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 June 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.
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 and obtain new contracts with both new and existing Halcyon
customers for the 2021 harvest. In July 2021, two toll processing agreements with Halcyon’s customers were awarded (see Note 13).
Under terms of these agreements, the Company will dry, strip, process and store approximately ten million pounds of hemp biomass assets.
Process operations from these contracts are expected to commence in July 2021. Expansion of our business lines is also expected to result
in additional revenues.
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.
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 June 30, 2021 or December 31, 2020.
During the three and six months ended June 30,
2021, one customer accounted for approximately 93% and 90% of our post-harvest and midstream services revenue, respectively. No amounts
were outstanding from this customer at June 30, 2021.
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 June 30, 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.
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 for 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 balance 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
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue, continuing operations
|
|
$
|
25,855
|
|
|
$
|
102,080
|
|
|
$
|
94,203
|
|
|
$
|
132,006
|
|
Loss from continuing operations
|
|
|
(1,149,124
|
)
|
|
|
(425,651
|
)
|
|
|
(3,047,721
|
)
|
|
|
(1,588,419
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.09
|
)
|
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:
|
|
June 30,
|
|
|
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
|
|
$
|
33,804
|
|
|
$
|
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
|
|
|
138,289
|
|
|
|
140,068
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations -
|
|
|
|
|
|
|
|
|
Long-term liabilities of discontinued operations held for sale
|
|
|
155,647
|
|
|
|
144,149
|
|
Total liabilities of discontinued operations held for sale
|
|
$
|
293,936
|
|
|
$
|
284,217
|
|
The following is a summary of the major classes
of line items constituting (loss) income on discontinued operations shown in the consolidated statements of operations:
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenue -
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
$
|
16,119
|
|
|
$
|
9,217
|
|
|
$
|
38,108
|
|
|
$
|
80,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense
|
|
|
18,067
|
|
|
|
22,033
|
|
|
|
40,795
|
|
|
|
60,337
|
|
Depreciation, depletion & amortization
|
|
|
-
|
|
|
|
1,928
|
|
|
|
-
|
|
|
|
9,942
|
|
Accretion
|
|
|
4,257
|
|
|
|
4,309
|
|
|
|
7,032
|
|
|
|
8,605
|
|
Gain on disposal of oil & gas property interests
|
|
|
-
|
|
|
|
(24,008
|
)
|
|
|
|
|
|
|
(24,008
|
)
|
Total costs and expenses
|
|
|
22,324
|
|
|
|
4,262
|
|
|
|
47,827
|
|
|
|
54,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
9,167
|
|
|
|
-
|
|
|
|
22,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
(6,205
|
)
|
|
$
|
(4,212
|
)
|
|
$
|
(9,719
|
)
|
|
$
|
2,532
|
|
5. Notes Payable – Related Parties
Notes payable – related parties consisted
of the following:
|
|
June 30,
|
|
|
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
|
|
|
250,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,740,000
|
|
|
|
3,698,874
|
|
Less debt discounts
|
|
|
(33,962
|
)
|
|
|
(362,282
|
)
|
|
|
|
|
|
|
|
|
|
Total Notes Payable – Related Parties
|
|
$
|
1,706,038
|
|
|
$
|
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 $15,986 at June 30, 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 and initially matured on June 30, 2021. Effective June 30, 2021, the promissory note was
extended to a new maturity date of December 31, 2021. The Company agreed to issue 20,000 restricted common shares as an extension fee
and made payment of $50,000 of accrued interest in July 2021. A principal payment of $250,000 is due on October 1, 2021. The remaining
principal and interest is due upon maturity. The promissory note is secured by the property acquired in the acquisition of certain assets
of Halcyon.
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 upon
origination of the promissory note in 2020. 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 $12,483 at June 30, 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.
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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Mortgage Payable
|
|
$
|
617,523
|
|
|
$
|
619,461
|
|
Paycheck Protection Program Loan
|
|
|
-
|
|
|
|
25,200
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
617,523
|
|
|
|
644,661
|
|
Less current portion
|
|
|
(617,523
|
)
|
|
|
(619,461
|
)
|
Total Other Indebtedness - Long-Term
|
|
$
|
-
|
|
|
$
|
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 provided 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 this extension period is
11% annually and the monthly payment is $6,067. The mortgage payable was subsequently extended to October 15, 2021 (see Note 13).
The Company leases the
Denver warehouse property to a tenant under an operating lease which was recently renewed with a new tenant and extended to August 1,
2023 for a monthly rent of $7,500. The lease requires a true-up with the tenant for property taxes and and insurance paid by the Company
and requires the tenant to maintain the interior and exterior of the warehouse (except for the roof). The lease provides for a rent abatement
in the first and last month of the contracted extension. Minimum future rents for the remainder of 2021 are $37,500, for 2022 are $90,000
and for 2023 are $52,500.
