RIV Capital Inc.

Good morning and thank you to everyone on the line for your interest in RIV Capital and our second quarter results. We know that there has been considerable anticipation for what's next for RIV Capital, and we're looking forward to providing an update today.

Following that, I'll hand it off to Matt Mundy, RIV Capital's Chief Strategy Officer; and then Eddie will walk through our financial results for the quarter ended September 30. We will end today's call with a question-answer-session.

By now, I'm sure many of you have read the quarterly press release that went out this morning. And we know that many of you have been watching closely for acquisition or investment news from us.

If there's one thing I want to make clear on today's call is that this anticipation and excitement inspires us every day, and we continue to advance discussions with a select number of target companies in strategic markets. Upon the close of the Canopy Growth deal, we communicated to you that we expected to announce a transformative transaction by the end of summer.

In the months that followed, our discussions with The Hawthorne Collective evolved around a shared idea of what was possible in the U.S. cannabis market.

That alignment ultimately culminated in the US$150 million convertible loan investment we received from Hawthorne during the quarter. This investment and the partnership that came along with it did more than push our cash balance north of $400 million.

It also fundamentally reshaped the way we are approaching our strategic shift. Over the past few months, we have executed our U.S.

transition through a new lens, with The Hawthorne partnership opening up a new range of possibilities for how our platform can be built. The Hawthorne investment has provided us with even more flexibility than we had in a period immediately following the Canopy Growth transaction.

We have an enviable balance sheet and liquidity, an attractive capital structure and a one-of-a-kind strategic partnership with a truly Blue Chip company that has proven it can win in the cannabis sector. We believe that what we have in front of us is an incredible opportunity to create long-term value for our shareholders.

And the launch of our platform is not something we are going to do with haste. While we are no longer deploying venture capital, one value we have carried over to our new focus is that cannabis is a long game.

We do not endeavor to be a short-term play, but rather a long-term growth-oriented mainstay in the U.S. cannabis sector.

That's why we haven't hesitated to walk away from discussion when we felt that the deal was not delivering enough value for our shareholders. And it's why our focus has been to continue developing our U.S.

market intelligence to identify the best opportunities rather than close on the first deal that landed in front of us. Like you, we are excited by sector wide news, such as the newly revealed Republican-led effort to decriminalized cannabis federally.

But we cannot let these events or other external factors rush a process where the goal is to ensure long-term sustainable value for shareholders in the years to come. Our platform is one that we built piece by piece beginning of the coming months and grow from there into a leading multistate operating and brand company.

We intend on being a key player in the U.S. cannabis sector, and we look forward to having you right beside us for that ride.

I'd like to now invite Matt Mundy, our Chief Strategy Officer, to provide a more granular update on our U.S. pivot.

Thanks, Narbé. With respect to the status of our pivot to the U.S.

market, we continue to develop our market intelligence and are very much engaged in discussions with our counterparties. These discussions vary in their stages, but we believe that the select number of targets we are engaged with today embody the qualities that we are looking for in our operating brand platform.

From a geography perspective, all of our prospective targets are operating in strategically attractive markets with regulatory environment and total addressable markets that promise to provide the groundwork for a solid return on investment in the years ahead. They also have strong management teams that can scale and build market share, while RIV continues to focus on expanding the scope of the platform.

Finally, we are laser focused on the future prospects and economic opportunities of these transactions. In such a fast paced industry, it is critical that the companies we engage with are prepared for the twists and turns that the sector will throw at them, and that their economics will remain strong despite this volatility.

This is where the bulk of our diligence is focused. We want to be sure that the operators and brands that we fold into our platform are truly great at what they do, from cultivation all the way through the customer and product experience.

We also need to ensure that these companies share our ambition for what opportunities lay ahead in the U.S. cannabis market.

And we really want to be sure that any acquisition provides the best value for our shareholders in the long term. While we are eager to see this strategy come to life, we also need to make sure we get it right.

