RIV Capital Inc. (OTCPK:CNPOF) Q1 2023 Earnings Conference Call August 29, 2022 5:00 PM ET
Company Participants
Mark Sims – President and Chief Executive Officer
Matt Mundy – Chief Strategy Officer and General Counsel
Eddie Lucarelli – Chief Financial Officer
Conference Call Participants
Operator
Hello, and welcome to RIV Capital’s First Quarter 2023 Earnings Conference Call. I am joined this morning by Mark Sims, Chief Executive Officer; Matt Mundy, Chief Strategy Officer and General Counsel; and Eddie Lucarelli, Chief Financial Officer. For your convenience, the press release, MD&A and condensed interim consolidated financial statements for the three months ended June 30, 2022 are available on the Investors section of the company’s website at www.rivcapital dot 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, its investees and attain, 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 outlooks. 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 results 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 August 30, 2022 and the risk factors referenced in the Q1 2023 MD&A and RIV Capital’s Annual Information Form.
In addition, this call may contain certain market and industry data obtained from various publicly available sources. Although the company believes that these independent sources are generally reliable, the accuracy and completeness of such information is not guaranteed and has not been verified due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process, and the limitations and uncertainty inherent in any statistical survey of market size, conditions and prospects. The company does not make any representation as to the accuracy of such information. As described in further detail in the Q1, 2023 financial statements and related MD&A, in light of the Etain acquisition, the company changed the presentation currency of its consolidated financial statements from the Canadian dollar to the US dollar effective April 1, 2022. All dollar amounts expressed today, unless otherwise stated, 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 first quarter 2023 earnings call. I will begin today’s call by providing an update on 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 on New York, followed by a review of our financial results with our CFO, Eddie Lucarelli.
We began Q1 by taking the first step in our previously announced strategic shift into the U.S. cannabis market with our proposed acquisition of New York based Etain, which includes Etain’s New York registered organization license allowing for cultivation, processing and retail medical dispensaries, four of which are currently active. We are pleased to complete the initial closing in April of Etain’s unregulated assets and look forward to completing the second and final phase during the second half of this year. Following the initial close, we remain confident that we have selected the ideal platform for growth as the New York market approaches the launch of adult use sales.
While the final transfer of Etain LLC’s equity interest, which is the entity holding the RO license in New York is currently under review by New York State Regulators. The structure of the acquisition gives us ownership of Etain’s non-regulated assets before the final equity transfer of the license holding entity occurs. As such, we have been diligently working with the Etain team to appropriately scale their existing infrastructure, processes and systems in support of the public reporting requirements of RIV Capital and a steady ramp to adult use sales. 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. Part of our strategy to strengthen our bench included the appointment of Mike Totzke as Chief Operating Officer in June. Mr. Totzky’s extensive operational experience from the Hawthorne Collective and Scotts Miracle-Gro will prove critical to the launch of our New York operations. And his deep operational and sales background further positions us for the successful execution of our U.S. strategy. His primary goal will be to drive sales, optimize operations and expand Etain’s existing infrastructure in preparation for serving New York’s medical and forthcoming adult use markets.
Despite the ongoing challenges in the existing medical market, which Matt will get into further detail in a minute. Etain has carved out a premium niche that we believe will serve as the foundation for our platform to grow market share. In the near term, we plan to complete the expansion of Etain’s hybrid greenhouse in Chestertown, extending its current cultivation capacity and enabling us to develop new product formats in advance of the launch of adult use sales. We will also be upgrading Etain’s existing retail locations to prepare for the expected increase in customer traffic and sales volume. On top of that, we are currently evaluating locations for the four new dispensaries permitted under the Etain license, which would ultimately bring Etain’s total New York footprint to eight retail locations, three of which will be co-located for adult use once legally permitted. We are pleased to report that we are now in process of constructing our new state of the art flagship indoor cultivation facility in Buffalo. The new facility is designed with premier cultivation and production infrastructure, specifically tailored to support the premium New York market.
Importantly, a 7,000 square foot portion of the new facility will be designated specifically to host social equity licensees. We believe this step will further strengthen the broader New York market by supporting the state’s initiatives for equitable cannabis industry, all while securing new wholesale opportunities and other potential partnerships for RIV Capital. We have executed a lease for the build out and occupation of the Buffalo property, which includes conditions requiring necessary regulatory approvals such as from New York’s Office of Cannabis Management. We expect a significant ramp in our business to occur once adult use sales have taken effect with our expanded operations coming online to satisfy the growing consumer demand that is expected across the state.
