Strategic investment of US$150 million by The Hawthorne Collective highlights quarter
Cash balance of $400 million available to launch U.S. platform
Discussions continue with shortlist of potential acquisition targets in strategic U.S. markets
TORONTO, Nov. 18, 2021 /PRNewswire/ – RIV Capital Inc. (“RIV Capital” or the “Company“) (TSX: RIV) (OTC: CNPOF) today released its unaudited condensed interim consolidated financial statements and management’s discussion and analysis (“MD&A“) for the three and six months ended September 30, 2021 (“Q2 2022“).
“Following the close of the convertible note investment from The Hawthorne Collective, we have been solely focused on narrowing our pipeline of potential acquisition targets in strategic U.S. markets,” said Narbé Alexandrian, President and CEO, RIV Capital. “We continue to advance discussions with a select number of target companies that we believe embody the qualities we are looking for in our U.S. operating and brand platform, and look forward to making an announcement further to this in the coming months.”
Hawthorne Investment and Strategy Update
Earlier this year, RIV Capital launched a strategic shift to the U.S. market. As the Company embarked upon this transition, it determined that to create a true market leader, it was paramount that the platform be differentiated from other U.S.-focused cannabis businesses in a real, tangible manner. To that end, during the quarter, the Company announced a strategic investment from The Hawthorne Collective, Inc. (“The Hawthorne Collective“), a subsidiary of The Scotts Miracle-Gro Company (“ScottsMiracle-Gro“), the global leader of branded consumer products for lawn and garden care as well as indoor and hydroponics growing products with over US$4.9 billion in annual sales.
On August 24, 2021, The Hawthorne Collective, a newly-formed cannabis-focused subsidiary of ScottsMiracle-Gro, invested US$150.0 million in RIV Capital pursuant to an unsecured convertible note (the “Convertible Note“) issued by the Company (the “Hawthorne Investment“) to be used for general corporate and lawful purposes. The key terms of the Convertible Note include the following:
- The Convertible Note has a maturity date of August 24, 2027, and bears interest at a rate of approximately 2.0% per annum until August 24, 2023, after which no interest will accrue for the remainder of the term. Accrued interest will be payable on the maturity date or will be included in the conversion value of the Convertible Note at the time of conversion.
- The Convertible Note is convertible into common shares of RIV Capital (the “RIV Shares“) at a fixed conversion price of $1.90 per RIV Share. Assuming full conversion of the Convertible Note, including the full amount of the anticipated accrued interest over the life of the Convertible Note, The Hawthorne Collective would be entitled to receive approximately 103.2 million RIV Shares, representing approximately 42.0% of the Company’s outstanding RIV Shares on a partially diluted basis based on the current number of non-diluted RIV Shares outstanding.
- The Convertible Note may be converted into RIV Shares at the election of The Hawthorne Collective on a discretionary basis, or at RIV Capital’s discretion upon the later of: (i) August 24, 2023; and (ii) the date on which federal laws in the U.S. are amended to allow for the general cultivation, distribution, and possession of cannabis.
The Hawthorne Investment established RIV Capital as The Hawthorne Collective’s preferred vehicle for investments not currently under the purview of The Hawthorne Gardening Company (another subsidiary of ScottsMiracle-Gro and North America’s leader in indoor and hydroponic growing suppliers). In connection with the Hawthorne Investment, the Company entered into an investor rights agreement with The Hawthorne Collective that established the key terms of the partnership, including board nomination rights, an investment top-up option, and other rights and restrictions, which are detailed in the Company’s press release dated August 10, 2021. Immediately prior to the closing of the Hawthorne Investment, the Company voluntarily delisted the RIV Shares from the Toronto Stock Exchange (the “TSX“) and the RIV Shares began trading on the Canadian Securities Exchange (“CSE“).
The Hawthorne Investment fundamentally re-shaped the Company’s strategic shift. Over the past few months, the Company has approached its U.S. transition through a new lens, as its new strategic partnership has opened up a new range of possibilities for how its U.S. platform can be built. The Company has been continuing to develop its U.S. market intelligence and engaging in discussions with various potential counterparties. Conversations are ongoing with a shortlist of potential acquisition targets in strategic U.S. markets and the Company is planning to announce a transaction in the coming months.
