This outfit has never been on my radar, and came across the name reading about a celebrity endorsement back in May.
I read about them again this morning, in a hand waving press release announcing the appointment of Jakob Ripshtein (and a guy who apparently invented the ‘infomercial’. He sounds like a more modern K-Tel. Not sure if I’d count that as a ‘plus’ per se….but….) to their Board. You might have heard of Ripshtein though – he was President at Aphria for a little more than a year, and prior to that, CFO at Diageo, and prior to that, President of Diageo Canada.
His professional path is a little anomalous, in that CFO’s/Finance usually don’t wander into the commercial lane….and vice versa. Just a generalization.
Hollister Biosciences ($HOLL) came online in early 2019 buying a preroll manufacturer in California, and picked up an extract house in Arizona 6 months later. And yep, mushrooms are there (ugh), but no pretence of clinical trials or such. They look to be core weed consumer driven, with affiliations around ‘lifestyle’ brands: EasyRiders (
bikers motorcycle enthusiasts), Tommy Chong, and Heavy Grass.
<Interesting note about Tommy Chong – who actually spent more time in jail than a Washington DC rioter – was convicted and sentenced on a felony charge written and placed into law by none other than current President Joe Biden>.
Arizona’s recreational coming on-stream was heaven sent for $HOLL, and sales have increased pretty hard over the past year or so:
Despite $HOLL’s investor deck claiming several business lines (now featuring delivery!), these guys are an extract shop. They sport 10 different extracted products (three of which I’ve never even heard of before), $HOLL’s segmentation by business unit lays it out:
I’m always interested in getting insights into California, and have become intensely curious about branding…. and how formal CPG will approach and develop the cannabis sector. It hasn’t worked very well so far at Charlotte’s Web, and while Curaleaf’s ‘Select’ looks to be in full build ‘nationally’ – $CURA’s disclosure is so poor, one can’t tell if the billion plus they paid for the name looks to be worth it, or looking more like shareholder money burned.
<I’ve reviewed $CURA’s latest financials over the past few days……and am currently putting a Structure together. Running around $PLTH’s statements recently reminded me about a given company’s approach to disclosure – and the differences are so stark in comparison between these two – it irks me. It reminds me of sell-side and their pitches: they’ll be happy to agree that there could always be more disclosure, natch. Of course. Who could disagree with that? But show me an example of them calling a specific company out for it….. I’ve never seen it, because it’s simply not done in those circles. End rant>
I have a simple test for any statements I approach, and do a search on the word ‘segment’ the first time I open them…and that led me to those two tables above. Disclosure is promising on the face of it, so let’s take a wander around this shop, and see what’s in here.
To the financials!
- Cash at $7MM, same as last quarter. They began the year packing only a $1MM. Look like they timed a raise well, pulling in a little over $6MM in early March.
- And boyo, brokers’ fees/warrants made it expensive money. Typical for Tier 3’s….. and those without significant investor interest. Half warrants went out with a share in ‘units’ – priced at $0.36CAD, adding 10MM warrants to the float. I mention warrants because….
- Some ridiculously cheap warrants (like, 20MM of them) have been bumming around the balance sheet since last fall. $HOLL’s share price – like many – benefitted from the run earlier this year – and 7.5MM of these warrants have been exercised as of June 30th. 12MM more to come, and at $0.15 in the money….
- More sophisticated companies – or those with initial book-runners who care about their customers <snicker> – would see initial warrants not being concentrated in particular strikes or tenors. This presumes there’d be raises over time, and that the equity price shows movement. 2020 looked like a loooong year for this outfit, who also looked to be in early signs of distress by late summer.
- A raise in the third quarter 2020 (even more expensive than March 2021’s) is how so much optionality ended up on their books in one shot. They even paid a whack in ‘finder’s fees for the raise.
- And they pack 14MM stock options around the same price, with an average time to expiry 3.5 years. Sigh. That’ll grow by another 6MM thanks to their 2 new Board members.
- There’s been a $155k sitting in ‘earn-out shares’ for their mushroom business line. It’s been collecting dust for a year now, while the mushroom outfit develops ‘non-psychogenic’ mushroom products. Ummm….yep. At least it didn’t cost much ($517k, all -in, Goodwill at 105% of purchase price. $300k in cash got knocked off the purchase price, probably when they found out the car they bought didn’t come with an engine. Or tires).
- Another 30MM in cheap shares (<$0.10) are destined for earn-outs on the Venom acquisition (their extract business). The milestones centre around gross revenue numbers (cumulative $30MM & $40MM hurdles). Another 6MM shares were granted to the person who introduced them.
- 300MM share fully diluted out there. Yuck. Price to revenue though isn’t bad for cannabis.
- Speaking of revenue, this quarter saw sales come off almost $5MM. There’s a story in there. Might be channel compression. Let’s see what the company has to say…..
