Canopy Rivers Reports First Quarter Fiscal Year 2021 Financial Results

Formed Special Committee to oversee investment in PharmHouse

Enhanced strategic exposure to cannabis 2.0 through investment in Dynaleo

Achieved significant progress toward operating expense reduction targets

Well-positioned for U.S. market development through key successes at TerrAscend

– Canopy Rivers Inc. (the “Company” or “Canopy Rivers“) (TSX: RIV) (OTC: CNPOF) today released its unaudited condensed interim consolidated financial statements and management’s discussion and analysis (“MD&A“) for the three months ended June 30, 2020 (“Q1 2021“).

“This quarter, we made a strategic investment in Dynaleo, a cannabis gummies manufacturer that we believe is well-positioned to help Canada’s licensed producers and brands catch up to consumer demand for the gummy product format,” said Narbé Alexandrian, President and CEO, Canopy Rivers. “We also continued to work closely with our portfolio companies to help resolve some of the unique macroeconomic challenges that emerged inside and outside of the cannabis sector. While PharmHouse faces some immediate challenges, we continue to believe that it has the potential to become a key component of the Canadian supply chain for low-cost, high-quality cannabis, especially as the value segment of dry flower becomes more prominent.”

Q1 2021 Financial Results1

Table 1
Select Summary of Quarterly ResultsThree months
ended 
Three months
ended 
30-Jun-2030-Jun-19
Operating income (before equity method investees and fair value changes)$2,662$2,141
Operating expenses2,6695,767
Net operating loss (before equity method investees and fair value changes)(7)(3,626)
Equity method investees and fair value changes(2,355)544
Net operating loss(2,362)(3,082)
Net loss(3,426)(2,966)
Other comprehensive income (loss) (net of tax)10,701(5,784)
Total comprehensive income (loss)7,275(8,750)
Basic earnings (loss) per share (“EPS”)$(0,02)$(0,02)
Diluted EPS$(0,02)$(0,02)
Cash flows used in operating activities(807)(2,788)
Cash flows used in investing activities(1,927)(12,702)
Cash flows provided by (used in) financing activities(78)57

“We began our fiscal year with a sharp focus on prudent financial discipline, highlighted by a significant decrease in our operating cash outflows in the first quarter,” said Eddie Lucarelli, CFO, Canopy Rivers. “With an optimized operating expense profile established, our focus in the coming quarters remains on our other core priorities – the successful operational ramp-up of our larger assets and key monetization events within our portfolio – while continuing to execute on strategic investments in companies that we believe are positioned for success in the global cannabis sector.” 

Table 2
Three months
ended 
Three months
ended 
30-Jun-2030-Jun-19
Royalty, interest, and lease income$2,667$2,141
Provision for credit losses(5)
Operating income
(before equity method investees and fair value changes)
$2,662$2,141
Consulting and professional fees$376$492
General and administrative expenses1,3421,547
Share-based compensation9093,686
Depreciation and amortization expense4242
Operating expenses$2,669$5,767
Net operating loss
(before equity method investees and fair value changes)
$(7)$(3,626)

Canopy Rivers reported a nominal net operating loss (before equity method investees and fair value changes) for the quarter.

Royalty, interest, and lease income was $2.7 million. This includes income from the Company’s royalty and debenture agreements with Agripharm Corp. (“Agripharm“), 10831425 Canada Ltd. d/b/a/ Greenhouse Juice Company (“Greenhouse Juice“), Radicle Medical Marijuana Inc. (“Radicle“), and The Tweed Tree Lot Inc., as well as interest income recognized on the Company’s $40.0 million shareholder loan agreement with PharmHouse Inc. (“PharmHouse“), among other items.

Operating expenses were $2.7 million for the quarter, of which $0.9 million (or approximately 33% of the total) related to share-based compensation, a non-cash expense. Excluding non-cash items, operating expenses decreased by approximately 16% from the comparative period last year. Operating expenses included $1.3 million of general and administrative expenses relating to employee and director compensation, marketing and business development, and other public company costs, as well as $0.4 million of professional fees relating to legal, audit, tax, accounting, and other regulatory advisory fees.

Table 3
Three months
ended 
Three months
ended 
30-Jun-2030-Jun-19
Share of loss from equity method investees$(3,985)$(968)
Net change in fair value of financial assets at FVTPL1,6301,512
Equity method investees and fair value changes$(2,355)$544

The Company’s share of loss from equity method investees was $4.0 million for the quarter. This includes the Company’s equity interests in Canapar Corp. (“Canapar“), 10663522 Canada Inc. d/b/a/ Herbert (“Herbert“), High Beauty, Inc. (“High Beauty“), LeafLink Services International ULC (“Leaflink“), PharmHouse, and Radicle. The Company expects these equity method investees to continue to generate net losses in the near term due to the early-stage nature of these businesses as they continue to ramp-up operationally.

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 $1.6 million for the quarter. The net increase was primarily driven by the positive change in the fair value of the Company’s investments in TerrAscend Canada Inc., Les Serres Vert Cannabis Inc. (“Vert Mirabel“), and Dynaleo Inc. (“Dynaleo“).