With a strong balance sheet and liquidity, an attractive capital structure, deep domain expertise, and a one-of-a-kind strategic partnership featuring a truly blue-chip company, RIV Capital believes that it is uniquely positioned to create a market-leading, value-driven, quality- and consumer-focused operating and brand platform in the U.S.
Q2 2022 Financial Results1
| Select Summary of Quarterly Results | Three months ended | Three months ended | ||
| 30-Sep-21 | 30-Sep-20 | |||
| Operating loss (before equity method investees and fair value changes) | $ | (1,681) | $ | (5,795) |
| Operating expenses | 5,127 | 1,555 | ||
| Net operating loss (before equity method investees and fair value changes) | (6,808) | (7,350) | ||
| Equity method investees and fair value changes | 175 | (36,211) | ||
| PharmHouse-related charges (recovery) | – | 70,756 | ||
| Net operating loss | (6,633) | (114,317) | ||
| Net loss | (1,496) | (110,381) | ||
| Other comprehensive income (net of tax) | 434 | 23,417 | ||
| Total comprehensive loss | (1,062) | (86,964) | ||
| Basic loss per share (“EPS”) | $ | (0.01) | $ | (0.58) |
| Diluted EPS | $ | (0.01) | $ | (0.58) |
| Cash flows used in operating activities | (3,280) | (1,055) | ||
| Cash flows provided by (used in) investing activities | 5,502 | (4,927) | ||
| Cash flows provided by (used in) financing activities | 187,248 | (2) | ||
| Select Summary of Quarterly Results | Six months ended | Six months ended | ||
| 30-Sep-21 | 30-Sep-20 | |||
| Operating loss (before equity method investees and fair value changes) | $ | (1,242) | $ | (3,133) |
| Operating expenses | 7,636 | 4,224 | ||
| Net operating loss (before equity method investees and fair value changes) | (8,878) | (7,357) | ||
| Equity method investees and fair value changes | (36,357) | (38,566) | ||
| PharmHouse-related charges (recovery) | (1,935) | 70,756 | ||
| Net operating loss | (43,300) | (116,679) | ||
| Net loss | (31,915) | (113,807) | ||
| Other comprehensive income (loss) (net of tax) | (58) | 34,118 | ||
| Total comprehensive loss | (31,973) | (79,689) | ||
| Basic loss per share (“EPS”) | $ | (0.22) | $ | (0.60) |
| Diluted EPS | $ | (0.22) | $ | (0.60) |
| Cash flows used in operating activities | (23,527) | (1,862) | ||
| Cash flows provided by (used in) investing activities | 110,318 | (6,854) | ||
| Cash flows provided by (used in) financing activities | 187,249 | (80) | ||
“With approximately $400 million in cash on our balance sheet, and potential access to further capital through our strategic partnership, RIV Capital is well-positioned to accelerate the operating and expansion plans of existing U.S. cannabis businesses,” said Eddie Lucarelli, Chief Financial Officer, RIV Capital. “We believe that our substantial liquidity is a core differentiator of our platform and positions us well to build a market leader in the U.S.”
