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Edited Transcript of RIV.V earnings conference call or presentation 27-Aug-19 2:00pm GMT

Q1 2020 Canopy Rivers Inc Earnings Call

Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Canopy Rivers Inc earnings conference call or presentation Tuesday, August 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward James Cirillo Lucarelli

Canopy Rivers Inc. - CFO

* Karoline Hunter

Canopy Rivers Inc. - Senior Director of IR & Communications

* Narbé Alexandrian

Canopy Rivers Inc. - President & CEO

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Conference Call Participants

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* Devin Schilling

PI Financial Corp., Research Division - Special Situations Analyst

* Graeme Kreindler

Eight Capital, Research Division - Principal

* Jeffrey Michael Fenwick

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* John Zamparo

CIBC Capital Markets, Research Division - Associate

* Justin Keywood

GMP Securities L.P., Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Canopy Rivers Q1 Fiscal Year 2020 Financial Results Conference Call. (Operator Instructions) Note that this conference is being recorded on Tuesday, August 27, 2019.

And I would like to turn the conference over to Karoline Hunter, Senior Director, Investor Relations and Communications. Please go ahead.

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Karoline Hunter, Canopy Rivers Inc. - Senior Director of IR & Communications [2]

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Thank you, Silvie. Good morning, everyone, and welcome to Canopy Rivers' financial results conference call for the first quarter ended June 30, 2019. My name is Karoline Hunter, and I'm the Senior Director of Investor Relations and Communications at Canopy Rivers. I'm joined this morning by Narbé Alexandrian, President and Chief Executive Officer; and Eddie Lucarelli, Chief Financial Officer. Following our formal remarks, we will open the line for your questions.

For your convenience, the press release, MD&A and unaudited condensed interim consolidated financial statement for the first quarter are available on the Investor section of our website at www.canopyrivers.com as well as on SEDAR.

Before we start, please note that remarks on this conference call may contain forward-looking statements about Canopy Rivers and its investee's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances.

However, there can be no assurance that such 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. As a result, Canopy Rivers cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.

Except as may be required by law, Canopy Rivers undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information contained in the company's financial results press release dated August 27, 2019, and the Risk Factors section of the company's annual information form dated July 15, 2019.

Please note that Canopy Rivers reports in Canadian dollars and all other dollar amounts expressed today, unless otherwise stated, are in Canadian currency. I would now like to turn the conference over to Narbé.

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [3]

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Thank you, Karoline. Good morning, everyone and thanks for your interest in Canopy Rivers. This morning, we reported our financial results for the first quarter ended June 30, 2019. I will begin the call with some brief highlights for the quarter, then I will turn it over to Eddie to provide you with a more detailed review of our financial results. I will then provide a corporate and portfolio update and share our growth plan before we turn to your questions.

Let me start by giving you some insight into our view on the cannabis industry. Over the last 12 months ended June 30, we have heard 1,523 pitches and talked to entrepreneurs all around the world about their plans to cultivate cannabis, extract cannabinoids and build global brands among other things. Through these interactions, we've captured an immense amount of data that helps us gauge how the industry has been evolving. We expect to see multiple new geographies open up, including but not limited to: the U.S, Asia Pacific, Latin America, Southeast Asia and Europe. We are seeing the stigma around cannabis decrease every day. As barriers to entry start disappearing, we expect that the globalization of the cannabis economy will welcome more sophisticated entrepreneurs and capital providers. We think that the industry is still in growth mode, as the potential applications of the plant are becoming more broadly understood and an increasing number of companies are disrupting how we think about cannabis cultivation, extraction, medicine and consumption.

Within this growth, we see opportunity. We believe Canopy Rivers is at the forefront of where this industry is heading. We are evaluating a multitude of potential opportunities and are working on developing a robust ecosystem of mutually beneficial cannabis companies to drive the industry forward and lay the foundation for long-term success.

We made several new investments last quarter, the first being High Beauty, creator of the cannabis beauty brand, high. We approach the cannabis beauty space with an emphasis on 2 specific factors: a strong brand that can transcend the regulatory environment, and a founder with experience in the beauty market.

When we came across High Beauty, we were impressed by CEO Melissa Jochim, a 30-year beauty industry veteran. Melissa is a successful repeat entrepreneur, having been part of the founding team at Juice Beauty, a well-established and celebrity-favorite cosmetics company that develop products directly for Gwyneth Paltrow's modern lifestyle brand, goop. In her tenure, Melissa has also been awarded with 14 patents for her skincare formulations and has worked with retailers like Sephora, Bloomingdale's and Macy's, to name a few.

High Beauty's products are formulated using cannabis sativa seed extracts and proteins. Since the products are free of all psychoactive properties, there are no barriers in crossing state and international boundaries, allowing high to be sold in multiple geographies, including Canada, the U.S. and Europe. Given their distribution collaboration partnerships with Sephora and Urban Outfitters and their expansion plans, we have high hopes for the success of this beauty brand.

Canopy Rivers also made 2 investments during the quarter in the innovative plant science vertical. To take a step back, we have been actively pursuing an investment thesis around plant science because we believe this area hasn't received a lot of attention. Our focus has been on companies that are already showing the successful application of their innovations and other crops and investing in them to apply their technology to cannabis.

The first of these investments was BioLumic, creator of an ultraviolet light technology. Specifically, BioLumic has developed a device that delivers short duration UV treatment to seedlings. The long-term benefits of the technology include improved crop consistency, increased yield and disease resistance. Already showing success in strawberries, lettuce and tomatoes, the company plans to apply the technology to cannabis and hemp with a targeted outcome of increasing the flowering capacity of the plant. We believe BioLumic leads a new category of ag biotech, whereby light can be used to exploit and trigger naturally occurring processes in plants. In academic application to cannabis cultivation, there has been early indication showing BioLumic's the technology delivering up to 20% increase in yield, while also strengthening -- increasing the strength and vigor of the plant.

