hpco_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission File Number: 001-41487

HEMPACCO CO., INC.

(Exact name of Registrant as specified in its charter)

Nevada		83-4231457
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

9925 Airway Road, San Diego, CA 92154

(Address of Principal Executive Office and Zip Code)

(619) 779-0715

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share		HPCO		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of August 11, 2023, was 28,343,728.

HEMPACCO CO., INC.

2023 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Part I – Financial Information

Item 1	Financial Statements	3
	Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023, and 2022 (unaudited)	4
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2023, and 2022 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4	Controls and Procedures	24

Part II – Other Information

Item 1	Legal Proceedings	25
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3	Defaults Upon Senior Securities	25
Item 4	Mine Safety Disclosures	25
Item 5	Other Information	25
Item 6	Exhibits	26

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HEMPACCO CO., INC.

Condensed Consolidated Balance Sheets

(Unaudited)

As of	June 30, 2023			December 31, 2022

ASSETS
Current Assets
Cash and cash equivalents	$	1,386,111		$	548,331
Accounts receivable		230,171			231,269
Accounts receivable, related parties		-			5,100
Loans receivable, related parties		263,182			-
Inventory		1,181,531			645,132
Prepaid expenses and other current assets		405,894			442,366
Prepaid expenses, related parties		957,871			35,609
Total Current Assets		4,424,760			1,907,807

Property and equipment		7,307,564			7,220,565
Right of use asset, related party		297,235			351,146
Other intangible assets, net of amortization		-			2,661
Other assets		568,357			-

TOTAL ASSETS	$	12,597,916		$	9,482,179

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Current Liabilities
Accounts payable	$	342,545		$	335,605
Accounts payable, related parties		30,169			42,831
Accrued liabilities		64,015			-
Customer prepaid invoices and deposits		861,314			838,164
Line of credit		100,000			-
Notes payable, related parties		50,000			69,282
Convertible promissory notes payable		100,000			125,000
Other short term loans		138,252			-
Right of use liability, related party – current		113,091			109,552
Total Current Liabilities		1,799,386			1,520,434

Long Term Liabilities
Long-term debt		-			142,770
Right of use liability, related party		200,450			258,776
Total Liabilities		1,999,836			1,921,980

Stockholders’ Equity
Preferred stock, $0.001 par value as of June 30, 2023 and December 31, 2022; 50,000,000 shares authorized as of June 30, 2023 and December 31, 2022, respectively.		-			-
Series A Preferred Stock, $0.001 par value as of June 30, 2023 and December 31, 2022, respectively; 10,000,000 Shares authorized as of June 30, 2023 and December 31, 2022, respectively. 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively.		-			-
Common stock, $0.001 par value as of June 30, 2023 and December 31, 2022, respectively; 200,000,000 shares authorized as of June 30, 2023 and December 31, 2022, respectively. 28,343,728 and 23,436,505 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively.		28,343			23,436
Additional paid-in capital		25,118,062			18,095,184
Accumulated deficit		(14,405,058	)		(10,463,048	)
Total Stockholders’ Equity		10,741,347			7,655,572
Non-controlling interests		(143,267	)		(95,373	)
Total Equity Attributable to Hempacco Co., Inc.		10,598,080			7,560,199

LIABILITIES AND STOCKHOLDERS’ EQUITY	$	12,597,916		$	9,482,179

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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HEMPACCO CO., INC.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Revenues
Product sales	$	223,188		$	1,853,996		$	618,187		$	2,811,562
Product sales, related parties		13,760			5,000			20,319			6,000
Manufacturing service revenue		1,386			13,995			13,438			26,595
Kiosk revenue		16,267			2,066			17,017			2,066
Total Revenues		254,601			1,875,057			678,961			2,846,223

Cost of Sales
Cost of sales		417,632			1,398,028			877,891			2,197,034
Cost of sales, related parties		14,423			-			75,885			-
Total Cost of Sales		432,055			1,398,028			953,776			2,197,034
Gross Profit (Loss) from Operations		(177,454	)		477,029			(274,815	)		649,189

Operating Expenses
General and administrative		947,461			235,924			1,684,636			966,999
General and administrative, related parties		53,414			45,000			268,697			150,000
Sales and marketing		229,759			287,866			409,588			484,110
Sales and marketing, related parties		27,491			-			50,087			-
Expensing of related party advances and loans		195,775			-			1,320,775			-
Total Operating Expenses		1,453,900			568,790			3,733,783			1,601,109

