Stockholders of Hempacco Co., Inc.
We have audited the accompanying consolidated balance sheets of Hempacco Co., Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, stockholders’ equity, and cash flows, for the years then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has used cash in operating activities, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
During the year ended December 31, 2022 and subsequent, the Company has provided a total of approximately $2.7 million in loans to its parent company and a subsidiary controlled by the parent company. At December 31, 2022 and subsequently the Company has recorded a full reserve on the loans. See Note 11 for additional information.
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
As discussed in Notes 1, 2, 3, 6, 8, 9, 11, 13 and 15 to the financial statements, the Company has significant related party transactions involving revenue, accounts receivable, accounts payable, prepaids, loans receivable/payable, advances, and expenses paid by and to multiple related parties. Our auditing of management’s identification of related parties and the related transactions was complex and is based on a thorough understanding the Company’s related party relationships, contracts, and business activities. These were the principal considerations that led us to determine this as a critical audit matter.
We evaluated the controls over the Company’s identification of, and recording of related party transactions, and of the revenue recognition process, including walkthroughs of internal controls. To evaluate the related party’s satisfaction of performance obligations, our audit procedures included, among others, reviewing contracts and evaluating management’s assumptions used to determine the distinct performance obligations, and reviewing the branding work performed by the Company for various products. In addition, to identify undisclosed related party transactions we performed the following: 1) made inquiries of management and other individuals throughout the Company; 2) obtained a selection of disbursements and reviewed for related party indicators; 3) reviewed public filings and other online information available; 4) confirmed with the transfer agent regarding significant shareholders; and 5) related procedures performed in other parts of the audit engagement.
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these Consolidated Financial Statements
The accompanying notes are an integral part of these consolidated financial statements
Notes to the Consolidated Financial Statements
December 31, 2022, and 2021
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”) 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.
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. This ban on any kind of smokable flower will remain in force until such time as the California Legislature enact a bill to tax the product. It is also 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. The celebrity joint ventures bring a national demand for our products.
During 2021, The Company entered into the following Joint Ventures:
| a) | On or about March 10, 2021, the Company entered into a joint venture partnership agreement with VZ Ventures and BX2SD Hospitality, LLC for the sale and marketing of a proprietary brand of smokables containing the D8 infused variety of hemp. Cali Vibes D8, LLC was formed as the entity’s business vehicle which is 50% owned by the Company. The Company will manage the business operations and accounting, as well as manufacturing the product. |
| | |
| b) | On or about June 22, 2021, the Company’s parent company, GGII, entered into a joint venture agreement with Hemp Hop Global, LLC, a Florida based company in the hip hop talent management business and the sale and distribution of branded snack food products. Hemp Hop Global is managed by Rick Ross, an American Rapper and record executive and his business partner James Lindsay. Hempacco will produce a range of smokable products under the Hemp Hop brand, and Hemp Hop Smokables, LLC was formed as the business entity, of which GGII owns 50%. |
| | |
| | On December 14, 2021, GGII assigned all of the membership and other equity and ownership interests in Hemp Hop Smokables LLC to Hempacco., Co., Inc. The business launched on or about May 25, 2022. |
During the year ended December 31, 2022, the Company entered into the following Joint Ventures and other significant agreements.
On or about January 20, 2022, the Company entered into employment agreements with Sandro Piancone, Hempacco’s CEO, Neville Pearson, the Company’s CFO, and Jorge Olson, the Company’s CMO. These agreements supersede and replace the Company’s consulting agreements with Mr. Piancone’s entity, Strategic Global Partners, Inc., and Mr. Olson’s entity, Cube17, Inc. The key terms of Mr. Piancone’s and Mr. Olsen’s employment provide for a base salary of $10,000 per month each, with the potential to earn a performance-based bonus of up to 110% of the annual base salary. Mr. Piancone and Mr. Olsen will also be eligible to participate in any stock or option-based incentive plans that the board of directors may approve in the future. The initial employment period is for three years, with a one-year option to extend being available to the Company. Mr. Pearson’s employment agreement with Green Globe International, Inc. remains in place.
On or about January 1, 2022, the Company entered into a joint venture agreement with Cheech and Chong’s Cannabis Company, a Nevada corporation (“CCCC”), to form a joint venture entity in Nevada, which entity will market and sell Cheech & Chong-branded hemp smokable products. Pursuant to the agreement, the joint venture entity will be owned 50% by each of us and CCCC, we are required to fund $10,000 to the joint venture entity. As of the date of publication of these financial statements this contribution had not been made, however Hempacco has been producing product inventory at its own expense prior to the official launch of the product in July 2022.
The joint venture agreement calls for the Company to manufacture joint venture product and provide accounting, inventory management, staff training, and trade show and marketing services for the joint venture entity, and CCCC is required to provide online marketing and promotion, design and branding, brand management and development, trademark receipt, and sales and distribution services. CCCC is also required to ensure that Cheech Marin and Tommy Chong attend and make appearances at joint venture entity events. As an incentive to enter into this joint venture, CCCC was awarded 100,000,000 Green Globe International warrants with a Black-Scholes valuation of $0.0031 per share for a total valuation of $309,990 on the issue date. This theoretical value was expensed within general and administrative expense on the statement of operations.
On or about January 19, 2022, the Company entered into a joint venture agreement with Stick-It Labs Ltd. (“Stick-It”), an Israeli corporation that manufactures cannabinoid sticks, to develop and sell hemp smokables products in the United States and Mexico utilizing each of the parties’ respective expertise. Pursuant to the original agreement, the Company was required to fund $750,000 to the joint venture entity, Stick-It USA, Inc., On September 7, 2022, the Exhibit A to the agreement was amended to reduce he initial capital contribution to $250,000. On September 12, 2022, the Company funded $250,000 to StickIt USA. For such funding the Company will receive preferred shares entitling the Company to 75% of distributable profits of the joint venture entity until the Company has been repaid $250,000, after which the preferred shares will convert into 250,000 shares of common stock of Stick-It USA, which will then constitute 50% ownership of Stick-It USA, with the other 250,000 shares of Stick-It USA common stock being owned by Stick-It Labs Ltd.
