| 2024 | 2025 | ||||||
| Price: | 0.31 | EPS | 0.04 | 0.05 | |||
| Shares Out. (in M): | 54 | P/E | 8x | 6x | |||
| Market Cap (in $M): | 17 | P/FCF | 16x | 10x | |||
| Net Debt (in $M): | 0 | EBIT | 3 | 3 | |||
| TEV (in $M): | 17 | TEV/EBIT | 7x | 5x | |||
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(1 of 9). ELEVATOR PITCH
• Fast-growing “consumer consumables” company.
• <10X P/E (trailing & forward) which is a cheap multiple considering the Company’s EPS growth rate.
• >50% annual growth in revenue and EPS is likely to continue.
• Undervalued because illiquid nanocap, in a cannabis niche, and quietly went public recently.
(2 of 9). OVERVIEW: COMPANY
Simply Solventless Concentrates Ltd. (TSXV: HASH) manufactures & distributes cannabis-derived products in Canada. End users are primarily recreational, but also some medical and B2B.
The Company was founded in 2020 by Jeff Swainson, the CEO and largest shareholder, who owns ~14% fully diluted worth ~$2M. Insiders own ~30%. It recently listed in December 2023 and trades on the Ventures (Canadian) exchange.
The Company has 4 sources of revenue. This includes the Company’s 3 fully-owned brands/“product lines” for which the Company owns the IP (which is the brand-name and processing formula): Astrolab, Frootyhooty, and Lamplighter. The Company’s fourth & final source of revenue is B2B whereby the Company manufactures & distributes third-party branded products.
(3 of 9). OVERVIEW: PRODUCT
The Company manufactures & distributes several types of cannabis products. They are all concentrates. They include solventless (i.e., chemical-free) concentrates, vapes, and infused pre-rolls. All are inhaled upon being ignited or heated by the end user. Across its 3 brands, the Company has ~30 products.
For context, the Company doesn’t grow or sell flower or edibles (it only does concentrates).
Manufacturing the concentrates entails washing (i.e., processing) the cannabis with equipment at a facility, which the Company does entirely in-house at its sole plant outside Calgary, Alberta.
The end users of the concentrates products are typically experienced/connoisseurs of cannabis who want potent, high-consistency-quality stuff. The products are less commoditized (i.e., more niche-y “target audience”) than flower or most edibles.
(4 of 9). OVERVIEW: INTERMEDIARY
The Company doesn’t sell directly to the end user. Instead, the Company sells its products to local cannabis dispensaries and large retail chains. (This is the same for the Company’s peers, too.) Dispensaries sell products via in-store, courier delivery, and/or online. Dispensaries have for sale an assortment of products (i.e., both the Company’s and competitors’).
(5 of 9). THESIS: PROFITABLE GROWTH LIKELY CONTINUES
My overall thesis is I believe revenue will continue growing (over the next few years) rapidly, profitably, and consistently. The share price is likely to rise due to EPS growth and, potentially, multiple expansion.
i. RAPIDLY. Revenue growth >50%, I believe, will continue for several more years. Here are the reasons why:
• Geographic expansion. The Company at the start of 2024 had sales in only two provinces: Alberta (where the Company was founded, its facility & headquarters are, and has the most market penetration) and Ontario. In 2Q2024, the Company launched into Saskatchewan and is looking to get into Manitoba and British Columbia per CEO’s comments last month. The Company has potential for 10X revenue growth solely within Canada. The Company’s market share is <1%, whereas large players (for instance, Tilray and Decibel) have >10% market share apiece. CEO said that entering into additional jurisdictions is low-hanging fruit for revenue expansion.
• M&A. The Company opportunistically acquired a brand Lamplighter in Jan2024. Lamplighter has increased the Company’s revenue and net income as reported in 1Q2024. Lamplighter generated immediate revenue & profitability for the Company, and thus aligns the CEO’s stated acquisition strategy. For context, acquisitions aren’t necessary for this Company to sustain double-digit growth; the Company has sufficient ways to organically grow (explained below). However, I’d guess there will be further opportunistic acquisitions because of the lower capital availability environment compared to several years ago in the cannabis industry.
• Retail chain expansion. CEO mentioned in Apr2024 that the Company’s products are expanding into several large retail chains over the next several months. The Company hired a VP Marketing (i.e., the key man from Lamplighter upon the Company acquiring it) who has connections to get the Company’s products placed into retailers.
• Additional products. The Company has continuously grown its number and variety of products/brands. This has been true throughout the Company’s brief history, and it is the CEO’s plan to continue. This could result in getting more shelf space at dispensaries as well as growing Company revenue. The Company currently has ~30 product listings across its 3 brands.
