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After Canada legalized recreational cannabis in mid-October, the cannabis sector has come under pressure and this is a trend that is worth watching.
The global cannabis industry is the fastest growing market in the world and we are bullish on the growth prospects heading into 2019. One theme that has recently been a major discussion point of the cannabis industry is the advancement of the United States market and we find this to be of the most exciting opportunities.
California is the largest medical cannabis market in the world and we expect this market to see incredible growth going forward. During the last year, we have been laser focused on this burgeoning market and have targeted companies that have attractive leverage to it.
A California Cannabis Leader Flying Under the Radar
Last month, we highlighted Sunniva (SNN.CN) (SNNVF) as a company that will be a beneficiary of the California cannabis industry and have provided an update on this opportunity. Sunniva is focused on the North American cannabis market and has leverage to California as well as Canada. The company in the middle of a major expansion and has been executing flawlessly on this.
Through organic and inorganic growth initiatives, Sunniva has significantly advanced its fundamental story and we are favorable on this. Earlier this year, the company acquired Natural Health Services (NHS) and Full-Scale Distributors, LLC (FSD), which have proven to be accretive acquisitions.
NHS serves as the education vertical and currently operates eight medical clinics and educational centers in Canada. NHS currently has more than 95,000 active current patients and has been focused on growing this number through a variety of strategic initiatives. FSD, through its brand, Vapor Connoisseur, is a provider of custom, private-label vaporizers and accessories. FSD currently serves the needs of over 80 brands in the North American marketplace.
Acquires Leading California Cannabis Distributor
Last week, Sunniva further enhanced its fundamental story and signed a binding term sheet to acquire LTYR Logistics, a California cannabis distribution company headquartered in San Diego. One of the primary drivers of this acquisition was LTYR’s proven ability to execute on growth opportunities while utilizing its distribution capabilities within the cannabis space. LYTR will play an key role in driving Sunniva’s leadership position in California as a vertically integrated cannabis company across the entire value chain.
Through this agreement, Sunniva has acquired a highly skilled management and a sales team with a retail network of more than 120 licensed retail dispensaries throughout California. This represents a significant opportunity and expect it to quickly prove to be accretive to Sunniva. LTYR plans to utilize Sunniva’s existing Cathedral City distribution and delivery license and will be compliant with new California regulations coming in January. Sunniva will purchase a 4,200 sq. ft. proposed distribution facility in Long Beach and we will monitor how the team executes on this exciting opportunity.
Kevin Wilkerson leads the LTYR team and has joined Sunniva as the COO of Sun CA Holdings, Sunniva’s wholly-owned California operating subsidiary. He earned a master’s degree from Harvard and has been a successful entrepreneur. Kevin has been active in the cannabis space since 2014, providing operations, distribution logistics and technology expertise to the industry. He will be responsible for all of Sunniva’s California operations.
Sunniva is also bringing on the other co-founders of LTYR in various management roles and we expect this to make the transition much easier. Jay Myers will be joining the team as Vice President of Sales in California and Brad Neeld will joining the team as Vice President of Distribution.
During the last year, Sunniva has conducted significant due diligence and evaluated several distribution opportunities to complement its vertical integration strategy with the goal of being able to sell all of the products that are produced in the company’s California facilities. This is important because Sunniva has been actively manufacturing and stockpiling inventory for its planned brand launches and has a significant amount of product ready for sale. The teams have been working closely analyzing consumer market data, demand metrics and pricing economics to better define all upcoming Sunniva product lines in preparation of these launches in the first quarter of 2019.
We are bullish on the growth prospects heading into 2019 and these acquisitions enhances the company’s ability to execute. Sunniva acquired valuable distribution assets and strategic human capital (in the form or new management members). The company acquired LTYR for all-stock and 30% of the compensation is based on hitting milestones. The economics of the deal are attractive, and the potential synergies are significant. We are favorable on the combined company and will monitor how the team executes from here.
Sunniva and Canopy Growth to Focus on the Canadian Opportunity
Sunniva has been working tirelessly on a major expansion that will take place in both the United
States and Canada. There are not many companies that have this type of leverage and we are favorable on the growth prospects as a result of this.
In Canada, Sunniva couldn’t have picked a better partner and the company has a strategic relationship with Canopy Growth Corp. (WEED.TO) (CGC). This relationship is through Sunniva’s Canadian subsidiary, Sunniva Medical Inc. (SMI), which signed a definitive supply agreement with Canopy to purchase up to 45,000 kilograms of dried cannabis per year.
Earlier this year, SMI acquired a 126-acre property, which will be the site of the Sunniva Canada Campus. SMI plans to build out more than 700,000 sq. ft. of cGMP greenhouses, which could produce more than 100,000 kilograms of premium cannabis flower a year plus higher margin extracted products such as capsules, cartridges, tinctures and creams.
SMI is in the review stage of the Health Canada’s ACMPR application and we are monitoring how the team continues to execute. We think this asset is underappreciated by the street and the issuance of cultivation license will be a major catalyst for the North American cannabis company.
An Underappreciated North American Opportunity
When it comes to investing in the cannabis industry, investors want to focus on companies that are executing on previously announced initiatives, that have significant leverage to burgeoning cannabis markets, that are led by a management with a proven track record of a success, and that are attractively valued.
Sunniva possess these traits and has been executing flawlessly on a North American expansion. Although the fundamental story has significantly improved, the shares have been under considerable pressure and have been trading lower with the market. Sunniva has been trending lower and the shares have fallen more than 20% from its November highs.
We think that the market underappreciates the growth potential and will monitor how the team continues to execute. The acquisition of LTYR significantly enhances the fundamental story and this is a company to watch. To receive updates on this burgeoning North American cannabis company, please email email@example.com