The agreement grants the right to Stick-It to purchase 100,000,000 five-year warrants of Green Globe International, Inc. common stock at an exercise price of $0.01 per share. The warrants are issuable in three tranches, the first 25,000,000 on signing the JV agreement, the second 25,000,000 when StickIt US achieves annual sales revenue in excess of $5,000,000, and the third tranche will be issued upon StickIt US achieving annual sales revenue in excess of $10,000,000. The first tranche of 25,000,000 Green Globe International warrants were valued by the Black-Scholes formula at $0.0051 per share for a total capitalized value of $127,385. This amount was also expensed within general and administrative expense on the statement of operations.
In July 2022, the Company acquired two existing cigarette manufacturing lines and approximately forty tobacco trademarks in exchange for the issuance of 2,000,000 common shares of Hempacco common stock valued at $2 per share. The $4,000,000 valuation initially was allocated $3,400,000 as to machinery, and $600,000 to the trademarks. A subsequent appraisal, performed in Mexico valued the equipment at $2,278,337. No value was allocated to the trademarks.The Company has recorded a one-time charge of $1,121,663 to its profit and loss account in order to reduce the asset costs to net realizable value.
On August 29, 2022, Hempacco Co., Inc. (the “Company”) entered into an underwriting agreement with Boustead Securities, LLC, as representative (the “Representative”) of the underwriters (the “Underwriters”) in connection with the initial public offering of the Company (the “IPO”). The Underwriting Agreement provides for the offer and sale of 1,000,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”) at a price to the public of $6.00 per share (the “Offering”). In connection therewith, the Company agreed to issue 70,000 warrants to purchase shares of Common Stock, exercisable from September 1, 2022, through August 29, 2027, and initially exercisable at $9.00 per share subject to adjustment as provided therein (the “Representative’s Warrants”). The Company also granted the Underwriters an option for a period of 45 days to purchase up to an additional 150,000 shares of Common Stock. The Offering is being made pursuant to a Registration Statement on Form S-1 (File No. 333-263805) (the “Registration Statement”), which was declared effective by the Securities and Exchange Commission on August 29, 2022.
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 any of those liabilities.
On September 1, 2022, the Offering was completed. At the closing, the Company (i) sold 1,000,000 shares of Common Stock for total gross proceeds of $6,000,000, and (ii) issued the Representative’s Warrants. After deducting the underwriting commission and expenses, the Company received net proceeds of $5,468,813.
On October 2, 2022, HempBox Vending, Inc. a wholly owned subsidiary of the Company entered into a Kiosk Strategic Partnership Agreement with Weedsies Vending, LLC. (“Weedsies”). See Note 15 subsequent events for further information regarding Weedsies.
Effective October 2, 2022, the Company entered into a joint venture operating agreement with Sonora Paper Co., Inc. (“Sonora”) a California corporation currently engaged in the manufacture of smoking papers at its plant in Sonora , Mexico.
The joint venture will manufacture smoking papers, blunts, wraps and ancillary paper products for sale in the United States and internationally. Manufacturing will take place in Hempacco’s rented space in both Tijuana, Mexico, and San Diego.
Products currently imported from a third-party manufacturer will be replaced by the joint venture’s own products.
Ownership will be allocated 80% to the Company for the supply of all necessary equipment and working capital, and 20% to Sonora for the provision of their know-how and proprietary technology and patents.
On July 18, 2022, the Company filed an Amendment to the Certificate of Incorporation of The Real Stuff, Inc. with the Delaware Secretary of State changing the name of The Real Stuff, Inc to Hempacco Paper Co., Inc.
Effective November 17, 2022, the Company entered into a joint venture operating agreement with High Sierra Technologies, Inc.(“High Sierra”), a Nevada limited liability company, to operate a joint venture entity (the “Joint Venture”), Organipure, Inc. (“Organipure”). Organipure will manufacture and market the proprietary Hemp related products of High Sierra pursuant to the Operating Agreement, the Joint Venture will be owned 50% by each of the Company and High Sierra, the joint venturers are both required to initially fund $1,000,000 to the Joint Venture and will also jointly fund the on-going patent and licensing expenses.
Effective November 17, 2022, the Company entered into a Patent Licensing Agreement with Organipure for the use of those certain patents and patent applications currently licensed to Hempacco by the owner, Old Belt Extracts, LLC. Organipure shall pay to Hempacco a license fee equal to 5% of its annual gross revenues received. The license agreement shall last for a period of ten years and two months.
Effective November 17, 2022, the Company entered into a Hemp Smokables Manufacturing Agreement with Organipure, Inc. for the manufacture of the proprietary Hemp Smokable products designed and conceived by High Sierra pursuant to the specifications, patents and trademarks detailed on Exhibits A through C of the agreement.
Effective November 17, 2022, Organipure, Inc. executed, as Maker, a “Series Promissory Note” in favor of Hempacco Co., Inc. in the maximum amount of $500,000 (five hundred thousand).This note is intended to secure payments made to Organipure in furtherance of the joint venture agreement referenced above. The maturity date of the Note is November 17, 2025, and the Note will bear interest at 4.10% per annum. All principal amounts and accrued interest will be payable on maturity.
Effective December 1, 2022, the Company engaged investor relations consultant Dr. Fischer and Partner GmbH of Hamburg Germany (“Fischer”) to promote the Company’s common stock in Europe and to promote the benefits of stock ownership in the Company. Fischer will also advise on the optimization of the Company’s capital structure and may introduce potential investors to the Company. The initial engagement period will be three months with the option of extension by mutual agreement.
Compensation will be composed of (i) a $30,000 payment upon signing the agreement, (ii) a further $20,000 payable no earlier than January 25, 2023 and no later than February 5, 2023 provided that the total trading volume of HPCO shares exceeds 10m shares since the start of the awareness campaign, and (III) 15,000 (fifteen thousand) Rule 144 shares of the Company’s common shares only if stages (1) and (ii) of the compensation plan have been achieved, (iv) Six percent (6%) of the gross proceeds of any capital raised during roadshows or other measures directly instituted by Fischer.
