UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from to
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TABLE OF CONTENTS
| Page | ||
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 20 |
| Item 4. | Controls and Procedures | 20 |
| PART II. OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 21 |
| Item 1A. | Risk Factors | 21 |
| Item 4. | Mine Safety Disclosures | 21 |
| Item 6. | Exhibits | 22 |
| SIGNATURES | 23 | |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under, but not limited to, the heading “Item 1A. Risk Factors” included in the Annual Report of Generation Hemp, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2020 (the “Annual Report”) and our other filings with the Securities and Exchange Commission (“SEC”).
Forward-looking statements may include statements about:
| ● | the risk that our results could be adversely affected by natural disaster, public health crises (including, without limitation, the COVID-19, outbreak), political crises, negative global climate patterns, or other catastrophic events; |
| ● | the marketability of our products; |
| ● | financial condition and liquidity of our customers; |
| ● | competition in the hemp markets; |
| ● | industry and market conditions; |
| ● | requisition of our services by major customers and our ability to renew processing and services contracts; |
| ● | credit and performance risks associated with customers, suppliers, banks and other financial counterparties; |
| ● | availability, timing of delivery and costs of key supplies, capital equipment or commodities; |
| ● | our future capital requirements and our ability to raise additional capital to finance our activities; |
| ● | the future trading of our common stock; |
| ● | legal and regulatory risks associated with OTC Markets; |
| ● | our ability to operate as a public company; |
| ● | our ability to protect our proprietary information; |
| ● | general economic and business conditions; the volatility of our operating results and financial condition; |
| ● | our ability to attract or retain qualified senior management personnel and research and development staff; |
| ● | timing for completion of major acquisitions or capital projects; |
| ● | our ability to obtain additional financing on favorable terms, if required, to complete acquisitions as currently contemplated or to fund the operations and growth of our business; |
| ● | operating or other expenses or changes in the timing thereof; |
| ● | compliance with stringent laws and regulations, as well as changes in the regulatory environment, the adoption of new or revised laws, regulations and permitting requirements, especially with respect to the industry in which we operate; |
| ● | potential legal proceedings and regulatory inquiries against us; and |
| ● | other risks identified in this report that are not historical. |
ii
We caution you that these forward-looking statements are subject to a number of risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control, including risks specific to the industry in which we operate. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement and speak only as of the date of this Quarterly Report. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.
iii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Generation Hemp, Inc.
Unaudited Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment | ||||||||
| Property and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total Property and Equipment, Net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Equity (Deficit) | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Payables to related parties | ||||||||
| Operating lease liability - related party | ||||||||
| Notes payable – related parties | ||||||||
| Other indebtedness - current | ||||||||
| Common stock issuable | ||||||||
| Current liabilities of discontinued operations held for sale | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liability - related party, net of current portion | ||||||||
| Other indebtedness - long-term | ||||||||
| Long-term liabilities of discontinued operations held for sale | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Series B redeemable preferred stock, par value, $ | ||||||||
| Equity (Deficit) | ||||||||
| Series A preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Common stock, no par value; | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Generation Hemp equity | ( | ) | ||||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Generation Hemp, Inc.
Unaudited Condensed Consolidated Statements of Operations
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Post-harvest and midstream services | $ | $ | $ | $ | - | |||||||||||
| Rental | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Costs and Expenses | ||||||||||||||||
| Cost of revenue (exclusive of items shown separately below) | - | |||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Merger and acquisition costs | - | |||||||||||||||
| General and administrative | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense (income) | ||||||||||||||||
| Interest and other income | - | - | ( | ) | ( | ) | ||||||||||
| Change in fair value of marketable security | - | ( | ) | ( | ) | |||||||||||
| Interest expense | ||||||||||||||||
| Total other expense | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: net loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Generation Hemp | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share: | ||||||||||||||||
| Loss from continuing operations | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss from discontinued operations | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Generation Hemp, Inc.
