UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the fiscal quarter ended
or
For the transition period from ________ to _________
Commission File Number:
(Exact name of Registrant as specified in its charter) |
| ||
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification Number) |
(Address of Principal Executive Office and Zip Code)
(
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading Symbol |
| Name of Each Exchange on Which Registered |
|
| The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
| Emerging growth company | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes
The number of shares of the registrant’s common stock outstanding as of November 20, 2023, was
HEMPACCO CO., INC.
2023 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
| 2 |
| Table of Contents |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEMPACCO CO., INC.
Condensed Consolidated Balance Sheets
(Unaudited)
As of |
| September 30, 2023 |
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| December 31, 2022 |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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Accounts receivable |
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Accounts receivable, related parties |
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Loans receivable, related parties |
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Inventory |
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Prepaid expenses and other current assets |
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Prepaid expenses, related parties |
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Total Current Assets |
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Property and equipment |
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Right of use asset, related party |
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Other intangible assets, net of amortization |
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Equity investment – related party |
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Other investments and Warrants |
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TOTAL ASSETS |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities |
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Current Liabilities |
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Accounts payable |
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Accounts payable, related parties |
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Accrued liabilities |
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Customer prepaid invoices and deposits |
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Line of credit |
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Loans and notes payable, related parties |
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Convertible promissory notes payable |
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Other short-term loans |
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Right of use liability, related party – current |
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Total Current Liabilities |
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Long Term Liabilities |
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Long-term debt |
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Right of use liability, related party |
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Total Liabilities |
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Stockholders’ Equity |
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Preferred stock, $ |
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Series A Preferred Stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total Stockholders’ Equity |
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Non-controlling interests |
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Total Equity Attributable to Hempacco Co., Inc. |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ |
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| $ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 3 |
| Table of Contents |
HEMPACCO CO., INC.
Condensed Consolidated Statements of Operations
(Unaudited)
|
| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2023 |
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| 2022 |
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| 2023 |
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| 2022 |
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Revenues |
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Product sales |
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Product sales, related parties |
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Manufacturing service revenue |
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Kiosk revenue |
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Total Revenues |
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Cost of Sales |
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Cost of sales |
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Cost of sales, related parties |
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Total Cost of Sales |
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Gross Profit (Loss) from Operations |
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Operating Expenses |
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General and administrative |
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General and administrative, related parties |
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Sales and marketing |
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Sales and marketing, related parties |
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Expensing of related party advances and loans |
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Total Operating Expenses |
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Net Operating Loss |
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Other Income (Expense) |
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Interest expense |
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Other income and expense |
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Total Other Income (Expense) |
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Net Loss before equity investment |
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Share of net losses of equity method investee |
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Net Loss |
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Net loss attributable to non-controlling interests |
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Net Loss Attributable to Hempacco Co., Inc. |
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| 5 |
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Basic and Dilutive Loss per Share |
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Shares Used in Calculating Loss per Share |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 4 |
| Table of Contents |
HEMPACCO CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
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| For the Three Months Ended September 30, 2023 |
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| Common Stock |
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| Additional Paid-In |
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| Accumulated |
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| Non-controlling |
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| Shares |
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| Amount |
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| Capital |
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| Deficit |
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| Interests |
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| Total |
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Balance as of June 30, 2023 |
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Shares issued for consulting services |
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Common stock issued for Cambero convertible note |
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Record beneficial conversion feature discount on convertible notes. |
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Reversal of capital contribution related to joint venture |
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Net loss / assets attributable to non-controlling interests |
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Net loss for the three months ended September 30, 2023 |
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Balance as of September 30, 2023 |
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| $ |
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| For the Nine Months Ended September 30, 2023 |
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| Common Stock |
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| Additional Paid-In |
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| Non-controlling |
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| Amount |
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| Capital |
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| Deficit |
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| Interests |
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| Total |
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Balance as of December 31, 2022 |
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Issuance of common stock |
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Offering costs |
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Shares issued for consulting services |
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Capitalized value of warrants |
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Common stock issued for convertible notes |
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Record beneficial conversion feature discount on convertible notes. |
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Net loss / assets attributable to non-controlling interests |
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Net loss for the nine months ended September 30, 2023 |
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Balance as of September 30, 2023 |
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| $ | ( | ) |
| $ |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 5 |
| Table of Contents |
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| For the Three Months Ended September 30, 2022 |
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| Additional |
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| Non- |
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| Common Stock |
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| Paid-In |
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| Accumulated |
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| controlling |
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| Shares |
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| Amount |
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| Capital |
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| Deficit |
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| Interests |
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| Total |
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Balance as of June 30, 2022 |
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| $ |
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Issuance of common stock |
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Offering costs |
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Boustead cashless warrant conversion |
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Acquisition of machinery and trademarks |
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Conversion of accounts payable to common stock |
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Partner capital contribution to joint venture |
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Titan General Agency Ltd. Debt repayment |
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North Equities marketing services, paid with shares |
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Net loss/equity attributable to non-controlling interests |
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Net loss for the three months ended September 30, 2022 |
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| - |
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Balance as of September 30, 2022 |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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| For the Nine Months Ended September 30, 2022 |
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| Additional |
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| Non- |
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| Common Stock |
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| Paid-In |
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| Accumulate |
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| controlling |
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| Shares |
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| Amount |
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| Capital |
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| Deficit |
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| Interests |
