A Quick Take On Hempacco
Hempacco (HPCO) has filed to raise $15 million from the sale of its common stock in an IPO, according to an amended registration statement.
The company sells hemp-based smokable products to consumers in the United States.
It isn’t obvious to me that the firm will gain significant distribution to become a major player in the hemp product market and the IPO’s high valuation gives me pause.
Although the IPO will likely attract day traders seeking volatility, I’m Neutral on HPCO on a more fundamental basis due to its high valuation.
Hempacco Overview
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 Prius 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 fair market value investment of $6.8 million as of March 31, 2022 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 trended higher as revenues have increased, as the figures below indicate:
Sales and Marketing |
Expenses vs. Revenue |
Period |
Percentage |
Three Mos. Ended March 31, 2022 |
23.7% |
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, rose to 3.6x in the most recent reporting period, as the table shows below:
Sales and Marketing |
Efficiency Rate |
Period |
Multiple |
Three Mos. Ended March 31, 2022 |
3.6 |
2021 |
1.6 |
(Source)
Hempacco’s Market and 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 three 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:
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Taat International
-
Wild Hemp
-
Pure Hemp
-
Colorado’s Finest
-
Redwood Reserve
-
Heimat
-
Hemp House
Hempacco Co. Financial Performance
The company’s recent financial results can be summarized as follows:
-
Growing topline revenue from a tiny base
-
Positive gross profit; variable gross margin
-
Higher operating losses but reduced negative operating margin
-
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 |
Three Mos. Ended March 31, 2022 |
$ 971,166 |
607.2% |
2021 |
$ 1,187,273 |
243.2% |
2020 |
$ 345,989 |
|
Gross Profit (Loss) |
||
Period |
Gross Profit (Loss) |
% Variance vs. Prior |
Three Mos. Ended March 31, 2022 |
$ 172,160 |
409.8% |
2021 |
$ 336,372 |
-160.7% |
2020 |
$ (553,710) |
|
Gross Margin |
||
Period |
Gross Margin |
|
Three Mos. Ended March 31, 2022 |
17.73% |
|
2021 |
28.33% |
|
2020 |
-160.04% |
|
Operating Profit (Loss) |
||
Period |
Operating Profit (Loss) |
Operating Margin |
Three Mos. Ended March 31, 2022 |
$ (456,522) |
-47.0% |
2021 |
$ (1,659,333) |
-139.8% |
2020 |
$ (1,304,989) |
-377.2% |
Net Income (Loss) |
||
Period |
Net Income (Loss) |
Net Margin |
Three Mos. Ended March 31, 2022 |
$ (473,346) |
-48.7% |
2021 |
$ (2,613,904) |
-269.2% |
2020 |
$ (1,465,444) |
-150.9% |
Cash Flow From Operations |
||
Period |
Cash Flow From Operations |
|
Three Mos. Ended March 31, 2022 |
$ (1,134,464) |
|
2021 |
$ (730,961) |
|
2020 |
$ (69,686) |
|
(Source)
As of March 31, 2022, Hempacco had $7,048 in cash and $4.9 million in total liabilities.
Free cash flow during the twelve months ended March 31, 2022, was negative ($2.2 million).
HPCO’s IPO Details
HPCO intends to sell 3.0 million shares of common stock at a proposed midpoint price of $5.00 per share for gross proceeds of approximately $15.0 million, not including the sale of customary underwriter options.
No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $99.2 million.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 13.1%. A figure under 10% is generally considered a “low float” stock which can be subject to significant price volatility.
Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:
25% of the net proceeds (approximately $3.3 million) for sales, marketing and advertising initiatives;
25% of the net proceeds (approximately $3.3 million) for acquisitions of companies and technologies aligned and synergistic with our manufacturing technologies and growth objectives;
15% of the net proceeds (approximately $2.0 million) for expansion and upgrades to our existing manufacturing facility;
10% of the net proceeds (approximately $1.3 million) for research and development;
10% of the net proceeds (approximately $1.3 million) for hiring of a national sales team and general employee staffing;
5% of the net proceeds (approximately $0.7 million) for legal, accounting, and other professional fees associated with becoming a public company;
5% of the net proceeds (approximately $0.7 million) for general and administrative expenses associated with increased operations; and
5% of the net proceeds (approximately $0.7 million) 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 underwriter of the IPO is Boustead Securities.
Valuation Metrics For Hempacco
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
Measure [TTM] |
Amount |
Market Capitalization at IPO |
$114,517,660 |
Enterprise Value |
$99,239,706 |
Price / Sales |
56.66 |
EV / Revenue |
49.10 |
EV / EBITDA |
-54.46 |
Earnings Per Share |
-$0.12 |
Operating Margin |
-90.16% |
Net Margin |
-136.20% |
Float To Outstanding Shares Ratio |
13.10% |
Proposed IPO Midpoint Price per Share |
$5.00 |
Net Free Cash Flow |
-$2,244,136 |
Free Cash Flow Yield Per Share |
-1.96% |
Debt / EBITDA Multiple |
-0.10 |
Revenue Growth Rate |
607.25% |
(Source)
Commentary About Hempacco
HPCO wants to go public to fund its expansion plans and for potential acquisitions.
The company’s financials have produced higher topline revenue from a tiny base, positive gross profit, variable gross margin, increased operating losses but reduced negative operating margin and growing cash used in operations.
Free cash flow for the twelve months ended March 31, 2022, was negative ($2.2 million).
Sales and Marketing expenses as a percentage of total revenue have trended higher as revenue has increased and its Sales and Marketing efficiency multiple rose to 3.6x in the most recent reporting period.
The firm currently plans to pay no dividends on its capital stock and anticipates that it will retain any future earnings to reinvest back into the business.
The market opportunity is relatively small but is forecast to grow at a high rate of growth over the next few years.
Boustead Securities is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 14.5% since their IPO. This is an upper-tier performance for all major underwriters during the period.
The primary risk to the company’s outlook is its lack of distribution and tiny size, although the company is growing at a high rate of growth in recent periods.
As for valuation, management is asking IPO investors to pay an Enterprise Value/Revenue multiple of more than 49x, so the IPO is priced for perfection.
To buy HPCO, an investor would need to believe that it will continue its growth trajectory in order to justify its 49x EV/Revenue multiple at IPO.
As for the medium term, it isn’t obvious to me that the firm will gain significant distribution to become a major player in the hemp product market and the IPO’s high valuation gives me pause.
The IPO will likely attract day traders seeking volatility, so if that’s your strategy, the IPO may be of interest. But, I’m on Hold for the HPCO IPO on a more fundamental basis due to its high valuation.
Expected IPO Pricing Date: To be announced.
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