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 July 28,
2008 in the State of Colorado. On November 27, 2019, HTF 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, HTF changed its name to Generation Hemp, Inc.
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 leased facility located in Hopkinsville, Kentucky. Additionally, the
Company offers safe storage services for processed hemp, which enables farmers to maximize strategic market timing. The Company
plans to significantly expand its business lines to include post-processing of biomass for use in a number of new products. This
expansion requires certain new equipment to be procured.
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 March 31,
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.
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 new strategy and execute
its acquisition plans.
We are focused
on executing our operating strategy now that the Halcyon acquisition has been completed. Management expects to renew contracts
with new and existing Halcyon customers for the 2021 harvest. Expansion of our business lines is also expected to result in significant
growth in revenues.
The Company will
continue to pursue additional funding 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.
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 qualities 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 March 31, 2021 or December 31, 2020.
During the three months ended March 31,
2021, one customer accounted for approximately 96% of our post-harvest and midstream services revenue. The total balance due from
this customer at March 31, 2021 was approximately 41% of total accounts receivable.
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 March 31, 2021 or December
31, 2020.
Recent Accounting Pronouncements –
No new accounting pronouncements had or are expected to have a material impact on the consolidated financial statements.
Reclassifications – Financial
statements presented for prior periods include reclassifications that were made to conform to the current-year presentation.
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 $6.1 million consisting of 6,250,000 shares
of Company common stock valued at $2.5 million (valued at $0.40 per share; restricted from trading for a period of up to one year),
$1.75 million in cash, a promissory note for $850,000 issued by the Company’s subsidiary, GenH Halcyon Acquisition, LLC,
and guaranteed by Gary C. Evans, CEO of the Company, and assumption of approximately $1.0 million of new indebtedness of Halcyon.
The Company was granted an option to purchase the real estate occupied by Halcyon for $993,000. This option is exercisable at any
time before its expiration on January 11, 2022.
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 to the assets acquired. This allocation is preliminary. 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
|
|
$
|
75,470
|
|
Inventories
|
|
|
700,000
|
|
Other working capital
|
|
|
224,530
|
|
Property and equipment, other
|
|
|
1,712,170
|
|
Intangibles - customer contracts and lists
|
|
|
3,333,794
|
|
Other assets - Purchase option on real estate
|
|
|
49,650
|
|
Assets acquired
|
|
$
|
6,095,614
|
|
Intangible assets
consist of customer contracts and lists and have 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 250,000
shares of restricted common stock of the Company as a signing bonus. Such shares are subject to restrictions on the trading or
transfer of such common stock.
Further, the term
employment agreements each provide for the payment by the executives of liquidated damages if the employee terminates his employment
without good reason during the initial term, other than due to the employee’s death or disability. Such liquidated damages
total $600,000 if such termination occurs on or prior to January 11, 2022 or $375,000 if such termination occurs after January
11, 2022 and prior to January 11, 2023.
On March 3, 2021,
the Company repaid the outstanding principal and interest on the $850,000 promissory note issued in connection with the acquisition.
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.
