Red White & Bloom Brands

Greetings and welcome to the Red, White & Bloom Incorporated 2020 and Quarter 1 2021 Earnings Call and Corporate Update. At this time, all participants are in a listen-only mode. The link to the webcast can be located on Red, White & Bloom's website as well as their press release. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad or type your issue into the text box. It is now my pleasure to introduce your host, Tyler Troup.

Thank you, operator. I just want to reiterate, anyone wanting to ask questions at the end has to click the web conferencing link, which is in the press release and on the IR website. Good afternoon, everyone. Thank you for joining RWB's Investor Conference Call. We'll cover the fourth quarter 2020, full year 2020, and first quarter 2021 results, as well as updates on our overall company. With me on the call today are Brad Rogers, Chairman and Chief Executive Officer, and Theo van der Linde, our CFO. Prior to the call, we distributed our Q4 2020 and full year results, as well as our Q1 2021 earnings. over the wire, posted them to our website at redwhitebloom.com. And a replay of this call will be available on the investor relations section of our website for 30 days. Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements regarding future events. We caution you that such statements reflect our best judgments as of today, July 27th, based on factors that are currently known to us. Actual future events... or results could differ materially due to a number of factors, many of which are beyond our control. For more detailed discussion on the risks and uncertainties affecting future results, we refer you to our filings on CDAR. RWB disclaims any obligation to update or revise these forward-looking statements to reflect future events or circumstances. During the call, we will discuss non-IFRS financial measures unless we specifically state otherwise, the non-revenue financial measures we will discuss today are not prepared in accordance with IFRS. With that, I'll turn over the call to Brad. Please go ahead, Brad.

Thank you, Tyler. Good afternoon, everyone, and thank you for joining us today for our first investor call. During this call, I'm excited to share with you the industry trends and the thesis behind how we got here, our vision and business strategy, our key partnerships, and the progress we have made towards our key initiatives and milestones. In addition, Theo will share some other details on our financial performance to date. First off, let me start by explaining a bit about what we are focused on achieving and what drives us to put the long hours in with smiles on our faces. I feel fortunate to be an executive in the cannabis industry as this comes out of prohibition. There's an exciting time in an era that will be documented for generations to come Whether our customers are using CBD, THC, or a combination of both of recreational use or medicinal purposes, we are proud to be part of this new age of acceptance around the cannabis plant and all it has to offer its many iterations. In a multi-billion dollar market in its infancy, the opportunity for RWB has never been greater. We've deliberately focused on key states with high barriers to entry, whether those be limited licensed states or complex regulatory barriers. and are primarily focused on deep penetration within those states and securing as much of the supply chain as possible. For RWB, those states include Michigan, Florida, Illinois, and California. Beyond that, we intend to adopt an asset-light approach to other states such as Arizona and Oklahoma. Above all else, the establishment of brands and overall expansion of those brands in distribution will underpin our overall strategy. We started as an investment company in 2018, and our initial focus was Michigan. We've deployed in excess of $85 million in that state and recently received our pre-qualification for medical in Michigan. We are awaiting our adult use there and will begin taking over the assets from our investee in that state imminently. We anticipate that we will take a few more weeks to get underway, but look to have a number of those operations under control and bannered by the end of this quarter. Our investee did about $69 million in top-line fiscal 2020. We have a clear strategy for growth in Michigan that includes optimizing a number of their operations once we have full operational control over them. In addition, our Platinum Brands products in Michigan are the clear market leader in the state, and we see a number of opportunities to expand the market-leading position over the next second half of this year, including the launch of the award-winning Platinum Branded Edibles in this quarter in Michigan. In Florida, which we acquired the second quarter this year, we have been extremely busy scaling our cultivation footprint. We had a 114,000 square foot facility and have 30 self-enclosed cultivation pods capable of producing $25 million in top line revenue based on current pricing in the retail level. We're also exploring additional expansion opportunities to expedite our growth revenue potential in that state. In Illinois, we have entered into a definitive agreement to acquire one of the 21 cannabis cultivation licenses that allow for 200,000 square feet of canopy and are awaiting approvals to close. This acquisition comes with an existing 28,000 square foot cultivation facility and extraction and manufacturing capabilities already in place. Our plans for the new facility are prepared and we are working towards final regulatory approval to complete this transaction. We continue to see strong performance of our platinum brand, California brand, with BDS placing it at number five in the category in the state earlier this year, and are working towards the launch in Arizona and expansion of the brand in Oklahoma through an asset-light approach. We believe the RWB plan for revenue growth and synergies that will create additional bottom line are well on its way, but are very excited about where we are at our current trajectory. I'll give additional comments on our brand strategy and articulate that a little more succinctly. But at first, I would like to turn the call over to Theo, our Chief Financial Officer, to comment on some of the results published over the last few days. Theo?

