Cost per L $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 1 2,000
Oil COGS $ 3,240,000 $ 8,640,000 $ 2 1,600,000 $ 28,800,000 $ 36,000,000 $ 43,200,000 $ 50,400,000 $ 57,600,000
Total Revenues $ 22,500,000 $ 73,142,857 $ 174,149,660 $ 221,142,425 $ 263,264,792 $ 300,874,048 $ 334,304,498 $ 3 63,868,841
COGS $ 4,815,000 $ 17,040,000 $ 42,600,000 $ 56,800,000 $ 71,000,000 $ 85,200,000 $ 99,400,000 $ 1 13,600,000
Total Revenues (C$) $ 28,125,000 $ 91,428,571 $ 217,687,075 $ 276,428,032 $ 329,080,990 $ 376,092,560 $ 417,880,622 $ 4 54,836,051
COGS (C$) $ 6,018,750 $ 21,300,000 $ 53,250,000 $ 71,000,000 $ 88,750,000 $ 106,500,000 $ 124,250,000 $ 1 42,000,000
Notes
Flower (KG) Trim (KG)
Phase 1 Production: 60,000 18,000 *30% of Flower and all Trim convert to oils
Phase 2 Production: 40,000 12,000 Dried Flower Equivalency= 0.1L per KG of Dried
Phase 1 Dried Production (70%) 42,000 Phase 1 Oils: 3,600
Phase 2 Dried Production (70%) 28,000 Phase 2 Oils: 2,400 Phase 2 CAPEX per sq-ft: $ 125
Total Dried Production 70,000 Total Oils: 6,000 Phase 2 CAPEX $ 20,625,000
Phase 2 CAPEX (CAD) $ 25,781,250
Lease Payments $ 8,700,000
Phase One First Harvest Q4-2018 USD-CAD: 1.25
Phase Two First Harvest Q1-2020
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Sunniva Canada Campus Revenue Forecasts
Source: FRC
Updated assumptions include:
Production capacity has been revised, as per recent updates from the company. We
had previously assumed that peak production capacity of the facility would be 125,000
kg of dried cannabis flower, and an additional 37,000 kg of trim to be used in cannabis
oils extraction. The company have revealed new production capacity estimates, and as
such, we have revised expected production capacity to 100,000 kg of dried flower and
25,000 kg of trim to be utilized for extraction purposes.
We have revised our price forecast from approximately $3.5 per gram of dried
cannabis equivalent to $3 per gram. This reflects the company’s intent to follow a
wholesale strategy.
The same cannabis oil to dried flower equivalency discussed above is utilized for
Sunniva Canada Campus.
In our initiating report, we had estimated CAPEX at $142 million. Since then,
management have provided CAPEX guidance of $127 million.
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Dried Flower Production Capacity (KG) 56,250 75,000 75,000 75,000 75,000 75,000 7 5,000
Dried Flower Sales (KG) - 45,000 45,000 45,000 48,750 52,500 56,250 6 0,000
Price per KG $ 3,750 $ 3,000 $ 3 ,000 $ 2,857 $ 2,721 $ 2,592 $ 2,468 $ 2,351
Dried Flower Revenue $ - $ 135,000,000 $ 135,000,000 $ 128,571,429 $ 132,653,061 $ 136,054,422 $ 138,831,043 $ 1 41,034,710
Cost per KG $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1 ,000
Dried Flower COGS $ - $ 56,250,000 $ 75,000,000 $ 75,000,000 $ 75,000,000 $ 75,000,000 $ 75,000,000 $ 7 5,000,000
Oil Production Capacity (L) - 1,406 1,875 1,875 1,875 1,875 1,875 1 ,875
Oil Sales (L) - 281 563 750 938 1,125 1,313 1 ,500
Price per L $ 938 $ 45,000 $ 45,000 $ 42,857 $ 40,816 $ 38,873 $ 37,022 $ 3 5,259
Oil Revenue $ - $ 12,656,250 $ 2 5,312,500 $ 32,142,857 $ 38,265,306 $ 43,731,778 $ 48,590,865 $ 52,888,016
Cost per L $ 12,000 $ 11,250 $ 11,250 $ 10,714 $ 10,204 $ 9,718 $ 9,255 $ 8 ,815
Oil COGS $ - $ 3,164,063 $ 6 ,328,125 $ 8,035,714 $ 9,566,327 $ 10,932,945 $ 12,147,716 $ 13,222,004
Branded Flower Production Capacity (KG) 18,750 25,000 25,000 25,000 25,000 25,000 2 5,000
Branded Flower Sales (KG) 3,750 7,500 10,000 12,500 15,000 17,500 2 0,000