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| Total |
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Balance as of December 31, 2021 |
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| $ |
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| $ |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Warrant valuation expense |
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Issuance of common stock |
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Offering costs paid in connection with sale of common stock |
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Common stock issued for convertible note |
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Acquisition of machinery and trademarks |
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Conversion of accounts payable to common stock |
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Partner capital contribution to joint venture |
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Common shares issuance – IPO 2 |
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Offering costs |
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Boustead cashless warrant conversion |
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Titan General Agency, Ltd. Debt repayment |
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North Equities USA Ltd. Marketing services |
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Net loss/equity attributable to non-controlling interests |
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| - |
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| ( | ) |
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Net loss for the nine months ended September 30, 2022 |
|
| - |
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| ( | ) |
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| ( | ) | |||
Balance as of September 30, 2022 |
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| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 6 |
| Table of Contents |
HEMPACCO CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2023 |
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| 2022 |
| ||
Cash flows from operating activities |
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
Adjustments to reconcile net loss to cash used in operating activities |
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Reclassification of Organipure capital contribution |
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| ( | ) |
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Depreciation and amortization |
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Non-cash warrant valuation expense |
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Reserving of related party loans |
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Elimination of loss from equity investment |
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Gain on disposal of assets |
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Stock based compensation for services |
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Changes in operating assets and liabilities |
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Trade receivables, net |
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| ( | ) |
|
| ( | ) |
Accounts receivable, related parties |
|
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| ( | ) | ||
Prepaid expenses and other current assets |
|
| ( | ) |
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| ( | ) |
Prepaid expenses, related parties |
|
| ( | ) |
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| |
Inventories |
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| ( | ) |
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| ( | ) |
Accounts payable |
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Accounts payable, related parties |
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| ( | ) | |
Accrued liabilities |
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Customer deposits |
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| ( | ) |
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| ( | ) |
Right of use assets and liabilities |
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| ( | ) |
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Net cash used in operating activities |
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| ( | ) |
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| ( | ) |
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Cash flows from investing activities |
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Purchases of property, plant and equipment |
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| ( | ) |
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| ( | ) |
Proceeds from disposal of equipment |
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Franchise fees and licenses related to joint venture |
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| ( | ) | |
Net cash provided by (used in) investing activities |
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| ( | ) |
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| ( | ) |
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Cash flows from financing activities |
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Line of Credit |
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| |
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Equipment loan repayment |
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| ( | ) | |
Long term loan repayment |
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| ( | ) |
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| |
Loans to related parties |
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| ( | ) |
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| ( | ) |
Proceeds from short-term promissory note, related parties |
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Repayment of short term note payable |
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| ( | ) |
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Equity investment in related party |
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| ( | ) |
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Proceeds from the sale of common stock |
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Offering costs paid in connection with sale of common stock |
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| ( | ) |
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| ( | ) |
Cash flows provided by financing activities |
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|
Increase (decrease) in cash and cash equivalents |
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| ( | ) |
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Cash and cash equivalents at beginning of period |
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| ||
Cash and cash equivalents at end of period |
| $ |
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| $ |
| ||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid for interest |
| $ |
|
| $ |
| ||
Cash paid for taxes |
| $ |
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| $ |
| ||
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NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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|
Warrants recorded as prepaid and other assets |
| $ |
|
| $ |
| ||
Conversion of convertible notes payable and accrued interest to common stock |
| $ |
|
| $ |
| ||
Marketing services paid with shares |
| $ |
|
| $ |
| ||
Accounts payable paid with shares |
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|
| $ |
| ||
Equipment paid with promissory note |
| $ |
|
|
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| |
Equity interest in affiliated entity paid with promissory note |
| $ |
|
| $ | - |
| |
Equipment loan paid with shares |
|
| - |
|
| $ |
| |
Payment for equipment and intangible assets with shares |
|
| - |
|
| $ |
| |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| 7 |
| Table of Contents |
HEMPACCO CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION, BUSINESS AND LIQUIDITY
Organization and Operations
These financial statements are those of Hempacco and its subsidiaries.
Hempacco Co., Inc. (the “Company” or “Hempacco”) was formed on April 1, 2019, as a Nevada corporation.
On April 23, 2021, the Company filed a second amendment to its Articles of Incorporation changing the name of the company from The Hempacco Co., Inc. to Hempacco Co., Inc.
The Company merged with, and became a subsidiary of, Green Globe International, Inc. (“GGII” or “Green Globe International”) on May 21, 2021.
Hempacco manufactures and distributes hemp smokables both under its own name and white label products for clients. The Company also owns high-tech CBD vending kiosks that it plans to place in retail venues throughout the US, in conjunction with a number of joint venture partners. During the current quarter the Company commenced supplying its JV partner, HPDG, Inc. with “Snoop Dogg” branded CBD Gummies.
On October 6, 2021, the California Assembly Bill Number 45 (“AB 45”) was passed into law. Despite the fact that industrial hemp is federally legal and not a controlled substance, this bill prohibits the sale of “inhalable” hemp products in California. However, the manufacture of inhalable hemp products for the sole purpose of sale in other states is not prohibited. The ban will remain in force until such time as the California Legislature enact a bill to tax the product. It is still legal to manufacture Delta-8 products containing less than 0.3% THC for sale in another State.
Because of the risk and uncertainty regarding the potential market for smokable products in California, the Company has focused on building its distribution network in other States and other Countries. Celebrity joint ventures bring a national demand for our products.
During the nine months ended September 30, 2023, the Company entered into the following Joint Ventures and other significant agreements.
Effective January 1, 2023, HempBox Vending, Inc. (“HVI”) a wholly owned subsidiary of the Company entered into a joint venture operating agreement (the “Operating Agreement”) with Weedsies Mobile, LLC (“Weedsies)”, a Florida limited liability company, to operate a joint venture entity (the “Joint Venture”) in Florida by the name of Weedsies Vending, LLC. The Joint Venture was created to market the hemp related products of Weedsies using automated kiosks provided by HVI. Pursuant to the Operating Agreement, the Joint Venture will be owned
Effective January 24, 2023, the Company entered into a joint venture operating agreement (the “Operating Agreement”) with Alfalfa Holdings, LLC (“Alfalfa”), a California limited liability company, to operate a joint venture entity (the “Joint Venture”) in California by the name of HPDG, LLC.
| 8 |
| Table of Contents |
The Joint Venture was created to market and sell hemp smokables products. Pursuant to the Operating Agreement, the Joint Venture will be owned
In connection with the Operating Agreement, effective January 24, 2023, HPDG, LLC entered into the Services Agreement with Spanky’s Clothing, Inc., and Calvin Broadus, Jr. p/k/a “Snoop Dogg” (collectively “Talent”), pursuant to which Talent will endorse the HDPG, LLC’s smokable hemp products and serve as a spokesperson for the products in the United States. HDPG, LLC shall (i)
As of September 30, 2023, the company has accrued $
On February 8, 2023, the Company signed, as guarantor, a lease agreement between US Tobacco de Mexico S.A. de C.V. (“US Tobacco de Mexico,” a related party), which is 100% owned by UST Mexico, Inc. (“UST Mexico,” a related party), and Grupo Fimher, S. de R.I. de C.V. (“Fimher”) for the lease of
On February 8, 2023, the Company’s subsidiary, Hempacco Paper Co., Inc., leased the above-referenced space for an initial period of one year for a monthly rental of $
Effective February 1, 2023, the Company through its representative in Warsaw, Poland, filed the equivalent of Articles of Incorporation with the court to create Hempacco Europe Sp.z.o.o. (an LLC equivalent), the corporate entity through which the Company will distribute its smokable products throughout the EU. Ownership of the entity rests 99% with the Company, and 1% with Jakub Duda, an individual.
On February 9, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Boustead Securities, LLC, and EF Hutton, a division of Benchmark Investments, LLC, as representatives (the “Representatives”) of the underwriters (the “Underwriters”) in connection with the public offering of additional shares of common stock of the Company. The Underwriting Agreement provides for the offer and sale of
| 9 |
| Table of Contents |
The Underwriting Agreement includes customary representations, warranties, and covenants by the Company. It also provides that the Company will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”), or contribute to payments the Underwriter may be required to make because of these liabilities.
On April 6, 2023,
On April 20, 2023, Hempacco received a further letter notification from Nasdaq advising of its non-compliance with Nasdaq listing rules because Hempacco had failed to file its Annual Report on Form 10-K (for the 2022 fiscal year) with the Securities and Exchange Commission by the required due date. The deficiency was cured by Hempacco by the filing of the Annual Report on Form 10-K on May 15, 2023.
