Red White & Bloom Brands

Greetings. Welcome to the Red, White, and Bloom Q3 2021 Earnings and Corporate Update Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may submit a question via the web at any time by using the Ask a Question feature on the left side of your screen. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, CEO Brad Rogers. Thank you. You may begin.

Thank you, Alex. Good evening, and thank you all for joining us today and your continued interest in red, white, and bloom. I'm excited to share details of a strong third quarter in which we continue to lay building blocks to a solid foundation for our house of premium brands. But before we get into that, I'd like to introduce you first to Chris Ecken, our new CFO, who joined our team in October and is already positively impacting RWV with his financial acumen insight on SOPs, operational efficiencies, et cetera. He comes to us with more than 25 years of executive experience at Brown Foreman, a powerhouse in the spirits industry with world-renowned brands such as Jack Daniels, Woodford Reserve, and Herodure. Chris's rise through the ranks and track record of accomplishments at each level is a testament to his financial acumen, his visionary leadership, and strategic mindset. and will be valuable to RWB in guiding this financial strategy and decisions for each of the company areas as we grow. Thank you to Chris for your guidance and input, and we look forward to more to come. Chris, just so everyone can hear, I want Chris to say hello to everybody and say a few words prior to us getting into some details. Chris?

Thank you, Brad. This is a really exciting time for Red, White & Bloom, and I'm really looking forward to shaping the financial structure of the company. As is typical of startups in their early stages, initially management wears multiple hats until it can build out the team. Fortunately, I've worked across many areas of finance and I'm relishing the challenges of this opportunity. Now, let's dive in and take a look at the many significant accomplishments RWB has in the third quarter and shed a bit of light on where we're heading. Thank you.

Thank you, Chris. First, as a bit of housekeeping, as a Canadian-based company, we will be using Canadian dollars for all monetary figures. So adjusted sales, I also want to explain a little bit about the adjusted sales term and figures that we use. The structure of our deal in Michigan does not allow us to fully realize top-line revenue at this point. As part of the legacy product licensing agreement, the only revenue RWB can recognize is is product sales, less inventory, purchases, and direct expenses. So that's revenue minus inventory minus direct expenses. As a result, RWB's reported revenue in Michigan appears substantially understated. The adjusted sales report in the press release shows the revenue RWB would make could be would make had product sales been able to be fully reported, which we anticipate getting to in very short order. Upon successful completion of a Step 2 license in Michigan, RWB will report full revenue on our platinum vapes and distribution channels. We are currently in a quiet period related to the regulators in Michigan, so we can unfortunately not share more details at this point, but we are progressing. There's no doubt that we had an excellent third quarter, in our opinion, with significant progress in multiple states, despite the fact that it isn't fully reflected on our reported revenue quite yet. We're still in the building stage, but now need to leverage what we've built thus far. The third quarter, we made major strides in our core operating states of Florida, Michigan, and California to become more vertically integrated. We're focusing on vertical integration only where it makes sense and where it is the most profitable for our company and will help drive growth increased revenue, and margins for the company. We expect to see first product sales from our new facilities in Florida starting Q1 2022 as we are currently harvesting out of our new facilities. From the Tennessee, we're gaining significant market share with our premium platinum vape and exclusively licensed High Times branded products in select markets and our distribution channels in Michigan and our direct sales channels in California. Sorry, the High Times is not in California, it's just in Michigan. As cited in RQ Green Tank's Q1 2020 Q3 Industry Vape Report, Platinum Vape was named number one vape brand cartridge in Michigan. We're extremely proud of that achievement and hope to gain similar prominence with additional products and brands and line extensions such as live rosin, chocolates, gummies in Michigan and other core states. Chris will now dig into the numbers and provide a bit of insight on them. Chris, can you please take that on? Thank you.