Net Operating Loss		(1,631,354	)		(91,761	)		(4,008,598	)		(951,920	)

Other Income (Expense)
Interest expense, net		20,034			(5,799	)		18,746			(9,396	)
Other income & expense		-			210			(52	)		(13,250	)
Total Other Income (Expense)		20,034			(5,589	)		18,694			(22,646	)

Net Loss	$	(1,611,320	)	$	(97,350	)	$	(3,989,904	)	$	(974,566	)

Net Loss Attributable to Non-Controlling Interests		34,911			1,350			47,894			1,583
Net Loss Attributable to Hempacco Co., Inc.		(1,576,409	)		(96,000	)		(3,942,010	)		(972,983	)

Basic and Dilutive Earnings per Share	$	(0.06	)	$	(0.00	)	$	(0.15	)	$	(0.05	)

Shares Used in Calculating Earnings per Share		28,312,275			19,899,969			27,093,163			19,798,315

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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HEMPACCO CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	For the Three Months Ended June 30, 2023
					Additional					Non-
	Common Stock				Paid-In		Accumulated			controlling
	Shares		Amount		Capital		Deficit			Interests			Total
Balance as of March 31, 2023		28,281,505	$	28,281	$	25,088,092	$	(12,828,649	)	$	(108,356	)	$	12,179,368
Common stock issued for convertible note		62,223		62		28,970		-			-			29,032
Capital contribution related to joint venture		-		-		1,000		-			-			1,000
Net loss attributable to non-controlling interests		-		-		-		34,911			(34,911	)		-
Net loss for the three months ended June 30, 2023		-		-		-		(1,611,320	)		-			(1,611,320	)
Balance as of June 30, 2023		28,343,728	$	28,343	$	25,118,062	$	(14,405,058	)	$	(143,267	)	$	10,598,080

	For the Six Months Ended June 30, 2023
					Additional						Non-
	Common Stock				Paid-In			Accumulated			controlling
	Shares		Amount		Capital			Deficit			Interests			Total
Balance as of December 31, 2022		23,436,505	$	23,436	$	18,095,184		$	(10,463,048	)	$	(95,373	)	$	7,560,199
Issuance of common stock		4,830,000		4,830		7,240,170			-			-			7,245,000
Offering costs		-		-		(634,600	)		-			-			(634,600	)
Shares issued for consulting services		15,000		15		12,885			-			-			12,900
Capitalized value of warrants		-		-		374,453			-			-			374,453
Common stock issued for convertible note		62,223		62		28,970			-			-			29,032
Capital contribution related to joint venture						1,000									1,000
Net loss attributable to non-controlling interests		-		-		-			47,894			(47,894	)		-
Net loss for the six months ended June 30, 2023		-		-		-			(3,989,904	)		-			(3,989,904	)
Balance as of June 30, 2023		28,343,728	$	28,343	$	25,118,062		$	(14,405,058	)	$	(143,267	)	$	10,598,080

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	For the Three Months Ended June 30, 2022
					Additional						Non-
	Common Stock				Paid-In			Accumulated			controlling
	Shares		Amount		Capital			Deficit			Interests			Total
Balance as of March 31, 2022		19,695,532	$	19,696	$	6,742,803		$	(4,336,197	)	$	(14,483	)	$	2,411,819
Issuance of common stock		208,000		208		415,792			-			-			416,000
Offering costs		-		-		(60,525	)		-			-			(60,525	)
Common stock issued for convertible note		56,592		56		56,535			-			-			56,591
Net loss attributable to non-controlling interests		-		-		-			1,350			(1,350	)		-
Net loss for the three months ended June 30, 2022		-		-		-			(97,350	)		-			(97,350	)
Balance as of June 30, 2022		19,960,124	$	19,960	$	7,154,605		$	(4,432,197	)	$	(15,833	)	$	2,726,535

