Notes to Unaudited Condensed Consolidated Financial Statements
1. Business
Generation Hemp, Inc.
(the “Company”) was incorporated on August 21, 2021 in the State of Delaware. The Company was originally incorporated as
Home Treasure Finders, Inc. (“HTF”) 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.
Upon closing, 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. In August 2021, the Company launched its small animal
bedding consumer goods product line (“Rowdy Rooster”) made from the hemp hurd byproduct that is produced from its hemp processing
operations.
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 March 31, 2022,
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 and
Going Concern – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue
its strategy and execute its acquisition plans.
In the three months
ended March 31, 2022, the Company used $505 thousand of cash for its operating activities. At March 31, 2022, the Company’s current
liabilities, including financing obligations due within one year, totaled $5.3 million as compared with its current assets of $251 thousand.
The Company will
continue to pursue additional capital raising opportunities in order to fund future acquisitions and meet its obligations as they become
due. We may not be successful in obtaining additional financing needed. 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 were adversely affected by the COVID-19
pandemic in 2020. The COVID-19 pandemic and measures taken to contain it 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, 2021.
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.
Fair Value Measurement – Our financial
assets and liabilities consist of cash, accounts receivable, accounts payable and indebtedness. The fair values of these instruments approximate
their carrying amounts at each reporting date.
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, 2022 or December 31, 2021.
During the three months ended March 31, 2022,
one customer accounted for all of our post-harvest and midstream services revenue. No amounts were outstanding from this customer at March
31, 2022.
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, 2022 or December 31, 2021.
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.
3. Acquisition
On January 11, 2021,
the Company completed the acquisition of certain assets of Halcyon. 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 operating facility in Kentucky it leases from Oz Capital, LLC for $993,000. The expiration date of this option was extended from January
11, 2022 to June 30, 2022 in a correcting amendment to this purchase option. The amended agreement required the Company to pay all past
due obligations related to the facility, including rent, totaling approximately $46,000. This payment was made in April 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:
Accounts receivable | |
$ | 75,470 | |
Other working capital | |
| 224,530 | |
Property and equipment, other | |
| 1,912,900 | |
Intangibles: | |
| | |
Non-competition agreements | |
| 63,176 | |
Customer relationships | |
| 2,612,650 | |
Other assets - Purchase option on real estate | |
| 407,000 | |
Goodwill | |
| 799,888 | |
Assets acquired | |
$ | 6,095,614 | |
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 weighted-average useful life assigned to the intangible assets was three years.
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.
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.
4. Property and Equipment
Property and equipment consisted of the following:
| |
Useful | | |
March 31, | | |
December 31, | |
| |
Life (yrs) | | |
2022 | | |
2021 | |
| |
| | |
| | |
| |
Land | |
| | |
$ | 96,000 | | |
$ | 96,000 | |
Warehouse | |
30 | | |
| 916,500 | | |
| 916,500 | |
Leasehold Improvements | |
3 | | |
| 473,601 | | |
| 473,601 | |
Machinery and equipment | |
5-7 | | |
| 1,506,447 | | |
| 1,506,447 | |
Vehicles | |
4 | | |
| 149,440 | | |
| 149,440 | |
Computer equipment and software | |
3 | | |
| 46,825 | | |
| 46,825 | |
Office furniture and equipment | |
3-5 | | |
| 17,294 | | |
| 17,294 | |
| |
| | |
| | | |
| | |
Subtotal | |
| | |
| 3,206,107 | | |
| 3,206,107 | |
Less accumulated depreciation and amortization | |
| | |
| (699,566 | ) | |
| (625,445 | ) |
| |
| | |
| | | |
| | |
Total property and equipment, net | |
| | |
$ | 2,506,541 | | |
$ | 2,580,662 | |
5. Intangible and Other Assets
The following table summarizes information related to definite-lived
intangible assets:
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
Gross Carrying
Amount | | |
Accumulated
Amortization | | |
Net | | |
Gross Carrying
Amount | | |
Accumulated
Amortization | | |
Net | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Customer relationships | |
$ | 2,612,649 | | |
$ | (938,222 | ) | |
$ | 1,674,427 | | |
$ | 2,612,649 | | |
$ | (796,858 | ) | |
$ | 1,815,791 | |
Non-competition agreements | |
| 63,176 | | |
| (26,323 | ) | |
| 36,853 | | |
| 63,176 | | |
| (21,059 | ) | |
| 42,117 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 2,675,825 | | |
$ | (964,545 | ) | |
$ | 1,711,280 | | |
$ | 2,675,825 | | |
$ | (817,917 | ) | |
$ | 1,857,908 | |
Other assets included $407,000 at March 31, 2022 and December 31,
2021 for the Company’s option to purchase the 48,000 square foot facility located in Hopkinsville, Kentucky presently leased from
Halcyon. Under this option agreement, the Company may purchase the facility on or before June 30, 2022 for a purchase price of $993,000.
