RIV Capital reports first quarter 2023 financial results

by Alessandra Hechanova Aug 29, 2022, 18:24 PM

Company working with Etain, LLC to scale infrastructure and processes ahead of license transfer and anticipated launch of New York adult-use sales

Company working with Etain, LLC to scale infrastructure and processes ahead of license transfer and anticipated launch of New York adult-use sales

TORONTO - RIV Capital Inc. (“RIV Capital” or the “Company”) (CSE: RIV) (OTC: CNPOF), an acquisition and investment firm focused on building a leading multistate platform with the strongest portfolio of cannabis brands in key strategic markets across the United States (“U.S.”), today released its financial results for the three months ended June 30, 2022 (“Q1 2023”). All financial information in this press release is reported in U.S. dollars, unless otherwise indicated.

Q1 2023 Highlights

  • Initial closing of acquisition of ownership and control of Etain, LLC and Etain IP LLC (together, “Etain”) completed in April 2022 (the “Etain Acquisition”)
  • Ongoing integration of the Etain business to optimally position the Company for the launch of the adult-use cannabis market in New York
  • Approximately $170 million of cash on-hand to support the Etain Acquisition and long-term expansion plans

“Following the initial closing on the unregulated assets of Etain in April 2022, we remain confident that we have selected the ideal platform for growth as the New York market approaches the launch of adult-use sales,” said Mark Sims, President and CEO of RIV Capital. “While the final transfer of equity interests of Etain, the license-holding entity, is currently under review by New York state regulators, the structure of the acquisition has given us ownership of Etain’s non-regulated assets, and accordingly, we have been diligently working with the Etain team to appropriately scale their existing infrastructure, processes, and systems. We expect a significant increase in Etain’s revenue and cash flow following the launch of adult-use sales in the New York, which Etain plans to support alongside the State’s medical program once legally permissible.”

“We believe that we have a significant advantage in our ability to expand the existing Etain business into a larger platform designed for long-term, sustained growth,” Mr. Sims continued. “Our newly appointed Chief Operating Officer, Mike Totzke, will be dedicated to leading our New York operations and executing our growth plans. Despite ongoing challenges in the existing medical market, particularly due to the rampant proliferation of unlicensed operators in the state of New York, Etain has carved out a premium niche that will serve as a foundation on which to grow market share in the years ahead. Four months following the initial closing of the Etain Acquisition, Etain is well on its way to completing the Chestertown expansion, introducing new and exciting products into the medical market, optimizing its retail platform, and readying to break ground on our new flagship facility in Buffalo.”

"Despite some of the prolonged headwinds that we have seen weigh on the sector over the past several quarters, we remain extremely bullish on the growth prospects for the cannabis industry, and we believe that New York will be the epicenter for key market developments in the years to come," said Chris Hagedorn, Executive Vice President, The Scotts Miracle-Gro Company, Division President, The Hawthorne Gardening Company, and Director, RIV Capital. "We remain confident that meaningful federal regulatory reform is a question of when, not if, and our long-term commitment to this industry is as strong as ever. We are excited to continue to watch and support our partners at RIV as they work towards building the New York leader that we believe they are optimally positioned to become. We are well-situated to win in this industry long-term with RIV as our investment vehicle and we look forward to the development of their strategy outside of New York's borders as well."

Eddie Lucarelli, Chief Financial Officer of RIV Capital, added, “Our cash position remains strong, providing us with more than enough liquidity to complete the Etain Acquisition and finance our expansion plans in New York, while remaining flexible enough to adapt to the shifting cannabis landscape in real time. Our goal to build a market-leading U.S. platform begins in New York, but we continue to explore new opportunities for the selective expansion of our footprint to other geographies in the future, keeping in mind the dynamic nature of the industry.”

Etain Acquisition and Integration

In April 2022, RIV Capital announced the completion of the initial closing of its previously disclosed transaction involving Etain, owners and operators of a legally-licensed Registered Organization with cannabis cultivation and retail dispensaries in the state of New York. Pursuant to the initial closing, RIV Capital acquired the non-regulated portion of the Etain companies. Subject to receipt of the relevant approvals by the New York state regulators, including the New York Cannabis Control Board (the “CCB”) and the New York State Office of Cannabis Management (the “OCM”), the second closing and transfer of the license-holding entity’s equity interests is expected to occur in the second half of calendar year 2022.