On May 23, 2023, Hempacco received a letter notification from Nasdaq advising of its non-compliance with Nasdaq listing rules because Hempacco had failed to file its Quarterly Report on Form 10-Q (for the quarter ended March 31, 2023) with the Securities and Exchange Commission by the required due date. The deficiency was cured by the filing of the Quarterly Report on Form 10-Q on July 5, 2023.
On October 2, 2023, the Company officially responded to Nasdaq requesting an additional six-months in which to bring its share price back over the $1,00 minimum price required by Nasdaq rules. The Company also confirmed its willingness to implement a reverse stock split in order to achieve its goal should it not be able to increase its share price through organic growth of the business.
On May 7, 2023, Hempacco entered into a joint venture agreement with Nasir Ghesani, a New York distribution company doing business as “Reliable Distributor,” with each party to own
On July 10, 2023, the Company signed a Purchase Agreement and an accompanying Assignment Agreement with Viva Veritas LLC (“Veritas”) (successor to Curated Nutra) whereby Veritas agreed to assign its
Green Globe International, Inc. Hempacco’s parent company owns a
The total purchase price to be paid by the Company is $
| 10 |
| Table of Contents |
The promissory note carries a
The applicable conversion price shall be 95.238% of the average closing price of the Company’s common stock during the three days immediately preceding the conversion.
In accordance with ASC 323-10-50-3 the following additional disclosures are made with regard to this equity investment:
| a) | As mentioned above, the owners of Green Star Labs, Inc. and the respective ownership percentages are: | |
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| i) | Green Globe International, Inc. |
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| ii) | Hempacco Co., Inc. |
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| b) | Hempacco, as the investor, will account for its interest under the equity method under GAAP/ASC 323 | |
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| c) | Hempacco purchased the equity interest for the sum of $ | |
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| d) | The $ | |
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| e) | GSL was a start-up operation in January 2022 and has recently started to generate operating profits. The purchase price was based on the future profitability and growth that Hempacco’s new business lines and joint ventures will bring to GSL Hence any current comparison of the purchase price and the current net assets of GSL would be misleading. | |
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|
| f) | The Company will, on a quarterly basis, monitor the underlying net assets of GSL in order to evaluate whether or not any adjustment is necessary to the carrying value of the equity investment in the books of the Company. Should GSL report other comprehensive income or changes to equity accounts, the Company will make the appropriate adjustments to its carrying cost to reflect its share of these additional items in accordance with the GAAP accounting standard. | |
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| g) | GSL has no contingent issuances of shares, warrants or convertible promissory notes that might affect Hempacco’s share of reported earnings or losses. | |
A review of the preliminary financial statements of Green Star labs, Inc. resulted in the Company reducing its equity investment in GSL by $
The non-controlling interests of these ventures have been disclosed on the consolidated balance sheet and income statement.
| 11 |
| Table of Contents |
Going Concern Matter
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”), which contemplates the Company’s continuation as a going concern. The Company incurred a net loss of $
Management intends to raise additional operating funds through equity and/or debt offerings. However, there can be no assurance management will be successful in its endeavors. Due to uncertainties related to these matters, there exists a substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. If we are not able to successfully execute our future operating plans, our financial condition and results of operation may be materially adversely affected, and we may not be able to continue as a going concern.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our unaudited consolidated financial statements have been prepared in accordance with US GAAP and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under those rules, we omitted certain footnotes or other financial information that are normally required by US GAAP for annual financial statements. We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal and recurring items. Our consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes filed with the SEC on May 12, 2023. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the Company’s financial condition and results of operations and cash flows for the interim periods presented.
Principles of Consolidation
The financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
| 12 |
| Table of Contents |
Joint Venture entities where the company owns at least 51% and controls the accounting and administration of the entities will be accounted for under ASC 810-10 which will allow full consolidation of the assets and liabilities into the Company’s balance sheet, with non-controlling interests being calculated and disclosed in the balance sheet and operating statement of the Company. Joint Venture entities where the company owns less than 51% are evaluated for treatment as variable interest entities. The Company may provide accounting and administration for these entities, may have board of director control, and may provide the majority of funding for these entities. Any entities not falling within this criterion will be accounted for under ASC 323-30. These consolidated financial statements include the operating results and the assets of the nine currently operating, joint venture entities, all of which have been deemed variable interest entities for the period ended September 30, 2023.
Equity Method Investments in Unconsolidated Affiliates
We apply the equity method of accounting for investments when we have significant influence, but not controlling interest in the investee. Judgment regarding the level of influence over each equity method investment includes key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions, operational decision-making authority, and material intercompany transactions. Under this method of accounting, our proportionate share of the net income (loss) resulting from these investments is reported in “Other income and expenses” in the consolidated statements of operations since the activities of the investees are closely aligned with, and a critical part of, our operations. The carrying value of our equity method investments is reported as “Equity od investment in related party” in our consolidated balance sheets.
For all equity method investments, we record our share of an investee’s income or loss on a one quarter lag. We evaluate material events occurring during the quarter lag to determine whether the effects of such events should be disclosed in our financial statements. We classify distributions received from equity method investments using the cumulative earnings approach on our consolidated statements of cash flows. A change in our proportionate share of an investee’s equity resulting from issuance of common shares or in-substance common shares by the investee to third parties is recorded as a gain or loss in our consolidated statements of operations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 323, “Investments-Equity Method and Joint Ventures” (Subtopic 10-40-1).
We assess investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If the decline in value is considered to be other than temporary, the investment is written down to its estimated fair value, which establishes a new cost basis in the investment. We did not record any such impairment charges for any periods presented.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of these judgments can be subjective and complex, and, consequently, actual results may differ from these estimates.
| 13 |
| Table of Contents |
Revenue Concentration
Sales to two of the Company’s customers made up approximately
Basic and Diluted Net Loss per Common Share
Pursuant to ASC 260, Earnings Per Share, basic net income and net loss per share are computed by dividing the net income and net loss by the weighted average number of common shares outstanding. Diluted net income and net loss per share is the same as basic net income and net loss per share when their inclusion would have an anti-dilutive effect due to our continuing net losses.
For the nine months ended September 30, 2023, and 2022, the following outstanding dilutive securities were excluded from the computation of diluted net loss per share as the result of the computation was anti-dilutive.
|
| September 30, |
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| September 30, |
| ||
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| 2023 |
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| 2022 |
| ||
|
| (Shares) |
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| (Shares) |
| ||
Warrants |
|
|
|
|
| - |
| |
Promissory notes convertible to shares* |
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| ||
TOTAL |
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| ||
· | A note for $ |
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a framework for all fair value measurements and expands disclosures related to fair value measurement and developments. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC 820 requires that assets and liabilities measured at fair value are classified and disclosed in one of the following three categories:
| · | Level 1—Quoted market prices for identical assets or liabilities in active markets or observable inputs. |
| · | Level 2—Significant other observable inputs that can be corroborated by observable market data; and |
| · | Level 3—Significant unobservable inputs that cannot be corroborated by observable market data. |
The carrying amounts of cash, accounts receivable, accounts receivable – related parties, inventory, deposits and prepayments, accounts payable and accrued liabilities, accounts payable – related parties, customer pre-paid invoices & deposits, other short-term liabilities – equipment loan, operating lease – right of use liability – short term portion approximate fair value because of the short-term nature of these items.
| 14 |
| Table of Contents |
Non-Controlling Interests
The Company accounts for the non-controlling interests in its subsidiaries and joint ventures in accordance with U.S. GAAP. and ASC 805-20.