	For the Six Months Ended June 30, 2022
					Additional						Non-
	Common Stock				Paid-In			Accumulated			controlling
	Shares		Amount		Capital			Deficit			Interests			Total
Balance as of December 31, 2021		19,695,532	$	19,696	$	6,321,428		$	(3,459,214	)	$	(14,250	)	$	2,867,660
Warrant valuation expense		-		-		437,375			-			-			437,375
Issuance of common stock		208,000		208		415,792			-			-			416,000
Offering costs paid in connection with sale of common stock		-		-		(76,525	)		-			-			(76,525	)
Common stock issued for convertible note		56,592		56		56,535			-			-			56,591
Net loss attributable to non-controlling interests		-		-		-			1,583			(1,583	)		-
Net loss for the six months ended June 30, 2022		-		-		-			(974,566	)		-			(974,566	)
Balance as of June 30, 2022		19,960,124	$	19,960	$	7,154,605		$	(4,432,197	)	$	(15,833	)	$	2,726,535

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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HEMPACCO CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities
Net loss	$	(3,989,904	)	$	(974,566	)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization		63,848			45,217
Non-cash warrant valuation expense		31,205			437,375
Reserving of related party loans		1,320,775			-
Gain on disposal of assets		-			10,690
Stock based compensation for services		12,900			-
Changes in operating assets and liabilities
Trade receivables, net		1,098			(19,549	)
Accounts receivable, related parties		5,100			5,934
Prepaid expenses and other current assets		111,363			482,948
Prepaid expenses, related parties		(922,262	)		-
Inventories		(536,399	)		(321,390	)
Accounts payable		6,940			265,340
Accounts payable, related parties		(12,662	)		(17,972	)
Accrued liabilities		64,015			10,423
Customer deposits		23,150			(1,046,920	)
Right of use assets and liabilities		(876	)		-
Net cash used in operating activities		(3,821,709	)		(1,122,470	)

Cash flows from investing activities
Purchases of property, plant and equipment		(148,186	)		(7,011	)
Proceeds from disposal of equipment		-			40,000
Net cash provided by (used in) investing activities		(148,186	)		32,989

Cash flows from financing activities
Equipment loan repayment		-			(50,000	)
Long term loan repayment		(4,518	)		-
Loans to related parties		(1,583,957	)		(115,777	)
Proceeds from short-term promissory note, related parties		-			50,000
Proceeds from line of credit		100,000			-
Investment in joint venture		(300,000	)		-
Proceeds from the sale of common stock		7,230,750			416,000
Offering costs paid in connection with sale of common stock		(634,600	)		(76,525	)
Cash flows provided by financing activities		4,807,675			223,698

Increase (decrease) in cash and cash equivalents		837,780			(865,783	)
Cash and cash equivalents at beginning of period		548,331			933,469
Cash and cash equivalents at end of period	$	1,386,111		$	67,686

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	6,762		$	-
Cash paid for taxes	$	132		$	2,770

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Warrants recorded as prepaid and other assets	$	374,453		$	-
Conversion of convertible notes payable and accrued interest to common stock	$	29,032		$	56,592

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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HEMPACCO CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - ORGANIZATION, BUSINESS AND LIQUIDITY

Organization and Operations

These financial statements are those of Hempacco and its subsidiaries.

Hempacco Co., Inc. (the “Company” or “Hempacco”) was formed on April 1, 2019, as a Nevada corporation.

On April 23, 2021, the Company filed a second amendment to its Articles of Incorporation changing the name of the company from The Hempacco Co., Inc. to Hempacco Co., Inc.

The Company merged with, and became a subsidiary of, Green Globe International, Inc. (“GGII” or “Green Globe International”) on May 21, 2021.

Hempacco manufactures and distributes hemp smokables both under its own name and white label products for clients. The Company also owns high-tech CBD vending kiosks that it plans to place in retail venues throughout the US, in conjunction with a number of joint venture partners.

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. Celebrity joint ventures bring a national demand for our products.

During the six months ended June 30, 2023, the Company entered into the following Joint Ventures and other significant agreements.

Effective January 1, 2023, HempBox Vending, Inc. (“HVI”) a wholly owned subsidiary of the Company entered into a joint venture operating agreement (the “Operating Agreement”) with Weedsies Mobile, LLC (“Weedsies)”, a Florida limited liability company, to operate a joint venture entity (the “Joint Venture”) in Florida by the name of Weedsies Vending, LLC. The Joint Venture was created to market the hemp related products of Weedsies using automated kiosks provided by HVI. Pursuant to the Operating Agreement, the Joint Venture will be owned 50% each by HVI and Weedsies with both entities 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.

