Red White & Bloom: Priced For Doom

Summary

• RWB reported Q3'21 results that still don't officially include most of the business lined up for 2022.
• The company is still working on finalizing the key regulatory approval for controlling the investee in Michigan while Florida cultivation is now ramping up.
• The Platinum Vape business has an encouraging C$130+ million run rate.
• The stock is cheap trading below a $200 million valuation with the potential for '22 sales to leapfrog the stock valuation.
• This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »

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The cannabis space has suddenly become a gloomy place to invest. Red White & Bloom Brands (OTCQX:RWBYF) is now priced for doom due to the confusing quarterly numbers until the MSO (multi-state operator) can officially own the Michigan investee. My investment thesis remains ultra Bullish on the cannabis stock, as the business continues to build.

Meaningless Quarterly Results

For Q3'21, RWB reported quarterly results of only C$11.6 million. The MSO hasn't closed the investee deal in Michigan due to regulatory delays preventing the company from reporting both the Platinum Vape and High Times branded sales and the investee dispensary sales.

The reported sales are the PV sales in California, Oklahoma, but the MSO can't report the full Michigan sales. RWB uses a third-party licensee in Michigan limiting revenues to product sales minus inventory purchases and direct expenses.

The adjusted sales are the actual product sales figures for PV. For Q3'21, the company had sales of C$32.2 million, down slightly from C$34.5 million in the prior quarter. The PV business is on an annual run rate of C$130 million.

Source: RWB Q3'21 earnings release

In addition, RWB has acquired the Acreage Holdings (OTCQX:ACRHF) assets in Florida and is now fully ready with cultivation assets and dispensary store openings. The MSO projects the current cultivation assets will produce enough cannabis for 2022 sales in Florida alone of C$50.8 million. The company will quickly open up to 8 dispensaries in the state in various stages of opening when RWB bought the Acreage assets.

RWB has the plans for THC and CBD cultivation in Illinois along with assets in Massachusetts. The ultimate plan is for 26 dispensaries opened from projects in the works in both Florida and Michigan and the wholesale distribution to double from 450 dispensaries focused on California, Oklahoma and Michigan to 900 dispensaries next year.

Source: RWB October, 2021 presentation

Big Plans

The MSO has a planned business in 2022 that far differs from the current reported revenues. The market has lost confidence in this business plan with the gloom in the cannabis sector and the inability so far to close the Michigan deal due to slow regulatory steps.

Investors should view the 2022 business opportunity as follows:

• PV - C$130 million
• MI - C$93 million
• FL - C$51 million
• Total - C$274 million

These revenue totals are based on what the company has provided the public markets. The estimates don't include 8 additional dispensaries in Michigan or any expansion of that business in 2022, the IL cultivation business (waiting regulatory approval) and the doubling of wholesale distribution into 900 dispensaries.

In reality, the wholesale business is the current largest segment and the potential doubling of this business would be huge. Investors can't exactly assume revenues double from the current levels just due to doubling distribution points, but the base revenue forecasts would seem to suggest 2022 revenue targets would top C$300 million and possibly reach C$400 million.

Back at the end of 2020, RWB provided very similar financial targets for 2021 before the company had even closed the Florida deal. Either way, the MSO appears set to reach that path in 2022 as they finally open the additional dispensaries in Florida and Michigan and can start officially operating the existing Michigan stores.

The stock will have ~464 million shares outstanding for a meager market cap of just shy of $200 million. The company has C$41 million in cash and the potential for another C$44 million from option and warrant exercises, though the current stock price will limit those cash totals and cut ~40 million shares out of the diluted share count until the stock is closer to $1.

The company is growing the business and the biggest question exists around the profitability of the business once all consolidated. With the limited cash balance for what will amount to rather large operations, the biggest risk is dilutive equity financing while the stock is beaten down.

Takeaway

The key investor takeaway is that RWB is a cheap stock trading with a market cap below $200 million with 2022 revenue targets easily topping $250 million. The MSO still needs to close the last piece of the deal in Michigan and prove the company can successfully grow cannabis in Florida and operate those new dispensaries.

As with any cannabis stock, RWB isn't without risk. Right now though, the potential reward offsets the risk while investors should definitely look to diversify investments in the sector.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RWBYF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.