25 November 2024

Howe Street Reporter Title

Tinley (TNY.C) Among the First Pubcos to Pursue the New California Rec Market


Everyone remembers last autumn’s spectacular surge in the Canadian-listed cannabis stocks, particularly the ones that have US operations.  Tinley Beverage Co. (TNY.C) went from $0.04 to $0.68, Nutritional High (EAT.C) went from $0.05 to $0.35, Golden Leaf (GLH.C) from $0.25 to $0.90, iAnthus (IAN.C) from $1.70 to $3.69 and Lexaria (LXX.C) from $0.15 to $0.40, all driven largely by the pending ballot measures on legalization in several states.  The Canadian-listed companies with no US operations enjoyed a similar surge due to expected developments on legalization north of the border.  Canopy (WEED.T) went from $4.00 to $12.00, Aphria (APH.T) went from $3.50 to $7.50, Organigram (OGI.V) from $1.20 to $3.40 and Aurora (ACB.V) from $0.60 to $2.60.

Well that was all fine and dandy, but now the real thing is coming.  The successful votes for adult (“recreational”) use legalization in California and 4 other states are now being implemented, and this should bring even greater attention to the stocks focused on these states.  In particular, January 1, 2018 is the big day in the motherlode of cannabis markets – California.  Starting on this day, 40 million residents and countless tourists will be able to purchase cannabis legally throughout the Golden State at their friendly local dispensary or order for home delivery in as little as 20 minutes.

Witness the massive opening numbers when Nevada legalized recreational use this month – $3 million in sales in 4 days, all from just a handful of outlets.  Friday Night (TGIF.C) had an especially spectacular launch on the CSE, rocketing from $0.15 to $0.40.

Let’s compare all this to Canada for a moment.  If all goes well – and this is a big if – recreational legalization will come into effect in July of 2018, a full 6 months after California.  But there’s a rub – the Canadian provinces might not have their distribution regulations in place by then, which could leave Canadian consumers waiting perhaps an additional 6-12 months to actually walk into a local dispensary, liquor or drug store to buy their cherished weed.  And goodness knows how much splif the government will keep.  If the tax, licensing and oligopolistic structure of alcohol distribution in Canada is any indication, there won’t be much profit left for the Canadian growers, much like the case with alcohol suppliers.  Add massive delivery distances, huge restrictions on higher-margin edible/drinkable/dabable/dripable/chewable/suckable/smearable products, a comparatively small population and already-massive valuations in Canada, it becomes apparent that the big upside for investors is in the USA.

So now the question is which US horse to bet on.  Growers vs. edibles?  Dabs vs. oils?  California vs. Colorado?  Nevada vs. Oregon?  Washington vs. Massachusetts?  Willie Nelson vs. Sheryl Crow?

Sure the growers are great.  They’re having a great run because, much like mines and other commodity companies, growers typically sell out everything they produce.  Consumers all know they love leaf, even before they walk into a dispensary, and are generally very flexible in the type of leaf they buy.  So as long as the growers’ products are relatively similar to other comparably-priced leaf on the market, it will all sell.  Or at least for now – while supply is at a shortage.

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Witness the case of Colorado, Washington and Oregon after they went rec.  Within a year, the prices of leaf tended to drift lower, and the majority of revenue in these states quickly became generated from infused products rather than leaf.  Meanwhile, the companies that make these oils and edibles have seen their selling prices stay stable.  So growers’ loss is infused products companies’ gains – infused products sell for the same price yet buy their leaf at half the price.  Growers margins down, infused-products margins up.  Booyah.

Ok but here’s the challenge – the branded products like edibles, drinks, creams and so on have to get a lot more right.  In addition to having to get the oil right, they also have to get the recipe, branding, food technology, pricing, marketing and channel sales strategies right.  If they goof up on any of these factors, their products could bomb (and not in the flattering “brah that product was bomb” sense).  Plus they have the same challenge of non-cannabis products, which is that consumers have to try the products and spread the good word to drive adoption, which isn’t as fast as safe-bet leaf products.  The reward for investors in the end, though, is that any successful products will enjoy enduring, defensible, long-term margins while the world of leaf continues to soften.

So what’s a madman to do?  It’s now a consumer products investment analysis rather than a commodity analysis.  The answer is the same approach as investors used for a host of other successful consumer products companies like Brick Brewing (up 400% in the last 2 years), Big Rock Brewery (up 33% in last 12 months) and Kona Red (up 60% in the last year). Astute investors who bought these stocks bet on management experience, their personal opinions on the products (e.g. how much they liked their brands and flavors) and on the category in general (e.g. beer vs. health drinks vs. liquors vs. Hawaiian coffee. vs cream cheese).  Put simply, if you’d personally like to guzzle the products, and have faith in the management team, then put your money where your mouth is and enjoy the ride.

The options for public investors to invest in infused cannabis-infused consumer products are growing.  The companies mentioned above are some of our favorite examples.  Let’s take a look at Tinley Beverage Company from the above angles and see how they stack up.

First – branding.  Anyone who has seen their products on www.tinleycollective.com would agree – their packaging is drop dead gorgeous, even compared with some of the most premium mainstream liquor products.  It’s no surprise, Ted Zittell was past president of one of Cott’s major cola divisions and a partner at the Watt Group, which was one of North America’s largest branding agencies under Cott’s ownership.