| _____________________ |
| 1 The financial highlights in this summary are presented in CA$ thousands, unless otherwise noted. |
Operating Income and Expenses
| Three months ended | Three months ended | |||
| 30-Sep-21 | 30-Sep-20 | |||
| Royalty, interest, and lease income (before provisions) | $ | 410 | $ | 4,066 |
| Provision for credit losses on interest and royalty receivables | ||||
| PharmHouse | – | (8,939) | ||
| Other | (2,091) | (922) | ||
| Operating loss (before equity method investees and fair value changes) | $ | (1,681) | $ | (5,795) |
| General and administrative expenses | $ | 2,962 | $ | 1,287 |
| Consulting and professional fees | 1,847 | 350 | ||
| Share-based compensation | 272 | (555) | ||
| Depreciation and amortization expense | 46 | 45 | ||
| Restructuring costs | – | 428 | ||
| Operating expenses | $ | 5,127 | $ | 1,555 |
| Net operating loss (before equity method investees and fair value changes) | $ | (6,808) | $ | (7,350) |
| Six months ended | Six months ended | |||
| 30-Sep-21 | 30-Sep-20 | |||
| Royalty, interest, and lease income (before provisions) | $ | 976 | $ | 6,733 |
| Provision for credit losses on interest and royalty receivables | ||||
| PharmHouse | – | (8,939) | ||
| Other | (2,218) | (927) | ||
| Operating loss (before equity method investees and fair value changes) | $ | (1,242) | $ | (3,133) |
| General and administrative expenses | $ | 4,628 | $ | 2,629 |
| Consulting and professional fees | 2,241 | 726 | ||
| Share-based compensation | 672 | 354 | ||
| Depreciation and amortization expense | 95 | 87 | ||
| Restructuring costs | – | 428 | ||
| Operating expenses | $ | 7,636 | $ | 4,224 |
| Net operating loss (before equity method investees and fair value changes) | $ | (8,878) | $ | (7,357) |
The Company reported an operating loss (before equity method investees and fair value changes) of $1.7 million for the quarter, net of a provision for expected credit losses of $2.1 million. This primarily consisted of royalty and interest income (before provisions for expected credit losses) generated from the Company’s royalty and debenture agreements with Agripharm Corp. (“Agripharm“), 10831425 Canada Ltd. d/b/a/ Greenhouse Juice Company (“Greenhouse Juice“), and NOYA Cannabis Inc. (“NOYA“, formerly known as Radicle Medical Marijuana Inc.), offset by a provision for expected credit losses on the Company’s royalty receivables.
Operating expenses were $5.1 million for the quarter. General and administrative expenses were $3.0 million for the quarter, primarily attributable to employee compensation (including the recognition and payment of certain non-recurring variable compensation expenses) and other public company costs. Consulting and professional fees were $1.8 million for the quarter, primarily attributable to legal and consulting fees related to transaction advisory expenses and other public company and regulatory advisory costs.
Equity Method Investees and Fair Value Changes
| Three months ended | Three months ended | |||
| 30-Sep-21 | 30-Sep-20 | |||
| Share of loss from equity method investees | ||||
| PharmHouse | $ | – | $ | (32,607) |
| Other | (525) | (550) | ||
| Net change in fair value of financial assets at FVTPL | 700 | (3,054) | ||
| Other PharmHouse-related charges | ||||
| Change in provision for credit losses on loans receivable | – | (45,756) | ||
| Change in provision for credit losses on financial guarantee liability | – | (25,000) | ||
| Equity method investees and fair value changes | $ | 175 | $ | (106,967) |
| Six months ended | Six months ended | |||
| 30-Sep-21 | 30-Sep-20 | |||
| Share of loss from equity method investees | ||||
| PharmHouse | $ | – | $ | (37,025) |
| Other | (872) | (117) | ||
| Net change in fair value of financial assets at FVTPL | (35,485) | (1,424) | ||
| Other PharmHouse-related charges | ||||
| Change in provision for credit losses on loans receivable | – | (45,756) | ||
| Change in provision for credit losses on financial guarantee liability | 1,935 | (25,000) | ||
| Equity method investees and fair value changes | $ | (34,422) | $ | (109,322) |
The Company’s share of loss from equity method investees was $0.5 million for the quarter. Greenhouse Juice, LeafLink Services International ULC (“LeafLink International“), and NOYA represented the Company’s equity method investees for which a share of income or loss was recognized for the quarter.
The Company also reported a net increase in the fair value of financial assets that are reported at fair value through profit or loss (“FVTPL“) of $0.7 million for the quarter.