After consideration of operating income, operating expenses, equity method investees, and FVTPL fair value changes, Canopy Rivers reported a net operating loss of $2.4 million for the quarter.

Table 4
Three months ended 30-Jun-20Three months ended 30-Jun-19
JWC$(976)$(3,629)
TerrAscend3,000(10,000)
Vert Mirabel9,5009,381
Eureka(1,085)
YSS(762)
Headset(200)(83)
Zeakal(600)(400)
Gross change in fair value of financial assets at FVTOCI$10,724$(6,578)
OCI income tax expense (recovery)(883)
Net change in fair value of financial assets at FVTOCI(1)$10,724$(5,695)
(1)In addition to the fair value change noted above, net change in fair value of financial assets at FVTOCI also includes FX  
 gains/losses related to equity method investees denominated in USD currency 

Other comprehensive income was $10.7 million, net of tax, for the quarter, which includes a $10.7 million, net of tax, increase in the fair value of financial assets that are reported at fair value through other comprehensive income (“FVTOCI“). The net increase was primarily attributable to the positive change in the fair value of the Company’s investments in Vert Mirabel and TerrAscend Corp. (“TerrAscend“).

Table 5
As atAs at
Period ended30-Jun-2031-Mar-20
Cash$43,912$46,724
Loan Receivable42,45042,450
Equity method investees46,53550,543
Financial assets at FVTPL83,80080,170
Financial assets at FVTOCI75,32364,599
Other assets15,93015,899
Total assets$307,950$300,385
Total liabilities1,5332,107
Total shareholders’ equity306,417298,278
Total liabilities and shareholders’ equity$307,950$300,385

PharmHouse Update

During the previous quarter, the Company announced that its joint venture, PharmHouse, received a key licence amendment from Health Canada allowing for cultivation across its entire greenhouse space in Leamington, Ontario. This enabled PharmHouse to begin planting pursuant to its previously announced offtake agreements with Canopy Growth Corporation (“Canopy Growth“) and TerrAscend.  For a variety of reasons, the previously anticipated timeline for PharmHouse to generate cash flows from these offtake agreements was not met, and the ultimate timing and receipt of cash inflows is currently uncertain. Taking into account these factors, as well as broader sector-wide challenges impacting the Canadian cannabis industry, including a slower-than-expected build-up of the market and a general imbalance of supply and demand, the Company believes that PharmHouse may have insufficient liquidity and capital resources to achieve its business objectives and, as a result, that there exists material uncertainty regarding PharmHouse’s ability to meet its financial obligations as they become due.

Recognizing the potential conflicts of interest that may arise given the relationship between the Company and PharmHouse’s counterparties to these offtake agreements, the Company’s Board of Directors formed a special committee comprised of independent directors (the “Special Committee“) to oversee and provide guidance relating to the Company’s investment in PharmHouse, including the offtake agreements with Canopy Growth and TerrAscend and the Company’s guarantee of any obligations of PharmHouse, as well as to consider strategic alternatives for the Company regarding its investment in PharmHouse, which may include, but are not limited to, any of the following:

  • Provision of additional capital to PharmHouse in the form of any existing or new class of debt or equity;
  • Renegotiation of any of PharmHouse’s existing offtake agreements or other material contracts;
  • The establishment of new partnerships or the attainment of additional third-party financing for PharmHouse; or
  • Reorganizing or selling the Company’s interests in PharmHouse.

In furtherance of its mandate, the Special Committee retained a financial advisor to assist it in assessing such strategic alternatives. In addition, based on the determination of the Special Committee, the Company has contributed, and expects that it will continue to contribute, additional capital to finance PharmHouse’s ongoing operations while the Special Committee assesses these strategic alternatives. While the Company is working towards a solution for its investment in PharmHouse that will be acceptable to the PharmHouse joint venture partner, there is no guarantee that a consensus will be reached amongst the parties.

Q1 2021 Corporate and Portfolio Updates

The following represents a summary of key developments at Canopy Rivers and its other portfolio companies during Q1 2021:

Canopy Rivers

  • Canopy Rivers welcomed Mike Lee, Canopy Growth’s CFO, to its Board of Directors.
  • The Company announced a series of operational changes designed to optimize its organizational structure, streamline operations, and preserve and maximize cash-on-hand. This included a targeted reduction in operating cash outflows and a focus on generating positive cash flow from operations for fiscal year 2021 and on maximizing returns on existing assets.
  • Canopy Rivers invested in Dynaleo, an Alberta-based cannabis gummies manufacturer. Shortly after, Dynaleo received its processing licence from Health Canada and signed its first letter of intent with Pantry, a California-based edibles brand that plans to expand to Canada.

