VIDEO: Canopy Rivers Inc (CVE:RIV) Restructures TerrAscend Corp (CNSX:TER) Investment

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Canopy Rivers Inc (CVE:RIV) is the venture capital investment platform of Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) and is building a network of complementary cannabis companies that can work together for mutual benefit. EVP of Strategy Daniel Pearlstein observes that the emergence of ancillary cannabis companies with the advent of legalization is a potential value catalyst for the space. Pearlstein believes that the leadership role Canada has developed in the cannabis space is embodied in Canopy Rivers, as the company seeks international investment opportunities. Earlier this month, the company announced a restructuring of its investment in TerrAscend Corp (CNSX:TER) (OTCMKTS:TRSSF) (FRA:TED). Canopy Rivers recently re-aligned the leadership group of LiveWell Canada (CVE:LVWL) (OTCMKTS:LXLLF)to optimize its capacity to produce cannabis derivative products.

Transcript

James West:   My next guest in this segment is Daniel Pearlstein. He’s the Executive Vice-President of strategy for Canopy Rivers, trading on the TSX Venture under the symbol RIV. Daniel, welcome.

Daniel Pearlstein: Thanks very much, James.

James West:   Daniel, it’s a brand new day here; it’s legalization day. Canopy Rivers is an investment enterprise that is attached to Canopy Growth Corporation, and so you guys are essentially in the catbird seat when it comes to looking at people, new investments, new opportunities in the space. Where are the big opportunities for entities like yours who, you know, other investors might invest alongside going forward in the future?

Daniel Pearlstein: That’s a good question. I think a good start would be, explain the idea or the concept of our ecosystem. Rivers is the venture capital investment platform of Canopy Growth, and what we’re trying to do is build an ecosystem of complementary cannabis companies that can work together and extract synergies, revenues and costs, by working together and collaborating together and with Canopy Growth and benefitting from that halo effect that is working with the largest cannabis company in the world.

As now we transition to legalization, some new regulations are going to come in that essentially fragment the value chain, allowing new kinds of players. You used to have to be a cultivator to be a cannabis company, but no longer. So we’re going to see lots of different ancillary companies coming up, and that’s part of where we’re trying to focus. But I think the bigger picture, if you kind of take an even bigger step back, and look what the Canadians have done, and all the years of activism going back to 2001, to 2013, and then switching over the MMAR to the MMPR.

James West:   1972. [laughter]

Daniel Pearlstein: And then, of course, with the Cannabis Act now coming into force – there are over 30 countries around the world that are looking at Canada. They’ve put in their own medical cannabis regulations, and now they say, Well, that country started medical, and now they’ve gone recreational; look at all the taxes and look at the job creations and look at all the opportunity.

James West:   Look at all the wealthy Canadians.

Daniel Pearlstein: Right. There are many countries around the world that are looking at Canada and holding us to that gold standard, and ultimately it’s that kind of vision that Canopy Rivers is looking to capitalize on.

James West:   Okay. So the leadership role that Canada has developed is embodied in the Canopy Rivers sort of value proposition?

Daniel Pearlstein: Totally. We want to export our excellence and our track record that we’ve created here in Canada, and mirror that in a number of countries around the world.

James West:   Sure. All right, interesting. What’s the, like, what in the ecosystem that has been evolved, the whole infrastructure, there are some areas that one might consider over-built, and some areas that might not yet be sufficiently built. Where do you see overbuilding happening versus under-building?

Daniel Pearlstein: We have a couple big assets on the cultivation side. I think the market, as you know, very strongly has – has been following the cultivation play for a long time. It seems like we have plenty of cultivators, but we have a couple of really key assets in our PharmHouse joint venture, as well as the Mirabel, Vert Mirabel joint venture. And we feel these are best in class greenhouses, operators who have track records of success in other industries, one of them the largest pink tomato growers in North America in Vert Mirabel, and one of them really the largest greenhouse in North America, in PharmHouse.

These are best-in-class operators that we’ve brought into the cannabis system, and they’re our horses and our partners for the cultivation side. We feel that, in an industry where I think investors are waiting on the execution, and that might be the biggest gap that many of these small or medium-sized players have, we feel very strongly with the partners that we have that they’ll be able to overcome that gap.

On the side of the portfolio that maybe where could be next or what we might also be looking for, would be, I’d say, on, it has to do with scaling.

James West:   Okay.

Daniel Pearlstein: A lot of the smaller players and bigger players, even, I think, are going to have trouble or hit bumps scaling, and I think one of the ways to really get over that hump is through technology. I think that there’s where have been piecemeal technology softwares or hardwares that involved in these businesses, it’s kind of been almost piecemeal, where there hasn’t been any cannabis-specific real technology plays that have developed over the last few years. I think that important in the ecosystem, not only in Canada for Canopy Rivers, but also globally – how do we connect investees’ hemp plays in Italy with intelligence of what’s going on here in Canada? How do we connect with, you know, in Western Europe or South America or Australia? How do we connect these companies?

I think that there’s a big gap where technology can solve a really good need, and I think that’ll become more prevalent in the portfolio over time.

James West:   Interesting. You recently announced a restructuring of your investment in TerrAscend, and I thought that would be a great sort of model to look at as to how Canopy Rivers interacts with its investees, because that was a mutually beneficial restructuring; it wasn’t really a case of one side demanding a better deal. So tell me how that works, and how do you interact with companies like TerrAscend?