Going Concern Matters
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 $7,134,957 during the year ended December 31, 2022 and has an accumulated deficit of $10,463,048 as of December 31, 2022. During the year ended December 31, 2022, the Company’s net cash used in operations was $4,370,475.
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.
There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available to the Company, it may be required to curtail or cease its operations.
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 on 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
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC).
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.
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 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 six currently operating, joint venture entities, all of which have been deemed variable interest entities for the period ended December 31, 2022. The non-controlling interests of these ventures have been disclosed on the consolidated balance sheet and income statement.
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.
Revenue Concentration
Sales to one of the Company’s customers made up approximately 82% and 41% of our revenues for the twelve months ended December 31, 2022, and 2021, respectively, and the balance receivable from this customer on December 31, 2022 and, represents approximately 46% and 37%, respectively, of the total accounts receivable balances of $236,368 and $281,543, respectively, as of that date. As a result of a legal dispute during 2022, we experienced a significant reduction in our projected revenues and cash flow for the year ended December 31, 2022.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with remaining maturities of less than ninety days at the date of purchase. We have not experienced any losses related to these balances, and we believe credit risk to be minimal. The Company does not have any cash equivalents.
Accounts Receivable
Accounts receivables are recorded in accordance with ASC 310, “Receivables.” Accounts receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. As of December 31, 2022, the Company reported an allowance of $247,411 for doubtful accounts. Doubtful accounts in the amount of $1,717,933 (inclusive of the allowance) were written off in the year ended December 31, 2022. The amount written off includes the $1,470,522 provided for the potential non-payment of inter-company loans – see Note 11 for additional information. The Company had an impairment allowance against trade receivables of $247,411 and $0 as of December 31, 2022, and 2021, respectively.
Inventory
Inventory is stated at the lower of cost and net realizable value on a first-in first-out basis. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Costs includes all expenses directly attributable to the manufacturing process as well as suitable portions of related production overheads, based on normal operating capacity. The Company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions, including forecasted demand compared to quantities on hand, as well as other factors such as potential excess or aged inventories based on product shelf life, and other factors that affect inventory obsolescence.
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 twelve months ended December 31, 2022, and 2021, 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.
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (Shares) | | | (Shares) | |
Promissory Notes convertible to shares | | | 125,000 | | | | 175,000 | |
TOTAL | | | 125,000 | | | | 175,000 | |
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities-current, and operating lease liabilities-noncurrent on the balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our balance sheets. 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. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our single lease does not provide an implicit rate, we have used our incremental borrowing rate(“IBR”) based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. 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 lease payments is recognized on a straight-line basis over the lease term.
Long-Lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted future cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The Company incurred an impairment charge of $1,721,663 and $0 against certain of long-lived assets as of December 31, 2022, and 2021, respectively. These assets, comprising machinery and trademarks, were acquired for shares in July 2022. A subsequent appraisal indicated a lower current market value than the acquisition value, resulting in the write down of value. The Company incurred no impairment of long-lived assets as of December 31, 2021.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method. The depreciation and amortization methods are designed to amortize the cost of the assets over their estimated useful lives, in years, of the respective assets as follows:
Kiosks | 5 years |
Leasehold improvements | 6 years or shorter of lease life |
Production Equipment | 20 years |
Maintenance and repairs are charged to expense as incurred. Improvements of a major nature are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any gains or losses are reflected in income. The kiosks that the Company has not sold or placed in service as of December 31, 2022, are not being depreciated. However, Kiosks used for demonstration and marketing purposes have been depreciated since January 1, 2021.
As of December 31, 2022, the book value of equipment that is not currently in service is $5,548,799. This number includes the value of our kiosks that are available for sale or lease.
During the year ended December 31, 2022, the Company purchased two cigarette production equipment for $2,278,337. As of December 31, 2022, the equipment was not yet placed in service. See Note 13 for additional information on this purchase.
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.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718, “Compensation–Stock Compensation,” which requires all such compensation to employees and non-employees, including the grant of employee stock options, to be calculated based on its fair value at the measurement date (generally the grant date), and recognized in the statement of operations over the requisite service period or as vesting occurs. The Company recorded $248,103 and $100,000 in share-based compensation expense for the years ended December 31, 2022 and 2021, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. As of December 31, 2022, and 2021, the Company did not have any amounts recorded pertaining to uncertain tax positions.
Advertising and Marketing Costs
Costs associated with advertising and marketing promotions are expensed as incurred. Advertising and marketing expense were $884,956 and $542,680 for the twelve months ended December 31, 2022, and 2021, respectively.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers. The Company generally earns its revenue by supplying goods or providing services under contracts with its customers in two primary revenue streams: manufacturing and commercial product supply and white label development services. The Company measures the revenue from customers based on the consideration specified in its contracts, or the value of the amount invoiced should the initial order be a basic purchase order or emailed order.
The Company recognizes revenues from customers when control of the goods or services are transferred to the customer, generally when products are shipped, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods.
Per Company policy, any product that doesn’t meet the customer’s expectations can be returned within the first 30 days of delivery in exchange for another product or for a full refund. Any product sold through a distributor or retailer must be returned to the original purchase location for any return or exchange. For the twelve months ended December 31, 2022, and 2021, the Company has not recorded any reserves on revenue.
The majority of the Company’s revenue is derived from sales of branded products to consumers via our direct-to-consumer (DTC) ecommerce website, distributors, and retail and wholesale “white label” business-to-business (B2B) customers.
For larger orders, the Company requires the customer to make a deposit equal to 50% of the invoice or order total which is recorded as customer prepaid invoices and deferred revenue on the balance sheet. When the product is shipped the customer deposit is recorded into revenue. The Company recorded $236,789 and $1,505,018 in customer pre-paid invoices and deposits for goods ordered but not delivered, as of December 31, 2022, and 2021, respectively. These numbers do not include the $623,375 referenced in the ensuing paragraph.
