Earlier this month, United States President Donald Trump delivered a catalyst to the U.S. cannabis industry when he promised to support states’ rights, especially when it comes to legal marijuana, during a conversation with Republican Colorado Senator Cory Gardner.

This announcement was a major catalyst since it removes some of the fears cannabis investors have when it comes to companies levered to the United States. California’s marijuana market is projected to be the largest in the world and investors have been actively looking for opportunities levered to this burgeoning market.

Although the number of cannabis stocks that claim to be capitalizing on the California marijuana market have increased significantly in 2018, investors need to focus on companies that are well capitalized, well positioned, and led by a management team that is focused on execution.

One company we are very excited about is Sunniva Inc. (SNN:CNX) (SNNVF), a Canadian cannabis firm focused on becoming one of the largest vertically integrated cannabis companies in both California and Canada.

Sunniva: An Attractive Operating Structure

Sunniva is comprised of three distinct divisions which can create value for each other as well as improve the value proposition of the entire company. Its three divisions are focused on large-scale purpose built cannabis production and manufacturing facilities through Sunniva’s Current Good Manufacturing Practice standards (cGMP) Greenhouses (Canada and California), patient education through Natural Health Services (NHS), and best-in-class therapeutic delivery devices through Vapor Connoisseur (North America).

In late 2017, Sunniva was granted a Conditional Use Permit for its California facility and broke ground on its fully funded cGMP Campus which will have a dispensary on-site and is expected to be operational by the third quarter of 2018. The facility is going to be completed in two phases. The initial phase includes the construction of a 325,000 sq. ft. facility and will produce over 60,000 kg of preium cannabis annually, while the second phase will be an additional 165,000 sq. ft. facility.

In Canada, Sunniva Medical Inc. is in the final review stage under Health Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR). Sunniva Medical plans to break ground on the Sunniva Canada Campus in the next two weeks, a 700,000 sq. ft. of cGMP greenhouse and manufacturing facility, which will produce more than 100,000 kilograms a year. It is anticipated this facility will be funded via bank and subordinate debt.

The company is focused on selling up to 75% of production via long term supply contracts and retaining 25% for NHS medical patients. Sunniva recently announced one of the largest take or pay supply contracts with Canopy Growth Corp.

NHS owns and operates a network of 8 medical clinics in Canada specializing in medical cannabis under ACMPR. NHS connects patients with safe and effective medical cannabis products through Licensed Producers (“LPs”). NHS has in-house physicians and nurse practitioners specializing in the endocannabinoid system providing expert consultation, education, and recommendations for patients. NHS’ proprietary technology infrastructure called spark assists physicians, patients and LPs to comply with the rules of Health Canada. NHS has more than 129,000 active medical documents outstanding and 93,000 active patients.

An Attractive Differentiated Opportunity

Sunniva is one of the only companies levered to both the California and Canadian marijuana market and we are very excited by this leverage. The company has diffracted itself by proving its ability to de-risk its distribution model via ownership of NHS, entering into large supply contracts with industry leaders and producing a, massive amount of high-quality cannabis at low costs.. This is significant when it comes to looking at a cannabis stock and we are bullish on this differentiating factor.

Over time, we expect Sunniva to be able to realize significant economies of scale in a largely automated, climate-controlled facility utilizing the energy of the sun. When all is said and done, the company should be able to produce cannabis for less than $1 a gram, which is much better than most of its competitors.

The California market is becoming much more regulated and this is a problem for many cannabis producers. Due to the size of the California market, we expect there to be a supply demand issue as regulators crack down on the sale of illegal cannabis. Since Sunniva is able to produce a high-quality compliant product, the company will be in a unique position to capitalize.

This situation puts Sunniva in a strategic and unique position to become one of California’s leading, most-trusted cannabis brand, and to capture significant market share. With its funded large-scale cannabis growing infrastructure and execution of long-term distribution agreements in Canada, Sunniva already has all the right dynamics to become attractive to a household-name corporate suitor.

A Company that Cannot be Missed

Sunniva has already virtually de-risked its business model by leveraging strategic commercial real estate and merchant banking lending relationships to finance and and produce 100,000 kilograms of cannabis dried flower and trim at full capacity in both California and Canada

Sunniva is negotiating long-term sales agreements with high-volume retailers and distributors of cannabis products in California as well as Canada. In February, Sunniva announced one of the largest take or pay supply agreements with Canopy Growth Corp. (WEED.TO) (TWMJF) and we think the market significantly underappreciates the economic value of this contract.We also anticipate additional contracts forthcoming both in Canada and California

Under the terms of the agreement, Canopy Growth will purchase up to 45,000 kilograms of dried cannabis annually and Canopy will also distribute Sunniva branded products.. Canopy Growth and Sunniva will share in the revenues as product is sold through Canopy Growth’s distribution network including its online marketplace, Tweed Main Street and via provincial distribution channels. The revenue share will be based on the strain, sales channel and other relevant factors.

The agreement is subject to Sunniva Medical receiving its license from Health Canada, which is currently in the final review stage, and completing the Sunniva Canada Campus, a 700,000-square-foot purpose-built GMP compliant greenhouse facility in British Columbia.

The total campus is expected to produce over 100,000 kilograms of premium cannabis flower a year plus higher margin extracted products such as capsules, cartridges, tinctures and creams. Sunniva is preparing to break ground within the next 30 days and anticipates the facility to be funded via bank and subordinate debt financing.

An Undervalued Leading North American Opportunity

We are bullish on Sunniva due to the company’s continued execution and see significant upside to current levels over the long-term. We are favorable due to the opportunity to capitalize on markets in California and Canada, the strategic relationships and supply agreements, the focus on high-margin products like cannabis oil, and the valuation.

The recent comments from President Trump only make us more favorable on companies like Sunniva. The regulatory environment in the United States is improving and we are monitoring this trend closely. We view the improving environment as a potential catalyst for Sunniva and will continue to monitor the company closely.