Price per KG $ 7,500 $ 6,000 $ 5 ,714 $ 5,442 $ 5,183 $ 4,936 $ 4,701 $ 4,477
Branded Flower Revenue $ 22,500,000 $ 4 2,857,143 $ 54,421,769 $ 64,787,820 $ 74,043,223 $ 82,270,247 $ 89,545,848
Cost per KG $ 1,500 $ 1 ,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500
Branded Flower COGS $ 1,000 $ 5,625,000 $ 1 1,250,000 $ 15,000,000 $ 18,750,000 $ 22,500,000 $ 26,250,000 $ 30,000,000
Branded Oil Production Capacity (L) 28,125 37,500 37,500 37,500 37,500 37,500 3 7,500
Branded Oil Sales (L) 5,625 11,250 15,000 18,750 22,500 26,250 3 0,000
Price per L $ 1,500 $ 1 ,429 $ 1,361 $ 1,296 $ 1,234 $ 1,175 $ 1,119
Branded Oil Revenue $ 8,437,500 $ 1 6,071,429 $ 20,408,163 $ 24,295,432 $ 27,766,209 $ 30,851,343 $ 33,579,693
Cost per L $ 250 $ 2 50 $ 250 $ 250 $ 250 $ 250 $ 250
Branded Oil COGS $ 1,406,250 $ 2 ,812,500 $ 3,750,000 $ 4,687,500 $ 5,625,000 $ 6,562,500 $ 7,500,000
Total Revenues $ - $ 178,593,750 $ 219,241,071 $ 235,544,218 $ 260,001,620 $ 281,595,631 $ 300,543,498 $ 3 17,048,267
COGS $ - $ 66,445,313 $ 95,390,625 $ 101,785,714 $ 108,003,827 $ 114,057,945 $ 119,960,216 $ 1 25,722,004
Notes
Flower (KG) Trim (KG)
Total Production: 100,000 25,000 *All Trim convert to oils
Total Dried Production 100,000 Dried Flower Equivalency= 0.1L per KG of Dried
Dried (KG) Oils (L) Total Oils: 2,500
Sales Contracts (75%) 75,000 1,875
Branded Products (25%) 25,000 37,500 Land Cost: $ 7,000,000
Facility Cost: $ 120,000,000
First Harvest Q1-2019 Interest Expense @ 8% WACD 9,600,000
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Valuation
NHS and FSD Revenue Forecasts
Source: FRC
Updated assumptions include:
Assumptions are largely the same as in our initiating report. However, we have
updated the forecast model to reflect actual FY2017 revenue as a base for forecasted
future revenues.
Average growth rate of 25% p.a.
Discounted Cash Flow Valuation
Our revised DCF valuation on Sunniva’s shares is $39.49 per share versus our previous
estimate of $47.66 per share.
Source: FRC
Based on our review of the company’s performance during FY2017, revisions in our
valuation models, and the expected catalysts to come in FY2018, we are adjusting our
fair value estimate on Sunniva’s shares to $39.49 per share. Note that this is largely due to
conservative revisions of our pricing assumptions in our valuation models, and dilution during
the period resulting from the company’s recent financing.
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
NHS Revenue 1 4,113,750 17,642,188 22,052,734 27,565,918 34,457,397 43,071,747 53,839,684 6 7,299,604
NHS COGS 7,056,875 8,821,094 11,026,367 13,782,959 17,228,699 21,535,873 26,919,842 3 3,649,802
VC Revenue 5,976,250 7,470,313 9,337,891 11,672,363 14,590,454 18,238,068 22,797,585 2 8,496,981
VC COGS 4,482,188 5,602,734 7,003,418 8,754,272 10,942,841 13,678,551 17,098,188 2 1,372,736
Total Revenues $ 20,090,000 $ 2 5,112,500 $ 31,390,625 $ 39,238,281 $ 49,047,852 $ 61,309,814 $ 76,637,268 $ 9 5,796,585
COGS $ 11,539,063 $ 14,423,828 $ 18,029,785 $ 22,537,231 $ 28,171,539 $ 35,214,424 $ 44,018,030 $ 5 5,022,538
Notes
NHS 2017 Revenue 11,291,000
NHS Weighted Average Growth Rate 25.0%
VC 2017 Revenue 4,781,000
VC Weighted Average Growth Rate 25.0%
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Risks We believe the company is exposed to the following risks (list is non-exhaustive):
The company operates in an industry that is highly regulated and subject to material
change from governmental intervention.