We weren't alone in our support for BioLumic's technology. We invested along Finistere Ventures, a fund focused on ag tech that is supported by industry leaders like Bayer and Nutrien, as well as Rabo Food & Agri Innovation Fund, which was launched by Rabobank, a global leader in food and agricultural financing.

Our second investment in agriculture technology was ZeaKal, a San Diego-based company that has developed a novel plant genetics technology called PhotoSeed. PhotoSeed's unique ability to increase photosynthesis results in improved plant yield and improvements in seed oil and protein composition for a variety of agricultural crops. ZeaKal has research projects underway in the U.S. and New Zealand, focused on soy, maize, rice and wheatgrass. Given the positive impacts of PhotoSeed on these row crops, we believe that the technology could have fundamental benefits for cannabis and hemp plants by theoretically increasing yield and oil production by up to 30%.

Our confidence in ZeaKal's capabilities is further bolstered by the multiyear partnership they have secured with Corteva Agriscience, the agricultural spin out of DowDuPont and other -- another investor in ZeaKal. This partnership is focused on using PhotoSeed in soybeans and potentially other crops. By leveraging Corteva's capabilities, ZeaKal plans to increase its product development scope and reduce its time-to-market.

Moving to our existing portfolio, many of our investees announced exciting new developments. Our 49% joint venture, PharmHouse, also announced that it had entered into a significant supply agreement with Canopy Growth. We saw this as a financial derisking milestone for the joint venture, increasing the total offtake committed by PharmHouse to third parties next year to 50%. I will go into more details about PharmHouse and the potential we see here with our partners, the founders and operators of Mastronardi Produce, later in the call.

Next, I'd like to talk about TerrAscend, a multistate U.S. operator with operations in Canada and sales to Europe. As a reminder, our investment thesis in TerrAscend and the chief reason behind our decision to restructure our investment in the company was its U.S. exposure. Once we exchanged our common shares for exchangeable shares, TerrAscend's U.S. strategy progressed quickly. Its subsidiary, NETA NJ, was selected by the state of New Jersey to apply for final approval to be licensed in the state.

In addition, TerrAscend acquired Florida-based Arise Bioscience, a manufacturer and distributor for hemp-derived products. Further, during the quarter, the company completed its acquisition of the award-winning dispensary network known as The Apothecarium, establishing its footprint in California and Nevada.

TerrAscend's value proposition extends beyond the U.S. During the quarter, it also received its EU GMP certification, which will allow it to distribute products in Europe, making it the first and only cannabis company able to sell in Canada, the U.S. and Europe.

Moving to Vert Mirabel, one of our joint venture assets in which we have 20% equity stake. The company received its financial -- its final cultivation license from Health Canada during the quarter. All 700,000 square feet of operating space at Vert Mirabel's greenhouse is now licensed. Prior to cannabis, the operators of Vert Mirabel produced organic tomatoes in the greenhouse. While not yet certified for organic cultivation, we believe that their expertise in the area offers a value add differentiator to our portfolio.

Another portfolio company, James E. Wagner corporation, received another cultivation license from Health Canada for its second facility. That at a full scale will be a 345,000-square-foot commercial production and distribution complex. JWC is a fifth generation family business, run by agricultural and cannabis experts. One of JWC's differentiators is its GrowthSTORM technology. The propriety patent-pending, modulate aeroponic growth system is designed to generate a significantly higher plant yield and to provide greater control over growing conditions than traditional soil, greenhouse or hydroponic solutions. JWC's aeroponic technology has led to minimal genetic drift across plants, resulting in better stability across growths.

Next, Agripharm received its outdoor cultivation license from Health Canada and began growing its first outdoor crop during the quarter. We think the companies behind Agripharm, being Green House Seeds, Canopy Growth and SLANG, make Agripharm a unique asset. For its outdoor grow, Agripharm is using award-winning Green House Seeds genetics. You may recognize the name behind Green House Seeds, Arjan Roskam, who has been called the king of cannabis, having traveled the world searching for cannabis genetics to share with growers and breeders worldwide.

We think we are off to a strong start for our fiscal year 2020. With 3 investments made during the quarter and positive momentum from our portfolio companies, we feel we have shown the investment community what we are capable of and what to expect from Canopy Rivers going forward.

I will now hand it over to our CFO, Eddie Lucarelli, to review our financial results in more detail. Ed?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [4]

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Thank you, Narbé, and thank you again to everyone who's dialed in for the call this morning. As this is our first earnings call, I wanted to devote some time to discuss how our financial results are presented. Due to the intricacy of our business model and the required application of certain accounting standards, our financial statements can admittedly be a little confusing to readers. As a company focused on making investments in the global cannabis sector, our objective is to generate returns in the form of dividends, interests, rents, royalties or capital appreciation from the investments that we make. As a result, we do not report financial metrics that are typical of Canadian LPs or U.S. MSOs, such as the revenue or cost of goods sold. Instead, you will see items on our financial statements, such as interest income, fair value changes and others that I will describe in more detail momentarily.

Our investees and the related financial instruments in which we have invested, generally fall into 1 of 3 buckets for accounting purposes. The first bucket is equity method investees. For an investment to be deemed an equity method investee, it would generally have the following characteristics: our ownership level is between 20% and 50%; we have Board representation rights; and the instrument that we are invested in bears the risk and return profile of an equity position. Our investments in equity method investees are initially recorded at cost, and the related financial statement balance is adjusted up or down each period based on our proportionate share of the income or loss generated by the investee. As such, the values on our statement of financial position for equity method investees do not necessarily reflect how a market participant may fair value those assets. Our equity method investees include some of our larger investments, such as our investments in PharmHouse and Canapar common shares.