Effective January 24, 2023, the Company entered into a joint venture operating agreement (the “Operating Agreement”) with Alfalfa Holdings, LLC (“Alfalfa”), a California limited liability company, to operate a joint venture entity (the “Joint Venture”) in California by the name of HPDG, LLC. The Joint Venture was created to market and sell hemp smokables products. Pursuant to the Operating Agreement, the Joint Venture will be owned 50% each by the Company and Alfalfa. The Company is required to fund $10,000 to the Joint Venture, manufacture product, and provide accounting, inventory management, staff training, and trade show and marketing services. Alfalfa is required to provide online marketing and promotion, design and branding, and brand management and development services as well as arranging appearances by Snoop Dogg at Joint Venture events. The appearances by Snoop Dog are subject to professional availability and a separate Talent License and Services Agreement between the Joint Venture and Alfalfa as described below (the “Services Agreement”).

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In connection with the Operating Agreement, effective January 24, 2023, HPDG, LLC entered into the Services Agreement with Spanky’s Clothing, Inc., and Calvin Broadus, Jr. p/k/a “Snoop Dogg” (collectively “Talent”), pursuant to which Talent will endorse the HDPG, LLC’s smokable hemp products and serve as a spokesperson for the products in the United States. HDPG, LLC shall (i) 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 the Company’s common stock at a strike price of $1.00 per share (the “Talent Designee Warrants”); and (iv) pay Talent royalties of 10% of HDPG, LLC’s 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. As of June 30, 2023, the company has accrued $41,956 of the minimum annual royalty payment of $450,000 which will be due and payable on April 10, 2025.On or about January 30, 2023, the Company issued the Talent Warrants and Talent Designee Warrants as required by the Services Agreement (See Note 9).

On February 8, 2023, the Company signed, as guarantor, a lease agreement between US Tobacco de Mexico S.A. de C.V. (“US Tobacco de Mexico,” a related party), which is 100% owned by UST Mexico, Inc. (“UST Mexico,” a related party), and Grupo Fimher, S. de R.I. de C.V. (“Fimher”) for the lease of 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. Hempacco Co., Inc. and Hempacco Paper Co., Inc. are sub-tenants of US Tobacco de Mexico and will manufacture products at this facility. A liability for the guarantee has not been recorded as of June 30, 2023 as the amount is not probable.

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 February 1, 2023, the Company through its representative in Warsaw, Poland, filed the equivalent of Articles of Incorporation with the court to create Hempacco Europe Sp.z.o.o. (an LLC equivalent), the corporate entity through which the Company will distribute its smokable products throughout the EU. Ownership of the entity rests 99% with the Company, and 1% with Jakub Duda, an individual.

On February 9, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Boustead Securities, LLC, and EF Hutton, a division of Benchmark Investments, LLC, as representatives (the “Representatives”) of the underwriters (the “Underwriters”) in connection with the public offering of additional shares of common stock of the Company. The Underwriting Agreement provides for the offer and sale of 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, at $1.50 per share subject to adjustment as provided therein (the “Representatives’ Warrants”, see Note 9). 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.

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The Underwriting Agreement includes customary representations, warranties, and covenants by the Company. It also provides that the Company will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”), or contribute to payments the Underwriter may be required to make because of these liabilities.

On April 6, 2023, Hempacco Co. received a letter notification from the Nasdaq Capital Market (“Nasdaq”) advising of its non-compliance with Nasdaq listing rules because Hempacco 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 Hempacco must restore compliance. This period expires on October 3, 2023.

On April 20, 2023, Hempacco received a further letter notification from Nasdaq advising of its non-compliance with Nasdaq listing rules because Hempacco had failed to file its Annual Report on Form 10-K (for the 2022 fiscal year) with the Securities and Exchange Commission by the required due date. The deficiency was cured by Hempacco by the filing of the Annual Report on Form 10-K on May 15, 2023.

On May 3, 2023, Hempacco paid $300,000 to Curated Nutra, LLC, the 50% partner in Green Star Labs, Inc., (“GSL”) for the purchase of additional manufacturing equipment. This equipment is required to fulfill product orders from Hempacco’s Snoop Dogg JV entity. This equipment will remain the property of Hempacco Inc., until such time that an agreement is reached with Curated Nutra for the transfer of its ownership interest in GSL. On July 10, 2023, Hempacco signed a Purchase Agreement and an accompanying Assignment Agreement with Viva Veritas LLC (“Veritas”) (the successor to Curated Nutra, LLC) whereby Veritas agreed to assign its 50% interest in GSL to Hempacco together with additional equipment lines related to bottling and gummy production (see Note 14).