In 2019, the Company entered into an arrangement with a customer whereby the Company was provided with product from the customer for the Company’s and the customer’s use. Under the arrangement, 50% of the product provided by the customer was to compensate the Company for their services for processing and packaging the customers remaining 50% share. The transaction was recorded at the fair market value of the inventory received, which was similar to the cost of the services to which were to be provided with an increase of $623,375 to inventory and customer deposits. As of December 31, 2022, and 2021, respectively, the customer deposit liability of $623,375 remained. The Company will defer revenue on customer deposits and record as revenue once product is delivered.
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 NCI’s using the percentage of ownership interest held by the respective NCI’s during the accounting period. As of December 31, 2022, and 2021, respectively, the Company reported a minority interest in its accumulated (gains)/losses and its net assets of ($131,123) and ($14,250), respectively.
Recent Accounting Pronouncements
In October 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this Update apply to all entities that enter into a business combination within the scope of Subtopic 805-10, Business Combinations. The amendments to this ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company continues to enter into a variety of business combinations, however at this time none of our joint venture partnerships are with customers. The Company will monitor all new business combinations with a view to complying fully with this standard.
The Company has reviewed all other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.
NOTE 3 – ACCOUNTS RECEIVABLE
As of December 31, 2022, and December 31, 2021, accounts receivable consisted of the following:
| | December 31, | | | December 31 | |
| | 2022 | | | 2021 | |
| | | | | | |
Accounts receivable | | $ | 478,680 | | | $ | 144,246 | |
Accounts receivable, related parties* | | | 5,100 | | | | 137,297 | |
Allowance for doubtful accounts | | | (247,410 | ) | | | - | |
Total accounts receivable | | $ | 236,370 | | | $ | 281,543 | |
Accounts receivable, related parties includes $0 and $132,147 as of December 31, 2022, and December 31, 2021, respectively, due from UST Mexico, Inc. See Note 11 for additional information on related party transactions related to receivables.
NOTE 4 – INVENTORY
As of December 31, 2022, and December 31, 2021, inventory, which consists primarily of the Company’s raw materials, finished products and packaging is stated at the following amounts:
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | | | | | |
Finished goods | | $ | 109,879 | | | $ | 41,088 | |
Raw materials (Net of obsolescence allowance) | | | 535,253 | | | | 157,848 | |
Total inventory at cost less obsolescence allowance | | $ | 645,132 | | | $ | 198,936 | |
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 December 31, 2022, and 2021, respectively, this allowance remains unchanged. This obsolescence allowance is continually re-evaluated and adjusted as necessary.
NOTE 5 - PROPERTY AND EQUIPMENT
As of December 31, 2022, and December 31, 2021, property and equipment consisted of the following:
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | | | | | |
Production equipment | | $ | 3,837,236 | | | $ | 1,461,586 | |
Leasehold improvements | | | 12,431 | | | | 12,431 | |
Kiosks plus improvements | | | 3,631,279 | | | | 3,686,107 | |
Less accumulated depreciation | | | (260,381 | ) | | | (161,353 | ) |
Total property and equipment | | $ | 7,220,565 | | | $ | 4,998,771 | |
Depreciation expense totaled $96,922 and $86,501 for the twelve months ended December 31, 2022, and 2021, respectively.
NOTE 6 – OPERATING LEASES – RIGHT OF USE ASSETS
The Company entered into a 72-month agreement to lease approximately 6,300 square feet of manufacturing, storage, and office space on January 1, 2020, for a period of 6 years with a related party, an entity controlled by the Company’s CEO. Approximately 1,800 sf (28.5%) is used as a manufacturing facility with the balance used as corporate offices and storage. There was no security deposit paid, and the lease carries no optional extension periods. The term of the lease is for six years. At inception of the lease, the Company recorded a right of use asset and liability. The Company used an effective borrowing rate of 6.23% within the calculation.
In addition to the rental of manufacturing space, the Company transacts routine storage business with Primus. The primary business of Primus is the provisions 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 $10,000 per month, with subsequent defined annual increases. All operating expenses are born by the lessee. Amounts payable to the related party for rent as of December 31, 2022, and December 31, 2021, were $5,163 and $0 respectively. On December 31, 2022, and December 31, 2021, the amounts of $25,000 and $14,764 respectively, of prepaid rent were included in the deposits and prepayments account.
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.
The following are the expected lease payments as of December 31, 2022. The lease is considered an “operating lease” and consequently lease payments are calculated on a straight-line basis, including the total amount of interest related.
Year Ending December 31 | | Operating Leases | |
2023 | | $ | 129,362 | |
2024 | | | 129,362 | |
2025 | | | 129,362 | |
Total lease payments | | | 388,086 | |
Less: Imputed interest/present value discount | | | (36,953 | ) |
Total | | $ | 351,133 | |
Lease expense, on the straight-line basis was $129,360 during the twelve months ended December 31, 2022, and 2021.
See Note 15 for information on a new lease between Hempacco paper Co., Inc., and UTC Mexico.
NOTE 7 – OTHER SHORT-TERM LIABILITIES – EQUIPMENT LOAN
On December 11, 2019, The Company entered into a short-term loan for equipment to use in its production. The terms of the loan were, $1,500,000 over 18 months with zero interest, which necessitated the calculation of an imputed discount of $109,627, which was being amortized over 18 months. During the year ended December 31, 2022, the Company amortized the remaining discount of $30,465 to interest expense.
The loan is secured by the equipment, and the lender recently agreed to repayments of $50,000 per month, interest free, which would take approximately thirty months to retire the loan, assuming no additional paydowns were made by supplying smokable products. As of December 31, 2022, and December 31, 2021, the principal balance of the loan was $-0- and $1,482,681, respectively. On January 6, 2022, the first payment of $50,000 was made to Titan Agency Management. The Company was granted forbearance with respect to further loan payments until the Company’s planned IPO was funded.
On September 6, 2022, a settlement agreement and mutual release was signed by the Company and the Titan Agency Management providing for the full repayment of the outstanding loan balance with a cash payment of $250,000 and the issuance of 266,667 restricted shares of Hempacco common stock.
