Just had a good laugh.
In prepping for this piece, I was looking over our last Structure on Hollister Biosciences ($HOLL) and was reminded of a Tweet that (to myself) exemplifies the general usefulness of social media around personal investing.
The fan bases of companies and their stocks can (and do) vary a lot. Some are more stoic and reserved, some are the ‘stonk’ sorts (diamond hands!), and some are downright savage. The latter ones are not plentiful….. but are the most memorable. And the nastiest fan bases I’ve come into contact with – hands down – are /were around Namaste, Heritage Cannabis, ZENA, C21 Investments, and most recently……. $HOLL.
There’s a generalization about academia – where conflict can become protracted and heated and ever-lasting – that says ‘the fights become so bitter only because the stakes are so small’. I’m not sure why one company’s fans might trend towards the nasty versus another’s, but I received several nasty DM’s from more than just Chad and Brad. Maybe I pissed off a small FB group. Meh.
Our last Structure on $HOLL saw a marginally profitable extraction company packing a Titanic-sized load of optionality. They’d taken on a couple of relatively ‘big’ names onto their Board, and announced an acquisition that would add acres of cultivation…… and triple their existing processing footprint.
We also saw potential channel stuffing taking place, some real struggles in California, and an absence of strategic vision.
Regarding that ‘vision’ – it looks like Jacob Ripshtein has been really busy since he arrived. $HOLL announced wholesale changes across the company in early October – that includes installing a new CEO and CFO, rebranding, a new comms strategy, bringing support services in-house, a new VP of Finance/Admin, new product categories, new visual ‘identity’, etc etc. This isn’t a restructure, it’s a comprehensive corporate overhaul….front to back. They’re establishing a Compensation committee too.
The new CEO was the guy who ran and sold Venom Extracts to $HOLL (this happened at $CANN too, where a more profitable acquisition hustled out the existing CEO). $HOLL’s new CFO was both on the Board and Audit Committee of Harvest Health. A new Chief Commercial Officer comes directly from CPG – and is ‘super-excited’ (his words) to turn $HOLL into a ‘house of brands’.
Their share price has done diddly over the past couple of months other than to go down. My crappy little position (at $0.235) is down $800 bucks, and I’ve had my finger on the mouse more than once hovering over the sell button, but have not yet pushed it:
To the financials!
- Cash at $7.6MM, up $600k. They report some $500k in net income this quarter.
- Sales took a gut punch this quarter, down $3.1MM. Perhaps my suspicion about channel stuffing was right. More below.
- Gross margin flat QoQ, remaining at 24%. Sequentially, it’s been 9%, 15%, 24%, 24% last 4 quarters. That low value – from their last quarter in 2020 – was noted to be slammed because they needed to source 3rd party distillate to keep sales whole.
- OPEX (excluding depreciation and SBC) at $1.5MM this quarter, up $300k from prior. An $80k drop in salaries and wages offset by a $150k increase in consulting fees.
- Interest cost is almost nil. The absence of debt here notable. What is there are financing charges on the extraction equipment. Looks like the Venom guy did a rental on the equipment with the manufacturer. There is an option to buy it outright coming up shortly.
- They report a loss $250k on a lease (after reporting a gain on it last quarter. They’d sublet some of their space in California, and it looks like the counter-party flaked.
- Inventory grew by $1.3MM QoQ, almost exclusively in WIP. At $5MM, immaterial. It reveals a pretty lean shop in terms of turnaround.
- The licensing deals with ‘Chong’s Choice’ and ‘Easyrider’ have both been cancelled.
- The conference call expands upon the rebranding – and adds the words ‘refinance strategy’ to it. Hmm. A reverse split? Incoming debt-load? The rebrand is expected to be launched sometime this month (December 2021).
- And nope to the reverse split, at least according to the CEO on the conference call.
- California (and their mushroom adventure) has been placed into a ‘care and maintenance’ program. Read: ‘we’re not spending another cent on either’.
- The conference call also mentions CA is now shut down, describing CA as a ‘very mature market that requires a highly coordinated strategy to successfully operate‘. Read that as ‘we have no clue what we were doing there’.
- At a guess – I’d look to debt coming in, but they’ve so few assets, it would be relatively small and pricey.
Ok. There’s still an unlock of 20MM more shares to come from Venom, the new CEO definitely has skin in this game. That they flushed pretty much the whole front office…….and now have an adult driving…….. speaks volumes about where this thing was at. The conference call also says that clearly to myself. It also suggests there are some very pissed-off retail shareholders wondering what the heck is going on.
The narrative in the MD&A is irritating, as it only addresses YoY changes, and not QoQ. I know GoBlue shares the same negative opinion as I do around this – it’s certainly a common feature across financial statements in the cannabis sector (although it exists in others as well).