Thank you very much, Brett. Lots to cover. So I'll try to focus on the highlights. So I'll jump right into it. Q4 adjusted sales were $28.6 million. and that's a 290% increase over Q3. Q4 revenue was up $15.7 million, up 158% over Q3, and the increase is substantially due to the fact that it was the first full quarter after closing the platinum acquisition. In Q1 2021, adjusted sales were $32.7 million. and that was an increase of 14.5% over Q4, and revenue was 11.8 million, which was down 25%. However, that's important to note and point out that under IFRS, revenues were represented as artificially low due to the large increase in inventory, and we can explain that below with the explanation of adjusted sales. Gross margins before the adjustments for biological assets for Q4 2020 remained strong at 13.9 million or 59% of the sales. Gross margins before biological adjustments for Q1 2021 were exceptionally strong at 8.2 million or 62% of sales, an increase of 300 basis points over Q4. The company remained somewhat near break-even on an adjusted EBITDA basis, and we see improvements coming as additional assets come on stream in the supply chain and various costs associated with the initial deployment of the ramp-up and ramp-up normalized. I would like to take a moment to provide some clarity on why the company used the non-IFRS financial metric adjusted sales as it sounds complicated, but it really just provides a more complete view the company's platinum vape sales in Michigan than just reviewing IFRS revenue alone. This will only be temporary until the company becomes fully licensed in Michigan or adjusts the MSA with the third party in Michigan. At the current time, the company utilizes a third-party licensee in Michigan for its platinum vape products. Due to the structure of the licensing agreement, the revenue the company can recognize is the product sales, less inventory purchases and direct expenses. As a result, the company revenue in Michigan is always understated by inventory purchases made and direct expenses incurred during the period. In the first quarter of 2021, product sales in Jet Michigan increased by 18% from the prior quarter, and the company significantly increased inventory purchases to secure sufficient product which reduce revenue as per the licensing agreement. This timing difference in revenue will continue until the company becomes fully licensed in Michigan. Once the company is licensed in Michigan, the company will be able to recognize full product sales as revenue under IFRS. As such, investors are provided adjusted sales for additional insight into the result of the company's performance. During 2020, the company reported a gain of 53.6 million in the value of its put-call agreement related to its Michigan acquisition. In Q1 2021, the value of its put-call agreement had a markdown of 42.5 million. The agreement is revalued every quarter and is based on the share price during the reporting period. This is a non-cash measure that rewards the income statement when the share price falls as the acquisition becomes less expensive when it closes. and the opposite for when the share price appreciates. Let's talk about the financial position. Cash at the end of the quarter was $6.1 million, and with the recent financing close subsequent to the quarter, the company's cash balance was $41 million as of July 2nd, putting the company in a strong financial position. I also wanted to point out that subsequent to the end of the quarter, the company extended the $65 million credit facility The facility maturity to January 2022 converted approximately $9.7 million of short-term debt to equity and paid off approximately $12 million of additional short-term debt. These transactions, coupled with the increase of cash on hand in July of about $35 million, would have reduced the working capital deficit by approximately $120 million had they been completed in the first quarter. At the end of 2020, the company had shareholders' equity of $209.5 million, and at the end of Q1 2021, the company had approximately $166.2 million. The decrease is attributable to the next loss of $56.9 million, of which the $42.5 million was attributed to the non-cash expense of the Putkal revaluation. That's it.

