8-K: Hempacco Secures $379,288.88 in Funding via Convertible Note and Warrants

Hempacco Co., Inc. has entered into a securities purchase agreement with Mast Hill Fund, L.P., resulting in a $379,288.88 convertible promissory note and warrants to purchase 113,786 shares of common stock.

Summary

• Hempacco Co., Inc. has secured a $379,288.88 convertible promissory note from Mast Hill Fund, L.P.
• The transaction also includes warrants for Mast Hill to purchase 113,786 shares of Hempacco's common stock.
• The aggregate purchase price for the note and warrants was $341,360, with $6,000 allocated to Mast Hill's legal expenses and $27,308.80 to broker-dealers.
• Hempacco received net funding of $308,051.20 from this transaction.
• The promissory note accrues interest at 10% per annum, with the first 12 months of interest guaranteed.
• The note matures in 12 months and requires monthly repayments starting four months after the issue date.
• The note is convertible into common stock at a price of $2.30 per share, subject to adjustments.
• The warrants have a 5-year term and are exercisable at $2.30 per share, also subject to adjustments.
• The proceeds from the transaction are to be used for fulfilling purchase orders, business development, and operating capital, but not for debt repayment to insiders or other corporate finance transactions.
• The agreement limits the issuance of shares to Mast Hill to 724,128 until shareholder approval is obtained.

Sentiment

Score: 4

Explanation: The document indicates a necessary capital raise for the company, but the terms of the financing, including the potential for dilution and the restrictions on the use of funds, are not particularly favorable for existing shareholders. The document also contains details of a potential reduction in the conversion price in the event of default, which is a negative signal.

Positives

• Hempacco has secured additional funding to support its operations and growth.
• The convertible note provides a potential source of equity financing in the future.
• The warrants offer an additional incentive for the investor and potential future capital for the company.
• The use of proceeds is restricted to business development and operating capital, which should support the company's core activities.

Negatives

• The company is obligated to repay the note with interest, which could strain cash flow.
• The conversion price of the note can be adjusted downwards in the event of default, potentially diluting existing shareholders.
• The company is restricted from using the funds for certain purposes, such as repaying debt to insiders.
• The company is required to obtain shareholder approval to issue more than 724,128 shares to Mast Hill, which could be a hurdle.

Risks

• The company may face challenges in meeting the monthly repayment obligations of the note.
• The potential for a reduced conversion price in the event of default could lead to significant dilution for existing shareholders.
• The company's ability to obtain shareholder approval for additional share issuance is uncertain.
• The company is subject to various covenants and restrictions that could limit its operational flexibility.

Future Outlook

The company is required to file a registration statement for the resale of shares by Mast Hill within 90 days and have it effective within 120 days. The company must also obtain shareholder approval to issue more than 724,128 shares to Mast Hill.

Industry Context

This type of financing, involving a convertible note and warrants, is common for small and micro-cap companies seeking capital. It allows investors to participate in potential upside while providing the company with immediate funding.

Comparison to Industry Standards

• The terms of this financing, including the interest rate, conversion price, and warrant terms, are within the typical range for similar transactions in the micro-cap space.
• The 10% interest rate is relatively standard for a convertible note of this type, reflecting the risk associated with investing in a smaller company.
• The conversion price of $2.30 per share is a common starting point, but the potential for adjustments based on future issuances and events of default is a standard feature to protect the investor.
• The 5-year term for the warrants is also typical, providing the investor with a longer-term opportunity to benefit from potential share price appreciation.
• The inclusion of a cap on the number of shares that can be issued without shareholder approval is a common protection for existing shareholders.

Stakeholder Impact

• Shareholders may experience dilution due to the potential conversion of the note and exercise of warrants.
• Employees may benefit from the company's increased financial stability.
• Customers may benefit from the company's ability to fulfill purchase orders.
• Creditors may be impacted by the company's increased debt obligations.

Next Steps

• Hempacco needs to file a preliminary information statement on Schedule 14C with the SEC within 10 calendar days of closing.
• Hempacco needs to file a definitive information statement on Schedule 14C with the SEC as soon as permissible.
• Hempacco needs to file a registration statement for the resale of shares by Mast Hill within 90 days.
• Hempacco needs to have the registration statement effective within 120 days.
• Hempacco needs to obtain shareholder approval to issue more than 724,128 shares to Mast Hill.

Key Dates

Keywords

convertible note, warrants, securities purchase agreement, common stock, funding, capital raise, shareholder approval, dilution, promissory note, registration rights