RE:Ted Ohashi interview with Sunniva "...We have been and remain exceedingly optimistic about the prospects for Sunniva shareholders.
We have indicated questions from Let’s Toke Business as LTB and answers from Holler and Negus as SNN.
For a brief background: 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 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 and led the finance team through their initial public offering. Mr. Negus received his Chartered Professional Accountant designation at Deloitte.
Leith Pedersen co-founder, president, director is my main contact. Pedersen has an investment back- ground as owner and CEO of Vida Wealth Management, Bahamas, investment advisor at Canaccord Wealth Management and partner and director of JF Mackie, an independent brokerage firm in Calgary, Alberta. He has impressed me with his extensive understanding of the industry and work ethic and seems to have a skill set perfectly suited for his role as president of SNN. Leith did not attend this meeting.
LTB: All right. Let’s get started. Please give us an update on construction at Cathedral City.
SNN: The outside construction is pretty much complete and the inside infrastructure is the next major task. This is more complex than people might imagine so we will do it carefully to ensure we are completely compliant. We are planning to start propagating the facility June/July and we’ll have our first harvest by September/October. We announced recently we received all our temporary state licenses which is actually a massive hurdle. Next we have to do our annual state licenses and each one is very complex. But once they are done, as long as there are no operating problems, it becomes more routine year after year. But we have heard the State of California has started sending out letters to those who haven’t filed for their interim licenses and the threat is you can be shut down. So we’re really excited by the prospect of being the first major grower to get underway. So the licensing gives us a competitive advantage over many other operators who don’t have the resources to get this complicated paperwork done.
LTB: But a lot of that is California’s fault, isn’t it? I mean they have dragged their feet on regulations and that has held everyone up.
SNN: Well California was the wild, wild, west of cannabis and they are trying to catch up. They are where Canada was around five to seven years ago. So 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 recreational is underway, they require testing. Random testing by various parties in years passed has shown that around 85% of the cannabis is contaminated. So that’s a major advantage to Sunniva. We are going to have clean product which explains why people want to distribute our product and others want us to 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. This is a little different in California than in Canada. In Canada you only need three or four customers to get your brand known. But in California we’ll need maybe 15 of the smaller customers. So that’s what you’ll see us doing because we see branding as an opportunity.
LTB: In California, you are setting up this system with eight tenants. I think what people really want to know is how this system compares with the case in which you are able to operate the entire facility for yourself.
SNN: California started off with the idea they would protect the small operators for five years. So they set up some five year restrictions, on the size limit on growing space of 22,000 square feet, for example. We have set up eight of these within our facility and we own one ourselves and have leased seven to others, of which we are allowed to own 19.9%. Each room has an individual address, its own license, its own power supply and so on. This is the regulatory requirement. What we have done is make “convenience arrangements” to use their licenses in our facility. We identified the individuals, did the paperwork, we provide all the services and buy the product when it is grown. We start with a propagated plant they grow for us and we buy back a fully grown plant. The financial impact on us is immaterial. We consider the complex, transactional flows we have set up to be a trade secret but when we received our temporary state licenses, it validated the business plan we developed. When we get to the smaller 10,000 square foot licenses in Phase II, we can own all of those. So there is no restriction.
LTB: The oil conversion operation is underway?
SNN: Yes. We have two conversion licenses that are all our own: volatile (butane) and non-volatile (C02). The licenses are for addresses that are beside each other. 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 C02 will be running in a month. We now have third parties 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 oil extraction nearby. But state regulations had no objection 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.
LTB: Can you please give me an update on Canada. I guess you are looking at some changes here.
SNN: We looked at several sites for our Canadian location and the Oliver location, in 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’ve got to get going. We’re ready to get started. The Osoyoos band is represented by the Federal Government through Indigenous and Northern Affairs Canada (INAC) and this was resulting in delays. INAC wouldn’t let us break ground until the contract was signed. Our contract was suppsed to be ready six months ago - in November 2017. 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 a 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.
LTB: If you were to make a decision to change, other than the location, what changes? The physical plant? The prospective financing?
SNN: Basically nothing. The physical facility will remain exactly the same. In fact, the new opportunity is to purchase the land. So we can own the property and that makes it a little easier to finance. We expect to complete our due diligence by the middle of May. So far we have not uncovered any serious issues.
LTB: Can you give us an update on Natural Health Services (NHS)?
SNN: Sure the updated figures will be released in a couple of days with our financial statements so we can’t talk about specifics today. Our last published figures were 125,000 active patient files and 95,000 patients. The latest Health Canada figures are around 270,000 registered patients in Canada so you can see how well NHS is doing. Our patient retention rate is very good. What I can say is growth continues.
LTB: I heard your call centre had stopped booking new patient appointments for some of your clinics. Is that correct?
SNN: Let me answer it this way. 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 and all the necessary data goes to the LP and patients get their cannabis the next day. They have to satisfy all these requirements 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 paperwork. We have software that addresses that problem. Right now our patient flow exceeds the ability of our doctors to assess. It’s a wonderful business problem to deal with. Right now we’re trying to get more doctors. We have a very good doctor training package. Also with our software, we think we can expand outside our own clinics to doctor’s offices and pharmacies. That’s one of the things we’re working on. NHS is doing very well.
LTB: How are your shareholders holding up in a difficult market?
SNN: We have quite a loyal and experienced shareholder base. Many have invested with us in ID Bio- medical, CRH Medical, Corriente, and so on. So they know it takes time to build a company. Management is also committed to the long term at Sunniva. We have a voluntary escrow agreement. So we don’t worry about the stock price day-to-day as much as we worry about the big picture. Building a great business. I think we’re doing that and so do most of our shareholders.
LTB: There’s quite a lot of talk out there now about Sunniva making acquisitions. Any comments?
SNN: Here’s what’s changed recently. 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. Many people thought the possibility was that Attorney General Jeff Sessions would do something stupid. We always had confidence in California and always felt the prospective returns outweighed the risks. Recent developments make us think it’s even better. 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. So we happen to be in an ideal situation to take advantage of the changes. 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 more time. Auditors are under a lot of pressure these days so if they’re not ready, they’ll hold you up.
LTB: But you’re all set now for Tuesday?
SNN: Yes. "