Thanks, Brad. First and foremost, I want to start with kind of future earning reports. With the first quarter report now behind me and a little more time to plan for the next, I'm going to streamline the reporting process and have consistent communication with the investor community. We will be announcing dates of earnings reports in less than 30 days in advance, and we will also delve into more detail when possible with future reports. So we're going to turn to Q3 financial results. The revenue for Q3 2021 was $11.8 million compared to $6.1 million in Q3 2020, an increase of 93%. The majority of revenue is derived from wholesaling our Platinum Bay products in Michigan and our direct sales in California. As Brad had noted, we are limited in the revenue we report due to legacy contracts. We expect reportable revenue to increase substantially when we can include full product sales in Michigan. Additionally, with cultivation and production underway in Florida, we expect to report significant product sales there in Q1 2022. For EBITDA, our EBITDA was 5.9 million for Q3 compared to an EBITDA loss of 5.8 million in Q3 2020. So that was a gain of 11.9 million. And then our net loss for Q3 2021 was 5.5 million compared to 9.5 million in Q3 2020. The change in net loss is primarily a result of the revaluation of the company's call-put option, as well as right-sizing compensation and achieving economies of scale. So now I want to turn to the nine months ended September 30, 2021 results. Revenue for the nine months ended September 30, 2021 was $36.9 million, an increase of 386% over revenue of $7.6 million and the comparable nine months ended September 30, 2020. Again, revenue is primarily derived from the wholesaling of Platinum Bay product in Michigan and the direct sales in California. Gross profit excluding fair value items for the nine months ended September 30, 2021, was $21.5 million, an increase of 295% over gross profit of $5.5 million in the comparable nine months ended September 30, 2020. The net loss for the nine months ended September 30th, 2021 with $73.8 million compared to net loss of $29.8 million for the nine months ended September 30th, 2020. The increase in net loss is primarily attributable to ramping up operations in our core markets and expectation of fortifying our brand strategy as we move forward. The important point to note here is that the increase in expenses reflects that we are rapidly building the business in our core markets. So turning to SG&As, our SG&A increased from $22 million to $60 million. This is to be expected at this stage of our growth. Just for a point of reference, the biggest increase is due to increased depreciation of fixed assets and amortization of licenses. We are expanding the management team and staff to accommodate future growth and revenue. And then also to note a couple of non-cash items that we had in the other expense bucket on the nine-month basis. So we had about $2 million in foreign exchange loss. We had the revaluation of the call put option of $2.3 million and the revaluation loss of the financial instruments of about $7.1 million. Now, we've had a very sizable increase in SG&A. But we are being diligent as we move forward. I've directed the HR staff to look at compensation and institute proper salary bands and right-size compensation appropriate to the market as we move forward. So we've mentioned, Brad mentioned the adjusted sales line a couple times. And just to kind of give clarity to the numbers around that, for Q3, our reported revenue per IFRS was $11.8 million. Our adjusted sales for Q3, based off the definition that Brad has given previously, was $32.2 million, so an increase by a factor of three. And then for the nine months, the IFSR revenue was $36.9 million, while adjusted sales was $99.2. Again, almost three times what we were able to report. So now, Brad, I'm going to... turn it back to you for you to discuss the progress we've been making with our core assets and pending transactions.