6. Notes Payable – Related Parties
Notes payable – related parties consisted
of the following:
| |
March 31,
| | |
December 31,
| |
| |
2022 | | |
2021 | |
| |
| | |
| |
Subordinated Promissory Note to CEO | |
$ | 523,551 | | |
$ | 523,551 | |
Convertible Promissory Note to CEO | |
| 457,069 | | |
| 410,000 | |
Secured Promissory Note to Coventry Asset Management, LTD. | |
| 1,000,000 | | |
| 1,000,000 | |
Subordinated Promissory Note to Investor | |
| 250,000 | | |
| 250,000 | |
Promissory Note to Investment Hunter, LLC | |
| 440,500 | | |
| - | |
| |
| | | |
| | |
| |
| | | |
| | |
Total notes payable – related parties | |
$ | 2,671,120 | | |
$ | 2,183,551 | |
Subordinated Promissory Note to CEO –
Our CEO made advances to the Company during 2020 under a subordinated promissory note initially due September 30, 2021. This note
was amended to a new maturity date of June 30, 2022. If the Company raises new equity capital of $3 million or more, then the full amount
outstanding under the note is due within five days. The note bears interest at 10% per annum. Accrued interest on this subordinated promissory
note totaled $20,512 at March 31, 2022.
Convertible Promissory Note to CEO –
In 2021, our CEO made advances totaling $410,000 to the Company under a convertible promissory note. Additional advances made in 2022
totaled $47,069. The convertible note matured on January 1, 2022 but was subsequently amended to extend the maturity date to June 30,
2022. If the Company raises new equity capital of $3 million or more, then the full amount outstanding under the note is due within five
days. The note bears interest at 10%. The principal and interest due on the convertible note may be converted, at the option of the holder,
into restricted shares of the Company’s common stock at a conversion price equal to $0.50 per share. Accrued interest on this convertible
promissory note totaled $29,256 at March 31, 2022.
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, a Company stockholder. The promissory note
is secured by the property acquired in the acquisition of certain assets of Halcyon. The unpaid balance of the secured promissory note
bears interest at a rate of 10% per annum and initially matured on June 30, 2021. The promissory note has been extended four times each
including the issuance of 20,000 restricted common shares as extension fees. The maturity date of the promissory note is July 31, 2022,
as amended. If before July 31, 2022, the Company raises new equity capital of $5 million or more, then the full amount outstanding under
the promissory note is due within five days. Additionally, the holder of the promissory note was given an option exercisable until June
16, 2022 to convert $250,000 of the outstanding principal balance into shares of the Company’s common stock at an exercise price
of $0.60 per share. Accrued interest on this secured note totaled $124,932 at March 31, 2022.
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 who is also a Company stockholder. The unpaid balance of the Subordinated Note bears interest at
a rate of 10% per annum. The Company made a principal payment of $250,000 in April 2021. The subordinated note principal together with
accrued and unpaid interest was due, as previously amended, on March 31, 2022 but was subsequently extended. As subsequently amended,
a payment of $50,000 was made in April 2022 and the remaining principal of $200,000 together with accrued interest is due on June 30,
2022. If at any time prior to the note’s maturity the Company raises new equity capital of $5 million or more, then the full amount
outstanding under the note is due within five days. Accrued interest on this subordinated promissory note totaled $24,864 at March 31,
2022.
The holder of the subordinated note received a
warrant to purchase 500,000 shares of common stock exercisable for cash at an exercise price of $0.352 per share. As consideration for
the extension, the term of this warrant was extended by one year to December 30, 2023. The Company recognized $68,756 of interest expense
for extension of the warrant term.
Promissory Note to
Investment Hunter, LLC – In the first quarter of 2022, Investment Hunter, LLC, a Texas LLC controlled by our CEO, made advances
totaling $440,500 to the Company under a promissory note due June 30, 2022. If the Company raises new equity capital of $3 million
or more, then the full amount outstanding under the note is due within five days. The note bears interest at 10% per annum. Accrued interest
on this subordinated promissory note totaled $6,334 at March 31, 2022.
