RIV Capital Inc. (OTCPK:CNPOF) Q4 2022 Earnings Conference Call June 13, 2022 8:00 AM ET
Company Participants
Mark Sims – President & CEO
Matt Mundy – Chief Strategy Officer and General Counsel
Eddie Lucarelli – CFO
Conference Call Participants
Operator
Hello, and welcome to RIV Capital’s Fourth Quarter and Full-Year 2022 Earnings Conference Call. I’m joined this morning by Mark Sims, Chief Executive Officer; Matt Mundy, Chief Strategy Officer and General Counsel; and Eddie Lucarelli, Chief Financial Officer. At this time, all lines are in listen-only mode. For your convenience, the press release, MD&A and condensed interim consolidated financial statements for the quarter and fiscal year ended March 31, 2022 are available on the Investors section of the company’s website at www.rivcapital.com as well as on SEDAR.
Before we start, please note that remarks on this conference call may contain forward-looking information within the meaning of applicable securities laws about RIV Capital and its investees, current and future plans, expectations, intentions, financial results, levels of activity, performance, goals or achievements, or any other future events, trends or developments. To the extent any forward-looking information contained in the remarks constitutes financial outlook, this information may not be appropriate for any other purpose and you should not place undue reliance on such financial outlook.
Forward-looking statements are made as of the date hereof based on information currently available to management and on estimates and assumptions based on factors that management believes are appropriate and reasonable in these circumstances. However, there can be no assurance that some estimates and assumptions will prove to be correct. Many factors could cause actual risks to differ materially from those expressed or implied by the forward-looking statements.
Financial outlooks are also based on assumptions and subject to various risks and the company’s actual financial position and results of operation may differ materially from management’s current expectations. As a result, RIV Capital cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on those forward-looking statements. Forward-looking information is made as of the date given and except as may be required by law. RIV Capital undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company’s financial results, press release dated June 13, 2022 and the risk factors in the MD&A. Please note that RIV Capital reports in Canadian dollars and all dollar amounts expressed today, unless otherwise noted, are in Canadian currency.
I would now like to turn the conference over to your host Mr. Mark Sims, President and Chief Executive Officer of RIV Capital. Thank you. You may begin.
Mark Sims
Thank you, operator, and welcome everyone to our fourth quarter and full-year 2022 earnings call. Before I begin, I would like to mention how proud I am to be speaking with you today as one of the newest members of the RIV Capital team, after being appointed President and CEO two months ago. I am excited to lead the company as we enter the U.S. cannabis market as an operator, and I thank the entire RIV team for their work to end our 2022 fiscal year on excellent footing.
I will begin today’s call by discussing our acquisition of New York-based Etain and outlining our U.S. strategy before turning it over to Chief Strategy Officer and General Counsel, Matt Mundy, for a brief regulatory outlook, followed by a review of our financial results with our CFO, Eddie Lucarelli.
We ended our 2022 fiscal year by taking the first step in our previously announced strategic shift into the U.S. cannabis market. We announced our proposed acquisition of Etain, one of New York’s original five medical cannabis license recipients and one of only ten approved vertically integrated operators. Through this acquisition, RIV will acquire ownership and control of Etain, LLC and Etain IP LLC, which includes Etain’s New York license and its four active medical dispensaries. We were pleased to complete the initial closing of Etain’s non-regulated assets in April and look forward to completing the second and final phase later this year.
So why Etain? Why this transaction? To us, the answer lies in what we believe will be the country’s most exciting legal cannabis market over the next several years, with the potential to follow only California in terms of sales. A state with an attractive regulatory framework and a market that skews toward premium products, New York is a cultural epicenter with a strong tourism industry and extremely high population density. And as a population of 22 million people and 265 million visitors a year, about a quarter of which visit New York City.
While we are extremely excited about Etain’s flagship dispensary located in Midtown East in Manhattan, Etain also operates three other prominent locations in Kingston, Syracuse, and Westchester. We chose our first strategic investment to be in New York because we believe the state’s launch of adult use sales, anticipated to begin later this year will be transformative. We are so confident in this market’s potential that we intend to invest in a new state-of-the-art flagship indoor cultivation facility that is specifically tailored to support the premium New York market, as well as four additional dispensaries.
