UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 20202021

or

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to

Commission File Number: 000-55019

GENERATION HEMP, INC.

(Exact name of registrant as specified in its charter)

ColoradoDelaware26-3119496
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
5128 Horseshoe Trail8533 Midway Road
Dallas, Texas75209
(Address of principal executive offices)(Zip code)

(469) 209-6154

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueGENHOTC MARKETS

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of January 29,November 15, 2021, the registrant had 24,130,332111,486,996 shares of common stock outstanding.

 

 

 

TABLE OF CONTENTS

Page
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements1
Item 1.Financial Statements1
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1416
Item 3.Quantitative and Qualitative Disclosures about Market Risk1820
Item 4.Controls and Procedures1920
PART II. OTHER INFORMATION
Item 1.Legal Proceedings21
Item 1A.Risk Factors21
Item 4.Mine Safety Disclosures21
Item 6.Exhibits2122
SIGNATURES2223

i

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under, but not limited to, the heading “Item 1A. Risk Factors” included in the Annual Report of Generation Hemp, Inc. (the “Company”) on Form 10-K for the year ended December 31, 20192020 (the “Annual Report”) and our other filings with the Securities and Exchange Commission (“SEC”).

Forward-looking statements may include statements about:

the risk that our results could be adversely affected by natural disaster, public health crises (including, without limitation, the recent Coronavirus Disease 2019, or COVID-19, outbreak), political crises, negative global climate patterns, or other catastrophic events;

the marketability of our products;

financial condition and liquidity of our customers;

competition in the hemp markets;

industry and market conditions;

purchasesrequisition of our services by major customers and our ability to renew salesprocessing and services contracts;

credit and performance risks associated with customers, suppliers, banks and other financial counterparties;

availability, timing of delivery and costs of key supplies, capital equipment or commodities;

our future capital requirements and our ability to raise additional capital to finance our activities;

the future trading of our common stock;

legal and regulatory risks associated with OTC Markets;

our ability to operate as a public company;

our ability to protect our proprietary information;

general economic and business conditions; the volatility of our operating results and financial condition;

our ability to attract or retain qualified senior management personnel and research and development staff;

timing for completion of major acquisitions or capital projects;

our ability to obtain additional financing on favorable terms, if required, to complete acquisitions as currently contemplated or to fund the operations and growth of our business;

operating or other expenses or changes in the timing thereof;

compliance with stringent laws and regulations, as well as changes in the regulatory environment, the adoption of new or revised laws, regulations and permitting requirements;requirements, especially with respect to the industry in which we operate;

potential legal proceedings and regulatory inquiries against us; and

other risks identified in this Quarterly Reportreport that are not historical.

ii

We caution you that these forward-looking statements are subject to a number of risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control, incidentincluding risks specific to the development, production, gathering and sale of coal.industry in which we operate. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement and speak only as of the date of this Quarterly Report. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.

ii

iii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Generation Hemp, Inc.

Unaudited Condensed Consolidated Balance Sheets

  September 30,  December 31, 
  2020  2019 
Assets      
Current Assets      
Cash $82,766  $101,337 
Current assets of discontinued operations held for sale  -   20,835 
Total Current Assets  82,766   122,172 
         
Property and Equipment        
Property and equipment  1,222,430   1,223,353 
Accumulated depreciation  (86,899)  (32,322)
Total Property and Equipment, Net  1,135,531   1,191,031 
         
Noncurrent assets of discontinued operations held for sale  -   1,196,161 
Investment in common stock, at cost  18,223   32,959 
         
Total Assets $1,236,520  $2,542,323 
         
Liabilities and Equity (Deficit)        
Current Liabilities        
Accounts payable $1,039,080  $685,692 
Accrued liabilities  284,393   269,410 
Accrued interest – related parties  389,995   247,500 
Notes payable – related parties  2,048,874   1,708,874 
Mortgage payable  614,346   626,086 
Common stock units issuable  150,000   - 
Current liabilities of discontinued operations held for sale  133,193   1,315,581 
Total Current Liabilities  4,659,881   4,853,143 
Lease liability  -   44,333 
SBA PPP loan  25,200   - 
Long-term liabilities of discontinued operations held for sale  122,222   119,657 
Total Liabilities  4,807,303   5,017,133 
         
Commitments and Contingencies        
         
Equity (Deficit)        
Series A preferred stock, no par value; $1.00 stated value; 6,500,000 shares authorized, 6,328,948 shares issued and outstanding  4,975,503   4,975,503 
Common stock, no par value; 100,000,000 shares authorized, 17,380,317 and 17,130,317 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively  6,083,480   6,029,328 
Common stock warrants  3,472,794   3,426,946 
Accumulated deficit  (17,873,743)  (16,722,036)
Generation Hemp equity  (3,341,966)  (2,290,259)
Noncontrolling interest  (228,817)  (184,551)
Total Equity (Deficit)  (3,570,783)  (2,474,810)
         
Total Liabilities and Equity (Deficit) $1,236,520  $2,542,323 
  September 30,  December 31, 
  2021  2020 
Assets      
Current Assets      
Cash $134,165  $2,776,425 
Accounts receivable  127,665   - 
Prepaid expenses  14,232   - 
Total Current Assets  276,062   2,776,425 
         
Property and Equipment        
Property and equipment  3,012,316   1,222,430 
Accumulated depreciation  (417,135)  (102,938)
Total Property and Equipment, Net  2,595,181   1,119,492 
         
Operating lease right-of-use asset  286,839   - 
Intangible assets, net  2,474,136   - 
Goodwill  509,701     
Other assets  407,000   23,077 
         
Total Assets $6,548,919  $3,918,994 
         
Liabilities and Equity (Deficit)        
Current Liabilities        
Accounts payable $1,061,873  $1,053,542 
Accrued liabilities  375,521   337,588 
Payables to related parties  167,482   448,271 
Operating lease liability - related party  98,749   - 
Notes payable – related parties  2,360,000   3,336,592 
Other indebtedness - current  516,359   619,461 
Common stock issuable  -   50,000 
Current liabilities of discontinued operations held for sale  137,068   140,068 
Total Current Liabilities  4,717,052   5,985,522 
Operating lease liability - related party, net of current portion  188,090   - 
Other indebtedness - long-term  -   25,200 
Long-term liabilities of discontinued operations held for sale  158,498   144,149 
Total Liabilities  5,063,640   6,154,871 
         
Commitments and Contingencies        
         
Series B redeemable preferred stock, no par value, $10,000 stated value, 300 shares authorized, 118 and 135 shares issued and outstanding at September 30, 2021 and December 31, 2020  591,558   729,058 
         