The structure of the Etain Acquisition has enabled an accelerated timeline for the optimization of Etain's business, which includes the early execution of certain integration activities and streamlining of internal processes. Following the initial close, the Company has been able to provide various support services, including advising on the implementation of new cultivation and manufacturing best practices, leveraging insights from the technical services team at The Hawthorne Gardening Company, a subsidiary of The Scotts Miracle-Gro Company (“ScottsMiracle-Gro”), RIV Capital’s strategic partner, with the goal of optimizing the design and fit-out of Etain’s Chestertown cultivation facility expansion.

Etain’s cultivation and production infrastructure in Chestertown is undergoing a significant expansion to increase cultivation capacity and support the development of new product formats in anticipation of the launch of adult-use sales in New York. The Company expects construction on the expansion to be substantially complete before the end of its fiscal year. The Company is also working to help prepare Etain’s existing retail locations for the expected increase in customer traffic and sales volume next fiscal year, with the potential for certain strategic relocations in early calendar year 2023. In addition, RIV is currently evaluating locations for the four new dispensaries permitted under the Etain license, which would bring the Company’s total New York footprint to eight retail locations, three of which will be co-located for adult-use (once legally permissible).

As previously announced, RIV Capital is also in the process of developing a new, state-of-the-art flagship indoor cultivation facility in Buffalo, designed with premier cultivation and production infrastructure specifically tailored to support the premium New York market. Under the lease agreement relating to the facility, RIV Capital will lease two buildings totaling approximately 75,000 square feet. Importantly, an approximately 7,000 square foot portion of the new facility will be designated to support social equity licensees. The Company believes that supporting the state’s initiatives for an equitable cannabis industry will further strengthen the broader New York market, while securing new wholesale opportunities and other potential partnerships. RIV Capital expects to break ground on the new flagship facility in the fourth quarter of calendar year 2022. The lease contains various conditions relating to receipt of regulatory and other necessary approvals, including completion of any environmental remediation pursuant to the New York State Brownfield Program. Operation of the flagship facility is also subject to receipt of regulatory approval from the CCB and the OCM.

While the Company believes that the pending launch of adult-use sales in New York will be transformative, management recognizes that the current market faces operational challenges. These include the prolonged roll-out of regulations for the adult-use market, low patient retention in the medical program, and rampant proliferation of unlicensed operators in the state. Although these factors have placed added pressure on the current market, management continues to strongly believe in the significant market opportunity in New York. The Company is hopeful that regulators are taking the necessary steps required to ensure a safe, legal market for patients and businesses alike, while setting the groundwork for a successful adult-use launch that supports the long-term, sustained success that patients, customers, and businesses alike deserve in the state.

Growth and Expansion Strategy

RIV Capital’s long-term strategy is to build a leading multi-state operating and brand platform, with New York serving as the foundation. The Company intends to develop and expand new brands and products designed to resonate with the New York consumer, with plans to offer as one of its core brands Etain’s popular product line, which will include new form factors and SKUs later this year. Once adult-use sales begin, the Company expects a significant ramp in business to occur, with expanded operations coming online to satisfy the growing consumer demand that is expected across the state. We further believe that adding capacity to Etain’s existing cultivation and manufacturing footprint will allow the company to continue efficiently serving New York’s medical market even as adult-use rolls out across the state. 

While RIV Capital remains focused on operationalizing its New York platform before undertaking significant expansions elsewhere, the Company continues to actively explore M&A opportunities as part of its overall corporate strategy. Amid difficult market conditions, RIV Capital’s strong liquidity puts the Company in a favourable position to build its U.S. platform as the broader market evolves. The Company intends to take full advantage of its significant cash position when the right opportunity presents itself, and aims to provide updates on its progress as its U.S. operations begin to scale.

Q1 2023 Financial Results

The following is a summary of the Company’s financial results for Q1 2023. Unless otherwise indicated, all financial highlights summarized in tables in this press release are presented in thousands of dollars, except share and per share amounts. In light of the Etain Acquisition, and its initial closing in April 2022, the Company changed the presentation currency of its consolidated financial statements from the Canadian dollar to the U.S. dollar effective April 1, 2022. As a result of the change in the Company’s presentation currency, all references to “$” are to United States dollars and references to “C$” are to Canadian dollars.