The Company has chosen to record the minority interests (NCI’s) in the equity section of the balance sheet, and on the income statement, the profit or loss attributable to the minority interests will be reported as a separate non-operating line item.
The Company measures its non-controlling interests using the percentage of ownership interest in the net assets and the current operating income / (loss) held by the respective NCI’s during the accounting period.
NOTE 3 - ACCOUNTS RECEIVABLE
As of September 30, 2023, and December 31, 2022, accounts receivable consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
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| 2022 |
| ||
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| ||
Accounts receivable |
| $ |
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| $ |
| ||
Accounts receivable - related parties |
|
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| ||
Allowance for doubtful accounts |
|
| ( | ) |
|
| ( | ) |
Total accounts receivable |
| $ |
|
| $ |
| ||
The Company recorded a reserve of approximately 90% against the entire balance of accounts receivable and loans due from related parties as of September 30, 2023. See Note 11 for additional information on related party transactions related to receivables.
NOTE 4 – INVENTORY
As of September 30, 2023, and December 31, 2022, inventory, which consists primarily of the Company’s raw materials, finished products and packaging is stated at the following amounts:
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
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| 2022 |
| ||
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Finished goods |
| $ |
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| $ |
| ||
Raw materials and labor (Net of obsolescence allowance) |
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Total inventory at cost less obsolescence allowance |
| $ |
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| $ |
| ||
The Company identified a potential for obsolescence in particular raw materials and provided an allowance for this risk in full in the year ended December 31, 2020. As of September 30, 2023, and December 31, 2022, and 2021, respectively, this allowance remains unchanged. This obsolescence allowance is continually re-evaluated and adjusted as necessary.
| 15 |
| Table of Contents |
NOTE 5 - PROPERTY AND EQUIPMENT
As of September 30, 2023, and December 31, 2022, property and equipment consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Production equipment |
| $ |
|
| $ |
| ||
Leasehold improvements |
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| ||
Kiosks |
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| ||
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| ||
Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Total property and equipment |
| $ |
|
| $ |
| ||
Depreciation expense was $
NOTE 6 - OPERATING LEASES – RIGHT OF USE ASSETS
The Company entered into a
In addition to the rental of manufacturing space, the Company transacts routine storage business with Primus. The primary business of Primus is the provision of cold storage facilities used for perishable raw materials and finished products from pharmaceutical manufacturing companies. The company stores its raw hemp smokable material with Primus.
Base monthly rent commenced at $
Operating lease right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives. Our variable lease payments primarily consist of maintenance and other operating expenses from our real estate leases. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
| 16 |
| Table of Contents |
The following are the expected lease payments as of September 30, 2023, including the total amount of imputed interest/present value discount.
Year Ending December 31 |
| Operating Leases |
| |
2023 |
| $ |
| |
2024 |
|
|
| |
2025 |
|
|
| |
Total lease payments |
|
|
| |
Less: Imputed interest/present value discount |
|
| ( | ) |
Total |
| $ |
| |
Rent expenses, on the straight-line basis, were $
See Note 1 for information on a new lease between Hempacco Paper Co., Inc., and UST Mexico.
NOTE 7 - OTHER SHORT-TERM LIABILITIES – EQUIPMENT LOAN
On December 11, 2019, the Company entered into a loan for $
On January 6, 2022, the first payment of $
NOTE 8 - CONVERTIBLE NOTES
During May and September 2021, the Company entered into financing arrangements to provide working capital. The Company received proceeds of $
The notes automatically converted at
The notes payable to Miguel Cambero for $
| 17 |
| Table of Contents |
The Company’s note payable to Miguel Cambero, including accrued interest, was converted into
On or about March 18, 2022, the Company issued a promissory note to a related party, Jerry Halamuda for $
NOTE 9 - WARRANTS
As of September 30, 2023, the following warrants are outstanding:
Talent Warrants (see Note 1) |
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| |
Talent Designee Warrants (see Note 1) |
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| |
Compensation Warrants |
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| |
Representatives’ Warrants (see Note 1) |
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| |
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On August 11, 2021, the Company signed an agreement with Boustead Securities, LLC (the “Representative”), which was amended on or about March 18, 2022, with respect to a number of proposed financing transactions. Included in the agreement was the initial public offering of the Company’s common stock, for which a listing on NASDAQ was successfully applied, the private placement of Hempacco securities prior to the IPO (“pre-IPO Financings”), and other financings separate from the IPO or the pre-IPO Financings (each such other financing an “Other Financing”).