In total, our New York footprint will eventually encompass eight brick-and-mortar retail locations, three of which will be co-located for adult-use. Our longer term strategy is to build a leading multi-state cannabis operating and brand platform with New York serving as our foundation. Part of our expansion (ph) plan is to bring successful authentic West Coast brands to the people of New York. New Yorkers expect the best, so we intend to offer a Etain’s high-quality products alongside those that are tried and true in California the nation’s largest cannabis market. We look forward to providing updates on our brand strategy as our U.S. operations begin to take shape.
While our primary goal is to become a cannabis powerhouse in New York before undertaking any significant expansions in other geographies, we are always evaluating other attractive opportunities in the U.S. that could accelerate our brand strategies and are closely monitoring the progression of other states developing cannabis markets. Contrary to the shotgun style approach favored by many of the major MSOs, who accumulate disjointed businesses in an effort to build large national retail footprints, our measured approach is laser focused on getting New York right from the outset.
To that end, today, we announced the appointment of Mike Totzke as Chief Operating Officer of RIV Capital effective June 20th. Mr. Totzke brings extensive operational experience to RIV Capital’s management team, having held a variety of operations and sales focus roles across Scotts Miracle-Gro, since 2006, and his deep operational background further positions us for successful execution of our U.S. strategy.
Before joining our team, he most recently served as Vice President at Hawthorne Collective, where he led a team of highly recognized performance across legal, finance and strategy to implement innovative investment structures within the cannabis industry. Prior to working with the Hawthorne Collective, he was Vice President of Sales for the National Accounts division of ScottsMiracle-Gro, where he grew annual sales by $200 million over three years by activating new retail channels and driving incremental distribution points.
We are thrilled to take the first active steps in our U.S. journey and believe that the addition of Mr. Totzke to the management team combined with our strong balance sheet, strategic footprint, and robust industry relationships competitively position us to grow market share in New York while delivering value for shareholders.
With that, I will now turn the call over to Matt Mundy, Chief Strategy Officer and General Counsel for regulatory outlook on the New York market. Matt?
Matt Mundy
Thanks, Mike. We believe that New York which is forecasted to generate around $1.5 billion in sales in the first 12 months of adult-use legalization and approaching roughly $3 billion of annual sales by 2026. We will be the country’s most exciting legal cannabis market over the next several years. We believe that the anticipated launch of adult-use sales will be transformative for the broader U.S. cannabis market, and the timing of our entrance into New York is designed to capitalize on the rapid growth potential ahead.
Earlier this month, the New York Cannabis Control Board proposed for a public comment (ph) period a new slate of regulations regarding advertising, packaging and laboratory testing for cannabis intended to be sold from adult use locations in the state. We welcome this development. However, incremental, as it represents yet another positive step on the road to an open adult use market. Additional regulations are expected to be proposed and approved over the coming months as the Control Board prepares for the marketplace to begin adult use sales later this year or in early 2023, and we are monitoring their progress closely.
As Mark mentioned, our near term plans for New York include expanding Etain’s current cultivation and retail operations to fully support the existing medical and future adult use market. We are currently in advanced discussions to construct a flagship facility in New York that will be home to state-of-the-art cultivation and production infrastructure that we believe will bring premium, high quality cannabis to New Yorkers and we look forward to sharing more details on our expansion progress with you in the coming months.
From a progress perspective, we believe that we will be extremely well-positioned to support the existing medical cannabis market, and we are committed to prioritizing patient access and participation in the state. We are also extremely supportive of the state’s focus on social equity in this burgeoning market and look forward to working alongside social equity applicants and participants as a New York Cannabis industry takes shape over the coming years. Once adult uses in effect and our expansion plans are being completed, we anticipate a significant ramp up in business to occur through the second half of 2023, with our new operations coming fully online by the first half of 2024.
We are eager to see our strategy come to light in New York, and we now have the right people and the right assets in place to make sure that we get it right. We have an incredible opportunity in front of us and we believe that RIV is uniquely positioned to create a market leading, value driven and consumer focused operating platform in what we believe will be the world’s most exciting cannabis market.
I’ll now hand the line to Eddie, who will walk us through our financial results. Eddie?
Eddie Lucarelli
Thank you, Mark and Matt. for the update on our New York strategy and our approach to the ever evolving U.S. cannabis industry. I’ll now review our financial results for the fourth quarter of our 2022 fiscal year. Operating loss before consideration of equity method investees and fair value changes was $2 million for the quarter, compared to operating income of $0.7 million for the same period last year.
