This Stock Goes To Pot As Revenue Numbers Get Smoked

The stock of Simply Solventless (HASH – TSXv) collapsed this week—from 44 cents to 19 cents Tuesday, on massive volume of 10.55 million shares, as they finally (FINALLY!) released its Q4 24 results.

This stock was a market darling in 2024—going from 15 cents to 80 cents on big volume, raising tens of millions of dollars to go on an M&A binge, and expand distribution of their cannabis products.

It was an Investing Whisperer stock pick as well, and while we had questions, I bought the 15 and 25 cent financings. But as the accounting questions started to pile up each quarter, I sold all my stock in mid to high 60s last year and early this year.

Unfortunately, the Q4 numbers just released show that their tolling revenue–always the most profitable part of the story, according to the financials and management–cannot actually be classified as revenue. I explain below, but that makes the financials look UGLY.

HASH was receiving cannabis product as payment for tolling—not cash! But the value was marked as revenue. And my understanding is that the product was classified as inventory on the balance sheet. The auditors said that revenue can’t be recognized until the product is sold and money collected….which can be many weeks or even a few months until that happens.

The auditor allowed them to recognize this revenue in 2023, but not 2024. What changed? The auditor decided that the tolling customer was actually a supplier, so no revenue could be acknowledged. This is all a bit odd, as there was almost no B2C business in 2023, it was mostly tolling. So will HASH be forced to restate 2023 as well? I still don’t understand why the auditors would have approved this in 2023.

Arguably, management could argue that other than losing the latest acquisition–CanadaBis–their day-to-day business hasn’t changed. We just don’t have a clue what margin or cash flow that day-to-day business generates. Quite possibly, it’s zero…or negative.

However we do know the stock as currency is now DOA, so the M&A machine will stop for at least a year.

It’s hard to imagine investors trusting this team completely until next year’s audited financials come out.

And now that this news is out, the past financials will look worse, as revenue gets de-recognized, but moving forward CEO Jeff Swainson will get to mark all the current inventory as revenue as it gets sold, and that will look good against a now-much reduced YoY comp to the restated 2024 numbers.

HOWEVER…the B2C business is super slim margin. And the tolling business is now also very slim, with revenue de-recognized. So we have no REAL idea what the business is doing now. My guess it’s negative margin—burning cash—but we have no real idea. And we can’t really trust management just yet—so talking to them is only partially useful.

Right from my first pass of HASH back in August 2024, I had concerns about margins. All those concerns came to a head with the Q4 numbers.

To recap: In my original subscriber report I noted that “HASH benefits from one thing most of the competition doesn’t have – a very profitable B2B tolling business. HASH’s B2B sales appear to be very high margin.”

I also noted that it would “be important to see how margins evolve over the next couple quarters”, since that B2B tolling business was becoming less important to HASH as they acquired more B2C brands.

In my Q3 update I became more concerned, noting that even if I assumed the B2B tolling business contributing less, the margin pressure I was seeing in the numbers was surprisingly high. As I said at the time, the B2B business “couldn’t account for all the margin compression. Something else must have pressured margins.”

I concluded my Q3 update by reiterating my original concern: “We were clear in the report that the biggest unknown was how margins would play out with all these moving pieces, and that is still the case.”

With the Q4 results the margin picture became both more and less clear.

More, because now it is EXTREMELY clear that the B2B tolling business was contributing the bulk of the gross profit.

Unfortunately, the reason this is so clear is because HASH had to restate their accounting to essentially remove the B2B tolling business from their results.

It turns out that the B2B tolling business didn’t meet the accounting standard definition of revenue.  All of the B2B tolling gross margin is now taken out of the income statement.

Source: Simply Solventless Q4 MD&A

It’s a big change. The gross profit for the entire business in the first nine months of the year was $4.8M. HASH derecognized $3.6M of that with this adjustment.

At this point, it is really hard to tell what the actual business looks like. Until Simply Solventless restates the entire 2024 year without the tolling business, it is pretty much impossible to understand what margins are.

The recent acquisitions only muddy the picture even more.

If you simply assume that gross profit dropped from $4.8M to $1.2M in the first 9 months of the year, it would mean gross margins are only 10%, a level that would be very difficult to remain in business with.

On top of this bombshell, there is another confusing restatement with corporate overhead costs being allocated to inventory. This does not seem like typical accounting treatment.

Another negative was a change to the terms of the promissory note they owe to ANC, their acquisition in September last year, that will lead to more dilution.

Finally, there is the business of the failed acquisition of CanadaBis. Remember CanadaBis pulled out of the deal, foreshadowing what investors saw yesterday. While it is now clear why they pulled out, there is still the question of the break-up fee due to HASH. I think this $1.2 million break fee is history now.

I could delve into each of these issues with more depth. But honestly, it doesn’t matter. 

Until we get clarity on what this business looks like and, in particular, what it looked like through 2024, there simply isn’t a good reason to waste more time on this company.

I’m going to go further and say they need to give detailed performance of each acquisition to provide above and beyond transparency if they want to win back investor trust.  Mine for sure!

This is a big loss for the entire sector; this will taint everyone for awhile. And it eliminated a big pile of speculative capital for Canadian listed industrials.