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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue, continuing operations
|
|
$
|
68,348
|
|
|
$
|
29,926
|
|
Loss from continuing operations
|
|
|
(1,898,597
|
)
|
|
|
(1,162,768
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Assets -
|
|
|
|
|
|
|
|
|
Oil and Natural Gas Properties held for sale, at cost, using the successful efforts method
|
|
$
|
1,874,849
|
|
|
$
|
1,874,849
|
|
Accumulated DD&A
|
|
|
(1,874,849
|
)
|
|
|
(1,874,849
|
)
|
Total assets of discontinued operations held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
31,856
|
|
|
$
|
31,117
|
|
Asset retirement obligations
|
|
|
52,368
|
|
|
|
56,834
|
|
Revenue payable
|
|
|
52,117
|
|
|
|
52,117
|
|
Note payable
|
|
|
-
|
|
|
|
-
|
|
Current liabilities of discontinued operations held for sale
|
|
|
136,341
|
|
|
|
140,068
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations -
|
|
|
|
|
|
|
|
|
Long-term liabilities of discontinued operations held for sale
|
|
|
151,390
|
|
|
|
144,149
|
|
Total liabilities of discontinued operations held for sale
|
|
$
|
287,731
|
|
|
$
|
284,217
|
|
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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Revenue -
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
21,989
|
|
|
$
|
71,108
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Lease operating
expense
|
|
|
22,728
|
|
|
|
38,304
|
|
Depreciation,
depletion & amortization
|
|
|
-
|
|
|
|
8,014
|
|
Accretion
|
|
|
2,775
|
|
|
|
4,296
|
|
Total costs
and expenses
|
|
|
25,503
|
|
|
|
50,614
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
-
|
|
|
|
13,750
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
$
|
(3,514
|
)
|
|
$
|
6,744
|
|
5. Notes Payable – Related Parties
Notes payable – related parties consisted
of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Promissory Note
|
|
$
|
-
|
|
|
$
|
1,500,000
|
|
Convertible Promissory Note
|
|
|
-
|
|
|
|
208,874
|
|
Subordinated Promissory Note to CEO
|
|
|
490,000
|
|
|
|
490,000
|
|
Secured Promissory Note to Coventry Asset Management, LTD.
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Subordinated Promissory Note to Investor
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,990,000
|
|
|
|
3,698,874
|
|
Less debt discounts
|
|
|
(199,060
|
)
|
|
|
(362,282
|
)
|
|
|
|
|
|
|
|
|
|
Total Notes Payable – Related Parties
|
|
$
|
1,790,940
|
|
|
$
|
3,336,592
|
|
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 1,000,000 common shares.
Convertible Promissory Note –
On March 9, 2021, the convertible promissory note issued in October 2019, together with accrued interest thereon, was converted
into 618,660 common shares under the terms of the note.
Subordinated Promissory Note to CEO
– Our CEO made advances to the Company during 2020 under a subordinated promissory note due September 30, 2021. The note
bears interest at 10% per annum. Accrued interest on this subordinated promissory note totaled $3,735 at March 31, 2021 and $22,393
at December 31, 2020.
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 $1,000,000 to Coventry Asset Management, LTD. The unpaid balance of
the secured promissory note bears interest at a rate of 10% per annum. The secured promissory note and accrued interest are due
June 30, 2021. The promissory note is secured by the real property acquired in the acquisition of certain assets of Halcyon.
In addition, the
holder of the secured promissory note received a warrant to purchase 1,000,000 shares of common stock exercisable at an exercise
price of $0.352 per share. This warrant was subsequently exercised in the first quarter of 2021.
Subordinated Promissory Note and Warrants
to Investor – On December 30, 2020, the Company issued a subordinated promissory note in principal amount of $500,000
to an accredited investor. The unpaid balance of the Subordinated Note bears interest at a rate of 10% per annum. The subordinated
note and accrued and unpaid interest are due September 30, 2021. The Company made a principal payment of $250,000 in April 2021.
Accrued interest on this subordinated promissory note totaled $12,466 at March 31, 2021.
If at any time
prior to September 30, 2021, the Company raises new equity capital in the amount of $5,000,000 or more, then within five business
days of closing, repayment of all outstanding principal and interest on the Subordinated Note will be due.
In addition, the
holder of the subordinated note received a warrant to purchase 500,000 shares of common stock exercisable until December 30, 2022
at an exercise price of $0.352 per share.
