Red White & Bloom Brands Inc.
Q1 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Greetings and welcome to the Red White & Bloom Incorporated 2020 and Quarter One 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. It is now my pleasure to introduce your host Tyler Troup.

[Tyler Troup:]

Thank you, operator. Just want to reiterate, anyone wanting to ask questions at the end, I ask you to click the web conferencing link which is in the press release and on the IR website. Good afternoon, everyone. Thank you for joining our RWBs 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.

[Brad Rogers:]

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've 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're 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. It is 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 for 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 multibillion 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 license 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.

[Theo Van Der Linde:]

Thank you very much, Brad. 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 Vape 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 a 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 breakeven on an adjusted EBITDA basis and we see improvements coming in as additional assets come on stream and supply chain and various costs associated with initial deployment of the ramp up – and ramp up normalize. I would like to take a moment to provide some clarity on why the company use the non-IFRS financial metric adjusted sales as it sounds complicated, but it's really just – it really just provides a more complete view of 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 adjust 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 Michigan increased by 18% from the prior quarter, and the company significantly increased inventory purchases to secure sufficient products, 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 results of the company's performance.

[Brad Rogers:]

Yeah, thanks Theo. 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 and an overlaying brand. As many have heard me before say, when I have a Starbucks coffee in my hand, I ask everyone who grew the beans in my cup, and nobody really knows. But I asked why I spent $4 on it. And it's unequivocally unanimous that everyone says it's because of the brand, because it's standardized that 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 I think – that's what we believe the industry will need and become over a period of time.

[Operator:]

Thank you. We'll be conducting our question-and-answer session.

[Tyler Troup:]

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?

[Brad Rogers:]

Platinum Vape, say that one more time, our investee and PV, is that what the question was?

[Tyler Troup:]

Correct, for both of those assets.

[Brad Rogers:]

Yeah, so just in Michigan alone, we're looking at approximately $180 million to $200 million run rate, right now in Michigan with those two lines. 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.

[Tyler Troup:]

Okay. I'm just looking through the questions here. There are quite a few just came out in over the past couple of 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 requalification 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.

[Brad Rogers:]

So the second step of the process is effectively taking those assets in under the RWB banner, getting the regulator into, do the inspection to make sure that we're getting 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 the set step two 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 SLPs 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.

[Tyler Troup:]

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?

[Theo Van Der Linde:]

I think he's referring to the bridging capital.

[Tyler Troup:]

Brad?

[Brad Rogers:]

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

[Tyler Troup:]

They were basically asking, bridging was do I think this summer, and it was recently extended to 2022.

[Brad Rogers:]

Yeah, we extended that to 2022. Yeah, exactly, so that's again, pushed out, we're very serviceable in terms of what we're doing right there. We've been actually – they're most compliant and fiduciary responsible client, I believe, is what we've been quoted as. So feeling obviously confident about being able to support that debt. And as it comes due, we've got lots of options in place to be able to actually service it and/or refinance that or other options within that world as well. So we've got some time to manage that though.

[Tyler Troup:]

And, as Theo mentioned, several on the other pieces were – debt were converted into equity and another piece was paid off –

[Brad Rogers:]

Some were write off. Yeah, absolutely.

[Theo Van Der Linde:]

Yeah. Yeah, that was about – this is Theo, 21.7 million converted and paid off and then the 65 million deferred to January 2022.

[Brad Rogers:]

Yeah, plus the subsequent cash rates just strengthens our position to be able to actually get all these things done.

[Tyler Troup:]

Okay, so there's a question here. Question from Joseph. Any plan – from new market, any plans to penetrate the Virginia market when it comes online?

[Brad Rogers:]

Sorry, can you repeat the question again?

[Tyler Troup:]

No, that was from Joseph.

[Brad Rogers:]

So no, there's no imminent plans to expand our portfolio. What we want to do is drill down heavily on what we've got right now and make these things operationally efficient and expand our power within those states. And I think, right now we've got lots of opportunity within what we're doing right now to be able to take this forward, so no, no immediate plans for Virginia. No.

[Tyler Troup:]

Okay. We have a question here about Florida from David B. I understand correctly, what he's asking – he's mentioning about the Pods, which was the kind of the quick way to get the states started. You're saying that 25 million in yearly retail value of cannabis, out of that those Pods in the larger facility you're saying it's quite low. Is there a further plan to expand that differently once those Pods are started?

[Brad Rogers:]

Yeah, absolutely, we've got so 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. But it's very conservative.

[Tyler Troup:]

Well, 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 branding?

[Brad Rogers:]

So the High Times 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 bannering 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 of weeks, the approvals and then we're going to start on the on the bannering of those stores.

[Tyler Troup:]

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

[Brad Rogers:]

Sure. So 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 growth potential ASAP. In Florida, it's – 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. And 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 within other states and bringing those formulations in to get to market with brand awareness expeditiously. That's 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 rack. And 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 you're going through significant opportunity lies within that as well as the other strategic locations that we have. So we're going to associate 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 take our next locations to do some distribution as well into home delivery, et cetera.

[Tyler Troup:]

Great. Yeah, the questions seem to be pouring in.

[Brad Rogers:]

And one more piece just to add on the strategy of Florida, because Florida is medical, the standardized method in which we actually produce products and we put label claims or 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.

[Tyler Troup:]

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

[Brad Rogers:]

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, et cetera, 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 jump into that market with the brands that we have as well. I mean, it's just – again, here's where our opportunity lies. There's also opportunities within that state to penetrate that state with our brands, with some partners as well, with strategic partnerships, et cetera, that we've done in other states. So we're going and drilling down there as well.

[Tyler Troup:]

We got a good question here from Bill T from Canaccord. The state of Michigan, it seems 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.

[Brad Rogers:]

So can you repeat that question? We're looking for a trend line. Is that what you’re looking for?

[Tyler Troup:]

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

[Brad Rogers:]

Right, well, I think a bulk of the reportable sales that we've presented today were Platinum from Q4 to Q1, Q4 2020 to Q1 2021. So look at – if you look at that trend you'll see, what was that – a 14.5% increase on that, right. So I think again, we're doing our best to be able to match that or beat it. And it's all I can tell you right now. I mean, there's opportunities with respect to more distribution, more distribution channels. And it's how we also flank our other brand High Times with that and how we present it market as well. So I think it's going to be a more of a mixed portfolio going forward versus just Platinum specifically. But I think we're obviously looking to penetrate every store and get as many sales as we can with the best product possible.

[Tyler Troup:]

Great. The question here about High Times, we can dovetail with that. Can you comment on the current High Times licensing agreements? For instance do you have to pay a royalty on product sales? Or was it an upfront payment before consideration?

[Brad Rogers:]

So it 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 licensees 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 into separate entities. So there's an upfront payment for exclusivity and then there was a product component, and there's a retail component.

[Tyler Troup:]

We got a question, kind of a financial question. Maybe, Joseph – we're going to take this from Alan, what was the main driver of the gross margin from 59% to 62% in Q1 over – I think he wrote this wrong. It's easy for me to say Q1 over Q4.

[Brad Rogers:]

Jospeh?

[Joseph Choi:]

Yeah, so the comment on the gross profit? Yes, the gross profit is pretty in line with the last quarter, but we did – it did increase by about 5% to 6%. So it is a strong growth. And also yeah, that's been pretty consistent and we have been demonstrating a consistent growth.

[Tyler Troup:]

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?

[Operator:]

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

[Brad Rogers:]

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.

[Operator:]

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.