Piecing Together Rogue One's (OTCMKTS: ROAG) Ground to Glass Tequila Operation

Rogue One (OTCMKTS: ROAG) is a vertically integrated tequila company with aspirations of being one of the leaders in tequila production. They are a ground to glass producer which means they cultivate and grow the agave, distill and bottle it, and then distribute it through their bars and restaurants. The term ‘lifestyle brand’ has Rogue One focused on the bigger picture of making tequila, while their brands are winning awards, their bulk production and white labeling business is their core revenue generator.

Tequila Opportunity

According to Drizly’s recent Retail Report, which surveyed more than 500 alcohol retailers across North America, the report said 2022 could be the year ‘tequila outsells vodka’. Almost 80% of the retailers intend to list more tequila next year, on par with bourbon.These findings correlate with the massive growth happening in tequila right now. According to Forbes Insights, tequila, as a category, has seen 46% growth over the past year. The global tequila market size is expected to reach USD 14.70 billion by 2028, exhibiting a CAGR of 5.8% during the forecast period.Amazingly, tequila still only holds 3% of the world’s spirit market share. The U.S. and Mexico markets have been the dominant tequila purchasers over the years. But that is starting to change as new markets get a taste. Markets like Australia, U.K., Germany, and Russia are all growing. China, which until 2013 had a ban on tequila, is now one of the fastest-growing markets. China’s tequila consumption is expected to grow 20% over the next six years, which will make it the second-largest market in the world, behind only the United States.The sector continues to grow at a rapid pace and is forecasted to grow further. There are only 144 tequila distilleries in the world. The demand is far outpacing the ability to supply.As tequila grows into new markets around the world, and as brands, particularly celebrity brands, continue to grow, the need for production capacity is in high demand.

How Rogue Plans to Capitalize

Rogue plans to be one of the producers to meet that demand. Through a process that has taken years to establish, the Company has built its own ecosystem and coined the phrase ‘from ground to glass’ – meaning having the ability to capitalize at each level of this growing category.The first level of opportunity is agave. Tequila cannot be made without the agave plant. Part of the Company’s strategy is to plant and own as many agave plants as possible. The drastic increase in demand for tequila has made the supply of agave plants more valuable. Since 2016, the price of agave has increased roughly 694%.As tequila grows in popularity, the demand and need for agave will continue to rise. Rogue currently owns and manages over 400,000 agave plants with projections to plant more agave each planting season. Once the plants mature the Company will harvest them. The strategy is to sell the plants creating significant revenue for the Company or to use in its bulk production which drastically lowers its costs creating larger profit margins.The next level of opportunity is the bulk tequila production level. This is the most significant piece of the Company’s business. Rogue has a production partnership and ownership interest in Hacienda Capellania, a top 15 rated tequila distillery. The distillery is located at the global epicenter of the tequila industry in the highly regarded highlands region of Jalisco, Mexico.The partnership currently has supply contracts with well-known and award-winning tequila brands, large distilleries, celebrities, athletes, restaurant groups, and retailers. The Hacienda/Rogue partnership currently produces 100k - 250k liters of 100% tequila monthly, with plans to grow to 1 million liters of production per month over the next 12 months. With only 144 tequila distilleries to service the entire world supply, the Company sees an enormous opportunity and upside being one of them. As worldwide demand for tequila increases, the distillery supply and value of that supply will continue to increase.To further capitalize on the demand the Company has recently started aging tequila, making Reposado and Anejo.Similar to whisky, with ‘age’ comes ‘value’. As tequila ages its value increases. By law, Reposado must 'rest' for a minimum of two months to one day less than one year. Anejo must age for a minimum of one year.Although the revenues from Reposado or Anejo don’t come as quick as selling Blanco, the returns and margins are significantly higher.The benefit in producing Reposado and Anejo is the cost of goods to produce does not change. It all starts out as Blanco. Because of this the Company’s margins increase by 45%+ and 75%+ on the Reposado and Anejo, respectively. The cost to produce a 25k liter lot of Blanco is roughly $120,000. The Company can sell that Blanco for $135,000. If the Company rests that Blanco for three months, making it Reposado, that Reposado will sell for upwards of $250,000+.Rogue’s core business is built around its bulk production operations. This will be the Company’s cornerstone and key revenue driver for years to come.The third level where Rogue controls and sells assets is the brand level. Rogue has ownership in multiples brands including, Tequila Armero, Fervor Mezcal, Profano Mezcal, 88 West Rum, and Nevele.Armero and Fervor were recently launched into the U.S. market with an initial focus on the New York and DC markets. The Company utilizes the NY and DC markets as a launch platform for its brands. Over the past few years, through the launch of Shinju Japanese Whisky through its import company, the Company has built a significant customer base in these two markets. This customer base allows for any brands Rogue launches to have immediate sales and create immediate traction. Once traction is created Rogue then expands into new U.S. markets (States) with the goal of selling the brands at a national level.The Company plans to launch Profano, 88 West, and Nevele under the same strategy in early 2022.The Company is also employing a strategy of taking ownership interest in brands where it’s making the tequila for third parties. With the growth and profile of tequila intensifying, the demand for private-label production is increasing, especially from celebrities and influencers. Part of Rogue’s bulk business is producing and developing brands for third parties. When the Company does that, in return it, will seek partial ownership in those brands.Launching a brand is very competitive and difficult, but if successful it can be very lucrative for a company and its shareholders. Recent brand buyouts have shown the premium being paid on brands that can gain market traction is accelerating fast, led by the Diageo buyout of George Clooney’s Casamigos for $1B. The average valuation per brand buyout is $1200 per case sold.The fourth level of Rogue’s business is the import/export level. In order for a brand to import and be sold in the United States the brand must be sold through a licensed importer. Rogue’s subsidiary, CapCity Beverage (“CapCity”), is a U.S. licensed importer and distributor. Because of the way the U.S. liquor laws are set up, an importer is generally the conduit between the brand owner and the distribution customer. Importers will generally buy the product from the brand owner, bring the product into the U.S and then sell directly to distributors. Importers will usually add anywhere from a 5% to 15% margin on the sale.Having a licensed import company allows Rogue to not only bring in its own products, but also any others. This gives Rogue another layer of sales under the Company.Currently, CapCity imports and sells, or has the right to sell, Shinju Japanese Whisky, Copa Imperial, Mazeray, Cote’ Or, Armero, Fervor, Profano, 88 West, Nevele, and Canelo Alvarez’ No Boxing No Life.The final level of Rogue’s business is the ‘hospitality’ level. This level allows the Company to sell directly to the end-user. This level entails the Company’s ownership in bars, restaurants, and hotels.The Company currently owns an 18% stake in one of the most popular restaurants in Guadalajara, Mexico, Santo Coyote Real. The group of Santo Coyote restaurants have been a staple, and major tourist attraction, in Guadalajara for over twenty years.The Company recently opened an offshoot of Santo Coyote, called Santa Cantina. Santa Cantina is a smaller version that is more centered on the bar/cocktail piece of the business. Santa Cantina focuses on the craft cocktail aspect and has over 1000 tequilas to choose from. Rogue owns 51% of Santa Cantina.The Company’s strategy is to perfect its bar/restaurant concepts in Guadalajara and then look to expand locations into the U.S. and other major Mexico cities. Currently the Company has leases in place for Cancun and Puerto Vallarta. Both were put on hold during the Covid pandemic.