Equity (Deficit)        
Series A preferred stock, $0.00001 par value; $1.00 stated value; 6,500,000 shares authorized, none and 6,328,948 shares issued and outstanding at September 30, 2021 and December 31, 2020  -   4,975,503 
Common stock, $0.00001 par value; 200,000,000 shares authorized, 111,070,329 shares issued and outstanding at September 30, 2021  1,111   - 
Common stock, no par value; 100,000,000 shares authorized, 17,380,317 shares issued and outstanding at December 31, 2020  -   6,083,480 
Additional paid-in capital  23,776,409   4,436,018 
Accumulated deficit  (22,644,284)  (18,220,705)
Generation Hemp equity  1,133,236   (2,725,704)
Noncontrolling interest  (239,515)  (239,231)
Total Equity (Deficit)  893,721   (2,964,935)
         
Total Liabilities and Equity (Deficit) $6,548,919  $3,918,994 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


1

 

Generation Hemp, Inc.

Unaudited Condensed Consolidated Statements of Operations

  For the three months ended
September 30,
  For the nine months ended
September 30,
 
  2020  2019  2020  2019 
             
Revenue $22,500  $-  $67,500  $- 
                 
Costs and Expenses                
Depreciation and amortization  16,038   3,264   54,961   9,798 
Impairment expense  -   -   -   247,574 
Merger and acquisition costs  6,856   183,103   99,880   360,858 
General and administrative  108,728   91,083   883,565   707,694 
Total costs and expenses  131,622   277,450   1,038,406   1,325,924 
                 
Operating loss  (109,122)  (277,450)  (970,906)  (1,325,924)
                 
Other expense (income)                
Interest and other income  -   (154)  (1)  (963)
Change in fair value of marketable security  (1,826)  9,630   14,736   234,309 
Interest expense  68,475   49,378   204,875   135,837 
Total other expense  66,649   58,854   219,610   369,183 
                 
Loss from continuing operations  (175,771)  (336,304)  (1,190,516)  (1,695,107)
(Loss) income from discontinued operations  (7,989)  (47,232)  (5,457)  2,215,442 
                 
Net (loss) income  (183,760)  (383,536)  (1,195,973)  520,335 
Less: net loss attributable to noncontrolling interests  (4,904)  -   (44,266)  - 
Net (loss) income attributable to Generation Hemp $(178,856) $(383,536) $(1,151,707) $520,335 
                 
Earnings (loss) per common share:                
Loss from continuing operations                
Basic $(0.01) $(0.65) $(0.07) $(3.74)
Diluted $(0.01) $(0.65) $(0.07) $(3.74)
(Loss) income from discontinued operations                
Basic $(0.00) $(0.09) $(0.00) $4.89 
Diluted $(0.00) $(0.09) $(0.00) $0.03 
Earnings (loss) per share                
Basic $(0.01) $(0.74) $(0.07) $1.15 
Diluted $(0.01) $(0.74) $(0.07) $0.01 
  For the three months ended September 30,  For the nine months ended September 30, 
  2021  2020  2021  2020 
             
Revenue            
Post-harvest and midstream services $487,088  $-  $535,053  $- 
Rental  15,000   22,500   60,000   67,500 
Total revenue  502,088   22,500   595,053   67,500 
                 
Costs and Expenses                
Cost of revenue (exclusive of items shown separately below)  279,621   -   549,881   - 
Depreciation and amortization  315,729   16,038   1,006,804   54,961 
Merger and acquisition costs ��-   6,856   16,115   99,880 
General and administrative  1,128,298   108,728   2,763,529   883,565 
Total costs and expenses  1,723,648   131,622   4,336,329   1,038,406 
                 
Operating loss  (1,221,560)  (109,122)  (3,741,276)  (970,906)
                 
Other expense (income)                
Interest and other income  -   -   (25,424)  (1)
Change in fair value of marketable security  -   (1,826)  (11,770)  14,736 
Interest expense  155,505   68,475   651,807   204,875 
Total other expense  155,505   66,649   614,613   219,610 
                 
Loss from continuing operations  (1,377,065)  (175,771)  (4,355,889)  (1,190,516)
Loss from discontinued operations  (1,630)  (7,989)  (11,349)  (5,457)
                 
Net loss $(1,378,695) $(183,760) $(4,367,238) $(1,195,973)
Less: net loss attributable to noncontrolling interests  (1,137)  (4,904)  (284)  (44,266)
                 
Net loss attributable to Generation Hemp $(1,377,558) $(178,856) $(4,366,954) $(1,151,707)
                 
Earnings (loss) per common share:                
Loss from continuing operations                
Basic $(0.03) $(0.01) $(0.11) $(0.07)
Diluted $(0.03) $(0.01) $(0.11) $(0.07)
Loss from discontinued operations                
Basic $-  $-  $-  $- 
Diluted $-  $-  $-  $- 
Earnings (loss) per share                
Basic $(0.03) $(0.01) $(0.11) $(0.07)
Diluted $(0.03) $(0.01) $(0.11) $(0.07)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


Generation Hemp, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

  Series B
Redeemable
Preferred Stock
  Series A Preferred Stock  Common Stock  

Additional

Paid-In

  Accumulated  Noncontrolling  Total
Equity
 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  (Deficit) 
                               
Balance at January 1, 2020  -  $-   6,328,948  $4,975,503   17,130,317  $6,029,328  $3,426,946  $(16,722,036) $(184,551) $(2,474,810)
Issuance of common stock units  -   -   -   -   250,000   54,152   45,848   -   -   100,000 
Net loss  -   -   -   -   -   -   -   (712,566)  (30,075)  (742,641)
                                         
Balance at March 31, 2020  -   -   6,328,948  $4,975,503   17,380,317   6,083,480   3,472,794   (17,434,602)  (214,626)  (3,117,451)
Net loss  -   -   -   -   -   -   -   (260,285)  (9,287)  (269,572)
                                         
Balance at June 30, 2020  -   -   6,328,948  $4,975,503   17,380,317   6,083,480   3,472,794   (17,694,887)  (223,913)  (3,387,023)
Net loss  -   -   -   -   -   -   -   (178,856)  (4,904)  (183,760)
                                         
Balance at September 30, 2020  -  $-   6,328,948  $4,975,503   17,380,317  $6,083,480  $3,472,794  $(17,873,743) $(228,817) $(3,570,783)
                                         
