December 5, 2018

Canopy Rivers Inc (CVE:RIV) CFO Discusses Global Expansion Opportunities and Q2 Financials

Midas Letter
Midas Letter
Canopy Rivers Inc (CVE:RIV) CFO Discusses Global Expansion Opportunities and Q2 Financials

Canopy Rivers Inc (CVE:RIV) CFO Eddie Lucarelli is happy with the company’s performance last quarter – and he has reason to smile. Rivers reported a net income of $11 million and a comprehensive income of $38 million for the period ending September 30. Lucarelli’s enthusiasm for the company’s performance extends beyond revenue and he highlights several key milestones achieved in the quarter such as the completion of an RTO and a private placement co-led by CIBC (the Big Five bank’s first inroad into the cannabis sector). During the period the company also made its first international investment. Rivers reached a deal with Italy’s Canapar, an industrial hemp producer and organic CBD extractor that has a significant research partnership with the University of Catania. Canopy Rivers has $40 million earmarked for further investment and is increasingly looking to ancillary companies in the space because of the multiplier effect.


James West:   My guest this segment is Eddie Lucarelli. He’s the of Canopy Rivers, trading on the TSX Venture under the symbol RIV. Eddie, welcome.

Eddie Lucarelli:   Thanks for having me, James.

[stock_chart symbol=”RIV:TSV” align=”left” range=”5D”]

James West:   Eddie, let’s start off with the financial reporting from Canopy Rivers, which was, in a word, surprisingly great – at least in terms of the context of the biggest, all of the Canopy earnings reporting which are, as a category, horrible! So you reported $0.03 in earnings – tell me how that all played out.

Eddie Lucarelli:   Yeah, so that, you know, we were pretty proud of that headline number; that’s largely driven by the share price performance in the quarter and September 30th for a lot of our investments that do flow through our earnings on a market to market basis. So we were able to report net income of 11 million, and comprehensive income of about 38 million, and you know, that underlying stock market volatility, that’s going to influence our results going forward. But you know, what we’re really focused on are the catalysts and the developments in our business and in the underlying portfolio companies as well.

You know, as the quarter where one of the milestones that we hit was the completion of our RTO, which was in us being trading on the TSX-V under the symbol RIV, and as part of that, we did a private placement that was co-led by CIBC, GMP and ACAP. And it was CIBC’s first foray into the cannabis space, and we all know that the big five Schedule 1 banks have taken a cautious approach in varying degrees to get into the cannabis sector, so it was really important to us that they were able to point at us and say ‘you’re the one that we want to play with as we enter the space’.

We also made our first international investment during the period, so we invested in a company called Canapar, which is focused on industrial hemp cultivation, extraction and R&D activities in Italy. The company has a partnership with the Department of Agriculture at the University of Catania; that department has extensive research they’ve been doing for a while on hemp cultivation techniques, and other things related to the plant itself. And then through an outsourced farming model there, that company is going to be able to purchase wholesale hemp from the farmers and then turn it into organic CBD oils.

So we’re very excited there; our partner there is an entrepreneur that’s had a very successful background in nutritional endeavours, derma-cosmetical endeavours and pharmaceutical as well, and he’s also very well-connected in the local community. So we’re thrilled to se where that company is headed.

J.W..:    Sure. Okay, so tell me about some of the other portfolio holdings and how they’ve done and performed for you. What’s really driving the earnings sort of impetus?

Eddie Lucarelli:   Yeah, so you know, a couple of the things that are going to impact our accounting is that a lot of our earnings in the short term are going to be driven by changes in share prices of our public market investments. Over time, as the greenhouse assets that we’ve invested in come online, we’re going to start to see those earnings flow through our earnings, as well.

One of our greenhouse assets is our farmhouse joint venture which we have in Leamington, Ontario, where we’re a 49 percent joint venture partner there. Our partner on the other side of that, you know, it’s the controlling shareholder group behind the leading North American commercial agriculture and produce conglomerate, and they have extensive experience with large-scale cultivation, marketing, distribution, brand development, things like that.

So we’re very excited to see where that asset goes. You know, as part of entering into that joint venture agreement with that partner, we did structure a global non-compete with them that that did have the US carved out. And then last week, we actually announced that we were going to enter into a loan agreement with Farmhouse, where we were able to provide up to 40 million of debt financing to that entity, at a good rate of return, 12 percent. And in addition to that, we also restructured that non-competition agreement to afford Canopy Rivers additional rights in favour of US expansion opportunities, when that would become legal for us to participate in that.