Net Change in Fair Value of Financial Assets at FVTOCI
| Three months ended | Three months ended | |||
| 30-Sep-21 | 30-Sep-20 | |||
| Nova Cannabis | $ | – | (218) | |
| Headset | 100 | (100) | ||
| Zeakal | 300 | (300) | ||
| Biolumic | 100 | 61 | ||
| Dynaleo | – | 835 | ||
| Other | – | 27,100 | ||
| Gross change in fair value of financial assets at FVTOCI | $ | 500 | $ | 27,378 |
| OCI income tax expense | 66 | 3,962 | ||
| Net change in fair value of financial assets at FVTOCI(1) | $ | 434 | $ | 23,416 |
| Six months ended | Six months ended | |||
| 30-Sep-21 | 30-Sep-20 | |||
| Nova Cannabis | $ | (267) | (218) | |
| Headset | – | (300) | ||
| Zeakal | 100 | (900) | ||
| Biolumic | 100 | 61 | ||
| Dynaleo | – | 835 | ||
| Other | – | 38,624 | ||
| Gross change in fair value of financial assets at FVTOCI | $ | (67) | $ | 38,102 |
| OCI income tax expense (recovery) | (9) | 3,962 | ||
| Net change in fair value of financial assets at FVTOCI(1) | $ | (58) | $ | 34,140 |
| (1) In addition to the fair value change noted above, the historical net change in fair value of financial assets at FVTOCI also includes FX gains/losses related to certain equity method investees denominated in USD currency |
The Company reported a total comprehensive loss of $1.1 million for the quarter. During the same period last year, the Company reported a total comprehensive loss of $87.0 million, primarily attributable to several charges related to the Company’s former investment in PharmHouse Inc. (“PharmHouse“). The net change in the fair value of financial assets that are reported at fair value through other comprehensive income (“FVTOCI“) was an increase of $0.5 million for the quarter (before tax).
| As at | As at | |||
| Period ended | 30-Sep-21 | 31-Mar-21 | ||
| Cash | $ | 404,231 | $ | 127,882 |
| Equity method investees | 7,494 | 7,366 | ||
| Financial assets at FVTPL | 21,693 | 164,030 | ||
| Financial assets at FVTOCI | 21,700 | 23,218 | ||
| Other assets | 13,478 | 12,866 | ||
| Total assets | $ | 468,596 | $ | 335,362 |
| Convertible note | $ | 94,435 | $ | – |
| Deferred tax liability | 21,205 | – | ||
| Financial guarantee liability | – | 3,000 | ||
| Other liabilities | 2,693 | 20,902 | ||
| Total shareholders’ equity | 350,263 | 311,460 | ||
| Total liabilities and shareholders’ equity | $ | 468,596 | $ | 335,362 |
RIV Capital ended the quarter with $404.2 million of cash on hand compared with $127.9 million as at the end of its most recently completed fiscal year, with the increase primarily attributable to the monetization of its previously-held Canopy Growth common shares and the proceeds from the Convertible Note. During the quarter, the Company also received a $6.5 million distribution upon the termination of PharmHouse’s proceedings under the Companies’ Creditors Arrangement Act (Canada).
Q2 2022 Portfolio Updates
The following represents a brief summary of other developments in the RIV Capital portfolio during and subsequent to Q2 2022:
- Subsequent to quarter end, RIV Capital entered into an asset purchase agreement with TREC Brands Inc. (“TREC Brands“) for the sale of the Company’s financial assets in Agripharm. Subject to certain terms and conditions, the Company will sell its royalty interest in Agripharm to TREC Brands in exchange for common shares of TREC Brands representing an approximate 26% non-diluted equity interest in TREC Brands at the time of closing (excluding the impact of any concurrent financing).
- Dynaleo Inc. (“Dynaleo“) introduced Pocket Fives, its new value brand of edible cannabis products. The new brand will bring Dynaleo’s trademark quality to a new price point on the premium spectrum, demonstrating that quality and value are not mutually exclusive. Subsequent to the quarter, Dynaleo partnered with Niagara College to build on prior research for a therapeutic CBD-infused gummy to support muscle recovery for the sports and wellness markets.
- Gage Growth Corp. announced that COOKIES, one of the best-known cannabis brands in the world, will be grown and distributed in Canada by NOYA.
- Greenhouse Juice announced a partnership with Too Good To Go to combat food waste, as well as a retail partnership with BIO RAW to give consumers more options for organic, plant-based meals.
- Headset expanded its competitive intelligence tool, Headset Insights Premium, to Michigan. This is Headset’s eleventh retail-derived cannabis market read based on point-of-sale data in the U.S. and Canadian markets.
- High Beauty, Inc. announced that it successfully closed its oversubscribed US$4.2 million convertible bridge financing round. The round was expanded three times to accommodate additional investments.
This press release should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements and MD&A for Q2 2022, 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. All financial information in this press release is reported in Canadian dollars, unless otherwise indicated.
For more information regarding the Company and its portfolio companies, please refer to the MD&A and the Company’s annual information form dated June 28, 2021 (“AIF“), also available under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website at www.rivcapital.com/investors.