In addition to the other compensation delineated in the agreement, the Company agreed to issue and sell to the Representative (and/or its designees) on the closing date of an IPO or Other Financing as applicable, five-year warrants to purchase shares of the Company’s common stock. The warrants are equal to
On January 25, 2023, the Company issued fully vested warrants to purchase
| 18 |
| Table of Contents |
The Black-Scholes model uses the following variables to calculate the value of an option or warrant for the nine months ended September 30, 2023, and the twelve months ended December 31, 2022:
|
| September30, |
|
| December 31, | ||
Description |
| 2023 |
|
| 2022 | ||
a) Price of the Issuer’s Security |
| $ |
|
| $ | ||
b) Exercise (strike) price of Security |
| $ |
|
| $ | ||
c) Time to Maturity in years |
|
|
| ||||
d) Annual Risk-Free Rate |
|
|
| ||||
e) Annualized Volatility (Beta) |
|
|
| ||||
NOTE 10 - OTHER LOANS PAYABLE
On June 15, 2020, Hempacco entered into a loan agreement with a third party whereby the Company received $
In July 2021, the Company secured a line of credit facility with First Citizens Bank in the amount of $
NOTE 11 - RELATED PARTY TRANSACTIONS
As of September 30, 2023, and December 31, 2022, the Company owed Primus $
As of September 1, 2022, the salaries of the CEO and the CMO, as defined in their respective employment agreements, were paid through the Company’s payroll service. These payments replace the prior independent contractor payments received by their entities, Strategic Global Partners, Inc. and Cube 17, Inc., respectively. Although employment contracts were dated from January 2022, salaries were paid with effect from September 1, 2022. During the three and nine months ended September 30, 2023, the Company incurred expenses of $
As of September 30, 2023, and December 31, 2022, the Company was owed $
| 19 |
| Table of Contents |
The Company sells hemp products to UST Mexico and provides manufacturing consulting services. The value of goods and services provided to UST Mexico, which are recorded as revenue, was $
As of September 30, 2023, UST Mexico owned
On or about March 1, 2022, the Company entered into a mutual line of credit agreement with its parent company, Green Globe International, Inc. (“GGII”). The purpose of the credit agreement is to facilitate short-term borrowing needs on an interest-free basis, with advances being subject to repayment within 90 days with a maximum of $
As of September 30, 2023 and December 31, 2022, the balance owed to the Company by GGII was $
During 2023 and 2022, the Company made short term cash advances directly to Green Star Labs, Inc., a subsidiary joint venture of the Company’s parent, Green Globe International, Inc. On July 10, 2023, the Company acquired a
During the nine-month period ended September 30, 2023, the Company made payments of approximately $
NOTE 12 - STOCKHOLDERS’ EQUITY
Common Stock
On September 28, 2021, the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock to
On or about April 7, 2022, the Company issued
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On or about July 15, 2022, the Company acquired from Nery’s Logistics, Inc., an entity that is owned by a significant shareholder (greater than 10%) of the Company’s parent, two cigarette production equipment lines together with multiple cigarette and cigar-related trademarks. The total acquisition price was deemed to be $
On July 15, 2022, the Company also settled two vendor accounts payable balances totaling $
On September 1, 2022, the Company sold
On September 6, 2022, Boustead exercised its warrants to purchase the Company’s common stock issued to it in connection with IPO, pursuant to paragraph 1.3.1 of the Underwriting Agreement. Boustead elected to convert its right to purchase
On September 17, 2022, the Company entered a Marketing Services Agreement with North Equities Corp. of Toronto, Canada, effective as of September 19, 2022, for an initial period of 6-months. Compensation for the initial period will be the issuance of
On October 12, 2022, the Company entered a Broadcasting and Billboard Agreement with FMW Media Works LLC (“FMW”) of Hauppauge, New York, for a period of three months. FMW will produce an informative TV show which will discuss the Company and its business. Total compensation will be made through the issuance of
On or around February 5, 2023, the Company issued
On February 14, 2023, the Company sold
On May 16, 2023,
On August 9, 2023,
On or around September 26, 2023, the Company issued
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NOTE 13 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of issuance of these financial statements.
On or around October 18, 2023, the Company executed a one-year Promissory Note, a Share Purchase Agreement and other supporting legal documents in connection with a series of Securities Purchase Agreements with First Fire Global Opportunities Fund, LLC.
The aggregate amount of these agreements is $
The Note Holder is restricted from holding more than
The Investor received additional compensation comprised of i) the issue of common shares (the commitment shares) amounting to 10% of each Promissory Note amount, and 2)
The Note Holder has the option to convert all or a part of the outstanding debt into common stock at a fixed conversion rate of $
On October 18, 2023, the Company issued
On October 19, 2023, a Note and other ancillary documents were signed in connection with a second tranche of funding under the First Fire umbrella commitment. The Promissory Note Holder is Mast Hill Fund, LLC. The gross amount of the Promissory Note is $
On October 19, 2023, the Company issued
Both of the above referenced Promissory Notes call for monthly payments of principal and interest in the aggregate of $
On November 6, 2023, the Company signed two agreements with Aspire North America, LLC, (“Aspire”) as follows:
| a) | Manufacturing & Supply Agreement (“MSA”) |
|
|
|
| b) | Exclusive Distribution Agreement (“EDA”) |
Aspire is a leading Los Angeles based, developer, manufacturer and marketer of cannabis vaporizer hardware.
The MSA provides for the Company, as a client of Aspire, to manufacture at Client’s Facility finished consumer vaporization goods using the products, filling Machines, their respective patents and other IP Rights embodied therein, and to fill with Client’s Finished Oils (collectively, “Finished Goods”); and (b) sell and distribute the Client Products as part of Client’s Finished Goods throughout the Territory (collectively, "Limited Distribution License").
The EDA provides for the Company, in the role of “Supplier” to award a worldwide “Master Distributor” agreement back to Ispire for all the supplier’s celebrity and influencer products produced by the Company. Ispire agrees not to sell nicotine-based products in North America.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. For example, statements in this Annual Report regarding our plans, strategy and focus areas are forward-looking statements. You can identify some forward-looking statements by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “goal,” “plan,” and similar expressions. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking 1supply chain disruption), the ongoing war in Ukraine and its impact on the global economy, our history of losses since inception, our dependence on a limited number of customers for a significant portion of our revenue, the demand for hemp smokables products, our dependence on key members of our management and development team, and our ability to generate and/or obtain adequate capital to fund future operations. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” in our other publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q. Because actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. We do not undertake responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.
Hempacco Co., Inc., collectively with its subsidiaries, is referred to in this Form 10-Q as “Hempacco”, “we”, “us”, “our”, “registrant”, or “Company”.
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Overview
We are focused on Disrupting Tobacco™ by manufacturing and selling nicotine-free and tobacco-free alternatives to traditional cigarettes. We utilize a proprietary, patented spraying technology for terpene infusion and patent-pending flavored filter infusion technology to manufacture hemp- and herb-based smokable alternatives.
We have conducted research and development in the smokables space and are engaged in the manufacturing and sale of smokable hemp and herb products, including The Real Stuff™ Hemp Smokables. Our operational segments include private label manufacturing and sales, intellectual property licensing, and the development and sales of inhouse brands using patented counter displays. Our private label customers include well-known and established companies in the cannabis and tobacco-alternatives industries, and we currently own approximately 580 kiosk vending machines which we plan to refurbish and use to distribute our products in a wider fashion under our HempBox Vending brand.
Our hemp cigarette production facility, located in San Diego, California, has the capacity to produce up to 30 million cigarettes monthly. From our facility, we can small-to-large quantities of product—from single displays of product to targeted retail locations to truckloads of product to private label customers—with in-house processing, packing, and shipping capabilities.
On July 10, 2023, the Company signed a Purchase Agreement and an accompanying Assignment Agreement with Viva Veritas LLC (“Veritas”) (successor to Curated Nutra) whereby Veritas agreed to assign its 50% interest in Green Star labs, Inc. to Hempacco together with additional equipment lines related to bottling and gummy production.
The total purchase price to be paid by the Company is $3,500,000. The preliminary purchase price has been allocated as to $1,776,000 for the interest in Green Star Labs, and $1,724,000 for the equipment. $3,200,000 of the $3,500,000 total purchase price was paid by the Company’s issuance of a convertible promissory note to the seller, which became effective on July 10, 2023. As noted previously (see Note 1), Hempacco had already paid the sum of $300,000 to Curated Nutra for the purchase of additional equipment, which represented the cash portion of the total $3,500,000 purchase price and was credited against the total purchase price by the seller, such that the total $3,500,000 purchase price was deemed paid after issuance of the $3,200,000 promissory note to the seller.
The note carries a conversion price of 95.238% of the average closing price of the Company’s common stock during the three days immediately preceding the conversion.
This acquisition will further our plans to increase our product line to include a full range of nutraceutical products which will be produced at the 50,000-sf certified GMP facility that Green Star Labs, Inc. occupies in San Diego.
