Red White & Bloom Makes Progress In Sales, But At A High Cost

Red White & Bloom is seeing its revenues rise, but it is paying a high price for those sales.

After the market closed on Tuesday, Red White & Bloom Brands Inc. (CSE: RWB)(OTC: RWBYF)  filed its 2022 second quarter financial statements and related Management’s Discussion and Analysis. Sales jumped to $27.4 million in the second quarter over last year’s $12.1 million. The net losses were $17 million, which was also higher than the previous year’s net loss of $11.4 million for the same time period. All figures are in Canadian dollars.

RWB said the increase in sales was related to vape product sales generated by House of Platinum or Platinum Vape (PV) PV California, PV Michigan, the added sales from the closing of the PharmaCo transaction in February of 2022, and cannabis product sales generated by RWB Florida. The increased sales volume, however, was partially offset by lower pricing due to strong price competition and one-time price discounting associated with the expansion of the company’s branded product lines.

Most notable in the earnings was the increase in the cost of sales to $22.6 million versus the previous year’s $992,141. RWB said in its filing that the increase in the cost of sales was attributed to the increase in sales, generated by PV California, RWB Florida, and PharmaCo operations. The quarter’s gross profit decreased by $3.4 million due to lower costs of sales being incurred during the same period in 2021 and higher unrealized fair value for biological assets being booked during the same period in 2021. Operations in Illinois, Mid-American Growers, Inc, (“MAG”) have been recorded as discontinued operations, accordingly, the results of operations for 2020 and 2021 exclude the operations from MAG.

CEO Brad Rogers said, “Q2 saw another significant improvement over 2021 in revenue and marked our first full quarter with operational control in Michigan of the newly acquired retail assets. This quarter we began to rationalize SKU management at our 8 operating dispensaries in Michigan, discounted and discontinued non-performing SKUs to optimize sales velocity and revenue per square foot.”

Rogers went on to say, “As I mentioned in my last update, Michigan continues to see significant price compression within the wholesale industry. As such we have responded with substantial operational improvements and have leveraged our purchasing power to further reduce our average cost per unit while increasing unit sales with our Platinum Vape (“PV”) branded product line. In Michigan, June was an incredibly strong month as we moved aggressively to expand shelf space and ended up with a record month for units sold, further fortifying Platinum as the leading brand in Michigan.”

Going Concern

RWB said in its filing that its statements were prepared on a ‘going concern’ basis. The company wrote that it has accumulated losses of $144,443,890 since inception, and for the three and six months ended June 30, 2022, the company has incurred a net loss of $ 17,646,210 and $ 29,403,398 , respectively, (June 30, 2021 – $11,448,650 and $ 68,336,512 , respectively), and had a working capital deficiency of $158,137,863. RWB said it has relied on debt and equity financing to keep it going and might not have enough cash to fund acquisitions and development of assets. The company had just $2.9 million in cash and cash equivalents at the end of June.

In April RWB closed on the sale of its Granville, Illinois greenhouse,  to New Branches LLC of California for a total cash purchase price of $56.1 million (US$ 44.5 million). In connection with the closing, the company repaid its secured lender $51.7 million from the proceeds and certain other accrued liabilities totaling approximately $3.8 million. The repayment represented approximately 80% of the outstanding balance due to its secured lender and eliminated $6.2 million of annual interest
the expense for the company.

Rogers stated, “On the finance front, Q2 includes the financial reporting of the elimination of over $50 million of our credit facility. We continue to streamline the operation to reduce our overall operational costs. With the first half of 2022 now behind us, we are committed to driving profitable growth throughout the organization through disciplined execution as we set our eyes to achieving positive EBITDA by the end of this fiscal year.”

Looking Ahead

RWB said it continues to work on a number of strategies to re-focus its efforts on its house of premium brands and expand its brand presence in an asset-light approach vs becoming vertically integrated within each state that it intends to see its brands sold. “In keeping with its decision to pursue an asset-light model, and the significant delays experienced of its attempts to close on the previously announced acquisition in Shelbyville, Illinois of a THC license and facility, the company decided to no longer pursue its own THC license in the State of Illinois. With the strategic pivot of Illinois complete, and due to a number of factors, RWB has decided to prioritize the growth of its Platinum Vape (PV) branded product portfolio, as a result of the restructuring it undertook and a new focus on its own brands.”

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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