We have an amazing opportunity in front of us and believe that we are uniquely positioned to create a market leading, value-driven and consumer obsessed operating brand platform to the world's most exciting cannabis market. Eddie will now walk you through our financial results for the quarter.

Eddie?

Thank you, Matt, and thank you again to everyone who's dialed in to the call this morning. Today, I will report on our financial results for the quarter ended September 30, which represents the second quarter of our fiscal year ending March 31, 2022.

I'd like to begin by highlighting the milestone Hawthorne investment that closed on August 24 and how it impacts our financial statements for the quarter. The convertible note is a compound financial instrument with two components; a debt component and an embedded option component, and we are required to recognize and measure these components separately.

A complex valuation analysis attached to this exercise required us to use significant estimates and assumptions and resulted in 93.8 million of value being allocated to the debt component, which is presented as a financial liability on our statement of financial position, and 94.6 million of value being allocated through the option component which is presented as a new reserve within equity on our statement of financial position. Financing costs of 1.2 million were allocated to the liability and equity components on a pro rata basis to reduce the carrying values for those two items.

Finally, the difference between the tax basis and the convertible note and the accounting basis for the financial liability resulted in the recognition of a significant deferred tax liability, offset by a corresponding amount being deducted directly in equity. So to summarize, upon issuance of the convertible note, we recognized on our statement of financial position 188.5 million of cash and 93.3 million financial liability, a 25.2 million deferred tax liability and a new reserve within equity totaling 68.8 million net of tax.

Subsequent to initial recognition, financial liability is measured at amortized cost using the effective interest method, which results in the systematic recognition of a non-cash accretion expense on our P&L. This causes the carrying value of the financial liability to gradually accrete over the six-year term of the convertible note up to the expected full settlement amount.

Furthermore, recognition of the aforementioned accretion expense results in an income tax recovery on our P&L, which causes the deferred tax liability to decrease over time. For the three months ended September 30, we recognized non-cash accretion expense of 1.2 million and a deferred tax recovery of 0.3 million on our statement of comprehensive loss.

I'll now summarize our operating results for the quarter. Net operating loss before consideration of equity method investees and fair value changes was 6.8 million for the quarter compared to 7.4 million for the same period last year.

Operating loss before consideration of equity method investees and fair value changes was 1.7 million for the quarter compared to a loss of 5.8 million for the same period last year. This includes the company's royalty and interest income, net of the change in provisions for expected credit losses.

This amount was primarily related to an increase in the provision for expected credit losses on overdue royalty receivable balances with two of the company's investees. Operating expenses were 5.1 million for the quarter compared to 1.6 million for the same period last year.

Excluding share-based compensation, operating expenses were 4.9 million for the quarter compared to 2.1 million for the same period last year. General and administrative expenses were 3 million for the quarter and were impacted by the recognition and payment of certain non-recurring variable compensation expenses.

Consulting and professional fees were 1.8 million for the quarter and were impacted by transaction advisory expenses incurred in connection with the company's ongoing M&A diligence activities. Our share of loss from equity method investees was 0.5 million for the quarter compared to a share of loss of 33.2 million for the same period last year.

The primary driver of the year-over-year decrease is that the comparative figure included our share of loss and PharmHouse, which was written off during our 2021 fiscal year. Our remaining [indiscernible] LeafLink International and NOYA.

As a reminder, pursuant to an election available under the relevant accounting standard, we pick up our share of profit or loss one quarter in arrears, meaning that the financial results of our equity method investees that we reported for our quarter ended September 30 related to their financial results for their quarter ended June 30, adjusted for any significant events that occurred up to our reporting date. The net change in fair value of financial assets at fair value through profit or loss was an increase of 0.7 million for the quarter compared with a decrease of 3.1 million for the same period last year.

There are several financial instruments in our portfolio that are classified as financial assets at fair value through profit or loss. A detailed breakdown of the fair value changes in these instruments is included in Note 8 to our Interim Consolidated Financial statements, and descriptions of the related valuation methodologies and key inputs and assumptions are presented in Note 14.