Summary Operating Results1,2

Three months ended
June 30, 2022		 Three months ended
June 30, 2021
Revenue $  1,428 $  -
Excise taxes (87) -
Total revenue, net   1,341   -
Cost of goods sold 783 -
Gross profit excluding fair value items   558   -
Fair value items included in gross profit (36) -
Gross profit   522   -
Operating expenses 5,529 2,029
Operating loss   (5,007)   (2,029)
Other income (loss) 2,157 (26,430)
Loss before taxes   (2,850)   (28,459)
Income tax expense (recovery) 624 (3,949)
Net loss $  (3,474) $  (24,510)
Other comprehensive income (loss) (4,549) 3,186
Total comprehensive loss $  (8,023) $  (21,324)
Loss per share - basic $  (0.02) $  (0.17)
Loss per share - diluted $  (0.02) $  (0.17)

 

1The operating results reported by the Company for the three months ended June 30, 2022, include the operating results for Etain, LLC from April 22, 2022, to June 30, 2022. The revenue and net loss reported by the Company for the three months ended June 30, 2022, would not have been materially different had the initial closing of the Etain Acquisition been effected April 1, 2022, instead of April 22, 2022.
2The Company changed its presentation currency from the Canadian dollar to the U.S. dollar, effective April 1, 2022. Comparative period results have been restated to reflect current period presentation.

The Company reported revenue, net of excise taxes, of $1.3 million for the three months ended June 30, 2022 (the Company did not report revenue for any reporting periods ended on or prior to March 31, 2022). Retail revenue of $1.3 million was generated from Etain, LLC’s dispensaries in Manhattan, Kingston, Syracuse, and Yonkers, and wholesale revenue of $0.2 million was generated from sales of Etain-branded products to other registered organizations in New York.

The Company reported cost of goods sold (which excludes unrealized fair value changes included in biological assets and realized fair value changes included in inventory sold) of $0.8 million for the three months ended June 30, 2022 (the Company did not report cost of goods sold for any reporting periods ended on or prior to March 31, 2022). 

The Company reported nominal amounts in respect of the unrealized loss on changes in fair value of biological assets and realized fair value changes included in inventory sold for the three months ended June 30, 2022 (the Company did not report either of these items for any reporting periods ended on or prior to March 31, 2022). 

Based on the foregoing, the Company reported a gross profit of $0.5 million for the three months ended June 30, 2022 (the Company did not report gross profit for any reporting periods ended on or prior to March 31, 2022). 

The Company reported operating expenses of $5.5 million for the three months ended June 30, 2022, compared with operating expenses of $2.0 million for the same period last year. The increase in operating expenses relative to the comparative period was primarily due to the significant increase in the size and scope of general and administrative functions of the Company to support its strategic shift to the U.S. cannabis market and as a result of the Etain Acquisition. 

The Company reported other income of $2.2 million for the three months ended June 30, 2022, compared with other loss of $26.4 million for the same period last year. The following factors contributed to the Company’s reported results:

  • Royalty, interest, and lease income was $0.1 million for the three months ended June 30, 2022, compared with $0.5 million for the same period last year. The decrease in royalty, interest, and lease income relative to the comparative period was primarily attributable to the Company no longer recognizing royalty, interest, or lease income for certain investees due to challenges in the underlying business performance of those investees or as a result of dispositions of these financial assets.
  • The net change in fair value of financial assets at fair value through profit or loss (“FVTPL”) was a decrease of $0.2 million for the three months ended June 30, 2022, compared with a decrease of $29.2 million for the same period last year. The net change in fair value of financial assets at FVTPL reported in the prior period included a negative change in the fair value of the Company’s previously-held investment in CGC common shares of $29.9 million.
  • Accretion and interest expense was $3.8 million for the three months ended June 30, 2022, compared with a nominal amount for the same period last year. The increase in accretion expense relative to the comparative period was primarily attributable to the accretion expense recognized on the Convertible Notes issued to The Hawthorne Collective and accretion expense recognized on the deferred consideration related to the Etain Acquisition.
  • Unrealized foreign exchange gain was $6.3 million for the three months ended June 30, 2022, compared with $nil for the same period last year. The unrealized foreign exchange gain was primarily attributable to foreign-denominated cash deposits held by the Company and certain of its subsidiaries. 

The Company reported an income tax expense of $0.6 million for the three months ended June 30, 2022, compared with an income tax recovery of $3.9 million for the same period last year. Income tax expense for the period included a tax expense of $0.4 million related to the estimated taxable profits of Etain, LLC for which the Company is responsible. 

Based on the foregoing, the Company reported a net loss of $3.5 million and basic and diluted EPS of $(0.02) for the three months ended June 30, 2022, compared with a net loss of $24.5 million and basic and diluted EPS of $(0.17) for the same period last year.

The net change in fair value of financial assets at fair value through other comprehensive income (net of tax expense or recovery) was an increase of $0.5 million for the three months ended June 30, 2022, compared with a decrease of $0.4 million for the same period last year. The Company also reported a downward adjustment as a result of foreign currency translation of $5.0 million for the three months ended June 30, 2022, compared with an upward adjustment of $3.6 million for the same period last year. The recognition of the foreign currency translation adjustment was new this period as a result of the shift in the Company’s presentation currency from Canadian dollars to U.S. dollars.

