This Marijuana Team Has Chosen A Different Path. Can They Make it Pay?

I’m trying to figure out if 1933 Industries (TGIF-CSE) is crazy, or crazy like a fox. Year end financials the end of this month should tell investors.
 
If current trends continue, this stock is ripe for a take-over, with quickly increasing cash flows and no large shareholder.
 
They could be crazy, as this micro-cap marijuana stock has no retail brick and mortar, when the Market seems to highly value brick and mortar (I’ll show you the stats below). 
 
They have chosen to focus on their product brands, as opposed to trying to build a retail, store brand. They sell their products through everybody else and via Direct-To-Consumer.
 
CEO Chris Rebentisch and Chairman Brayden Sutton have resisted all partnership/merger overtures from the rest of the industry when scaling up—and fast—has been industry practise.
 
They stayed in Nevada, not ever wanting to go next door to California, the biggest marijuana market on earth.
 
They have just kept their heads down, doing everything themselves—from growing to having brand ambassadors in their retail outlets; they don’t outsource anything.
 
And they’ve built a US$20 million a year business, so far—though their latest financials show they’re still losing money—a US$2.3 million EBITDA loss in Q3 19. Year end numbers are due out the end of this month, and they’ve guided to a Q4 revenue of US$5.2 million, a $600,000 bump over Q3 and up 50% YoY.
 
2020 will be a year of huge organic growth with several new facilities—hemp, CBD and marijuana–coming online, but with only US$14.6 million in treasury back then—April 2019—have they picked the right strategy to make it to positive cash flow? Because not only is the equity window closed, the debt window is as well.
 
“We’re going to start seeing revenue tick up significantly in January because of the cultivation building putting out,” says Chairman Brayden Sutton. “And then we’re going to start to see revenue tick up in February and March from our marijuana extraction lab, and then we’ll start to see revenue tick April, May, June, July from the Hemp extraction facility.”
 
Shareholders sure hope they’re right. TGIF stock is down 50% in the last six months the same as most juniors—but their bank account is full and revenue is increasing.
 
That’s in contrast to a lot of once-high-flying marijuana stocks coming to earth hard because they’re running out of money.
 
Seeing collapsing stock charts in this industry is not a surprise. But having this happen because companies are running out of money IS.
 
This industry overcapitalized during the boom years of 2016 – 2018, raising billions of dollars.
 
The Green Organic Dutchman (TGOD-TSX) raised over $200 million, and now doesn’t have enough money to complete their big Valleyfield facility in Quebec. The stock has gone from $5.50 – $1 in 6 months.
 
MedMen (MMEN-CSE) just laid off 190 people.
 
HEXO Corp. (HEXO-TSX) lost $60 million in just the last quarter.
 
Dionymed (DYME-CSE) just went bankrupt last week after raising $10 million in May at $2.75 from two Toronto brokers and another US$2 million in August from a specialist fund.
 
Here’s my take on 1933, and I’m watching for the Q4 financials at the end of this month.
 
QUICK FACTS
 
Trading Symbols:                                     TGIF
Share Price Today:                                   $0.21
Units Outstanding:                                  285 million
Market Capitalization:                            $59.85 million
Net CASH:                                                  $9 million
Enterprise Value:                                     $50.85 million
 
Battle of the Brands
 
Early on in my foray into U.S cannabis names, I realized that there were two schools of thought. One believed that the future was in retail brands while the other believed that it was in product brands.
 
The alternatives were summed up nicely in a recent presentation by MedMen.  Will cannabis follow the path of natural foods, or the path of alcohol?
Source: MedMen Investor Presentation
As it has turned out, most public companies have gone the way of MedMen. Cresco Labs, Acreage Holdings, Green Thumb Industries, iAnthus – they all chose the route of owning the retail space. Only a few (Charlotte’s Web comes to mind) have decided to stay away from bricks and mortar.
 
What makes 1933 Industries interesting, and somewhat unique, is that they have taken this road less travelled.
 
1933 Industries owns zero retail locations.
 
So, are they crazy? Or crazy like a fox? That is what I am trying to get to the bottom of.
 
Brands, Brands, Brands
 
1933 Industries has staked its turf and that turf lies deep within branded products.
 
They have a two-pronged strategy. They are developing their own in-house cannabis and CBD brands while at the same time partnering as the wholesale manufacturer and distributor of leading brands outside of the state those brands are centered on.
Source: 1933 Industries Investor Presentation
1933 Industries operates two in-house brands out of their Nevada operations: Alternative Medicine Association (AMA) and Canna Hemp.
 
AMA is sold in 60 of 66 dispensaries in Nevada. It is also sold in Colorado through a licensing arrangement with Denver Dab Co. Canna Hemp is a CBD brand that is sold in 800 retail locations (400 dispensaries) in 46 states.
 
As a reminder, the US cannabis industry is fragmented because it is not legal at the federal level. That means that operations need to be separate between states. That means that popular brands in one state are often not available across state lines. 1933 Industries is trying to bring the most popular brands across the border through licensing arrangements.
 