Portfolio

  • TerrAscend had several notable developments during the quarter. The company appointed Jason Ackerman as its CEO. Mr. Ackerman joined the TerrAscend Board of Directors as Executive Chairman in November 2019 and was appointed as interim CEO in January 2020. He is the founder of FreshDirect, a company he went on to lead for 18 years, growing it to over $600 million in annual sales. TerrAscend also announced a US$30 million non-brokered private placement which, following strong investor demand, was upsized to US$37 million. Finally, TerrAscend also announced the opening of its third retail dispensary location in Pennsylvania. As of market close on August 13, 2020, TerrAscend’s Canadian listed stock had increased from $2.49 on March 31, 2020 to $4.84, representing an increase of 94%. The Company owns 19,445,285 exchangeable shares of TerrAscend that are convertible into common shares upon the occurrence of certain events. Assuming conversion of the exchangeable shares, this would imply a value of $94.1 million for the Company’s investment in TerrAscend.
  • BioLumic Ltd. appointed Steve Sibulkin as its CEO. Mr. Sibulkin is the founder of agricultural field modelling company Agronomic Technology Corp (“Agronomic“), which operates Adapt-N. He had been working with Yara International, the Norwegian fertilizer company that acquired Agronomic, since 2017.
  • YSS Corp. (“YSS“) announced its Q1 2020 financial results. YSS reported a 15% revenue increase and 21% gross margin increase over Q4 2019.
  • Agripharm received a licence amendment from Health Canada to allow for the sale of dried cannabis, extracts, edibles, and topicals. The amendment enables Agripharm to exercise its exclusive rights to introduce U.S.-based brands from SLANG Worldwide Inc. and Green House Seed Co. to the Canadian market.
  • Greenhouse Juice announced that its products are now available in 42 additional stores across Ontario, including grocery chains such as Loblaws, Zehrs, City Market, Your Independent Grocer, and Valu Mart.

This press release should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements and MD&A for the three months ended June 30, 2020, which are available under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website at www.canopyrivers.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 2, 2020 (“AIF”), also available under the Company’s profile on SEDAR at www.sedar.com and on the Company’s website at www.canopyrivers.com/investors.

About Canopy Rivers Inc.

Canopy Rivers is a venture capital firm specializing in cannabis with a portfolio of 18 companies across various segments of the cannabis value chain. We believe that bringing together people, capital, and ideas raises the potential of the entire cannabis industry. By leveraging our industry insights, in-house expertise, and thesis-driven approach to investing, we aim to provide shareholders with exposure to specialized and disruptive cannabis companies. Our mission is to invest in innovators across the cannabis value chain, help them grow, and ultimately create value by guiding these companies towards a monetization event. Together with our portfolio, we are helping build the cannabis industry of tomorrow, today.

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 the Company with respect to future business activities and operating performance. To the extent any forward-looking information in this news release constitutes “financial outlooks” within the meaning of applicable Canadian securities laws, the reader is cautioned that this information may not be appropriate for any other purpose and the reader should not place undue reliance on such financial outlooks. 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: management’s belief that Dynaleo is positioned to help Canada’s licensed producers and brands catch up to consumer demand for gummies; the Company’s belief that cannabis can remain resilient during economic downturns and its expectations regarding the role that the Company’s portfolio companies will play in the cannabis sector; the Company’s expected focus and priorities for the coming quarters; the expectation that certain equity method investees will continue to generate net losses in the near term; the Company’s targeted reduction in operating cash outflows; expectations regarding timing and receipt of cash inflows at PharmHouse, the provision of additional capital to PharmHouse and the strategic alternatives available to PharmHouse, as well as the Company’s belief that PharmHouse may have insufficient liquidity and capital resources to achieve its business objectives and there exists material uncertainty regarding PharmHouse’s ability to meet its financial obligations and that PharmHouse has the potential to become a key component of the Canadian supply chain for low-cost, high-quality cannabis; the Company’s belief that it is well-positioned for U.S. market development through its investment in TerrAscend as well as its expectations regarding the conversion and implied value of its TerrAscend exchangeable shares; Pantry’s plans to expand to Canada; 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 the Company 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 the Company. Financial outlooks, as with forward-looking information generally, are, without limitation, based on the assumptions and subject to various risks as set out herein. Our actual financial position and results of operations may differ materially from management’s current expectations. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: risks associated with the termination, renegotiation and enforcement of material contracts; credit, liquidity and additional financing risks for the Company and its investees; stock market volatility; regulatory and licensing risks; cannabis pricing risks; changes in cannabis industry growth and trends; changes in the business activities, focus and plans of the Company and its investees and the timing associated therewith; the Company’s actual financial results and ability to manage its cash resources; changes in general economic, business and political conditions, including challenging global financial conditions and the impact of the novel coronavirus pandemic; competition risks; potential conflicts of interest; the regulatory landscape and enforcement related to cannabis, including political risks and risks relating to regulatory change; changes in the Company’s relationship with Canopy Growth and its investees; changes in applicable laws; compliance with extensive government regulation, including the Company’s interpretation of such regulation; changes in the global sentiment towards, and public opinion of, the cannabis industry; divestiture risks; and the risk factors set out in the Company’s AIF, filed with the Canadian securities regulators and available on the Company’s profile on SEDAR at www.sedar.com.

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 the Company 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. The Company does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.

1The financial highlights in this summary are presented in CA$ thousands.

SOURCE NEWSWIRE

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