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These financials cover a period of change for 1933 Industries ($TGIF). They lost yet another CEO to the Board, and began striking a more conciliatory tone with long-suffering shareholders.
Our last Structure – covering Q2F2020 – didn’t see much hope for those very shareholders in the absence of some fundamental changes to their operating model. Travails around maintaining capital adequacy have been going on for more than a year now, and one should wonder how many showdowns can happen before investor fatigue sets in. The rotation through $TGIF’s front office (4 CEOs in 2 years, as well as Founder/Chairman Brayden Sutton’s
ejection extraction) suggests there’s a serious lack of vision and/or protracted/persistent business issues present.
Let’s take a look at their year end, and see if there’s been any improvements made over the past 2 quarters.
To the financials!
- Cash down to $2.7MM (from $4.8MM previous). Sales of $2.4MM (yikes) during the quarter…..total gross margin for the year of $2.6MM (or 25%).
- That gross margin is the annual number though. Q4 sales (while anemic) report a gross margin in this quarter of 58% (!), while Q3 showed a gross margin of ~=1%. One should probably approach these numbers with caution.
- G&A is $2.2MM. Same as last quarter, and same as most quarters prior. The executive pulled $3.5MM out in compensation this year, wages and benefits for the rest of the outfit was $4.2MM. Interest expense was $2.6MM. Professional fees $1.1MM. You get the idea.
- It all adds up to a company with an annual of $2.6MM of gross margin generated by $22MM in expenses.
- It looks like their focus around their products is getting a full dose of ‘CPG’ – with a full e-commerce enabled website and expanded e-channel development commencing this month. Presumeably, it’ll get them heading full speed toward that fabled land of ‘DTC Conversions’.
- Those products – 100 SKUS in CBD alone – are getting trimmed as they’re going through and cancelling licensing deals and partnerships. More below.
- 51MM warrants and 20MM options laying around, but nothing near the $0.07 share price. Unless there’s a reprice or a cancellation/reissue, these things are going to collect dust.
- PP&E at $20MM is pretty much all ‘right of use’ assets of the facility. They had to sell their (incomplete) last one (IIRC) because of delays due to initial engineering, and that the building wasn’t completed within permitting window. $TGIF disposed of the land and buildings (for about $2MM), and since went and rented the grow op they’re now going to produce in.
- For a company that’s been through as much capital as these guys…..to end up in a rental….well.
There’s nothing much in here we haven’t talked about. Looking back, I’ve been pretty harsh on them over the past couple of write-ups. These financials though pretty much confirm what we’ve put forward.
In the MD&A, $TGIF addresses what they call their ‘Path Forward’, which acknowledges that positive cashflow and profitability are management’s (and the business’) key short-term priority:
Ok. We also find out that their
current ‘new’ facility is still in commissioning (there’s been more than one false start in the past here, but they aren’t trying to build another one, it’s already there. Historically, they are 0-2-0 on builds). The site is being touted as being a Geist facility (and presumeably shiny). They’ve announced that the goal of said facility is to make them “a leading supplier of craft cannabis flower to the Nevada market“. It’s not slated to be in full production until March of 2021, which, means further delay on them 40 cultivars they had planned to serve that craft market with. Thus, they won’t commit to provide guidance around either of those 2 key priorities……..for at least another 4 full quarters:
At least for now, they aren’t saying they will be profitable…and wont commit to anything solid for a year. I expect that could change by Q2 or Q3 2021 if things continue as they have. Management will need to speak up at some point.
We’ve talked about the ‘Infused’ acquisition and (the lack of) tangible assets that came with it. Sales over the year from the Infused business unit along with related G&A and wages/benefits are in the table below. It reveals that the unit was – in risk management parlance – ‘out of control’. Looks like someone in front office started paying attention this quarter:
There’s a story here about Infused’s decline in sales, perhaps reflecting the competitive landscape in CBD products. Perhaps some is attributable to COVID. $TGIF offers little colour though, and other Nevada companies aren’t showing as much slowdown. But $TGIF exists solely within the wholesale market, and there is limited visibility on comparables.
A master service agreement with ‘Green Spectrum’ in California was terminated. The deal was announced with much paid fanfare, and claimed to be $TIGF’s emergence as ‘MSO’. The deal didn’t last 14 months:
$TGIF expands on that by blaming the initial deal structure, advise that they’re cancelling plans to build of processing capacity, as well as announce that they’re excising various brands and partnerships that had ‘little prospect(s)’ of generating meaningful profit:
Well, if they aren’t in a formal restructuring, these are many of the things that would be done under a formal restructuring. Sometimes, a company doing such will put out guidance for when positive cashflow is expected.
These financials have the all the feels of being a ‘pivot’ – with $TGIF moving to produce small batches of absolutely everything in a hunt for the ‘premium’ segment of the market. On its’ face, that move is a higher risk strategy for a company, all things being equal. As example, due to lowered capacity, the risk of stock-outs on popular product is higher, as is the risk of an untested cultivar being rejected by the marketplace…..and remaining unsold. Both are negative commercial outcomes. All while the story of sales and gross margin so far from $TGIF has been one of needing to establish production and quality. Neither of which have been present consistenly.
If there’s one thing $TGIF has been consistent in, it’s been within re-jigging their business plan, and having a ‘this time we’ll get it right‘ kind of attitude. Given how many things they’ve failed to execute on, they’ve had plenty of practice to refine that attitude to high art.
Cash levels are critical, operations from the primary business is at a negative gross margin, the CBD division revenues have halved over 12 months, and a relatively higher risk cultivation strategy won’t be in full production until the beginning of the third quarter……..of next fiscal year. By calendar date, that means $TGIF won’t report a full quarter of their own operations (at 100%) until a year from now.
$TGIF’s share price has been languishing below a dime for awhile now. That its’ languishing at all is a testament to the enthusiasm of the US legal cannabis sector, and $TGIF’s hard (and thus far successful) dealing with debt holders. There’s nothing to see here, and I can’t even offer the reader a decent takeaway. I’m sure $TGIF’s agitating for continued investment dollars……they’re going to need cash to continue to operate.
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
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