The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in our
Annual Report on Form 10-K ("Annual Report") for the year ended December 31,
2020 filed with the Securities and Exchange Commission ("SEC"), as well as the
financial statements and related notes appearing therein and elsewhere in this
Quarterly Report. The following discussion contains forward-looking statements
that reflect our future plans, estimates, beliefs and expected performance. The
forward-looking statements are dependent upon events, risks and uncertainties
that may be outside our control. We caution you that our actual results could
differ materially from those discussed in these forward-looking statements.
Factors that could cause or contribute to such differences are discussed
elsewhere in this Quarterly Report, particularly in the "Cautionary
Note Regarding Forward-Looking Statements" and in our Annual Report under the
heading "Item 1A. Risk Factors," all of which are difficult to predict. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed may not occur. We do not undertake any obligation to publicly update
any forward-looking statements except as otherwise required by applicable law.
Overview
We are a holding company active within the "hemp" space. We were incorporated on
August 21, 2021 in the State of Delaware. The Company was originally
incorporated on July 28, 2008 in the State of Colorado. On November 27, 2019, we
purchased approximately 94% of the common stock of Energy Hunter Resources, Inc.
("EHR") in a series of transactions accounted for as a reverse merger (the
"Transaction"). Upon closing of the Transaction, we changed our name to
Generation Hemp, Inc.
There is limited historical financial information about our Company upon which
to base an evaluation of our future performance. We cannot guarantee that we
will be successful in the hemp business. We are subject to the risks associated
with the regulatory environment in the industry in which we operate. In
addition, we are subject to risks inherent in a small company, including limited
capital resources, delays and cost overruns due to price and cost increases.
There is no assurance that future financing will be available to our Company on
acceptable terms. Additional equity financing could result in dilution to
existing shareholders.
On January 11, 2021, we completed the acquisition of certain assets of Halcyon
Thruput, LLC ("Halcyon"). With this acquisition, we commenced providing
post-harvest and midstream services to growers by drying, processing, cleaning
and stripping harvested hemp directly from the field and wetbaled at our 48,000
square foot facility located in Hopkinsville, Kentucky. Additionally, the
Company offers safe storage services for processed hemp, which enables farmers
to maximize strategic market timing. In August 2021, the Company launched its
animal bedding consumer goods product line made from the hemp hurd byproduct
that is produced from its hemp processing operations.
In 2020, Halcyon had revenues of $3.0 million for the processing of
approximately 8.5 million pounds of hemp biomass. With additional contracts
executed in 2021, we expect to process at least 10 million pounds during the
remainder of 2021 and the first six months of 2022.
We also generate revenue from rental of our "Cannabis Zoned" (Hemp) warehouse
property located in Denver, Colorado currently leased to a hemp seed company.
As of September 30, 2021, EHR held an approximate 8% working interest in an
oil & gas property located in Cochran County, Texas within the
Slaughter-Levelland Field of the San Andres formation in the Northwest Shelf of
West Texas. EHR's oil & gas activities are currently held for sale and are
presented in these consolidated financial statements as discontinued operations
for each of the periods presented.
Liquidity - The Company is dependent upon obtaining additional funding to
continue ongoing operations and to pursue its strategy and execute its
acquisition plans.
In the nine months ended September 30, 2021, the Company used $2.7 million of
cash for its operating activities. At September 30, 2021, the Company's current
liabilities, including financing obligations due within one year, totaled $4.7
million as compared with its current assets of $276 thousand. Cash payments
under several financing obligations were initially due in September and October
of 2021. These were subsequently amended to extend these payments by one to six
months.
The Company will continue to pursue additional capital raising opportunities in
order to fund future acquisitions and meet its obligations as they become due.
In the event financing cannot be obtained, the Company may not be able to
satisfy these plans and obligations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
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Impact of COVID-19 Pandemic on Our Business - Our business, results of
operations and financial condition have been adversely affected by the COVID-19
pandemic, beginning in mid-March 2020. The COVID-19 pandemic and measures taken
to contain it have subjected our business, results of operations, financial
condition, stock price and liquidity to a number of material risks and
uncertainties, all of which may continue or may worsen.
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020
The net loss for the three months ended September 30, 2021 was $1.4 million as
compared with a net loss of $179 thousand for the same period of 2020. We
completed the acquisition of Halcyon in January 2021. The first part of each
calendar year is typically a slower period for midstream operations within the
hemp industry until the annual harvest begins in late-summer. We had $487
thousand of revenue for post-harvest and midstream services in the three months
ended September 30, 2021. Cost of revenue was $280 thousand during this same
period resulting in a gross margin of 43%. The net loss for the three months
ended September 30, 2021 includes $316 thousand for depreciation and
amortization as compared with $16 thousand in the 2020 period due to the Halcyon
acquisition. General and administrative expenses were higher by approximately
$1.0 million because of corporate staffing additions made this year and higher
legal and professional fees incurred.
The Company reports its oil & gas activities as discontinued operations. Loss
from discontinued operations was $2 thousand for the three months ended
September 30, 2021 as compared with a loss of $8 thousand in the 2020 period.