The second bucket is financial assets. For an investment to be deemed a financial asset, it would generally have one of the following characteristics: the instrument is in the form of common or preferred shares, representing less than 20% of the entity's voting rights; the instrument is a derivative financial instrument, such as warrants or options; or the instrument is a nonequity item, such as a royalty interest or a debenture. Our investments in financial assets are generally recorded at fair value each quarter. Changes in fair value from quarter-to-quarter will either flow through profit or loss, or P&L, or show up in what is called other comprehensive income, or OCI. Those investments that flow through profit or loss are generally our yield-oriented investments, such as royalty instruments, debentures or preferred shares and cumulative dividends, or are those financial assets that are required under the accounting standards of flow-through P&L, such as derivative financial instruments. The instruments that flow through other comprehensive income are generally the common or preferred equity positions that are intended at inception to be long-term and strategic in nature. All of our equity investments and publicly-traded companies would fall into this fair value through other comprehensive income subcategory.

The third and final bucket is a generic category, which includes instruments that do not fall into the other 2 buckets, such as our shareholder loan to PharmHouse and our finance lease with Spot. We may hold multiple financial instruments for each of our investees. For example, with Greenhouse Juice, we hold convertible debentures and warrants; or at Canapar, we own common shares as well as a call option on the shares that we don't own. In total, we hold 30 different financial instruments across our 18 investees. Each individual instrument has its own unique accounting treatment. When you layer these 30 different financial instruments on top of 18 investees, the results is a somewhat complex set of financial statements. We strive to reduce that complexity by ensuring a robust level of disclosure in our financial statement and MD&A. Despite the challenges associated with this complexity, we believe that our ability to create multifaceted investment structures differentiate us in the venture capital arena and supports our position as a preferred supplier of capital through cannabis industry.

Turning to our financial results, the operating results generated by the company since its inception has generally been characterized by the following 5 elements: first, a somewhat predictable and slightly growing stream of income in the form of interest income on debentures, royalty income on royalty assets and lease income on finance leases. Second, a marginal share of net losses from equity method investees as they continue to ramp up their operational capabilities. Third, a somewhat predictable SG&A cost base, which is grown in tandem with our company's growth, especially as we matured into a public company. Fourth, a somewhat variable, noncash, share-based compensation expense, which, to date, has been largely related to options granted to nonemployees at an early stage in the company's growth. And fifth, unpredictable net changes in fair value of financial assets, particularly with respect to our publicly-traded investments, which are driven by market factors.

I want to spend the next few minutes recapping our financial results for the quarter, beginning with our operating results. I will note that while comparative information for the quarter ended June 30, 2018, is included in our financial statements and MD&A, I will only refer to results for this quarter. We believe that the growth in the cannabis sector and the nascent stage of both the industry and our company in the same period last year limits the relevance of last year's results for comparative purposes.

Total operating income was CAD 2.7 million for the quarter. Operating income includes income on our finance lease receivable with Spot; income on our shareholder loan receivable with PharmHouse; our share of loss from equity method investees; royalty and interest income on financial assets at fair value through profit or loss; and net changes in the fair value of financial assets at fair value through profit or loss. We reported income on loan receivable of CAD 1.2 million for the quarter. The loan receivable is the CAD 40 million shareholder loan to PharmHouse that bears interest of 12% per year. The interest receivable balance will build over time, and we anticipate that accrued interest will begin to be paid once PharmHouse generates revenue in early calendar year 2020.

Our share of loss from equity method investees was CAD 1 million for the quarter. This includes assets, such as PharmHouse and Canapar common shares, both of which are free revenue companies. I will note that as per election available under relevant accounting standard, we pick up our share of profit or loss 1 quarter in arrears, meaning that for the most part, the financial results of our equity method investees that we report for the quarter ended June 30, 2019, relate to their financial results for the quarter ended March 31, 2019.

Income on financial assets at fair value through profit or loss was CAD 0.8 million for the quarter. This includes royalty income on our various royalty investees, including Agripharm, JWC and Radicle, and interest income on our various debenture instruments, including Agripharm and Greenhouse Juice. We are pleased with the production improvements that we are seeing at our royalty investees.

Net increase in fair value of financial assets at fair value through profit or loss was CAD 1.5 million for the quarter. There are several financial instruments in our portfolio that are classified as financial assets at fair value through profit or loss. A detailed breakdown of the fair value changes in these instruments is included in Note 9 to our interim consolidated financial statements.

Total operating expenses were CAD 5.8 million for the quarter. I'll split this into 2 groupings. The first grouping is comprised of cash-based operating expenses, which are reported as consulting and professional fees, and general and administrative expenses. The second grouping is comprised of noncash based operating expenses and primarily relates to share-based compensation. Consulting and professional fees were CAD 0.5 million for the quarter. These expenses are primarily attributable to ongoing consulting services related to business management, the sourcing and evaluation of investment opportunities and due diligence-related matters, legal fees related to transaction execution and general corporate and securities matters and audit tax, accounting and other regulatory compliance advisory fees. We anticipate that consulting and professional fees will continue to increase going forward as the company continues to execute its growth strategy and commence business activities in new markets and jurisdictions.

General and administrative expenses were CAD 1.5 million for the quarter. These expenses are primarily attributable to salaries and benefits, marketing and business development and other administrative activities of the company. We anticipate that salaries will increase going forward as the company continues to build out its management team and employee base as required, and that other general and administrative expenses will also increase going forward, due to enhanced public company compliance and regulatory requirements, including with respect to our uplift into the Toronto Stock Exchange as well as administrative costs associated with expanding the company's operations.