Our long term strategy is to build a leading multi-state operating and brand platform with New York serving as our foundation. We plan to develop and expand new brands and products designed to resonate with New York consumers, offered alongside Etain’s popular product line as one of our core brands, which will include new form factors, such as pre rolls and other skews later this year. While we are, of course, laser focused on getting New York right, before undertaking any significant expansions elsewhere, we are always evaluating new attractive opportunities that could accelerate our brand platform, strategy and we continue to actively explore M&A opportunities as part of our overall corporate strategy.
During these dynamic incredibly active times for the industry, our strong liquidity enables us to build our U.S. platform as the broader market evolves. What’s possible today may not be tomorrow, and we intend to take full advantage of our significant cash position when the right opportunity presents itself. We look forward to providing updates on our strategy and progress our U.S. operations begin to scale. We believe that we have a significant advantage in our ability to expand the existing Etain business in New York into a larger platform designed for long term sustained growth. We are excited to enter the U.S. market as an operator in partnership with the outstanding Etain team and brand and we eagerly await the final completion of the Etain acquisition.
With that, I will now turn the call over to Matt Mundy, Chief Strategy Officer and General Counsel for a regulatory outlook on the New York market. Matt?
Matt Mundy
Thanks, Mark. As Mark just mentioned, despite significant noise around the New York market over the past several months we strongly believe that the Etain asset we have purchased is an ideal platform for growth. As we mentioned before, we believe that New York will be the country’s most exciting legal cannabis market over the next several years, with the potential to follow only California in sales. New York is forecasted to generate around $1.5 billion in sales in the first twelve months of adult use legalization and roughly $3 billion of annual sales by 2026. We chose to begin the implementation of our strategic entry into the U.S. market in New York for several reasons.
First, we believe that the state’s imminent launch of adult use sales will be transformative for the industry as a whole. This will be a truly landmark moment for the industry. And we think that playing a meaningful role in that moment will create substantial value for our shareholders now and into the future. Second, we think that timing our entrance into New York just as adult use is going to come online will do much to capitalize on the rapid growth potential in the New York market in the next couple of years. Third, we believe that New York offers us the best platform to launch our brand focus strategy and that the outsized cultural influence of New York City is going to allow brands that succeed there to reap disproportionately large rewards as the industry continues to unroll nationwide in the years ahead.
While we work with Etain to achieve final regulatory approval and closing the Etain transaction, our strategy continues to be informed by the existing medical market, which is struggling to operate effectively. Medical card renewal programs have encountered setbacks and patient headcounts continue to drop. All while the unlicensed gray market grows ever more prominent and lucrative. Despite this, we believe recent momentum in New York on the regulatory side is cause for optimism. And we remain bullish on the future regulatory landscape as the rollout of adult use continues over the coming months.
Furthermore, understanding the market’s current challenges will enable us to better address the potential challenges in the early days of adult use sales. We also believe we have the wherewithal to improve the existing medical cannabis market by prioritizing patient access and participation, and feel we are well positioned to translate those improvements into a stronger footing for widespread adult use. We are vocal supporters of the state’s focus on social equity and look forward to working alongside social equity applicants and participants to grow the local market together. We believe that the social equity retail license program in New York presents an attractive opportunity for our future wholesale business and aligns well with our growth strategy.
As Mark mentioned, we are leaning into the state’s initiatives by designating a considerable section of our flagship facility for social equity operators. We believe that this approach will incubate new business opportunities for both RIV and the local community, while strengthening and diversifying the market in an equitable manner. We are incredibly excited about the opportunity in front of us, and we believe that we are uniquely positioned to create a market leading consumer focused platform and what we believe will be the world’s most exciting cannabis market in the coming years.
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 those updates. I will now review our financial results for the first quarter of our 2023 fiscal year. Please note that as referenced in our press release, as of this quarter we have shifted our presentation currency from Canadian dollars to US dollars.
For the first quarter ended June thirty, 2022, we reported revenue net of excise taxes of $1.3 million, comprising retail revenue generated from Etain’s dispensaries and wholesale revenue generated from sales of Etain branded products to other registered organizations in New York. Cost of goods sold was $0.8 million for the quarter. Unrealized fair value changes including biological assets and realized fair value changes including inventory sold are nominal, and gross profit was $0.5 million.
