A Lesson in Cannabis: Second Mover Can Be Better Position

NEW YORK, June 22, 2021 /PRNewswire/ -- Even though medical marijuana had been legal in some U.S. states for more than a decade, the substance didn't gain much recognition until Colorado set the market on its head in 2012 by making adult-use marijuana legal. Since then, other states have followed suit, while in 2018, Canada went all-in to become the first developed nation with weed legalized at the federal level. Not surprisingly, North American companies and investors were tripping over themselves trying to capitalize on the massive burgeoning market. In all market segments, plenty of lessons were learned as everyone from companies to investors to lawmakers worked to organize a brand new market; lessons that the new generation of multistate operators such as Red White & Bloom Brands Inc. (CSE: RWB) (OTCQX: RWBYF) (Profile) have leveraged to more efficiently execute their business models. RWB is following in the footsteps of large first movers such as Curaleaf Holdings Inc. (CSE: CURA) (OTCQX: CURLF), Green Thumb Industries Inc. (CSE: GTII) (OTCQX: GTBIF), Trulieve Cannabis Corp. (CSE: TRUL) (OTCQX: TCNNF) and Cresco Labs (CSE:CL) (OTCQX:CRLBF), companies that survived the early days to hold valuations in the billions of dollars.

• Grand View Research forecasts the global legal marijuana market to grow 14.3% annually to reach $84 billion by 2028.
• RWB is emerging as a dominant MSO, with licenses, cultivation space and dispensaries in top U.S. markets.
• Products are already in more than 700 dispensaries; its PV products are no. 1 selling vape in Michigan.
• RWB has acquired licensing, branding rights of High Times dispensaries and High Times cannabis-based CBD and THC products.

Click here to view the custom infographic of Red White & Bloom Brands Inc. editorial.

Learn from Elders to Capture Chunk of $84 Billion Market

The green rush is in full swing, including medical marijuana now being legal in 36 U.S. states and recreational marijuana legal in 16 more plus Washington, DC. A recent survey by Pew Research indicates that 91% of Americans say marijuana should be legal for use by adults in some form, which begs the question about when Congress will take up the issue to overturn federal prohibition. To that point, market analysts at Grand View Research see legalization and better understanding of therapeutic benefits as key drivers in the global legal marijuana market growing 14.3% annually to reach $84 billion by 2028.

While most think that trumpeting first-mover status is the optimal position, that isn't always necessarily true. Look what happened to MySpace and AIM (AOL Instant Messenger) as they faded to irrelevance as Snapchat, TikTok, and Instagram exploded in popularity to challenge incumbent platforms. Second movers can enjoy advantages as they learn from pioneering entities that paved the way. Specific to the cannabis business, there is no shortage of companies that learned from sad experience the price to pay for expanding too fast, overpaying for acquisitions, or building a business a mile wide and a foot deep.

Red White & Bloom Brands Inc. (CSE: RWB) (OTCQX: RWBYF) is a compelling mix of old and new that is methodically building a commanding position in the United States. as a multi-state operator (MSO). In fact, the company refers to itself as a "super state operator," a reflection of its strategy to remain hyperfocused on dominating specific markets before expanding to others, which ensures it doesn't get spread too thin. The company has the capital to move aggressively after raising $44.5 million this month, part of which went to retire $7.7 million in debt.

Headquartered in Toronto, Canada, Red White & Bloom's business is initially targeting seven states with lucrative cannabis markets: California, Arizona, Oklahoma, Florida, Illinois, Michigan, and Massachusetts. About 91% of the $24.6 billion global cannabis market was generated in the United States in 2020, with these states instrumental in market share.

Cumulatively across the states, the company owns, or has agreements for, licenses (cultivation, processor and distribution), millions of square feet of cultivation space for CBD (cannabidiol) and cannabis, and dispensaries (either open or leases that will be retail locations), in addition to distribution networks that have their popular brands in 700+ dispensaries.

A House of Premium Brands

Red White & Bloom is employing strategic brand acquisitions and partnerships to become a top-three player in U.S. cannabis, as well as its nonpsychoactive cousin hemp. RWB's model is derisked by leveraging longstanding and popular brands.

In the world of marijuana, arguably the most recognizable brand is 46-year-old High Times(R), which is a portfolio brand of RWB after an acquisition deal last year. Per the agreement, RWB has licensing and branding rights of High Times dispensaries and High Times cannabis-based CBD and THC products in Michigan, Illinois and Florida. The company also acquired branding of High Times hemp-derived CBD products nationally in the U.S. carrying the Culture(R) brand.

RWB's portfolio also contains Platinum Premium Cannabis Products (PV). As the name implies, Platinum CBD and THC (tetrahydrocannabinol, the cannabinoid responsible for the high feeling from ingesting cannabis) products are premium goods manufactured to the highest industry standards for safety and purity.

Mid-American Growers is also an important part of the portfolio, a brand that began as an eight-acre greenhouse half a century ago and which has grown into a 3.6 million-square-foot, state-of-the-art technology and R&D facility under glass. Mid-American product bag includes CBD Icy Relief Salve, CBD Icy Relief Roll-on and CBD Gummies. This dovetails with RWB's upcoming PURA H&W of CBD cosmetics.

Impressive Core Markets

RWB is staring down a long list of catalysts, many of which are centered on its core markets of Michigan and Illinois. Michigan is the fastest-growing cannabis market in the country, with sales topping $1 billion less than one year after legal recreational marijuana sales started in 2019.