Cannabis is illegal at the federal level in the U.S., where Sunniva intends to construct
their initial production facility.
There is no guarantee that the company will be granted an ACMPR license. Failure to
secure said license will bar the company from producing or selling cannabis in Canada.
No guarantee that the company will be able to finance the Sunniva Canada Campus
facility, or phase two development at the Sunniva California Campus. Furthermore,
the financing of phase one of the Sunniva California Campus is dependent upon BPG’s
ability to raise the necessary capital to complete the phase one build-out.
No guarantee that the company will be able to sell the cannabis produced at either
Sunniva Campus facility. Supply agreements that are not legally binding may also
exhibit a degree of risk.
Contamination risk and other risks associated with biological/ agricultural production.
Exchange rate risk associated with cross-border operations.
Access to capital and share dilution.
We are maintaining our risk rating of 4 (Speculative).
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Appendix
STATEMENTS OF OPERATIONS
(C$) - YE Dec 31st FY2016 FY2017 2018E 2019E
Revenue 38,000 1 6,072,000 4 8,215,000 2 95,134,821
COGS 12,000 9 ,389,000 1 7,557,813 1 02,169,141
Gross Profit 26,000 6,683,000 30,657,188 192,965,681
EXPENSES
SG&A Expense 3,596,000 1 4,390,000 1 4,464,500 75,377,433
Leaseback Payments 10,875,000 10,875,000
Share-based Compensation 3,981,000 4,821,500 7,378,371
EBITDA - 3,884,000 - 11,688,000 496,188 99,334,877
Depreciation 2,526,000 817,000 6 ,891,150
EBIT - 3,884,000 - 14,214,000 - 320,813 92,443,727
Financing Costs 854,000 3 13,000 3 ,318,627 1 0,518,627
EBT - 4,738,000 - 14,527,000 - 3,639,440 81,925,100
Non-Recurring Expenses 2,149,000 5 ,933,000
Taxes - 1,988,000 22,119,777
Net Profit (Loss) - 6,887,000 - 18,472,000 - 3,639,440 59,805,323
FOREX Translation - 33,000 - 2 30,000
Net comprehensive Profit (Loss) - 6,920,000 - 18,702,000 - 3,639,440 59,805,323
Shares outstanding 16,782,306 2 5,128,623 3 1,735,410 31,735,410
EPS $ -0.41 $ - 0.74 $ -0.11 $ 1.88
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BALANCE SHEET
(C$) - YE Dec 31st FY2016 FY2017 2018E 2019E
ASSETS
CURRENT
Cash and Cash Equiv. 9,613,000 11,424,000 23,905,766 55,792,709
A/R 33,000 2,273,000 4,821,500 29,513,482
Inventory 433,000 1,755,781 10,216,914
Assets Held For Sale
Loan Receivable 100,000
Prepaid Expenses 47,000 402,000 482,150 2,951,348
Total Current Assets 9,793,000 14,532,000 30,965,198 98,474,453
Deposits on Leases and Properties 273,000 382,000 382,000 382,000
Property, Plant, and Equipment 2,031,000 16,340,000 137,823,000 159,358,100
Intangible Assets 13,566,000 25,148,000 25,148,000 25,148,000
Goodwill 17,546,000 17,546,000 17,546,000
Other
Total Assets 25,663,000 73,948,000 211,864,198 300,908,553
LIABILITIES
CURRENT
A/P 783,000 5,621,000 3,511,563 20,433,828
Deferred Revenue 656,000 964,300 5,902,696
Secured Promissory Notes 9,333,000 9,262,000 - -
Warrant Liability 764,000
Provisions 202,000 200,000 200,000 200,000
Loans from Shareholders 336,000
Total Current Liabilities 11,418,000 15,739,000 4 ,675,863 26,536,525
Deferred Income Taxes 2,156,000 2,156,000 2,156,000
Warrant Liability 2,098,000 2,098,000 2,098,000
Finance Lease 11,120,000 11,120,000 11,120,000
Convertible Debt 9,495,000 9,495,000 9,495,000
Loans 120,000,000 120,000,000
Total Liabilities 11,418,000 40,608,000 149,544,863 171,405,525
SHAREHOLDERS EQUITY
Share Capital 23,815,000 53,502,000 81,299,275 81,299,275
Equity Component of Convertible Debt 1,806,000 1,806,000 1,806,000
Warrants 2,048,000 2,048,000 2,048,000
Share Subscriptions 84,000
Share Based Payment
Contributed Surplus 415,000 4,755,000 9,576,500 16,954,871
Deficit - 10,036,000 - 28,508,000 - 32,147,440 27,657,883
Accumulated Other Comprehensive Income - 33,000 - 263,000 - 263,000 - 263,000
Total shareholders’ equity (deficiency) 14,245,000 33,340,000 62,319,335 129,503,028
