RIV Capital Inc.

Good morning, everyone. Thank you for joining us today and for your interest in RIV Capital.

This morning we reported our financial results for the quarter and fiscal year ended March 31, 2021. I would like to begin today's call by providing some more information on what the past year has looked like for RIV Capital, how we got to where we are today and what you can expect from us in the coming months.

We believe we have an exciting strategy, the right team to execute and hope that after today's call you'd feel confident in the direction we are taking in the wake of the transaction we closed in February. Eddie will then walk through the financials and then we'll end the call with some more corporate and portfolio updates from the previous quarter.

Matt Mundy, RIV Capital's Chief Strategy Officer and General Counsel will also join us for today's question-and-answer period. Since the closing of our transformative transaction with Canopy Growth in February, we have been diligently executing on our strategic pivot and launch into the U.S.

market. While being in the U.S.

is not a new goal for us, it has been something that we have been structurally limited in pursuing over the past several years. Whether because of regulatory issues or restrictions placed on us by the multiple voting shares, we were unable to pull the trigger on many investments, even in some ancillary companies that we envisioned providing value for our shareholders.

Despite meeting with hundreds of U.S. companies, developing relationships, building in-depth thesis and working tirelessly to navigate complex regulatory frameworks, we could not legally invest in these businesses.

Pursuing and then closing a transformative deal that removed these roadblocks became an absolute imperative for our team as we watched the U.S. market evolve into what it is today.

After likely negotiation, we closed the deal this past quarter that enabled us to separate from Canopy Growth and add significant liquidity to our balance sheet. Ultimately, we believe that this transaction provide us with strategic flexibility, return substantial value for our shareholders, bolstered our balance sheet relative to our peers and lay the groundwork we needed to launch in the U.S.

market. Moving forward, our strategy is to leverage our balance sheet, public listing, strategic relationships and industry expertise to execute a transformative transaction focusing on the U.S.

cannabis space. The exact structure of this transaction is evolving as we identify the best opportunities in the U.S.

market and we plan to make this pivot by bringing capital to operators that are positioning themselves for the burgeoning U.S. market.

We believe that our shifting -- that shifting our focus to operating companies, those that grow, process and market cannabis products better aligns with goals of RIV Capital and our shareholders, putting us on the best path for future sustainable growth. We believe that the societal acceptance of cannabis and regulatory momentum at both the federal and state levels makes now an ideal time to enter the U.S.

market. Support for cannabis legalization is at an all-time high and underscored by adult-use legalization in 17 states.

The designation of cannabis as essential in many states during the pandemic also highlights the growing acceptance of cannabis. While the exact timing and shape of federal regulatory reform remains unclear, we are optimistic that we will see progress in some form in the short-term.

We expect that these catalysts, which include more states legalizing and a growing consumer base would create a solid foundation for our expectations in the U.S. market.

By 2025 it is estimated that total addressable market for cannabis in the U.S. will be in excess of US$40 billion.

We also expect that M&A activity, which has heated up in recent months will persist as multi-state operators position themselves for continued regulatory evolution. The U.S.

market is a catalyst-rich environment, with many operators having built a competitive advantage. And we believe that these factors combined with current market trends, our expertise and capital, make now the best time for RIV to attack the U.S.

market. After reviewing these market trends, and conducting a critical analysis of where we believe the market to be headed, we identified three key indicators for potential partners that we believe will lead to value creation for shareholders.

First, cost containment. We’re focused on operators who continually work to reduce costs, produce high margin cannabis, and future proof their operations through standardization and scale of operating procedures.

Second, business model flexibility. Change is the only constant in the cannabis industry.

We're focused on operators and management teams who demonstrate a willingness and aptitude for the rapid pivot that broader industry changes and maturation will require. And finally, a focus on CPG.

As the market matures, brands will rapidly come to forefront, hyper focus on experiences, customer loyalty and repeat purchases. We want to ensure that our partner has the CPG capabilities required to build with consumer demand.

We believe that focusing on these three pillars will help us identify and partner with operators that are positioning themselves for where the industry will be in 5, 10 years from now. The industry will look substantially different than it does today.

