Hempacco Co., Inc. (NASDAQ: HPCO) is a vertically integrated hemp manufacturing company that is making waves in the tobacco industry. Founded in 2019, the company has rapidly established itself as a leading innovator in the production and distribution of hemp-based smokable products, including cigarettes, rolling papers, and alternatives to traditional tobacco.
Company Background
Origins and Formation
The company’s origins date back to April 1, 2019, when it was formed as The Hempacco Co., Inc. in Nevada. On April 23, 2021, the company filed a second amendment to its Articles of Incorporation, changing its name to Hempacco Co., Inc. Shortly after, on May 21, 2021, Hempacco merged with Green Globe International, Inc., becoming a subsidiary and solidifying its position as a vertically integrated player in the hemp industry.
Product Overview
Core Focus and Products
Hempacco’s core focus has been the development and manufacture of hemp-based smokable products, utilizing proprietary technologies to infuse terpenes and flavors into its offerings. The company operates in three key product segments: Private Label Manufacturing and Sales, Intellectual Property Licensing, and Inhouse Brand Development and Kiosk Sales.
In the Private Label Manufacturing and Sales segment, Hempacco manufactures and sells smokable hemp and herb products, including its own brand “The Real Stuff Hemp Smokables”, as well as producing private label products for other well-known companies in the cannabis and tobacco-alternatives industries. The company has the capacity to produce up to 30 million hemp cigarettes per month from its facility in San Diego, California.
The Intellectual Property Licensing segment generates revenue by licensing Hempacco’s patented technologies for terpene infusion and flavored filter infusion to other manufacturers.
In the Inhouse Brand Development and Kiosk Sales segment, Hempacco owns and operates approximately 580 kiosk vending machines that it plans to use to distribute its own branded hemp and herb products through a wider retail network.
In addition to its smokable products, Hempacco owns high-tech CBD vending kiosks that it planned to place in retail venues throughout the US, in partnership with various joint venture partners. The company also manufactures and distributes hemp smokables under its own name and as white label products for clients. In 2021, Hempacco began supplying its joint venture partner, HPDG, Inc., with Snoop Dogg branded CBD Gummies, showcasing its ability to collaborate with high-profile brands in the industry.
Legislative Challenges
The passing of California Assembly Bill Number 45 (AB 45) on October 6, 2021, presented a significant challenge for Hempacco, as it prohibited the sale of inhalable hemp products in California. In response, the company shifted its focus to building distribution networks in other states and countries, while continuing to manufacture inhalable hemp products for sale outside of California.
Recent Expansions
Throughout 2023, Hempacco expanded its business through several new joint ventures and acquisitions. The company entered into agreements with Weedsies Mobile, LLC, Alfalfa Holdings, LLC, and Nasir Ghesani’s Reliable Distributor. Additionally, Hempacco acquired a 50% equity interest in Green Star Labs, Inc., further diversifying its product lines and distribution channels.
Manufacturing Capabilities
One of Hempacco’s key strengths is its comprehensive in-house manufacturing capabilities. The company operates a 30 million cigarette per month production facility in San Diego, California, enabling it to cater to a wide range of customers, from small private label orders to large-scale distribution. This vertical integration allows Hempacco to maintain tight control over its supply chain and product quality, a critical advantage in the highly regulated hemp and tobacco industries.
Financials
Financial Performance
Financially, Hempacco has seen mixed results in recent years. In the most recent fiscal year (2023), the company reported annual revenue of $4.05 million, with a net loss of $13.12 million. Operating cash flow for the year was negative $5.84 million, and free cash flow was negative $6.26 million.
The most recent quarter (Q3 2023) showed revenue of $2.04 million, with a net loss of $6.95 million. Operating cash flow for the quarter was negative $873,900, and free cash flow was negative $1.12 million.
The decrease in revenue and increase in net loss during the most recent quarter was primarily due to a temporary decline in orders from one of Hempacco’s largest customers due to a legal dispute, as well as the impact of California’s ban on the sale of smokable hemp products.
For the first nine months of 2023, Hempacco generated total revenues of $2 million, down 42% from the same period in 2022. Gross profit for this period was $712,810, down from $642,800 in the prior year period. Operating expenses increased significantly to $5.41 million, up from $2.64 million in the first nine months of 2022, driven by higher general and administrative costs, increased sales and marketing expenditures, and the expensing of $1.49 million in related party advances and loans.
Liquidity
Hempacco’s liquidity position has been challenging. As of Q3 2023, the company had a debt-to-equity ratio of -19.67 and cash on hand of just $17,080, down from $548,330 at the end of 2022. The company has a $100,000 line of credit, which was fully drawn as of Q3 2023. Hempacco’s current ratio stands at 0.25, and its quick ratio is 0.06, indicating potential liquidity concerns.
Despite these near-term financial hurdles, Hempacco remains focused on capitalizing on the growing demand for hemp-based alternatives to traditional tobacco products. The company has forged strategic partnerships and joint ventures with high-profile figures in the cannabis and hemp industries, such as its agreement with Snoop Dogg’s Dogg Pounds brand to produce and distribute CBD gummies.
Future Outlook
Strategic Partnerships
Hempacco has been actively expanding its product portfolio and distribution channels. In 2023, the company acquired a 50% stake in Green Star Labs, Inc., a subsidiary of its parent company Green Globe International, Inc. This move is expected to enhance Hempacco’s capabilities in the production of bottled and gummy-based hemp and CBD products.
Product Portfolio Expansion
Looking ahead, Hempacco remains committed to its mission of “Disrupting Tobacco™” and is well-positioned to capitalize on the growing consumer demand for healthier, natural alternatives to traditional tobacco products. The company’s focus on innovation, vertical integration, and strategic partnerships positions it as a formidable player in the rapidly evolving hemp and tobacco-alternative markets.
Risks and Challenges
Hempacco faces several key risks that investors should be aware of. The company operates in a highly regulated industry, with ongoing changes in state and federal laws governing the production and sale of hemp-based products. Additionally, the company’s reliance on a limited number of large customers for a significant portion of its revenue presents a concentration risk.
Furthermore, Hempacco’s financial position remains a concern, with ongoing net losses and a need for additional capital to fund its growth initiatives. The company’s ability to effectively manage its operating expenses and achieve profitability will be crucial in the coming years.
Legal challenges have also emerged. In October 2022, Hempacco was sued by Long Side Ventures LLC et al. alleging fraudulent transfer of assets. While the court dismissed the case against all defendants except the CEO and COO, the case is still ongoing. Additionally, in September 2023, the California Attorney General sued Hempacco and other defendants for selling inhalable hemp products in California in violation of AB 45. Hempacco believes this was an unnecessary lawsuit as the company had already ceased sales of such products in California.
Despite these challenges, Hempacco’s commitment to innovation, its comprehensive manufacturing capabilities, and its strategic partnerships make it a company worth watching in the rapidly evolving hemp and tobacco-alternative industries. As the company continues to navigate the regulatory landscape and optimize its financial performance, investors may find its story of disruption and innovation in the $1 trillion tobacco industry particularly compelling.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.