7. Other Indebtedness
The Company is obligated
under a mortgage payable dated September 15, 2014 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. The note has been amended several times to a maturity date
of April 15, 2022. In April 2022, the note was again amended to a new maturity date of June 15, 2022. The Company is paying monthly extension
fees of $1,000 each and made an agreed $25,000 principal payment in April 2022. The new monthly payment of the note is $6,500 including
interest at an effective rate of approximately 12% and the agreed extension fee.
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 $7,500. The lease requires a true-up with the tenant for property taxes 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 2022 are $67,500 and for 2023 are $52,500.
8. 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 $8,000 and $4,000 in the three months ended March 31, 2022 and
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 $27,110 in the three
months ended March 31, 2022 and 2021, respectively. A right-of-use asset and lease liability is recorded for this lease. 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.
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
estimate the ultimate outcome of these matters.
Generation Hemp, Inc. v. Colorado Mills Equipment, LLC
The Defendant sold to the Company a faulty piece of equipment
for $16,000 and will not refund the Company the purchase price after repeated attempts to return their equipment. An original lawsuit
was filed by the Company against Colorado Mills in January 2022 in Dallas County, subsequently dismissed, and a second lawsuit has been
filed El Paso County, Colorado.
Halcyon Thruput, LLC, Plaintiff v. United National Insurance
Company, Defendant, United States District Court for the Northern District of Texas, Dallas Division, Case No. 3:21-CV-3136-K.
Halcyon Thruput, LLC (Halcyon) obtained an all-risks commercial
insurance policy, including an Equipment Breakdown Endorsement (Policy) from United National Insurance Company (UNIC) to provide substantial
coverages for Halcyon Thruput LLC’s (Halcyon) $1,203,735 hemp processing dryer (Dryer) at its facility in Hopkinsville, Kentucky.
During the Policy period, the Dryer caught fire due to the Dryer being defectively designed.
While UNIC paid a number of Halcyon’s claims, Halcyon’s
claim for the cost of the replacement Dryer of $1,380,374 was denied as described below.
Buyer, a wholly owned subsidiary of the Company, pursuant
to an Asset Purchase Agreement as twice amended, then acquired all the assets of Halcyon, except for the right to the proceeds of UNIC’s
insurance policy since the Policy prohibited assignment. Halcyon and Buyer agreed that Buyer’s principal, Gary C. Evans, had the
right to control the litigation, engage counsel for Halcyon and make all decisions relating to any proceeds received in the litigation
by settlement or otherwise.
Halcyon’s suit against UNIC, which was removed to
federal court, seeks $796,865.53 (the cost of the replacement dryer of $1,380,374, less a credit for $583,508.47 previously paid by UNIC
to Halcyon for the Dryer fire=$796,865.53) plus statutory interest on that sum from August 10, 2020 for violating the Texas Insurance
Code’s requirement that claims be promptly paid, additional statutory penalties, and attorneys’ fees. Certain documents have
been executed between the Company, Halcyon and legal counsel, which provide for a sharing of costs and expenses and awards, if any, against
UNIC. Mediation of the case was held in April 2022 where no agreement was reached by the parties.
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 previously 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 exceeding $400,000. 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 July 2022. We believe that Grand Traverse Holdings, LLC and John Gallegos are jointly
liable for the asserted damages which exceed $1 million plus attorney’s fees and we continue to vigorously pursue our claims.
KBSIII Tower at Lake Carolyn, LLC and Prime US-Tower
at Lake Carolyn, LLC (collectively – “KBSIII” v. 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 March 31, 2022, the Company had accrued $252,583 for this judgment, which is exclusively an EHR obligation.
9. 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, 2022 or 2021 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, 2022.
10. 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. The Company is authorized for 200 million shares
of capital stock, par value $0.00001 per share and 20 million shares of preferred stock, par value $0.00001 per share.
Series A Preferred Stock – Our
Series A Preferred Stock was originally issued in connection with HTF’s acquisition of EHR in 2019. 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,
6,328,948 shares of Series A Preferred Stock were converted into 75,947,376 shares of common stock, with each share of Series A Preferred
Stock converting into 12 shares of restricted common stock pursuant to the applicable Certificate of Designations.
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.