Other income, net of other expenses, was 1.5 million for the quarter. This included a 2.3 million unrealized gain on the company's cash deposits held in U.S.

dollars, due to U.S. dollar appreciation relative to the Canadian dollar during the period.

It's also included the 1.2 million accretion expense related to the convertible note that I previously discussed. Income tax recovery was 3.7 million for the quarter compared to 4.5 million for the same period last year.

Income tax recovery for the quarter included a current income tax recovery of 2.5 million and a deferred income tax recovery of 1.1 million. After consideration of operating loss, operating expenses, equity method investees, other income and expense items and income taxes, RIV Capital reported net loss of 1.5 million for the quarter compared to a loss of 110.4 million for the same period last year.

You'll recall that the primary driver of that net loss for the same period last year was the recognition of the charges on our previously held investments in PharmHouse, including the financial guarantee liability, which was fully settled earlier this year. Below the net loss line, we capture 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 0.4 million for the quarter compared to an increase of 23.4 million for the same period last year. A detailed breakdown of the fair value changes in the financial instruments in our portfolio that are classified as financial assets at fair value through other comprehensive income is included in Note 9 to our Interim Consolidated Financial Statements and descriptions of the related valuation methodologies and key inputs and assumptions are presented in Note 14.

Overall, comprehensive loss for the quarter was 1.1 million compared to comprehensive loss of 87 million for the same period last year. At this halfway point of our fiscal year, it is evident that the nature of our operating results has shifted significantly.

In prior fiscal years, fair value changes in financial assets for both publicly traded and privately held investees generated significant volatility in our financial results, such as our previously held TerrAscend exchangeable share and Vert Mirabel common share. And last year, charges recognized in respect of our investment in PharmHouse dominated our headline numbers.

With several of our significant assets divested earlier this calendar year and PharmHouse now fully in the rearview mirror, we anticipate that operating results from our legacy portfolio will continue to play a more and more limited role in our overall financial results. And of course, our earnings profile is expected to change significantly upon the completion of our first significant U.S.

investment or acquisition. Moving on to cash flows, cash used in operating activities was 3.3 million for the quarter compared to 1.1 million for the same period last year.

Cash provided by investing activities was 5.5 million for the quarter compared to cash used in investing activities of 4.9 million for the same period last year. The primary driver of this net cash inflow this quarter was the receipt of the final distribution from PharmHouse of 6.5 million upon termination of the CCAA proceedings.

Cash provided by financing activities was 187.2 million for the quarter compared to a nominal amount for the same period last year, driven almost entirely by the proceeds received from The Hawthorne investment. Finally, total assets as of September 30 amounted to 468.6 million, which included 404.2 million of cash.

On a per share basis, assuming the full conversion of The Hawthorne convertible note into common shares, total assets per share as of September 30 was approximately $1.91 and cash per share as of September 30 was approximately $1.65. I will now turn it back over to Narbé to conclude today's call.

Thanks, Eddie. I want to highlight to everyone again that our cast balance, liquidity and access to future capital is a strong differentiating point for us as we look to pivot our business.

Over the past year, we have worked to clear our balance sheet of any liabilities that might pose a material risk to our U.S. strategy.

At the same time, we replenished our balance sheet to ensure that we have the cash available to acquire top operators and brands in some of the most strategic markets. Before we end today's call, I want to highlight a few updates from our existing portfolio that occurred during and subsequent to the quarter.

Subsequent to the quarter, we entered into an asset purchase agreement with TREC Brands for the sale of our 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 approximately 26% of a non-diluted equity interest in TREC Brands at the time of closing.

We also had several updates from the consumer products companies in our portfolio. 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 announced that COOKIES, one of the best-known cannabis brands world, will be grown and distributed in Canada by our portfolio company NOYA, formally known as Radicle. Greenhouse Juice continued to expand its social responsibility efforts, announcing 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.