6. Other Indebtedness
Other indebtedness consisted
of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
Mortgage Payable
|
|
$
|
618,721
|
|
|
$
|
619,461
|
|
Paycheck Protection Program Loan
|
|
|
25,200
|
|
|
|
25,200
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
643,921
|
|
|
|
644,661
|
|
Less current portion
|
|
|
(618,721
|
)
|
|
|
(619,461
|
)
|
Total Other Indebtedness - Long-Term
|
|
$
|
25,200
|
|
|
$
|
25,200
|
|
Mortgage Payable
and Operating Lease—The Company is obligated under a mortgage payable, dated September 15, 2014 and as amended
October 1, 2019, secured by its warehouse property located in Denver, Colorado. The note provides for a 25-year amortization period
and an initial interest rate of 9% annually. As amended, the note matured on January 15, 2021 but was extended under terms of the
amendment to July 15, 2021 after payment by the Company of an extension fee of 1% of the then outstanding principal. The rate during
the extension period is 11% annually and the monthly payment is $6,067.
The Company leases
the Denver warehouse property to a tenant under an operating lease expiring June 30, 2021 for a monthly rent of $7,500. The lease
requires the tenant reimburse us for property taxes and insurance and to maintain the interior and exterior of the warehouse (except
for the roof). Minimum future rents for 2021 are $22,500.
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 25% of the loan, if employee headcount decreases, or compensation decreases by more than 25% for
each employee making less than $100,000 per year, unless the reduced headcount or compensation levels are restored.
On April 29, 2020,
Generation Hemp, Inc. received disbursement of an approved PPP loan in the amount of $25,200. The Company received notice that
the PPP Loan principal and interest thereon was fully forgiven on April 20, 2021.
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 $2,000 and is month-to-month. Lease expense for this facility totaled $4,000 in the three months ended March
31, 2021.
The Company leases
its operating facility in Kentucky from Oz Capital, LLC, a related party, under a lease expiring May 31, 2024. The lease provides
for monthly payments of $10,249. Oz Capital, LLC is responsible for all taxes and maintenance under the lease. Lease expense for
this facility totaled $27,110 in the three months ended March 31, 2021. A right-of-use asset and lease liability is recorded for
this lease.
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 10% in determining the present value of the lease payments.
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 $1.1 million. In 2020, Halcyon received, as partial payment, insurance proceeds of $595,000 from its insurance carrier.
In the acquisition
of Halcyon, the Company assumed Halcyon’s rights to any future recoveries related to the fire loss. The Company has filed
for additional claims of in excess of $1.0 million against Halcyon’s insurance carrier including violation of Prompt Payment
of Claims Act and Texas Insurance Code violations. The Company may also pursue additional recovery of its losses against the third-party
general contractor and its insurers. No amounts have been recognized for the possible recovery of these losses.
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 61 months, with a personal guaranty from Defendant John Gallegos. On April 12, 2019, Grand
Traverse presented JDONE with an alleged forged, signed copy of the draft early termination amendment that JDONE had previously
rejected. JDONE has suffered damages due to Defendant’s alleged misconduct of approximately $823,504 plus interest and attorney’s
fees. A court ordered mediation was held in May 2020 without success. All material defendant motions have been denied by the court.
The case is set for jury trial in June 2021. We believe that Grand Traverse Holdings, LLC and John Gallegos are jointly liable
for the asserted damages and continue to vigorously pursue our claims.
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 has
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 $230,712.
The judgment provides for post-judgment interest at a rate of 5% per annum until paid and further provides for additional amounts
owed should EHR pursue unsuccessful appeals to higher courts. At March 31, 2021, the Company had accrued $252,583 for this judgment.
Arbitration
– Jones & Keller, P.C.
In February 2021,
Jones & Keller, P.C., a Denver law firm that previously represented the Company, filed an arbitration demand against the
Company and JDONE for the payment of alleged legal fees owing regarding our lawsuit against Grand Traverse Holdings, LLC and John
Gallegos discussed above. We subsequently engaged new legal counsel and filed a counterclaim for charging inappropriate and unreasonable
legal fees and for unreasonable, unnecessary and duplicative work. An arbitration hearing is anticipated during the summer of 2021.
8. Equity
Series A Preferred
Stock – The Company has 6,328,948 shares of Series A Preferred outstanding. Each share of the Series
A Preferred; (a) converts into 12 shares of common stock of the Company, (b) possesses full voting rights, on an as-converted basis,
with the common stock of the Company, and (c) has no dividend rate.