Any or all 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. Initially, redemption payments
of 12.5% each of the total amount of Series B Preferred Stock then outstanding plus accrued dividends were due from the Company to each
Holder of Series B Preferred Stock at the end of each calendar quarter of 2021. The first required redemption payments totaling $137,500
were made in April 2021. 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 –
At March 31, 2022, the Company had 113,114,002 common shares outstanding. Following is a discussion of common stock issuances during
the periods presented:
| ● | Acquisition
of Certain Assets of Halcyon – In January 2021, the Company issued 6,250,000 shares of common stock valued at $2.5 million
($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. In the fourth quarter of 2021, the Company received $375,000 for the exercise of 1,065,340 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 in the first quarter of 2021. |
|
|
|
|
● |
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 first quarter of 2022. Refer to Note 6. |
| ● | Stock-based Compensation – The Company issued 500,000 restricted common shares valued at $155,000 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 as of March 31, 2022:
| |
# of
Warrants | | |
Exercise Price
(each) | | |
Expiration
Date | |
Method of
Exercise |
| |
| | |
| | |
| |
|
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 | |
| 500,000 | | |
$ | 0.352 | | |
December 30, 2022 | |
Cash |
Issued in Q1 2021 with common stock units (1) | |
| 1,600,000 | | |
$ | 0.500 | | |
January-February, 2023 | |
Cash |
Issued in Q4 2021 with common stock units (1) | |
| 958,333 | | |
$ | 0.600 | | |
October-December, 2023 | |
Cash |
Total warrants outstanding at March 31, 2022 | |
| 8,558,333 | | |
| | | |
| |
|
| (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. |
Following is a summary of outstanding stock warrants activity
for the periods presented:
| |
| | |
Weighted | |
| |
| | |
Average | |
| |
# of
Warrants | | |
Exercise
Price | |
| |
| | |
| |
Warrants as of December 31, 2021 | |
| 8,808,333 | | |
$ | 0.407 | |
Cancelled | |
| (250,000 | ) | |
$ | 0.400 | |
Warrants as of March 31, 2022 | |
| 8,558,333 | | |
$ | 0.407 | |
11. 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 15 million
shares of common stock for issuance, and provides that the maximum number of shares that may be issued pursuant to the exercise of ISOs
is 15 million. The number of shares of common stock available for issuance under the 2021 Plan constituted approximately 13.1% of the
Company’s fully diluted common shares outstanding as of the date of Board approval, including shares issuable upon the conversion
of preferred shares, as calculated on an as-converted basis. On the one-year anniversary date of the 2021 Plan, the number of shares of
common stock reserved for issuance thereunder shall automatically increase to 20% of the fully diluted common shares outstanding, including
shares issuable upon the conversion of preferred shares, as calculated on an as-converted basis.
In the first quarter
of 2021, the Company issued 500,000 restricted shares valued at $155,000 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. These awards became fully vested
in January 2022.
In the fourth quarter
of 2021, the Company awarded options for 13,850,000 shares of the Company’s common stock as incentive compensation. One-third of
the awarded options vested immediately with the remaining options vesting in two equal annual tranches over the next two years. Vested
options may be exercised at any time until their expiration after 10 years at an exercise price of $0.76 per share. Unvested options are
forfeited upon termination of employment.
Compensation expense
for stock option grants was recognized based on the fair value at the date of grant using the Black-Scholes option pricing model. Key
assumptions included a risk-free interest rate ranging from 1.18% to 1.28%, historical volatility ranging from 331% to 643% and an expected
life of the stock options ranging from five to six years. We recognized $1.3 million of compensation expense for these option awards in
the three months ended March 31, 2022. As of March 31, 2022, there was $4.8 million of total unrecognized compensation cost related
to options to be recognized over a remaining weighted average period of 21 months.
The following table summarizes
options outstanding, as well as activity for the periods presented:
| |
Shares | | |
Weighted Average Grant Date Fair Value | | |
Weighted Average Exercise Price | | |
Aggregate Intrinsic Value | |
| |
| | |
| | |
| | |
| |
Outstanding at December 31, 2021 | |
| 13,850,000 | | |
$ | 0.76 | | |
$ | 0.76 | | |
| - | |
Granted | |
| - | | |
$ | - | | |
$ | - | | |
| - | |
Outstanding at December 31, 2021 | |
| 13,850,000 | | |
$ | 0.76 | | |
$ | 0.76 | | |
| - | |
The remaining weighted average contractual life
of exercisable options at March 31, 2022 was 9.6 years.
