Shares in Sunniva Inc (CNSX:SNN) (OTCMKTS:SNNVF) are weathering the cannabis storm about as well as any junior LP trading on the Canadian Securities Exchange. Despite CSE cannabis stocks shedding close to twenty percent in value since the October 15th close, Sunniva has lost significantly less ground. We attempt to make sense of the company’s recent relative out-performance.

SNN:CNX Performance, since October 15th

Midas Letter CSE Canadian Cannabis Index, Since October 15th

Searching for recent catalysts to justify Sunniva’s performance, we’re loathe to find any. On October 17th, the company did announce a non-arms length binding letter of intent to acquire all outstanding equity interests of the companies that comprise the Oakland Vision Project—including a licensed cultivation facility located in Irvine, California. The acquisition will add another 725 kg/year of production capacity, with development plans to scale production to 3600 kg/year in 2019. But in the relative scheme of things, such news would generally qualify as non-material.

Casting our net a little wider, Sunniva has some potential catalysts on the horizon that investors may be staking claim to.

The most prominent one is perhaps the opening of its 325,000 square foot Sunniva California Campus (Phase I) in Cathedral City, CA. Facility operations are expected to commence before 2018 ends, with cannabis harvest arriving in Q1 2019. Phase 1 is expected to ramp up to an annual rate of 60,000 kilograms of flower and trim. This is an important milestone since Sunniva is hemorrhaging working capital, and subsequent dry flower sales will impede its burn rate significant. Over the past two quarters, Sunniva has lost about $11 million, or about $1.8 million per month.

Perhaps another under-the-radar event supporting the bid is ancillary news related to Sunniva’s recent $23.0 million bought deal closure, announced October 12th. In the presser, the company provided an operational update, disclosing that they have retained prominent investment bank, Canaccord Genuity Corp., to review all strategic alternatives. Some considerations may include, but are not limited to a sale of, outside investment in, a joint venture for some or all of the Company’s Canadian assets, or up-listing its shares on the Toronto Stock Exchange and the NASDAQ. As Sunniva has yet to secure financing for its proposed $120M Canadian Campus Facility, such asset offloading may be deemed as a net positive by the marketplace.

Canaccord Genuity has previously acted as a financial advisor to Sunniva, in connection with a Spinout Transaction proposal announced on July 10, 2018. The investment bank’s current price target is C$13.00/share, which they issued on June 28, 2018.

And in a July note to investors, Beacon Securities analysts Doug Cooper slapped a $16.50/share price target on SNN—roughly double from then-current prices. Cooper told clients that, “SNN has a current EV of ~$220 million, which neither reflects the true value of the US nor Canadian assets.” The quote is representative of the feeling many retail investors hold for the company; that is, Sunniva is undervalued on a peer comp basis.

Needless to say, the stock hasn’t lived up to those expectations to date.

Final Thoughts

Sunniva appears to be a company coming into its own. The company will soon be operating its Sun Oil extraction facility, begin cannabis harvest, and open dispensaries in California—all within the next couple of quarters. While its Canadian operations are advancing at a slower rate—placing its annual 45,000 kg supply agreement with Canopy Growth in jeopardy—the market may be telling us that the company is doing enough good things in California to justify its share price. With only 47.6M shares fully diluted—giving it a market cap of around $245 million—there might be some tire kicking going on at these levels. In isolation, California is the world’s 5th largest economy, surpassing $2.7 trillion in gross domestic product in 2017.

Certainly, there’s no denying the out-performance in Sunniva’s common shares of late. Midas Letter will report on more relevant company developments, as warranted.

Update: 12:51 pm EST

The Sun Oil extraction facility has been fulfilling contracts since June 2018, although it is not, to date, fully operational. Some of Sunniva’s customer products (Pure Organix, Cali-gold, and Farmacy Phactory) are indeed stocked on select dispensary shelves in-state.