Thank you, Theo. Yep. Thanks, Leo. Appreciate it. I would like to touch a bit on the brand strategy and articulate that a little more succinctly. Over time, as the industry evolves, we see the value chain separating into specific disciplines such as cultivation, processing, distribution, retailing, and the like. Our approach to focus on what we believe will be the most valuable part of the business in the near future and the highest potential to defend yourself in what will ultimately become a commoditized input That is product development, product standardization, branding, and distribution. Naturally, with certain markets either being in their infancy or vertically integrated from a regulatory perspective, we make the investments required to have a greater influence on the quality and availability of the raw inputs for our final products. We look at this as a hybrid approach, somewhat like alcohol and big pharma in an overlaying brand. As many have heard me before say, when I have a Starbucks coffee in my hand and I ask everyone who grew the beans in my cup, and nobody really knows. But I ask why I spent $4 on it, and it's unequivocally unanimous that everyone says it's because of the brand. Because it's standardized. It all tastes the same. I can buy a Starbucks coffee in China and or California, and it's standardized, and it's a repeatable product. That's what we're striving for, and that's what we believe the industry will need and become over a period of time. And when I look forward to the second half of the year, I anticipate the following, transferring the assets from our investee into RWB, recognizing revenue from those assets, line extending PV into other product offerings such as gummies and chocolates into other markets and penetrating those markets more heavily, commencing expanded operations in Florida and THC operations in Illinois, further penetration of high times throughout our distribution channels and line extending that brand throughout those channels as well. With that, I'd like to turn the call over to the operator for questions. Operator?

Thank you. We'll now be conducting our question and answer session. If you would like to ask a question, please type your questions into the Ask a Question text box located on your screen. One moment, please, while we now poll for questions.

Hello, it's Tyler. So I'm going to be reading some of the questions received through the web. So, Mike C. asked a question. This one will go to Brad Rogers. If you just looked at platinum vape in Michigan and Pharmaco, based on last year, what is the run rate currently?

Platinum vape, say that one more time. Are it Dusty and PV? Is that what the question was?

Correct. For both of those assets.

Yeah, so just in Michigan alone, we're looking at approximately $180 to $200 million run rate right now in Michigan with those two lines. Great. And we're looking at, of course, expanding that growth, bringing in those pieces, putting more to the bottom, and that does not include the High Times brand either, which we're going to concentrate a little bit more on heavily penetrating that piggybacking our distribution channels and moving that forward as well.

Okay. I'm just looking through the questions here. Quite a few just came in over the past couple minutes. Here's one about the two-step process in Michigan, which Brad will take as well. Step one of the two-step process for qualification in Michigan was done several months ago. What is involved in step two and how confident are you that this will be completed in the current quarter?

So the second step of the process is effectively taking those assets in under the RWB banner, getting the regulator in to do the inspection to make sure that we're doing everything as compliant as per the letter of the regulatory framework that we work in. And as they're operating businesses right now, and are compliant to those regulations, I'm very confident that we will pass this step to approval. And we're bringing, actually, we're actually upping the bar with respect to how we're operating as well. So we're adding added SOPs, operational efficiencies, and more compliant measures in place as well. So we're working with the regulator right now and working through that process. So Feeling good about that.

Here's a question about the debt load and the balance sheet. And I think we can dovetail this into the questions Theo gave some additional color on with the repayment of some certain debt items and the extension of the bridging capital. So Nathan is asking the question, will the loans be paid off in time? I think he's referring to the bridging capital, right?

I'm sorry. Yeah. So, um, sorry, that was more of a financial piece that we had just sort of covered on. I know, um, we, we rolled over the debt. So again, we don't have, uh, any, any, uh, payments obligations on that till, uh, 2022, I believe is the, was, was the answer there. And what was the other part of the question, Ty? Sorry.

They were basically asking, bridging was due, I think, this summer, and it was recently extended. Yeah, we extended that to 2022.