Right. And I'll mention it later, but Chris, just with respect to what those revenues are, they don't include high times revenue and they don't include our investee revenue as well that we're in concert with our regulator to bring in and be able to report as soon as it comes in as well. So just to note, This is significant upside with what we have the availability to increase going forward once we get those pieces in place. So, yeah, I'll just cover state by state here. I'll start with Michigan acquisition. A big question in everybody's mind, obviously, is what's happening with the acquisition of the multiple properties in Michigan. What I typically refer to as the Michigan investee. RWB Michigan LLC subsidiary finalized the revised structure for the closing on its purchase of its Michigan investee and received adult use recreational prequalification status pursuant to the licensing provisions of the Michigan Regulatory and Taxable Marijuana Act. RWB has continued to work closely with Michigan's MRA, Marijuana Regulatory Agency, and is making progress on the closing of the acquisition of the Michigan facility's which include active and planned dispensaries, cultivation facilities, and significant company-owned real estate holdings generating cash right now. These Michigan facilities generated $93 million in Canadian revenue in 2020. We will be vertically integrating upon closing the pending acquisition of the Michigan Investee, and we anticipate that we will leverage cost-sharing and other economies of scale to further improve our Michigan operation. Like you, we can't wait to... This transaction close has taken far longer than we had hoped or expected. The transaction is unfortunately, I can't talk too much more about it because we are in a quiet period with the regulators right now. So we have to be a little bit more tight-lipped for the approval process and all these things that are going on in discussions right now. But we'll share information, I promise, as soon as readily available. During the period, we've been preparing, despite going through this process, from an HR and operational planning perspective so we can hit the ground running after we're cleared to do so from the regulatory bodies that we're just transitioning into. We've also, on another Michigan front, we've completed a build out of a separately acquired production and processing facility for the production of vapes, chocolates, and gummies in Michigan. We've received local zoning and approval and are just awaiting step two by the MRA. So yet one more licensable facility that we're just in process right now. Once complete, RWB will be able to recognize all top line revenue for all RWB controlled brands from this facility. So that's a huge, huge opportunity for us again to consolidate and report top line revenue going forward. But again, due to a quiet period related to the Michigan regulatory body, we cannot disclose more information at this point. we'll again update you as soon as possibly humanly possible to get to get everybody updated and we we look to to get that done relatively soon and I've said it before but I'm feeling a lot better about where we're at right now in the process as we've had significant discussions with with the powers that be so I'm going to move to Apopka Florida here so changing states we're During Q3 2021, we closed the acquisition of the Apopka 45,000 square foot cultivation facility and 44.7 acres and readied 30 grow pods for transition onto the site with the anticipation of being fully planted by December 1st, 2021. RWB projects its first full year of revenue of $50.8 million from the 30 pods and greenhouse in Apopka. We anticipate the first harvest from the pods in Q4, which we're doing right now, and realization of revenue of those newly acquired assets in q1 2022. our rwb florida team began producing edibles at the sanderson facility and our r d there has resulted in new formulations for live rosin that are now in the approval process with the state regulator in florida you're only allowed to sell what you produce and in your own dispensaries and so the edible production and new production formulations will continue contribute to additional product available in our dispensaries across the state and scheduled to open in the first quarter of 2022. To date, the Florida acquisition R&D and preparation for cultivation has progressed smoothly. The team there has met all deadlines on time within budget related to preparation of now the state operations for our new processing facility in Sanderson and our cultivation facilities in Apopka. The average Florida cannabis operators are just currently reporting gross margin of approximately 60%. We'd like to think we're above that, but we wanted to share some metrics on the gross margins that we hope to realize in 2022. We'll update shareholders again on our progress shortly. We're eager to share how our work in Florida and other areas is coming to fruition in Q1 2022 and our following results. California, we took over operational control of platinum vapes. the operation proper in California. This has leveraged efficiencies of scale across our multiple states we're operating in, and we expect to scale platinum to additional states as we expand further. We also anticipate doubling its footprint in California and expanding beyond vapes to products such as chocolates, gummies in select markets in California and other core state markets that we're operating in. We currently transition the management oversight of platinum vape brand to our own team, With the improved operational structure and procedures, RWB is achieving greater operational efficiencies in areas including packaging, purchasing, procurement, and distribution. So we're excited about that opportunity as well. I just want to also talk about vertical integration. As we've stated, the current planning of vertical integration in Florida and Michigan is underway. However, RWB as a strategy is being very strategic in pursuing vertical integration, only owning where there is value to be added. We aim to be asset light and brand rich. Our strategy is to support the brands in the most profitable way. We'll swim upstream for as far as we need to to support the brand distribution and fortifying our profitability for us and shareholders. We have been putting teams in place to support the strategy in each state where we operate. As RWB integrates vertically in multiple states, we anticipate that our margins will grow dramatically based on our integration strategy. and our business decisions enabling us to move forward profitably. Expanding our workforce. Chris touched on that a little bit on the expansion of our workforce as it relates to increasing SG&A. I want to add a few thoughts relative to our long-term strategy. Our talented employees and board members are our most important asset and are critical to achieving our goals. We have actively improved our talent roster by bringing together top talent from commodity markets and similar industries to strengthen our management team and execute on our strategy. We've added high-profile experts across multiple industries to our board, such as former Congressman Ryan Costello, and more to be named shortly when regulatory approval is achieved. With a number of additions to the organization over the last year, we now have key members of our management team in place to support our strategy. We will continue to tactically expand our board and management team as staff is needed to facilitate our growth. Due to some of the regulatory body restrictions, sometimes we have to adjust our timing, as I said before, due to preclearance, et cetera, with respect to how some states manage approvals of officers and directors. But before we close, I just want to put this piece of our presentation, I want to commend our team members for the dedication, expertise, and track records of achievements over the past few quarters. It truly hasn't been easy with a lot of regulatory pieces with COVID, et cetera, and I hate using that word, but it truly has affected our ability to efficiently get things done. And as we look forward to Q4 and bringing all the pieces together in our strategy, I'm looking forward to a solid Q4, and Q1, Q2 as we bring on our Florida acquisition and improve our synergies and our brand strategy with the acumen we've brought to the table. So with that, I'm going to open it up to Q&A, and I believe it's a web-based piece, and I think I'm not sure who I turn it over to. I think it's Tyler. I'm not sure.

