Special Report: Sunniva (CSE: SNN) Conference Call

I participated in the Sunniva (CSE: SNN) (OTCQB: SNNVF) management conference call on August 29, 2019. Speaking on behalf of SNN were Dr. Anthony Holler, Chairman and Chief Executive Officer of Sunniva, Kevin Wilkerson, President of Sunniva Inc. and President and CEO of Sun CA Holdings the main U.S. subsidiary and David Lyle, Chief Financial Officer of Sunniva. As if to prove every cloud has a silver lining, for some reason I was not given a chance to ask questions. However, Dr. Holler noticed this and arranged for himself, Wilkerson, Lyle and Rob Knowles, Vice President of Corporate Development to hold a conference call with me immediately after the formal call to answer my questions.

This was fortunate because the most value for me was derived from what I gleaned from the second call with Holler, Wilkerson, Lyle and Knowles.

Here are my main takeaways from the scheduled conference call:

1. Management is totally riveted on getting the glasshouse finished and operating. However, there was a further delay disclosed as operational status is now expected in the second quarter of 2020. The actual statement was “…we expect we will receive our Certificate of Occupancy no later than Q2 2020 with the intent of pulling that target forward….” This includes bringing the glasshouse into partial operation on an accelerated basis if possible.

2. The role of Colliers International as the contractor has been significantly increased from an advisory one to providing complete project management oversight. Colliers is now fully in charge of running the project and some changes have already been instituted. Colliers is in charge of completing the construction of the glasshouse reporting to both Sunniva Inc. and Barker Pacific. All contractors and subcontractors will report to Colliers. Colliers is updating all construction completion dates. Sunniva and Barker Pacific have agreed to this change.

3. An important announcement was the adoption of a plan to add additional backup electric power so the building can operate offline in the event of a power loss. As previously discussed, SNN will also increase its chilling capacity. This will raise the total capital cost by U.S. $25 million. There are ongoing discussions with the Barker Pacific Group regarding the allocation of these outlays.

4. The bad news was announced in a Press Release the same day. The closing of the Okanagan Falls property has been delayed until the middle of September. The good news is the deal is still alive. The best news from my point of view is what I learned when I had the opportunity to ask questions.

5. Sunniva has entertained expressions of interest from prospective buyers of Natural Health Services (NHS). One particular party is described as “…actively pursuing this asset.” Management hopes to be able to say something “…soon, once we have something solidified.”

6. The purchase of biomass and extraction was deliberately dialled back due to cash constraints. Management is now considering ways to realize revenue opportunities by utilizing the expanded capacity in extraction and distribution and packaging for third parties. Their new packaging and distribution facility can handle all of their own as well as others. But glasshouse funding is the priority.

7. The urgency of the cash crunch was not fully appreciated by me or the markets. Sunniva was running as close to hand to mouth as you can imagine. However, the recent financings and the expected closing of the OK Falls property has relieved this problem for the immediate future and will allow work to continue toward the completion of the glasshouse. More to follow below.

8. I was pleased to hear new President Kevin Wilkerson admit a major problem has been meeting corporate timelines and targets. I think recognizing and acknowledging a problem is the first step toward fixing it. With the new team, Wilkerson says the goal is to set and meet our corporate milestones.

Below are the questions I asked and the answers I received.

Questions:

1. A major problem for Sunniva in the almost two years I have been following you is a complete inability to meet deadlines. This has eroded and continues to erode investor confidence. The sale of the Okanagan Falls property was supposed to close in early July, then the end of August and now the middle of September. Do you have more evidence to convince me that the closing by the middle of September is any more realistic than the earlier deadlines that weren’t met?

2. The $25 million in additional capital costs was a bit of a jolt. Can you elaborate on that?

3. I read into what you said about the glasshouse, there is another delay from the first quarter to the second quarter of 2020. As with my earlier question, is there some reason your shareholders can have any confidence that this deadline will be met?

4. What is your monthly burn rate?

5. You have talked about financing options. One of the major concerns of shareholders is the shares are now around a dollar and if you are forced to do a major equity financing at this level there will be a significant amount of dilution. Do you have plans that will avoid this potential dilution?

