Hempacco (HPCO) Begins U.S. IPO Process

A Quick Take On Hempacco

Hempacco Co. (HPCO) has filed to raise an undisclosed amount in an IPO of its common stock, according to an S-1 registration statement.

The firm designs and manufactures hemp and herb-based alternatives to smoking for consumers in the United States.

HPCO is a tiny company that seeks to take advantage of the potential high growth rate in the smokable hemp products market.

I’ll provide an opinion when we learn more about the IPO details from management.

Company

San Diego, California-based Hempacco was founded to manufacture smokable hemp and herb products (nicotine- and tobacco-free) and has a current manufacturing capacity of up to 30 million cigarettes per month.

Management is headed by co-founder, President and CEO, Sandro Piancone, who has been with the firm since inception and has been CEO of Primus Logistics, a cold storage company and CEO of UST Mexico, a Mexican tobacco company.

The company’s primary offerings include:

• Real Stuff Smokables in packs of 20, 10 or single cigarette packs

• Hemp-flavored rolling papers

• Hempbar liquor-flavored smokables

Hempacco has booked a fair market value investment of $6.3 million as of December 31, 2021 from investors.

Hempacco – Customer Acquisition

The firm sells its products to convenience stores through master distributor channels.

The firm has also initiated several joint venture relationships for various product extensions.

Sales and Marketing expenses as a percentage of total revenue have risen sharply as revenues have increased, as the figures below indicate:

Sales & Marketing	Expenses vs. Revenue
Period	Percentage
2021	45.7%
2020	8.0%

(Source)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was 1.6x in the most recent reporting period. (Source)

Hempacco’s Market & Competition

According to a market research report by Hemp Industry Daily and Nielsen Research, the global market for smokable hemp is currently around $80 million in annual value but is forecast to reach $300 million by 2025.

This represents a forecast 4x growth multiple in around 3 years’ time.

The main drivers for this expected growth are an increase in consumer awareness of the availability of smokable hemp products from younger demographics.

Also, smokable hemp products promise to have a more immediate effect than traditional marijuana products.

Major competitive or other industry participants include:

• Taat International

• Wild Hemp

• Pure Hemp

• Colorado’s Finest

• Redwood Reserve

• Heimat

• Hemp House

Hempacco Co.’s Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing topline revenue from a tiny base

• A swing to positive gross profit and gross margin

• Higher operating losses

• Increasing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2021	$ 1,187,273	243.2%
2020	$ 345,989
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
2021	$ 336,372	-160.7%
2020	$ (553,710)
Gross Margin
Period	Gross Margin
2021	28.33%
2020	-160.04%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2021	$ (1,659,333)	-139.8%
2020	$ (1,304,989)	-377.2%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
2021	$ (2,613,904)	-220.2%
2020	$ (1,465,444)	-123.4%
Cash Flow From Operations
Period	Cash Flow From Operations
2021	$ (730,961)
2020	$ (69,686)
(Glossary Of Terms)

(Source)

As of December 31, 2021, Hempacco had $933,469 in cash and $4.7 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021 was negative ($810,924).

Hempacco Co.’s IPO Details

Hempacco intends to raise an undisclosed amount in gross proceeds from an IPO of its common stock.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

25% of the net proceeds […] for sales, marketing and advertising initiatives;

25% of the net proceeds […] for acquisitions of companies and technologies aligned and synergistic with our manufacturing technologies and growth objectives;

15% of the net proceeds […] for expansion and upgrades to our existing manufacturing facility;

10% of the net proceeds […] for research and development;

10% of the net proceeds […] for hiring of a national sales team and general employee staffing;

5% of the net proceeds […] for legal, accounting, and other professional fees associated with becoming a public company;

5% of the net proceeds […] for general and administrative expenses associated with increased operations; and

5% of the net proceeds […] for general working capital.

(Source)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says it is not aware of any legal proceedings or claims against the firm.

The sole listed bookrunner of the IPO is Boustead Securities.

Commentary About Hempacco’s IPO

HPCO is seeking U.S. public capital market funding to invest in its further commercialization efforts and for other corporate requirements, including potentially acquiring another company, although no agreements have been finalized at the time of filing.

The company’s financials have produced increasing topline revenue from a tiny base, growing gross profit and gross margin, increasing operating losses and higher cash used in operations.

Free cash flow for the twelve months ended December 31, 2021 was negative ($810,924).

Sales and Marketing expenses as a percentage of total revenue have risen as revenue has grown; its Sales and Marketing efficiency multiple was 1.6x in 2021.

The firm currently plans to pay no dividends on its shares and anticipates that it will use any future earnings to reinvest back into the company’s expansion efforts.

The market opportunity for smokable hemp products is currently small but is forecast to grow at a rapid rate of growth over the coming years, so the firm has strong industry growth dynamics in its favor.

Boustead Securities is the sole underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of 74.0% since their IPO. This is a top-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook are its tiny size and the potential for larger competitors in adjacent markets to move into the hemp smokable market and compete on price and distribution capabilities.

When we learn more information about the IPO, I’ll provide an update.

Expected IPO Pricing Date: To be announced.