Unaudited Condensed Consolidated Statements of Equity
| Series B Redeemable Preferred Stock | Series A Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Noncontrolling | Total Equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Interest | (Deficit) | |||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Issuance of common stock units | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | - | - | $ | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Acquisition of Certain Assets of Halcyon Thruput, LLC | ||||||||||||||||||||||||||||||||||||||||
| Issuances of common stock units | ||||||||||||||||||||||||||||||||||||||||
| Warrant exercises | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for Convertible Promissory Note | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for Senior Secured Promissory Note | ||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock redemption | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common shares issued to vendor for services | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Issuance of common shares for extension of secured note | ||||||||||||||||||||||||||||||||||||||||
| Change in common stock par value due to change in corporate domicile | - | - | - | - | - | ( | ) | - | - | - | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Conversion of Series A preferred stock | ( | ) | ( | ) | - | - | - | |||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | - | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Generation Hemp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
| For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash from operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of debt discount | ||||||||
| Stock-based compensation | ||||||||
| Common shares issued to vendor for services | ||||||||
| Other income - PPP Loan forgiveness | ( | ) | ||||||
| Loss on disposal of property and equipment | ||||||||
| Change in fair value of marketable securities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Net cash from operating activities – continuing operations | ( | ) | ( | ) | ||||
| Net cash from operating activities – discontinued operations | ||||||||
| Net cash from operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Capital expenditures | ( | ) | ||||||
| Acquisition of certain assets of Halcyon Thruput, LLC, net of acquired cash of $224,530 | ( | ) | ||||||
| Proceeds from sale of investment in common stock | ||||||||
| Net cash from investing activities – continuing operations | ( | ) | ||||||
| Net cash from investing activities – discontinued operations | ||||||||
| Net cash from investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds for common stock issuable | ||||||||
| Issuance of common stock units | ||||||||
| Redemptions of Series B preferred stock | ( | ) | ||||||
| Series B preferred stock dividends paid | ( | ) | ||||||
| Proceeds from warrant exercises | ||||||||
| Repayment of Halcyon bank note | ( | ) | ||||||
| Proceeds from SBA PPP Loan | ||||||||
| Proceeds from subordinated notes | ||||||||
| Repayment of subordinated notes | ( | ) | ||||||
| Payment of mortgage payable | ( | ) | ( | ) | ||||
| Net cash from financing activities – continuing operations | ||||||||
| Net cash from financing activities – discontinued operations | ||||||||
| Net cash from financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Generation Hemp, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Business
Generation
Hemp, Inc. (the “Company”), formerly known as Home Treasure Finders, Inc. (“HTF”), was incorporated on August
21, 2021 in the State of Delaware. The Company was originally incorporated on July 28, 2008 in the State of Colorado. On November 27,
2019, HTF purchased approximately
On
January 11, 2021, we completed the acquisition of certain assets of Halcyon Thruput, LLC (“Halcyon”). With this acquisition,
we commenced providing post-harvest and midstream services to growers by drying, processing, cleaning and stripping harvested hemp directly
from the field and wetbaled at our
We also generate revenue from rental of our “Cannabis Zoned” (Hemp) warehouse property located in Denver, Colorado currently leased to an unaffiliated hemp seed company.
As
of September 30, 2021,
Our management team has been and continues to actively review acquisition candidates involved in the hemp industry that operate within a number of vertical businesses, predominantly within the midstream sector that are attractive to us and are within the hemp supply chain.
Liquidity – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue its strategy and execute its acquisition plans.
In
the nine months ended September 30, 2021, the Company used $
The Company will continue to pursue additional capital raising opportunities in order to fund future acquisitions and meet its obligations as they become due. In the event financing cannot be obtained, the Company may not be able to satisfy these plans and obligations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Impact of COVID-19 Pandemic on Our Business – Our business, results of operations and financial condition have been adversely affected by the COVID-19 pandemic, beginning in mid-March 2020. The COVID-19 pandemic and measures taken to contain it have subjected our business, results of operations, financial condition, stock price and liquidity to a number of material risks and uncertainties, all of which may continue or may worsen.
2. Summary of Significant Accounting Policies
Basis of Presentation – These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. Intercompany balances and transactions between consolidated entities are eliminated.
5
Revenue Recognition – Post-harvest and midstream services revenue is typically determined based on volumes processed at agreed-upon contractual prices and is recognized when performance obligations under the terms of a contract with our customers are satisfied. This occurs when control of the product is transferred to our customers upon completion of our processing.
Rental revenue is recognized based on the contractual cash rental payments for the period. Oil & gas revenue is recognized for discontinued operations based on delivered quantities in the amount of the consideration to which the Company is entitled.
Stock-based Compensation – We account for employee stock-based compensation using the fair value method. Compensation cost for equity incentive awards is based on the fair value of the equity instrument generally on the date of grant and is recognized over the requisite service period. Forfeitures are recognized as they occur.
Fair Value Measurement – Our financial assets and liabilities consist of cash, accounts receivable, accounts payable and notes payable. The fair values of these instruments approximate their carrying amounts at each reporting date.
The Company’s non-financial assets measured at fair value on non-recurring basis include impairment measurements of oil and gas properties and warrants issued as part of financing transactions. These are considered Level 3 measurements as they involve significant unobservable inputs.
Major Customer and Concentration of Credit Risk – We estimate an allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. An allowance for doubtful accounts was not needed as of September 30, 2021 or December 31, 2020.
During
the three and nine months ended September 30, 2021, one customer accounted for approximately
Our rental revenue is derived from a single lessee on a commercial warehouse owned by the Company. There were no amounts due from this customer at September 30, 2021 or December 31, 2020.
Recent Accounting Pronouncements – In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The Company elected to early adopt ASU 2020-06 in 2021. Adoption of this new guidance had no impact on its financial statements at the date of adoption but is applicable to newly issued instruments.
There are no other new accounting pronouncements that are expected to have a material impact on the consolidated financial statements.
6
3. Acquisition
On
January 11, 2021, the Company completed the acquisition of certain assets of Halcyon pursuant to the Asset Purchase Agreement dated March
7, 2020, as amended on January 11, 2021. The purchase consideration totaled approximately $
The acquisition was accounted for as a business combination where the Company is the acquirer and the acquisition method of accounting was applied in accordance with GAAP. Accordingly, the aggregate value of the consideration we paid to complete the acquisition was allocated to the assets acquired based upon their estimated fair values on the acquisition date.