Results of operations for the Company's remaining oil & gas activities have been
significantly reduced due to downturns in oil & gas pricing and production and
disposals of property interests.
Revenue. Revenue from continuing operations for the third quarter of 2021
totaled $502 thousand as compared with $22 thousand for the same period of 2020.
Post-harvest and midstream services commenced regular operations for new and
renewed customer contracts executed in the third quarter of 2021. Rental revenue
totaled $15 thousand in the 2021 period as compared with $22 thousand in the
2020 period. The lease of the Company's Denver warehouse was recently extended
with a new tenant to August 1, 2023 for $7.5 thousand per month.
Cost of Revenue. Cost of revenue for the third quarter of 2021 was $280 thousand
and consisted of direct labor, supplies and overhead for the Company's
post-harvest and midstream services operations. The gross margin on revenue was
43% for the third quarter of 2021.
Merger and Acquisition Costs. We incurred $7 thousand of costs for evaluating
acquisition opportunities during the three months ended September 30, 2020. The
amount of future expenses of this type that we incur will depend upon our future
acquisition activities.
General and Administrative Expense. General and administrative expenses totaled
$1.1 million for the three months ended September 30, 2021 as compared with $109
thousand in 2020 period. The increase in general and administrative expense in
the 2021 period is principally due to corporate staffing additions made this
year and higher legal and professional fees incurred. In the third quarter of
2021, the Company paid $189 thousand for legal fees and $33 thousand of interest
in settlement of arbitration with a law firm. General and administrative expense
for the third quarter of 2021 also includes $39 thousand of non-cash stock-based
compensation expense.
Depreciation and Amortization. Depreciation and amortization expense totaled
$316 thousand in the three months ended September 30, 2021 as compared with $16
thousand for the same period of 2020. The increase in the 2021 period is due to
completion of the Halcyon acquisition including $201 thousand for amortization
of acquired intangible assets. The allocation of the purchase price to the
assets acquired in the Halcyon acquisition is preliminary. Final adjustments,
including increases and decreases to depreciation and amortization resulting
from the allocation of the purchase price to amortizable tangible and intangible
assets, may be material.
Other Income/Expense. Total other expense was $156 thousand for the three months
ended September 30, 2021 as compared with $67 thousand for the comparable 2020
period. The largest item of total other expense is interest expense which has
increased due to having higher levels of indebtedness. Interest expense for the
2021 period includes $34 thousand of amortization of debt discounts and $33
thousand of interest for the arbitration settlement discussed above.
Loss from Discontinued Operations. In the three months ended September 30, 2020,
we recognized a loss from discontinued operations of $8 thousand as compared
with a loss of $2 thousand in the three months ended September 30, 2021. The
major classes of line items constituting the loss on discontinued operations are
presented in Item I, "Financial Statements - Note 4 - Discontinued Operations."
Until we fully dispose of our remaining oil & gas property interests, we expect
lower future revenues and costs as production activities have declined
substantially. We do not anticipate making future investment of growth capital
into these properties.
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Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
The net loss for the nine months ended September 30, 2021 was $4.4 million as
compared with a net loss of $1.2 million for the same period of 2020. The net
loss for the nine months ended September 30, 2021 includes $1.0 million for
depreciation and amortization as compared with $55 thousand in the 2020 period
principally due to the Halcyon acquisition. Our remaining operating expenses
were higher by approximately $2.3 million because of the Halcyon acquisition,
other corporate staffing additions made this year, the payment of bonus
compensation in the first quarter of 2021 and the arbitration settlement
discussed above.
The Company reports its oil & gas activities as discontinued operations. Loss
from discontinued operations was $11 thousand for the nine months ended
September 30, 2021 as compared with a loss of $5 thousand in the 2020 period.
Revenue. Revenue from continuing operations for the first nine months of 2021
includes post-harvest and midstream services revenue of $535 thousand.
Post-harvest and midstream services commenced regular operations for new and
renewed customer contracts executed in the third quarter of 2021. These revenues
are typically limited due during the first half of each year until harvest.
Rental revenue was $60 thousand in the 2021 as compared with $68 thousand in the
2020 period. The lease of the Company's Denver warehouse was recently extended
with a new tenant to August 1, 2023 for $7.5 thousand per month.
Cost of Revenue. Cost of revenue for the first nine months of 2021 was $550
thousand and consisted of direct labor, supplies and overhead for the Company's
post-harvest and midstream services operations. We operated with limited
staffing until harvest.
Merger and Acquisition Costs. We incurred $16 thousand and $100 thousand of
costs for evaluating acquisition opportunities during the nine months ended
September 30, 2021 and 2020, respectively. These costs principally related to
the Halcyon acquisition. The amount of future expenses of this type that we
incur will depend upon our future acquisition activities.