So we’re super excited to see what the company is able to do going forward. You know, our partners there have experience in Canada, the US, Mexico, Panama, Guatemala, different jurisdictions. So we when we see news coming out like we saw recently with the Mexican government, the incoming government, introducing legislation that might create this regulatory framework in Mexico, it’s great to have a partner already with us that we know has good knowledge of the localized good there.

James West:   Oh, so you think Mexico is going to be a pretty important market?

Eddie Lucarelli:   You know, it was great news and it came out, it’s definitely something that we’re keeping our eye on, similar to a lot of other jurisdictions in Europe and other places that are, you know, continuing to put out that evolvement of news around what new regulatory frameworks are emerging, whether it’s the medical frameworks evolving or being introduced, or even some jurisdictions talking about recreational at the early stages.

James West:   Wow, interesting. So apart from the jurisdictions, what are the sort of sub-segments of the cannabis industry that are evolving into the public eye, most excite you?

Eddie Lucarelli:   Yeah, you know, if you look at our portfolio and how it evolved, there’s definitely a lot of companies that started off essentially as cultivators, and when you look back sort of eight, nine, ten months also, to be a cannabis company you sort of either had to have a license or be in the process of getting a license. Now, we’re really starting to see a proliferation of businesses that are attacking ancillary parts of what the cannabis economy looks like.

There’s the report that came out from Deloitte that everybody seems to quote, that references the size of the market from the cultivation perspective, but also with that multiplier effect as evolving ancillary parts of the business that are going to develop. So we’re starting to see those companies come to the market more and more; by some estimates, there’s thousands out there that already exist. They’re very immune in ways that, you know, there might not be subject to the same risks and regulations that come from being a licensed company, so there might be a better opportunity to transfer those companies or that IP across borders. It’s kind of, you know, analogous to investing in the picks and shovels when the gold rush was happening.

James West:   Sure.

Eddie Lucarelli:   Technology is obviously a big focus area for us. I think data-driven approaches ae really going to form where w a lot of the industry is headed, and companies that have the ability to commercialize data and understand the products and understand the consumers are going to be very well positioned for success, and we’re definitely taking a look at that. And like I mentioned, you know, emerging markets: there’s new news coming out every single day about a new jurisdiction that’s looking at a regulatory reform in one shape or another, and what we’ve seen, and we say it in the in development of our partnership at Canapar,  having connections and the ability to really scale up the business in these foreign jurisdictions is going to be incredibly important in terms of determining what’s going to be a level of success for a Canadian company looking to make international investments.

James West:   Sure. Do you think that has Europe progresses – and forgive me, I like Europe, I’d like to talk about Europe more than California. People like to say California is the biggest market; obviously, Europe’s got multiple size of California as a market, and it doesn’t offer it as one jurisdiction sometimes. What do you think the likelihood is of uniformity of regulation across the Euro Zone as an entire a block as it pertains to, you know, regulation of cannabis, THC, CBC, etcetera?

Eddie Lucarelli:   I mean, I think because of the construct of the European Union, we can kind of make an assessment of what that’s going to look like in terms of what we’ve already seen, in terms of countries coming out with their own independent regulatory frameworks but still having that opportunity for many some cross0border-transport of goods because of the trade framework that exists within the European Union.

I think eventually we’ll probably get to an end state where probably everything is harmonized; like everything else, you’re making a guess until how long you can get there, and just with the information that we have now, we are seeing them take sort of a country by country approach, and we have to adopt our international investment strategy accordingly.

James West:   Right. Interesting. So then, what’s Canopy Rivers looking at in the next four quarters in terms of opportunities where you want to deploy capital?

Eddie Lucarelli:   Yeah, so I mean, at September 30th, on our September 30th balance sheet, we reported that we had 105 million of cash. W had about 25 million of that earmarked for current portfolio companies; that left us with about 80 million after that.

We certainly don’t’ want that cash to be sitting int h bank gathering 2 percent interest, we want to put that to work; so we announced that investment in the loan agreement with Farmhouse last week, and that that remaining 40 million, I think you’re going to see us deploy that very quickly. You know, we’re very, very fortunate to be in the position we’re in in terms of the pipeline of investment opportunities that are available to us, and a lot of that does come from that halo effect of being associated with arguably the largest and most sophisticated cannabis company in the world, in Canopy Growth. And Bruce is traveling the world every single day meeting new people and getting new investment opportunities pitched to him, so we’re constantly evaluating a number of opportunities in the space, and I think you’ll see us put that capital to work relatively quickly.

James West:   Awesome. Okay, Eddie, well, that’s great. Fantastic update. We’ll come back to you in a short while and hear how you’re making out, thanks for joining us today.

Eddie Lucarelli:   Thanks, James. It’s great to be here.

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