Answers:

1. We have been working with CannaPharm for several weeks on their due diligence, their people, their financiers and that has taken much longer than we or they anticipated. Through the process we have been narrowing in on the timing of completion of their financing and believe it will be done very shortly. We are now on a schedule of weekly calls with their management and we are adding input from our side. We are looking for ways to help them get this done and we have team members who are meeting with their people. We have been meeting with their financiers and helping them to understand the project. We have been meeting with their appraiser to get them to understand the project. We are having multiple meetings every week driving to a close. So for them, financing was a major factor and it looks like they are there now. It looks like we have enough data points from them that we are confident it will close as outlined. We now have way more information that leads us to this conclusion. Just in case, this wasn’t going to happen we have been working on contingency plans and that is what the recent financings were all about. So as it took longer than anyone thought, we had to be ready. We have always been confident it would close but it has taken longer than we or they anticipated.

2. Before David and Kevin got involved in the project there were changes made to the way we handled chilling. As David and I really dug into the plans we concluded that we didn’t have the backup systems needed for a facility this large and this valuable. We concluded we must have the contingency plans in place. I come from a military background so I’m all about contingency plans and backup programs. So Tony agreed that along with the additional environmental contingencies (cooling systems), we should add backup plans so, for example, we could handle a temporary loss of power without losing the whole facility. The shareholder value represented by the glasshouse is going to be far more secure with these additions. The $25 million in capital cost discussed today covers both the changes to the cooling system we had disclosed before and the backup power and other things we added since.

3. This all ties together. We know we have to meet our milestones when we say we are going to meet them. In fact that day has come and gone. So yes we announced a date in this call and we were very clear that we’re going to try to pull it forward. But we are aware that we have to build our credibility in the marketplace and to do that we have meet our deadlines. So we looked at everything involved and we are very comfortable that the glasshouse will operational in the second quarter of 2020.

4. We have some charges that jacked up our apparent burn rate in the second quarter that showed operating costs of $12.6 million. But that included an accounts receivable provision of $2.2 million and a $1.8 million production facility line item and non-cash items of $2 million. So we’re looking at around U.S. $6 million per quarter or U.S. $2 million a month.

5. For clarification, we were on a shoestring budget when I arrived in June and then the OK Falls closing was delayed so a cash pinch is something we’ve had to deal with all along. We’ve done some debt instruments with warrants so there has been some dilution already because we had no choice. I think that was the best decision we could make for the shareholders at the time and now we have some breathing room. So we’ve gone from weeks to months ahead of us where cash isn’t our overriding concern. Again, we have been planning our financial needs beyond that so we have been looking at the kind of debt with warrants funding that we’ve done recently all the way to straight equity. No decisions have been made. If our shares stay low, we will emphasize the less dilutive debt and warrants. Market conditions will dictate what we do and we know minimizing dilution is important.

Conclusion: After thinking about our discussion and considering the impressions I now have of Kevin and David, I conclude they will be invaluable to Tony Holler in fulfilling the requirements of management at Sunniva. I also know in previous discussions with Tony and Leith Pedersen at the time and shortly after he left, there are more additions to senior management planned but perhaps deferred due to cash constraints.

For about a ten year period in my investment career, I had the privilege of working with former professional athletes who had successfully transitioned from sports to business. I haven’t had the same experience with military people but I bet they are similar. I found them to be highly goal and achievement oriented. They were extremely hard working and disciplined in the way they went about attaining their goals. I sense some of the same qualities in Kevin Wilkerson. Tony introduced Kevin as the person leading the first conventional troops into Afghanistan that was a chaotic and unpredictable environment. Tony pointed out Kevin had received the Bronze Star, which I later learned is awarded to members of the U.S. armed services for either heroic or meritorious achievement or service in a combat zone. When I joked saying leading people in a chaotic and unpredictable environment was the perfect training to join Sunniva, he chuckled and said:

“The analogy I’d make is training soldiers what to do if you’re caught in an ambush. You can’t stop and you can’t go back. You have to gather your people together and convince them you’re going to fight through it. We’ve already had a couple of days when I have sat with Tony, David and others and we’ve decided not to stop and not to go backwards but to fight right through it.”

That’s a guy I want on my side.