Share-based compensation expense was CAD 3.7 million for the quarter. As I previously mentioned, this is a noncash expense and is largely related to options granted to nonemployees, which occurred at an early stage in the company's growth and requires remeasurement each period. The portion of this expense that relates to options granted to employees and directors was CAD 0.8 million for the quarter. When you combine our operating income, cash-based operating expenses and noncash-based operating expense for the quarter, along with some other less material items, the result is a reported net loss of CAD 3 million or CAD 0.02 per share.

Below the net loss line, we capture the impact of net changes in fair value of financial assets at fair value through other comprehensive income, which is presented net of tax. This line item includes the fair value changes in our investments and instruments of investees that are publicly traded, including TerrAscend, JWC and YSS. As you are aware, market prices for publicly-traded cannabis companies experienced a challenging period from April 1, 2019, to June 30, 2019. As a result, our mark-to-market reflects a fair value decrease of CAD 15.5 million related to our publicly traded investments. This was partially offset by a CAD 9.4 million increase in the estimated fair value of our investment in Vert Mirabel common shares, which is estimated by a third-party evaluator based on the discounted cash flow approach to value using a 25% discount rate. On a net basis, the decrease in the fair value of financial assets at fair value through other comprehensive income was CAD 5.8 million for the quarter, and our total comprehensive loss was CAD 8.8 million.

Shifting to our cash flow activity, net cash used in operating activities was CAD 2.8 million for the quarter. Net cash used in investing activities was CAD 12.7 million for the quarter. We advanced funds pursuant to a preexisting agreement with Agripharm, completed a follow-on investment in Greenhouse Juice and made new investments in BioLumic, High Beauty and ZeaKal, which Narbé previously described. Total cash deployed in new and follow-on investments was CAD 24.8 million. However, the reported figure for net cash used in investment activities also reflects the CAD 12 million positive impact from the reduction of the requirement for Canopy Rivers to maintain a minimum cash balance pursuant to PharmHouse's CAD 80 million credit agreement. There were no material cash flows for financing activities during the quarter.

We ended the quarter with CAD 88.8 million of cash in our statement of financial position. Approximately CAD 21.5 million of that cash is reserved for funding commitments to certain portfolio companies, leaving approximately CAD 67.3 million of dry powder available to deploy.

Total assets as of June 30, 2019 amounted to CAD 412.9 million. Aside from the CAD 88.8 million cash balance, the significant components of total assets included the shareholder loan to PharmHouse for the book value of CAD 40 million; investments and equity method investees for the book value of CAD 66.7 million; investments in financial assets at fair value through profit or loss of the book value of CAD 65.3 million; and investments in financial assets at fair value through other comprehensive income for the book value of CAD 144.2 million.

One thing I would like to note with respect to that asset value, relates to our investment in TerrAscend exchangeable shares, which are included in financial assets at fair value through other comprehensive income. We currently hold approximately 19.4 million exchangeable shares in TerrAscend. These exchangeable shares become convertible into common shares of TerrAscend following certain events related to federal permissibility of cannabis in the United States. As these exchangeable shares are not transferable or monetizable until exchanged into common shares, we are required, for accounting purposes, to record these shares at a discount to the value implied by reference to TerrAscend's trading price on the CSE. If we were not required to take a discount, the value of our investment in TerrAscend shares would have been approximately CAD 66 million higher.

Total liabilities as of June 30, 2019, amounted to CAD 9.7 million, primarily relating to a CAD 6.4 million deferred tax liability reflecting unrealized gains on certain investments. We currently have no interest-bearing debt.

Finally, total shareholders' equity, or the net book value of assets for accounting purposes, as of June 30, 2019, amounted to CAD 403.2 million. Based on the yesterday's closing share price, our basic market capitalization is approximately CAD 456.5 million, which represents an implied price-to-book ratio of approximately 1.1x. We note that this net book value reflects the CAD 66 million discount on our TerrAscend investment that I've described, and does not reflect market value estimates for our equity method investees, such as PharmHouse. As such, it is important to note the difference between net book value for accounting purposes and net asset value from a market participant's perspective.

I'll conclude my remarks by looking ahead. We expect that 4 things will cause our operating results to change in the long term. First, equity method investees like PharmHouse, for which we pick up our proportionate share of income or loss, will contribute a more meaningful amount to our net income as they scale their operations and become revenue-generating. Second, interest and royalty income will remain relatively stable and cover a significant portion of our cash-based operating expenses, which will remain lean by cannabis sector standards. Third, volatility in market factors in the cannabis sector will hopefully subside, creating less variability in the investments that we have to mark-to-market each period. And fourth, we will recognize gains or losses on investments from which we exit, and of course, it is our intention and our hope that these monetization events generates significant gains.

I will now turn it back over to Narbé for commentary on recent developments and our strategy going forward.

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [5]

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Thank you, Eddie. I would like to take a few minutes to provide you with the current portfolio and corporate update before moving on to our growth plan. We are pleased to confirm that Canopy Rivers has received conditional approval to graduate to the TSX. We see this as a significant milestone for the company that has been achieved in less than a year of our go-public transaction. We are proud to be joining a class of issuers that includes many large and reputable domestic and international companies. We believe that the uplifting will improve awareness about our business and enhance liquidity for investors and other market participants.

