Hempacco (HPCO) begins US IPO process

Sinhyu/iStock via Getty Images

A quick approach to Hempacco

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

The company designs and manufactures based on hemp and herbs Alternatives to smoking for consumers in the United States.

HPCO is a tiny company trying to capitalize on the potentially high growth rate in the smokable hemp products market.

I will comment when we hear more about the details of the IPO from management.

society

Based in San Diego, California, Hempacco was founded to manufacture smokable hemp and herbal products (nicotine and tobacco free) and currently has a production capacity of up to 30 million cigarettes per month.

Management is led by Sandro Piancone, Co-Founder, President and CEO, who has been with the company since its inception and was CEO of Primus Logistics, a cold storage company, and CEO of UST Mexico, a Mexican tobacco company.

The company’s main offerings include:

• Real Stuff Smokables in packs of 20, 10 or individually

• Hemp flavored papers

• Smokeable with hemp bar liqueur flavor

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

Hempacco – customer acquisition

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

The company has also initiated several joint venture relationships for various product expansions.

Sales and marketing expenses as a percentage of total sales have increased sharply as sales have increased, as shown in the following figures:

Sales & Marketing	Expenses vs. Income
period	percentage
2021	45.7%
2020	8.0%

(Source)

The Sales and Marketing Efficiency Multiplier, defined as how many dollars of additional new revenue generated by each dollar of sales and marketing spend, was 1.6x for the most recent reporting period. (Source)

Hempacco Market and Competition

According to a market research report by Hemp Industry Daily and Nielsen Research, the global smokable hemp market is currently worth around US$80 million annually but is expected to reach US$300 million by 2025.

This equates to a projected 4x growth multiple in about 3 years.

The main drivers for this expected growth are increasing consumer awareness of the availability of smokable hemp products among younger demographics.

Additionally, smokable hemp products promise a more immediate effect than traditional marijuana products.

Key contestants or other industry participants include:

• State International

• Wild Hemp

• Pure Hemp

• Colorado’s Finest

• Redwood Reserve

• hometown

• hemp house

Financial performance of Hempacco Co

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

• Increasing top-line earnings from a tiny base

• A swing to positive gross profit and gross margin

• Higher operating losses

• Increasing cash burn in operations

The following are relevant financial results arising from the company’s registration statement:

total revenue
period	total revenue	% variance vs. before
2021	$1,187,273	243.2%
2020	$345,989
gross profit (loss)
period	gross profit (loss)	% variance vs. before
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 debt.

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

Hempacco Co. IPO Details

Hempacco intends to raise an undisclosed amount of gross proceeds from an initial public offering of its common stock.

No existing shareholder has expressed an interest in buying shares at the IPO price.

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

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

25% of net proceeds […] to acquire businesses and technologies that are aligned and synergistic with our manufacturing technologies and growth objectives;

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

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

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

5% of the net proceeds […] for legal, accounting and other professional fees related to the incorporation of a public company;

5% of the net proceeds […] for general and administrative expenses related to increased operating expenses; and

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

(Source)

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

Regarding pending lawsuits, management says it is not aware of any lawsuits or claims against the company.

The sole public bookrunner for the IPO is Boustead Securities.

Commentary on Hempacco’s IPO

HPCO is seeking funding from the US public capital market to invest in its continued commercialization efforts and for other corporate needs, including the potential acquisition of another company, although no agreements have been entered into at the time of filing.

The company’s financial metrics have driven growing revenues, increasing gross profits and gross margins, increasing operating losses, and higher cash usage from a tiny base.

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

Sales and marketing expenses as a percentage of total sales have increased as sales have grown; its sales and marketing efficiency multiple was 1.6x in 2021.

The company currently plans not to pay dividends on its shares and expects to use future profits to reinvest in the company’s expansion efforts.

The market opportunity for smokable hemp products is currently slim, but it is forecast to grow at a rapid growth rate in the coming years, allowing the Company to benefit from strong industry growth momentum.

Boustead Securities is the sole underwriter and the IPOs the firm has led over the past 12 months have generated an average return of 74.0% since going public. This is a peak performance for all major underwriters over the period.

The main risks to the Company’s prospects are its small size and the potential for larger competitors in adjacent markets to enter the smokable hemp products market and compete for price and distribution capacity.

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

Estimated IPO Price Date: To be announced.