On May 7, 2023, Hempacco entered into a joint venture agreement with Nasir Ghesani, a New York distribution company doing business as “Reliable Distributor,” with each party to own 50% of the joint venture and working capital needs to be paid by Hempacco. The joint venture is intended to enter new master distributor agreements for Hempacco smokable products to be placed in New York area convenience stores, gas stations and specialty smoke shops. On May 16, 2023. the Company formed a new Nevada Corporation, RD-HPCO, Inc. as the joint venture entity between the Company and Nasir Ghesani.

On May 23, 2023, Hempacco received a letter notification from Nasdaq advising of its non-compliance with Nasdaq listing rules because Hempacco had failed to file its Quarterly Report on Form 10-Q (for the quarter ended March 31, 2023) with the Securities and Exchange Commission by the required due date. The deficiency was cured by the filing of the Quarterly Report on Form 10-Q on July 5, 2023.

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 $3,989,904 during the six months ended June 30, 2023, and has an accumulated deficit of $14,405,058 as of June 30, 2023. During the three months ended June 30, 2023, the Company’s net cash used in operations was $3,821,709.

Management intends to raise additional operating funds through equity and/or debt offerings. However, there can be no assurance management will be successful in its endeavors. Due to uncertainties related to these matters, there exists a substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern. If we are not able to successfully execute our future operating plans, our financial condition and results of operation may be materially adversely affected, and we may not be able to continue as a going concern.

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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our unaudited consolidated financial statements have been prepared in accordance with US GAAP and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. As permitted under those rules, we omitted certain footnotes or other financial information that are normally required by US GAAP for annual financial statements. We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal and recurring items. Our consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements and related notes filed with the SEC on May 12, 2023. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair statement of the Company’s financial condition and results of operations and cash flows for the interim periods presented.

Principles of Consolidation

The financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Joint Venture entities where the company owns at least 51% and controls the accounting and administration of the entities will be accounted for under ASC 810-10 which will allow full consolidation of the assets and liabilities into the Company’s balance sheet, with non-controlling interests being calculated and disclosed in the balance sheet and operating statement of the Company. Joint Venture entities where the company owns less than 51% are evaluated for treatment as variable interest entities. The Company may provide accounting and administration for these entities, may have board of director control, and may provide the majority of funding for these entities. Any entities not falling within this criterion will be accounted for under ASC 323-30. These consolidated financial statements include the operating results and the assets of the nine currently operating, joint venture entities, all of which have been deemed variable interest entities for the period ended June 30, 2023. 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 three of the Company’s customers made up approximately 28%, 18% and 11%, respectively, of our revenues for the three months ended June 30, 2023 and sales to one of the Company’s customers made up approximately 91% of our revenues for the three months ended June 30, 2022. Sales to two of the Company’s customers made up approximately 40% and 12%, respectively, of our revenues for the six months ended June 30, 2023 and sales to one of the Company’s customers made up approximately 91% of our revenues for the six months ended June 30, 2022. The balance receivable from these customers on June 30, 2023 and 2022 represents approximately 23% and 30%, respectively, of the total accounts receivable balance of $230,171 and $326,349 as of that date. As a result of a legal dispute between a major customer and a third party during 2022, we experienced a significant reduction in our projected revenues and cash flow for the three and six months ended June 30, 2023.

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.

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For the six months ended June 30, 2023, and 2022, the following outstanding dilutive securities were excluded from the computation of diluted net loss per share as the result of the computation was anti-dilutive.

	June 30,		June 30,
	2023		2022
	(Shares)		(Shares)
Warrants		838,100		-
Promissory Notes convertible to shares		100,000		50,000
TOTAL		938,100		50,000

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.

Non-Controlling Interests

The Company accounts for the non-controlling interests in its subsidiaries and joint ventures in accordance with U.S. GAAP. and ASC 805-20.

The Company has chosen to record the minority interests (NCI’s) in the equity section of the balance sheet, and on the income statement, the profit or loss attributable to the minority interests will be reported as a separate non-operating line item.