Green Star Labs, Inc. is managed by, and co-owned by our parent company, Green Globe International, Inc.
In the coming months the Company, in collaboration with its joint venture partner Snoop Dogg will manufacture and distribute many new product lines containing hemp derived CBD, starting with the “Dogg lbs” brand of gummies.
On November 6, 2023, the Company signed two agreements with Ispire North America, LLC whereby the Company, under license, will manufacture and distribute vaporizer products under the celebrity brands the Company controls through its various joint ventures. See Note 13 of the financial statements for more detailed information on this new product line.
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Results of Operations
For the Three and Nine Months Ended September 30, 2023, compared to the Three and Nine Months Ended September 30, 2022
Revenue
For the three and nine months ended September 30, 2023, and 2022, revenues were as follows:
|
| Three Months Ended September 30, |
|
| Change |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product sales |
| $ | 1,305,254 |
|
| $ | 561,818 |
|
| $ | 743,436 |
|
|
| 132 | % |
Product sales, related parties |
|
| 11,709 |
|
|
| 16,940 |
|
|
| (5,231 | ) |
|
| (31 | )% |
Manufacturing service revenue |
|
| 9,049 |
|
|
| 6,653 |
|
|
| 2,396 |
|
|
| 36 | % |
Kiosk revenue |
|
| - |
|
|
| 6,824 |
|
|
| (6,824 | ) |
|
| (100 | )% |
Total Revenues |
| $ | 1,326,012 |
|
| $ | 592,235 |
|
| $ | 733,777 |
|
|
| 124 | % |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product sales |
| $ | 1,950,460 |
|
| $ | 3,373,380 |
|
| $ | (1,422,920 | ) |
|
| (42 | )% |
Product sales, related parties |
|
| 32,028 |
|
|
| 22,940 |
|
|
| 9,088 |
|
|
| 40 | % |
Manufacturing service revenue |
|
| 22,487 |
|
|
| 33,248 |
|
|
| (10,761 | ) |
|
| (32 | )% |
Kiosk revenue |
|
| - |
|
|
| 8,890 |
|
|
| (8,890 | ) |
|
| (100 | )% |
Total Revenues |
| $ | 2,004,975 |
|
| $ | 3,438,458 |
|
| $ | (1,433,483 | ) |
|
| (42 | )% |
The decrease in revenues during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was a result of a temporary decline in orders from one of our largest customers due to a legal dispute, as well as the passing of AB 45 by the State of California, which banned the sale of smokable hemp products in California until such time as the legislature decided on a tax policy with regard to these products.
However, the increase in revenues of 124% for the three months ended September 30, 2023, as compared to September 30, 2022, was primarily a result of our first shipments of CBD gummies under the “Dogg lbs” brand, a product of our joint venture with Snoop Dogg as well as increasing sales by Hempacco Paper Co., Inc.
Cost of Goods Sold
For the three and nine months ended September 30, 2023, and 2022, cost of goods sold were as follows:
|
| Three Months Ended September 30, |
|
| Change |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Cost of Goods Sold |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of goods sold |
| $ | 1,349,631 |
|
| $ | 598,627 |
|
| $ | 751,004 |
|
|
| 125 | % |
Cost of goods sold related parties |
|
| 414,374 |
|
|
| - |
|
|
| 414,374 |
|
| - | % | |
Total Cost of Goods Sold |
| $ | 1,764,005 |
|
| $ | 598,627 |
|
| $ | 1,165,378 |
|
|
| 195 | % |
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| Table of Contents |
|
| Nine months Ended September 30, |
|
| Change |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Cost of Goods Sold |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of goods sold |
| $ | 2,227,521 |
|
| $ | 2,795,661 |
|
| $ | (568,140 | ) |
|
| (20 | )% |
Cost of goods sold related parties |
|
| 490,260 |
|
|
| - |
|
|
| 490,260 |
|
| - | % | |
Total Cost of Goods Sold |
| $ | 2,717,781 |
|
| $ | 2,795,661 |
|
| $ | (77,880 | ) |
|
| (3 | )% |
The increase in relative total cost of goods sold in the three months ended September 30, 2023, is primarily due to increased production overhead expenses associated with set-up of new product production lines, compared to the same period in 2022.
The decrease in relative total cost of goods sold in the nine months ended September 30, 2023, is primarily due to decreasing sales and production in the nine months ended September 30, 2023, as compared to the same period in 2022.
Operating Expenses
For the three and nine months ended September 30, 2023, and 2022, operating expenses were as follows:
|
| Three Months Ended September 30, |
|
| Change |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
General and administrative |
| $ | 1,037,790 |
|
| $ | 791,562 |
|
| $ | 246,228 |
|
|
| 31 | % |
General and administrative, related parties |
|
| 135,454 |
|
|
| 45,000 |
|
|
| 90,454 |
|
|
| 201 | % |
Sales and marketing |
|
| 306,505 |
|
|
| 200,976 |
|
|
| 105,529 |
|
|
| 52 | % |
Sales and marketing, related parties |
|
| 29,794 |
|
|
| - |
|
|
| 29,794 |
|
| - | % | |
Expensing of related party advances and loans |
|
| 166.267 |
|
|
| - |
|
|
| 166,267 |
|
| - | % | |
Total Operating Expenses |
| $ | 1,675,810 |
|
| $ | 1,037,538 |
|
| $ | 638,272 |
|
|
| 61 | % |
|
| Nine Months Ended September 30, |
|
| Change |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| $ |
|
| % |
| ||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
General and administrative |
| $ | 2,770,482 |
|
| $ | 1,758,561 |
|
| $ | 1,011,921 |
|
|
| 57 | % |
General and administrative, related parties |
|
| 403,963 |
|
|
| 195,000 |
|
|
| 208,963 |
|
|
| 107 | % |
Sales and marketing |
|
| 668,227 |
|
|
| 685,086 |
|
|
| (16,859 | ) |
|
| (2 | )% |
Sales and marketing, related parties |
|
| 79,881 |
|
|
| - |
|
|
| 79,881 |
|
|
| - | % |
Expensing of related party advances and loans |
|
| 1,487,042 |
|
|
| - |
|
|
| 1,487,042 |
|
|
| - | % |
Total Operating Expenses |
| $ | 5,409,595 |
|
| $ | 2,638,647 |
|
| $ | 2,770,948 |
|
|
| 105 | % |
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| Table of Contents |
The increase in general and administrative expenses during the three and nine months ended September 30, 2023, compared to the same periods in 2022 was mainly due to accounting, legal and insurance costs related to Nasdaq/SEC compliance expenses plus additional staffing for improvement of internal systems and controls.
During the three and nine months ended September 30, 2023, related party general and administrative expenses consisted of senior management consulting fees, write offs of related party receivables and rent payable on our premises leased in San Diego, California. During the three and nine months ended September 30, 2022, related party general and administrative expenses consisted of related party fees and rent. The landlord, Primus Logistics, is 90%-owned by Sandro Piancone, the Company’s CEO.