The operating loss we reported for the quarter was primarily driven by an increase in the provision for expected credit losses on interest and royalty receivables. Over the course of our fiscal year, we have recognized multiple increases in the provisions for expected credit losses related to our royalty agreements with the Agripharm and NOYA, and debenture agreements with Greenhouse Juice and NOYA, due to underlying financial challenges experienced by these entities. By fiscal year end, we had stopped recognizing gross royalty income on our royalty investment in Agripharm and gross interest income on our secured convertible debenture investment in Greenhouse Juice.
Total operating expenses were $4.8 million for the quarter compared with $7.9 million for the same period last year. Included in operating expenses are general and administrative expenses of $2.2 million for the quarter compared to $2 million for the same period last year. Consulting and professional fees of $0.1 million for the quarter compared to $0.7 million for the same period last year. And transaction costs of $1.8 million for the quarter, primarily attributable to legal fees and other advisory costs incurred in respect of the Etain transaction.
For our equity method investees, we recognized a share of loss of $0.1 million and impairment charges of $0.2 million for the quarter compared with a share of loss of $47,000 and no impairment charges for the same period last year. We also recognized a net decrease in the fair value of financial assets that are reported at fair value through profit or loss of $3.8 million for the quarter compared with $19.8 million for the same period last year. The net decrease for the quarter was primarily driven by the negative changes in the estimated fair values of our investments in the Greenhouse Juice secured convertible debenture of $2.2 million and Agripharm royalty interest of $1 million.
Other expenses were $9.3 million for the quarter, compared to other income of $0.1 million for the same period last year. The biggest driver of this line item for the quarter was a $6.1 million unrealized foreign exchange loss recognized upon the translation of our U.S. dollar cash reserves to our presentation currency of Canadian dollars. We anticipate that beginning in the first quarter of our 2023 fiscal year, we will shift our presentation currency from Canadian dollars to U.S. dollars. Other expenses also include the non-cash accretion expense related to the Hawthorne Collectives convertible note investment, which will continue to be recognized on a systematic basis until the maturity of the debt.
Income tax recovery was $2.8 million for the quarter compared to $2.6 million for the same period last year. Overall, RIV Capital reported a total comprehensive loss of $17.2 million for the quarter compared with total comprehensive income of $64.8 million for the same period last year. As a reminder, the comprehensive income reported for the fourth quarter of our 2021 fiscal year included the material gains recognized through our divestiture of select portfolio companies to Canopy Growth Corporation in February 2021. As of March 31, 2022, we had $398.3 million of cash on hand or approximately $318.7 million when converted to U.S. dollars using the exchange rate posted by the Bank of Canada for that day.
Subsequent to year end, as previously disclosed, the Hawthorne Collective exercised its top up option under its investor rights agreement and advanced an additional $25 million United States dollars (ph) to the company, pursuant to a newly issued unsecured convertible note. This top up investment brought the total proceeds received from the Hawthorne Collectives convertible note investments in the company to $175 million. On April 22nd, the company paid $170.6 million in connection with the initial closing of the Etain transaction, which was financed entirely by proceeds received from the Hawthorne Collectives convertible note investments. Accordingly, as at June 10, 2022, RIV Capital had approximately $169 million of cash on its balance sheet.
The financial support received from the Hawthorne Collective leaves us extremely well positioned to successfully implement our U.S. strategy and we believe that the decision by the Hawthorne Collective to invest again in RIV Capital is a testament to the quality of Etain’s assets as well as the significant opportunity ahead in New York. In our view, our significant liquidity and strong balance sheet uniquely position us to build a market leading platform in the United States. In addition to our healthy balance sheet, we believe that our in-house expertise and cannabis domain knowledge position us for success as we fully operationalize the New York platform. We are looking forward to sharing our progress with you as we continue to execute on our strategy.
With that, I will now turn the call back to Mark for closing remarks.
Mark Sims
Thank you, Eddie. We are extremely excited to complete our transition to a U.S. cannabis operator upon the full completion of the Etain transaction anticipated to occur later this year. In the meantime, we will focus on our plans to further enhance the value of this asset ahead of adult use sales in New York, which we’re eagerly awaiting. We look forward to updating you on our continued progress on our next call and thank you all for joining us today.
Question-and-Answer Session
Q –
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