Yeah, exactly. So that's, you know, again, pushed out. We're very serviceable in terms of what we're doing right there. We've been actually their most compliant and fiduciarily compliant responsible, uh, client, I believe is what we've been quoted as. So feeling, you know, obviously confident about being able to support that debt. And, uh, and, and as it comes due, uh, we have, uh, we've got lots of, uh, options in place to be able to actually service it and, or, uh, refinance that or, um, you know, or, or other options within that world as well. So, um, we've got some time to, uh, to, to, to manage that though.

And, uh, as, As Theo mentioned, several of the other pieces were converted into equity and another piece was paid off.

Yeah, absolutely.

Yeah, that was about 21.7 million converted and paid off. And then the 65 million deferred to January 2022.

Plus the subsequent cash rate just strengthens our position to be able to actually get all these things done. Yeah. Okay. So there's a question here.

Question from Joseph M. It's on new markets. Any plans to penetrate the Virginia market when it comes online?

Sorry, can you repeat the question again? No, that was from Joseph. So, no, there's no imminent plans to expand our portfolio yet. what we want to do is drill down heavily on what we've got right now, uh, make these things operationally efficient, um, you know, expand our power within those states. Um, and I think, uh, you know, right now we've got, uh, we've got lots of, lots of opportunity within what we're doing right now to be able to, um, you know, to take this, uh, um, take this forward. So no, no, no immediate plans for Virginia. No.

Okay. Uh, we have a question here about Florida from David B. Um, If I understand correctly, what he's asking, he's mentioning about the pods, which was kind of the quick way to get the state started. He's saying that $25 million in yearly retail value of cannabis out of those pods in the larger facility, he's saying it's quite low. Is there a further plan to expand that differently? once those pods are started?

Yeah, absolutely. We've got options on some other growth sites in Florida right now. We're working through those options right now, as well as we've got the 114,000 square feet we've got plans for to be able to actually build out. But yeah, the estimates for those pods are conservative, and that's how we operate the business if we're where we can, how we can. So we don't want to put anything too conservative or too aggressive out there.

Great.

Very conservative.

There's a lot of questions. Okay, so here's a great one about high times. What is the status of the high times store brandings?

Status of the high time store branding is as soon as we get, as soon as we pull in the assets from the put call and get those approved by the regulator, we will be bantering those stores. And we've got some flagship potential in there as well. So that'll be, we're expecting that in the next couple weeks. the approvals, and then we're going to start on the battery of those stores.

Great. And to bounce back to Florida, there's a question here. Can you touch more on the Florida strategy? I think that he's, you know, wanting to know more, sort of like the question previously about, you know, what's more beyond pods and a couple of stores?

Sure, sure. So, look, Florida is a very unique market, and we love the market because of the way it's structured. It's vertically integrated, and we're obviously a little late to the market getting a license there, but we're expediting the grow potential ASAP. In Florida, you can't purchase from any other supplier other than you have to supply yourself. So you eat what you kill, so to speak. And so within that market, we have to ramp up our grow expeditiously to be able to actually satiate our stores. We've got to also... put processing in place, which we're in the process of doing right now as well. And when those come online, we're going to have obviously some very high-end product. We're going to have some great and proven extracts and vapes and edibles and all the other pieces that we've already proven ourselves with in other states and bring those formulations in to get to market with brand awareness expeditiously. That's effectively the strategy right now. We've got eight stores. And as a matter of fact, Florida just turned down recreational but still remains one of the top states in the United States for consumption, which really kind of lays a good groundwork for us to be able to catch up a little bit before it goes wreck. But within that portfolio of stores that we've taken over from the acreage purchase, one of them is one of three stores within South Beach. And so when you look at the footfall within South Beach and the volume of people that are living there and are going through, the significant opportunity lies within that as well as the other strategic locations that we have. So we're going to satiate those stores first and then build up the rest of the state as we go, inclusive of being very strategic in terms of how we pick our next locations to do some distribution as well into home delivery, et cetera.