Balance at January 1, 2021  135  $729,058   6,328,948  $4,975,503   17,380,317  $6,083,480  $4,436,018  $(18,220,705) $(239,231) $(2,964,935)
Acquisition of Certain Assets of Halcyon Thruput, LLC  -   -   -   -   6,250,000   2,500,000   -   -   -   2,500,000 
Issuances of common stock units  -   -   -   -   800,000   136,707   263,293   -   -   400,000 
Warrant exercises  -   -   -   -   8,428,976   4,771,669   (1,804,669)      -   2,967,000 
Issuance of common shares for Convertible Promissory Note  -   -   -   -   618,660   217,769   -   -   -   217,769 
Issuance of common shares for Senior Secured Promissory Note  -   -   -   -   1,000,000   1,942,500   -   -   -   1,942,500 
Stock-based compensation  -   -   -   -   500,000   42,250   -   -   -   42,250 
Series B preferred stock dividend  -   -   -   -   -   -   -   (20,250)  -   (20,250)
Net loss  -   -   -   -   -   -   -   (1,836,882)  3,668   (1,833,214)
                                         
Balance at March 31, 2021  135   729,058   6,328,948   4,975,503   34,977,953   15,694,375   2,894,642   (20,077,837)  (235,563)  3,251,120 
Stock-based compensation  -   -   -   -   -   38,750   -   -   -   38,750 
Series B preferred stock redemption  (17)  (137,500)  -   -   -   -   -   -   -   - 
Series B preferred stock dividend  -   -   -   -   -   -   -   (20,250)  -   (20,250)
Net loss  -   -   -   -   -   -   -   (1,152,514)  (2,815)  (1,155,329)
                                         
Balance at June 30, 2021  118   591,558   6,328,948   4,975,503   34,977,953   15,733,125   2,894,642   (21,250,601)  (238,378)  2,114,291 
Common shares issued to vendor for services  -   -   -   -   125,000   117,500   -   -   -   117,500 
Issuance of common shares for extension of secured note  -   -   -   -   20,000   18,000   -   -   -   18,000 
Change in common stock par value due to change in corporate domicile  -   -   -   -   -   (15,868,273)  15,868,273   -   -   - 
Stock-based compensation  -   -   -   -   -   -   38,750   -   -   38,750 
Conversion of Series A preferred stock          (6,328,948)  (4,975,503)  75,947,376   759   4,974,744   -   -   - 
Series B preferred stock dividend  -   -   -   -   -   -   -   (16,125)  -   (16,125)
Net loss  -   -   -   -   -   -   -   (1,377,558)  (1,137)  (1,378,695)
                                         
Balance at September 30, 2021  118  $591,558   -  $-   111,070,329  $1,111  $23,776,409  $(22,644,284) $(239,515) $893,721 

 

  EHR Series A
Redeemable
Preferred Stock
  Preferred Stock  Common Stock  Common
Stock
  Accumulated  Noncontrolling  Total
Stockholders’
Equity
 
  Shares  Amount  Shares  Amount  Shares  Amount  Warrants  Deficit  Interest  (Deficit) 
                               
Balance at January 1, 2019  412,500  $9,118,691   6,328,948  $4,975,503   418,342  $889,697  $-  $(6,411,483) $-  $(546,283)
Cancellation of Series A preferred stock in disposal of oil & gas property interests  (412,500)  (9,118,691)  -   -   -   -   -   -   -   - 
Net income  -   -   -   -   -   -   -   1,197,003   -   1,197,003 
Balance at March 31, 2019  -   -   6,328,948   4,975,503   418,342   889,697   -   (5,214,480)  -   650,720 
Net loss  -   -   -   -   -   -   -   (293,132)  -   (293,132)
Balance at June 30, 2019  -   -   6,328,948   4,975,503   418,342   889,697   -   (5,507,612)  -   357,588 
Private placement of common stock  -   -   -   -   165,611   125,000   -   -   -   125,000 
Series C convertible preferred stock issuance  -   -   34,000   850,000   -   -   -   -   -   850,000 
Net loss  -   -   -   -   -   -   -   (383,536)  -   (383,536)
                                         
Balance at September 30, 2019  -  $-   6,362,948  $5,825,503   583,953  $1,014,697  $-  $(5,891,148) $-  $949,052 
                                         
Balance at January 1, 2020  -  $-   6,328,948  $4,975,503   17,130,317  $6,029,328  $3,426,946  $(16,722,036) $(184,551) $(2,474,810)
Issuance of common stock units  -   -   -   -   250,000   54,152   45,848   -   -   100,000 
Net loss  -   -   -   -   -   -   -   (712,566)  (30,075)  (742,641)
Balance at March 31, 2020  -   -   6,328,948   4,975,503   17,380,317   6,083,480   3,472,794   (17,434,602)  (214,626)  (3,117,451)
Net loss  -   -   -   -   -   -   -   (260,285)  (9,287)  (269,572)
Balance at June 30, 2020  -   -   6,328,948   4,975,503   17,380,317   6,083,480   3,472,794   (17,694,887)  (223,913)  (3,387,023)
Net loss  -   -   -   -   -   -   -   (178,856)  (4,904)  (183,760)
                                         
Balance at September 30, 2020  -  $-   6,328,948  $4,975,503   17,380,317  $6,083,480  $3,472,794  $(17,873,743) $(228,817) $(3,570,783)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


Generation Hemp, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

  For the nine months ended
September 30,
 
  2020  2019 
Cash Flows From Operating Activities      
Net (loss) income $(1,195,973) $520,335 
Income from discontinued operations  (5,457)  2,215,442 
Net loss from continuing operations  (1,190,516)  (1,695,107)
Adjustments to reconcile net loss from continuing operations to net cash from operating activities:        
Depreciation expense  54,961   9,798 
Loss on disposal of property and equipment  539   - 
Impairment expense  -   247,574 
Change in fair value of marketable securities  14,736   234,309 
Changes in operating assets and liabilities:        
Prepaid expenses and other assets  -   182,295 
Accounts payable and accrued liabilities  466,533   351,871 
Net cash from operating activities – continuing operations  (653,747)  (669,260)
Net cash from operating activities – discontinued operations  31,716   37,976 
Net cash from operating activities  (622,031)  (631,284)
         
Cash Flows From Investing Activities        
Additions to property and equipment  -   (394)
Proceeds from disposal of property and equipment  -   1,000 
Net cash from investing activities – continuing operations  -   606 
Net cash from investing activities – discontinued operations  -   (17,333)
Net cash from investing activities  -   (16,727)
         