December 2020
Issuance of 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 50,000 shares of common stock of the
Company.
The sale of the
preferred stock units for $10,000 each resulted in aggregate gross proceeds of approximately $1.35 million, before deducting estimated
offering expenses payable by the Company. Substantially all of the proceeds raised in the offering were used to fund the acquisition
of assets of Halcyon, expenses related thereto and for general corporate purposes.
Each share of
Series B Preferred Stock is initially convertible into 25,000 shares of common stock, subject to adjustment. Holders of Series
B Preferred Stock are entitled to receive dividends of 6.00% per annum based on the stated value equal to $10,000 per share. Except
as otherwise required by law, the Series B Preferred Stock does not have voting rights. However, as long as any shares of Series
B Preferred Stock are outstanding, the Company will not, without the affirmative vote of the holders of a majority of the then
outstanding shares of the Series B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the
Series B Preferred Stock, (b) alter or amend the related certificate of designation, (c) amend its certificate of incorporation
or other charter documents in any manner that adversely affects any rights of the holders of Series B Preferred Stock, (d) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its common stock, (e)
enter into any agreement with respect to any of the foregoing, or (f) pay cash dividends or distributions on any equity securities
of the Company other than pursuant to the terms of the outstanding Series B Preferred Stock. The Series B Preferred Stock does
not have a preference upon any liquidation, dissolution or winding-up of the Company.
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 25,000 shares of common stock, as
adjusted for any stock dividends, splits, combinations or similar events.
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. For
purposes of this automatic conversion of the Series B Preferred Stock, a “Qualifying Event” shall have occurred if
(A) (1) the rolling five-trading day volume-weighted average trading price of shares of the common stock exceeds $1.00, and (2)
there shall be an effective registration statement under the Securities Act of 1933, as amended covering all of the shares of common
stock which would be issuable upon conversion of all of the outstanding shares of Series B Preferred Stock or (B) the Company closes
a firm commitment underwriting of the common stock on a Form S-1 Registration Statement with aggregate gross proceeds of at least
$5,000,000 at a price per share equal to or greater than $1.00. In each instance, a conversion may not be made unless the Company
has filed an amendment to its Articles of Incorporation effecting an increase in its authorized common stock so that the Company
has a sufficient number of authorized and unissued shares of common stock so as to permit the conversion of all outstanding shares.
The Series B Preferred
Stock may be redeemed by the Company for its stated value, plus accrued and unpaid dividends, at any time. On June 30, 2021, September
30, 2021 and December 31, 2021, redemption payments of 12.5% each of the total amount of Series B Preferred Stock then outstanding
plus accrued dividends will be due from the Company to each Holder of Series B Preferred Stock. The first required redemption payment
was made in April 2021.
Each warrant is
exercisable until December 30, 2022 at an exercise price of $0.352 per share.
Common Stock
– At March 31, 2021, the Company had 34,977,953 common shares outstanding. Following is a discussion of common stock
issuances during the periods presented:
|
●
|
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 contain 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.
|
●
|
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.
|
|
●
|
Warrant Exercises – In the first quarter of 2021, the Company
received $2,967,000 million 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.
|
|
●
|
Stock-based Compensation – The Company issued 500,000 restricted
common shares as incentive compensation to two executives who joined the Company in the first quarter of 2021.