And we want to ensure that our next move takes us to where cannabis will be. I'll now hand it over to Eddie to discuss our fourth quarter and fiscal year 2021 financial results.

Thank you, Narbé. And thank you again to everyone who's dialed into the call this morning.

Today, I will review our financial results for the quarter ended March 31, which represents the end of our 2021 fiscal year. I'll begin my comments by recapping our milestone transaction with Canopy Growth which closed on February 23, as this transaction had a significant impact on our financial results for the quarter.

As you’ll recall, in connection with this transaction, we disposed of our investments in the TerrAscend exchangeable shares, TerrAscend Canada term loan, TerrAscend Warrants, Tweed Tree Lot royalty interest and Vert Mirabel common and preferred shares. In exchange, we received approximately 118.4 million of cash and approximately 3.65 million shares of Canopy Growth and we cancelled all of the shares of RIV held by Canopy Growth, representing 51.7 million shares total inclusive of Canopy Growth’s 36.5 million multiple voting shares.

Accordingly, this transaction eliminated our dual class share structure. In terms of how this transaction shows up in our financial results for the period, we recorded the disposition of these financial assets at the fair value of the consideration received for each asset.

Some of these assets were classified as financial assets at fair value through profit or loss, while others were classified as financial assets at fair value through other comprehensive income. Based on the fair value of consideration received for each asset, we recognize the corresponding net change in fair value of financial assets in our statement of comprehensive income immediately prior to disposition, whether that net change for particular financial asset showed up in P&L or OCI, depending on the classification of that asset.

The closing of the transaction on February 23 triggered a derecognition event for all of these disposed assets. And we replaced these assets on our statement of financial position with $118.4 million of cash, $160 million worth of Canopy Growth shares and a reduction to share capital of $57 million.

It is also important to note that the disposition of these financial assets triggered a series of taxable events for the company, based on the fair value of consideration received upon closing. Total proceeds at disposition as measured on the closing date were more than 335 million, which as you can expect, translated into very large capital gains for the company.

Partially offsetting these capital gains for the March 31, 2021 tax year were certain capital losses, particularly related to PharmHouse, as well, to a lesser extent, non-capital losses. Taking into account these various elements, we estimated the taxes we owed as of March 31 to be 17.5 million, which shows up as a current liability on our statement of financial position.

The Canopy Growth shares and director fees pursuant to the Canopy Growth transaction have a cost base for tax purposes of approximately equal to the fair market value of these Canopy Growth shares on February 23. We anticipate that the disposition of any Canopy Growth shares subsequent to March 31 that occurred at a price below the February 23 fair market value will result in a capital loss that the company can utilize to either reduce taxable income in the current taxation year or carry back to claim a refund in respect to taxes paid for historical taxation.

As we've previously mentioned, the strategic and financial merits of the Canopy Growth transaction were quite clear for the company. Our financial results for the period ended March 31 further demonstrate the significant value that this transaction unlocked and the substantial liquidity that was added to our balance sheet.

I'll now summarize our operating results for the quarter. Net operating loss before consideration of equity net investees and fair value changes was 7.1 million for the quarter, compared to a loss of 0.9 million for the same period last year.

Operating income before consideration of equity method investees and fair value changes was 0.7 million for the quarter compared to income of 2.6 million for the same period last year. This includes the company's royalty, interest and lease income, net of provisions for expected credit losses.

On a gross basis, this income was primarily generated from the company's royalty interest in Agripharm, Radicle and Tweed Tree Lot, debenture investment in Greenhouse Juice and financed leases with Tweed Tree Lot and was offset by a provision for expected credit losses on interest royalty receivables of 0.1 million. Operating expenses were 7.9 million for the quarter compared to 3.5 million for the same period last year.

Excluding share-based compensation, operating expenses were 7.4 million for the quarter, compared to 2.2 million for the same period last year. The primary driver of the year-over-year increase relates to 4.7 million in fees recognized during the quarter that were directly attributable to the Canopy Growth transaction.

