RWBYF Q3 2021 Earnings Call

Operator: 00:05 Greetings and welcome to the Red White & Bloom Q3 Twenty Twenty One 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. . Please note this conference is being recorded. 0:33 I will now turn the conference over to your host, CEO, Brad Rogers. Thank you. You may begin.

Brad Rogers: 00:40 Thank you, Alex. Good evening and thank you all for joining us today and your continued interest in Red White & Bloom. Excited to share details of a strong third quarter in which we continue to late 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 he is already positively impacting RWB with his financial acumen inside in SOPs, operational efficiencies, etcetera. It comes to us with more than twenty five years of executive experience at Brown Forman. A powerhouse in the spirits industry with world renowned brands such as Jack Daniels . 01:22 Chris has risen through the ranks and track record of accomplishments at each level is a testament to his financial acumen is visionary leadership and strategic mindset and we'll be valuable to RWB and 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?

Chris Ecken: 01:54 Thank you, Brad. This is a real exciting time for Red White & Blue as I'm really looking forward to shaping the financial structure of the company. As it is typical as startups in their early stages, initially management wears multiple hats until it can build out the team. Unfortunately, I've worked across many areas finance and I'm really seeing the challenges of this opportunity. 02:14 Now let's dive into the – let’s dive and take a look at the many significant accomplishments RWB has in the third quarter and shed a bit light on where we're heading.

Brad Rogers: 02:26 Thank you, Chris. First is a bit of house caving as a Canadian based company, we will be using Canadian dollars for all monetary figures. So adjusted sales, I want to explain a little bit about the adjusted sales term and figures that we use. The structure of our yield in Michigan does not allow us to fully realize top line revenue at this point. As part of the legacy product licensing agreements, the only revenue RWB can recognize 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 appear substantially understated. 03:11 The adjusted sales report in the press release shows the revenue RWB would make, had a product sales being able to be fully reported, which we anticipate getting to a very short order. Upon successful completion of a step two license in Michigan, RWB will report full revenue on our platinum-based 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. 03:45 There's no doubt that we had an excellent third quarter and our opinion with significant progress in multiple states despite the fact that it is fully reflected on a 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 was the most profitable for our company and will help drive increase revenue and margins for the company. We expect to see first product sales from our new facilities in Florida starting Q1 twenty twenty two as we are currently harvesting out of our new facilities. 04:27 significant market share with the premium platinum Vape and exclusively licensed high times branded products and select markets and our distribution channels in Michigan and our direct sales channels in California. The high times is not in California just in Michigan. As cited in ArcView/Greentanks Q1 twenty twenty, Q3 Industry Vape Report, Platinum Vape was named number one Vape Brand Cartridge in Michigan, which certainly proud of that in achievement multigain 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. Thank you.

Chris Ecken: 05:13 Thanks, Brad. For first and foremost, I want to start with kind of future earning reports with the first quarter report being – now behind me, 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 reporting – earnings reports less than thirty days in advance, and we will also delve into more detail when possible with future reports. 05:39 So, we're going to turn to Q3 financial results. The revenue for Q3 twenty twenty one was eleven point eight million dollars compared to six point one million dollars in Q3 twenty twenty, an increase of ninety three percent. The majority of revenues derived from our from wholesaling our platinum based products in Michigan and our direct sales in California. As Brad 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 to this again product sales there in Q1 twenty twenty two. 06:18 For EBITDA, our EBITDA was five point nine million dollars for Q3 compared to an EBITDA loss of five point eight million dollars in Q3 twenty twenty. So that was a gain of eleven point nine million dollars and then our net loss for Q3 twenty twenty one was five point five million dollars compared to nine point five million dollars in Q3 twenty twenty. The change in net loss is primarily resolved, the revaluation of the company's call put option as well as rightsizing and compensation and achieving economies of scale. 06:50 So now I want to turn to the nine months ended September thirtieth twenty twenty one results. Revenue for the nine months ended September thirtieth twenty twenty one was thirty six point nine million dollars an increase of three eighty six percent over revenue of seven point six million dollars and the comparable nine months ended September thirtieth twenty twenty. Again, revenues primarily derived from the wholesaling platinum bay product in Michigan and in the direct sales in California. Gross profit excluding fair value items for the nine months ended September thirtieth twenty twenty one was twenty one point five million dollars an increase of two ninety five percent over gross profit of five point five million dollars and comparable nine months ended September thirtieth twenty twenty. The net loss for the nine months ended September thirtieth twenty twenty one was seventy three point eight million dollars compared to net loss of twenty nine point eight million dollars for the nine months ended September thirtieth twenty twenty. 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. 08:06 So turning to SG&A, our SG&A increase from twenty two million dollars to sixty million dollars. This is to be expected at this stage of our growth. Just for 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 two million dollars in foreign exchange loss we had the revaluation of the call put option of two point three million dollars and the revaluation loss of the financial instruments of about seven point one million dollars. 08:49 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 in institute proper solid bands and right-sized compensation appropriate to the market as we move forward. So, we've mentioned, Brad mentioned the adjusted sales line a couple of times and just to kind of give clarity to the numbers around that. For Q3, our reported revenue per IFRS was eleven point eight million dollars. Our adjusted sales for Q3 based off the definition that Brad has given previously was thirty two point two million dollars so an increase by a factor of three. And then for the nine months, the IFRS revenue was thirty six point nine million dollars while adjusted sales was ninety nine point two. Again, almost three times what we were able to record. 09:43 So now, Brad, I'm going turn it back to you for you to discuss a progress we've been making with our core assets and pending transactions.

