Hemp, Inc.: Massive Revenue Growth Cannot Justify Its Valuation

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About: Hemp, Inc. (HEMP)
by: Villamayor Capital
Summary

Hemp, Inc. provides services to farmers through its industrial hemp facilities in Spring Hope, North Carolina.

The company is using a large amount of stock to pay expenses, which is increasing the share count dramatically.

As of December 22, 2018, the weighted average number of common shares outstanding is 20.978 billion shares. The compant currently has 3.951 billion shares outstanding.

Using the weighted average number of common shares outstanding, the company trades at 403x sales with competitors trading at 9x-209x sales.

While Hemp is growing revenues at larger pace than competitors, its gross profit margin and net income losses don’t justify this valuation.

Editor's note, December 27, 2018, 11:30 A.M.: The company contacted Seeking Alpha regarding the share count (and hence the valuation) referenced in this article. The article has now been updated to clarify that the figures used are based on the weighted average number of common shares outstanding. Total shares outstanding (non-weighted) are clearly differentiated where that figure is discussed.

With a large amount of equipment and revenue growth of 466% for the nine months ended September 30, 2018, Hemp, Inc. (OTCPK:HEMP) could be an interesting player in the hemp industry. With that, the company has many issues that don’t make it a clear buy. Firstly, the company is using too many shares to pay expenses, which is creating massive stock dilution. Additionally, it trades at 403x sales while competitors trade at 9x-209x sales. While Hemp delivers more revenue growth than its peers, both its gross profit margin and net income losses should not justify its current valuation. Finally, Hemp is not uploading its financial information on the OTC Market website, which should worry most investors.

Business

Founded in 2008, Hemp, Inc. provides services to farmers through its industrial hemp facilities in Spring Hope, North Carolina.

On the company’s site, Hemp invites investors to join the hemp revolution and shows a panoramic picture of its properties. Take a look at the image below:

Source: Company’s Website

The annual report reads that Hemp owns several divisions:

  • Industrial Hemp Manufacturing and Processing Infrastructure: It runs what the annual report says to be the largest industrial hemp processing facility in the western hemisphere. This 85,000-square foot facility, located in Spring Hope, North Carolina, is operating full time processing of kenaf into Lost Circulation Material, which Hemp sells to the oil and gas industry. In the image below, there are some photos taken from the company’s website:

Source: Company’s Website

  • Hemp Oil Extraction Infrastructure: Hemp also counts with a CO2 Supercritical Extraction equipment from NuAxon BioScience. According to the annual report, Hemp commenced using the extractor for processing CBD on August 15, 2017. The images below provide further details regarding the CO2 extraction technology owned by Hemp:

Source: Company’s Website - CO2 Extraction

  • Hemp Farming Infrastructure: This division consists of several acres of hemp and kenaf at different locations, equipment and farming tools. Investors should review the Facebook of one of the founders, where substantial information is provided about the operations of Hemp.

  • Hemp Education And Marketing: The company also transmits its know-how and has people in charge of marketing the company’s products. As per the annual report, Hemp Inc. has its own university led by double PhD. The lines below provide further details on this matter:

Source: Company’s Website - 2017 Annual Report

Stop Symbol - About The Financial Statements

Shareholders of Hemp can find the company’s financial statements on the company’s website. Hemp used its site to release its 2017 annual report and quarterly reports. In this regard, there is a worrying feature to be pointed out. The company is not uploading this new information on the OTC Markets platform. The last quarterly report shown in the OTC Markets is of 2017. As a result, the exchange is right now showing a stop symbol, which means that the company is not making material information publicly available. It is shown in the image below:

Source: OTC Markets

While the market seems to be reacting to press releases from the website, investors should understand that Hemp is not processing correctly. The financial information should be correctly uploaded to the OTC Markets website. This “mistake” makes the company lose investors, resulting in reduction in the amount of stock demand. Keep in mind that after noting the stop symbol, many investors will not even assess the company.

