The Offer

Company Overview

Hempacco Company Inc. is committed to disrupting the tobacco industry by creating and marketing tobacco- and nicotine-free alternatives to regular cigarettes. The business produces hemp- and herb-based smokable substitutes using a proprietary, patented spraying process for terpene infusion and a patent-pending flavored filter infusion technology. The business manufactures and sells smokable hemp and herb products, such as The Real Stuff Hemp Smokables, and has undertaken research and development in the smokables industry. Private label production and sales, intellectual property licensing, and the creation and marketing of in-house brands employing proprietary counter displays are some of the company's main sectors.

Key Highlights

Primary Offering: The Company is accepting applications for 1,000,000 Shares (1,150,000 if the underwriter exercises the over-allotment option in full) at a price of USD 6.00 per share to raise USD 6,000,000 (or 6,900,000 if underwriter exercises) before costs. The firm has given the underwriters a 45-day option to buy from it up to an extra 15% of the shares sold in the offering (or an additional 150,000 shares) at the price of the first public offering, less the underwriting discounts and fees.

Use of proceeds:

Dividend policy: On its common shares, the corporation has never declared or distributed any cash dividends. Hempacco does not foresee paying any cash dividends on its common shares anytime soon. Instead, it now expects to keep all cash on hand and any future revenues for use in running its company. In the future, the corporation may also sign credit agreements or other borrowing contracts that would limit its capacity to declare or pay cash dividends on the common shares. Any decision to pay dividends in the future will be at the board of directors' discretion and will be based on the company's financial situation, operating performance, capital needs, legal constraints, general economic circumstances, and any other relevant criteria that they may deem important.

Industry & Market Overview:

• The hemp-CBD industry has a burgeoning segment for smoked hemp products, which includes CBD flower, hemp-CBD pre-rolls, cigars, and other inhalable. Smokable hemp is one of the fastest growing and most profitable sectors in the emerging hemp and CBD business, according to Hemp Industry Daily - Sector Snapshot - Smokable Hemp, with predictions that the market will rise fivefold over the next five years.
• According to Nielsen, the market for smokable hemp will be worth USD 300 million to USD 400 million by 2025, or around 5% of the potential USD 6 billion to USD 7 billion hemp-derived CBD consumer goods market.

Financial Highlights (Expressed in USD):

• Increasing revenues: The company's sales increased from USD 348,521 in Q2FY21 to USD1,875,057 in Q2FY22, as shown in the table above, representing an increase of almost 5.38x because of the increasing demand for its products.
• Better gross Profit: In Q2FY22, the company reported a gross profit of USD 477,029 which was USD153,563 in Q2FY21, depicting an increase in gross profit by around 3.10x. Furthermore, the gross margin has been reduced for the company from 44% in Q2FY21 to 25.44% in Q2FY22.
• Enhanced profitability efficiency by decreasing net losses: The company has been successful in bringing down the net losses to USD 97,350 in Q2FY22 from USD 494,961 in Q2FY21, depicting an increase in operational efficiency for the company. The company almost halved its general and administrative expenses from USD 434,768 in Q2FY21 to a level of USD 235,924 in Q2FY22.

Key Management Highlights

Risk Associated (High)

Investment in the IPO of “HPCO” is exposed to a variety of risks such as:

• Regulatory risk: The 2018 farm bill, also known as the Agricultural Improvement Act of 2018 or the "2018 Farm Bill," which authorized the controlled production of hemp, had been implemented by more than 40 states as of December 31, 2020. The 2018 Farm Bill gives states the power to create their own regulatory frameworks, therefore restrictions will perhaps remain to differ from state to state. Under state food and drug laws, different states have different methods for controlling the cultivation and sale of hemp and goods produced from it. The Company's compliance expenses, and mistake risk can grow due to the fluctuating nature of state regulations.
• Profitability risk: The business has so far had negative cash flows from operating activities and net losses. The business anticipates that it will continue to experience operating losses and further considerable outlays for its growing activities. The pace of future expenses and its capacity for income generation will both have an impact on how much money it loses.
• Stiff competition: Price reductions, reduced margins, and market share losses due to aggressive industry competition from current or potential rivals could negatively impact the company's growth prospects, operating results, and financial performance. Competition from established, sizable, well-capitalized tobacco or nicotine cigarette producers or distributors may negatively impact the distribution arrangements, impede the growth of the company's existing markets, and prohibit it from extending its markets.

Conclusion

HPCO performance over the past three years shows strength of its business model and growing demand of its product offerings. Revenues, gross profit, and net losses all improved during the three months ended June 30, 2022, and the company reported healthy performance in the first half of FY22. It is anticipated that HPCO will have opportunities to grow using IPO funds and gain market share. Additionally, the company's recent spike in product demand bodes well for a long-term optimistic view. However, company is exposed to a large variety of risks ranging from regulatory headwinds to intense competition and supply chain issues due to geopolitical conditions.

Hence, given the financial performance of the company in the three-months ending June 30, 2022, narrowing losses, and associated risks “Hempacco Co., Inc.'s (HPCO)” IPO seems "Attractive for High-Risk Appetite Investors" at the IPO price.