- And….nothing but YoY/YTD comparisons. Definite red flag there. If it was channel stuffing and sell through isn’t ripping, a clue could be in sales remaining at this level next quarter. A sales decline would be a pretty firm confirmation absent supply chain issues.
- As it is, inventory is up $1.4MM to $4.4MM. Not significant given throughput.
- PP&E an incredibly light $2.7MM, only $1.1MM in ‘equipment’.
I can’t find a thing on whereVenom’s facility is in Phoenix, a tight 11k ft2 for the array of output they have, and butI suspect it’s as cramped as a phone booth given their sales flow. It also reveals what can be done with a few extraction columns and a couple of vacuum ovens.
- It looks like $HOLL’s been threatening to build an expanded facility for Venom, but no word on if or when (or even where) this will be done. $HOLL’s got 34k ft2 in CA, half of it was rented out at some point to save money. The remaining 17k ft 2 is in Holister CA, but that was before 2 recent sublets, one of which extends to 2025. Whatever they’ve got, it’s compact.
- UPDATE – while I was checking out their footprint, presto! Looks like $HOLL’s in for a spend and upgrade
- They describe their delivery service as ‘asset-light’ within a higher margin DTC model. California’s on-the-ground market is reflected here, with ‘Dreamy’ having sales on product every single day of the week, student and veteran discounts, and 20% off for first time buyers. (The service is called Dreamy Delivery,’ natch. I can’t even type that with a straight face, let alone say it out loud).
- Really, their entire business is ‘asset-light’, with only $9MM in non-current assets. They sublet 2 facilities they had in California (Dec 2020 & May 2021). It doesn’t look like they have much penetration in California (compared to AZ). More below.
- And there it is. Margin an anemic 24%. Looks like the breadth of licensing deals they have combined with what’s probably an unscaled facility is hammering it. Hard to see it budging much either absent capital spend. They do reside in a relatively tight slot of ‘premium extracts’ – not much width in that lane as it is, and specialized.
As hoped for, the disclosure here is pretty good overall, although the MD&A is very flimsy in several key areas. The financials are relatively succinct, largely stemming from the fact they really didn’t do much until 2021, and outside of extracts, they don’t really do anything else but buy product and upgrade it.
Here’s their regional split-out:
Which, brings up a concern of mine regarding not only California, but margin in general. Previous quarter, this company reported a 16% margin, with CA’s sales the same, but CA’s loss doubling in this one. At a glance, it looks like they’re being cute in cost allocation. Salaries and wages last quarter across the system were $200k, this quarter, $500k. I can’t see coherence, and the MD&A is silent.
Well, that’s all I’ll ride this horse for now. A definite Tier 3 with some decent ramp and good penetration in AZ, but it stops there. Good disclosure in several parts of their statements, a game of ‘hide-the-weenie’ in other areas.
I don’t know what to think of this one, except that its’ a small-ish cannabis extractor with too much overhang in their capital structure that presents no strategic vision (outside of a 5 day old rental agreement with an un-costed capital spend). Might be a good speculative buy if they can figure out how to improve margin…..and become meaningful in CA. Probably easier to do the former than the latter. We’ve seen several companies turn on the ‘cultivation’ switch and promptly hit the ditch. Risk is that they are processors, not growers. They’ve gone ex-company for the growing part….bringing in a hired gun to roll out the grow. A challenge here for the investor is wondering what margins and sales next quarter will bring. Which, is what finance professionals mean when they say that assets have ‘an enhanced risk profile’.
I’ll look at them again. If margin keeps whipsawing – and if sales remain static/decline – I’d be very concerned about go-forward growth prospects, and whether they have a brand durable enough to stay out of said ditch.
Ripshtein and Harrington might be useful here. I’d hope so, because $HOLL granted $1MM worth of stock options to get them on-(B)oard. I bought into a small-ish position today, under the speculative premise that sales next quarter will rebound; to gain specific exposure to extracts/branding; and that $HOLL bringing 2 experienced folks onto the Board (doubling it’s size) will bring a formal commercial/strategic perspective to this outfit…..that I don’t see currently.
$HOLL strikes me as ending up with some decent sales more by accident than design, is specialist top heavy, and doesn’t appear to have much depth/personnel in the business sorts.
This is a trade position, and length of hold is essentially week to week. If this mutt gets irritating, it’s gone.
EDIT: this popped up in my feed today. I hope it illustrates what ‘insights’ are found in the wider world of social media.
EDIT2: Jesus Christ. I looked up more about Kevin Harrington just now. WTF is Ripshtein wanting to be connected with that midway? Is Ripshtein that hard up? Is $HOLL? Is an MLM launch imminent? Man. All of Harrington’s material leads straight into a swamp. Literally, all of it. I’m embarrassed for not pointing this out earlier.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds position in $HOLL