Daniel Pearlstein: Sure. That’s actually a big part of what we do. It’s working with our portfolio, and it’s not only providing capital to aspiring cannabis entrepreneurs, it’s also about strategic and operational support, and bringing years of experience and learnings from Canopy Growth and being able to draw upon some of the best-in-class in the technical aspects of that company, and being able to bestow that knowledge upon our portfolio companies.

So it comes with frequent calls with management, identifying a need and solving it with an introduction to another one of the companies. So we can find, if one company is really good at cultivating, and another maybe has some capacity to do some extraction, well then, we can put those companies together; that creates revenue for the company, the latter. For extraction throughput on maybe like a toll milling kind of basis, whereas the cultivator then has product that they can get turned into extracts and create their own kind of new, branded products.

So ultimately, you know, one of the goals we’d like for the ecosystem would be to have product grown at the cultivator that’s sent to the extractor, that’s sent to the formulator, that’s sent to the food processor, the beverage, the vape pen, the edibles, that’s sold through a retail outlet, that’s tracked, you know, seed to sale, that’s covered by a media outlet, and then ultimately that’s intelligence from seed all the way to sale.

And then by using that, that’s actionable intelligence that we can use, not only to help understand the industry, but help create and make the portfolio better.

James West:   Interesting. So then, another one of your portfolio investments is with LiveWell Canada, and you announced that you had re-aligned its leadership position through the new CEO, David Rendimonti. And so is that sort of, again, a reflection of the involvement of Canopy Rivers in sort of optimizing the management structure to deliver a better sort of team overall to the long term prospects of the opportunity?

Daniel Pearlstein: Yeah, so LiveWell is a company that Canopy Growth and Canopy Rivers have a small stake in, and this is a company that has a project both just outside of Ottawa as well as in Quebec. And the founders of that company have a nice history of working with functional foods and hemp-based products that are distributed through supply and distribution partners throughout the country already, so that’s really an ability where we can see, Hey, how is there a way that this company that has a history of functional foods and taking ingredients and then putting them into products and then putting them on the shelves, how can they kind of make the most of what they’re doing?

And part of that recent move, along with a few others, in terms of a recent acquisition as well as a couple of supply agreements, is that company generally transitioning into, hey, how do we get ingredients and put them into products? And that’s ultimately where I think, people use this Cannabis 2.0 or Legalization 2.0 – that’s ultimately where we want to make some of the smart bets.

James West:   Okay, so where else – what other sectors are you looking at right now in terms of, I guess, since you don’t want to exactly notify everybody as to where you’re looking…

Daniel Pearlstein: Here’s all the secrets.

James West:   That’s right! [laughter] Here’s our shopping list, now stay away. So, but what, like, where are the sort of emerging sectors that, as a result of an infrastructure that is now more or less getting built out, there are some places that people still haven’t really expended enough capital?

Daniel Pearlstein: Sure. I think somewhere where the general, let’s say, public markets might not have as much visibility into, would be early-stage international plays. And then this is something as an example that we did with our Italian investment, Cannapar, where we actually worked with a CEO who has a track record in the cosmetics and pharmaceutical industry, to actually seed that company, and then participate in that seed financing, where we identified an opportunity and then were able to participate in that first or second round of really cultivating a new kind of business.

So we’re not getting into the fourth, fifth round of financing of international companies; we’re looking at countries all around the world where it’s federally legal, where medical cannabis regulation is looking to start, and maybe even recreational cannabis regulations down the line. We’re looking for best-in-class entrepreneurs who have track records of success in other industries. And looking to make bets on those management teams within favourable regulatory environments, where sometimes we can be in the first or second round of financing, in the seed round or the Series A or the Series B, and be able to provide important strategic and operational insight.

And the point is really that there’s not a lot of international cannabis companies out there, mostly because they’re too immature to be public. Whereas what Rivers does is provide investors opportunity and exposure to emerging markets where we can take some of those same lessons learned in Canada, and bestow those upon some of the best-in-class that are starting up, those kind of first movers.

So ultimately, it would be from that international perspective.

James West:   Right. Is it safe to compare an investment in Canopy Rivers to, I mean, I look at it as, it’s kind of a sophisticated managed portfolio run by industry experts who have an extreme advantages in terms of access to deal flow, and I look at this the same target investor for whom this would be an appropriate transaction would be the same ones who are looking towards ETFs and/or mutual funds, because they’re not in a position to manage their investments themselves. It strikes me that this would be a better play without actually taking on more risk, better chances of a successful experience.

Daniel Pearlstein: Right. So Rivers is different from an ETF, because we’re not getting a snapshot of the whole industry of just what’s out there; we actually get to be picky. So we can choose the best in class, and we don’t have to rebalance, and we don’t have to sell the winners and buy the losers and have rebalancing.

Rivers, essentially, represents somewhere between a financial sponsor and a strategic buyer. So it’s not just capital, it’s being able to take capital plus plus plus. This is – we ultimately want to be the best allocator of capital in the cannabis sector. This is the kind of stock that we want people to give to their kids and put away and forget about, so that their kids can then tell their friends that they own that stock. But really, ultimately, it’s – we appeal to a wide variety of investors, because we can help provide a lens and provide clarity and differentiation and expertise to a space that is becoming increasingly crowded with a lot of fly-by-night ideas and get-rich-quick schemes. Where we want to be long-term greedy.

James West:   Okay, that makes perfect sense. Daniel, we’ll leave it there for now; we’ll come back to you in a very short period of time. It’s a very dynamic story that we’re following with interest; by way of disclosure, Canopy Rivers is a client of the media production division. Thank you for joining me today.

Daniel Pearlstein: My pleasure. Thank you very much.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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