The following table summarizes the purchase price allocation for the assets acquired. This allocation is preliminary. In the third quarter of 2021, we made adjustments to the previously recognized amounts for inventory, intangibles, goodwill and the real estate purchase option based on the preliminary results of a valuation study. The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final evaluation of the fair value of tangible and identifiable intangible assets acquired. Final adjustments, including increases and decreases to depreciation and amortization resulting from the allocation of the purchase price to amortizable tangible and intangible assets, may be material.
| Accounts receivable | $ | |||
| Other working capital | ||||
| Property and equipment, other | ||||
| Intangibles: | ||||
| Non-competition agreements | ||||
| Customer relationships | ||||
| Other assets - Purchase option on real estate | ||||
| Goodwill | ||||
| Assets acquired | $ |
Intangible assets consist of customer relationships and non-compete agreements, each having definite-lives. These intangible assets are being amortized over the estimated useful life on an accelerated basis reflecting the anticipated future cash flows of the Company post acquisition of Halcyon.
The results of operations for the acquired Halcyon assets have been included in the Company’s consolidated financial statements since the January 11, 2021 acquisition date.
Concurrent
with the closing of the asset acquisition, the Company entered into term employment agreements with two executives to serve as vice presidents
of the Company for a term of at least two years. The term employment agreements each provide for the issuance of
Further,
the term employment agreements each provide for the payment by the executives of liquidated damages if
On
March 3, 2021, the Company repaid the outstanding principal and interest balance on the $
Supplemental Pro Forma Information – The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition of certain assets of Halcyon had been completed on the date indicated, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that management believes are reasonable under the circumstances.
7
The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the acquisition had occurred on January 1, 2020, to give effect to certain events that management believes to be directly attributable to the acquisition. These pro forma adjustments primarily include:
| ● | an increase to depreciation and amortization expense that would have been recognized due to acquired tangible and intangible assets; and |
| ● | an adjustment to interest expense to reflect the reduced borrowings due to the repayment of Halcyon’s historical debt in conjunction with the acquisition; |
The supplemental pro forma financial information for the periods presented is as follows:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue, continuing operations | $ | $ | $ | $ | ||||||||||||
| Income (loss) from continuing operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Earnings (loss) per common share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
4. Discontinued Operations
In connection with the Transaction, management determined to fully divest of EHR’s oil and gas activities. As such, these activities are presented as discontinued operations for each of the periods presented.
The following is a summary of the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets - | ||||||||
| Oil and natural gas properties held for sale, at cost | $ | $ | ||||||
| Accumulated DD&A | ( | ) | ( | ) | ||||
| Total assets of discontinued operations held for sale | $ | $ | ||||||
| Liabilities | ||||||||
| Accrued liabilities | $ | $ | ||||||
| Asset retirement obligations | ||||||||
| Revenue payable | ||||||||
| Current liabilities of discontinued operations held for sale | ||||||||
| Asset retirement obligations - | ||||||||
| Long-term liabilities of discontinued operations held for sale | ||||||||
| Total liabilities of discontinued operations held for sale | $ | $ | ||||||
The following is a summary of the major classes of line items constituting loss on discontinued operations shown in the consolidated statements of operations:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue - | ||||||||||||||||
| Oil and gas sales | $ | $ | $ | $ | ||||||||||||
| Costs and Expenses | ||||||||||||||||
| Lease operating expense | ||||||||||||||||
| Depreciation, depletion & amortization | - | |||||||||||||||
| Accretion | ||||||||||||||||
| Gain on disposal of oil & gas property interests | - | ( | ) | |||||||||||||
| Total costs and expenses | ||||||||||||||||
| Interest expense | - | |||||||||||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
8
5. Notes Payable – Related Parties
Notes payable – related parties consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Senior Secured Promissory Note | $ | $ | ||||||
| Convertible Promissory Note | ||||||||
| Subordinated Promissory Note to CEO | ||||||||
| Convertible Promissory Note to CEO | - | |||||||
| Secured Promissory Note to Coventry Asset Management, LTD. | ||||||||
| Subordinated Promissory Note to Investor | ||||||||
| Total | ||||||||
| Less debt discounts | - | ( | ) | |||||
| Total Notes Payable – Related Parties | $ | $ | ||||||
Senior
Secured Promissory Note – On March 9, 2021, the total principal, interest and accrued fees under the Senior Secured Promissory
Note was contributed to the Company and exchanged into
Convertible
Promissory Note – On March 9, 2021, the convertible promissory note issued in October 2019, together with accrued interest
thereon, was converted into
Subordinated
Promissory Note to CEO – Our CEO made advances to the Company during 2020 under a subordinated promissory note due
Convertible
Promissory Note to CEO – In the third quarter of 2021, our CEO made advances totaling $
Secured
Promissory Note and Warrants to Coventry Asset Management, LTD. – On December 30, 2020, the Company received proceeds
from issuance of a secured promissory note in principal amount of $
The
holder of the secured promissory note received a warrant to purchase
Subordinated
Promissory Note and Warrants to Investor – On December 30, 2020, the Company issued a subordinated promissory note in
principal amount of $
9
The holder of the subordinated
note received a warrant to purchase
6. Other Indebtedness
Other indebtedness consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Mortgage Payable | $ | $ | ||||||
| Paycheck Protection Program Loan | ||||||||
| Total | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Total Other Indebtedness - Long-Term | $ | $ | ||||||
Mortgage Payable and
Operating Lease—
In July 2021, the mortgage payable was amended to a new maturity date of October 15, 2021. The Company made a $100,000 principal payment and paid an extension fee of $6,000 in July 2021 for this amendment. The rate during the extension period was increased to 12% annually and the new monthly payment is $5,279.