Thank you. At this time, we're conducting a question and answer session. Thank you, Brad. Thank you. As a reminder, you may submit questions via the web by using the ask a question feature on the left side of your screen. We will now proceed with questions.

The first question, actually there's this question repeated multiple times. I think we have eight or nine questions that are similar, but this is from Christie, an individual investor. What is the status of Michigan? We'll turn this one over to Brad.

Well, I pretty much gave us a succinct Michigan update, but I'll just repeat what we're doing. I mean, the roll-up of Michigan is effectively two pieces. It's the deal that PV, Platinum Vage, had in place in the first instance when we took them over. Again, with the framework that they entered into that deal, as a public company, we could not recognize their top-line revenue. And so we are now in a position with our new facility to be able to actually bring that business in and recognize that top-line revenue so we don't have to adjust sales for PV or any of our brands through distribution any longer. So that's a huge, huge piece of the two-part process that we're going through in Michigan. The other piece is our investee. So our investee, we've executed our put call and is now just in what I would like to say are the last pieces of regulatory approval for us to bring that in also and into the RWB umbrella and start operating those stores and really taking advantage of what we'll be able to leverage across the stores that are operating. and a couple of big stores that we know will be high volume, high margin, high profit entities going into distribution of our vapes and our extended product lines. So a lot of opportunity there to be able to actually get what we need out of all those pieces in Michigan specifically, but those are the two big pieces of where we're going right now. So, I mean, when you're looking at the ability to recognize just on the vape business, we're doing 400,000 vapes per month just from our PV line. That doesn't include High Times. That doesn't include some other brands that we've got coming in or going to be launching Q1, Q2. So, I mean, when you just look at the vape business and PV being the number one vape brand in Michigan, I mean, that's substantial in and of itself. And when we piggyback that leverage onto expanded shelf space with our other products and, uh, and really start leveraging the high times brand and being able to, to pull that revenue in and recognize that, um, you know, we're just, you know, I would like to consider us a sleeping giant with respect to where we're at right now and being handcuffed on not being able to tell the world what we're doing. Uh, but I'm feeling really strong about that. That's, uh,

Yeah, that makes sense. That's sufficient. Actually, there's two more questions here for you, Brad. We've narrowed down. There's quite a few questions, but there's two more here. This is from Alejandro P. at MKX Capital. Could you update shareholders on what's happening in Illinois?