Cash Flows From Financing Activities        
Proceeds from third party for shares to be issued  150,000   - 
Proceeds from issuance of common stock units  100,000   - 
Proceeds from private placement of common stock  -   125,000 
Proceeds from Series C convertible preferred stock issuance  -   850,000 
Proceeds from SBA PPP loan  25,200   - 
Proceeds from subordinated promissory note  340,000   - 
Payment of note payable  (11,740)  - 
Net cash from financing activities – continuing operations  603,460   975,000 
Net cash from financing activities – discontinued operations  -   - 
Net cash from financing activities  603,460   975,000 
         
Net change in cash  (18,571)  326,989 
         
Cash, beginning of period  101,337   426,952 
Cash, end of period $82,766  $753,941 
  For the nine months ended September 30, 
  2021  2020 
Cash Flows From Operating Activities      
Net loss $(4,367,238) $(1,195,973)
Loss from discontinued operations  (11,349)  (5,457)
Net loss from continuing operations  (4,355,889)  (1,190,516)
Adjustments to reconcile net loss from continuing operations to net cash from operating activities:        
Depreciation expense  1,006,804   54,961 
Amortization of debt discount  380,282   - 
Stock-based compensation  119,750   - 
Common shares issued to vendor for services  117,500   - 
Other income - PPP Loan forgiveness  (25,424)  - 
Loss on disposal of property and equipment  -   539 
Change in fair value of marketable securities  (11,770)  14,736 
Changes in operating assets and liabilities:        
Accounts receivable  (52,195)  - 
Prepaid expenses  (14,232)  - 
Accounts payable and accrued liabilities  176,969   466,533 
Net cash from operating activities – continuing operations  (2,658,205)  (653,747)
Net cash from operating activities – discontinued operations  -   31,716 
Net cash from operating activities  (2,658,205)  (622,031)
         
Cash Flows From Investing Activities        
Capital expenditures  (77,716)  - 
Acquisition of certain assets of Halcyon Thruput, LLC, net of acquired cash of $224,530  (1,525,470)  - 
Proceeds from sale of investment in common stock  34,847   - 
Net cash from investing activities – continuing operations  (1,568,339)  - 
Net cash from investing activities – discontinued operations  -   - 
Net cash from investing activities  (1,568,339)  - 
         
Cash Flows From Financing Activities        
Proceeds for common stock issuable  -   150,000 
Issuance of common stock units  350,000   100,000 
Redemptions of Series B preferred stock  (137,500)  - 
Series B preferred stock dividends paid  (16,500)  - 
Proceeds from warrant exercises  2,967,000   - 
Repayment of Halcyon bank note  (995,614)  - 
Proceeds from SBA PPP Loan  -   25,200 
Proceeds from  subordinated notes  620,000   340,000 
Repayment of subordinated notes  (1,100,000)  - 
Payment of mortgage payable  (103,102)  (11,740)
Net cash from financing activities – continuing operations  1,584,284   603,460 
Net cash from financing activities – discontinued operations  -   - 
Net cash from financing activities  1,584,284   603,460 
         
Net change in cash  (2,642,260)  (18,571)
         
Cash, beginning of period  2,776,425   101,337 
Cash, end of period $134,165  $82,766 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


Generation Hemp, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business

1. BUSINESS

Generation Hemp, Inc. (the “Company”), formerly known as Home Treasure Finders, Inc. (“HTF”), was initiallyincorporated on August 21, 2021 in the State of Delaware. The Company was originally incorporated on July 28, 2008 in the State of Colorado. On March 3, 2014, the Company formed a wholly-owned subsidiary, HMTF Cannabis Holdings, Inc. to purchase properties that qualify for legal cultivation of cannabis. The Company generates income from its real estate holdings.

On November 27, 2019, HTF completed the purchase ofpurchased approximately 68%94% of the common stock of Energy Hunter Resources, Inc. (“EHR”) through the issuancein a series of 6,328,948 shares of the Company’s Series A Preferred Stock (“Series A Preferred”transactions accounted for as a reverse merger (the “Transaction”). 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. The acquisition, together with the other transactions contemplated by the Stock Purchase Agreement, dated August 15, 2019 are referred to herein as the “Transaction”. In connection with theUpon closing of the Transaction, HTF changed its name to Generation Hemp, Inc.

In an exchange transaction also effective November 27, 2019,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 acquiredoffers 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 additional 26% of the common stock of EHR through the issuance of common stock and warrants.unaffiliated hemp seed company.

The Company owns approximately 94% of the issued and outstanding common stock of EHR. Thus, EHR is a majority-owned subsidiary of the Company. EHR is an oil and gas exploration and production company whose core properties asAs of September 30, 2020 were2021, EHR held an approximate 8% working interest in an oil & gas property located in the Cochran County, Texas within the Slaughter-Levelland Field of the San Andres formation in the Northwest Shelf of West Texas. EHR held an 8.0% interest in certain oil and gas and/ or oil, gas and mineral leases, lands interests, and other properties located in Cochran County. 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.

Going Concern and Management’s PlansLiquidity – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue its new 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. As disclosed in Notes 5 and 6 below, these were subsequently amended to extend these payments by one to six months.

The Company currently has limited revenue.

Management plans towill continue to pursue additional fundingcapital raising opportunities in order for the Company to fund future acquisitions and meet its obligations as they become due and may not be successful in obtaining additional financing.due. In the event financing cannot be obtained, the Company may not be able to satisfy its obligations as they become due.

Based on these plans and obligations. These factors there israise 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.

Response to the Coronavirus Disease 2019 (COVID-19)Impact of COVID-19 Pandemic on Our Business – On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence and practice social distancing when engaging in essential activities. These actions and the global health crisis caused by COVID-19 have created significant volatility, uncertainty and economic disruption.

Our business, results of operations and financial condition werehave been adversely affected by the COVID-19 pandemic, especially beginning in mid-March and such impact has materially worsened to date in the second and third quarters.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

The extent of the potential effect of the COVID-19 pandemic will depend on future actions and outcomes, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the short-term and long-term economic impact of the outbreak (including the effect on consumer discretionary spending and our employees in the markets in which we operate), the actions taken to mitigate the impact of the virus, and the pace of economic and financial market recovery when the COVID-19 pandemic subsides, among others.

5

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of PresentationThese 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, 2019.2020.

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.

Common stock units issuable—From time

Rental revenue is recognized based on the contractual cash rental payments for the period. Oil & gas revenue is recognized for discontinued operations based on delivered quantities in the amount of the consideration to time,which the Company accepts payment from investorsis entitled.

Stock-based Compensation – We account for common stock unit subscriptions pursuant to approved offerings of securities. Amounts received before completion and closingemployee stock-based compensation using the fair value method. Compensation cost for equity incentive awards is based on the fair value of the offeringsequity instrument generally on the date of grant and is recognized over the requisite service period. Forfeitures are reportedrecognized as liabilities.they occur.

