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
Quarterly 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 statements, including, but not limited to risks relating
to the impact of the COVID-19 pandemic (including the emergence of vaccine
resistant COVID-19 variants), 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
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q, and our consolidated financial
statements for the years ended December 31, 2021 and 2020, included in our
registration statement on Form S-1, as amended, declared effective by the
Securities and Exchange Commission on August 29, 2022.
Hempacco Co., Inc., collectively with its subsidiaries, is referred to in this
Form 10-Q as "Hempacco", "we", "us", "our", "registrant", or "Company".
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
inhouse brands are currently sold in over 200 retail locations located in the
San Diego, California, area, our private label customers include well-known and
established companies in the cannabis and tobacco-alternatives industries, and
we currently own approximately 600 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.
We believe that our manufacturing technologies will be a critical component of
our success. We plan to continue to invest in research and development, and we
currently have one approved patent and one patent pending with respect our
critical manufacturing processes. Our approved patent is an exclusivity patent
to spray hemp with terpenes for flavoring or to add cannabidiol, which we refer
to as CBD, or cannabigerol, which we refer to as CBG, and our pending patent
relates to our flavored filter infusion technology. We also have several
ready-to-file patent applications with respect to hemp manufacturing, hemp
processing, design patents for hemp machines and merchandisers, and customized
manufacturing equipment.
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We believe that we are positioned to rapidly grow our customer and product
footprint through increasing marketing efforts, reaching agreements with master
distributors who will sell to a broad network of retail establishments, and
aggressively targeting additional distributors throughout the United States. We
plan to drive and increase customer traffic with internet marketing to or with
the clients that carry our products.
Our Products
We have launched the production and sale of our own in-house brand of hemp-based
cigarettes, The Real Stuff Smokables, in three presentations: the twenty pack,
the ten pack, and the Solito™ single pack, all of which are sold in our patented
counter displays in convenience stores through master distributors.
We have also entered into several joint ventures to launch multiple new
smokables brands: Cali Vibes D8, a joint venture focused on Delta 8 smokable
products; Hemp Hop Smokables, a joint venture with rapper Rick Ross and Rap
Snack's CEO James Lindsay; a joint venture with StickIt Ltd., an Israeli
corporation, to manufacture cannabinoid sticks for insertion into other
cigarettes; and a joint venture to launch Cheech & Chong-branded hemp
smokables.
We have launched a brand of flavored hemp rolling papers, and we also private
label manufacture hemp rolling papers for third parties. We are currently
manufacturing hemp rolling papers for HBI International, one of the leading
smoking paper producers in the world.
Recent Developments
In the fall of 2021, we received our largest purchase order to date for
approximately $9.2 million from HBI International's Skunk and Juicy brand to
manufacture hemp rolling papers for it. This purchase order is non-binding (we
are not obligated to produce any product for HBI International under it), and we
are currently negotiating a supply and manufacturing agreement with HBI
International, the terms of which have not yet been finalized. Our sales to HBI
International constituted approximately 41% of our revenues for the year ended
December 31, 2021, the balance receivable from HBI International at December 31,
2021, represents approximately 37% of our total accounts receivable balances as
of that date, and were we to lose HBI International as a customer, our revenues
would significantly decline, and our business would be harmed.
In December 2021, we sold 1,300,000 shares of common stock at $1.00 per share to
24 investors, and in April 2022, we sold 208,000 shares of common stock at $2.00
per share to 9 investors.
On or about March 18, 2022, we borrowed $50,000 from Jerry Halamuda, one of our
directors, and issued Mr. Halamuda a $50,000 promissory note, accruing interest
at 8% per annum, which originally matured on June 18, 2022, and was extended to
mature on December 18, 2022. The note is secured by 50,000 shares of our common
stock.
In July 2022, we launched sales of our Hemp Hop Smokables joint venture
products, as well as our Cheech & Chong-branded joint venture products.
On or about June 10, 2022, we issued 56,592 shares of common stock to our
lender, Mario Taverna, in conversion of $50,000 in principal and $6,592 of
accrued interest due to Mr. Taverna under a convertible promissory note.
On July 15, 2022, we settled two vendor accounts payable balances totaling
$100,000 by issuing 50,000 shares of common stock to the vendors.
On or about July 15, 2022, we acquired two cigarette equipment and machinery
lines, as well as a suite of trademarks described below, from the seller, Nery's
Logistics, Inc., in consideration of the issuance of 2,000,000 shares of our
common stock to the seller. The trademarks we acquired include multiple
smokables product trademarks in Mexico for smokable brands including "Tijuana,"
"Gladiator," "Anchor," "Black Cat," and "Solitos." The acquired equipment and
trademarks will be used in connection with our hemp smokables products and will
not be used for tobacco smokables products.
On August 29, 2022, we entered into an underwriting agreement with Boustead
Securities, LLC ("Boustead"), in connection with the initial public offering of
our common stock (the "IPO"), pursuant to which we (i) sold 1,000,000 shares of
our common stock at a price to the public of $6.00 per share, (ii) issued
Boustead 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 (the "Boustead Warrants"), and (iii) granted Boustead an option for a
period of 45 days to purchase up to an additional 150,000 shares of common
stock.