Okay. Well, Illinois, we've encountered a bit of a layer of complexity with the acquisition due to the fact that the acquisition of the license that we've acquired there that we've that we haven't acquired yet, but we've, we've got a definitive on. So it's the complexity lies within the acquisition due to the fact that the entity is a non-for-profit. We're working with the state regulator to structure the acquisition in a way that complies with the regulations to move forward the first half of 2022. So that's pretty much all I can say. I think, you know, it's, it's just, it's a bit of a, been more of a complex issue being a not-for-profit and license transfers within that framework. So that's where we're at right now.

Thanks, Brad. And finally, from Martin S., an individual investor, in the company's first full year as a public company, we've seen net losses slightly accelerate. What is this attributable to, and will G&A level off as we enter 2022?

Okay. Yeah. I mean, look, the, this company has been building mode, as Chris said, and we're, we're, we're, we're catch up with respect to, uh, where we want to be. Um, and so when we look in, uh, building, we'll look across 20 and 2021 anticipation, new acquisitions in the markets, et cetera, we've been, uh, you know, building towards that. Uh, we've now set the stage in the form of infrastructure to start reporting all the revenues and assets of these businesses, most of the one-time expenses. And large non-cash items are behind us, putting us in pretty much solid ground for 2022 and beyond. So I'm looking forward to just getting effectively over this hump.

Great. And then we have a couple of financial questions that I think we'll turn over to Chris. A lot of shareholders notice liabilities have been increasing. What are the companies doing to ensure that does not get unmanageable?

Yeah, good question. So, you know, if you look at our historical acquisitions, they were financed using shorter-term debt, really in order to close the acquisition quickly and not lose the opportunity. I think the company is in position now, you know, with the lower-rate environment to really bundle up some of these higher-interest short-term debt and refinance with longer-term debt with lower interest rates. That definitely would improve our liquidity and our profitability measures. I think what's also important, too, is at the same time, and as I've come into this position also, we're looking at really identifying several non-core assets. And if it makes sense, we'll look to potentially divest those assets and redeem additional short-term liabilities with the proceeds. So those are some of the actions we're looking at as we move forward.

Thanks, Greg. And then there's one more question here from Devin H., another individual investor. The company reported EBITDA of nearly $6 million. That's great, but what's the company doing to achieve profitability?

Yeah, so I think you start thinking about the different markets that we have. So we realize that some of our core markets, such as Michigan, are very competitive. So as such, we're really looking to reinforce the power of our brands to stand up to the market pressures, pricing pressures in particular, within that market. Platinum Vape has been more resilient than the overall market, and hopefully we'll continue to reinforce the power of that brand as we expand the line to include chocolates and gummies. We really want this to be the brand that people demand when they go to the dispensary. I think the other important piece for Michigan is as we are looking at opening our new processing facility, we're going to take one layer of cost out of our value chain, and that also should lead to improved profitability. If you go from Michigan into Florida, you know, in Florida the company is really operating in a limited license state. So the way that we think about that is it really is not as commoditized in that state as the non-limited license states. So all things being equal as we expand in Florida, I know Brad mentioned some industry margin levels in Florida previously in the call. But really, as we expand in Florida in Q1 of 2022, the company really should benefit from improved gross margins, which will drive profitability in 2022 and well into the future.

Great. So I think that's all the questions that we're going to take this evening. We're going to turn it back over to Brad.

Thank you, Ty. Appreciate all of your time, guys. As we close off Q4 2021, we're working diligently on all these pieces to thread our strategy together, stand up our brands. We're not kidding ourselves in the fact that this is going to be a commoditized market, and our strategy is such that we're going to be standing on brands going forward. and we just need to fortify what we're doing into the markets that we're in right now. We created a platform to be able to do that, and we're looking forward to Q4 2021 and Q1, Q2 2022 to really show what we've built, and I'm excited to bring those to you in short order. So thank you all for your time, and looking forward to Q4.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.