Fair Value MeasurementOur 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 the Company’s investment in common stock before it became publicly traded.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 have a limited number of customers. We estimate an allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. An allowance for doubtful accounts was not needed as of September 30, 20202021 or December 31, 2019.2020.

During the three and nine months ended September 30, 2021, one customer accounted for approximately 99% and 90% of our post-harvest and midstream services revenue, respectively. Amounts outstanding from this customer represented 99% of total accounts receivable at September 30, 2021.

Our rental incomerevenue is derived from a single lessee on a commercial warehouse owned by the Company. There were no amounts due from this customer at September 30, 20202021 or December 31, 2019.2020.

Recent Accounting Pronouncements—Pronouncements – In February 2016,August 2020, the FASBFinancial 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 2016-02, Leases,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 aimsthe 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 make leasing activities more transparentreduce 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 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 comparableguaranteed by Gary C. Evans, CEO of the Company, and requires substantially all leases be recognizedassumption of approximately $1.0 million of new indebtedness of Halcyon. The Company was granted an option to purchase the real estate occupied by lesseesHalcyon for $993,000. This option is exercisable at any time before its expiration on their balance sheet as a night-of-use asset and corresponding lease liability, including leases currentlyJanuary 11, 2022.

The acquisition was accounted for as operating leases, Leasesa business combination where the Company is the acquirer and the acquisition method of mineral reservesaccounting was applied in accordance with GAAP. Accordingly, the aggregate value of the consideration we paid to complete the acquisition was allocated to the assets acquired based upon their estimated fair values on the acquisition date.

The following table summarizes the purchase price allocation for the assets acquired. This allocation is preliminary. In the third quarter of 2021, we made adjustments to the previously recognized amounts for inventory, intangibles, goodwill and related land leases are exemptedthe real estate purchase option based on the preliminary results of a valuation study. The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final evaluation of the fair value of tangible and identifiable intangible assets acquired. Final adjustments, including increases and decreases to depreciation and amortization resulting from the standard. allocation of the purchase price to amortizable tangible and intangible assets, may be material.

Accounts receivable $75,470 
Other working capital  224,530 
Property and equipment, other  1,712,170 
Intangibles:    
Non-competition agreements  64,691 
Customer relationships  3,102,052 
Other assets - Purchase option on real estate  407,000 
Goodwill  509,701 
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 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 adopted ASU 2016-02entered 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, 2019 and elected2020, to give effect to certain events that management believes to be directly attributable to the package of practical expedients within the standard which permits the Company not to reassess prior conclusions about lease identification, lease classification and initial direct costs, 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 Company made an accounting policy election to not separate lease and non-lease components for all leases. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilitiessupplemental pro forma financial information for the Company’s office lease totaling $279,111 on January 1, 2019.periods presented is as follows:

  For the three months ended September 30,  For the nine months ended September 30, 
  2021  2020  2021  2020 
Revenue, continuing operations $502,088  $974,434  $596,291  $1,106,440 
Income (loss) from continuing operations  (1,377,065)  59,631   (4,424,786)  (1,528,788)
Earnings (loss) per common share:                
Basic and diluted $(0.03) $0.00  $(0.11) $(0.09)

4. Discontinued Operations

6

3. DISCONTINUED OPERATIONS

In connection with the Transaction, management determined to fully divest of EHR’s oil and gas activities. TheseAs such, these activities are presented as discontinued operations for each of the periods presented and are being actively marketed for sale.presented.

The following is a summary of the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale:

  September 30,  December 31, 
  2020  2019 
Assets      
Accounts receivable -      
Current assets of discontinued operations held for sale $-  $20,835 
         
Oil and Natural Gas Properties held for sale, at cost, using the successful efforts method  1,874,849   5,285,340 
Accumulated DD&A  (1,874,849)  (4,089,179)
Total oil and gas properties, net of discontinued operations held for sale  -   1,196,161 
Total assets of discontinued operations held for sale $-  $1,216,996 
         
Liabilities        
Accrued liabilities $24,242  $92,196 
Asset retirement obligations  56,834   52,776 
Revenue payable  52,117   70,609 
Note payable  -   1,100,000 
Current liabilities of discontinued operations held for sale  133,193   1,315,581 
         
Asset retirement obligations -        
Long term liabilities of discontinued operations held for sale  122,222   119,657 
Total liabilities of discontinued operations held for sale $255,415  $1,435,238 
  September 30,  December 31, 
  2021  2020 
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 $32,583  $31,117 
Asset retirement obligations  52,368   56,834 
Revenue payable  52,117   52,117 
Current liabilities of discontinued operations held for sale  137,068   140,068 
         
Asset retirement obligations -        
Long-term liabilities of discontinued operations held for sale  158,498   144,149 
Total liabilities of discontinued operations held for sale $295,566  $284,217 

The following is a summary of the major classes of line items constituting loss on discontinued operations shown in the consolidated statements of operations:

  For the three months ended
September 30,
  For the nine months ended
September 30,
 
  2020  2019  2020  2019 
Revenue -            
Oil and gas sales $13,036  $50,044  $93,361  $417,431 
                 
Costs and Expenses                
Lease operating expense  16,762   66,555   77,099   303,780 
Depreciation, depletion & amortization  -   13,005   9,942   60,722 
Accretion  4,263   3,966   12,868   29,008 
Gain on disposal of oil & gas property interests  -   -   (24,008)  (1,666,790)
Impairment & abandonment  -   -   -   229,466 
Mergers & acquisition costs  -   -   -   100,000 
Total costs and expenses  21,025   83,526   75,901   (943,814)
                 
Other income  -   -   -   (881,697)
Interest expense  -   13,750   22,917   27,500 
                 
Income from discontinued operations $(7,989) $(47,232) $(5,457) $2,215,442 

  For the three months ended September 30,  For the nine months ended September 30, 
  2021  2020  2021  2020 
Revenue -            
Oil and gas sales $55,140  $13,036  $93,248  $93,361 
                 
Costs and Expenses                
Lease operating expense  53,919   16,762   94,714   77,099 
Depreciation, depletion & amortization  -   -   -   9,942 
Accretion  2,851   4,263   9,883   12,868 
Gain on disposal of oil & gas property interests  -   -       (24,008)
Total costs and expenses  56,770   21,025   104,597   75,901 
                 
Interest expense  -   -   -   22,917 
                 
Loss from discontinued operations $(1,630) $(7,989) $(11,349) $(5,457)