Brad Rogers: 09:52 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 were encountered with our regulator to bring in and be able to report and 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. 10:23 So, I'll just cover step by step here, I'll start with Michigan acquisition. A big question and everybody's mind obviously is what's happening with the acquisition of the multiple properties in Michigan. What I typically refer to is 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 recreation, prequalification status pursuant to the licensing provisions of the Michigan Regulatory and Taxation of 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 facilities, which include active and planned dispensaries, cultivation facilities and significant company-owned real estate holdings, generating cash right now. These Michigan facilities generated ninety three million dollars in Canadian revenue in twenty twenty. We'll 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. 11:34 Like you we can't wait this transaction closes 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 quite period with the regulators right now. So we have to be a little bit more tight lift for the approval process and all these things are going on in discussions right now, below share information I promise as soon as readily available. During the period, we've had – we have been preparing despite going through this process. From an HR and operational planning perspective, so we can hit the ground running after we're clear to do so from the regulatory bodies that we're just transitioning into. 12:19 We've also on another Michigan front, we've completed a buildout of a separately acquired production and processing facility for the production of vapes, chocolates, and gummies in Michigan. We've received local zoning approval and are just awaiting step-2 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 control brands from this facility. So that's a 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. But we'll again update you as soon as possibly humanly possible to get everybody updated and we look 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 the powers of these. So I move to an Apopka, Florida here, so changing states were during Q3 twenty twenty one, we closed the acquisition of the Apopka forty five thousand square foot cultivation facility and forty four point seven acres ready. Thirty grow pods for transition onto the site with the anticipation of being fully planted by December first twenty twenty one. 13:44 RWB projects is full first full year of revenue of fifty point eight million dollars from the thirty pods and greenhouse in Apopka. We anticipate the first harvest from that – from pods in Q4 which we're doing right now and realization of revenue of those newly acquired assets in Q1 twenty twenty two. Our RWB Florida began producing edibles at the Sanderson facility and our R&D there is 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 in your own dispensaries and so the edible production and new production formulations will contribute to additional product available in our dispensaries across the state to open – and schedule to open in the first quarter of twenty twenty two. To date Florida, the Florida acquisition, R&D of preparation for Cultivation has produced – as progressed smoothly. The team there has met all deadlines on time within budget related to a preparation of now the state operations for our new processing facility in Sanderson and our cultivation facilities in Apopka. 14:54 The average Florida cannabis operators are just currently reporting gross margin approximately sixty percent. We'd like to think we're above that, but we want to share some metrics on the gross margins that we hope to realize in twenty twenty two. We'll update shareholders again on our progress shortly and we're eager to share how our work in Florida and other areas of coming fruition in Q1 twenty twenty two in the following results. 15:19 California, as we took over operational control of platinum vapes, the operational profit in California. This is 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 and 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, RWD as a strategy, is being very strategic and pursuing vertical integration only owning where there is value to be added. We have to be asset light and brand rates and strategies to support the brands in the most profitable way. We'll swim upstream for as far as we need 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 and our business decisions enabling us to move forward profitably. 16:52 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 few thoughts relative to our long-term strategy. Our talented employees and board members are a most important asset and are critical to achieving our goals. We've 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. 17:20 We've added high profile experts across multiple industries to our board such as former congressman, Ryan Costello and more to be name 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 some of the regulatory body restrictions, sometimes we have to adjust our timing as I said before due to the preclearance etcetera, which respect to how some states manage approvals of officers and directors. 18:05 But before we close, I just wanted to 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 has – it truly hasn't been easy with a lot of regulatory pieces with COVID, etcetera, and I hate using that word, but it's just, it truly has affected our ability to efficiently get things done and as we look forward to Q4 and bringing all the pieces together on 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 we've brought to the table. 18:52 So with that, I'm going to open 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. I think it's Tyler. I'm not sure or Alex.