General and Administrative Expense. General and administrative expenses totaled
$2.8 million for the nine months ended September 30, 2021 as compared with $884
thousand in 2020 period. The increase in general and administrative expense in
the 2021 period is principally due the Halcyon acquisition, other corporate
staffing additions made this year and the payment of bonus compensation in the
first quarter of 2021. Bonus compensation totaling $600 thousand was paid to our
CEO for successful completion of the Halcyon acquisition. In the third quarter
of 2021, the Company paid $189 thousand for legal fees and $33 thousand of
interest in settlement of the arbitration with Jones & Keller, P.C. General and
administrative expense for the 2021 period also includes $120 thousand of
non-cash stock-based compensation expense.
Depreciation and Amortization. Depreciation and amortization expense totaled
$1.0 million in the nine months ended September 30, 2021 as compared with $55
thousand for the same period of 2020. The increase in the 2021 period is due to
completion of the Halcyon acquisition including $693 thousand for amortization
of acquired intangible assets. The allocation of the purchase price to the
assets acquired in the Halcyon acquisition is preliminary. Final adjustments,
including increases and decreases to depreciation and amortization resulting
from the allocation of the purchase price to amortizable tangible and intangible
assets, may be material.
Other Income/Expense. Total other expense was $615 thousand for the nine months
ended September 30, 2021 as compared with $220 thousand for the comparable 2020
period. The largest item of total other expense is interest expense which has
increased due to having higher levels of indebtedness. Interest expense for the
2021 period includes $380 thousand of amortization of debt discounts and $33
thousand of interest for the arbitration settlement discussed above.
In the first quarter of 2021, we sold our investment in the common stock we held
for total proceeds of $35 thousand. This publicly traded security was marked to
market each fiscal quarter until its eventual sale.
We received notice from the SBA that the Company's PPP Loan principal and
interest thereon was fully forgiven on April 20, 2021. As such, we recognized
forgiveness income of $25,424 in the second quarter of 2021.
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Loss from Discontinued Operations. In the nine months ended September 30, 2020,
we recognized a loss from discontinued operations of $5 thousand as compared
with a loss of $11 thousand in the nine months ended September 30, 2021. The
major classes of line items constituting the loss on discontinued operations is
presented in Item I, "Financial Statements - Note 4 - Discontinued Operations."
Until we fully dispose of our remaining oil & gas property interests, we expect
lower future revenues and costs as production activities have declined
substantially. We do not anticipate making future investment of growth capital
into these properties.
Liquidity and Capital Resources
Our primary source of cash from continuing operations includes post-harvest and
midstream services and rental revenue. Our primary uses of cash include our
operating costs, general and administrative expenses and merger and acquisition
expenses.
Cash flow information from continuing operations for the first nine months of
2021 was as follows:
? Cash used in operating activities was $2.7 million principally due to the net
loss adjusted for non-cash items.
? Net cash used in investing activities totaled $1.6 million including an
expenditure of $1.5 million for the cash portion of the total consideration
for the Halcyon acquisition and proceeds from the sale of our investment in
common stock of $35 thousand. We made capital expenditures totaling $78
thousand for new processing equipment to expand our business lines to include
post-processing of biomass.
? Net cash from financing activities totaled $1.6 million. This amount included
$3.3 million of cash inflows from the issuance of common stock units and
proceeds from warrant exercises. We used $2.1 million of cash for repayment of
outstanding indebtedness and $154 thousand for payment of scheduled
redemptions and dividends on the Series B preferred stock. In the third
quarter of 2021, our CEO advanced $620 thousand under a convertible promissory
note.
We had no cash flows from discontinued operations in the first nine months of
2021.
Funding Requirements
We expect to continue to incur significant expenses and operating losses for the
foreseeable future. We anticipate that our expenses may increase substantially
as we grow our hemp business.
We expect that we will require additional capital to fund operations, including
hiring additional employees, completing acquisitions and funding capital
expenditures during the next twelve-month period.
Because of the numerous risks and uncertainties associated with the development
and commercialization of our business, we are unable to estimate the amounts of
increased capital outlays and operating expenses. Our future capital
requirements will depend on many factors, including:
? our success in identifying and making acquisitions of profitable operations;
? our ability to negotiate operating contracts with growers and others within
the hemp industry on favorable terms, if at all;
? deriving revenue from our assets and operations; and
? the cost of such operations and costs of being a public company.
Until such time, if ever, as we can generate substantial revenues, we expect to
finance our cash needs through a combination of equity offerings and debt
financings. We do not have any committed external source of funds. To the extent
that we raise additional capital through the sale of equity or convertible debt
securities, the ownership interest of our shareholders will be diluted, and the
terms of these securities may include liquidation or other preferences that
adversely affect the rights of common shareholders. Debt financing, if
available, may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making
capital expenditures or declaring dividends. If we are unable to raise
additional funds through equity or debt financings when needed, we may be
required to delay, limit, reduce or terminate our growth plans and future
commercialization efforts.
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Indebtedness
The Company's indebtedness at September 30, 2021 is presented in Item I,
"Financial Statements - Note 5 - Notes Payable - Related Parties" and in Item I,
"Financial Statements-Note 6-Other Indebtedness."
Off-Balance Sheet Arrangements
As of September 30, 2021, we had no material off-balance sheet arrangements.
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