As you will note in our financial statements, we did not report revenue, cost of goods sold, or gross profit for any reporting periods ended on or prior to March 31, 2022. Operating expenses during the quarter were $5.5 million compared with operating expenses of $2 million for the same period last year. The increase in operating expenses compared to last year was primarily due to the significant increase in the size and scope of general and administrative functions to support our strategic shift to the U.S. cannabis market and as a result of the Etain acquisition.
Other income was $2.2 million for the quarter compared with other loss of $26.4 million for the same period last year. Other income this period includes an unrealized foreign exchange gain of $6.3 million, which was primarily attributable to foreign denominated cash deposits held by the company in certain of its subsidiaries. This was partially offset by accretion expense of $3.8 million, which is a non-cash item and was primarily related to the convertible notes issued to the Hawthorne Collective and the deferred consideration payable related to the Etain acquisition.
Income tax expense was $0.6 million for the quarter, compared with an income tax recovery of $3.9 million for the same period last year. Based on the foregoing items, we reported a net loss of $3.5 million for Q1 2023 compared with a net loss of $24.5 million for the same period last year. Other comprehensive loss was $4.5 million for the quarter compared with other comprehensive income of $3.2 million for the same period last year. Aside from an immaterial change in the fair value of financial assets measured at fair value through other comprehensive income, we reported a downward adjustment of $5 million due to foreign currency translation, which is new this period as a result of the shift in our presentation currency. In aggregate, the company reported a total comprehensive loss of $8 million for Q1, 2023 compared with a total comprehensive loss of $21.3 million for the same period last year.
On April 22, the company paid a $170.6 million in connection with the initial closing of the Etain acquisition. As previously disclosed, during the first quarter the Hawthorne Collective exercised its top up option under its preexisting agreements with the company and advanced an additional $25 million to the company pursuant to an unsecured convertible note. This top up investment brought the total proceeds received from the Hawthorne Collective’s convertible note investments in the company to $175 million. Accordingly, the cash consideration paid upon the initial Etain closing was financed almost entirely by proceeds received from the Hawthorne Collective’s initial convertible note investment and the subsequent note issued upon exercise of its top up option. The financial support received from the Hawthorne Collective leaves us extremely well positioned to successfully implement our U.S. strategy as it has enabled us to preserve the vast majority of our unrestricted cash to develop and execute upon our growth plans in New York, while having sufficient capital to selectively expand our footprint to other geographies in the future. We believe that the decision by the Hawthorne Collective to invest further in RIV Capital pursuant to its existing rights is a testament to the significant opportunity ahead in New York.
Shifting to our balance sheet, during the quarter we recognized approximately $228.8 million dollars of intangible assets and goodwill related to the Etain acquisition. It is important to note that the estimated fair values of the assets acquired and liabilities assumed that underpin this amount involves significant judgment and assumptions. The evaluation of these fair values and the related tax attributes are provisional as of June 30, 2022, and will be finalized during the measurement period prescribed by the relevant accounting standard, which is one year from the date of acquisition. Any measurement period adjustments would be applied retrospectively to the period of acquisition in the company’s consolidated financial statements. We ended the period with $171.5 million of cash on hand. And we estimate that the cash required for the second closing of the Etain acquisition will be approximately $42.4 million. Our financial position remains strong and we believe it provides us with more than enough liquidity to complete the Etain acquisition and finance our contemplated expansion plans in New York, while remaining flexible enough to adapt to the shifting canvas 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 growth outside of the state, keeping in mind the dynamic nature of the industry. Beyond our U.S. platform, certain other assets in our portfolio continue to grow and attract new capital, further increasing the value of our enterprise. We believe that certain of these assets have considerable value yet to be realized, and we continue to identify and execute upon new opportunities for the monetization of non-core investments. In our view, our considerable liquidity and strong balance uniquely position us to build a market leading U.S. platform as the industry evolves.
In addition to our healthy balance sheet, we believe that our unique expertise and cannabis domain knowledge position us for success as we fully operationalize the New York platform. We look forward to sharing our continued progress with you as we execute on our U.S. 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 be completing the second closing of the Etain transaction in the coming months, the final step in our transition to a U.S. cannabis operator. In the meantime, we continue to refine our internal processes to further enhance the value of this asset in advance of adult use sales in New York. We believe our strong balance sheet, strategic footprint and robust industry relationships give us a competitive position to grow market share in New York, while delivering value for shareholders.
We look forward to sharing our continued progress during our next call and thank all of you for joining us today.
Question-and-Answer Session
End of Q&A
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