On a normalized basis, after adjusting for one-time items occurred in respect to PharmHouse and the Canopy Growth transaction, we are pleased to report that the company achieved its operating cost reduction targets for the 2021 fiscal year. Our shared loss in equity method investees was nominal for the quarter, compared to shared loss of 3.2 million for the same period last year.

As a reminder, pursuant to an election available under the relevant accounting standard, we pick up our share of profit and loss one quarter in arrears. Meaning that the financial results of our equity method investees that we reported for the quarter ended March 31 related to their financial results for the quarter ended December 31, adjusted for any significant events that occurred up to our reporting date.

The company's equity method investees include Greenhouse Juice, High Beauty, LeafLink International and Radicle. The net change in fair value of financial assets at fair value through profit and loss was a decrease of 19.8 million for the quarter, compared to the decrease of 16.3 million for the same period last year.

The decrease this quarter was primarily driven by the negative change in fair value at the Canopy Growth shares that the company received as consideration in connection with the Canopy Growth transaction, as well as the negative change in the estimated fair value of our investment in the TerrAscend Warrants, which were disposed of this quarter in connection with the Canopy Growth transaction. There are several financial instruments in our portfolio that are classified as financial assets at fair value through profit and loss.

A detailed breakdown of the fair value changes in these instruments is included in Note 10 to our consolidated financial statements, and descriptions of the related valuation methodology and key inputs and assumptions are presented in Note 16. We're pleased to report that the historical volatility in our quarterly net loss as a result of the PharmHouse CCAA proceedings and restructuring appears to now be largely behind us.

You'll recall that as of December 31, we had estimated the liability related to our financial guarantee of PharmHouse’s $90 million syndicated credit facility to be $32.5 million, based on an analysis that we call the PharmHouse recoverability assessment. We updated the PharmHouse recoverability assessment as at March 31 based on events that occurred during the quarter.

Specifically, on March 3, we announced that, as a result of the sale and investment solicitation process, PharmHouse has entered a binding asset purchase agreement to sell various operating assets, including its greenhouse facility in Leamington, Ontario and certain equipment located at that facility. Shortly thereafter, we announced the payment of $25 million to the lenders of the PharmHouse credit facility to partially satisfy the company's financial guarantee liability.

This payment reduced the principal outstanding on PharmHouse credit facility to $65 million and reduced our remaining liability in respect to the guarantee from $32.5 million to $7.5 million. Then, as of March 31, we've revised our estimate of the remaining liability on the PharmHouse guarantee, based on the net proceeds expected to be received pursuant to the PharmHouse asset purchase agreement, as well as the cash of PharmHouse is projected to have available for distribution upon conclusion of the CCAA proceedings.

As a result of our analysis, we've further reduced the estimate of the PharmHouse guarantee liability from $7.5 million to $3 million. A $4.5 million recovery of this expected credit loss is reflected in our P&L for the quarter and the estimated $3 million liability is presented on our statement of financial position as at March 31.

Income tax recovery for the quarter was $2.6 million compared to income tax recovery of $1.3 million for the same period last year. Income tax recovery for the quarter was driven mainly by current income tax recovery of $15.3 million related to net capital losses and non-capital losses generated and utilized in the quarter, offset by deferred income tax expense of $12.7 million related to the reversal of certain deductible temporary differences the company anticipated at the end of our previous fiscal quarter.

It is important to note that the company's current income tax payable at March 31 is driven primarily by current income tax expense for the quarter of $33.7 million, related to the disposition of the TerrAscend exchangeable shares and Vert Mirabel common shares which is presented in other comprehensive income, which I will talk more about in a moment. After consideration of operating income, operating expenses, equity method investees, fair value changes, other foreign PharmHouse related items and income taxes, RIV Capital reported a net loss of $21.5 million for the quarter compared to a loss of $30.5 million for the same period last year.

Below the net loss line, we count for the impact of net changes in fair value of financial assets at fair value through other comprehensive income, which is presented net of tax. On a net of tax basis, the net change in fair value was an increase of $86.3 million for the quarter, compared to a decrease of $6.3 million for the same period last year.