Tequila is Big Business

Many may not realize it, but Tequila is a highly regulated industry in Mexico and protected by appellation of origin which designates the geographic region where an agricultural product was grown. The Consejo Regulador del Tequila (Tequila Regulatory Council) is the governing body that routinely inspects the facilities, conducts laboratory analysis, and ensures the quality of the product. There are 144 licensed distilleries in Jalisco and Rogue One’s Hacienda Capellania is one of them. This isn’t just any distillery, it’s currently ranked #14 according to Tequila Matchmaker.The global tequila market was $9.41 billion in 2020. The impact of COVID-19 actually created a positive demand shock to the system. According to Fortune Business Insights one of the things fueling the growth are celebrity brands and exposure. This is a niche market that Rogue One is ideally suited with its white labeling, along with selling to other local distilleries, to capture most of the growth within this segment of the market.The big conglomerates hold a big piece of the tequila business. One of the most well-known is Constellation Brands (NYSE: STZ) with its purchase of Jalisco-based Casa Noble tequila in 2014. STZ has a $41 billion market cap. Diageo (NYSE: DEO), a global presence with its $119 billion market cap, invested $500 million in tequila production in Jalisco Mexico just last month. The oldest distillery in Mexico which was established in 1852 in the city of Tequila was purchased by Pernod Ricard SA (OTCMKTS: PDRDY). Some of the distillery’s well-known brands include Tezon, Real Hacienda, Avion, Alteno, and Agavia. The company has an impressive, diversified line of products and has a market cap of $61 billion. Other players are Remy Cointrau SA (OTCMKTS: REMYY) with a $10 billion market cap. The most well-known brand is Jose Cuervo, which is owned by Becle, S.A.B. de CV (OTCMKTS: BCCLF) and has an $8.0 billion market cap.

