Last quarter, we noted some *ahem* concerns around the balance sheet: anemic revenues and margins, asset impairments, and an outlook that was looking rather bleak. At least in my opinion. 

In late summer, they announced an ‘extraordinary’ meeting to be held with debenture holders , based upon on offer made to them by 1933. We explored possible reasons for this, and 2 weeks later, 1933 was able to avoid the meeting altogether through some offline negotiations with convertible debt holders. 

The purchase of Infused brought all kinds of things that wasn’t really of much use to 1933 at this stage: goodwill, SBC, and little in terms of earnings. Combined with high corporate overhead, crap margins, and a capital structure that could only be described as ‘feral’ – a front office shakeup in late spring saw them replace the CEO, CFO, and fire the COO. The original CEO (and founder) went up to Chair the board, where presumeably, he could watch the new guys try to do what he failed so miserably at.

Harsh? 

Nope. 

This outfit was an early mover, and put out pitch decks and announcements and ran capital like they were really a going concern. Which has not been the case for over 8 quarters now.

I suspect the first guy happened to be at the right place and the right time to catch a slipstream – but had absolutely no clue in how to run an outfit, nor had any clue about aligning capital structure with the business model. And investors and shareholders have paid a heavy price in terms of current positioning and share value. Even the sag the sector has experienced over the past 6 months has been more forceful on companies in this position. 

Let’s look at their year end, and see what can be said about the new management’s activities. they’ve had a couple of quarters now to begin putting their fingerprints on the place, and see if the company’s prospects are changing.

To the financials!

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• Sales are up $600k on the quarter (from $4.6MM to $5.2MM). 
• Cash is up some $4.8MM QoQ, but, it stems from a sale/leaseback of their facility, and a $4MM private placement. Cash burn still burning brightly
• CB1 – retained in February of this year are mentioned only once in the fins, and only about their retention. If they’re doing something, it’s not mentioned.
• The Spire fire kept on burning – chewing through another $575k in consulting fees on ‘discontinued operations’. Even putting a bullet into it didn’t stop wind up costs and (perhaps potential) litigation. If you search for Spire now – one gets redirected to either malicious websites or blank pages. What a bitter ending to it all for investors. 
• The day (probably to the hour) that the debenture meeting was cancelled back in August, 6.8MM of 3 year at the money options were granted to management. Well then, job done.
• In September, the former CEO and current CEO were gifted 450k shares. 291k of that total was to the Chair, who ran this company into the state it currently is. I can’t imagine being a shareholder and taking this well.
• SBC has been muted, to a merciful $350k in the quarter. 
• Given the financial shape this thing is in – it’s no wonder the market has been beating the hell out of it, sector downtrend or not. 
• The Infused (a CBD company) deal is in progress. It’s a relatively complex affair, and it feels like there had to be some <ahem> flexibility on behalf of 1933 to get it done. We won’t get a good look at it in these, it’s all contingent paper at the moment, but we do learn that Infused had a book value of $160k for it’s $5MM+ price.
• ‘AMA’ (their medical/rec grow side) was able to lose a million on $8MM in sales over the year. Ugh. 
• Contrast that with year prior – same sales, but 50% margin. Wow.
• Corporate costs for 1933 are an absolute fortune at $11MM over the year. That gets layered on top of the $4MM operations lost over same period.

Ok. Crying ‘uncle’ here.

I could go on, but, it wouldn’t surface much more than what’s contained in this and our prior structure on them. They sucked then, and they continue to suck here.

The absence of revenue growth is notable. Infused’s buy shows some revenue being on-boarded, and some margin contribution. Given it’s only had a few months under the umbrage of 1933, we’ll have to see if the magic touch they have with selling dope at a loss confers losses to it as well.

The optionality within this company, related party deals, and SBC and executive pay – given their performance – is really something else. The fiasco of Spire, the inability to build a grow op, increase sales, produce margin…..it all adds up to me. This thing needs a turnaround.

The time they have depends heavily on whether the new guy can demonstrate he’s doing it, and on larger investors’ patience. They seem to have had confidence (or at least tolerance) from them so far. The August ‘renegotiation’ helped greatly in this regard.

It’s an interesting business story to myself, and from those halcyon days of just a year ago, we see how companies have separated as operations and acquisitions have begun playing out. These guys have done jack with the head start and relatively easy capital that *was* available. 

If 1933 continues to keep on what they’ve been doing, it’ll be the beginning of a slow circling of the drain. Getting production up and online – and actually selling it for more than it costs to grow should be the only thing that’s occupying management’s time. $6MM a year in margin from Infused can’t even cover the losses of the grow op as it is, let alone corporate overhead. YoY revenue growth in Infused appears good, but definitely not good enough.

These guys look simply awful at this point, far beyond their share price. Which, has been beaten down to a point where much of the optionality is now far out of the money. A fitting state for a company that has belayed so much of their initial promise – and spent investor capital for so little. Now, we wait to see what the new guy can really do.

For investors, one hopes it isn’t more of the same.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $TGIF