In October 2021, the mortgage payable was amended
to a new maturity date of
The Company leases the
Denver warehouse property to a tenant under an operating lease which was renewed with a new tenant and extended to August 1, 2023 for
a monthly rent of $
Paycheck Protection Program Loan – Congress created the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide forgivable loans to eligible small businesses facing economic hardship to retain U.S. employees on their payroll during the Coronavirus Disease 2019 (“COVID-19”) pandemic.
PPP loan recipients may
be eligible to have their loans forgiven if the funds were used for eligible expenses over the eight-week coverage period commencing when
the loan was originally disbursed. The amount of forgiveness may be reduced if the percentage of eligible expenses attributed to nonpayroll
expenses exceeds
On April 29, 2020, we
received disbursement of an approved PPP loan in the amount of $
7. Commitments and Contingencies
Leases – The
Company assumed Halcyon’s lease of office space in Fort Worth, Texas for managerial offices. This lease requires monthly payments
of $
The Company leases its
operating facility in Kentucky from Oz Capital, LLC, a related party, under a lease expiring
10
The right-of-use asset
represent the right to use the underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments
arising from the lease. A right-of-use asset and lease liabilities were recognized at the commencement date based on the present value
of lease payments over the lease term. As the lease does not provide an implicit rate, the Company used its estimated incremental borrowing
rate of
Pending Insurance
Claim – In 2019, drying equipment that Halcyon purchased from a third party was being placed into service when a fire loss subsequently
occurred and destroyed the equipment causing significant business interruption. The cost of this drying equipment totaled $
Litigation – From time to time, we are subject to various litigation and other claims in the normal course of business. Below is a discussion of specific matters. We cannot predict the ultimate outcome of these matters.
JDONE, LLC v. Grand Traverse Holdings, LLC and John Gallegos, Denver District Court Case No. 2019CV33723
JDONE, LLC (“JDONE”)
is a wholly owned subsidiary of the Company and landlord of a commercial warehouse building that was leased to Grand Traverse Holdings,
LLC on December 31, 2018 for a term of
KBSIII Tower at Lake Carolyn, LLC and Prime US-Tower at Lake Carolyn, LLC (collectively – “KBSIII”) vs. Energy Hunter Resources, Inc.
Plaintiff/Counterdefendant
KBSIII was seeking lost rent on office space for periods after EHR vacated office premises located in Las Colinas, Texas. EHR filed a
counter suit alleging specific damages due to uninhabitable premises of the office space due to the intolerable conduct of other tenants
located on the same floor. On December 23, 2020, the trial court entered a summary judgment against EHR for $
8. Equity
Change of Corporate
Domicile – On August 21, 2021, the Company changed its domicile from the State of Colorado to the State of Delaware. The change
of domicile had no effect on the number of outstanding securities of the Company.
Series A Preferred
Stock – On September 8, 2021, holders of the Company’s Series A Preferred Stock elected to convert such
shares into shares of the Company’s common stock. As a result,
Series B Preferred
Stock Units – On December 30, 2020, the Company sold to certain accredited investors, including Gary C. Evans, our Chief Executive
Officer, an aggregate of 135 preferred stock units comprised of (i) one share of Series B Redeemable Convertible Preferred Stock, no par
value, and (ii) one warrant exercisable for
The sale of the preferred
stock units for $
11
Each share of Series
B Preferred Stock is initially convertible into
Beginning the later of
June 30, 2021 or the effectiveness of any registration statement registering the underlying common shares, all or any portion of the Series
B Preferred Stock may be converted, at their holder’s option, into
At any time after the
occurrence of a “Qualifying Event,” the Company, upon 5-day written notice, shall have the right to cause each share of Series
B Preferred Stock (and all accrued in-kind dividends with respect thereto) to be converted into common stock.
The Series B Preferred
Stock may be redeemed by the Company for its stated value, plus accrued and unpaid dividends, at any time.
In May, June and October of 2021, the three holders of the Series B Preferred Stock, including the Company’s chief executive officer, entered into transactions in which they accepted the mandatory redemption payment required pursuant to the Series B Preferred Stock certificate of designation in a number of Series B Units to effectively waive the redemption requirement. All other terms of the Series B Units remain unchanged and the holders’ ownership interest in the Series B Preferred Units remains the same as it was before such transactions.