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On August 30, 2022, our common stock was listed and began trading on the Nasdaq
Capital Market, and on September 1, 2022, the IPO closed. At the closing, we (i)
issued 1,000,000 shares of common stock for total gross proceeds of $6,000,000,
and (ii) issued Boustead the Boustead Warrants. After deducting underwriting
commission and expenses, we received net proceeds of $5,468,812 from the IPO. On
September 6, 2022, Boustead exercised the Boustead Warrants in full on a
cashless basis, and on September 7, 2022, we issued 54,928 shares of common
stock to Boustead for their warrant exercise.
On September 6, 2022, we entered into a settlement agreement with Titan General
Agency Ltd. ("Titan"), our creditor equipment financier which was owed
approximately $1,450,000 by us as of September 6, 2022 (the "Titan Debt"),
pursuant to our prior purchase of cigarette manufacturing machinery and
equipment, pursuant to which we agreed to pay Titan $250,000 in cash (the
"Settlement Cash Payment") and issue Titan 266,667 shares of our common stock
(the "Settlement Shares"), in full satisfaction of the Titan Debt. On or about
September 8, 2022, we made the Settlement Payment to Titan and issued Titan the
Settlement Shares, extinguishing the Titan Debt.
On October 4, 2022, we issued North Equities USA Ltd. ("North") 41,494 shares of
Company common stock for six months of marketing services to be rendered by
North to us, commencing on September 19, 2022, and including content management
for our YouTube channel, establishment of a brand ambassador, and social media
services.
Impact of the COVID-19 Pandemic
In December 2019, a novel coronavirus disease ("COVID-19") was reported to have
surfaced in Wuhan, China, and on March 11, 2020, the World Health Organization
characterized COVID-19 as a pandemic. The pandemic, which has continued to
spread, and the related adverse public health developments, including orders to
shelter-in-place, travel restrictions, and mandated business closures, have
adversely affected workforces, organizations, customers, economies, and
financial markets globally, leading to an economic downturn and increased market
volatility. It has also disrupted the normal operations of many businesses,
including ours.
Our operations have been impacted by a range of external factors related to the
pandemic that are not within our control. For example, many cities, counties,
states, and even countries have imposed or may impose a wide range of
restrictions on the physical movement of our employees, partners, and customers
to limit the spread of the pandemic, including physical distancing, travel bans
and restrictions, closure of non-essential business, quarantines, work-from-home
directives, shelter-in-place orders, and limitations on public gatherings. These
measures have caused, and are continuing to cause, business slowdowns or
shutdowns in affected areas, both regionally and worldwide. In 2020, we
temporarily scaled down sales efforts at trade shows and with customers and
potential customers in in-person meetings, and we were forced to source
ingredients for some of the components of our products from alternative
suppliers. These changes disrupted our business, and similar changes in the
future may disrupt the way we operate our business. In addition, our management
team has, and will likely continue, to spend significant time, attention and
resources monitoring the pandemic and seeking to minimize the risk of the virus
and manage its effects on our business.
The duration and extent of the impact from the pandemic depends on future
developments that cannot be accurately predicted at this time, such as the
severity and transmission rate of the virus, the extent and effectiveness of
containment actions and the disruption caused by such actions, the effectiveness
of vaccines and other treatments for COVID-19, and the impact of these and other
factors on our employees, customers, partners, and vendors. If we are not able
to respond to and manage the impact of such events effectively, our business
will be harmed.
To the extent the pandemic adversely affects our business and financial results,
it may also have the effect of heightening many of the other risks affecting our
business.
Results of Operations
For the Three and Nine Months Ended September 30, 2022, Compared to the Three
and Nine Months Ended September 30, 2021
Revenue
During the three and nine months ended September 30, 2022, the Company generated
$592,235 and $3,438,438, respectively, in revenue, compared to $377,221 and
$911,007, respectively, in revenue during the three and nine months ended
September 30, 2021. During the three and nine months ended September 30,
2022, $575,295 and $3,415,518, respectively, of our revenue was from product
sales to third parties, $16,940 and $22,940, respectively, was from product
sales to related parties, $6,653 and $33,248, respectively, was from consulting
and manufacturing services, and $6,824 and $8,890, respectively, was from kiosk
sales, as compared to $218,166 and $542,728, respectively, in product sales to
third parties, $95,517 and $95,517, respectively, in product sales to related
parties, and $63,538 and $272,762, respectively, in consulting services during
the three and nine months ended September 30, 2021. The increase in revenues
during 2022, as compared to 2021, was as a result of us expanding product sales
during 2022 as compared to 2021.
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Operating Costs and Expenses
The Company had total cost of goods sold of $598,627 and $2,795,661,
respectively, during the three and nine months ended September 30, 2022,
compared to total cost of goods sold of $297,178 and $613,784, respectively,
during the three and nine months ended September 30, 2021. The increase in
relative total cost of goods sold is primarily due to increasing sales and
production in the nine months ended September 30, 2022, as compared to the same
period in 2021.