7


5. Notes Payable – Related Parties

2019 Disposal of Oil & Gas Property InterestsOn March 1, 2019, the Company entered into a Termination, Repurchase and Release Agreement (the “Agreement”) with Lubbock Energy Partners LLC (“LEP”) wherein the Company reassigned a 52% working interest in the oil & gas assets acquired in the San Andres Acquisition #1 back to LEP (with the Company continuing to hold an 8% working interest in those assets) in exchange for the return and cancellation of 412,500 shares

Notes payable – related parties consisted of the Company’s Series A Preferred Stock plus all accrued and unpaid dividends thereon and LEP’s assumption of the Company’s obligations under its Senior Subordinated Debentures totaling $400,000. Operatorship of the oil & gas assets was transferred by the Company to LEP, and amounts owed by the Company to LEP and all trade payables associated with the assets were memorialized in the form of a non-recourse promissory note totaling $1.1 million. The Company and LEP also entered into certain financial arrangements and mutual releases in order to settle all existing disputes relating to the assets arising prior to the effective date. The promissory note was due March 1, 2020, bore interest at 5% per annum and required no payments until maturity. The Company recognized a gain on disposal of $1,666,790 within the loss from discontinued operations in the consolidated statements of operations. In May 2020, the $1.1 million non-recourse promissory note and accrued interest thereon was settled upon LEP’s foreclosure of the Company’s Gap Band property interest.following:

  September 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 
Convertible Promissory Note to CEO  620,000   - 
Secured Promissory Note to Coventry Asset Management, LTD.  1,000,000   1,000,000 
Subordinated Promissory Note to Investor  250,000   500,000 
         
Total  2,360,000   3,698,874 
Less debt discounts  -   (362,282)
         
Total Notes Payable – Related Parties $2,360,000  $3,336,592 

Impairment of Oil & Gas Property InterestsIn the fourth quarter of 2019, the Company’s oil and gas properties became impaired due to the market decline and the Company’s determination to exit the oil and gas business. The Company’s interest in the San Andres Acquisition #1 was determined to be fully impaired and its interest in the Gap Band property was determined to have a fair value of $1.2 million. Impairment expense totaling $3,730,678 was recorded in the fourth quarter of 2019 within the loss from discontinued operations in the consolidated statements of operations to reduce the carrying values of the Company’s oil and gas property interests to their estimated fair values.

2020 Disposal of Gap Band Property InterestIn May 2020, LEP completed the foreclosure of the Company’s remaining ownership interest in the Gap Band property due to the Company’s default on its $1.1 million non-recourse promissory note and accrued interest thereon. The Company recognized a gain of $24,008 in the second quarter of 2020 as a result of this disposal.

4. NOTES PAYABLE—RELATED PARTIES

Senior Secured Promissory NoteOn March 31, 2017,9, 2021, the Company entered into a subscription agreementtotal principal, interest and accrued fees under which we issued a $3,000,000 10% Senior Secured Promissory Note with an initial maturity of September 1, 2017 to Satellite Overseas (Holdings) Limited (“SOHL”), a stockholder of the Company’s common shares. The Senior Secured Promissory Note was funded through three equal monthly draws of $1 million made in April, May, and June 2017. Upon maturity, at the option of the holder, the Senior Secured Promissory Note may either become due and payable or convert into shares of common stock at 75% of the share price in a qualified equity offering.

The Company and SOHL agreed to nine interim extensions of the maturity date. As extended, the maturity date was April 30, 2020. There have been no formal demands of repayment since this maturity. The interest rate of the Senior Secured Promissory Note is 12%.

The contingent put option in the Senior Secured Promissory Note is an embedded derivative that is recorded at fair value. The fair value calculation includes Level 3 inputs including the estimated fair value of the Company’s common stock and assumptions regarding the probability that the contingent put will be exercised. Management determined that the probability that the convertible note will be settled in shares was near zero at inception and has remained near zero during the term of the promissory note. The holder has indicated to the Company that they do not intend to exercise the conversion option. Therefore, the Company concluded that the fair value of the embedded derivative was near zero throughout the term of the convertible note.

The outstanding balance of the Senior Secured Promissory Note was $1,500,000 at September 30, 2020contributed to the Company and December 31, 2019. Accrued interest and fees on the Senior Secured Promissory Note were $372,500 and $247,500 at September 30, 2020 and December 31, 2019, respectively.exchanged into 1,000,000 common shares.

Convertible Promissory NoteIn October 2019, HTF issued a convertible promissory note to EHR in exchange for EHR’s payment of HTF’s accounts payable and Transaction expenses. The convertible promissory note bears interest at 4% per annum and matures on November 1, 2021. Commencing 180 days subsequent to the date ofOn March 9, 2021, the convertible promissory note any portion or allissued in October 2019, together with accrued interest thereon, was converted into 618,660 common shares under the terms of the principal and accrued interest payable is convertible by the holder at any time prior to payment into the common stock of the Company at a rate of $0.352 of principal and/or interest per share.note.


EHR distributed the convertible promissory note receivable to its shareholders prior to consummation of the Transaction. The outstanding balance owed by the Company under this convertible promissory note was $208,874 at September 30, 2020 and December 31, 2019.

Subordinated Promissory Note to CEO – Our CEO made advances totaling $340,000to the Company during the first nine months of 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 $17,495$28,508 at September 30, 2021 and $22,393 at December 31, 2020. This note was amended to a new maturity date of January 31, 2022.

Convertible Promissory Note to CEO – In the third quarter of 2021, our CEO made advances totaling $620,000 to the Company under a convertible promissory note. The convertible note matures on January 1, 2022, 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 subordinated promissory note totaled $5,047 at September 30, 2021.

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 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. 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 a first extension fee, make a payment of $50,000 of accrued interest and a principal payment of $250,000 on October 1, 2021. The accrued interest and principal payment were not made but were subsequently amended. As amended in November 2021, the promissory note’s required payments and maturity date were extended to January 31, 2022. If before December 31, 2021 the Company raises new equity capital of $10 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 in November 2021 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. The Company agreed to issue 20,000 restricted common shares as a second extension fee. Accrued interest on this secured note totaled $75,069 at September 30, 2021.

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 Company made a principal payment of $250,000 in April 2021. The subordinated note principal together with accrued and unpaid interest was due September 30, 2021 but was subsequently extended. As amended, payments of $125,000 each are due on January 31, 2022 and March 31, 2022 together with accrued interest thereon. If at any time prior to the note’s maturity the Company raises new equity capital of $12.5 million or more, then the full amount outstanding under the note is due within five days. Accrued interest on this subordinated promissory note totaled $18,733 at September 30, 2021.