• CEO. I think the CEO (Jeff Swainson) is trustworthy. He has delivered on his growth and profitability past comments. He has been fair to all shareholders, including non-controlling and related party. He has clear goals (and the “right goals”, I believe) that he articulates clearly, and he often repeats them in writing & verbally which I deem a positive sign. He is net income-focused, which is a rarity amongst cannabis and Canadian nanocaps. He has attracted & hired competent (and not related) people to Management and the Board. He is a former Chartered Accountant, is relatively young & “hungry”, and I think sensible/intelligent/pragmatic person. This is a small company and he is the founder; thus, he has outsized control. To get a sense for him and his goals, consider watching his two interviews—recorded Feb2024 and Apr2024:
https://www.youtube.com/watch?v=P0EFIgdWJ6U
https://www.youtube.com/watch?v=opqeNC2FvNQ
His commentary is articulate (per the press releases and MD&A). I have emailed him questions, and his responses to me are intelligent.
• Past. The Company has a track record (albeit brief) of revenue growing rapidly. The most recently reported quarter (i.e., 1Q2024) is $3.1M revenue, which is >70% higher than a year ago. This aligns with what Management wrote in its MD&A for YE 12/31/2023: “SSC is experiencing rapid revenue growth. In 2022, SSC generated average gross revenue of approximately $233,281 per month. In 2023, SSC generated average gross revenue of approximately $581,117 per month. In February 2024, SSC provided Q1 2024 guidance including average projected gross revenue of $1,033,334 per month.”
• Future. For the upcoming quarter (i.e., 2Q2024), Management has guided to $4M revenue which would be >100% higher than a year ago. Per the 5/27/2024 guidance release: “SSC projects record quarterly gross revenue during Q2 2024 of approximately $4,000,000 (Q1 2024 - $3,122,232), representing a growth rate of 28% quarter over quarter. SSC's continued revenue growth is primarily attributable to SSC's brands Astrolab, and Frootyhooty, and SSC's acquisition of Lamplighter in January 2024.”
ii. PROFITABLY. Net income margins >15%, I believe, will continue indefinitely. Here are the reasons why:
• CAPEX. The Company doesn’t require significant additional CAPEX to grow. The Company has an indoor facility that is massive (i.e., 30K square ft.) with excess capacity. The Company’s existing PP&E is sufficient to produce several times the Company’s current volume. As volume increases, the CAPEX cost per unit should decline as the fixed cost is spread over more units. This Company differs from cannabis companies that grow their own flower (for instance, Grown Rogue “$GRIN”) which typically require significant CAPEX spend in order to increase volume/capacity.
• Distribution cost. Distribution/transportation cost per unit should come down as more volume is sold to each dispensary and province. Higher market share/penetration generally means cheaper distribution per unit.
• Management labor. Economies of scale likely exist in Management labor. The “SG&A compensation” cost per unit should decrease the more volume is sold. This is because the majority of added (i.e., marginal) labor costs are relatively cheap manual labor which is used to process/“wash” the cannabis into the concentrate finished product.
• Manufacturing labor. The larger the batches, the less manufacturing labor per unit is used. Thus, the per unit manufacturing cost generally decreases the more volume is produced (unless they keep it “small batch”, which isn’t necessary for the Company’s business/marketing).
• Pricing power. The Company’s products (i.e., branded concentrates with fully-owned IP) have a medium degree of pricing power. They aren’t as commoditized as most edibles (e.g., gummies) and flower. The typical concentrates consumer is someone who is experienced and generally not a cannabis newbie or someone looking to spend the lowest dollar to get the most stuff. The recreational legal cannabis industry is still relatively new. However, my belief is pricing power in any cannabis product won’t ever get as strong as, say, cigarettes (e.g., Marlboro) or alcohol (e.g., Bacardi). This is because consumers seek out variety in cannabis products (and varied price points, based largely on quality); they are less likely to use the exact same product only, thus cannabis products’ brand/product loyalty is inherently weaker.
• CEO. The Company has particularly low-cost (without sacrificing quality) production cost of its concentrates. Compare its margins to the rest of the industry’s. This doesn’t happen by chance. The CEO is thrifty in a variety of ways including labor costs. I trust him to follow through on his repeated statements about growing profitability, and to not undertake a product/brand/acquisition/new hires that are unprofitable.
• Disciplined M&A. CEO has said (and done) M&A only if profitable for the Company upon acquisition. For evidence, see the Lamplighter brand acquisition.
• Past. The Company has a track record (albeit brief) of net income increasing. The most recently reported quarter (i.e., 1Q2024) is $0.5M net income and slightly higher Adjusted EBITDA of $0.6M which is 90% higher than a year ago.
• Future. For the upcoming quarter (i.e., 2Q2024), Management has guided to $0.75M net income which would be >100% higher than a year ago. Per the 5/27/2024 guidance release: “Q2 2024 adjusted EBITDA of approximately $850,000 (Q1 2024 - $611,571) representing a growth rate of 39% quarter over quarter, and net income of approximately $750,000 (Q1 2024 - $502,536), representing a growth rate of 49% quarter over quarter. Our focus remains on profitable revenue growth both organically and through opportunistic acquisitions.”
iii. CONSISTENTLY. Revenue and margins, I believe, will continue to be steady (i.e., not lumpy and relatively smooth) on quarterly basis. Here are the reasons why:
• Consumables. The Company’s products are all consumables. They are one-time use. The items don’t take a long time to fully consume upon heating/igniting it. They must be purchased again and again in order to use. Consumers often consistently/frequently buy & use cannabis (cannabis is now used daily more than alcohol). This contributes to revenue being relatively stable (i.e., not lumpy) quarter-to-quarter.