The Company incurred general and administrative expenses of $791,562 and
$1,758,561, respectively, during the three and nine months ended September 30,
2022, which included a one-time charge of $437,375 during the prior quarter
ended March 31, 2022, for the valuation of warrants of our parent company issued
to two joint venture partners as an inducement to enter into joint venture
agreements with us, compared to $224,926 and $736,811, respectively, during the
three and nine months ended September 30, 2021. The Company also incurred
related party general and administrative expenses of $45,000 and $195,000,
respectively, during the three and nine months ended September 30, 2022,
consisting of senior management consulting fees and rent payable on our premises
leased in San Diego, California, compared to related party general and
administrative expenses of $193,973 and $403,973, respectively, during the three
and nine months ended September 30, 2021, for 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 increased to $200,976 and $685,086,
respectively, during the three and nine months ended September 30, 2022,
compared to sales and marketing expenses of $60,538 and $96,638, respectively,
during the nine months ended September 30, 2021, as a result of us significantly
expanding sales and marketing activities during the 2021 and 2022 fiscal years
as we expanded our operations.
Net Loss
The Company had a net loss of $1,049,473 and $2,024,039, respectively, for the
three and nine months ended September 30, 2022, compared to a net loss of
$467,303 and $1,196,703 for the three and nine months ended September 30, 2021.
The increase in net loss for the nine months ended September 30, 2022,
significant additional one-off expenses were incurred in connection with our IPO
on September 1, 2022 in addition to significantly increasing our operations
during 2021 and into 2022, including the expensing of the $437,375 valuation of
warrants issued to joint venture partners during the prior quarter ended March
31, 2022, partially offset by decreasing interest expense to $13,080 during the
nine months ended September 30, 2022, compared to interest expense of $206,145
during the comparative period in 2021.
Assets & Liabilities
The following table sets forth key components of our balance sheet as of
September 30, 2022, and December 31, 2021.
As of
September 30, December 31,
2022 2021
Current Assets $ 5,197,591 $ 2,117,638
Property and Equipment 8,439,091 4,998,771
Total Assets 14,664,060 7,570,523
Current Liabilities 1,638,875 4,168,264
Total Liabilities 2,083,505 4,702,863
Stockholder's Equity (for Hempacco) 2,726,535 2,867,660
Total Liabilities and Equity $ 14,664,060 $ 7,570,523
As of September 30, 2022, current assets increased to $5,197,591, from
$2,117,638 as of December 31, 2021. This increase was primarily due to the
receipt of $5,468,812 being the net proceeds from our IPO. As of September 30,
2022, current liabilities decreased to $1,638,875 from $4,168,264 as of December
31, 2021, primarily due to repayment of our equipment loan of $1,432,681 plus
other short-term loans.
At September 30, 2022, the Company had cash funds of $2,973,686.
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Liquidity and Capital Resources
The table below, for the periods indicated, provides selected cash flow
information:
Nine Months Nine Months
Ended Ended
September 30, September 30,
2022 2021
Net cash used in operating activities $ (3,217,684 ) (966,243 )
Net cash provided by (used in) investing
activities (282,007 ) (17,289 )
Net cash provided by financing activities 5,539,908 1,027,886
Net change in cash $ (2,040,217 ) 44,354
Cash Flows from Operating Activities
We had cash used in operating activities of $3,217,684 in the nine months ended
September 30, 2022, as compared to cash used in operating activities of $966,243
during the nine months ended September 30, 2021. The increase in cash used in
operating activities of $2,251,441 for the nine months ended September 30, 2022,
is primarily attributable to the increase in net operating loss of $2,024,039
plus increases in customer deferred revenues of $1,115,266 and an increase of
$599,572 attributable to inventories.
Cash Flows from Investing Activities
We had cash used in investing activities of $282,007 for the nine months ended
September 30, 2022, as compared to cash used in investing activities of $17,289
for the nine months ended September 30, 2021. The increase was primarily due to
the purchase of additional plant and equipment of $152,109 and franchise and
license fees of $152,609 paid as a requirement of a new product joint venture
partially offset by a $40,000 cash receipt from the sale of equipment.in the
nine months ended September 30, 2022.
Cash Flows from Financing Activities
We had cash provided by financing activities of $5,539,908 in the nine months
ended September 30, 2022, as compared to cash provided by financing activities
of $1,027,886 in the comparative period in 2021, with this increase primarily
due to the receipt of $6,000,000 of gross proceeds from the sale of 1,000,000
shares of common stock in our IPO partially offset by the costs of the offering
of $531,188 and a $300,000 cash loan repayment in the nine months ended
September 30, 2022, as compared to the nine months ended September 30, 2021.
We anticipate that our cash needs for the next twelve months for working capital
and capital expenditures will be approximately $1,500,000. As of September 30,
2022, we had approximately $2,973,686 in cash, and we believe that our current
cash and cash flow from operations will 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.
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 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 the possibility that we may not
continue to operate as a going concern in the long term. 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.
We do not know of any trends, demands, commitments, events or uncertainties that
will result in, or that are reasonable likely to result in, our liquidity
increasing or decreasing in any material way.
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.
We do not have any commitments or arrangements from any person to provide us
with any equity capital.
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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.
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.
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