Also, during the quarter, High Beauty announced that it had closed its oversubscribed US$4.2 million convertible bridge financing round. The round was expanded three times to accommodate additional investments, a sign of significant excitement for the plans Melissa and her team have to ensure that High Beauty’s brands are available around the world.

And finally, moving on to Headset which continues to be a top performer in its category and one of the leading data companies in the sector. During the quarter, Headset expanded its competitive intelligence tool, Headset Insights Premium, to Michigan.

Then, following the quarter, Headset introduced insights to Arizona, Illinois and Maryland. Its total number of market reads to 15 across Canada and the United States.

As markets expand and open across the U.S., Headset continues to be one of the first ancillary companies to arrive on scene to ensure that retailers have the insights they need to understand their consumer and grow their business. I want to end today's call by again reiterating our excitement for a strategic shift to the U.S.

market. We have brought on a truly Blue Chip strategic partner that has proven and has a right to win in this sector.

We have a strong balance sheet with north of $400 million in cash and an attractive capital structure. And we have been hard at work over the past quarter to ensure that we dig as deep as we can into market intelligence to understand who and where are the best acquisition targets in the industry.

We have a shortlist of companies that embody what we envision for offering and brand platform and look forward to making announcements further to this strategy in the near future. Thank you.

And I'll now ask the operator to open the line for questions.

Hi. Good morning and thank you for taking my questions.

First question I had was with respect to the recent lift the sector has had off the back of the positive SRA [ph] developments, I'm wondering has that made negotiations with targets any difficult? Has it changed expectations with respect to valuations?

Thank you very much.

I think the question is a great question, Graeme. Thank you for asking the question.

There has been numerous discussions with targets that we've had over the past quarter and even beyond before that as well. The recent developments have in some ways helped, in some ways hindered discussions with startups when it comes to discussions around valuation, around the future of the cannabis market in the U.S.

and how things do play out. In some ways, it has expedited the process.

In other ways, it does create difficulties. It has increased valuations in some sense for some targets that aren't necessarily ready to sell.

So it goes both ways.

Okay, understood. Thanks for that.

Then just as a follow up to that, you mentioned in the prepared remarks looking at companies or assets that are able to have some resilience in the industry as the landscape continues to shift, and then followed that up with remarks about vertical integration, talking about see-through [ph] sales. So I'm wondering, does that mean RIV Capital has a bias towards assets that are currently vertically integrated or piecing something together that would have a vertically integrated supply chain?

Thank you.

Yes, I think it's a great question. Our focus is on the limited license markets, predominantly in the East Coast.

We view the supply and demand imbalance of these markets to be particularly attractive for us as we look at targets in those markets and markets such as New Jersey, Illinois, Pennsylvania, New York, Maryland, and the like. The licenses that we do find or the licensees that we do find are vertically integrated in nature.

So they do everything from cultivation to processing, manufacturing and retail. There is -- in some markets, there is a strong wholesale game as well.

In other markets, there isn't. So it really depends on a market-by-market basis.

In terms of resilience coming out of the Canadian market previously as well as looking at neighboring states, such as California and Colorado, we do see that a wave of competition will come soon enough for these limited license states. So when we looked at targets, we tried to ensure and stress test as much as possible how the numbers would change if wholesale prices were to drop significantly or more competition or more supply would come into the market; or even in the most extreme cases, what it would look like if interstate commerce were to light up tomorrow.

And in these situations, we try to understand what is it that makes the company, what gives it the competitive advantage that it has over any of the other assets that are there, or any of the other opportunities that we have in other states? If and when these types of shocks do happen to the market, and through that we try to zone in on what are the targets that are resilient enough that can go beyond the current state of the cannabis market and be truly ready for the long term.

Okay. Thank you very much for the color.

That's it for me.

Thank you everyone for joining the call today. Look forward to announcing new news in the near term in terms of our acquisition strategy.

Thank you, everyone.