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, we received disbursement of an approved PPP loan in the amount of $25,200. The Company received notice from the SBA
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 $6,000 and $10,000 in the three and six months ended June 30,
2021, respectively.
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
$30,747 and $57,857 in the three and six months ended June 30, 2021, respectively. 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. The Company made a formal claim
against the 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 is in the process of formulating legal action against the insurance carrier. 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 January 2022. We believe that Grand Traverse Holdings, LLC and John Gallegos are jointly liable for the asserted
damages which approximate $1 million 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 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 June 30, 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 of approximately $150,000 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 from two attorneys employed by Jones & Keller, P.C. who previously worked
the case. A one-day arbitration hearing concerning this matter was held in late-July 2021 where both parties presented their case. A final
ruling is anticipated within the third quarter 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 until December 30, 2022
at an exercise price of $0.352 per share.
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 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 payments were made in April 2021.
In May and June of 2021, the three holders of the Company’s Series
B Preferred Stock and associated warrants (the “Series B Preferred Units”), 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 –
At June 30, 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 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.
|
●
|
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 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 June 30, 2021
|
|
|
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 June 30, 2020
|
|
|
14,738,632
|
|
|
|
|
|
|
Warrants as of January 1, 2021
|
|
|
22,988,632
|
|
Issued
|
|
|
1,600,000
|
|
Exercised
|
|
|
(8,428,976
|
)
|
Warrants as of June 30, 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 $38,750 and $81,000 for the three and six months ended June 30, 2021, respectively.
As of June 30, 2021, there was $77,500 of total unrecognized compensation cost related to unvested awards to be recognized over a weighted-average
period of six months.
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.
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 six months ended June 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 June 30, 2021.
11. Supplemental Cash Flow Information
|
|
For the six months ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
45,342
|
|
|
$
|
-
|
|
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
|
|
|
24,000
|
|
|
|
-
|
|
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
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Amounts attributable to Generation Hemp:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to common stockholders
|
|
$
|
(1,146,697
|
)
|
|
$
|
(256,337
|
)
|
|
$
|
(2,980,285
|
)
|
|
$
|
(975,224
|
)
|
(Loss) income from discontinued operations
|
|
|
(5,817
|
)
|
|
|
(3,948
|
)
|
|
|
(9,111
|
)
|
|
|
2,373
|
|
Less: preferred stock dividends
|
|
|
(20,250
|
)
|
|
|
-
|
|
|
|
(40,500
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,172,764
|
)
|
|
$
|
(260,285
|
)
|
|
$
|
(3,029,896
|
)
|
|
$
|
(972,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
34,977,953
|
|
|
|
17,380,317
|
|
|
|
26,691,992
|
|
|
|
17,311,636
|
|
Dilutive effect of preferred stock
|
|
|
79,322,376
|
|
|
|
75,947,376
|
|
|
|
79,322,376
|
|
|
|
75,947,376
|
|
Dilutive effect of common stock warrants
|
|
|
11,654,942
|
|
|
|
-
|
|
|
|
11,787,111
|
|
|
|
743,784
|
|
Weighted average shares used to compute diluted EPS
|
|
|
125,955,271
|
|
|
|
93,327,693
|
|
|
|
117,801,479
|
|
|
|
94,002,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
(Loss) income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
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
In July 2021, the Company executed two new Toll
Processing Agreements with a leading hemp processor and CBD product manufacturer and a large farmer. Under terms of these
agreements, the Company will dry, strip, process and store approximately ten million pounds of hemp biomass assets. Process operations
from this contract are expected to commence in July 2021.
In July 2021, the Company filed a Preliminary
Information Statement on Schedule 14C with the SEC for the appointment of three directors to the Company’s Board of Directors and
to implement other governance matters. The directors will assume their roles following the effective date of the information statement.
In July 2021, the mortgage payable secured by
the Company’s Denver warehouse 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 July and August 2021, our CEO made advances
totaling $200,000 to the Company under a promissory note. Proceeds were used in part to make the additional principal payment required
under the mortgage payable extension agreement and for other general corporate purposes. The note matures on January 1, 2022 and bears interest
at 10%.
In August 2021, the Company entered into an agreement with a third-party
to provide biomass processing and other services for approximately one to two million pounds of hemp biomass. The Company will obtain
ownership rights to such biomass upon pick up at the customer’s facilities and will be compensated in-kind of the processed product
with the customer receiving an earn-out payment, following allocated fees and all costs and expenses incurred by the Company, equal to
40% of the net profit the Company receives from the processed product.
* * * * *