The net increase this quarter was primarily attributable to the positive change in the estimated fair value of our investment in TerrAscend exchangeable shares, which we disposed of this quarter in connection with the Canopy Growth transaction and was partially offset by a decrease in the estimated fair value of our investment in Vert Mirabel common share which we also disposed of this quarter in connection with the Canopy Growth transaction. A detailed breakdown of the fair value changes in these instruments is included in Note 11 to our consolidated financial statements, and descriptions of the related valuation methodologies and key inputs and its functions are presented in Note 16.

Overall, comprehensive income for the quarter was $64.8 million compared to a comprehensive loss of $36.8 for the same period last year. Total assets as at March 31 amounted to $335.4 million.

This includes $127.9 million of cash and $143.9 million of Canopy Growth shares. Narbé will momentarily provide an update on the activity involving the Canopy Growth share, subsequent to the end of the reporting period.

Total liabilities as at March 31 amounted to $23.9 million primarily relating to the company's current tax liability as a result of the Canopy Growth transaction of $17.5 million as well as the estimated remaining financial liabilities associated with the company's guarantee of the PharmHouse credit facility of $3 million. Moving on to cash flows, cash used in operating activities was $5.3 million for the quarter compared to $0.7 million for the same period last year.

Cash provided by investing activities was [$94.1 million] compared to cash used in investment activities of $2.3 million for the same period last year. The net cash flow from investing activities was positive for the quarter due to the cash proceeds of $118.4 million received in connection with the Canopy Growth transaction offset in part by the $25 million guaranteed payment made to the lenders of the PharmHouse credit facility among other items.

Finally, cash provided by financing activities was $1 million for the quarter and primarily related to proceeds received from the exercise of the stock options. I will now turn it back over to Narbé to conclude our prepared remarks.

Thanks, Eddie. I will now go over some corporate and portfolio updates for and subsequent to the quarter before beginning the Q&A period.

I'd like to start by providing an update on PharmHouse further to the information Eddie just provided. Subsequent to the quarter PharmHouse completed an asset purchase agreement to sell its facility and certain equipment to company related to CCA Act.

Concurrent with the closing of the sale, we made a $7.5 million payment against the PharmHouse credit facility, which together with previous amounts paid fully satisfied all outstanding obligations pursuant to the facility. We are now entitled to any cash available for distribution upon termination of PharmHouse to CCAA proceedings.

Our team has worked tirelessly over the past quarters to ensure that the issues at PharmHouse and their exposure to them do not hamper our ability to pursue our strategic pivot. And we look forward to now turning our complete focus to executing on our investment strategy and imminent launch in the U.S.

market. Before jumping into portfolio updates, I wanted to provide several updates on pre-monetization events that occurred subsequent to the quarter.

First, between April 1, 2021 and June 2, 2021, we sold 3.6 million common shares of Canopy Growth for net proceeds of $106.7 million. As of June 2, 2021, we no longer own any Canopy Growth common shares.

Second, we divested our position in Nova formerly YSS, selling all of our common shares for net proceeds of approximately $1.4 million. Finally, we sold the New Brunswick property to Tweed Tree Lot for $4 million.

Together, these divestments represent a continued effort to return capital to our balance sheet in order to ensure we are in a best possible position to take advantage of opportunities in the U.S. market.

We also had several exciting updates from our portfolio during and subsequent to the quarter. In the retail portion of our portfolio High Beauty launched the High & Bye CBG collection, a collaboration with Lygos.

High Beauty also announced that its products are now available to Cult Beauty and [GlossWire]. High Beauty's products are now available at 42 retailers worldwide accounting for 2,340 stores in the U.S., Canada, Hong Kong, United Arab Emirates, and the European Union.

Greenhouse Juice also continued to add to its distribution network in the quarter, announcing that its products are now available at Health Plan in Ontario and Thrifty Foods and Costco in British Columbia. Greenhouse Juice also announced that it is now a certified B corporation, reflecting its consideration for all stakeholders and environment and its business practices.