Some of California’s most hoity toity retailers would agree. Tinley has become perhaps the only cannabis company to place their CBD products (yes they have those too) in a wide base of premiere retailers including Bristol Farms, Erewhon, Lazy Acres and select Sprouts and 7-Elevens (ok the last one isn’t so hoity toity but Suja Juice straddles 7-11 and premium grocers and got bought by Coke for $300 million).

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Second – Product category. This one’s simple.  We drink to get drunk, so why not drink to get high?  And in all the same settings where we get our drink on.  It’s a natural.  Now read any trade press on the alcohol industry and it’s clear that consumers are switching from alcohol to cannabis everywhere that it’s been legalized.  That shift should happen even faster if cannabis products more closely resemble the alcohol products consumers are switching from.  Especially for the new recreational and first-time users that will pile in on January 1.

Third – product formulas.  Coconut rum (yum).  Cinnamon whisky (now more popular than Jägermeister on US campuses).  Italian Amaretto (divine with coffee and desserts).  And a pre-mixed, ready to drink margarita cocktail.  Drink straight up, on the rocks or mixed into your usual cocktail (ideas on their web site).  They’re made by a California alcohol formulator using the same extracts as they use when they make alcoholic drinks, however Tinley’s versions are all alcohol-free and infused with California-grown cannabis.  Witness the long lineups at the recent Cannabis Cup on their twitter site (@drinktinley) and even the most traditional cannabis aficionados would agree that this is a darn delicious way to blaze.

Fourth – management team.  CEO Jeff Maser came from Jacob Securities, one of the most active investment banks in Canadian cannabis during his tenure, and he also worked with Ted Zittell at Watt/Cott.  Combine a cannabis finance background with a beverage background and, well you get the point.  Add Andrew Stodart, who was behind the resurgence of Black Velvet Canadian Whisky, Dan Aykroyd Wines, Crystal Head Vodka and Patron Tequila, and it’s clear the company has the expertise to woo alcohol consumers.  Plus it’s no secret the company received a seed investment and some operational assistance by the family that owned Cott.  It’s therefore so small wonder that the company’s CBD products came out of the gate in such first-rate stores, and it’s probably a harbinger of things to come for their THC products.

Fifth – capital.  We didn’t mention this criteria earlier, but it’s pretty darn important, especially in the under-capitalized US cannabis industry.  The company reported over $4 million in cash as of the end of April and, given the stock is trading above even their highest-priced warrants, it’s probably safe to assume that warrant exercise money is continuing to come in.

So where exactly is the company at?  It’s clear their CBD products are getting some respectable shelf placement, but questions have been swirling about when their “Tinley ’27” THC beverages will hit shelves.  They put on a splashy drink-fest at the Cannabis Cup in California in April, where they signed up over 800 patients for their cannabis collective, yet have been relatively quiet since then.

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We asked Maser to give us the scoop on this.  “We’re following the same process as we did when we launched the Hemplify CBD drink.  First we sold and sampled the products at live events in Nevada and California to get consumer feedback and build awareness.  Then we worked over the subsequent months on a series of increasingly large test batches to optimize the consumer experience and ensure longer-term shelf stability.  This involved making formulation modifications as well as packaging and equipment adjustments.  This is exactly what’s happening with ’27 now.  I suppose we could continue to sell the ’27 formulations from the Cannabis Cup at more live events in the meantime to pad our revenue, given long-term shelf stability isn’t needed for immediate on premises consumption.  However that sort of thing can consume capital and be a huge distraction.  I feel it’s better to have all hands on deck readying the product for dispensary distribution,” said Maser.

“Plus we have revenue from our CBD products in the meantime.  Hemplify is in stores in LA and Orange County, and we’ve shipped over 1,000 bottles of the new CBD squeeze since announcing it a few weeks ago.  Most companies pursuing permits can’t pursue revenue at all during the application process, however we’re fortunate to have these other options given the uniqueness of the California market,” continued Maser.

California generated the equivalent of C$3.6 billion from its medical program last year, representing 40% of the entire North American market.  Canada’s medical program generated about C$300 million last year, and stands to grow when Canada goes rec.  However it could take years for Canada to hit the C$3.6 billion that California generated last year, and by then, Cali’s rec system will probably have grown to C$9 billion.  And CBD products are available in all 50 states, making it every bit as large an opportunity as regular cannabis, as other successes like Isodol, Lexaria and CV Sciences have shown.

Conclusion – you need California rec companies in your cannabis portfolio.  No ifs, ands or bud’s (sorry every weed article needs at least one corny pun).  Repeat – you must have California companies in your cannabis portfolio.  Various California municipalities will be issuing their license applications throughout the summer, and announcements from the California legislature on the final regulations could come at any time.  As this unfolds, Tinley should have a lot to talk about, in addition to everything happening on the product fronts.  As the old saying goes, you make your money when you buy, not when you sell.  So take advantage of the quiet summer months and build your positions in the right companies for when developments unfold.  This is probably worth doing for many cannabis stocks, but we’re obviously huge fans of Tinley and think it’s your top choice for both the California and the overall infused products categories.

FULL DISCLOSURE:  Tinley Beverage is an Equity Guru marketing client.  We think they have an important role to play in the growing cannabis industry.

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