At the beginning of July, Bruce Linton stepped down as Chairman of the Board of Canopy Rivers. As one of the cannabis pioneers, we think Bruce was monumental in developing a great foundation for the cannabis industry as we see it today. Although Bruce was not involved in the day-to-day operations of Canopy Rivers, he helped foster relationship between Canopy Rivers, Canopy Growth and Constellation, a relationship that continues to be strong following his departure. We plan to follow in his footsteps by maintaining a commitment to entrepreneurialism, prioritizing investments that support innovators and focusing our impact team on accelerating the path of success of our current portfolio investments.

John Bell has been nominated as the Chairman of our Board. His extensive corporate governance experience spans industries. He is currently the Chairman and Lead Independent Director at Canopy Growth, and he also sits on the board of DelMar Pharmaceuticals. John is a former entrepreneur, proven leader and successful investor who has grown companies into global operators.

We plan to continue focusing on our joint venture assets. PharmHouse recently received a cultivation license from Health Canada for 190,000 square feet of licensed nursery infrastructure. We expect PharmHouse to be fully licensed for cultivation by the end of the year, and the operators are hard at work getting the facility GMP certified. While we are not publicly disclosing any production estimates at this time, we believe that once PharmHouse is generating revenue on its entire operation, it will be a significant catalyst of value creation for our investors.

The time line on PharmHouse ramp-up has been on schedule. We believe our impact team's knowledge, coupled with the substantial greenhouse cultivation experience of our partner, has been key to the successful execution of the greenhouse conversion at PharmHouse and the introduction of state-of-the-art automation to the facility. We think of the ability to leverage the core competencies of North America's leading grower and distributor of greenhouse produce is a significant advantage for PharmHouse. We will update investors on PharmHouse's continued progress in the coming quarters.

Moving to Vert Mirabel, the operators of the greenhouse are busy readying the financial -- the final production zone in the greenhouse that were licensed at the end of May, and we expect the entire 700,000 square-foot facility to be online in the next 2 months. A significant portion of the greenhouse is already in production. As a reminder, 100% of the offtake from Vert Mirabel has already been contracted to Canopy Growth, thereby significantly derisking the project.

Finally, progress at Canapar has been steady. The extraction machinery is expected to be shipped from the U.S. in the fall and construction of the facility is well underway. Its contracted hemp is currently being harvested with the intention that extraction will begin before the end of 2019.

There has been some concerns surrounding negative sentiment from the Italian government around hemp and CBD. This stems from a ruling by the Italian court that existing laws do not permit the sale -- retail sale of cannabis light above a certain THC percentage. We want to clarify that this ruling does not affect Canapar, as the company's focus has been on extracts and isolates. We understand the demand for extracts and isolates in Europe is strong and that no one is currently doing this at scale. In this segment, we think that Canapar will have a first-mover advantage.

In other public and private venture investments, there has been many positive developments. TerrAscend made yet another move in the U.S., signing a definitive agreement to acquire Ilera Healthcare, owner of 1 of 5 super licenses in Pennsylvania. Ilera is a fully incubated, seed-to-sale operator and adds to TerrAscend's global portfolio of operations. According to unaudited financial statements prepared in accordance with the U.S. GAAP, Ilera's current revenue run rate is over USD 43 million, up from a total sales in 2018 of less than USD 8 million. TerrAscend recently announced record revenues for its second quarter and increased its guidance. On a pro forma basis, one taking into account its completed and pending disclosed acquisitions, TerrAscend generated CAD 42 million of revenue in the quarter or over CAD 168 million on an annualized basis.

Radicle, another portfolio company, received approval from Health Canada for its production facility expansion project, which will increase its capacity. The 140,000 square-foot indoor facility is being developed in 3 phases with significant expansion potential and low development risk. We expect the 40,000 square feet that has been approved so far will be in production by the end of September.

Most recently, Headset announced that its cannabis market intelligence platform is launching in Canada. Our investment thesis for Headset was based on the value that we saw for data in the cannabis industry. In the traditional consumer packaged goods space, it usually takes 2 years to develop a product, measuring everything from segment size, competitive mix, price, packaging, logo and color design to ensure alignment with consumer needs. We noticed that cannabis company didn't have the benefit of consumer trends and market data, resulting in products being developed based on anecdotal evidence only. Since our investment in Headset, the company has announced strategic partnerships with Nielsen and Deloitte.

I would like to pivot now and talk about our impact team, since a lot of what I have already discussed can be partly attributed to their work. The impact team at Canopy Rivers offers a value-add component of working with us. Specifically, the impact team helps our portfolio companies on their path to commercialization, assisting with regulatory affairs, capital buildout, branding, distribution and other important operational areas. The ultimate goal of the impact team is to help our portfolio companies find ways to build revenue and cash flow, guiding them towards eventual exit or other monetization event. The impact team also helps to drive collaboration within our portfolio. The result is the development of an ecosystem that helps our investees scale and focus on what they do best.

A recent example of this collaboration was the announcement from JWC and TerrAscend about their purchase and sale agreement pursuant to which JWC will supply cannabis flour and oils to be sold through TerrAscend online medical sales platform, called Solace Health. We believe that the initial wave of vertical integration in the cannabis industry will go away, as companies find their areas of expertise and become specialists. Our impact team's focus is on tying these specialist firms to one another to create a synthetically, vertically integrated value chain. We believe that as the dollar flows from one portfolio company to another, it will create a multiplier effect on that same dollar, leading to increases in valuation across the portfolio.

From a venture capital standpoint for the remainder of our fiscal year, we plan to continue to use our domain expertise, focusing on 15 to 20 areas within the cannabis and adjacent industries. We have broken down the cannabis value chain into 97 sub-segments and have applied a 10-criteria analysis when considering investments, looking at characteristics such as barriers to entry, bargaining power, exit potential and synergies across the portfolio. Through this exercise, we have developed a strong thesis of where we believe the industry is headed. Our deal pipeline is stronger than ever, with outbound deal flow being the most beneficial in uncovering who we believe to be promising innovators and operators. When making an investment, we look for exceptional entrepreneurs, product-market fit and favorable market dynamics. While we cannot highlight specific priorities for capital allocation over the next quarters, we generally expect you will see us making follow-on investments in the existing portfolio companies, looking at brand plays that we think will benefit from the synergies created within our ecosystem and the area of biosynthetic cannabinoid production.

