Sunniva's Entry In The U.S. Is Turning Out To Be Very Expensive

After the market closed on Monday, Vancouver-based Sunniva Inc.  (CSE: SNN) (OTCQB: SNNVF) reported its fiscal 2018 results for the year ending December 2018 in Canadian dollars. The company delivered$18.8 million in revenue versus 2017’s $16.1 million. The net losses for 2018 rose to $29.0 million versus last year’s $17.5.

The company attributed the increase in net losses to SG&A expenses increasing by $10.5 million during the year.  The increase was primarily due to the company’s growth in 2018 as US operations, which led to an increase in the number of employees.  The most significant increase in costs was related to personnel costs, rent, and insurance of US operations.

In addition to that, share-based payment expenses were $8.2 million for the year versus $4.0 million in 2017 as the options granted during the year had much higher valuations due to the higher share price in the first half of 2018. Also, the company recognized an impairment loss of $1.3 million due to a valuation assessment of assets held-for-sale in December.

“While we were faced with some challenges in 2018, our existing businesses continued to see revenue growth and we now have strategic verticals assembled in California which have allowed us to leverage our core assets and to launch brands covering numerous cannabis product categories,” said Dr. Anthony Holler, CEO of Sunniva.

“Hard work by our team in California throughout 2018 has begun to bear fruit in early 2019.  The extraction facility became operational in Q3 2018 and, in conjunction with the acquisition of our distribution company, has enabled us to successfully launch two of our first three product brands into the California market in March 2019.  Strong initial sales of our cannabis brands contributed over $10.0 million of revenue to our total preliminary revenue estimate of $14.0 million for Q1 2019 which is almost as much revenue as we generated all of last year.”

Revenue did increase by $2.7 million during the year and FSD revenue increased by $3.3 million during the year due to an increase in sales from current customers as well as an increase in the customer base. NHS revenue decreased by $0.7 million during the year due to a temporary loss of doctors midway through 2018. CPL revenue increased by $0.1 million as initial extraction revenue was realized.

2019 Outlook

In 2019, Sunniva said it plans to focus primarily on the ongoing development of our California assets and brands in California. In a statement, the company noted, “In Canada, we continue to expand our Natural Health Services operations with new leadership from Dr. Mark Kimmins. We have suspended operations on our Okanagan Falls property (the “Sunniva Canada Campus”) as we focus efforts on US operations, and we continue to review strategic initiatives in respect of our Canadian assets.”

California – Delayed & More Expensive

Sunniva said that construction of the phase one 325,000 square foot California Campus in Cathedral City has experienced delays and is now expected to be operational in late Q3 2019. Sunniva attributed the delay on additional leasehold improvements required to increase the efficiency of the greenhouse and slower than expected construction progress.

The company also said that the estimated capital costs of the leased California Campus have increased to $95 million due to additional costs expected for the temperature control and lighting systems and additional infrastructure on phase two. Sunniva has contributed approximately $19.5 million to date and is committed to spending an additional US$10.5 million to complete its obligation. The flagship Sunniva onsite dispensary is expected to be completed and operational in Q1 2020 which will showcase the Sunniva brands.

Acquisitions

Sunniva also announced on Monday that its wholly-owned subsidiary, CP Logistics had acquired an 80% membership interest in 420 Distribution and Coachella Distillation from Group Two Investments and will assume the existing leases of the commercial property located in Coachella, CA. The company said that the total purchase price was not material.

“We continue to focus our efforts on enhancing and expanding our business in California and this new facility will expand our packaging and distribution operations,” said Kevin Wilkerson, CEO of Sun CA Holdings, Inc. “Following the successful launch of our first cannabis branded products earlier this year, we are looking ahead to growing  in the volume of products sold and we see this facility playing an instrumental role within the fully vertically integrated operations we are building in Southern California as it will enable us to increase our overall packaging capacity, expand our distribution capabilities and most importantly reduce our overall distribution costs.”

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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