• Ted Ohashi

Has Sunniva (CSE: SNN) missed the boat?

QUESTION: My questions about Sunniva (CSE: SNN) (OTCQB: SNNVF) are related to short term viability:

  1. What tailwinds remain besides the glasshouse for SNN? I understand the low cost product potential once operational but have they missed so badly on the glasshouse they will have lost their competitive edge in the California market?

  2. Similarly, have they missed the boat in terms of selling their Canadian assets?

  3. Since they will likely miss commitments without having inventory to sell, how will that play out when they do have the inventory later in 2020?

  4. The lack of cash will be a big problem until they can generate cash from operations. Do you see them diluting soon? They bungled this earlier this year and they might have to go to the well again. I suspect they will. Do you think that event is baked in to the price?

  5. Finally, I know you place management integrity and ability to deliver at the top of the priority list. I feel management has made enough serious mistakes to give me concern. Generally, their mistakes seriously outweigh their successes. Maybe you can talk about what it is that gives you confidence they can turn it around. What are they super good at that separates them from the competition? Perhaps you've explained that, but I could use some reinforcement on that subject.

Thanks as always!

A. G., from Chicago, IL

ANSWER: I will start with a warning. If you ask questions about problems and I answer them, there is a tendency to interpret the article as being totally negative. In such a process, we will overlook many positives. So let’s keep in mind there needs to be a balance in the way, you the reader, judge my answers. But right now we are all focussed on the problems and that is probably fair. There will be a conference call with management on August 29, 2019 when management will have their turn to speak to these matters. I have included below the information that will allow you to join the conference call meeting.

In summary, did management make some reasonably serious miscalculations, a.k.a. mistakes? With the benefit of perfect hindsight, it is clear they did and I am sure they would be the first to admit it. The errors management admits to might be quite different from the ones I would pick or you would choose. But we weren’t there and they were. And now, I am sure, they feel they are inside the tent peeing out and we are outside the tent peeing in. Still there have been enough mistakes made along the way that have contributed to Sunniva being at a fairly critical point in their development.

Now I will address your questions in order:

(1) The tailwinds that exist for Sunniva are the ones that have always been there.

  • California is still a terrific market for an integrated cannabis company. CA is one of the most attractive and arguably the most attractive cannabis market in the world.

  • The problems that CA had with poor quality product tainted with herbicides and pesticides still exist. So the potential for the glasshouse is as great as ever.

  • There may be people who grow tomatoes and peppers like this but there is no one growing cannabis this way. The quality and quantity of output will be unsurpassed once the glasshouse is functioning according to design.

  • The prospect still remains that someone who wants to make an opportunistic move into cannabis in CA will do so. It is also possible that SNN takes on a partner on the glasshouse or in California. Most investors and portfolio managers mark to market, that is, the price of SNN is yesterday’s closing price. So a CAN $2.00 offer is double yesterday even though it might only be 25% of what you paid. I’m not saying a $2 offer will succeed but an offer well below the $10 to $15 a share shareholders may have been hoping for a year ago has a realistic chance.

  • But now and for some time there have been headwinds. SNN has lost a lot of investor confidence and credibility through this process. They have missed deadlines many times. They have disappointed the market more often than they have fulfilled promises. It will take time to recover from that.

  • The limited number of shares issued was once a plus and it has become a negative. SNN has been underfunded to the point where they could not finance what should have seemingly been a simple path to US $55 - $60 million in revenue. They are seriously capital constrained.

(2) I don’t think they have missed the boat on selling their Canadian assets but they sure haven’t made it easy on themselves.

  • If you are a seller of anything, the last thing you want a buyer to know is you are under pressure to sell. That should be clear to anyone who reads the financial press in the case of SNN and their Canadian assets.

  • The cannabis stocks have dropped significantly in value since the beginning of the year. Nobody knows with certainty when group is going to turn and start rising. Having said that, I think it is fair to conclude we are nearer the bottom than the top. So the market cycle has worked against SNN as the seller of assets.

  • The closing of the sale of the Okanagan Falls property is over a month late and the last promised closing date was “in August.” By the time of the conference call with management, we should have a good idea whether this will happen or not. But this sale has become very important to SNN because it will be either a sign of a (already once delayed) deadline being met or just another deadline tossed on the pile of unfulfilled promises with all the others.

  • The sale of the Natural Health Services (NHS) asset has been talked about but a firm announcement is still forthcoming. As a result, a development on this front will be an important accomplishment. The valuation of NHS, however, has likely been impacted by the fact that SNN is now known to be a motivated seller and the general decline in the market value of cannabis assets.

(3) Not having enough product to refill shelves is a serious issues but this is not McDonald’s undertaking a national campaign to introduce a vegetarian hamburger and not having any to sell. This is early days in the cannabis industry and shoppers experience shortages and outages all the time. As long as it is rectified quickly, I don’t see it as a major problem. From a cash management point of view, however, it is one thing that stands out to me. If SNN had sales of US $55 - $60 million in sight for this year, I have to question not funding it. From a cash flow perspective, this activity should be or be very close to self-funding. Given that investors were given management guidance toward US $55 to $60 million in branded goods sales this year, I think it would have been better to maintain this sales level and keep it growing. Given there were only two things investors were expecting – the start-up of the glasshouse and revenues from branded product sales, I would have chosen to deliver on one and fail on one rather than deliver on neither and/or fail on both.

(4) The shortage of capital has clearly been a much larger problem than management had let on. It was mentioned as a consideration but it hasn’t seemed as dire as it does now. Everything that has happened has damaged SNN’s ability to equity finance. With the stock price down and investor confidence at a low, an equity issue will be difficult and costly, assuming it can be done. When or if it will happen depends on the timing of things we have talked about. When does the OK Falls sale close? When does NHS sell and for how much? Worst case, they might have to finance immediately. I guess it is still possible they can get through this low point without issuing shares but it is looking less and less likely.

(5) The factors you mention are certainly important in measuring management performance. But there is another that is just coming into play. How does management respond when a serious problem arises? So if my assessment of Dr. Holler was correct, he is going to do everything in his power to see this through. He isn’t hiding his head in the sand. He isn’t playing the blame game. He is facing up to the problems, some of which he was involved in creating, and doing his best to fix them. Am I giving Holler a free pass on what has happened to date? No, I’m not. But in hockey terms, I’m giving him two minutes in the penalty box and not a game misconduct.

Conclusion: Events in the sixty days will probably have a significant impact on the future of SNN. Will the Canadian assets close in a timely manner from SNN’s point of view? Will it need a highly dilutive equity financing? Will it continue to operate as an independent company? Will it enter into some sort of partnership or joint venture to complete the glasshouse?

As I said at the outset, the nature of this article focussed on addressing some of the negative issues and I hope I have done that. At the same time, my research process with independent sources and the help of the Sunniva Discord Group has unearthed some positive information. This includes the suggestion that the electrical hookup from Southern California Edison will happen close to mid-September than late October and a considerable amount of computing equipment including robots have been delivered to the site. There is lots more but none of it is official so I don’t want to start unconfirmed rumours.

The next important development barring an official news release beforehand, will be the Teleconference on Thursday. To participate in the call, follow the instructions below:

  • Date of management conference call: August 29, 2019

  • Time of management conference call: 2:00 p.m. Pacific time 5:00 p.m. Eastern time

  • To participate in the conference call: local 604-638-5340 or otherwise 1-800-319-4610

  • To listen to an audio replay call: local 604-674-8052 or otherwise 1-855-669-9659. Use code 3557

93 views0 comments