Despite short-term headwinds created by market volatility, we remain very optimistic in overall growth potential of the cannabis industry. We plan to execute on our growth plan using our thesis-driven investment approach and high-performance culture and team to continue to capitalize on opportunities that we believe will drive value for our shareholders.

That concludes our formal remarks. Eddie and I are now pleased to answer your questions. Operator, please begin the question period.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Graeme Kreindler at Eight Capital.

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Graeme Kreindler, Eight Capital, Research Division - Principal [2]

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I wanted to follow up on -- with respect to the transition of leadership of Canopy Growth. You had some comments there in the prepared remarks, but understanding that Constellation Brands has their own corporate venture arm and does a lot of work in earlier stage investments, I was wondering if there has been any discussion or communication with the teams to date or sharing any sort of best practices as you continue to grow the business and looking to (inaudible).

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [3]

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Graeme, yes. I mean we have constant discussion with both Canopy Growth and Constellation on a regular basis. Bruce and Mark have done a great job of assembling a solid team at Canopy Growth that is largely beyond any single individual. We speak to Mark and his team on a regular basis and speak to senior executives at Constellation on a weekly basis. And then together, we're working on a number of projects, then collaborating with them on a regular basis as well.

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Graeme Kreindler, Eight Capital, Research Division - Principal [4]

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Okay. And just on a separate note, you mentioned some priorities for capital allocation in the coming quarters with respect to some specific verticals. I was wondering if you could elaborate, maybe, what sort of stage of businesses you're looking for in the life cycle? I mean recently, it looks like the portfolio has trended towards more earlier stage stuff and that is probably as a result of where we are in the industry. But I was wondering if there's potential to invest in some more mature companies or look to bring that into the portfolio, perhaps bridging over some companies from some other industries into -- or into cannabis?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [5]

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So we are a life cycle investor. So our thesis has always been to invest in early-stage and late-stage companies and kind of spread that across the portfolio. As you can imagine, when you invest in early-stage companies, there is a bit higher risk when you stay, but with a higher reward. When you invest in a late-stage company, there is a lower risk and a lower reward as well. So when you look at it from a portfolio construction dynamic, you want to spread that risk and reward across multiple investments in order to create a diversified portfolio.

But by segment, we're looking at a number of opportunities. As I mentioned in the prepared remarks, there is about 15 to 20 investment thesis for where we think the industry is going to be headed within the next 2 to 3 years. For each of these theses, we have the opportunity to talk to a multitude of companies within that segment, whether them being early or being late and through that process, we gauge where we think companies are going to win and then what companies are going to really succeed. The 3 areas that we want to publicly disclose in terms of where we look for, whether that be early stage or late stage, right now would be brands, biosynthetics and on the genetic or plant science side.

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Operator [6]

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And your next question will be from John Zamparo at CIBC.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [7]

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I want to ask about the domain cultivation assets of PharmHouse, Mirabel and Canapar. Are you still comfortable with the attributable 2020 EBITDA numbers you've previously put out?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [8]

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John, so I guess we can give a little bit of the high-level update on where those assets stand. I mean the majority of the PharmHouse facility is built out, as Narbé was referencing, they did receive their cultivation license recently, and they are moving plants into the mother room. Currently finalizing the design of the packaging room and the extraction line there as well and working towards GMP certification, having mapped out all the processes that are required there. It's looking like the cultivation asset for the entire facility should be received by the end of the year. We are anticipating initial revenues from PharmHouse happening at some time between fourth calendar quarter of 2019 and the first calendar quarter of 2020.

With respect to Canapar, we did note in the MD&A that we released this morning that due to certain factors that are anticipated to impact the timing of when Canapar will be in position to begin generating revenue, and those factors will be focused on regulatory uncertainties in the European market and challenges sourcing some of the required GMP-certified equipment. We're not really in a position at this point to provide guidance for calendar year 2020 until we have greater clarity with respect to these items. So you'll see that reflected in the updated investor presentation that we released this morning.

And then with Vert Mirabel, Narbé referenced the fact that all 700,000 square feet of that facility is now licensed. 7 out of the 10 zones there are operational and the company is looking to get those final 3 zones ready for plants over the next 2 months. So Vert Mirabel is the 1 of the 3 that is at the revenue-generation stage. And again, just adjusting for that, that Canapar estimate, the guidance for PharmHouse and Vert Mirabel remain the same.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [9]

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Okay. That's helpful. So sticking with those 3 assets, when you look at financial reporting, do you anticipate you'll start disclosing results from those assets in a pretty visible way? And can you potentially use proportionate consolidation in the future for those assets?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [10]

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Yes. I think what we will -- what we're committed to doing is that once those assets do reach their stage of operations, specifically as we noted PharmHouse and Canapar both being pre-revenue at this stage, but once they do reach revenue generation capabilities, we will disclose in our MD&A a detailed buildup to EBITDA and our proportionate share of EBITDA for those assets, so that TheStreet and investors have the ability to use that information to form their value assessments for Rivers.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [11]

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Okay, great. I want to ask about the U.S. listing. Is that something you guys are exploring? And if so, when might you look to do that?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [12]

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If it makes sense for Canopy Rivers, we will take a look at a U.S. listing. But at this time, we have no current plans to list in the U.S.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [13]

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Okay. Got it. And one more before I re-queue. M&A environment, I mean, we've all seen what's happened with valuations across the states, the public markets. Have you found that to be the case in private markets as well? Or are asking prices from the targets you're looking at still fairly lofty?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [14]

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Yes. I think that there's definitely some softening in terms of valuations and expectations from companies within the space. However, I'd say that at the same time, that there's more capital than ever that's entering the industry from the private market's perspective that kind of negate some of that, that decrease in valuations. As you can imagine for private companies, they do look at the public multiples and gauge valuations based off of that. So when there is a general softening within the industry, then the private markets do show that as well. However, typically for the summer months has been a bit slower for the cannabis sector over the last few years. So I think there's a lot of sentiment across the industry that they're waiting to see what would happen in the fall and to really understand where valuations will tail off for the rest of the year.