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

 

5. OTHER INDEBTEDNESSOther indebtedness consisted of the following:

  September 30,  December 31, 
  2021  2020 
       
Mortgage Payable $516,359  $619,461 
Paycheck Protection Program Loan  -   25,200 
         
Total  516,359   644,661 
Less current portion  (516,359)  (619,461)
Total Other Indebtedness - Long-Term $-  $25,200 

Mortgage Payable and Operating LeaseThe 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 providesprovided for a 25 year25-year amortization period and an initial interest rate of 9% annually. As amended, the note matured on JulyJanuary 15, 20202021 but was extended under terms of the amendment to JanuaryJuly 15, 2021 after payment by the Company of aan extension fee of 1% of the then outstanding principal. The rate during this first extension period is 10% annually and the monthly payment is $5,590. The maturity date may be subsequently extended at the Company’s option to July 15, 2021 after payment again of a extension fee of 1% of the then outstanding principal. The interest rate will increase towas 11% annually if this extension is made.annually.

 

As of September 30, 2020, the balance ofIn July 2021, the mortgage payable was $614,346amended 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 present maturitynew monthly payment is January 15, 2021. As of December 31, 2019, the balance of$5,279.

In October 2021, the mortgage payable was $626,086.amended to a new maturity date of January 15, 2022. The Company will pay an extension fee of $1,000 each month beginning November 15, 2021. The new monthly payment of the note is $5,500 including interest at an effective rate of approximately 13%.

 

The Company leases the Denver warehouse property to a tenant under an operating leases expiring June 30, 2021lease 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 reimburse us for property taxes and insurance paid by the Company and maintainsrequires 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 20202021 are $22,500, for 2022 are $90,000 and for 20212023 are $45,000.$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, Generation Hemp, Inc.we received disbursement of an approved PPP loan in the amount of $25,200. The Company anticipatesreceived notice from the SBA that this entire disbursement amount will bethe PPP Loan principal and interest thereon was fully forgiven under the current program requirements for forgiveness eligibility.on April 20, 2021.

7. Commitments and Contingencies

 

6. COMMITMENTS AND CONTINGENCIES

LeasesOn March 31, 2019, theThe Company abandoned itsassumed Halcyon’s lease of office lease.space in Fort Worth, Texas for managerial offices. This office lease requiredrequires monthly payments of $10,802 until its expiration on May 31, 2021. No rent payments have been made since abandonment. The lessor has made a claim$2,000 and is month-to-month. Lease expense for rentthis facility totaled $6,000 and the Company has made a counterclaim due to the premises being uninhabitable due to the actions of other tenants located on the floor. At September 30, 2020, the Company had accrued unpaid rent totaling $252,583.

Rent expense for$16,000 in the three and nine months ended September 30, 2020 totaled $02021, 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 $8,380, respectively. Rentmaintenance under the lease. Lease expense for this facility totaled $30,747 and $88,604 in the three and nine months ended September 30, 2019 totaled $5,9042021, respectively. A right-of-use asset and $60,980, respectively.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 has made a formal claim against the insurance carrier and is pursuing all available options to recover the unpaid amounts.

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 two specific matters. We cannot estimatepredict 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 aan 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.fees exceeding $300,000. 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 calendar year 2021.January 2022. We believe that Grand Traverse Holdings, LLC and John Gallegos are jointly liable for the asserted damages which exceed $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 iswas seeking lost rent on office space for periods after EHR vacated office premises located in Las Colinas, Texas. EHR has filed a counter suit alleging specific damages due to uninhabitable premises of the office space due to the intolerable conduct of other tenants located on the same floor. On December 23, 2020, the trial court entered a summary judgment against EHR for $230,712. The judgment provides for post-judgment interest at a rate of 5% per annum until paid and further provides for additional amounts owed should EHR pursue unsuccessful appeals to higher courts. The previous judge who entered the judgment has left the bench. A new judge has been appointed to this court andAt September 30, 2021, the Company has filed a motionhad accrued $252,583 for a new trial based upon erroneous amounts awarded in the summary judgment.this judgment, which is exclusively an EHR obligation.

8. Equity

 

7. EQUITY

IssuanceChange of common stock unitsCorporate DomicileIn February 2020, – On August 21, 2021, the Company issued 250,000 common units for $100,000. Each unit consistedchanged its domicile from the State of one share of common stock and a warrant for purchase of one common share for $0.40 per share. The warrant expires March 1, 2022 and contain certain anti-dilution provisions requiring a downward adjustmentColorado to the exercise priceState of Delaware. The change of domicile had no effect on the number of outstanding securities of the warrant if dilutive instruments are issued at prices less than the warrant exercise price. ProceedsCompany. The Company is authorized for 200 million shares of this issuance were used for general corporate purposes.capital stock, par value $0.00001 per share and 20 million shares of preferred stock, par value $0.00001 per share.

 

The common stock issued in the exchange was valued using the traded priceSeries A Preferred Stock – On September 8, 2021, holders 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 volatilityCompany’s Series A Preferred Stock elected to convert such shares into shares 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.

Common stock warrants outstanding—Following isstock. As a summary of warrants outstanding as of September 30, 2020:

  # of
Warrants
  Exercise
Price (each)
  Expiration
Date
 Method of
Exercise
           
Issued upon exchange of EHR Series C Preferred Stock(1)  7,244,319  $0.352  November 27, 2021 Cash
Issued upon exchange of EHR Series C Preferred Stock(1)  7,244,319  $0.352  November 27, 2021 Cashless
Issued in February 2020 with common stock units(2)  250,000  $0.400  March 1, 2022 Cash

(1)May be redeemed beginning October 1, 2020 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 25,000result, 6,328,948 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.

8. 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 or nine months ended September 30, 2020 was not recognized because the Company expects to incur a tax loss in the current year. This tax loss is expected to result in a net operating loss carryforward at year-end; which is expected to be fully offset by a valuation allowance.

The Company did not recognize any income tax benefit for the three or nine months ended September 30, 2019 because tax losses incurred for the year were fully offset by a valuation allowance against deferred tax assets.

There were no uncertain tax positions as of September 30, 2020.