Yeah, the questions seem to be pouring in.

And one more piece, just to add on the strategy of Florida, because Florida is medical, the standardized method in which we actually produce product and we put label claims, we're going to be putting label claims on each product that goes out the door, that really puts us in a good position as a medical product. So when you get consistency in your product, you're able to take over a market. And we were able to do that with previous iterations of my companies in the past. And so when you look at the medical strategy that we rolled out, it's really, really fitting with respect to how the Florida operations are being built out as well.

Someone is asking for, Nathan's asking for a general Illinois update.

Yeah, so Illinois obviously continues to be a state that you can't seem to satiate with respect to cannabis consumption. And our agreement is still in the works to be able to actually get through the scrutiny of the regulator, etc., which we're in the process of doing right now. We're looking at options and ways to expedite that process. And as soon as we're able to, we're going to take over that facility and and, um, and jump into that market with the brands that we have as well. You know, I mean, it's just, again, here's where our opportunity lies. There's also opportunities within that state, um, to penetrate that state with, uh, with our brands, with some partners as well, with, um, you know, with strategic partnerships, et cetera, that we've done in other States. So, um, you know, we're going and drilling down there as well.

Great. We've got a good question here from, um, Bill P. from Canaccord. The state of Michigan has seen strong retail sales growth in Q2 2021. Perhaps you can provide some forward-looking insight on how platinum vape sales have trended in Q2 relative to the state's overall top line.

So can you repeat that question? We're looking for a trend line?

Yeah, he wants to know the general trend in Michigan for platinum alone, none of the other businesses.

Right. Well, I think, you know, a bulk of the reportable sales that we've presented today were platinum from Q4 to Q1, Q4 2020, Q1 2021. So if you look at that trend, you know, you'll see, what was that a 14 and a half percent increase on, uh, on, on that. Right. So, um, I think, you know, again, we're, we're doing our best to be able to, to, you know, match that or beat it. Um, and, and, you know, that's all I can tell you right now. I mean, there's, there's opportunities with respect to, uh, more distribution, more distribution channels. Um, and you know, it's how we also plank our, our other brand high times with that and how we present it in market as well. So, I think it's going to be more of a mixed portfolio going forward versus, you know, just platinum specifically. But I think, you know, we're obviously looking to penetrate every store and get as many sales as we can with the best product possible.

Great. We have a question here about high times. We can dovetail with that. All right. Can you comment on the current high times licensing agreement? For instance, do you have to pay a royalty on product sales or was it an upfront payment for full consideration?

So there was an upfront payment, which I believe is articulated in some of the notes there for exclusive rights over a period of time. And then of course there's ongoing obligations with respect to with the product sales and in marketing and license fees as well. So there's a retail component to it. There's a product component to it because we have obviously more distribution than we have retail locations. So we had to break those things out and they're separate entities. So there was an upfront payment for exclusivity and then there was a product component and there's a retail component.

You got a question, kind of a financial question. Maybe Joseph would want to take this from Alan. What was the main driver of the gross margin from 59% to 62% in Q1? I think he wrote this wrong. He needed to say Q1 over Q4.

Joseph? Yeah, so the comment on the gross profit. Yeah, the gross profit is pretty in line with the last quarter, but it did increase by about 5% to 6%. So it is a strong growth. And also, yeah, it has been very consistent, and then we have been demonstrating a consistent growth. Thank you, Joseph.

Just coming to the end of the questions here. I think that's basically it. We've worked our way through all of these questions. Operator?

Ladies and gentlemen, that has reached the end of our question session. With that, I would like to turn back to management for any closing remarks that you may have.

Yeah, I just want to say thank you to everybody for joining the call. As I said earlier, we're very excited about the significant progress we are making and have made to execute on our plan to become the premier house of brands focused on deep penetration in certain states. We look forward to updating you on progress in the future, and this concludes today's call. Thank you so much.

Ladies and gentlemen, this concludes the end of our webcast for today. You may now disconnect your lines at this time. Thank you for your participation and have a great day.