Simply Solventless ($HASH.V) FINS Review (from the archive)
Q1 2024 * Originally posted June 2024
Plenty of interest from the TSA discord asking for a review. Cool logo, amazing ticker, but the company name sure is a mouthful and a half and I must say their font and colour usage within their investor deck makes me want to reach for an edible. Don't know much about these guys yet but when SmallCapDiscoveries is a fan and involved in a recent financing, it makes you sit up in your chair and take notice (sadly this phrase has been somewhat ruined by a Roaring Kitty meme).
Despite spending several years as a stoner, this has never been a sector I've favoured. and I've never put any serious money into it. Is this the one? I'm always a skeptic, but going to dig in.
Balance Sheet:
Solid current ratio of over 1.6, but one of the more illiquid balance sheets you'll see with that good of a ratio. It consists of only $135k of cash, $1.11M of receivables and a staggering $9.5M worth of inventory against $6.6M worth of liabilities due over the next twelve months. SSC has no debt and their only long term liabilities are lease related. It's also notable that their current ratio worsened over the last three months from 1.8. Their A/R jumped by 110% within the last three months. That outpaces their revenue increase QoQ, and although the company is not accounting for a significant credit loss, I always like to see an aging report and SSC does not disclose one. Inventory makes up for 88% of their current assets at over $9.5M and with under $10M in net revenue (extrapolated) equates to an absolutely terrible turnover ratio. Their main competitors (using the ones they mention in their investor deck) range between 2.4 & 3.1 while they are at 1.05. Now they are a young company and allegedly did add some inventory with the Lamplighter acquisition, so I wouldn't get too excited about this yet, but it is something to monitor in future financials.
Cash Flow:
Positive cash flow from operations of $208k vs a cash burn of $188k in the comparable quarter last year. Much going on within their working capital changes including big spikes in A/R, accrued liabilities and the previously mentioned inventory on hand. Not a lot occurring within the other sections of their cash flow statement, so while their cash position improved by 68% in the last three months, it still ended at a rather paltry $135k. Based on everything I've said so far including their lack of liquidity, it's not shocking that the company raised $800k post financials at 15 cents/share.
Share Capital:
48.5M shares outstanding as of March 31, with 38% dilution since the beginning of 2023
An additional 11% dilution post financials bringing current share count to approx 53.8M
26.1M warrants outstanding including the 5.3M post financials. All are ITM at .20 expiring between Aug '26 and Apr '27
3.9M options, all ITM between .19 &.25
Fully diluted float of approx 84M
Per YF, 28% insider ownership
Some small activity from insiders in the open market, but insiders did participate for $100k in their most recent raise
Income Statement:
$2.3M of net revenue achieved in Q1, 28% better than Q1 of last year. Gross profit took an absolute shit kicking however with their GP eroding by a rarely seen rate of well over 2000 basis points from 70.3% to a much leaner 48.6%. I've included the company (image) comments from their MD&A here. In what fucking universe is going from 70% to 49% a slight decrease? Their Q1 margin is actually much higher than the 37% margin they produced in Q4 of last year, but this is very extreme margin lumpiness here, and I'm going to suggest if you discuss your mix of branded product to other product in your margin rationale, you should also provide some additional segmented revenue disclosure. So on 28% more revenue, they brought 11% less dollars to the GP line. Not good.
Cash burning expenses within their SG&A rose by 83% on 28% more revenue including payroll which rose by 350% and Office and general expenses by 140%. I think I'm willing to excuse this a little more than their margin miss as they are scaling and 16% SG&A to gross revenue still seems relatively lean.
But at the end of the day we're here for the bottom line of the P&L and when your expenses outpace your revenue increase and bring less margin dollars to the table it's going to add up to a big hit on the bottom line and that's what we have here with $502k in Net income, a 34% decrease in profitability to last year.
Overall:
I think it is safe to say I was expecting to like this better. Do I like them better than any of the other giant shitco's in this sector? Certainly, but I'm not sure that's the bar that I want to measure them by. They've also only been publicly trading for six months so whatever determination I make on them here isn't going to be my last or final say either. I don't like the liquidity of their balance sheet, even with adding $800k post financials, their inventory turnover compared to their peers is terrible, but most of all I'm uncomfortable with their margin lumpiness ranging from 37 - 70% over the past five quarters. I also find their disclosures lacking. There is no segmented breakdown by type of product, no A/R aging and absolutely no breakdown of their acquisition within the financial notes that occurred during the quarter. I don't think I have ever seen that.
With that said, even with all of those concerns, they still produced 22% of net income as a percentage of net revenues, which is a fantastic number. They have a market cap of $15M, but with nearly 60% of near guaranteed dilution with ITM warrants and options, the implied valuation is much higher. Should they hit their $20M 2024 revenue target with the net income and EBITDA rates they have done in Q1, there could be some pretty good value here. I feel like I shit on it more than I intended overall , but it is what it is. Don't think I'd be ready to pull the trigger here myself just yet but this is more than watchlist worthy. A quite positive initial 3.5 stars and looking forward to see what they can do in Q2.
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Disclaimer:
My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from companies I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.