The Company measures its non-controlling interests using the percentage of ownership interest held by the respective NCI’s during the accounting period.

NOTE 3 - ACCOUNTS RECEIVABLE

As of June 30, 2023, and December 31, 2022, accounts receivable consisted of the following:

	June 30,			December 31,
	2023			2022

Accounts receivable	$	263,891		$	478,680
Accounts receivable, related parties		-			5,100
Allowance for doubtful accounts		(33,720	)		(247,411	)
Total accounts receivable	$	230,171	)	$	236,369

The Company recorded a reserve against the entire balance of accounts receivable from related parties as of June 30, 2023. See Note 11 for additional information on related party transactions related to receivables.

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NOTE 4 - INVENTORY

As of June 30, 2023, and December 31, 2022, inventory, which consists primarily of the Company’s raw materials, finished products and packaging is stated at the following amounts:

	June 30,		December 31,
	2023		2022

Finished goods	$	462,818	$	109,879
Raw materials (Net of obsolescence allowance)		718,713		535,253
Total inventory at cost less obsolescence allowance	$	1,181,531	$	645,132

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 June 30, 2023 and 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 June 30, 2023, and December 31, 2022, property and equipment consisted of the following:

	June 30,			December 31,
	2023			2022
Production equipment	$	4,033,172		$	3,837,236
Leasehold improvements		12,431			12,431
Kiosks		3,583,529			3,631,279
		7,629,132			7,480,946
Accumulated depreciation		(321,568	)		(260,381	)
Total property and equipment	$	7,307,564		$	7,220,565

Depreciation expense was $33,196 and $61,187 for the three and six months ended June 30, 2023, respectively, and $22,813 and $45,217 for the three and six months ended June 30, 2022, 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 Primus Logistics, Inc. (“Primus”), a related party that is controlled by the Company’s CEO. Approximately 1,800 square feet (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 provision of cold storage facilities used for perishable raw materials and finished products from pharmaceutical manufacturing companies. The company stores its raw hemp smokable material with Primus.

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Base monthly rent commenced at $10,000 per month, with subsequent defined annual increases. All operating expenses are borne by the lessee. Amounts payable to the related party for rent as of June 30, 2023, and December 31, 2022, were $0 and $5,163 respectively. On June 30, 2023, and December 31, 2022, the amounts of $155,465 and $25,000 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 June 30, 2023, including the total amount of imputed interest/present value discount.

Year Ending December 31	Operating Leases
2023	$	65,558
2024		135,049
2025		139,100
Total lease payments		339,707
Less: Imputed interest/present value discount		(26,166	)
Total	$	313,541

Rent expenses were $32,779 and $65,558 during the three and six months ended June 30, 2023, respectively, and $31,827 and $63,654 during the three and six months ended June 30, 2022, respectively.

See Note 1 for information on a new lease between Hempacco Paper Co., Inc., and UST Mexico.

NOTE 7 - OTHER SHORT-TERM LIABILITIES – EQUIPMENT LOAN

On December 11, 2019, the Company entered into a loan for $1,500,000 within an initial maturity of 18 months to fund the purchase of equipment to use in its production. The loan did not have a stated interest rate, and, therefore, the Company calculated an imputed discount of $109,627, which was amortized over 18 months. As of December 31, 2022, the discount had been completely amortized. The loan is secured by the production equipment.

On January 6, 2022, the first payment of $50,000 was made to the lender. The Company was granted forbearance with respect to further loan payments until the Company’s planned initial public offering (“IPO”) was funded. On September 6, 2022, the Company executed a settlement agreement and mutual release with the lender providing for the full repayment of the outstanding loan balance of $1,450,000 with a cash payment of $250,000 and the issuance of 266,667 restricted shares of Hempacco common stock. As of June 30, 2023, and December 31, 2022, the principal balance of the loan was $0.

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NOTE 8 - CONVERTIBLE NOTES

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 matured between May 4, 2022, and October 23, 2022. The notes automatically converted 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 converted at the lower of $1.00 per share or the current market price of Hempacco stock. The notes could not be converted prior to maturity. The Taverna note matured on May 4, 2022, and were converted, along with accrued interest, into 56,592 shares of Hempacco common stock on June 7, 2022.

