10-K: Hempacco Co. Inc. Reports 2023 Annual Results Amidst Expansion and Financial Challenges

Hempacco Co. Inc.'s 2023 annual report reveals a year of strategic acquisitions, joint ventures, and financial complexities, including a net loss of $13.4 million.

Summary

• Hempacco Co., Inc. is focused on manufacturing and selling nicotine-free and tobacco-free alternatives to traditional cigarettes.
• The company utilizes patented spraying and filter infusion technologies for hemp and herb-based smokable alternatives.
• Hempacco also offers nutritional supplement and beauty product manufacturing through its subsidiary, Green Star Labs, Inc.
• The company's operational segments include private label manufacturing, intellectual property licensing, and in-house brand development.
• Hempacco's manufacturing facility has a capacity of up to 10 million cigarettes monthly.
• The company has one approved patent and one patent pending related to its manufacturing processes.
• Hempacco has launched its own brand, 'The Real Stuff Smokables,' and entered into several joint ventures with brands like Hemp Hop and Cheech & Chong.
• The company acquired the remaining 50% ownership of Green Star Labs, Inc. in December 2023, making it a wholly-owned subsidiary.
• Hempacco experienced a net loss of $13.4 million for the year ended December 31, 2023, compared to a net loss of $7.1 million in 2022.
• The company's revenue was $4.04 million in 2023, slightly up from $3.96 million in 2022.
• The company has raised capital through the sale of convertible promissory notes and warrants, and has also issued shares for services and acquisitions.
• The company is facing challenges in meeting sales goals and has a going concern qualification from its auditors.

Sentiment

Score: 3

Explanation: The document presents a mixed picture with some positive developments in terms of expansion and product launches, but the significant net loss, going concern qualification, and Nasdaq non-compliance issues weigh heavily on the overall sentiment. The company faces significant financial and operational challenges.

Positives

• Hempacco has a proprietary, patented spraying technology for terpene infusion and patent-pending flavored filter infusion technology.
• The company has a manufacturing facility with a capacity of up to 10 million cigarettes monthly.
• Hempacco has launched its own brand, 'The Real Stuff Smokables,' and entered into several joint ventures with well-known brands.
• The acquisition of Green Star Labs, Inc. provides additional revenue streams in nutritional supplements and beauty products.
• The company has secured agreements with master distributors to expand its retail presence.

Negatives

• Hempacco experienced a significant net loss of $13.4 million in 2023.
• The company's operating expenses increased significantly in 2023.
• The company has a going concern qualification from its auditors, indicating substantial doubt about its ability to continue as a going concern.
• The company is dependent on a limited number of customers for a significant portion of its revenue.
• The company has experienced significant changes in sales personnel.

Risks

• The company has a history of losses since inception and anticipates continued operating losses.
• Hempacco is dependent on a limited number of customers for a significant portion of its revenue.
• The company's ability to generate and/or obtain adequate capital to fund future operations is uncertain.
• The company faces competition from traditional and large, well-financed tobacco or nicotine cigarette manufacturers.
• The company's products may face reduced demand due to health concerns and legislative initiatives against smokables products.
• The company's reliance on distributors, retailers, and brokers could affect its ability to efficiently and profitably distribute and market its products.
• The COVID-19 pandemic has and could continue to negatively affect various aspects of the company's business.
• The company relies on suppliers, manufacturers, and contractors, and events adversely affecting them would adversely affect the company.
• The company may be subject to product liability claims and other claims of its customers and partners.
• The company may experience a reduced demand for some of its products due to health concerns and legislative initiatives against smokables products.
• The company may be unable to respond effectively to technological changes in its industry.
• The company may not be able to satisfy the continued listing requirements of Nasdaq or obtain or maintain a listing of its common stock on Nasdaq.
• The company is not currently in compliance with Nasdaq's Listing Rules for not having filed Form 10-K for the year ended December 31, 2023.
• The company is not currently in compliance with Nasdaq's Audit Committee Requirement and Nasdaq's Annual Shareholder Meeting Requirement.
• The company's share price has closed at less than $1.00 for 30 consecutive business days, putting it out of compliance with Nasdaq rules on this topic.
• The company's business and operations would be adversely impacted in the event of a failure or interruption of its information technology infrastructure or as a result of a cybersecurity attack.
• The company's results of operations may fluctuate from quarter to quarter for many reasons, including seasonality.
• Changes in the company's effective tax rate may impact its results of operations.
• Global economic, political, social and other conditions, including the COVID-19 pandemic, may continue to adversely impact the company's business and results of operations.
• The company is currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine, as well as the current armed conflict in Israel and the Gaza Strip.
• Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect the company's financial results.