Dynaleo had an exciting quarter launching two new brands, Sunshower and DYNATHRIVE CBD. Both brands are available in British Columbia, Saskatchewan, Alberta and Ontario and represent Dynaleo’s continued commitment to raising the bar for quality, consistent products available to consumers across the country.

Subsequent to the quarter, Dynaleo also completed a $9.7 million oversubscribed equity financing. Moving to the technology portion of our portfolio, Headset had several updates subsequent to the quarter and launched its Insights Premium platform in Pennsylvania marking the first time a full market read of consumer insights has been available for the state.

As part of this launch, Headset noted that Pennsylvania’s medical only market brought in approximately US$909 million between April 2020 and March 2021. Headset also released several reports highlighting trends and growth in the broader U.S.

market. In April they projected that cannabis sales in the U.S.

will reach approximately $23 billion by 2022. These projections echo our estimates for the U.S.

market and underscore that our strategic pivot is happening ahead of where a significant amount of value will be unlocked in the U.S. In their plant sciences part of the portfolio, ZeaKal released groundbreaking results from its trials applying its novel PhotoSeed trait to hemp.

PhotoSeed, a trait technology that increases a plant's ability to capture carbon and sunlight translating into additional energy and therefore better nutritional composition, increased oil composition and hemp biomass by up to 50% relative to controls. ZeaKal anticipates that PhotoSeed hemp could produce approximately 800 pounds of oil per acre, nearly triple that of soybeans, the largest oil seed crop in North America.

This idea -- this new data validates our initial investment thesis that PhotoSeed could be transformational for the hemp sector, and eventually in the cannabis sector. I'd like to end today's call by reiterating management's excitement for the next phase of the company as we explore acquisition and investment opportunities in the U.S.

market. We believe that this strategic pivot will open new doors for value creation.

When combined with our strong liquidity and a balance sheet that stands out from many of our peers, the next iteration of RIV Capital will be a well-capitalized, to continue expanding our footprint across the U.S. This concludes our formal remarks.

Eddie, Matt and I will now be pleased to answer your questions. Operator, please begin the question period.

Hi, good morning and thank you for taking my questions. First question, I was hoping you could provide some more color on the current opportunities that you're seeing with respect to the transition to an operating model?

In the United States, could you give us any sort of goalposts here? How many prospects you've assessed so far?

Are there any LOIs out, and what areas of the value chain or specific geographies have you found particularly interesting in that process so far? Thank you very much.

Thanks, Graeme. We've seen a few different permutations and several opportunities of both large and small companies across the U.S.

And we're still on page from our previously disclosed timelines for an announcement of a deal and closing of a deal sometime this year as well. So at this point we don't have any more information to provide, but we look forward to disclosing more information when the time is right.

Okay. Understood.

Thank you for that. With respect to the existing investment portfolio of the -- and considering the divestiture activity that happened subsequent to the quarter, how would you characterize the current portfolio in terms of investments or opportunities that you see as having maybe significant upside or synergies in a potentially operating model versus other investments you might deem as non-core and would look to divest them moving forward?

Thank you.

Yes. So we've always believed that we've invested in cutting edge technologies and cutting edge companies across the cannabis value chain.

As we transition to becoming more of an operating company and launching it to the U.S. market, some of these assets do create synergies across the border, others don't.

However, it's not to say that, that we're looking to sell anything. And in the near term I think we're opportunistic when offers do come about, but we do believe in the long-term outlook of many of our portfolio companies.

And so we want to hold onto them to see that through.

Then my last question before I get back in the queue here. With respect to the disposal of the Canopy Growth shares, the implied price, I think comes out to around C$30 per share, which is about a 30% decline from the closing of that Canopy Growth arrangement there.

So I was wondering if you could provide some more details in terms of the actual timing of the divestiture of those shares subsequent to the quarter. What played out in that decision and how it worked out in terms of the total net proceeds received?

Yes. From the perspective of the decision, I think that the spirit of the deal that we had with Canopy Growth was not to hold on to the shares but just to take on their cash.