Total Liabilities and Shareholders Equity 25,663,000 73,948,000 211,864,198 300,908,553
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STATEMENTS OF CASH FLOWS
(in C$) - YE Dec 31st FY2016 FY2017 2018E 2019E
OPERATING ACTIVITIES
Net Profit for the Year - 6,887,000 - 18,472,000 - 3,639,440 59,805,323
Adjusted for items not involving cash:
Accretion 831,000 127,000
Provision for Lease 202,000 - 2,000
Unrealized FOREX Loss 49,000
Share-based payments 3,981,000 4,821,500 7,378,371
Fair Value Adjustment of Warrant Liability - 75,000 6,321,000
Deferred Tax Recovery - 1,988,000
Finance Expense 35,000
Bad Debt Expense 45,000
Depreciation 2,526,000 817,000 6,891,150
Funds From Operations - 5,845,000 - 7 ,462,000 1 ,999,060 7 4,074,843
Change in working capital
A/R 28,000 - 880,000 - 2,548,500 - 24,691,982
Change in Loans Receivable - 100,000
Changes in Inventory - 210,000 - 1,322,781 - 8,461,133
Changes in Prepaids 1,118,000 - 229,000 - 80,150 - 2,469,198
A/P 264,000 3,066,000 - 2,109,438 16,922,266
Changes in Warrant Liability
Changes in Deferred Revenue 656,000 308,300 4,938,396
NET CASH USED IN OPERATING ACTIVITIES - 4 ,535,000 - 5 ,059,000 - 3 ,753,509 6 0,313,192
INVESTING ACTIVITIES
Deposits on Properties and Leases - 222,000 - 80,000
Purchase of Licenses
Purchase of PPE - 2,031,000 - 18,395,000 - 122,300,000 - 28,426,250
Intangibles/ Acquisitions - 4,266,000 - 3,904,000 - -
NET CASH USED IN INVESTING ACTIVITIES - 6 ,519,000 - 2 2,379,000 - 1 22,300,000 - 28,426,250
FINANCING ACTIVITIES
Loans from Shareholders 2,088,000 - 9,262,000
Proceeds on Finance Lease 11,120,000
Repayment of Loans from Shareholders - 377,000 - 11,955,000
Proceeds from Convertible Debt 11,978,000
Proceeds from Loans 30,000 120,000,000
Net Proceeds from Issuance of Warrants 6,035,000
Net Proceeds from Issued Shares 18,762,000 4,841,000 27,797,275
Common Shares Repurchased
Share Subscriptions Received 84,000
NET CASH FROM FINANCING ACTIVITIES 2 0,587,000 2 2,019,000 1 38,535,275 -
Foreign Exchange / Others 39,000 230,000
INCREASE IN CASH FOR THE YEAR 9 ,572,000 - 5,189,000 1 2,481,766 3 1,886,942
CASH, BEGINNING OF THE YEAR 41,000 9,613,000 11,424,000 23,905,766
CASH, END OF THE YEAR 9,613,000 4 ,424,000 2 3,905,766 5 5,792,709
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Fundamental Research Corp. Equity Rating Scale:
Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold – Annual expected rate of return is between 5% and 12%
Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk
Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale:
1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.
The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is
conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive
to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows
(though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive
to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage
ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround
situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products
may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks
are considered highly speculative.
Disclaimers and Disclosure
The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and
opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.
There is no guarantee that our forecasts will materialize. Actual results will likely vary. The Analyst and FRC do not own shares of the subject company. Fees were paid
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The distribution of FRC’s ratings are as follows: BUY (73%), HOLD (6%), SELL / SUSPEND (21%).
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This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and
uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not
limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services;
competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the
Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these
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