NOTE 8 – CONVERTIBLE NOTES
During the year ended December 31, 2021, the Company issued twelve convertible promissory notes totaling $650,000 and warrants to purchase up to 750,000 shares of Hempacco common stock at $1.00 per share were issued to two related party members of the Board of Directors. Subsequently, as a result of the merger and share exchange agreement of May 21, 2021, between Hempacco and Green Globe International, Inc. these warrants were cancelled and replaced on November 9, 2021, with equivalent warrants to purchase Green Globe common shares. See Note 9 below for additional details.
Individual note holders converted $511,500 in principle and $23,552 in accrued interest into 535,052 shares of Hempacco common stock. On May 21, 2021, these shares were exchanged for 2,236,213,775 of GGII’s common shares.
During May and June 2021, the Company entered into financing arrangements to provide working capital. The Company received proceeds of $175,000 from three private investors. The promissory notes carried interest at the rate of between 8% and 12% and mature between May 4, 2022, and October 23, 2022. The Notes automatically convert at 75% of the 30-day average bid price of the obligor common stock (or the public company common stock as the case may be), with the exception of the $50,000 Taverna 12% Note which converts at $1.00 per share or the current market price of Hempacco stock. The Notes cannot be converted prior to maturity. The Taverna notes matured on May 4, 2022, and was converted, along with accrued interest, into 56,592 shares of Hempacco common stock on June 7, 2022.
The notes payable to Miguel Cambero ($100,000) and Ernie Sparks ($25,000) matured on October 23, 2022. The notes were extended through April 30, 2023. As of the date of this filing, the Company is in technical default.
On or about March 18, 2022, the Company issued a promissory note to a related party for $50,000. The note carries an interest rate of 8% and matures on June 18, 2022. The note is secured by 50,000 common shares of the Company. On June 18, 2022, the Company and the investor signed Amendment No. 1 to the promissory note extending the maturity date to September 18, 2022. Subsequently, amendments 2, 3 and 4 were executed which extend the maturity date to June 18, 2023.
NOTE 9 – WARRANTS
The 750,000 Hempacco warrants issued to Jerry Halamuda and Dr. Stuart Titus in February 2021 were effectively cancelled on May 21, 2021, as a result of the merger and share exchange between Hempacco and Green Globe International, Inc. but not re-issued by Green Globe International, Inc. until November 11, 2021. The total number of replacement warrants issued was 27,173,925 at a strike price of $0.027600 which is the equivalent of 750,000 warrants exercisable at $1.00 each.
A Black-Scholes valuation discount of $149,831 was initially recorded. The discount was expensed as interest in the three months ended March 31, 2021. No further expense was incurred as a result of the modifications of the warrants to GGII warrants. The valuation discount represents the fair market value as derived by using the Black-Scholes formula, which produced an initial valuation of the Hempacco warrants of $0.4986 per share. The Black-Scholes formula applied to the GGII warrants on June 9, 2021, produced a valuation of $0.0138 per share.
On August 11, 2021, The Company signed an agreement with Boustead Securities, LLC (the “Representative”), which was amended on or about March 18, 2022, effective as of August 11, 2021, with respect to a number of proposed financing transactions, including the initial public offering (“IPO”) of the Company’s common stock for which a listing on NASDAQ has been applied for, 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”). See Note 13 below for further details.
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 equal to 7% of the gross offering amount, at an initial exercise price of 150% of the offering price per share in the IPO, or 100% of the offering price in an Other Financing.
On November 23, 2021, The Company entered into a Broker Representation Agreement with a Third Party, whereby Broker would receive a commission of 10% on any Net sales brought to the Company by their efforts or introductions. In particular, as a bonus for introducing a major client, Broker shall be granted 100,000,000 warrants to purchase common stock of Green Globe International, Inc. exercisable at $0.01 each for a period of three years.
The Black-Scholes valuation of the 100,000,000 warrants as of the contract date is $0.0018 per share for a total valuation of $178,317 which has been recorded as a one-time charge to the income statement in the fourth quarter of 2021 due to there being no future performance obligations arising from this warrant award.
The Black-Scholes model uses the following variables to calculate the value of an option or warrant for the year ended December 31, 2021. See Note 1 and 13 for grant and valuation of warrants issued during the year ended December 31, 2022:
Description | Input Range December 31, 2021 |
a) Price of the Issuer’s Security | $1.00 - $2.00 |
b) Exercise (strike) price of Security | $0.75 - $1.50 |
c) Time to Maturity in years | 3 to 5 years |
d) Annual Risk-Free Rate | 2-year T-Bill |
e) Annualized Volatility (Beta) | 59% - 493% |
NOTE 10 – OTHER LOANS PAYABLE
On June 15, 2020, Hempacco entered into a loan agreement with a third party whereby the Company received $85,000. The terms of the loan were for one year, with 0% interest. On January 15, 2021, the lender advanced a further $83,328 on the same terms. In December 2021, a letter agreement and loan extension were signed by the lender in which it was confirmed that the new maturity date of the loan would be August 15, 2023. As of December 31, 2022, and December 31, 2021, the balance outstanding was $142,770 and $168,328 respectively. The lender, also a customer, advanced a deposit of $40,000 for the purchase of 10 vending kiosks which were delivered in February 2022.
In July 2021, the Company secured a line of credit facility with First Citizens Bank in the amount of $100,000. The line of credit bears interest at a floating rate equal to 1.0% above the Wall Street Journal Prime Rate at any time and matures in July 2023. The line of credit is guaranteed by the CEO of the Company. As of December 31, 2022, $0 was owed on the line of credit.
NOTE 11 - RELATED PARTY TRANSACTIONS
In May 2021, Cube17, Inc., a related party sales and marketing consulting company, converted all outstanding consulting fees earned since the inception of the Company in the amount of $185,000 for 185,000 shares of Hempacco common stock, for $1 per share. On May 21, 2021, these shares were exchanged for 707,113,562 common shares of Green Globe International, Inc. Consulting expenses of $80,000 and $120,000 were recorded for the twelve months ended December 31, 2022, and 2021. Consulting fee balances payable were $0 and $63,404 as of December 31, 2022, and December 31, 2021. In addition, Cube17, Inc., as a founder of the Company, converted its 400,000 founders shares into 1,528,997,476 common shares of Green Globe International, Inc. on May 21, 2021.