Common Stock –
| ● | February 2020 Issuance of Common Stock Units – In February 2020, the Company issued 250,000 common units for $100,000. Each unit consisted of one share of common stock and a warrant for purchase of one common share for $0.40 per share. The warrant expires March 1, 2022 and contains certain anti-dilution provisions requiring a downward adjustment to the exercise price of the warrant if dilutive instruments are issued at prices less than the warrant exercise price. Proceeds of this issuance were used for general corporate purposes. |
The common stock issued in the exchange was valued using the trading price of the common stock on February 20, 2020. The warrants were valued at $45,848 using a binomial lattice valuation model using inputs as of the exchange date. Our expected volatility assumption was based on the historical volatility of the Company’s common stock (252%). The expected life assumption was based on the expiration date of the warrant (two years). The risk-free interest rate for the expected term of the warrant was based on the U.S. Treasury yield curve in effect at the time of measurement (1.39%). The warrants are classified within equity in the consolidated balance sheets. Under GAAP, the anti-dilution provisions will be accounted for if and when these provisions are triggered.
12
| ● | Acquisition of Certain Assets of Halcyon – the Company issued 6,250,000 shares of common stock valued at $2.5 million (valued at $0.40 per share; restricted from trading for a period of up to one year) in the acquisition. Refer to Note 3. |
| ● | 2021 First Quarter Issuances of Common Stock Units – In the first quarter of 2021, the Company issued 800,000 common stock units for total proceeds of $400,000. Each common stock unit consists of one share of common stock and a warrant for the purchase of two shares of common stock for $0.50 each. Each warrant is exercisable any time before its expiration on the second anniversary of its issuance. The Company allocated the total proceeds based on the relative fair values of the common stock and warrants. The fair value of the warrants was determined using an options valuation model with key assumptions including a risk-free interest rate of 0.11% and historical volatility of 272%. A total of $263,293 was allocated to the warrants and reported in additional paid-in capital. |
| ● | Warrant Exercises – In the first quarter of 2021, the Company received $2,967,000 for the exercise of 8,428,976 outstanding warrants. |
| ● | Issuances for Exchange or Conversion of Debt – The Company issued a total of 1,618,660 common shares for the exchange or conversion of outstanding debt. Refer to Note 5. |
| ● | Issuance to Vendor for Services – In the third quarter of 2021, the Company issued 125,000 common shares to a vendor for services performed. |
| ● | Issuance for Extension of Secured Note – The Company issued 20,000 common shares as consideration to extend the maturity of a senior note in the third quarter of 2021. Refer to Note 5. |
| ● | Issuance for Conversion of Series A Preferred Stock – As noted above, in the third quarter of 2021, the Company issued 75,947,376 common shares for the conversion of all outstanding shares of its Series A Preferred Stock. |
Common Stock Warrants Outstanding – Following is a summary of warrants outstanding:
| # of Warrants | Exercise Price (each) | Expiration Date | Method of Exercise | |||||||||
Issued upon exchange of EHR Series C Preferred Stock (1) | $ | |||||||||||
| Issued upon exchange of EHR Series C Preferred Stock (1) | $ | |||||||||||
| Issued in February 2020 with common stock units (2) | $ | |||||||||||
| Issued in December 2020 with Series B preferred units (1) | $ | |||||||||||
| Issued in December 2020 with subordinated note to investor (1) | $ | |||||||||||
| Issued in Q1 2021 with common stock units (1) | $ | |||||||||||
| Total warrants outstanding at September 30, 2021 | ||||||||||||
| (1) | May be redeemed for $ |
| (2) | Contains certain anti-dilution provisions requiring a downward adjustment to the exercise price of the warrant if dilutive instruments are issued at prices less than the warrant exercise price. |
Following is a summary of outstanding stock warrants activity for the periods presented:
| Warrants as of January 1, 2020 | ||||
| Issued | ||||
| Warrants as of September 30, 2020 | ||||
| Warrants as of January 1, 2021 | ||||
| Issued | ||||
| Exercised | ( | ) | ||
| Warrants as of September 30, 2021 |
13
9. Stock-Based Compensation
We award restricted stock or stock options as incentive compensation to employees. Generally, these awards include vesting periods of up to three years from the date of grant.
The 2021 Omnibus Incentive
Plan (“2021 Plan”) was adopted by our Board on July 1, 2021. The 2021 Plan provides for the initial reservation of
In the first quarter
of 2021, the Company issued
On April 6, 2021, the Company announced that Chad
Burkhardt has joined the Company as its Vice President and General Counsel, effective April 1, 2021. In addition to his annual salary,
the Company agreed to make a future grant to Mr. Burkhardt of $
10. Income Taxes
Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. An income tax benefit for the three and nine months ended September 30, 2021 or 2020 was not recognized because tax losses incurred were fully offset by a valuation allowance against deferred tax assets. There were no uncertain tax positions as of September 30, 2021.
11. Supplemental Cash Flow Information
| For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | ||||||||
| Noncash investing and financing activities: | ||||||||
| Acquisition of certain assets of Halcyon Thruput, LLC | ||||||||
| - issuance of common shares | ||||||||
| - issuance of subordinated note | ||||||||
| - assumption of Halcyon bank note | ||||||||
| Series B preferred stock dividend payable | ||||||||
| Issuance of common stock units previously subscribed | ||||||||
| Issuances of common shares for exchange or conversion of debt | ||||||||
14
12. Earnings (Loss) per Share
The following is the computation of earnings (loss) per basic and diluted share:
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Amounts attributable to Generation Hemp: | ||||||||||||||||
| Numerator | ||||||||||||||||
| Loss from continuing operations attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: preferred stock dividends | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted average shares used to compute basic EPS | ||||||||||||||||
| Dilutive effect of convertible note | ||||||||||||||||
| Dilutive effect of preferred stock | ||||||||||||||||
| Dilutive effect of common stock warrants | ||||||||||||||||
| Weighted average shares used to compute diluted EPS | ||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||
| Loss from continuing operations | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| (Loss) income from discontinued operations | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The computation of diluted earnings per common share excludes the assumed conversion of the Series B Preferred Stock and outstanding convertible notes and exercise of common stock warrants in periods when we report a loss. The dilutive effect of the assumed exercise of outstanding warrants was calculated using the treasury stock method.