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Operator [15]

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Next question will be from Jeff Fenwick at Cormark Securities.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [16]

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I wanted to follow up on the pipeline commentary there in terms of maybe deal size that you're seeing. We've seen

(technical difficulty)

Is relatively smaller ones of late. So how are you feeling in terms of relative deal size you're seeing? And then the financial capacity with that CAD 66 million of available or CAD 67 million of available cash?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [17]

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Yes. So I think generally, across the board, it really depends on where we invest in the value chain. The check sizes do vary depending on how capital-intensive the project is. For example, when you look at cultivation extraction plays, they're relatively capital-intensive, requiring tens of million of dollars to properly build and scale the projects out. On the other end, the technology and more horizontally-integrated brand plays require a lot less capital to build and scale. So it really depends on what part of the value chain that we're playing at. Typically, what we're looking at deploying, close to CAD 10 million to CAD 15 million in each of our portfolio companies. Sometimes that's a smaller check size in the beginning to get it more of a foothold. We believe, through our investment thesis, that when we get the company into our portfolio, we can actually make them much larger very quickly. And then go out and potentially raise for a larger amount afterwards. So it's a bit of an understanding of the domain expertise of how that company will play out within our ecosystem, and where we think drive value from that company immediately before going and making a larger investment into the same company. And I think that was proven out by how we invested last summer into Canapar at a small dollar amount and then came in, in December with a larger check size for their Series A.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [18]

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That's helpful color. And then maybe if we can just move on to some of the fair value accounting and appreciate the detail you ran through here. One of the ones that stuck out was the lift on the Vert common equity, it was fairly sizable in the quarter. You mentioned it's a third-party group that does that valuation or just do with it. But just wondering what might be the catalyst for that swing there. Is it the licensing event that lowers a discount rate for you? Or what was the driving factor on that?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [19]

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Yes. So that's valued by a third-party valuator using a discounted cash flow approach to value. We did decrease the discount rate this period to reflect the operational improvement at that asset, and the more harvest you get under your belt, the more confidence you have in the projections going forward. As we disclosed in the financial statement, the discount rate we use there is 25% for those common shares, which is -- when you look at some commentary in TheStreet, that's probably high relative to those other estimates. But we do reflect that discount rate -- or sorry, we do adjust that discount rate downwards as we see more consistency in the results period to period. And because of the higher discount rate as you move forward in time, the value of the asset increases as well.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [20]

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And then onto a different topic here, TerrAscend. It sort of stands out as the one that's a little bit maybe aside of where you're focusing now, and that you're a little more targeted in where your investments lie, and it seems to be one that's more of a vertically integrated type of model. What's your thinking there around holding that investment, the horizon, the time horizon in your mind that you have? And your plans to just continue to support them as they continue down their path?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [21]

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Yes. I mean I'd say that we were huge fans of what TerrAscend has done in terms of building out their own vertically integrated ecosystem within Canada, the U.S. and slowly into Europe as well. We believe that TerrAscend provides us with a strong amount of U.S. exposure, indirectly, into what they're building out there, which would seem to be a multistate operator that has its tentacles in areas such as adult-use, recreational and as well as on the medical component as well. TerrAscend has been one of our best, if not the best, investment to date for us since our initial investments, and we do everything we can in our powers to help them out and to continue to see the progress that we've been seeing to date.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [22]

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And I guess the follow-on is that your philosophy on thinking and timing around monetization because this is one that -- it sounds like they're going down their path. You're -- maybe I'm wrong, but maybe you're not quite as involved in helping to cultivate their success there. So how do you think about what the right time is around monetizing a position like that?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [23]

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I think we will see value in them upon federal legalization within the U.S. As you know, currently, we have exchangeable shares within TerrAscend which limits our ability to monetize that investment. However, we do believe that -- I don't think it's a if, it's more of a when the U.S. looks towards federal legislation. TerrAscend is going to be best situated to capture as much value as they can from a legal cannabis market in the U.S. And that will be a good time for us to really dig deep on the monetization side of the investment.

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Operator [24]

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(Operator Instructions) And your next question will be from Justin Keywood at GMP Securities.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [25]

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I appreciate the comments around the OpEx. I was just wondering if you have an expected cash OpEx for this fiscal year.

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [26]

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I think when you look at the last 2 quarters or 6 months of results, we've come in at about CAD 5 million of cash-based OpEx. Annualizing that is probably a good indication of what FY '20 OpEx will look like. So -- and that number would be roughly CAD 10 million.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [27]

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Okay. That's helpful. And just looking at the working capital, there seems to be some use over the past 2 quarters. Would you expect that to rebound in the near term? Or what's driving that?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [28]

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One of the significant factors driving that is the accrual of the interest receivable on the PharmHouse shareholder loan. So while we do pick up our share of interest income on that loan, as of today, the interest isn't expected to begin being paid until PharmHouse is generating revenue. So you'll see that balance tick up over the next several quarters. And then once PharmHouse generates revenue, you'll see the repayment of that interest grow. So until that event happens, you'll see a marginal investment in that working capital.