In May 2021, Primus Logistics was issued 170,000 common shares of Hempacco as compensation for $170,000 of accrued and unpaid rent owed at that time by from its inception. On May 21, 2021, these shares were exchanged for 649,780,985 common shares of the Company. Subsequent to December 31, 2022 through the date of issuance of this report, the Company made payments totaling $182,000 to Primus Logistics. The Company’s CEO, Sandro Piancone, is the 90% owner of Primus Logistics which is considered a related party. Rent expenses for the years ended December 31, 2022 and 2021 are reported in Note 6 above.
As of December 31, 2022, and December 31, 2021, the Company owed Primus Logistics $5,163 and $0 respectively, for routine business transactions, which, in addition to the rent, consist entirely of storage fees. As of December 31, 2022, and December 31, 2021, Primus Logistics had been paid $25,000 and $14,764 respectively, in advance, for rent. Sandro Piancone is the 90% owner of Primus Logistics.
In May 2021, Strategic Global Partners, Inc. was issued 170,000 Hempacco common shares as compensation for $170,000 worth of consulting services incurred since Hempacco’s inception by the CEO, Sandro Piancone, President and Owner of Strategic Global. On May 21, 2021, these shares were exchanged for 649,780,985 common shares of Green Globe International, Inc. Strategic Global Partners is a related party. Consulting expenses of $52,000 and $120,000 were recorded for the twelve months ended December 31, 2022, and 2021, respectively. Unpaid consulting fee balances of $28,000 and $70,000 were outstanding as of December 31, 2022, and December 31, 2021, respectively.
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.
As of December 31, 2022, and December 31, 2021, the Company owed $0 and $29,000 and was owed $0 and $132,147, respectively, by UST Mexico, Inc. ("UST"). The Company sells hemp products to UST and provides manufacturing consulting services. The value of goods and services provided to UST was $17,386 and $152,147 for the twelve months ended December 31, 2022, and 2021, respectively, and the value of goods and services provided by UST as $192.181 and $251,000 for the twelve months ended December 31, 2022, and 2021, respectively. During the year ended December 31, 2022, the Company wrote off receivables from UST totaling $172,409. UST is a manufacturer of tobacco cigarettes in Mexico and provides consulting services and parts for the Company’s equipment. Subsequent to December 31, 2022 through the date of issuance of this report, the Company made payments totaling $110,000 to UST.
As of December 31, 2022, UST owned 947,200,000 shares of common stock of Green Globe International, Inc., representing 1.72% of the issued and outstanding common stock of the parent company of Hempacco. UST is a related party by virtue of Sandro Piancone’s 25% interest in UST.
Lake Como is owned/controlled by Sandro Piancone. This entity is used primarily as a sales company, and sometimes sells products purchased from Hempacco. The Company had receivables of $-0- and $150 due from Lake Como as of December 31, 2022, and December 31, 2021, respectively.
On or about March 1, 2022, the Company entered into a mutual line of credit agreement with its parent company, Green Globe International, Inc. The purpose 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 $500,000 allowed to be outstanding within any 90-day period. On December 1, 2022, the maximum amount was increased to $1,500,000. During the twelve months ended December 31, 2022, the Company loaned GGII a net amount of $692,119. As of December 31, 2022, the balance owed to the Company by GGII was $692,119. The Company recorded a reserve against the entire balance as of December 31, 2022. As of April 30, 2023, balance due from GGII had increased to $1,378,119.
During 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. As of December 31, 2022, the balance owed by Green Star Labs, Inc. was $605,994. As of April 30, 2023, balance due from Green Star Labs, Inc. had increased to $1,320,994.
A 100% provision for potential non-payment of the UST, GGII, and the Green Star Labs loans was recorded, and a one-time charge of $1,470,522 was recorded on the consolidated statements of operations for the year ended December 31, 2022.
NOTE 12 - INCOME TAXES
The Company provides for income taxes under ASC 740, “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax basis of assets and liabilities and the tax rates in effect when these differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
The following is a reconciliation of income tax expense for the year ended December 31, 2022, and 2021.
| | 2022 | | | 2021 | |
Current: | | | | | | | | |
Federal | | $ | - | | | $ | - | |
State | | | - | | | | - | |
Foreign | | | - | | | | - | |
| | | - | | | | - | |
Deferred | | | | | | | | |
Federal | | | (980,426 | ) | | | (292,851 | ) |
State | | | (51,256 | ) | | | (81,363 | ) |
| | | (1,031,682 | ) | | | (374,214 | ) |
Valuation allowance | | | 1,031,682 | | | | 374,214 | |
Total provision for income taxes | | $ | - | | | $ | - | |
The Company’s net deferred tax assets as of December 31, 2022, and 2021, consisted of the following:
| | 2022 | | | 2021 | |
Depreciation and amortization | | $ | - | | | $ | - | |
Reserves and accruals | | | 171,889 | | | | 171,338 | |
Research and development credits | | | - | | | | - | |
Net operating loss carryforwards | | | 1,586,709 | | | | 555,578 | |
Gross deferred tax assets | | | 1,758,598 | | | | 726,916 | |
| | | | | | | | |
Valuation allowance | | | (1,758,598 | ) | | | (726,916 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | - | | | $ | - | |
The Company has provided for a full valuation allowance against the deferred tax assets, on the expected future tax benefits from the net operating loss carryforwards, as the management believes it is more likely than not that these assets will not be realized in the future.
The following is a reconciliation of the federal income tax provision at the federal statutory rate to the Company’s tax provision attributable to continuing operations:
| | Year Ended December 31, | |
| | 2022 | | | 2021 | |
Statutory federal income tax rate | | | 21.0 | % | | | 21.0 | % |
State income taxes, net of federal benefit | | | 0.7 | % | | | 5.2 | % |
Stock based compensation | | (0.7 | %) | | | 0.0 | % |
Permanent differences | | | 0.0 | % | | (1.1 | %) |
Change in valuation allowance | | (21.0 | %) | | (23.9 | %) |
Effective tax rate | | | 0.0 | % | | | 1.2 | % |
The difference between the effective tax rate and the stated tax rate is primarily due to a full valuation allowance on the deferred tax assets and permanent differences due to non-cash related charges.