13. Subsequent Events
In October 2021, the Company issued
As disclosed in Note 5 above, (i) we amended the subordinated note to our CEO in the amount of $490,000 to a new maturity date of January 31, 2022, (ii) we amended the secured promissory note to Coventry Asset Management, LTD. to a new maturity date of January 31, 2022 with an earlier maturity date of December 31, 2021 in the event of a new equity capital raise is completed and granted the holder a limited option to convert part of the principal to common stock and (iii) we amended the subordinated promissory note with an investor to a new maturity date of March 31, 2022 with an earlier maturity date of December 31, 2021 in the event of a new equity capital raise is completed.
In October 2021, our CEO made advances totaling
$
As disclosed in Note 6 above, the mortgage payable was amended to a new maturity date of January 15, 2022.
* * * * *
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”), as well as the financial statements and related notes appearing therein and elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Quarterly Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and in our Annual Report under the heading “Item 1A. Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
We are a holding company active within the “hemp” space. We were incorporated on August 21, 2021 in the State of Delaware. The Company was originally incorporated on July 28, 2008 in the State of Colorado. On November 27, 2019, we purchased approximately 94% of the common stock of Energy Hunter Resources, Inc. (“EHR”) in a series of transactions accounted for as a reverse merger (the “Transaction”). Upon closing of the Transaction, we changed our name to Generation Hemp, Inc.
There is limited historical financial information about our Company upon which to base an evaluation of our future performance. We cannot guarantee that we will be successful in the hemp business. We are subject to the risks associated with the regulatory environment in the industry in which we operate. In addition, we are subject to risks inherent in a small company, including limited capital resources, delays and cost overruns due to price and cost increases. There is no assurance that future financing will be available to our Company on acceptable terms. Additional equity financing could result in dilution to existing shareholders.
On January 11, 2021, we completed the acquisition of certain assets of Halcyon Thruput, LLC (“Halcyon”). With this acquisition, we commenced providing post-harvest and midstream services to growers by drying, processing, cleaning and stripping harvested hemp directly from the field and wetbaled at our 48,000 square foot facility located in Hopkinsville, Kentucky. Additionally, the Company offers safe storage services for processed hemp, which enables farmers to maximize strategic market timing. In August 2021, the Company launched its animal bedding consumer goods product line made from the hemp hurd byproduct that is produced from its hemp processing operations.
In 2020, Halcyon had revenues of $3.0 million for the processing of approximately 8.5 million pounds of hemp biomass. With additional contracts executed in 2021, we expect to process at least 10 million pounds during the remainder of 2021 and the first six months of 2022.
We also generate revenue from rental of our “Cannabis Zoned” (Hemp) warehouse property located in Denver, Colorado currently leased to a hemp seed company.
As of September 30, 2021, EHR held an approximate 8% working interest in an oil & gas property located in Cochran County, Texas within the Slaughter-Levelland Field of the San Andres formation in the Northwest Shelf of West Texas. EHR’s oil & gas activities are currently held for sale and are presented in these consolidated financial statements as discontinued operations for each of the periods presented.
Liquidity – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue its strategy and execute its acquisition plans.
In the nine months ended September 30, 2021, the Company used $2.7 million of cash for its operating activities. At September 30, 2021, the Company’s current liabilities, including financing obligations due within one year, totaled $4.7 million as compared with its current assets of $276 thousand. Cash payments under several financing obligations were initially due in September and October of 2021. These were subsequently amended to extend these payments by one to six months.
The Company will continue to pursue additional capital raising opportunities in order to fund future acquisitions and meet its obligations as they become due. In the event financing cannot be obtained, the Company may not be able to satisfy these plans and obligations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
16
Impact of COVID-19 Pandemic on Our Business – Our business, results of operations and financial condition have been adversely affected by the COVID-19 pandemic, beginning in mid-March 2020. The COVID-19 pandemic and measures taken to contain it have subjected our business, results of operations, financial condition, stock price and liquidity to a number of material risks and uncertainties, all of which may continue or may worsen.
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
The net loss for the three months ended September 30, 2021 was $1.4 million as compared with a net loss of $179 thousand for the same period of 2020. We completed the acquisition of Halcyon in January 2021. The first part of each calendar year is typically a slower period for midstream operations within the hemp industry until the annual harvest begins in late-summer. We had $487 thousand of revenue for post-harvest and midstream services in the three months ended September 30, 2021. Cost of revenue was $280 thousand during this same period resulting in a gross margin of 43%. The net loss for the three months ended September 30, 2021 includes $316 thousand for depreciation and amortization as compared with $16 thousand in the 2020 period due to the Halcyon acquisition. General and administrative expenses were higher by approximately $1.0 million because of corporate staffing additions made this year and higher legal and professional fees incurred.