The Company’s sales and marketing expenses decreased during the nine months ended September 30, 2023, compared to sales and marketing expenses during the nine months ended September 30, 2022, due to scaling back our expansion efforts in the current year compared to the same period of the prior year. Sales and Marketing expenses increased during the three months ended September 30, 2023, due to the promotional activities related to new joint venture product launches and trade shows.
Related party sales and marketing expenses for the three and nine months ended September 30, 2023, include costs of services provided by the CMO.
During the three months and nine months ended September 30, 2023, the Company recorded an allowance for the potential non-payment of certain inter-company receivables in the amount of $166,267 and $1,487,042, compared to an allowance of $0 and $0, respectively, during the three and nine months ended September 30, 2022.
Net Loss
The Company had net losses of $2,261,508 and $6,251,412, respectively, during the three and nine months ended September 30, 2023, compared to net losses of $1,049,473 and $2,024,039, respectively, during the three and nine months ended September 30, 2022. The increase in net loss for the three months ended September 30, 2023, was due primarily to increases in operations of the Company that resulted in additional overhead expenses. The increase in net loss for the nine months ended September 30, 2023, was due primarily to significant additional one-off expenses incurred in connection with the provision for impairment of inter-company loans receivable.
Liquidity and Capital Resources
The table below, for the periods indicated, provides selected cash flow information: | ||||||||
|
| Nine months Ended September 30, 2023 |
|
| Nine months Ended September 30, 2022 |
| ||
|
|
|
|
|
|
| ||
Net cash used in operating activities |
| $ | (4,972,225 | ) |
| $ | (3,217,684 | ) |
Net cash provided by (used in) investing activities |
|
| (163,184 | ) |
|
| (282,007 | ) |
Net cash provided by financing activities |
|
| 4,604,154 |
|
|
| 5,539,908 |
|
Net change in cash |
| $ | (531,255 | ) |
| $ | 2,040,217 |
|
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| Table of Contents |
Cash Flows from Operating Activities
We had cash used in operating activities of $4,972,225 in the nine months ended September 30, 2023, as compared to cash used in operating activities of $3,217,684 during the nine months ended September 30, 2022. The increase in cash used in operating activities of $1,754,541 for the nine months ended September 30, 2023, is primarily attributable to the increase in net operating loss of $2,688,705 (after deduction of reserve for related party loans of $1,493,935) as well as increases attributable to prepaid expenses and inventory.
Cash Flows from Investing Activities
We had cash used in investing activities of $163,184 for the nine months ended September 30, 2023, as compared to cash used in investing activities of $282,007 for the nine months ended September 30, 2022. The increase of $1,605,177 was primarily due to the purchase of plant and equipment of $163,184 during the nine months ended September 30, 2023.
Cash Flows from Financing Activities
We had cash provided by financing activities of $4,604,154 in the nine months ended September 30, 2023, as compared to cash provided by financing activities of $5,539,908 in the comparative period in 2022, with this net decrease of $935,754 was primarily due to an increase of $777,000 from the sale of common stock, offset by a $300,000 acquisition investment in Green Star Labs, Inc., a net outflow of $50,000 from a shoirt-term promissory note, and loans to related parties of $1,750,649 and zero payments of equipment loans compared to $300,000 in the nine months ended September 30, 2022.
We anticipate that our cash needs for the next twelve months for working capital and capital expenditures will be approximately $3,000,000. As of September 30, 2023, we had $17,076 in cash, and we believe that our current cash and cash flow from operations will not be sufficient to meet anticipated cash needs for the next twelve months for working capital and capital expenditures. We will likely also require additional cash resources due to possible changed business conditions or other future developments. We plan to seek to sell additional equity securities to generate additional cash to continue operations. We may also sell debt securities to generate additional cash. The sale of equity securities, or of debt securities that are convertible into our equity, could result in additional dilution to our shareholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including the following: investors’ perception of, and demand for, securities of cigarette and hemp companies; conditions of the U.S. and other capital markets in which we may seek to raise funds; future results of operations, financial condition and cash flow. Therefore, our management cannot assure that financing will be available in amounts or on terms acceptable to us, or if at all. Any failure by us to raise additional funds on terms favorable to us could have a material adverse effect on our liquidity and financial condition.
On February 11, 2023, the Company sold an additional 4,830,000 shares of common stock in a registered underwritten offering at a price to the public of $1.50 per share. Gross offering proceeds of $7,245,000 were reduced by commission and offering costs of $634,600, with net proceeds of $6,610,400 being received by the Company on February 11, 2023.
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At the time of this writing, the Company had reached an agreement with a consortium of Convertible Promissory Note lenders to provide a commitment to purchase up to $3,000,000 of the Company’s common shares. Advances will be made in tranches, each subject to a Securities Purchase Agreement (“SPA”). To date the Company has signed promissory Notes in the aggregate amount of $1,112,778 and received net proceeds of $906,760 after deduction of Original Issuer Discount and legal expenses. Full details of the terms of this financing can be found in Note 13 of the Financial Statements above.
The Securities Purchase Agreements also (i) require the Company to satisfy the shareholder approval requirements of Nasdaq Listing Rule 5635, which currently would prohibit the issuance of more than 5,782,332 shares of Company common stock (the “Exchange Cap”) until shareholder approval has been received to issue shares in excess of the Exchange Cap under the Financing Transactions and such approval has become effective pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended, and (iii) require the Company to file a preliminary information statement on Schedule 14C in connection with the issuance of shares in excess of Exchange Cap under the Financing Transactions with the U.S. Securities and Exchange Commission (the “SEC”) within 10 calendar days of closing, and file a definitive information statement as soon as permissible but no later than December 1, 2023.
Going Concern
In the event we are not successful in reaching our sustained revenue targets, we anticipate that depending on market conditions and our plan of operations, we will likely incur, for the next few months, continued operating losses. We base this expectation, in part, on the fact that we may not be able to generate enough gross profit to cover our operating expenses. Consequently, there remains substantial doubt about the Company’s ability to continue as a going concern. We are subject to many factors which could detrimentally affect us. Many of these risk factors are outside management’s control, including demand for our products, our ability to hire and retain talented and skilled employees and service providers, as well as other factors. The accompanying financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and settle its liabilities in the normal course of business for the foreseeable future.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Our financial statements are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition.
We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
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| Table of Contents |
Our significant accounting policies are summarized in Note 2 to our financial statements. While these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause an effect on our results of operations, financial position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
The Company has not yet, despite on-going improvement programs, achieved the level of operational effectiveness such that controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures would include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including the Company’s Chief Executive Officer, the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2023, have been evaluated, and, based upon this evaluation, the Company’s Chief Executive Officer has concluded that these controls and procedures are not yet sufficiently effective in providing reasonable assurance of compliance.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
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Management is committed to remedying this problem through a continuous process of systems and procedures analysis, together with an on-going evaluation of the training, skills and knowledge of accounting staff to ensure that the staff member is fully qualified to handle the assigned tasks. In addition, each team member will be made aware of the importance of their role in ensuring that the systems and procedures achieve the desired effect and how any errors or omissions affect the whole accounting period closing and the preparation of GAAP financial statements in accordance with the SEC rules and regulations.