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Justin Keywood, GMP Securities L.P., Research Division - Director of Equity Research [29]

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Okay. Understood. And then going back to the Canapar guidance comments, is it expected that the attributable EBITDA for that gets pushed out to maybe 2021? And if you could provide any additional color on what's the regulatory uncertainty there and when it could clear up?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [30]

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It's possible that the EBITDA guidance that we previously provided is simply just going to shift backward a few quarters, to be honest. The reason that we didn't want to remove the guidance from the deck is simply due to the uncertainty that was associated with some of the regulatory developments that have happened. A couple of things there, one would be that we're navigating the process at this point in terms of which licenses are required in the process of CBD extraction in Europe. The time line to get that license could drive revenue back a little bit from when it was initially anticipated. And then there's also a little bit of a backlog in terms of securing the equipment required from GMP certified isolates to be distributed in the market. So as you know, obviously, CBD isolate pricing's derived from GMP sources, would be priced a little bit higher in the marketplace, so to the extent that there is a little bit of a delay in getting that equipment in place, it could impact short-term revenue. So that's the extent of what we've disclosed on that asset, and again, we remain very bullish on it and its ability to generate value in the medium term. However, with a view towards calendar quarter 1 of 2020, there is just a little bit too much uncertainty for us to keep the number in our guidance.

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Operator [31]

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Next question will be from Devin Schilling at PI Financial.

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Devin Schilling, PI Financial Corp., Research Division - Special Situations Analyst [32]

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Just another follow-up question on the deal pipeline. Is there any particular regions you guys are putting a greater focus on right now, whether it's Canada, U.S. or somewhere else international?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [33]

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Yes. Great question. I think by geography, we're having a continued focus on the U.S. and European markets. In the U.S., we're seeing a number of strong brands and ancillary companies scaling quickly, and they don't necessary touch the plants. In Europe, we're seeing a number of cultivation and extraction plays with very strong operating teams backing them. So I'd say those are the top 2 areas, our geographies that we're focusing on. But however, we do see deals from all across the world, whether they be in Latin America, in Australia or New Zealand as well as some of the emerging areas, such as Asia Pacific and India as well.

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Devin Schilling, PI Financial Corp., Research Division - Special Situations Analyst [34]

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Okay. Great. I guess also looking at your CAD 67 million here of available cash, have you guys provided much of an outlook on how you guys see that as a split between new investments, I guess, versus additional follow-ons in your existing portfolio?

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Edward James Cirillo Lucarelli, Canopy Rivers Inc. - CFO [35]

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So one of the things that we disclosed in the financial and with the MD&A is that of the CAD 88.8 million cash balance that we've reported at June 30, we have reserved CAD 21.5 million for commitments to existing investees. So that's how we derive the number of just over CAD 67 million of dry powder. So theoretically, that dry powder could be deployed entirely to new investees and to add into the portfolio. There could be cases where some of that money does go toward existing investees, but there are no commitments to do so at this time.

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Operator [36]

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(Operator Instructions) Next is a follow-up from John Zamparo.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [37]

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A couple of follow-ups. It seems like credit financing in the industry is increasingly favoring the lenders. Curious if you're seeing attractive credit opportunities, and does it make you want to allocate some capital towards these types of arrangements?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [38]

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Yes. I mean we are seeing the same thing in the industry today as well. Typically, those credit deals have a lower rate of return than some of the equity deals that we're seeing coming into the play. We are looking at all possibilities, and we are very agnostic to how we structure our deals. So we could do a deal for credit or convertible debt or all the way up to equity. But we are seeing a lot more value on equity component.

This is going to be a huge industry, and we're well underway of seeing how that growth is looking all over the world. And if you have that type of vision in mind of just how big cannabis is going to be worldwide, then the equity portion looks a lot more attractive than credit deals.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [39]

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Okay. Understood. And then last one for me. You made several investments in the past, call it 6 to 9 months, typically in early-stage financing, an array of businesses. I'm trying to get just broadly how do you think about exiting these investments? You mentioned you might be playing in future financing rounds. So on the exiting side, is that -- should we interpret that as you'd hold these until these companies go public?

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Narbé Alexandrian, Canopy Rivers Inc. - President & CEO [40]

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Not necessarily. I think if you look at exits that there's a multitude of ways that we can get monetization from dividends from cash-producing assets, royalties, M&A and even a go-public event. If you look at the standard life of a venture portfolio, it's about 7 to 10 years and involves cash deployment, harvesting these companies and then a potential exit. I think the cannabis industry is no standard industry, we're seeing a record amount of M&A and deals take place year-after-year, and quite frankly, we just don't see it stopping any time soon.

So over the next year, we're going to see many of our companies begin to rapidly monetize. As Eddie mentioned, on the joint venture end, we're expecting approximately CAD 100 million of attributable EBITDA from PharmHouse, Vert and Canapar. We have CAD 9 million of minimal annual royalty payments from our 4 portfolio companies. And we have a large ownership in TerrAscend which allows us to enter into the U.S. upon federal legalization. That's just half of our portfolio. Currently, there are a few companies in our portfolio that we can foresee monetizing -- a monetization event for in the next, call it, 6 to 12 months. However, as you know, these things change. And this industry is no standard industry, so we can't really disclose anything until it actually happens.

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Operator [41]

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At this time, it concludes the question-and-answer session. Please proceed.

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Karoline Hunter, Canopy Rivers Inc. - Senior Director of IR & Communications [42]

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Thank you, and we'll now end the call, and appreciate your participation.

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Operator [43]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.