The Company reports its oil & gas activities as discontinued operations. Loss from discontinued operations was $2 thousand for the three months ended September 30, 2021 as compared with a loss of $8 thousand in the 2020 period. Results of operations for the Company’s remaining oil & gas activities have been significantly reduced due to downturns in oil & gas pricing and production and disposals of property interests.
Revenue. Revenue from continuing operations for the third quarter of 2021 totaled $502 thousand as compared with $22 thousand for the same period of 2020. Post-harvest and midstream services commenced regular operations for new and renewed customer contracts executed in the third quarter of 2021. Rental revenue totaled $15 thousand in the 2021 period as compared with $22 thousand in the 2020 period. The lease of the Company’s Denver warehouse was recently extended with a new tenant to August 1, 2023 for $7.5 thousand per month.
Cost of Revenue. Cost of revenue for the third quarter of 2021 was $280 thousand and consisted of direct labor, supplies and overhead for the Company’s post-harvest and midstream services operations. The gross margin on revenue was 43% for the third quarter of 2021.
Merger and Acquisition Costs. We incurred $7 thousand of costs for evaluating acquisition opportunities during the three months ended September 30, 2020. The amount of future expenses of this type that we incur will depend upon our future acquisition activities.
General and Administrative Expense. General and administrative expenses totaled $1.1 million for the three months ended September 30, 2021 as compared with $109 thousand in 2020 period. The increase in general and administrative expense in the 2021 period is principally due to corporate staffing additions made this year and higher legal and professional fees incurred. In the third quarter of 2021, the Company paid $189 thousand for legal fees and $33 thousand of interest in settlement of arbitration with a law firm. General and administrative expense for the third quarter of 2021 also includes $39 thousand of non-cash stock-based compensation expense.
Depreciation and Amortization. Depreciation and amortization expense totaled $316 thousand in the three months ended September 30, 2021 as compared with $16 thousand for the same period of 2020. The increase in the 2021 period is due to completion of the Halcyon acquisition including $201 thousand for amortization of acquired intangible assets. The allocation of the purchase price to the assets acquired in the Halcyon acquisition is preliminary. Final adjustments, including increases and decreases to depreciation and amortization resulting from the allocation of the purchase price to amortizable tangible and intangible assets, may be material.
Other Income/Expense. Total other expense was $156 thousand for the three months ended September 30, 2021 as compared with $67 thousand for the comparable 2020 period. The largest item of total other expense is interest expense which has increased due to having higher levels of indebtedness. Interest expense for the 2021 period includes $34 thousand of amortization of debt discounts and $33 thousand of interest for the arbitration settlement discussed above.
Loss from Discontinued Operations. In the three months ended September 30, 2020, we recognized a loss from discontinued operations of $8 thousand as compared with a loss of $2 thousand in the three months ended September 30, 2021. The major classes of line items constituting the loss on discontinued operations are presented in Item I, “Financial Statements – Note 4 – Discontinued Operations.” Until we fully dispose of our remaining oil & gas property interests, we expect lower future revenues and costs as production activities have declined substantially. We do not anticipate making future investment of growth capital into these properties.
17
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The net loss for the nine months ended September 30, 2021 was $4.4 million as compared with a net loss of $1.2 million for the same period of 2020. The net loss for the nine months ended September 30, 2021 includes $1.0 million for depreciation and amortization as compared with $55 thousand in the 2020 period principally due to the Halcyon acquisition. Our remaining operating expenses were higher by approximately $2.3 million because of the Halcyon acquisition, other corporate staffing additions made this year, the payment of bonus compensation in the first quarter of 2021 and the arbitration settlement discussed above.
The Company reports its oil & gas activities as discontinued operations. Loss from discontinued operations was $11 thousand for the nine months ended September 30, 2021 as compared with a loss of $5 thousand in the 2020 period.
Revenue. Revenue from continuing operations for the first nine months of 2021 includes post-harvest and midstream services revenue of $535 thousand. Post-harvest and midstream services commenced regular operations for new and renewed customer contracts executed in the third quarter of 2021. These revenues are typically limited due during the first half of each year until harvest. Rental revenue was $60 thousand in the 2021 as compared with $68 thousand in the 2020 period. The lease of the Company’s Denver warehouse was recently extended with a new tenant to August 1, 2023 for $7.5 thousand per month.
Cost of Revenue. Cost of revenue for the first nine months of 2021 was $550 thousand and consisted of direct labor, supplies and overhead for the Company’s post-harvest and midstream services operations. We operated with limited staffing until harvest.
Merger and Acquisition Costs. We incurred $16 thousand and $100 thousand of costs for evaluating acquisition opportunities during the nine months ended September 30, 2021 and 2020, respectively. These costs principally related to the Halcyon acquisition. The amount of future expenses of this type that we incur will depend upon our future acquisition activities.