Future Outlook

The company plans to continue to invest in research and development, increase marketing efforts, reach agreements with master distributors, and aggressively target additional distributors throughout the United States. The company also plans to drive and increase customer traffic with internet marketing to or with the clients that carry its products.

Management Comments

• Management intends to raise additional operating funds through equity and/or debt offerings.
• Management believes that its current cash and cash flow from operations will be insufficient to meet anticipated cash needs for the next six months for working capital and capital expenditures.
• Management is working to improve the situation of disclosure controls and procedures through a system of staffing evaluation and document review processes.

Industry Context

The company operates in the competitive smokables industry, facing competition from both traditional tobacco companies and other hemp-based product manufacturers. The industry is also subject to changing regulations and consumer preferences, which could impact the company's performance.

Comparison to Industry Standards

• Hempacco's financial performance, particularly its net loss, is worse than some of its competitors in the smokables industry, such as Turning Point Brands (TPB) which reported a net income of $10.8 million in 2023, and Vector Group (VGR) which reported a net income of $100.8 million in 2023.
• The company's revenue growth is modest compared to some of the larger players in the industry, such as Altria (MO) which reported a revenue of $24.5 billion in 2023.
• Hempacco's focus on nicotine-free and tobacco-free alternatives positions it in a growing segment of the market, but it faces challenges in scaling its operations and achieving profitability.
• The company's reliance on joint ventures and celebrity endorsements is a common strategy in the industry, but its success depends on the performance of its partners and the market acceptance of its products.
• The company's going concern qualification is a significant concern, as it indicates a high level of financial risk compared to more established companies in the industry.

Management Changes

Corporate Governance

Legal Proceedings

• The Company was a defendant in a suit filed in the United States District Court for the Southern District of New York by Long Side Ventures LLC, et al., alleging fraudulent transfer and commingling of assets. The Company has discontinued its defense of this lawsuit following the Courts September 29, 2023, dismissal of Hempacco Co., Inc., Pearson, Halamuda and Titus from the litigation.

Related Party Transactions

• 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.
• The company leases office and manufacturing space from Primus Logistics, an entity controlled by the company's CEO.
• The company has a line of credit agreement with its parent company, Green Globe International, Inc.
• The company has entered into a promissory note agreement with a related party.
• The company has entered into a promissory note agreement with its parent company, Green Globe International, Inc. in connection with its acquisition of the 50% equity interest of Green Star Labs, Inc.

Stakeholder Impact

• Shareholders face the risk of losing their investment due to the company's financial challenges and going concern qualification.
• Employees may be affected by potential cost-cutting measures or restructuring due to the company's financial difficulties.
• Customers may experience disruptions in product availability or quality due to the company's operational challenges.
• Suppliers and creditors face the risk of non-payment or delayed payments due to the company's financial instability.

Next Steps

• The company plans to continue to invest in research and development.
• The company plans to increase marketing efforts.
• The company plans to reach agreements with master distributors.
• The company plans to aggressively target additional distributors throughout the United States.
• The company plans to drive and increase customer traffic with internet marketing to or with the clients that carry its products.
• The company plans to seek to sell additional equity securities to generate additional cash to continue operations.
• The company may also sell debt securities to generate additional cash.
• The company plans to submit a plan to Nasdaq to regain compliance with listing rules.
• The company plans to hold an annual shareholder meeting to regain compliance with Nasdaq rules.

Key Dates

Keywords

Hempacco, Hemp Smokables, Nicotine-Free, Tobacco-Free, Terpene Infusion, Flavored Filters, Green Star Labs, Joint Ventures, Manufacturing, Distribution, Financial Results, Going Concern, Nasdaq, Convertible Notes, Warrants