Balance Sheet And Assets Per Share

As of December 31, 2017, with $13.15 million in total assets, the most relevant assets are property plant and equipment, equal to $7.22 million. The amount of cash equals $0.386 million, and Hemp has also securities held for sale, equal to $0.086 million. The company also reported software worth $1.8 million, which seems very impressive. Keep in mind that the company’s inventory is worth less than the software being used. The image below provides further details on this matter:

Source: Company’s Website - 2017 Annual Report

The amount of liabilities is below the total amount of assets. It is equal to $11.5 million. However, it is very worrying that the amount of financial debt is quite large. Hemp reported $11.26 million in notes payable, 27% more than the same figure reported in 2016. The most worrying is that the company does not seem to have sufficient liquidity or cash flow generation to pay this debt. Keep in mind that the most significant assets are fixed assets. The image below provides the list of liabilities:

Source: Company’s Website - 2017 Annual Report

In order to assess the valuation of the share price, investors should check the net asset per share. After increase of 2,685% in 2017, the weighted average number of common shares outstanding is equal to 20.978 billion shares. It is shown in the image below.

Source: Company’s Website - 2017 Annual Report

With this figure in mind, the number of assets per share equals $0.0006. As of December 21, 2018, the shares are trading at $0.045, which is many times the assets per share. The market seems to be expecting massive growth in the future.

Equity Structure And Increase In The Number Of Assets

The equity structure is not simple, which most common shareholders should not appreciate. Hemp shows a large amount of preferred stock delivered by the company to finance its property and equipment and its operations. Common stock owners should understand that preferred stocks are senior to common stock. They have higher ranking. The existence of the preferred stock reduces the intrinsic value of each share. The image below provides the equity structure released in the last annual report:

Source: Company’s Website - 2017 Annual Report

Income Statement

Sales were equal to $0.107 million in 2017. In addition, the company reported net income losses of -$2.9 million and -$11.4 million in 2016 and 2017 respectively. The largest expenses were stock compensations of -$1.35 million and -$6.8 million in 2016 and 2017 respectively. The company seems to be issuing a massive amount of stock, which most shareholders should not appreciate. Keep in mind that stock dilution diminishes the intrinsic value of each share. The image below provides the income statement in 2017 and 2016:

Source: Company’s Website - 2017 Annual Report

Source: Company’s Website - 2017 Annual Report

In 2018, the amount of sales did increase. For the nine months ended September 30, 2018, sales were equal to $0.4 million and the gross margin was equal to $0.257, which seems beneficial. With that, stock based compensations were equal to $6.17 million, and net income losses from operations were equal to -$11.6 million. While sales are increasing, growth investors should be concerned about the large amount of stock compensations. If Hemp does not stop this practice, the stock price should keep its downward trend. The image below provides the income statement released in the last quarterly report.

Source: 10-Q

Valuation

As of December 22, 2018, using the weighted average number of common shares outstanding of 20.978 billion at $0.038, the total figure seems larger than the market capitalization shown in the OTC Markets. Please note that the weighted average number of common shares outstanding is larger than the total amount of shares outstanding. It includes convertible securities that could dilute common stockholders. Adding debt of $11 million and deducting cash of $0.386 million, the enterprise value equals $807 million. For the nine months ended September 30, 2018, sales were equal to $0.4 million, 466% more than the same figure for the nine months ended September 30, 2017. With these figures in mind, assuming forward revenues of $2 million seems reasonable.

Using these numbers, the company trades at 403x sales, which seems too expensive. Most competitors in the same industry are trading at 9x-209x sales. Hemp seems overvalued as compared to them. The image below provides further details on this matter:

Source: Ycharts - EV/Sales

In 2018, Hemp reported revenue growth of more than 466%. Many investors may justify its valuation with this feature. As shown in the image below, it is true that other competitors are not showing such a high revenue growth. With that, the main issues are the gross profit margin and the massive amount of losses reported by Hemp. The company is losing too much money to trade at such a high valuation.

Source: Ycharts - Revenue Growth

Source: Ycharts - Gross Profit Margin

Conclusion

With a large amount of equipment and reporting revenue growth of 466% for the nine months ended September 30, 2018, Hemp, Inc. is a player to be reviewed closely in the hemp industry. With that, there are several issues that the company needs to modify so that investors can trust the business model. First of all, the company is using a large amount of stock to pay expenses, which is increasing the share count dramatically. With this in mind, stock dilution seems to be the most significant issue of Hemp, Inc. Additionally, as of December 22, 2018, the company seems overvalued as compared to competitors. Using the weighted average number of common shares outstanding, the company trades at 403x sales with competitors trading at 9x-209x sales. While Hemp is growing revenues at larger pace than competitors, its gross profit margin and net income losses don’t justify this valuation. Finally, the company is not uploading information to the OTC Markets site, which will worry most investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.