12. Discontinued Operations
In 2019, 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, | |
| |
2022 | | |
2021 | |
Assets - | |
| | |
| |
Oil and natural gas properties held for sale, at cost | |
$ | 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 | |
$ | 51,357 | | |
$ | 48,997 | |
Asset retirement obligations | |
| 52,368 | | |
| 52,368 | |
Revenue payable | |
| 52,117 | | |
| 52,117 | |
Current liabilities of discontinued operations held for sale | |
| 155,842 | | |
| 153,482 | |
| |
| | | |
| | |
Asset retirement obligations - | |
| | | |
| | |
Long-term liabilities of discontinued operations held for sale | |
| 170,464 | | |
| 162,948 | |
Total liabilities of discontinued operations held for sale | |
$ | 326,306 | | |
$ | 316,430 | |
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, | |
| |
2022 | | |
2021 | |
Revenue - | |
| | |
| |
Oil and gas sales | |
$ | 38,868 | | |
$ | 21,989 | |
| |
| | | |
| | |
Costs and Expenses | |
| | | |
| | |
Lease operating expense | |
| 44,048 | | |
| 22,728 | |
Accretion | |
| 7,516 | | |
| 2,775 | |
Total costs and expenses | |
| 51,564 | | |
| 25,503 | |
| |
| | | |
| | |
Loss from discontinued operations | |
$ | (12,696 | ) | |
$ | (3,514 | ) |
13. Supplemental Cash Flow Information
| |
For the three months
ended
March 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
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 | |
| 20,992 | | |
| 20,250 | |
Issuance of common stock units previously subscribed | |
| - | | |
| 50,000 | |
Issuances of common shares for exchange or conversion of debt | |
| - | | |
| 2,160,269 | |
14. Earnings (Loss) per Share
The following is the computation of earnings (loss)
per basic and diluted share:
| |
For the three months
ended
March 31, | |
| |
2022 | | |
2021 | |
Amounts attributable to Generation Hemp: | |
| | |
| |
Numerator | |
| | |
| |
Loss from continuing operations attributable to common stockholders | |
$ | (2,443,183 | ) | |
$ | (1,833,588 | ) |
Loss from discontinued operations | |
| (11,901 | ) | |
| (3,294 | ) |
Less: preferred stock dividends | |
| (20,992 | ) | |
| (20,250 | ) |
Net loss attributable to common stockholders | |
$ | (2,476,076 | ) | |
$ | (1,857,132 | ) |
| |
| | | |
| | |
Denominator | |
| | | |
| | |
Weighted average shares used to compute basic EPS | |
| 113,099,558 | | |
| 26,691,992 | |
Dilutive effect of convertible note | |
| 1,164,773 | | |
| - | |
Dilutive effect of preferred stock | |
| 2,953,125 | | |
| 79,322,376 | |
Dilutive effect of common stock options | |
| - | | |
| - | |
Dilutive effect of common stock warrants | |
| 3,270,820 | | |
| 9,881,349 | |
Weighted average shares used to compute diluted EPS | |
| 120,488,276 | | |
| 115,895,717 | |
| |
| | | |
| | |
Earnings (loss) per share: | |
| | | |
| | |
Loss from continuing operations | |
| | | |
| | |
Basic | |
$ | (0.02 | ) | |
$ | (0.07 | ) |
Diluted | |
$ | (0.02 | ) | |
$ | (0.07 | ) |
Loss from discontinued operations | |
| | | |
| | |
Basic | |
$ | - | | |
$ | - | |
Diluted | |
$ | - | | |
$ | - | |
Earnings (loss) per share | |
| | | |
| | |
Basic | |
$ | (0.02 | ) | |
$ | (0.07 | ) |
Diluted | |
$ | (0.02 | ) | |
$ | (0.07 | ) |
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 options
and warrants in periods when we report a loss. The dilutive effect of the assumed exercise of outstanding options and warrants was calculated
using the treasury stock method.
15. Subsequent Events
Advances under Convertible Promissory Note – In the second
quarter of 2022, our CEO made advances totaling $530,000 to the Company under the existing convertible promissory note due June 30, 2022.
Advances under Promissory Note – In the second quarter
of 2022, Investment Hunter, LLC, a Texas LLC controlled by our CEO, made advances totaling $40,000 to the Company under the existing promissory
note due June 30, 2022.
Extension of Secured Promissory Note to Coventry Asset Management,
LTD – As discussed in Note 6, the Company extended the maturity of this secured promissory note to July 31, 2022 and issued
20,000 restricted common shares as extension fees.
* * * * *