General and Administrative Expense. General and administrative expenses totaled $2.8 million for the nine months ended September 30, 2021 as compared with $884 thousand in 2020 period. The increase in general and administrative expense in the 2021 period is principally due the Halcyon acquisition, other corporate staffing additions made this year and the payment of bonus compensation in the first quarter of 2021. Bonus compensation totaling $600 thousand was paid to our CEO for successful completion of the Halcyon acquisition. In the third quarter of 2021, the Company paid $189 thousand for legal fees and $33 thousand of interest in settlement of the arbitration with Jones & Keller, P.C. General and administrative expense for the 2021 period also includes $120 thousand of non-cash stock-based compensation expense.
Depreciation and Amortization. Depreciation and amortization expense totaled $1.0 million in the nine months ended September 30, 2021 as compared with $55 thousand for the same period of 2020. The increase in the 2021 period is due to completion of the Halcyon acquisition including $693 thousand for amortization of acquired intangible assets. The allocation of the purchase price to the assets acquired in the Halcyon acquisition is preliminary. Final adjustments, including increases and decreases to depreciation and amortization resulting from the allocation of the purchase price to amortizable tangible and intangible assets, may be material.
Other Income/Expense. Total other expense was $615 thousand for the nine months ended September 30, 2021 as compared with $220 thousand for the comparable 2020 period. The largest item of total other expense is interest expense which has increased due to having higher levels of indebtedness. Interest expense for the 2021 period includes $380 thousand of amortization of debt discounts and $33 thousand of interest for the arbitration settlement discussed above.
In the first quarter of 2021, we sold our investment in the common stock we held for total proceeds of $35 thousand. This publicly traded security was marked to market each fiscal quarter until its eventual sale.
We received notice from the SBA that the Company’s PPP Loan principal and interest thereon was fully forgiven on April 20, 2021. As such, we recognized forgiveness income of $25,424 in the second quarter of 2021.
18
Loss from Discontinued Operations. In the nine months ended September 30, 2020, we recognized a loss from discontinued operations of $5 thousand as compared with a loss of $11 thousand in the nine months ended September 30, 2021. The major classes of line items constituting the loss on discontinued operations is presented in Item I, “Financial Statements – Note 4 – Discontinued Operations.” Until we fully dispose of our remaining oil & gas property interests, we expect lower future revenues and costs as production activities have declined substantially. We do not anticipate making future investment of growth capital into these properties.
Liquidity and Capital Resources
Our primary source of cash from continuing operations includes post-harvest and midstream services and rental revenue. Our primary uses of cash include our operating costs, general and administrative expenses and merger and acquisition expenses.
Cash flow information from continuing operations for the first nine months of 2021 was as follows:
| ● | Cash used in operating activities was $2.7 million principally due to the net loss adjusted for non-cash items. |
| ● | Net cash used in investing activities totaled $1.6 million including an expenditure of $1.5 million for the cash portion of the total consideration for the Halcyon acquisition and proceeds from the sale of our investment in common stock of $35 thousand. We made capital expenditures totaling $78 thousand for new processing equipment to expand our business lines to include post-processing of biomass. |
| ● | Net cash from financing activities totaled $1.6 million. This amount included $3.3 million of cash inflows from the issuance of common stock units and proceeds from warrant exercises. We used $2.1 million of cash for repayment of outstanding indebtedness and $154 thousand for payment of scheduled redemptions and dividends on the Series B preferred stock. In the third quarter of 2021, our CEO advanced $620 thousand under a convertible promissory note. |
We had no cash flows from discontinued operations in the first nine months of 2021.
Funding Requirements
We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses may increase substantially as we grow our hemp business.
We expect that we will require additional capital to fund operations, including hiring additional employees, completing acquisitions and funding capital expenditures during the next twelve-month period.
Because of the numerous risks and uncertainties associated with the development and commercialization of our business, we are unable to estimate the amounts of increased capital outlays and operating expenses. Our future capital requirements will depend on many factors, including:
| ● | our success in identifying and making acquisitions of profitable operations; |
| ● | our ability to negotiate operating contracts with growers and others within the hemp industry on favorable terms, if at all; |
| ● | deriving revenue from our assets and operations; and |
| ● | the cost of such operations and costs of being a public company. |
Until such time, if ever, as we can generate substantial revenues, we expect to finance our cash needs through a combination of equity offerings and debt financings. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our growth plans and future commercialization efforts.
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Indebtedness
The Company’s indebtedness at September 30, 2021 is presented in Item I, “Financial Statements – Note 5 – Notes Payable – Related Parties” and in Item I, “Financial Statements—Note 6—Other Indebtedness.”
Off-Balance Sheet Arrangements
As of September 30, 2021, we had no material off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk are included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of our Annual Report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. While the outcome of these proceedings cannot be predicted with certainty, in the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, individually or in the aggregate, will have a material adverse effect on our financial condition, cash flows or results of operations. For a description of our legal proceedings, see Item I, “Financial Statements – Note 7 – Commitments and Contingencies” in the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Annual Report.
Item 4. Mine Safety Disclosures
No response required.
Item 5. Other Information
No response required.
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Item 6. Exhibits
| * | Exhibit filed herewith. |
| ** | Furnished herewith. Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability under Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GENERATION HEMP, INC. | ||
| November 15, 2021 | By: | Gary C. Evans |
| Gary C. Evans | ||
| Chairman and Chief Executive Officer | ||
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