|
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)
|
|
|
1,065,340
|
|
|
$
|
0.352
|
|
|
November 27, 2021
|
|
|
Cash
|
|
Issued upon exchange of EHR Series C Preferred Stock (1)
|
|
|
7,244,316
|
|
|
$
|
0.352
|
|
|
November 27, 2021
|
|
|
Cashless
|
|
Issued in February 2020 with common stock units (2)
|
|
|
250,000
|
|
|
$
|
0.400
|
|
|
March 1, 2022
|
|
|
Cash
|
|
Issued in December 2020 with Series B preferred units (1)
|
|
|
5,500,000
|
|
|
$
|
0.352
|
|
|
December 30, 2022
|
|
|
Cash
|
|
Issued in December 2020 with subordinated note to investor (1)
|
|
|
500,000
|
|
|
$
|
0.352
|
|
|
December 30, 2022
|
|
|
Cash
|
|
Issued in Q1 2021 with common stock units (1)
|
|
|
1,600,000
|
|
|
$
|
0.500
|
|
|
Jan-Feb, 2023
|
|
|
Cash
|
|
Total warrants outstanding at December
31, 2020
|
|
|
16,159,656
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
May be redeemed for $0.0001 per warrant at the Company’s option with 30 days advanced notice should the weighted average market price of common stock exceed $1.00 for any five out of seven consecutive trading days with a minimum average daily trading volume for such seven-day period of at least 25,000 shares of common stock.
|
|
(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
|
|
|
14,488,632
|
|
Issued
|
|
|
250,000
|
|
Warrants as of March 31, 2020
|
|
|
14,738,632
|
|
|
|
|
|
|
Warrants as of January 1, 2021
|
|
|
22,988,632
|
|
Issued
|
|
|
1,600,000
|
|
Exercised
|
|
|
(8,428,976
|
)
|
Warrants as of March 31, 2021
|
|
|
16,159,656
|
|
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.
In the first quarter
of 2021, the Company issued 500,000 restricted shares valued at $158,500 as incentive compensation to two executives who joined the
Company. Compensation expense related to these awards totaled $42,250 for the three months ended March 31, 2021. As of March 31,
2021, there was $116,250 of total unrecognized compensation cost related to unvested awards to be recognized over a weighted-average
period of nine months.
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 months ended March 31,
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 March 31, 2021.
11. Supplemental Cash Flow Information
|
|
For the three months
ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
31,446
|
|
|
$
|
-
|
|
Cash paid for taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition of certain assets of Halcyon Thruput, LLC
|
|
|
|
|
|
|
|
|
- issuance of common shares
|
|
|
2,500,000
|
|
|
|
-
|
|
- issuance of subordinated note
|
|
|
850,000
|
|
|
|
-
|
|
- assumption of Halcyon bank note
|
|
|
995,614
|
|
|
|
-
|
|
Series B preferred stock dividend payable
|
|
|
20,250
|
|
|
|
-
|
|
Issuance of common stock units previously subscribed
|
|
|
50,000
|
|
|
|
-
|
|
Issuances of common shares for exchange or conversion of debt
|
|
|
2,160,269
|
|
|
|
-
|
|
12. Earnings (Loss) per Share
The following is the computation of earnings
(loss) per basic and diluted share:
|
|
For the three months
ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Amounts attributable to Generation Hemp:
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
Loss from continuing operations attributable to common stockholders
|
|
$
|
(1,833,588
|
)
|
|
$
|
(718,888
|
)
|
(Loss) income from discontinued operations
|
|
|
(3,294
|
)
|
|
|
6,322
|
|
Less: preferred stock dividends
|
|
|
(20,250
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,857,132
|
)
|
|
$
|
(712,566
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
26,691,992
|
|
|
|
17,242,955
|
|
Dilutive effect of preferred stock
|
|
|
79,322,376
|
|
|
|
75,947,376
|
|
Dilutive effect of common stock warrants
|
|
|
9,881,349
|
|
|
|
3,325,039
|
|
Weighted average shares used to compute diluted EPS
|
|
|
115,895,717
|
|
|
|
96,515,370
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
The computation of diluted earnings per common
share excludes the assumed conversion of the Series A and Series B Preferred Stock 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
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 $750,000 worth of options for the purchase of our common
stock at an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Such options
will vest annually in equal installments over a three year period from his date of hire.
On April 20, 2021,
the Company’s PPP Loan in the amount of $25,200 was forgiven.
* * * * *