The notes payable to Miguel Cambero for $100,000 and Ernie Sparks for $25,000 originally matured on October 23, 2022. Both notes were extended through April 30, 2023. On or about May 16, 2023, Ernest Sparks’ note and accrued interest of $4,032 were converted into 62,223 shares of the Company’s common stock.

The Company’s note payable to Miguel Cambero is convertible under its terms into shares of common stock. Subsequent to June 30, 2023, the note and accrued interest will be converted into common stock.

On or about March 18, 2022, the Company issued a promissory note to a related party, Jerry Halamuda for $50,000. The note carries an interest rate of 8% and the initial maturity date was 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, additional amendments were executed which extended the maturity date to June 18, 2023, and then to September 18, 2023. The $50,000 principal balance of the note was repaid on August 1, 2023. Accrued interest will be repaid in stock at a later date.

NOTE 9 - WARRANTS

As of June 30, 2023, the following warrants are outstanding:

Talent Warrants (see Note 1)			450,000
Talent Designee Warrants (see Note 1)			50,000
Compensation Warrants			500,000
Representatives’ Warrants (see Note 1)			338,100
			938,100

On August 11, 2021, the Company signed an agreement with Boustead Securities, LLC (the “Representative”), which was amended on or about March 18, 2022, with respect to a number of proposed financing transactions. Included in the agreement was the initial public offering of the Company’s common stock, for which a listing on NASDAQ was successfully applied, the private placement of Hempacco securities prior to the IPO (“pre-IPO Financings”), and other financings separate from the IPO or the pre-IPO Financings (each such other financing an “Other Financing”). See Note 12 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. The warrants are 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 Other Financing.

On January 25, 2023, the Company issued fully vested warrants to purchase 500,000 shares of the Company’s common stock to non-employees as compensation for services (“Compensation Warrants”). The Compensation Warrants have an exercise price of $1.00 and a contractual life of 5 years. Stock-based compensation expense related to the Compensation Warrants was $12,900 for the six months ended June 30, 2023. As of June 30, 2023, total compensation costs related to the common stock warrants not yet recognized amounted to approximately $343,248. The amounts were recorded as prepaid compensation, for which there is a current and noncurrent portion that is amortized over the life of the contract. As of June 30, 2023, the current portion of $74,891 is included in prepaid expenses and other current assets on the balance sheet and the noncurrent portion of $268,357 is included in other assets. During the six months ended June 30, 2023, $31,205 was amortized to sales and marketing expense.

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The Black-Scholes model uses the following variables to calculate the value of an option or warrant for the six months ended June 30, 2023, and the twelve months ended December 31, 2022:

	Input Range	Input Range
	June 30,	December 31,
Description	2023	2022
a) Price of the Issuer’s Security	$ 0.75-$1.25	$ 1.00 - $7.00
b) Exercise (strike) price of Security	$1.00	$ 0.75 - $1.50
c) Time to Maturity in years	5 years	3 to 5 years
d) Annual Risk-Free Rate	5-year T-Bill	2-year T-Bill
e) Annualized Volatility (Beta)	90% - 100%	59% - 100%

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 further advanced $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 June 30, 2023, and December 31, 2022, the balance outstanding was $138,252 and $142,770, respectively.

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 matured in July 2023. On July 1, 2023, the facility was renewed for an additional 12 months and will be reviewed by the bank for potential renewal on June 30, 2024. The line of credit is guaranteed by the CEO of the Company. As of June 30, 2023 and December 31, 2022, $100,000 and $0, respectively, was owed on the line of credit. On June 30, 2023, the interest rate on the facility was 9.25%.

NOTE 11 - RELATED PARTY TRANSACTIONS

As of June 30, 2023, and December 31, 2022, the Company owed Primus $0 and $5,163 respectively, for rent and storage fees. As of June 30, 2023, and December 31, 2022, Primus had been paid $169,780 and $25,000 respectively, in advance, for rent. During the six months ended June 30, 2023 and 2022, the Company expensed $94,266 and $70,094, respectively, for services provided by Primus. The Company’s CEO owns 90% of Primus.

As of September 1, 2022, the salaries of the CEO and the CMO, as defined in their respective employment agreements, were paid through the Company’s payroll service. These payments replace the prior independent contractor payments received by their entities, Strategic Global Partners, Inc. and Cube 17, Inc., respectively. Although employment contracts were dated from January 2022, salaries were paid with effect from

SEC Form 10-Q filed by Hempacco Co. Inc.