Based on the foregoing, the Company reported a total comprehensive loss of $8.0 million for the three months ended June 30, 2022, compared with a total comprehensive loss of $21.3 million for the same period last year.

Summary Cash Flows and Financial Position Data

Three months ended
June 30, 2022		 Three months ended
June 30, 2021
Net cash flows from operating activities $  (4,747) $  (15,976)
Net cash flows from investing activities (166,079) 81,182
Net cash flows from financing activities 24,550 1
Net increase (decrease) in cash $  (146,276) $  65,207
Effect of foreign exchange rate movements on cash held (893) 4,514
Cash, beginning of fiscal period 318,706 101,695
Cash, end of fiscal period $  171,537 $  171,416

 

As at
June 30, 2022		 As at
March 31, 2022
Current assets $  189,771 $  330,190
Non-current assets 270,765 36,021
Total assets $  460,536 $  366,211
Current liabilities $  43,965 $  3,946
Non-current liabilities 124,261 97,551
Total liabilities $  168,226 $  101,497
Total shareholders' equity $  292,310 $  264,714

Q1 2023 Portfolio Updates

The following represents a brief summary of other developments in the RIV Capital portfolio during and subsequent to Q1 2023:

  • BioLumic Inc. (“BioLumic”) announced the closing of a $13.5 million Series B funding round that will be used to accelerate commercial growth, market its technology, and deepen relationships with cannabis cultivation leaders and technology partners, while expanding its growing library of Light Signal Recipes. BioLumic also announced an exclusive partnership with Fluence, a leading global provider of energy-efficient lighting solutions for commercial cannabis and food production, to deliver BioLumic’s cutting-edge UV Light Signals through Fluence’s LED products.
  • The Company completed the divestment of its financial interests in 10831425 Canada Ltd. d/b/a Greenhouse Juice Company (“Greenhouse Juice”) for cash consideration of C$5.5 million. The Company had originally invested in Greenhouse Juice in January 2019, at a time when Greenhouse Juice’s strategic plan included exploring opportunities to participate in the cannabis market in Canada. The disposition was consistent with the Company’s strategy in respect of its legacy portfolio as it relates to the identification of opportunities for monetization for non-core investments. No gain or loss or mark-to-market adjustments were recognized upon disposition as the proceeds received by the Company were equal to the carrying value of the investment for financial reporting purposes.
  • Subsequent to Q1 2023, High Beauty, Inc. (“High Beauty”) completed the initial closing of a financing round that triggered automatic conversion mechanisms pursuant to the senior secured convertible promissory note agreement between High Beauty and the Company. Accordingly, the convertible promissory note with a face value of $0.8 million that the Company purchased in December 2019 converted into 1,000,017 shares of High Beauty based on a conversion price that was a 20.0% discount to the price per share implied by High Beauty’s raise.
  • NOYA Cannabis Inc. (“NOYA”) reached an agreement with Medicibis (“Mendo”), an online portal for medical cannabis patients that ships nationwide through Canada. Under the agreement, NOYA and its cultivation partners will cultivate product drops for Mendo from both their indoor and sun grown facilities, in addition to offering their world-renowned cultivars, giving Mendo patients access to all NOYA brands.
  • ZeaKal, Inc. (“ZeaKal”) announced a multi-year development agreement to raise more sustainable poultry through improved soy genetics and feed quality with Perdue AgriBusiness (“Perdue”), a leading merchandiser, processor, and exporter of agricultural products. With Perdue handling roughly three million acres worth of soybeans per year, ZeaKal’s PhotoSeed® trait technology offers growers a higher value crop with reduced environmental footprint.

This press release should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements and management’s discussion and analysis (“MD&A”) for Q1 2023, which are available under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website at www.rivcapital.com/investors.

For more information regarding the Company, please refer to the MD&A and the Company’s annual information form (“AIF”) dated June 10, 2022, also available under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website at www.rivcapital.com/investors.

About RIV Capital

RIV Capital is building a leading cannabis packaged goods company, with a focus on establishing one of the strongest portfolios of brands in key strategic U.S. markets. Backed by in-house expertise and cannabis domain knowledge, RIV Capital aims to grow its own brands and partner with established U.S. cannabis operators and brands to bring them to new markets and build market share. RIV Capital established the foundational building blocks of its active U.S. strategy with the announced Etain Acquisition. Through its strategic relationship with The Hawthorne Collective, Inc. (“The Hawthorne Collective”), a subsidiary of The ScottsMiracle-Gro Company (“ScottsMiracle-Gro”), RIV Capital is The Hawthorne Collective’s preferred vehicle for cannabis-related investments not under the purview of other ScottsMiracle-Gro subsidiaries.