Operator: 19:10 At this time, we are conducting question-and-answer session. Thank you, Brad. we will now proceed with questions.

Tyler Troup: 19:20 The first question, actually, there was, this question repeated multiple times. I think we have eight or nine questions that are similar, but this is from Christy, an individual investor. What is the status of Michigan? I turn this one over to Brad.

Brad Rogers: 19:36 Well, I pretty much gave us a sync 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’s PV platinum based 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 to adjust sales for PV or any of our brands through distribution any longer. So that's a huge piece of the two part process that we're going through in Michigan. The other piece as our investee, so our investee, we've executed our put called and is now just in what I would like to say on 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 profits and the keys 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 four hundred thousand 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 either be launching in 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 itself and when we piggyback that leverage onto expand shelf space with our other products and really start leveraging the high times brand and being able to pull that revenue in and recognize that. We're just I would like to consider us a sleeping giant with respect to where we're at right now and being hang up on not being able to tell the world what we're doing, but I'm feeling really strong about that. Is that…

Chris Ecken: 22:20 Yes, that makes sense.

Tyler Troup: 22:22 Actually there is two more questions here for you, Brad. We have been there around, there's quite a few questions, but there's two more here. This is from MKX Capital. Could you update shareholders on what's happening in Illinois?

Brad Rogers: 22:39 Okay. Well, Illinois, we've been encountered a bit of a, bit of a layer of complexity with the acquisition due to the fact, it's the acquisition of the license that we've acquired there, we've haven't acquired yet, but we've got quite 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 regulators to structure the acquisition in the way that complies with the regulations to move forward the first half of twenty twenty two. So that's pretty much all I can say. I think it's just, it's a bit of a more of a complex issue of being profit and license transfers within that framework, so that's where we're at right now.

Tyler Troup: 23:24 Thanks, Brad. And finally from Martin, he is an individual investor. In the company's first full year as the public company, we've seen net losses slightly accelerate, what is this attributable to and will G&A levels with G&A level off of we enter in twenty twenty two?

Brad Rogers: 23:46 Okay. Yeah. I mean, look, this company has been building mode as Chris said and we're catch up with respect to where we want to be and so when we look across twenty twenty and twenty one, participation new acquisitions of the markets etcetera, we've been building towards that. 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 pretty much solid ground for twenty twenty two and beyond. So looking forward to just give us effectively over this.

Tyler Troup: 24:27 Great. And then we have a couple financial questions, but 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?

Chris Ecken: 24:43 Yeah, good question. So 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 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 to 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.

Tyler Troup: 25:37 Thanks Chris. And then there's one more question here from (Devin Hedge) another individual investor. The company reported EBITDA of nearly six million dollars, that's great, but what’s the company doing to achieve profitability?

Chris Ecken: 25:51 Yes. So, I think in interesting about the different markets that we have. So we realized that some of our core markets such as Michigan are very competitive. So as such we're 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 we'll, 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 of people demand when they go to the dispensary. I think the other important piece from Michigan is as we are looking and opening our new process in facility, we're going to take one layer of cost out of our value chain and that also should lead to improve the profitability. 26:41 If you go from Michigan then to Florida. In Florida of 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 and that's say as the non-limited license states. So all things being equal as we expand in Florida and Brad mentioned some some industry margin levels in Florida previously in the call. But really as we expanded in Florida in Q1 twenty twenty two, the company relationship benefit from the improved gross margins, which will drive profitability in twenty two and well into the future.

Tyler Troup: 27:19 So, I think that's all the questions that we're going to take this evening. I'm going to turn it back over to Brad.

Brad Rogers: 27:29 Thank you, Tyler. Appreciate all of your time guys and as we close off Q4 twenty twenty one, we're working diligently on all these pieces to thread our strategy together, stand up our brands. We're not getting ourselves and 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 when you just need to fortify what we're doing into the markets that we're in right now. We create a platform to be able to do that and we're looking forward to Q4 twenty twenty one and Q1 Q2 twenty twenty two to really show what's – 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.

Operator: 28:19 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.