During the nine-month period ended September 30, 2023, the Company hired additional accounting personnel, and designed and maintained a manual of policies and procedures with a view to ensuring proper procedures were executed and that transactions were regularly reviewed by management. During the audit process it became apparent that there are still inherent weaknesses in our systems and procedures. Special attention will be given to improving these areas prior to the closing of our fiscal year end.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to claims arising out of commercial operations in the normal course of business. As of September 30, 2023, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s results of operations except as set forth below.
On or about October 7, 2022, the Company accepted service in a suit filed in the United States District Court for the Southern District of New York by Long Side Ventures LLC, R & T Sports Marketing Inc., Sierra Trading Corp., Taconic Group LLC, KBW Holdings LLC, Robert Huebsch and Ann E. Huebsch, Joseph Camberato, Joseph Crook, Sachin Jamdar, Michael Matilsky, Gerard Scollan, and Daisy Arnold (collectively “Plaintiffs”) against Hempacco Co., Inc., Mexico Franchise Opportunity Fund, LP, Sandro Piancone, Jorge Olson, Neville Pearson, Stuart Titus, Jerry Halamuda, Retail Automated Concepts, Inc. f/k/a Vidbox Mexico Inc., and Vidbox Mexico S.A. De C.V. (collectively “Defendants”) (Case No. 1:22-cv-08152 (ALC)), alleging that (i) Plaintiffs previously received a judgment (the “Judgment”) in a New York state court action (the “State Action”) against Retail Automated Concepts, Inc. (“RAC”) and Vidbox Mexico S.A. De C.V. (“Vidbox Mexico”), for breach of promissory notes issued by RAC to Defendants in 2018 and guaranteed by Vidbox Mexico, and (ii) prior to the filing of the State Action, Defendants fraudulently transferred and commingled assets, specifically 600 retail kiosks, in order to avoid enforcement of the Judgment, with Plaintiffs seeking monetary damages from Defendants. On or about November 29, 2022, the court granted Defendants’ request to file a motion to dismiss the suit, and on December 30, 2022, Defendants filed the motion to dismiss the suit for failure to state a claim and lack of personal jurisdiction. The court has not yet ruled upon the motion to dismiss. Defendants believe the suit is without merit and intend to defend the matter vigorously.
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On or about August 31, 2023, our defense counsel received a decision from the court in response to our motion to dismiss. The court’s decision is summarized below:
| · | All defendants, except Sandro Piancone and Jorge Olson, have been dismissed without prejudice due to a lack of personal jurisdiction. |
| · | Personal jurisdiction exists over Sandro Piancone and Jorge Olson because they are "closely related" to Vidbox Mexico, and thus, subject to the New York forum selection clause included in the Securities Purchase Agreements (Sandro signed the agreement on behalf of Vidbox Mexico and Jorge is purportedly a controlling officer). |
| · | Despite the lack of personal jurisdiction over all defendants, except Sandro and Jorge, the Court has directed the parties to conduct jurisdictional discovery and then will allow Plaintiffs to amend the complaint for purposes of asserting jurisdiction over all defendants; and |
The Court did not rule on the substantive merits of Plaintiffs' claims despite our request that it do so and dismiss them based on various deficiencies (likely because of its finding that jurisdiction was lacking on 7 of the 9 defendants and its directive regarding jurisdictional discovery).
A conference call with the Court and the Plaintiff was held on October 16, 2023, for the purposes of deciding how to proceed with the pending jurisdictional issues, the Court agreed to give the parties 2 weeks to continue discussions. A joint letter is now due on October 31, 2023, wherein the parties will either inform the court that an agreement of some type has been reached, (i.e., plaintiffs drop certain defendants/Hempacco and MFOF consent to jurisdiction) or will provide the Court with a proposed schedule on jurisdictional discovery.
On or about September 15, 2023, the Company accepted service in a suit filed in the Superior Court of the State of California by the People of the State of California (by and through Rob Bonta, Attorney General), alleging that the Defendant, (together with eight other co-defendants) did knowingly sell inhalable hemp products in California contrary to Assembly Bill 45. The suit also alleges that Defendants failed to warn their customers of the risks involved by the inhalation of the highly toxic chemicals that are present in all commercial hemp products, contrary to Proposition 65 that requires all such products to carry prop 65 warnings on the packaging.
The Plaintiff is asking the court for civil penalties of $2,500 against Defendants for each violation and to award Plaintiff the cost of its suit, and to grant such other and further relief as the court deems just and proper.
The Company recognizes that two transactions with on-line suppliers could have occurred subsequent to the AB 45 ban, however, for all intents and purposes the company ceased its distribution and sale of hemp smokable products as soon as was practical after AB 45 was enacted.
The Company also prints Proposition 65 warnings on all of its products that might be considered to contain (in the opinion of the State of California) “highly toxic chemicals”.
The Company feels that this matter could have been handled through the normal administrative process that applies to any business found to be committing acts or business practices that are contrary to the rules and regulations of the governing authority.
To use a lawsuit for this purpose was highly unnecessary and without merit. The Company expects to be able to negotiate a settlement of the matter without imposing on the valuable time of the Superior Court.
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ITEM 1A. RISK FACTORS
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, the Company is not required to provide information under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2023, the Company did not issue any unregistered equity securities except as set forth below.
On or about May 16, 2023, the Company issued 62,223 shares of its common stock to Ernest Sparks upon conversion of a convertible note and accrued interest.
On or about May 16, 2023, the Company issued 332,398 shares of its common stock to Miguel Cambero upon conversion of a convertible note and accrued interest.
On or around September 26, 2023, the Company issued 250,000 shares to FMW MediaWorks for services pursuant to a consulting contract dated February 2, 2023.
On or around February 5, 2023, the Company issued 15,000 shares to Dr. Fischer and Partner GmbH/ Ruediger Beuttenmueller for IR consulting services in Europe pursuant to a consulting contract effective December 1, 2022, and terminating on February 20, 2023.
The above-described shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) promulgated thereunder, as there was no general solicitation, the shareholders were accredited and/or financially sophisticated, and the transactions did not involve a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit No. |
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101.INS** |
| Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
101.SCH** |
| Inline XBRL Taxonomy Extension Schema Document. |
101.CAL** |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF** |
| Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB** |
| Inline XBRL Taxonomy Extension Labels Linkbase Document. |
101.PRE** |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104** |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* ** | Executive compensation plan or arrangement. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. | ||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| HEMPACCO CO., INC. (Registrant) |
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Date: November 20, 2023 | By: | /s/ Sandro Piancone |
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| Sandro Piancone |
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| Chief Executive Officer
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Date: November 20, 2023 | By: | /s/ Neville Pearson | |
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| Neville Pearson | |
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