Busy earnings day on April 1st – And 1933 is one of them. I’ve got many more structures to come.

I’ve been interested in $TGIF since I came across them in late 2017, as well as 2018 when I did rundowns on them in both of the Dive Bar Pub Crawls past two years running.

TGIF has a back story that I never quite got a handle on…which…while important to me at the time…has faded into the rearview of relevance. 2 years ago, it was important to me because it was not only my first pass, but also to get insights into the ‘jockey’ riding the horse.

With time under their belts, the financials can speak more to operations.

To the financials:

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• Cash holding, small inventory growth, small expansion in receivables….and….nothing much else to see in current assets past 6 months
• The ‘Restricted’ cash they are sitting on is reserved for construction. I like that, it isolates commitments by management.
• Construction in progress increased by $10MM since July. Which, is essentially the entire change in non-current assets over that time. That, and a $110k of office supplies (Note 9)
• Spire Global Strategy turned out to <ahem> been a little high on the price side. TGIF had picked them up for $5MM, but Spire only had *minus* $14k in assets when they bought it. Thus, all $5MM went to Goodwill. $2MM (40%) of that was written off over the period, after only 9 months of holding….ugh (Note 4)
• Which – is a good lesson in ‘how not to buy during a run’. Or, just a bad decision(1). Can’t tell which.
• Account payable growth faster than receivables – hopefully because of construction. No details that I can spot.
• G&A and wages civilized. Management fees and SBC aren’t.
• Those latter two aren’t large per se, but they are material to income statement. They need to bulldog them, or increase margins to make up for it. 
• Nice to see forex under control. I mentioned this in 2017 – great contrast to some other financial statements with USD exposure.
• Recent equity issues offsets the equity dump in Note 11, which, details what happened with the overhang in the last part  of the note. 38MM of 3 yr warrants at $0.65. Holy UGH.
• Add 18MM more in stock options at $0.38. Hella.
• And 3MM more in agent options at $0.45.
• I really enjoy the disclosure of segmented information in Note 18. Which, reveals an inverted pyramid of expenses. G&A at the corporate level appears very high relative to operations. A red flag to myself in the general.
• I take back what I said about G&A being civilized.
• Good news is it appears to be trending downward in the last reported quarter.
• Subsequent events saw 10MM warrants/debenture conversions at a net of $0.30 share. Yep, predictable at this point. (Note 18)
• Another 10MM 2 year $0.50 warrants issued, another  and another 10MM in convertibles (also Note 18)

So. In total – there’s 80MM warrants and options at the money, or better, in the financials. The vast bulk of them with multi-year tenors.

Without operational expansion and cashflows increasing QoQ – aggressively and steadily – I’d guess their share prices are going to go nowhere. 

For a good, long, time. Which is exactly what their share price has shown. 

Where I land on these guys pretty much is summed up by the question I’d ask of them on the next conference call: Why don’t you call a bank and borrow money?

I can probably guess the answer: Because there’s 80 million reasons why. 

(1) While I did the following for one of our subscribers (who’s keen on learning about financial analysis) the Spire goodwill write down is a great illustration of how the equity box affects the value of a stock.

Once upon a time, I had a mentor tell me: In business, there is no such thing as a ‘bad decision’. If all the available information is examined…and rational choices made….there is only bad outcomes. It can’t be a ‘bad’ decision. The choice was as sound as it could be…it just didn’t work out. It happens.

Now, if a pattern begins emerging….as in….”wow, that’s a lot of ‘bad outcomes’ you have there mister”….well, one might spot a trend. That a 40% write down happens within 6 months of purchase begs a question. And the answer is: revenue projections were bunk. A revaluation of DCF (discounted cash flows) ended up cutting asset value by 40%.

To the analyst: it says they got sold a bag of magic beans.

The impact? Instead of net capital expansion from operations of $4MM, it was $2MM. 

To illustrate,TGIF’s operations contributed margin of some $4MM. Cool. But because of the write-down of the Spire asset, it was notionally only $2MM. As it flows through the income statement and into the balance sheet….instead of the equity deficit (cet par) being reduced (or a net equity addition) by $4MM….the write-down consumed $2MM of operational margin.

This is what the equity box is: it’s where GoBlue’s tale of operations end up. If deficits continue to expand (or net equity stagnates) – it reveals there is less increase in net assets from operations. ‘Potato’, ‘Potahto’.

Same tale as a Rundown, just viewed in a different perspective. Higher hurdle rates nested in capital structure demand a higher gross margin to compensate.

Now, If you add the Spire transaction all up, income tax recovery recaptures half of the dump 1933 took on the purchase price. Small mercies on a dud pickup. All in all, isn’t material, but, a useful example. I’d still feel a little bummed about burning a million at any rate.

The preceding is the opinion of the author, and in no way constitutes advice on the sale or purchase of any security or derivative. The author holds no position in 1933 Industries.