Forward Looking Statements

This news release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of RIV Capital and its portfolio companies with respect to future business activities and operating performance. Forward-looking information is often identified by the words “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or similar expressions and includes information regarding the Company’s strategies, objectives, goals, opportunities and plans, including in respect of Etain; the Company’s liquidity position, including its ability to finance the second closing of the Etain Acquisition and long-term expansion plans with cash on-hand; the Company’s ability to appropriately scale Etain’s existing infrastructure, processes and systems; the Company’s expectations regarding the U.S. cannabis market; the Company’s expectations of the anticipated benefits of the Etain Acquisition, and the structure thereof, and strategic rationales for acquiring Etain, including expectations regarding legal cannabis market opportunities in the New York; expectations regarding the launch of adult-use sales in the state of New York; expectations regarding expansion and timing thereof, including in respect of Etain’s Chestertown facility; the Company’s investment in Etain, including the timing and cash required for completion of the second closing of the Etain Acquisition; the Company’s expectations regarding Etain’s position in the New York cannabis market; the Company’s expectations and plans regarding Etain’s business, including its market share, sales, brand, products and locations; the Company’s expectations regarding growth opportunities; the Company’s plans to expand geographically; challenges faced by the existing U.S. medical cannabis market; the Company's plan to invest in, launch and/or develop U.S. assets to build a multistate cannabis operating and brand platform and the value to be derived therefrom; the Company’s expectations with respect to the development of a new Buffalo facility, including the size and expected timing for completion of such facility; the Company’s intention to, and the anticipated benefits of, supporting New York state cannabis equity initiatives; the anticipated benefits of the investments from The Hawthorne Collective; the Company’s expectation that it will be ScottsMiracle-Gro’s preferred vehicle for investments not under the purview of The Hawthorne Gardening Company; and expectations for other economic, business, and/or competitive factors.

Investors are cautioned that forward-looking information is not based on historical fact but instead reflects management’s expectations, estimates or projections concerning future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although RIV Capital believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of RIV Capital or its portfolio companies.

Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: the timing and likelihood for receipt of all required regulatory approvals, and satisfaction of other conditions to closing, in respect of the Etain Acquisition; the Company’s ability to execute its go-forward strategy; stock market volatility; changes in the business activities, focus and plans of the Company, Etain and the Company’s investees and the timing associated therewith; the timing of any changes to federal laws in the U.S. to allow for the general cultivation, distribution, and possession of cannabis; regulatory and licensing risks; changes in cannabis industry growth and trends; changes in general economic, business and political conditions, including changes in the financial markets; litigation risks; the global regulatory landscape and enforcement related to cannabis, including political risks and risks relating to regulatory change; risks relating to anti-money laundering laws; compliance with extensive government regulation, including RIV Capital’s interpretation of such regulation; public opinion and perception of the cannabis industry; divestiture risks; and the risk factors set out in RIV Capital’s MD&A and AIF filed with the Canadian securities regulators and available on RIV Capital’s profile on SEDAR at www.sedar.com.

The Company has invested in and acquired, and intends to in the future invest in and/or acquire, companies that are involved in the manufacture, possession, use, sale, and distribution of cannabis in the recreational and medicinal cannabis marketplace in the United States. Local state laws where such operations occur permit such activities, however, investors should note that there are significant legal restrictions and regulations that govern the cannabis industry in the United States. Cannabis remains a Schedule I drug under the U.S. Controlled Substances Act, making it illegal under federal law in the United States to, among other things, cultivate, distribute or possess cannabis in the United States. Financial transactions involving proceeds generated by, or intended to promote, cannabis-related business activities in the United States may form the basis for prosecution under applicable U.S. federal money laundering legislation.

While the approach to enforcement of such laws by the federal government in the United States has trended toward non-enforcement against individuals and businesses that comply with recreational and medicinal cannabis programs in states where such programs are legal, strict compliance with state laws with respect to cannabis will neither absolve the Company of liability under U.S. federal law, nor will it provide a defense to any federal proceeding which may be brought against the Company. The enforcement of federal laws in the United States is a significant risk to the business of the Company and any proceedings brought against the Company thereunder may adversely affect the Company's operations and financial performance.

Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Although RIV Capital has attempted to identify important risks, uncertainties and factors that could cause actual results to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. RIV Capital does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.

SOURCE RIV Capital Inc.

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