RIV Capital Inc. (CNPOF) Q4 2023 Earnings Call Transcript

RIV Capital Inc. (OTCPK:CNPOF) Q4 2023 Earnings Conference Call June 14, 2023 5:00 PM ET

Company Participants

Mike Totzke - Chief Operating Officer and Interim Chief Executive Officer

Matt Mundy - Chief Strategy Officer and General Counsel

Eddie Lucarelli - Chief Financial Officer

Operator

Hello, and welcome to RIV Capital's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call.

I'm joined this morning by Mike Totzke, Chief Operating Officer and Interim 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 consolidated financial statements for the three months and year ended March 31, 2023 are available on the Investors section of the company's website at www.rivcapital.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 Etain, 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 outlook.

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 June 14, 2023 and the risk factors referenced in the Q4 and year-end 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 source. 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.

All dollar amounts expressed today, unless otherwise stated, are in U.S. currency.

I would now like to turn the conference over to your host, Mr. Mike Totzke, Chief Operating Officer and Interim Chief Executive Officer of RIV Capital. Thank you. You may begin.

Mike Totzke

Thank you, operator, and welcome everyone to our fourth quarter and fiscal year-end 2023 earnings call.

Our fiscal year-end marks nearly one year since we acquired ownership and control of Etain and officially entered the U.S. cannabis market. While the path to an efficient and fair adult-use market in New York has taken longer than we might have hoped, the recently updated draft regulations, which Matt will discuss in more detail shortly, brightens the light at the end of the tunnel.

During the quarter, we substantially completed the expansion of Etain's Chestertown-based cultivation and production infrastructure, which is expected to triple Etain's existing cultivation capacity. We commenced plant propagation across the new high-tech greenhouse bays, which positions our first harvest to coincide with our entry in the adult-use wholesale market in Q4 of this year. We are happy to report that our investments in operational improvements at the facility have already resulted in notable flower yield and THC potency improvements, which have garnered positive customer feedback.

In Buffalo, we've erected the walls for our indoor flagship facility and interior commissioning is scheduled to start this fall. Subject to the receipt of regulatory approval for the site, facility completion is expected in the first half of the calendar year of 2024. We are designing this facility with a goal of producing some of the highest quality flower in the state, so we can become a leading premium wholesaler in the market.

From a retail perspective, we continue to focus on expanding distribution points. As of March 31, 2023, Etain products are now in 75% of medical dispensaries across the state. Etain also continues to develop its wholesale business for anticipated entry into the adult-use market later this year.

In addition to preparing to enter New York's adult-use market, we are also focused on M&A opportunities to drive shareholder value. Our recently established Strategic Growth Committee has identified several opportunities and is engaged in conversations with potential counterparties, such that we expect to announce a value accretive transaction in the second half of calendar year 2023.

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, followed by a review of our financial results with our CFO, Eddie Lucarelli. Matt?

Matt Mundy

Thanks, Mike.

Today, I'll provide an update on the New York State Cannabis Control Board and New York State Office of Cannabis Management's revised proposed regulations to the state's adult-use cannabis program, which were approved for publication by the CCB on May 11 this year. The regulations were formally published for a 45-day public comment period on June 14. Overall, we believe that the revised regulations represent substantial progress and are more favorable for both RIV and the broader New York market.

From our perspective, a particularly notable development is that they authorized medical operators to enter the retail tier of the adult-use market far sooner than the previous draft regulations had outlined. We expect this to be a substantial benefit for the market as it will provide the existing operators with much needed additional doors to sell into.

The revised regulations also modify the structure and timing of the one-time special licensing fee assessed on medical operators transitioning to adult-use. Market entry fees would now include $5 million due at the time of licensure, $5 million due within 180 days of opening a second store, $5 million due when $100 million in revenue is achieved, and the final $5 million due when $200 million in revenue is achieved, with the fees collected used to support social and economic equity applicants.

In general, we believe the revised regulations reflect a more pragmatic approach to New York's adult-use market, and we are hopeful there are signal that additional positive regulatory changes to address some of the significant issues of the rollout thus far will be forthcoming.

Based on the current version of the draft regulations, we anticipate entering the adult-use wholesale market in Q4 of this calendar year, collocating our first adult-use retail dispensary by January 1, 2024, followed by two additional adult0use colocations on or around July 1, 2024. We are confident that the OCM will continue to work closely with card retail license holders to open more stores over the next several months, which we believe will be necessary for the adult-use market in New York to thrive.