As of December 31, 2022, the Company’s net operating losses (NOL’s) on a gross basis were $6,665,035, which can be carried forward indefinitely to offset future taxable income.
The Company’s tax returns are subject to examination by United States Internal Revenue Service authorities as well as the California Franchise Tax Board, beginning with the period ended December 31, 2019. There are no current tax examinations.
NOTE 13 - STOCKHOLDERS’ EQUITY
Hempacco - Series A Preferred Shares
On May 20, 2021, the Hempacco’s Board of Directors declared and authorized a 6% common share dividend to Series A Preferred Shareholders. Mexico Franchise Opportunities Fund (“MFOF”) received dividends of $757,479 which, together with MFOF’s 8,000,000 preferred shares were converted into 8,757,479 shares of the Company’s common shares.
On May 21, 2021, MFOF exchanged these Hempacco common shares for 33,473,197,809 shares of GGII common shares.
On September 28, 2021, the Company amended its Articles of Incorporation to increase the number of authorized shares of preferred stock to 50,000,000 and changed its par value to $0.001.
The holder of Hempacco’s Series A Preferred Stock is entitled to a dividend of 6% payable in common shares, if and when declared by Hempacco's Board of Directors. The Series A preferred shares shall not have the right to vote on matters presented to the holders of junior stock.
Common Stock
On May 21, 2021, the Company issued 100,000 shares of common stock to a consultant for services rendered. The shares were paid in exchange for software development and IT services related to Hempacco’s automated CBD kiosks. The Company’s common stock was valued at $100,000 (based upon the contract for services and the agreed upon rates for labor and materials) and was exchanged for 382,224,109 shares of GGII’s common shares.
During the year ended December 31, 2021, Hempacco issued convertible promissory notes totaling $650,000 and warrants to purchase up to 750,000 shares of common stock at $1 per share. On or about November 11, 2021, these Hempacco warrants were converted to GGII warrants. See Note 9 above for further details. On May 21, 2021, individual note holders converted $511,500 in principle and $23,552 in accrued interest into 535,052 shares of Hempacco common stock. On May 21, 2021, these shares were exchanged for approximately 2,045,094,734 of Green Globe International Inc. common shares.
On August 11, 2021, the Company signed an agreement with Boustead Securities, LLC (the “Representative”), which was amended on or about March 18, 2022, effective as of August 11, 2021, with respect to a number of proposed financing transactions, including the initial public offering (“IPO”) of Hempacco’s common stock for which a listing on NASDAQ has been applied for, the private placement of the Company’s 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”). A commission of 7% of gross offering proceeds is payable to the Representative, as well as a non-accountable expense allowance of 1% of offering proceeds. In addition, the Company will reimburse Boustead for the diligence, legal and road show expenses up to $205,000.
On September 28, 2021, the Company amended its Articles of Incorporation to increase its authorized common shares to 200,000,000 and changed its par value to $0.001 per share. Each common share entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of Hempacco is sought.
On or about December 6, 2021, the Company sold 805,541 shares of Hempacco common stock at $1.00/share to 19 investors, 17 of which were third parties. Neville Pearson, Company CFO, and Dr. Stuart Titus, Company director, purchased 50,000 of the shares for $50,000, and 100,000 of the shares for $100,000, respectively. The Company received gross proceeds of $805,541, and net proceeds of $724,255 after payment of commissions and expenses to the Company’s registered broker and the payment of expenses associated with the private offering and the Public Offering.
See Note 7 for details on restricted shares of Hempacco common stock issued to Titan Agency Management.
In December 2021, the Company issued 1,300,000 common shares at $1.00 per share to the public in a pre-IPO offering managed by Boustead Investments, LLC. Net proceeds of $1,057,565 were received by the Company after all commission and expenses.
On or about April 7, 2022, the Company sold a further 208,000 shares of Hempacco common stock at $2.00/share to nine investors, eight of which were third parties. The Company received gross proceeds of $416,000, and net proceeds of $339,475 after payment of commissions and expenses to the Company’s registered broker and the payment of expenses associated with the private offering and the Public Offering.
On or about July 15, 2022, The Company acquired from Nery’s Logistics, Inc., an entity that is 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 $4,000,000 to be paid solely by the issuance of 2,000,000 common shares of the Company. $3,400,000 was initially allocated to the value of the equipment, and the balance of $600,000 was allocated to the intangible assets. See note 13 for additional information concerning the value of these assets.
On July 15, 2022, The Company also settled two vendor accounts payable balances totaling $100,000 by the issuance of 50,000 common shares of the Company.
On September 1, 2022, the Company sold 1,000,000 shares of Hempacco common stock at $6.00 per share to our underwriters pursuant to the IPO and the underwriting agreement with Boustead Securities, LLC. After deducting the underwriting commission and expenses, the Company received net proceeds of $5,390,753.
On September 6, 2022, Boustead Securities LLC submitted a notice of the exercise of the warrant purchase option, pursuant to paragraph 1.3.1 of the Underwriting Agreement. Boustead elected to convert its right to purchase 70,000 common shares at $9.00 per share using the cashless basis formula into 54,928 shares of common stock. The market price of these shares on the issue date was $4.74 per share resulting in additional underwriting expenses of $260,358, which was an increase and decrease to additional paid in capital.
On September 17, 2022, the Company entered a Marketing Services Agreement with North Equities Corp. of Toronto, Canada, effective September 19, 2022, for an initial period of 6-months. Compensation for the initial period will be by the issuance of 41,494 rule 144 restricted shares of the Company’s common stock. This amount represents a market value of approximately $100,000 as of the effective date. The shares were issued to North Equities Corp. of Toronto on October 4, 2022. The Company will also reimburse North Equities for all direct, pre-approved and reasonable expenses incurred in performing the marketing services.