• End user. The end users are mostly elective/recreational retail customers. Their consumption isn’t significantly impacted by economic slowdowns. Throughout the calendar year, the product is sold and consumed consistently (i.e., at a stable rate). This contributes to steady revenue & margins on a quarterly basis.
• Repeat sales. The Company has repeat sales to dispensaries. The number of dispensaries/retail chains that sell the Company’s products is growing each quarter (i.e., gradually) and isn’t prone to “dramatically dropping off” quarter-to-quarter.
• Production. Neither production nor consumption has seasonality or cyclicality. The Company’s product can be manufactured at a consistent rate throughout the calendar year. The Company’s manufacturing & distribution—which is done via an indoor facility—isn’t prone to seasonality or cyclicality. For context, the Company isn’t as exposed to external variables (such as weather) compared to cannabis companies that grow their own flower.
(6 of 9). WHY UNDERVALUED?
$HASH is trading for less than, I believe, it is worth. Here are the reasons why:
• Nanocap. $HASH is a Canadian nanocap listed on the TSXV with a $16M market cap (~30% of which is held by insiders, who haven’t sold any stock). It’s too small for most institutional investors or those with large portfolios to get a meaningful stake.
• Illiquid. It takes a while to build a position in $HASH (or exit), without moving the share price.
• Cannabis. Many cannabis stocks have a sketchy past, recurring significant losses, or are promotional/enrichment schemes for Management. (To be clear, I don’t think any of these apply to $HASH.) Moreover, equity capital in cannabis is flighty. The peak of the “hype cycle” for cannabis stocks was several years ago. Value investors may be wary of (or completely ignore) cannabis stocks, for justified reasons.
• Niche product. The Company manufactures concentrates, which are more of a niche product in cannabis (compared to, say, flower or edibles like gummies). Concentrates may be unfamiliar to investors, or few investors consume concentrates.
• Quiet listing. This is a young company, founded in 2020, that went public in Dec2023 (i.e., approximately 6 months ago). I couldn’t find any writeups on the Company/stock. Its story isn’t widely-known yet. Moreover, the CEO isn’t promotional: he has only done two interviews/conferences (that I’m aware of) and both were intellectual conversations with a lot of discussion about underlying/numerical fundamentals that would be unappreciated/ignored by many traders.
(7 of 9). RISKS
Non-moving inventory. The Company’s inventory balance has grown in conjunction with revenue (as is expected, based on the business model). It’s difficult for me as an outsider to determine if the Company has sitting inventory or is over-producing certain types of inventory.
• Mitigant: The shelf life of concentrates is long, which mitigates spoilage risk. I intend to monitor the financial statement footnotes and MD&A as well as assess if inventory is growing in excess of revenue. However, outside of touring the facility, it’s difficult for me to determine if certain inventory is “collecting dust” or being over-produced.
Recall/Product disaster. The Company could have a recall based on the product/formula being contaminated, mis-manufactured, or mislabeled.
• Mitigant: This is difficult to predict, but unlikely I’d guess. Other brands’ concentrates bought at dispensaries have variability in a product’s quality, and it doesn’t necessitate a recall.
Fleecing shareholders. Management or the Board may in the future significantly increase their own SBC or cash compensation.
• Mitigant: I think it’s unlikely with this Company. They are focused on the Company’s cash & profitability. CEO wants to get rich via the share price rising due to profitable growth (as opposed to selling out of his shares or his own compensation). Insiders own ~30%. Management/Board doesn’t pay itself too much (i.e., <$1M annually), and the amount isn’t rising rapidly. Per the most recently reported MD&A: “During the three months ended March 31, 2024, officers and directors received cash-based compensation of $177,500 (three months ended December 31, 2023 - $140,000, three months ended March 31, 2023 – $47,063), and share-based compensation of $32,320 (three months ended December 31, 2023 - $nil, three months ended March 31, 2023 – $79,800.”
Dilution. Share count (and warrants) have grown at a rapid clip in 2024 thus far. Most is attributable to the Apr2024 financing totaling $0.8M to fund growth & inventory.
• Mitigant: I don’t think the Company will need any more financings. I think the Company will become self-funding (from retained cash earnings) soon; for context, the Company generated positive FCF of $0.2M in 1Q2024 (compared to $0.1M FCF in 4Q2023; and -$0.5M FCF last year 2023). CEO avoids debt and lines of credit, which I deem a positive sign.
(8 of 9). CATALYST
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(9 of 9). APPENDIX: KEY DATES
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