Canopy Rivers Inc. (OTC: CNPOF) released its unaudited condensed interim consolidated financial statements and management’s discussion and analysis for the third quarter ending December 31, 2020. Canopy Rivers reported an operating income of $3.0 million for the quarter. The company said this included royalty, interest, and lease income (before provisions for credit losses) of $5.9 million. The net income was $1.4 million. Operating expenses were $3.4 million for the quarter, compared with $3.9 million for the same period last year.
Other comprehensive income was $80.8 million for the quarter, driven by the increase, net of tax, in the fair value of financial assets that are reported at fair value through other comprehensive income. Canopy Rivers reported a gross increase in the fair value of financial assets at FVTOCI of $94.5 million for the quarter, which was primarily attributable to the positive change in the fair value of its investment in TerrAscend. This was driven by a significant increase in TerrAscend’s share price during the quarter and a lower estimate of the liquidity discount used in the exchangeable share valuation due to positive cannabis regulatory reform momentum in the U.S., including support for cannabis legalization at all three levels of government and the success of five cannabis ballot initiatives at the state level. Partially offsetting this material increase was a decrease in the estimated fair value of the Company’s investment in Vert Mirabel common shares of $9.5 million, driven primarily by lower expectations about long-term wholesale cannabis pricing in Canada. This led to a total comprehensive income for the quarter of $82 million.
“Our quarter was highlighted by the announcement of our milestone transaction with Canopy Growth, which we believe will provide substantial value to our shareholders,” said Narbé Alexandrian, President, and CEO, Canopy Rivers. “Our portfolio companies continue to gain momentum, and we are further encouraged by the potential for regulatory reform in the U.S. given recent progress at the state level and the new administration’s position on cannabis reform. We believe that we will have the opportunity to enter the U.S. market at an ideal point in time and that our balance sheet, simplified share structure, strategic flexibility, and deep domain expertise will enable us to deliver value to shareholders as we consider potential material investments or acquisitions in the U.S.”
In December Canopy Rivers entered into an agreement with Canopy Growth Corporation (NASDAQ: CGC) in which Canopy Rivers agreed to sell its interests in TerrAscend and TerrAscend Canada, Vert Mirabel, and Tweed Tree Lot to Canopy Growth for $115.0 million in cash, up to 3.75 million common shares in Canopy Growth, and the cancellation of Canopy Growth’s multiple voting shares and subordinated voting shares of Canopy Rivers. The CGC Transaction represents a return on invested capital of approximately 5.6x and an internal rate of return of approximately 101% as at the time of announcement. Following the anticipated close of the transaction, which is expected to be reflected in the March quarter, Canopy Rivers said it expects to have approximately $310 million in net cash and liquid securities on a pro forma basis.
“After a challenging September quarter during which we recognized material charges on our investment in PharmHouse, we ended the calendar year with significant positive momentum, as evidenced by our financial results,” said Eddie Lucarelli, CFO, Canopy Rivers. “We expect to sustain this momentum during the current quarter as we work towards closing our transformative transaction with Canopy Growth. By redeeming shares at a discount to net asset value and successfully monetizing assets that carried significant liquidity restrictions, the financial merits of the transaction are clear. Fundamentally, we believe that the accretive nature and strategic value of this transaction will unlock substantial value for our shareholders and optimally position the Company to execute on new opportunities in the U.S., the world’s largest cannabis market.”
Canopy Rivers said it expects to use the proceeds from the Canopy Growth deal to invest in more cannabis companies within the U.S. As part of that strategy, the company said it is also starting the process to delist its shares from the TSX so that it can list its securities on an alternate stock exchange that does not prohibit listed Canadian companies to invest in or acquire legal U.S.-based cannabis businesses.
The company also gave an update on the restructuring of Pharm House. Assets were identified for sale and parties that were interested in buying have put forth offers. Day to day operations have continued under DIP financing. Canopy Rivers said no repayments of the principal have occurred and the current outstanding balance remains $90.0 million, with interest payable by PharmHouse monthly.
On February 10, 2021, the company said it received a statement of claim filed by the PharmHouse majority shareholder concerning certain disputes relating to PharmHouse. Canopy Rivers said in a statement, “The claim is substantially similar to a claim previously filed in September 2020, which was subsequently discontinued. The Claim makes a number of allegations against Canopy Rivers, Canopy Growth, TerrAscend, and TerrAscend Canada. As with the previously filed statement of claim, Canopy Rivers views the Claim as it relates to its actions to be completely without merit and intends to vigorously defend its position at the appropriate time and in the appropriate forum.”