We are also heartened by recent moves by the governor's office in terms of combating the rampant illicit market in New York. On April 27, New York Governor Kathy Hochul announced an agreement to address key priorities in the fiscal year 2024 state budget, which included efforts to combat the illicit market. The agreement expands the enforcement powers of the OCM and Department of Taxation and Finance, giving them the ability to impose a wide array of penalties for engaging in illicit market sales, including closing operations and levying significant fines on illegal cannabis operations.

Just last week, Governor Hochul announced the launch of an interagency initiative to cease the sale of untested cannabis from unlicensed storefronts. Enforcement officers have begun conducting inspections of unlicensed cannabis retailers and issuing notices of violation and orders to cease unlicensed activity. The initiative will expand across the state to end public sales of untested cannabis by unlicensed businesses, and we believe that it will ramp up significantly over the coming months.

We applaud these actions taken to curtail illicit activity that is currently creating unsafe conditions for New Yorkers and unfair market conditions for all of New York's licensed cannabis operators. While we believe that there has been significant progress on the regulatory front, we feel that there's still substantial work to do, so RIV will continue to advocate alongside other stakeholder groups for additional changes that position New York to be successful, safe and equitable cannabis market.

I'll now hand the line to Eddie, who will walk us through our financial results. Eddie?

Eddie Lucarelli

Thank you, Mike and Matt, for those updates. I will now review our financial results for the fourth quarter of our 2023 fiscal year.

We reported revenue net of excise taxes of $1.7 million compared to $1.9 million for the previous quarter. This includes retail revenue generated from Etain's dispensaries and wholesale revenue generated from sales of Etain branded products to other registered organizations in New York. Sales at medical dispensaries in New York continue to be impacted by pressure from the illicit market.

Cost of goods sold, excluding fair value adjustments, was $1.6 million for the quarter compared to $1.1 million for the previous quarter. As a result, we reported a gross profit of $0.2 million for the quarter compared with $0.8 million for the previous quarter. Gross profit this quarter was impacted by the continued expansion and ramp up of Etain's operations ahead of its anticipated transition to the adult-use market later this year, as well as certain expense reallocations and recognition during the quarter.

Selling, general and administrative expenses were $5.3 million for the quarter compared with $4.8 million for the previous quarter and $3.8 million for the same period last year. The increase in SG&A expenses relative to the comparative periods was primarily due to the significant increase in the size and scope of general and administrative functions of the company to support a strategic shift to the U.S. cannabis market and the scaling up of Etain's operations.

Other loss was $19.4 million for the quarter compared with $6.3 million for the previous quarter and $12.2 million for the same period last year. This line item includes a $16 million charge related to the settlement agreement announced by the company on February 23, whereby RIV repurchased for cancellation approximately 33.7 million common shares for an aggregate purchase price of $19.6 million. From a financial reporting perspective, the share repurchase price was bifurcated between a decrease in share capital on the company's statement of financial position using the closing share price on the date before the settlement and a charge on the statement of comprehensive loss based on the residual amount.

In total, we've reported a net loss of $23.6 million for the quarter compared with a net loss of $9.9 million for the previous quarter and $13.7 million for the same period last year. Other comprehensive loss was $1.1 million for the quarter compared with $2.8 million for the previous quarter and other comprehensive income of $4 million for the same period last year. Included in other comprehensive loss for the fourth quarter of fiscal 2023 was a decrease in the estimated fair value of our investment in Dynaleo. Overall, we reported a total comprehensive loss of $24.7 million for the quarter compared with a total comprehensive loss of $12.7 million for the previous quarter and $9.8 million for the same period last year.

As noted in our disclosure, we ended the fiscal year with just under $98 million of cash and short-term investments, which we believe puts us in an enviable liquidity position in an industry where access to capital remains limited. We continue to strategically deploy capital to enhance our team and capabilities, expand and optimize our Chestertown facility, and develop our flagship Buffalo facility. We believe that we have more than sufficient resources to capitalize on our upcoming transition to adult-use in New York, while simultaneously looking for value creative opportunities outside of the state through M&A or otherwise.

With that, I will now turn the call back to Mike for closing remarks.

Mike Totzke

Thank you, Eddie.

Our confidence in the opportunities presented by the developing New York market continue to grow, especially given the recent regulatory developments that Matt discussed. Despite the market entry delay, it appears that our first Chestertown harvest will coincide nicely with the launch of the adult-use wholesale opportunities in this state.

New York is set to be one of the few high growth cannabis markets in the country through 2024, and we are well positioned to capture an outsized share of that growth. While we are focused on executing our entry into the adult-use market later this year, we also are working to close a value accretive transaction that will drive stakeholder value.

We look forward to sharing our continued progress and updates on our strategy during our next call, and thank you for joining us today.

Question-and-Answer Session

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