1933 Industries acts as the Nevada manufacturer and distributor for a number of third-party brands. They operate through licenses with Denver Dab Co, OG DNA Genetics, Gotti’s Gold, Blonde™, The Original Jack Herer, and PLUGplay. 
 
Brands like DNA Gentics, Blonde, and The Original Jack Herer are popular brands out of California while Denver Dab Co. is out of Colorado. 
 
Gotti’s Gold, and Kurupt Moonrocks are brands of the rapper Kurupt that AMA has licensing rights in Nevada for.
 
No Retail, No Problem
 
Not having a retail presence can go both ways. The market is looking at it as a negative (witness the valuation comp below). But I can see how it can work in their favor. 
 
Most other cannabis companies are building a retail brand to sell their own product into it. MedMen sells Statemade, MedMen and Luxlite. Cresco’s Reef locations sell Tryke, Bake Sale and Khalifi Krush. You can go down the list, each retail brand sells a group of brands owned by that retailer.
 
But the retailers need variety. They only want to allocate 60-70% of their shelf space to their own brands. The other 30% is for third-party brands.
 
This is where 1933 Industries comes in. Their goal is to be the one-stop shop for branded cannabis products that aren’t owned by a retail brand.
 
Here is how I could see the strategy working. 1933 Industries doesn’t own their own retail space, so they aren’t considered competition.  
 
MedMen is going to be very reluctant to sell Tryke branded products in their shop. But they won’t be threatened to sell Blonde and Jack Herer – products not associated with any retail competition.
 
CBD & Skateboard Culture
 
CBD—a non-psychotic part of marijuana–is a different beast because unlike cannabis, it can be sold out of state. It also doesn’t require dispensaries – products can take up shelf-space in drugstores, convenience stores, or athletic departments.
 
About half of 1933’s revenue currently comes from their CBD branded Canna Hemp line. 
 
The company is looking to expand their CBD capacity significantly. More on that shortly.
 
The company has targeted skateboard culture with a couple of their brand alliances.
 
They partnered with skateboarding company Grizzly Griptape on a CBD sports-cream Canna-Hemp X.
 
Canna-Hemp X is available in Zumiez locations – a specialty retailer targeting young men and women with over 700 stores in North America.
 
They expanded the CBD product line further into skateboard culture this week with the introduction of the Birdhouse brand.
 
Birdhouse Skateboards was founded by legendary boarder Tony Hawk, lending name recognition to the brand. Together they will launch a Canna Hemp X CBD Balm in November.
 
Ramping up High Margin Production
 
The entire cannabis industry is growing, and 1933 Industries is no exception. 
 
The company is in the process of a major capacity build. They just completed a new cultivation facility that will increase grow yield by 5x. First harvest is expected in December.
 
They have recently completed the retrofit of their old grow facility to turn it into an extraction and manufacturing facility with 5x the capacity that they currently have. 
 
This facility will be used for AMA branded extracts and other brands that they are bringing in: shatter, crumble, sugar, wax, budder, and distillates. 
 
They are also in the process of building a hemp processing facility for CBD. The facility will be able to produce between 4,500 to 5,000 kilograms of CBD isolates and distillates a month. 
 
Prices of those products are $3,000 to $4,000 per kilogram, which means at capacity this facility will generate significant revenue. Construction is expected to be complete by year end.
 
But The Market Doesn’t Care… yet
 
While the entire industry has been decimated over the last 6 months, investors are still putting a higher value on retail locations.
 
Consider the following:
Source: Company Filings
1933 Industries trades at a large discount to peers. Part of that is size – realize that I am comparing them against much larger capitalization companies. Yet on a trailing revenue basis though, 1933 Industries is not so much smaller.
 
What this tells me is that the market still believes the future is in retail branding, not product branding.
 
I’m still trying to figure out where I stand on the matter. I will say, I’m not convinced the market has this one right. I am also well aware that the discount may not reflect how the industry eventually plays out.
 
Doing It Differently
 
1933 is doing things differently. Creating a business model based on brands – becoming a one-stop shop for third party product that is not competition to retail brands makes sense. 
 
They are in a strong state – Nevada – and have expanded into California, Colorado and soon will be adding Arizona to the list. In each of these states the strategy is the same. Become the manufacturer and distributor of a suite of owned and licensed brands that can be sold into multiple retail chains, taking that 30% of shelf space not designated for house brands.
 
While I like the company, my big problem is the space. Look at 1933’s chart. Look at MedMen’s chart. Keep going down that list. UGLY!
 
Trying to pick a bottom is not my style. I look for chart set-ups that are at least peaking up and to the right. There is no real sign that we are there yet.
 
Fortunately, they don’t need to raise money, and appear to have enough cash to deliver on year of huge organic growth year in 2020–actually, quite early in 2020.
 
With no controlling shareholder—Rebentisch and Sutton each own a little over 1% of the 273 million shares out—this company could be ripe for cultivating by a larger harvester.
 
I think it is an interesting – differentiated – business model that could find a niche in a landscape full of bricks and mortar companies all trying to hock their own brand.  I just want to see the whole sector turn.