Company Structure

At the heart of the company are the fields of agave, without them there would be no true control of the business. Rogue has the distillery which processes the agave and turns it into tequila. Rogue has the white label operation that lets the Company outsource some the production to celebrities and athletes. The Company has the brands, which hold significant upside potential through buyout opportunities. Rogue has the import company which adds another layer of revenue to the topline. And the Company has the ‘hospitality’ layer which gives it direct access to the end customer.The beauty of their plan is that all these entities can operate together or independently. Rogue can sell wholesale agave if their consumption at the bars is too slow. Vice versa, Rogue can sell other spirits if their production is not able to keep up with demand. Rogue has developed an ecosystem that works together or independently which really takes away much of the operational risk.

All-Star Team

Joe Poe Jr. – CEO Rogue One, Inc. & DirectorMr. Poe has worked in the scurities industry since 1987, currently working in compliance of customer securities deposits. He currently serves on several Charity Boards, including Chairman of the Oklahoma City Pow Wow Club. Mr. Poe graduated from the University of Texas at Austin in 1986, where he was a member of its intercollegiate swimming team. Joe’s experience in public companies, and compliance of public companies, plays a vital role within Rogue One, Inc.Ryan Dolder – CEO Human Brands Intl, Inc, CFO Rogue One, Inc. & DirectorRyan has significant beverage industry experience, having worked with leading international brands and bar/restaurant groups responsible for managing, purchasing and negotiating with global distributors. Amongst others, he has held management positions with both Rande Gerber’s Midnight Oil Group, who launched Casamigos Tequila with George Clooney, and Bortz Entertainment Group. Ryan founded Human Brands in 2014, which has now become a subsidiary of Rogue One, Inc. He has a double major in marketing and computer science from the University of Notre Dame.Janon Costley – COO Human Brands Intl, Inc., COO Rogue One, Inc. & DirectorJanon brings more than two decades of experience in operations, business development and sales and marketing. Initially starting out in the fashion industry, Janon worked with leading brands including Converse, Skechers, FIFA, MCM and Pony in both supplier and licensing partner capacities. Mr. Costley co-founded The Brand Liaison, which ultimately led him to the beverage industry. He subsequently served as CEO of Village Tea Company, founded Affinity Beverage Group, STI Signature Spirits Group and CapCity Beverage LLC.Daniel Bouquet de Grau – President of Mexico OperationsA certified Master Tequila Distiller and Founder of Armero Tequila. Daniel has 13 years of experience in all aspects of the tequila industry. Daniel deals directly and manages all of the Company’s bulk production customers.Omar Alejandro Contreras Oseguera – Head of DistilleryOmar is the principal and the operating manager of a 3rd generation family-owned distillery and agave producer, Hacienda Capellanía. He has 20 years of experience in agriculture cultivation and the production of premium tequila. Omar manages all aspects of the Company’s bulk tequila production.

Value Proposition

In the tequila business a brand's survival is based on its access to the agave plant and its ability to source tequila. While Rogue One has operations across multiple layers of this industry, its bread-and-butter business is the white labeled production of tequila for other brands. This piece of Rogue’s business continues to grow, and will continue to grow, as the demand for tequila is projected to increase over the next decade. Rogue’s bulk production operations have the ability to bring significant revenues into the Company for the coming years.

Financial Analysis

Rogue One is an undervalued asset play and it’s unclear how much in the way of sales are on the books until the financials are released. They have not released sales figures nor given any guidance which is why the market is not efficiently pricing the stock. The company currently has a great structure after executing a 1 for 100 reverse split on April 7, 2021 which left 136.6 million shares outstanding. There are only 56 million in Float but there is the risk that up to 71.4 million shares (pg 10) could find their way into the market at approximately $.02 as these represent the outstanding amount of the convertible notes on an as converted basis. This is assuming management wasn’t smart enough to get lock up agreements in exchange for placing the asset into the company. It's also widely expected that the acquisition of Human Brands will have been completed in the latest quarter which is expected to increase the share count by 176,771,962 along with 45 shares of Series D stock. This will result in a revised outstanding share count of 384 million on a fully diluted basis. This reflects a $10.75 million post-merger market cap. There are 1,000,000,000 authorized shares which gives them the flexibility to pursue acquisitions should they choose.They have 350,000+ agave plants owned or under contract, but it is not reflected on the balance sheet yet. Since agave plants tend to produce 2-5 liters of tequila, a conservative estimate of 2 liters/piña core results in the production of 500,000 liters. Since a typical bottle of tequila is 750 ml this would translate into 375,000 bottles which wholesale for $15/bottle. Converting their existing stock would conservatively yield $7.5 million in sales. The margins in the business are pretty lucrative with an all in cost of $11.33 per liter or $4.25 million. The net of converting this existing inventory is $3.25 million. The company is barely trading at 2X future expected sales.