And looking back at the transaction, we would have taken all cash in that situation, but with the transaction consideration it was divided between cash and shares. So we wanted to add the cash on our balance sheet to just really prepare ourselves for the U.S.

market. And we did that through multiple selling opportunities throughout the quarter and subsequent to the quarter.

I was wondering to get out some commentary maybe on changes you've seen in M&A opportunities since our last call, when it comes to valuations, and how would you characterize the difference in valuations in private markets versus public say versus a few months ago?

Thanks for the question, John. I think you do see that the private markets and the public markets do typically lag each other in terms of changes in valuation multiples, especially, as things soften in the public markets.

When the public markets are hot, and multiples are increasing, the private markets quickly catch up to it. But when things cool down, the private markets do lag behind the public comps.

We do see that valuations do range according to what -- where the company is within the value chain and what it is actually working on and where it's located as well. So typically, you do see single state operators at a lower multiple than multistate operators, because of their inability to -- and the capital and the inability to have capital to go and expand into new markets versus larger MSOs -- public MSOs have a higher multiple and private MSOs have somewhat lower multiples as well.

If I take a step back from there, John, I’d say that there is a somewhat of an arbitrage opportunity here where you do see that on the private side, the multiples are lower for both single state operators and multistate operators, relative to what you're seeing in the public markets. So there's M&A opportunity all across the board.

And you can see that not only with our discussion, but with many of the discussions with our peers as well in terms of looking at opportunities to consolidate within certain markets, and expand the reach to consumers.

And sticking with M&A, any evolution on your thinking on whether you'd look to acquire just one name versus multiple assets? And would you need to be a majority holder on any deal that you did?

Or would you be open to essentially being a minority holder on a larger ticket transaction?

I mean, at a high level, I think we're looking at different permutations. And I mean, there's different opportunities, there's opportunities to look at a large platform investment, there's opportunity to look at two to three medium sized players and smash them together.

So we're at this point looking at all of opportunities ahead of us. And we're trying to -- we're assessing which of those opportunities are best to provide value for our shareholders and we look forward to providing more information on this but when the time comes.

Got it. Without sharing specific plans, do you plan to monetize further assets in advance of U.S.

acquisition, or maybe how would you characterize the likelihood of monetization of any other assets within your portfolio currently?

In no way, shape or form are we looking to a prior-sale of any of our portfolio assets. I think since our announcement of the Canopy Growth transformative transaction that we closed in February, we've had a number of parties reached out to us looking to acquire our interest or acquire one or more of our portfolio companies.

So, we're working through those details, and looking at the opportunities. And the lens that we always have is what's best for returning value for our shareholders and what best helps us pivot to our imminent launch as an operating company in the U.S.

So, we're consistently assessing these opportunities. But there is nothing to note -- there's nothing to disclose at this point actually.

Understood. And then just one last one.

One valuation was the Dynaleo equity financing done, are you able to share that?

Yes. We can comment on that, John.

That was through the ordinary shares.

I appreciate the follow-up here. Just as a quick follow-up with respect to a housekeeping item.

Given all the divestiture activity happening subsequent to the quarter, would it be possible to update us on what the cash balance in RIV Capital works like as of today or start of month?

Yes. Happy to outline that, Graeme.

So we've got the cash that's reported at the March 31 added to the balance sheet of around $128 million. You'll see in the subsequent event note in the financial statements, the net proceeds received from the Canopy Growth share disposition subsequent to quarter end.

So that's about $106 million to add on to that there. We do have the 2 liabilities that are on the balance sheet of March 31, which was the $17.5 million tax liability associated with the Canopy Growth transaction and then the $3 million liability that we estimated in respect to the financial guarantee on PharmHouse.

And the only other real large cash employ item that we would have announced in the last 48 hours is the inflow on the divestiture of the Tweed Tree Lot asset. So $4 million added to the balance sheet vis-à-vis that sale.

Okay. So just to confirm there, the disposal of the Nova shares that was in the quarter and within the March 31 cash balance, correct?

No, that was subsequent to the quarter. It was just a smaller number.

So you'll see in the subsequent event note that it references $1.4 million there.