Unhappy Riv Capital Investors Want to Toss Board

The Etain acquisition sparked the unrest.

It’s been rumored for weeks that Riv Capital (OTC: CNPOF) investors were unhappy, and now it seems those rumors were true. JW Asset Management, the largest shareholder of RIV Capital owns approximately 19.77% of the issued and outstanding Class A common shares of the company and has asked for a special meeting of shareholders to replace five of the seven directors on the board.

At the heart of the dissatisfaction is the price paid for New York cannabis company Etain.

“It’s clear that change is required at RIV Capital, and I am confident that the independent and experienced individuals nominated to join the newly constituted board will provide the judgment, oversight, and business acumen required to change course and build value,” said Jason Wild, president and chief investment officer at JW Asset Management.

Wild is also a board member at TerrAscend, which has a history with Canopy Rivers – the precursor to Riv Capital.

The statement read, “As Shareholders, we must recognize that the current Board and management team have failed to create value. In fact, value has been destroyed. Since the listing of the shares on the TSX Venture Exchange in September 2018, upon Canopy Rivers Inc.’s reverse takeover of AIM2 Ventures Inc., the share price has declined by approximately 97% from an opening price per share of $10.75. More recently, since August 9, 2021, the day before the initial investment by The Hawthorne Collective, Inc. was announced, the stock has fallen approximately 82% from $1.77.”

The disgruntled investors claim that the board had no coherent strategy or business plan and that there were too many people on the board associated with Hawthorne with no equity in the company.

Etain Acquisition

While Etain wasn’t specifically named in the statement, the investors said that Riv “pushed ahead with an ill-advised acquisition of a significantly overpriced New York asset when all signals in the marketplace were flashing caution. The company made the questionable decision to sign and close on this egregiously overpriced asset, a transaction riddled with major uncertainties, ignoring repeated arguments from the Concerned Shareholder to abandon the transaction or at least lower the valuation ascribed to a New York cannabis license.”

Riv Capital recently closed on the Etain acquisition, in which the company had agreed to pay $212 million in cash and $35 million in stock for the small medical cannabis company. At the time, it looked like a good transaction and an easy entry into what appeared to be the lucrative New York market.

However, a pivot in the state legal cannabis program threw a monkey wrench into plans for the existing license holders. Instead of being able to capitalize on the existing verticle structure, Etain would be forced into picking only one channel of business. With heavy investment already sunk into cultivation, it looked as if the company was boxed into being a grower – the less lucrative side of the cannabis business.

At the end of November, RIV announced it had taken a $138.9 million write-down on the acquisition, based on updated cash flows and “to account for the enhanced risk and uncertainty attached to the New York market,” the company reported at the time. Still, Riv Capital leadership remained optimistic about the deal.

“With four dispensaries, including a Manhattan flagship store and locations in Kingston, Syracuse, and Westchester, as well as a cultivation and production facility in Chestertown, we believe Etain is a strong foundation and a scalable platform for future growth,” said Mark Sims, president and CEO of RIV Capital, at the time of the earnings.

Overpriced Deal

The disgruntled investors said, “The total consideration paid by the company was equal to over three times the value of any prior New York license acquisition – a valuation made even more indefensible in light of the material ongoing declines in value for publicly traded cannabis companies and the high level of uncertainty surrounding the New York cannabis market regulatory structure. While the Company was essentially betting its future on this acquisition, the Board, for reasons we simply cannot understand, does not appear to have engaged a banker to represent the Company, obtained a fairness opinion, or given Shareholders the opportunity to vote on the matter.”

Despite making what the investor thought was a terrible deal, the board also gave itself a raise. It voted to increase the annual retainer compensation for nonemployee directors for 2023 from $120,000 to $225,000.

Recently, Ascend Wellness backed out of a plan to acquire MedMen’s New York assets. When New York state changed its structure for legal adult-use cannabis, the value of these licenses fell.

Rollout of the program also has been delayed and chaotic. While New York once looked like a promising market, it has since turned into a nightmare for the vertically integrated medical operators.

Proposed Board Members

The concerned shareholders want to remove Joseph Mimran, Laura Curran, Christopher Hagedorn, Richard Mavrinac, and Mark Sims from the board. They want the following people instead:

  • Raymond Boyer, the chief executive officer of Missouri Leasing & Consulting and co-founder of Organic Remedies Missouri, a licensed grower, processor, and retailer of medical marijuana in Missouri.
  • Samuel Brill, president and chief investment officer of Seventh Avenue Investments since August 2017. SAI is the private equity arm of a single-family office in New York City with a multibillion-dollar asset portfolio.
  • Chad Bronstein, chief executive officer and founder of Fyllo Inc., a company providing compliance-first SaaS solutions for highly regulated industries. He also serves as co-founder and chairman of the board for Tyson 2.0 Inc. and has been a director of Jones Soda Co. since Feb. 15.
  • Christopher JWB Leggett, a highly esteemed clinical academic interventional cardiologist who spent nearly three decades practicing interventional cardiology in the Atlanta metropolitan area and in rural Georgia.
  • Stevens J. Sainte-Rose, who brings expertise across a diverse range of industries including consumer goods, retail, hospitality, food service, manufacturing & production, managed services, and cannabis.

No women were suggested to be included in the new board.

The group also warned that it expected Riv Capital to spend funds on a smear campaign as a result of the efforts to remove the board.

Riv Capital said it received the request and was “reviewing and considering the requisition with its professional advisors and will respond appropriately in due course.”

Riv’s History

Canopy Rivers was formed on April 26, 2017, as an investment arm of Canopy Growth Corp. (Nasdaq: CGC). Canopy Rivers completed a reverse takeover with AIM2 Ventures and separately raised $60 million ahead of an eventual public listing. It was spun out in 2018 and began trading on its own.

Some investments, such as TerrAscend, proved promising, while others, like publisher Civilized, soaked up $5 million and went bankrupt. Through 2019, the company continued to see its assets lose value and losses mounted.

By mid-2020, Canopy Rivers began laying off employees and cutting back on spending as it focused on positive cash flow. It said that it was streamlining its operations to preserve its cash on hand.

Another disastrous investment was PharmHouse. By the third quarter 2020, PharmHouse was bankrupt and cost Canopy Rivers millions as it worked to keep it afloat after the company missed its cash flow goals. The PharmHouse problem led to a deterioration among the partners causing counterclaims of bad behavior.

Canopy Rivers said it would act as a debtor-in-possession lender for PharmHouse and would provide up to $7.2 million in DIP financing. The company had advanced as much as $50 million and also had a guaranteed line of credit totaling $90 million to PharmHouse. It ultimately took a $112 million charge on the investment.

The company was saved by its old parent, Canopy Growth, which took over the assets at the end of 2020 and filled Riv’s pockets with even more money. For $115 million, Canopy Growth got a sizable portion of TerrAscend stock along with other assets. The company also pivoted towards making cannabis investments in the U.S.

In August 2021, the company signed a deal with The Hawthorne Collective, a newly formed cannabis-focused subsidiary of The Scotts Miracle-Gro Company (NYSE: SMG) for the purchase of a $150 million unsecured convertible note from RIV Capital. This filled the company’s coffers with cash and brought in many of the board members that the unhappy investors want to be removed.

It was this big pile of cash that prompted the company to want to buy Etain at the beginning of 2022.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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