Competitor Valuations

When tequila names sell their brands they are in the 100’s of millions or billions of dollars of valuation. ROAG is really positioning themselves as more of a lifestyle name than a tequila brand. The idea is to add stickiness to their purchases and gently expand their ecosystem with that core group of consumers over time. Since sales numbers aren’t available it's useful to speculate using other celebrity liquor companies. Most valuations in this sector are driven by a multiple of sales. Splash Beverage Group (NYSE: SBEV), a flavored tequila, has a $57 million market cap but their sales are growing exponentially and they are projecting a $16 million annual revenue number. They are trading at a multiple of 3.5X sales but Splash CEO said in an interview that the industry average was actually 5 - 7 times sales and that George Clooney’s deal of 20 times sales was an anomaly. Their tequila line is called SALT, but they also have a performance drink called Tapout that could be weighing down their valuation because they are not a pure play tequila company.Iconic Brands (OTCMKTS: ICNB) with their celebrity vodka, and Christie Brinkley’s Bellissima sparkling wine prosecco, has a $47 million market cap. There are about four celebrities active in promoting their brands. Although the company has an $18 million dollar run rate they secured $40 million of capital in a private placement so it makes more sense to look at the sales to enterprise value (EV) which strips out the value of the cash component. The company has a major acquisition planned in the adult alcohol pops market and the money is funding the expansion. Unadjusted their multiple is 2.6 times sales but using EV they are at a very low multiple of .4 times sales.Rogue One is expected to have the celebrity component of ICNB and the tequila component of SBEV. There are no true comparables to their business because it is so unique, but it's reasonable to assume 5 - 7 times expected sales. Without any guidance from the company the only metric are the 350,000 plants which back into a number of $7.5 million in sales. This puts the company on par in terms of valuation. Once numbers on the 10-Q in are released, valuation could reach $45 million which is a multiple of 6 times projected sales. Using a fully diluted share count of 384 million it represents a price target of $.12 in order to reflect the fair value.ROAG is the only pure play tequila player under $100 million in value. And based on just the aged tequila should be trading north of that. When the market finally realizes they have revenue this could be a multi-bagger winner.While the Dos Equis brand (owned by Heinekin (OTCMKTS: HEINY)) is an advertising play around “the most interesting man in the world”, Rogue One’s mantra is to “go rogue”. By making a tequila brand from the ground up they turned the dream of developing a tequila brand into a reality. With celebrity and athlete clients in tow they are on their way to creating one of the largest collections of tequila.Michael Jordan, NBA legend, along with four other founders were able to roll out the Cincoro brand of tequila. These other four backers were NBA heavyweight celebrities that include the president of the LA Lakers, Jeanie Buss; the co-owner of the Milwaukee Bucks, Wes Edens; owner of the Boston Celtics, Emilia Fazzalari, and Wyc Grousbeck.What is so interesting about this brand is that they don't have a distillery. They are missing one of the key ingredients that ROAG has secured for their business model - a distillery. They compensate by utilizing Jordan’s special secret sauce. He supposedly hand-picks the Weber Blue agave from private farms in the highland and lowlands and turns it into four types of tequila under their Cincoro brand. Although this isn’t a very scalable model, let's face it when it comes to entrepreneurs in the tequila business very few are afforded this level of access and can build a successful brand around it. For entrepreneurs without Michael Jordan's resources and connections there is Rogue One as a white label manufacturer.

Investment Summary

Tequila is a multibillion-dollar market where the big seem to get bigger. Here sits Rogue One with its $4.5 million market cap in a sea of Giants. How do they compete against billions of dollars? In order for Rogue One to compete they have to differentiate themselves and not be just another tequila company. Their approach to go after the growing celebrity market is timely but involves risk. Their strategy seems to target growth at multiple points of their ecosystem. They seem set on developing their own lifestyle brand and seem to have painted the picture very clearly with their opening video. They are savvy enough as a management team to understand that they need to be vertically integrated to control the quality of the product yet diversified into the restaurant and wholesale business to withstand the lumpiness of sales in the white label industry.The management team has top notch resumes, including the very important piece – key persons on the ground, in Mexico, managing operations. These are tequila operators with a proven track record. They have amassed some tangible assets which include aged tequila and 350,000 agave plants, and a restaurant buildout. There is a risk of dilution, but the opportunity lies in getting in at a good valuation before the financials are released, which should be any time now (NT 10-Q filed). This will de-risk the stock as investors understand the final structure and revenues, if any. They might even surprise with a modest profit.

Hacienda Capellania’s offices in the highlands of Jalisco

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