This is a growth springboard opportunity for RWB, which recently received its prequalification for a cannabis license in Michigan. The licensing paves the way for RWB to take control of eight stores open currently, with two more awaiting licenses and eight more turnkey ready that will be branded High Times. PV is sold in 200-plus dispensaries and is the top-selling vape in the state. Furthermore, the company is prequalified for a processing license for oils, edibles and concentrates, and is planning three indoor cultivation facilities, including one under construction.

The Illinois market is booming after adult-use was legalized in June 2019, and RWB is moving forward in this space as well. The company recently signed a definitive agreement to acquire the issued and outstanding shares of Cannabis Capital Partners Inc., an arm's length Ontario special purpose vehicle with rights to concurrently purchase medically and recreationally approved THC cultivation center licenses in Illinois. Assets also include a 23,572-square-foot active cultivation and manufacturing operation as well as the associated inventory and the real estate assets, include two acres of land. 

Currently a $1.2 billion market and growing, Illinois' approach to the cannabis market remains fragmented. RWB aims to maintain and expand the existing cultivation license but could be in line for significant expansion if given the green light to utilize its 3.6 million-square-foot greenhouse located only a couple hours from the existing licensed facility. The much larger facility could easily add significant revenue via 100,000 pounds of product produced at sub-$500 per pound cash cost and sold at $2,500 per pound wholesale. PV and High Times products would be launched as well.

C$32 Million in Sales and "Just Getting Started"

As impressive as the existing asset list is, the fact remains that RWB is still in its infancy, with some deals only recently being finalized that will serve as key inflection points. Early this month, RWB reported adjusted sales for Q1 2021 of C$32.2 million, up 2.4% from Q4 2020. Removing the forex effects of the strengthening Canadian dollar, the gain was 5.5%. The company also reached positive earnings before interest, taxes, depreciation, and amortization (EBITDA) of $460,000 for the first quarter.

The kicker is that those financial results don't include the RWB assets in Michigan that are not yet migrated under the corporate umbrella, the Florida acquisition which took place at the end of April, nor did the results include the Illinois assets, which are still waiting on regulatory approval to close before being added to RWB's books.

"Those assets when coupled with the significant market share of our Platinum brands, makes us a significant player in Michigan — and we're actually just getting started," commented Brad Rogers, RWB Chairman and CEO, in a recent news release. The company added that it remains active in looking for new acquisitions, is expanding its cultivation footprint in Florida and plans to have new Florida retail stores open during 2H 2021 as well.

Investors Love MSOs

While an upstart such as Red White & Bloom is still a microcap, Wall Street and Bay Street have shown their interest in MSOs. The rationale is simple insomuch that majors are whipping up big revenue numbers as the markets continue to emerge, which makes them good long-term holds.

• Curaleaf Holdings Inc. (CSE: CURA) (OTCQX: CURLF) is a top provider of cannabis consumer products and industry-leading service product selection and accessibility across the medical and adult-use markets. Curaleaf brands includes its eponymous products, as well as Select and Grassroots. The company has operations in 23 states with 106 dispensaries, 23 cultivation sites and more than 30 processing sites; the company employs more than 4,800 team members, while also being the largest vertically integrated cannabis company in Europe. During Q1, Curaleaf reported $260 million in sales, putting it on track to top $1 billion this year.
• Green Thumb Industries Inc. (CSE: GTII) (OTCQX: GTBIF) manufactures and distributes a portfolio of branded cannabis products including Beboe, Dogwalkers, Dr. Solomon's, incredibles, Rythm and the Feel Collection. The Chicago-based company also owns and operates national retail cannabis stores called Rise(TM), has 14 manufacturing facilities, licenses for 103 retail locations and operations across 12 U.S. markets. During the first quarter, Green Thumb reported a revenue surge of 89.5% year-over-year to $194.4 million.
• Trulieve Cannabis Corp. (CSE: TRUL) (OTCQX: TCNNF) is primarily a vertically integrated seed-to-sale company and is the first and largest fully licensed medical cannabis company in the state of Florida. Trulieve cultivates and produces all of its products in house and distributes those products to Trulieve-branded dispensaries throughout the state as well as directly to patients via home delivery. The company is also a licensed operator in California, Massachusetts, Connecticut, Pennsylvania and West Virginia. Trulieve generated $619 million in revenue in the last year, but its recent acquisition of Harvest Health will put it over the $1 billion mark annually.
• Cresco Labs (CSE:CL) (OTCQX:CRLBF) is one of the U.S.'s largest vertically integrated MSOs. Employing a consumer-packaged goods approach, Cresco is the biggest wholesaler of branded cannabis products in the country, with brands including Cresco(TM), High Supply(TM), Mindy's Edibles(TM), Good News, Remedi, Wonder Wellness Co.(TM and FloraCal Farms(R). Cresco's national dispensary operates under the moniker Sunnyside. For Q1, Cresco reported revenue of $178.4 million, up 168.8% from the year prior quarter. Indicating the expectations of more growth, management provided guidance of annualized revenue run-rate of more than $1 billion by the end of 2021.

Some critics have knocked the legal cannabis market as getting off to a slower-than-expected start over the last few years. Perhaps that is true, but the type of results the aforementioned companies are producing indicate that the U.S. cannabis market is alive and well, which could easily lead to some consolidation in the coming years as bigger companies look to immediate expand their footprint through acquisitions.

For more information about Red White & Bloom Brands, please visit Red White & Bloom Brands.

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