Sales doubled in CA QoQ, but $HOLL lost the same amount there as they did last quarter (removing the impact from that lease cancellation). The entire reduction in wages at $HOLL ($80k) noted above is from CA too.
Arizona completely shit the bed (metaphorically speaking) with a sales decline of some 20% QoQ.
The previous quarter is on the right, current on left:
The product mix fell across the board except for some modest increases in pre-rolls, vapes, and hash-bone. A new business line in terpenes has apparently begun too – but all of this is swamped by the $3.4MM drop in their core extract business:
It looks worse when seen through quarterly sales over the year. Once Arizona came online, revenue spiked, but $HOLL has ‘not been able to sustain’ revenues – which is also how $HOLL describes it in the MD&A. They add nothing more to the narrative either. I see possible drivers as price compression, increased competition, or perhaps lower than expected throughput (initial channel stuffing). This is not a good look for $HOLL at all and should be very concerning. It’s no wonder Ripshtein hit the big red button at this point:
And, $HOLL’s new CEO lays out the travails on the conference call. It looks like their sales drop was driven by all three of those things:
The impact of Venom on $HOLL is hard to overstate. Despite being in business for a couple of years – prior to the acquisition, $HOLL wasn’t really going anywhere for a company with the then 200MM shares outstanding. Parsing revenue backwards sees $HOLL’s existing business was in decline, and marginal. Now, the shot in the arm it got from Venom hasn’t lasted. How Venom goes is now how $HOLL goes.
I’ve mentioned $CANN a couple of times, and I think there are some strong parallels here between their story and $HOLL’s.
Both were struggling, both on-boarded sales via the purchase of an extractor, and both have seen the acquired businesses assume the CEO position. Profitability of both remains suspect, although $HOLL isn’t showing the same cash haemorrhaging present at $CANN.
I think $HOLL’s strategic reset – catalyzed by Ripshtein – was seen to be needed back in the first/second quarter of this year. Bringing a company and a business model to a public exchange is one thing – operating one profitably in the real world another. A charitable take is that $HOLL is simply in flux – that operationalization needs a tweak (a very hard tweak apparently), and that this quarter represents an outlier due to seasonality and some needed changes in marketing, sales planning, and product array.
An uncharitable take is that they’re getting creamed by competition, that their pricing and expected sell-though 2 quarters ago were off, that their brands aren’t catching, and despite announcing pre-rolls with some fanfare back in late June – it is immaterial as a revenue line right now.
This position is not much more than a lark to myself. It gives me several things: exposure to the broader ‘MSO’ sector, a low amount of capital at risk for a relatively high 30k share count delta, specialized product exposure, in a state that’s just initiated adult use. Speculative and risky. And now it’s not even an MSO: it’s retreated to being an SSO.
These financials are definitely not what one wants to see. I’d close the position and crystallize the loss today and could care less. But – here’s a thing – and I hope you (valued subscriber) will use it as a takeaway.
The front-to-back reconstitution of this outfit by Ripshtein got in front of this full diaper, I have zero doubt he saw it coming, and it was the catalyst. Will his prescience (and presumeably big brains) be able to take what is essentially a hobby shop and expand commercially – levering off of whatever anchor the brand currently sports – and ramp? $HOLL now sports enhanced risk – in that they are tripling production capability and entering cultivation – but what if sales don’t show up or they can’t grow? We’ve seen this happen in many companies. Their asset light approach has served them well so far, but as their scale and lack of verticality and current capabilities show – generating any kind of meaningful margin has been a real bitch.
It moves a decision by the trader/investor on whether to hold or cut losses to front and centre, and these financials present the dual narrative of ‘yes, this looks like dogshit’ juxtaposed with ‘hey, you won’t be able to recognize this place in 6 months, just wait and see!’. And that’s the core of what this position has become. It’s now ‘several quarters out’. Which is a crappy place for a position to find itself in after initial conditions – the conditions that induced the position – have changed.
I’m gonna sit on this for awhile. I like the fact I can get a hold of a large amount of
MSO SSO volatility for relatively little money. The rational side of my head knows that ‘CPG-fication’ of something hasn’t really done anything for anyone in sector yet. Charlotte’s Web ($CWEB) has been wrecked in the waters off of CPG shoals, and other outfits with larger amounts of cash and CPG minded management…….haven’t been able to hit second gear.
If this blister gets bigger, I’ll pop it. For now, it’s a 2-3-4 quarters out story. The challenge is that it’ll take Ripshtein 4-6 quarters to execute.
I hope that serves as example of how initial trades can become ‘investments’, and knowing what one is willing to put at risk needs to be acknowledged up front. I certainly don’t know how this thing will sort, but I know what it’s always been worth to me guessing at it.
It’s not much.
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