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 by the issuance of 63,292 rule 144 restricted common shares of Hempacco. The market value of the issued shares was $148,103 and was expensed in full in 2022.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
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. Defendants anticipate filing a motion to dismiss for lack of personal jurisdiction and failure to state a claim, and on or about November 4, 2022, Defendants’ counsel sent the court a letter requesting a pre-trial conference to discuss Defendants’ anticipated motion to dismiss pursuant Rule 2(A) of the court’s Individual Rules of Practice. Defendants intend to defend the matter vigorously. No further allowance for legal fees or settlement costs has been provided in the financial statements.
NOTE 15 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of issuance of these financial statements.
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, Weedsies Vending, LLC which will market the Hemp related products of Weedsies using automated kiosks provided by HempBox Vending. Pursuant to the Operating Agreement, the Joint Venture will be owned 50% by each of HVI and Weedsies, HVI and Weedsies are both required to fund $1,000 to the Joint Venture. HVI will be responsible for provision of the self-service vending kiosks and will be responsible for technology and marketing support as well as accounting, financial services, and tax preparation for the Joint Venture. Weedsies will be responsible for installations, repair, customer service, marketing support, billing, and reconciliations to the Joint Venture.
On February 8, 2023, the Company signed, as guarantor, a lease agreement between US Tobacco de Mexico S.A. de C.V. (“UST” a related party) and Grupo Fimher, S. de R.I. de C.V. (“Fimher”) for the lease of 43,000 sf of manufacturing space located in Tijuana, Mexico. The term of the lease is three years, commencing on March 1, 2023. The first year’s rent payment is $18,622 per month, with 3.5% inflation increases on the first and second anniversaries of the lease. The estimated total contingent liability at lease inception will be $694,159.31. Hempacco Co., Inc. and Hempacco Paper Co., Inc. are sub-tenants of UST and will manufacture products at this facility.
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 $2,500. Hempacco paper will use this facility for the manufacture of all its paper products.
Effective January 30, 2023, Hempacco Co., Inc. (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, HPDG, LLC, which will market and sell hemp smokables products. Pursuant to the Operating Agreement, the Joint Venture will be owned 50% by each of the Company and Alfalfa, the Company is required to fund $10,000 to the Joint Venture, manufacture Joint Venture product, and provide accounting, inventory management, staff training, and trade show and marketing services for the Joint Venture. Alfalfa is required to provide online marketing and promotion, design and branding, and brand management and development services to the Joint Venture, as well as Snoop Dogg attendance and appearances at Joint Venture events subject to professional availability, and subject to a separate Talent License and Services Agreement between the Joint Venture and Alfalfa as described below (the “Services Agreement”).
In connection with the Operating Agreement, effective January 30, 2023, the Joint Venture 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 Joint Venture’s smokable hemp products and serve as a spokesperson for the products in the United States, and the Joint Venture shall (i) pay Talent’s legal expenses of $7,500 in connection with entering into the Operating Agreement and Services Agreement; (ii) cause the Company to issue to Talent a fully vested warrant to acquire 450,000 shares of Company common stock at a strike price of $1.00 per share (the “Talent Warrants”); (iii) cause the Company to issue to Talent’s designee a fully vested warrant to acquire 50,000 shares of Company common stock at a strike price of $1.00 per share (the “Talent Designee Warrants”); and (iv) pay Talent royalties of 10% of Joint Venture gross revenue, with minimum annual royalty payments of $450,000 by the end of the first two years of the initial term of the Services Agreement, an additional $600,000 by the end of the third year of the initial term, and an additional $1,200,000 by the end of the fourth year of the initial term. On or about January 30, 2023, the Company issued the Talent Warrants and Talent Designee Warrants as required by the Services Agreement.
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 with Hempacco Co., Inc. -99% and Jakub Duda an individual -1%.
On February 9, 2023, Hempacco Co., Inc. (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 the Company. The Underwriting Agreement provides for the offer and sale of 4,200,000 shares of the Company’s common stock, par value $0.001 (the “Common Stock”) at a price to the public of $1.50 per share (the “Offering”). In connection therewith, the Company agreed to issue to the Representatives and/or their designees 338,100 warrants to purchase shares of Common Stock, exercisable from February 14, 2023, through February 10, 2028, and initially exercisable at $1.50 per share subject to adjustment as provided therein (the “Representatives’ Warrants”). The Company also granted the Underwriters an option (the “Option”) for a period of 45 days to purchase up to an additional 630,000 shares of Common Stock. The Offering is being made pursuant to a Registration Statement on Form S-1 (File No. 333-269566) (the “Registration Statement”), which was declared effective by the Securities and Exchange Commission on February 9, 2023.
On February 11, 2023, the Underwriters exercised the Option in full, and on February 14, 2023, the Offering was completed. At the closing of the Offering, the Company (i) sold an aggregate of 4,830,000 shares of Common Stock for total gross proceeds of $7,245,000, and (ii) issued the Representatives’ Warrants as directed by the Representatives. After deducting underwriter commissions and Offering expenses, the Company received net proceeds of $6,610,400.
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 any of those liabilities.
On or about February 10, 2023, a Motion to Dismiss the Longside Ventures LLC et al lawsuit (see note 14 above) was filed in the New York District Court for the Southern District of New York. At the time of the publication of these financial statements, no response has yet been received from the court.
On April 6, 2023, the Company received a letter notification from the Nasdaq Capital Market (“Nasdaq”) advising of our non-compliance with Nasdaq listing rules in that the Company had failed to maintain its stock price at above $1.00 for a period of 30-days. The Nasdaq rules provide for a period of 180 days in which the Company must regain compliance. This period expires on October 3, 2023.
On April 20, 2023, the Company received a further letter notification from Nasdaq advising of our non-compliance with Nasdaq listing rules in that the Company had failed to submit its annual report on Form 10-K to the Securities and Exchange Commission by the stipulated due date plus any extension granted. The Nasdaq rules require that the Company submit a detailed plan of action explaining how the Company will remedy this situation and regain compliance. The report must be submitted within 60 days, which period expires on June 20, 2023.