9. SUPPLEMENTAL CASH FLOW INFORMATION

  For the nine months ended
September 30,
 
  2020  2019 
       
Cash paid for interest $        -  $       - 
Cash paid for taxes  -   - 
         
Noncash investing and financing activities:        
Initial recognition of right to use asset and lease liabilities  -   279,111 
Right of use asset amortization  -   31,537 
Apply deposit against lease liability  -   10,690 

10. EARNINGS (LOSS) PER SHARE

The following is the computation of earnings (loss) per basic and diluted share:

  For the three months ended
September 30,
  For the nine months ended
September 30,
 
  2020  2019  2020  2019 
Amounts attributable to Generation Hemp:            
Numerator            
Net loss from continuing operations attributable to common stockholders $(171,367) $(336,304) $(1,146,592) $(1,695,107)
(Loss) income from discontinued operations  (7,489)  (47,232)  (5,115)  2,215,442 
Net (loss) income attributable to common stockholders $(178,856) $(383,536) $(1,151,707) $520,335 
                 
Denominator                
Weighted average shares used to compute basic EPS  17,380,317   520,949   17,500,308   452,920 
Dilutive effect of preferred stock  75,947,376   75,947,376   75,947,376   75,947,376 
Dilutive effect of common stock warrants  -   -   -   - 
Weighted average shares used to compute diluted EPS  93,327,693   76,468,325   93,447,684   76,400,296 
                 
Earnings (loss) per share:                
Loss from continuing operations                
Basic $(0.01) $(0.65) $(0.07) $(3.74)
Diluted $(0.01) $(0.65) $(0.07) $(3.74)
(Loss) income from discontinued operations                
Basic $(0.00) $(0.09) $(0.00) $4.89 
Diluted $(0.00) $(0.09) $(0.00) $0.03 
Earnings (loss) per share                
Basic $(0.01) $(0.74) $(0.07) $1.15 
Diluted $(0.01) $(0.74) $(0.07) $0.01 

The computation of diluted earnings per common share excludes the assumed conversion of the Series A Preferred Stock and exercisewere converted into 75,947,376 shares of common stock, warrantswith each share of Series A Preferred Stock converting into 12 shares of restricted common stock pursuant to the applicable Certificate of Designations. The Series A Preferred Stock was originally issued in periods when we report a loss. The dilutive effect ofconnection with the assumed exercise of outstanding warrants was calculated using the treasury stock method. A total of 14,738,638 outstanding warrants are excluded from the computation of diluted shares for the three months ended September 30, 2020 because their effect would be anti-dilutive. A total of 14,693,018 warrants were similarly excludedCompany’s merger transaction completed in the computation for the nine months ended September 30, 2020. The computation for the three and nine months ended September 30, 2019 excluded 14,488,638 outstanding warrants.December 2019.

 


11. SUBSEQUENT EVENTS

Issuance of Subordinated Promissory Note to Our CEOOur CEO made additional advances through 2020 under a subordinated promissory note due September 30, 2021. The total outstanding balance at January 29, 2021 was $490,000.

Issuance ofSeries B Preferred Stock UnitsOn December 30, 2020, the Company sold to certain accredited investors, including Gary C. Evans, our Chief Executive Officer, an aggregate of 135 commonpreferred 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.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, Thruput, LLC, expenses related theretoand 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 its 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 June30, 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"“Qualifying Event” shall have occurred if (A) (1) the rolling five (5)-tradingfive-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 March 31, 2021, and June 30, 2021, September 30, 2021, December 31, 2021, a paymentInitially, redemption payments of 12.5% each of the total amount of Series B Preferred Stock then outstanding plus accrued dividends will bewere due from the Company to each Holder of Series B Preferred Stock as a partialat the end of each calendar quarter of 2021. The first required redemption by the Company of such Holder.payments totaling $137,500 were made in April 2021.

 

Each warrant is exercisable untilIn May, June and October of 2021, the 24-month anniversarythree holders of the dateSeries 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 issuance at an exercise pricedesignation in a number of $0.352 per share. The exercise priceSeries B Units to effectively waive the redemption requirement. All other terms of the warrants will be subject to adjustmentSeries B Units remain unchanged and the holders’ ownership interest in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction. The warrants may only be exercised for cash.

Issuance of Subordinated Promissory Note and Warrants to InvestorOn December 30, 2020,Series B Preferred Units remains 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 will make payments of principal of $250,000 on March 30 and September 30, 2021.same as it was before such transactions.

 

If at any time prior toCommon Stock – At September 30, 2021, the Company raises newhad 111,070,329 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 capitalin 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. The Company allocated the total proceeds based on the relative fair values of the common stock and warrants. The fair value of the warrants was determined using an options valuation model with key assumptions including a risk-free interest rate of 0.11% and historical volatility of 272%. A total of $263,293 was allocated to the warrants and reported in additional paid-in capital.  

Warrant Exercises – In the first quarter of 2021, the Company received $2,967,000 for the exercise of 8,428,976 outstanding warrants.

Issuances for Exchange or Conversion of Debt – The Company issued a total of 1,618,660 common shares for the exchange or conversion of outstanding debt. Refer to Note 5.

Issuance to Vendor for Services – In the third quarter of 2021, the Company issued 125,000 common shares to a vendor for services performed.

Issuance for Extension of Secured Note – The Company issued 20,000 common shares as consideration to extend the maturity of a senior note in the third quarter of 2021. Refer to Note 5.

Issuance for Conversion of Series A Preferred Stock – As noted above, in the third quarter of 2021, the Company issued 75,947,376 common shares for the conversion of all outstanding shares of its Series A Preferred Stock.

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 September 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, 202014,488,632
Issued250,000
Warrants as of September 30, 202014,738,632
Warrants as of January 1, 202122,988,632
Issued1,600,000
Exercised(8,428,976)
Warrants as of September 30, 202116,159,656


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.

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 $158,500 as incentive compensation to two executives who joined the Company. Compensation expense related to these awards totaled $38,750 and $119,750 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, there was $38,750 of total unrecognized compensation cost related to unvested awards to be recognized over a weighted-average period of three 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 nine months ended September 30, 2021 or 2020 was not recognized because tax losses incurred were fully offset by a valuation allowance against deferred tax assets. There were no uncertain tax positions as of September 30, 2021.

11. Supplemental Cash Flow Information

  For the nine months ended
September 30,
 
  2021  2020 
       
Cash paid for interest $127,812  $- 
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  39,137   - 
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
September 30,
  For the nine months ended
September 30,
 
  2021  2020  2021  2020 
Amounts attributable to Generation Hemp:            
Numerator            
Loss from continuing operations attributable to common stockholders $(1,376,030) $(171,367) $(4,356,315) $(1,146,592)
Loss from discontinued operations  (1,528)  (7,489)  (10,639)  (5,115)
Less: preferred stock dividends  (16,125)  -   (56,625)  - 
Net loss attributable to common stockholders $(1,393,683) $(178,856) $(4,423,579) $(1,151,707)
                 
Denominator                
Weighted average shares used to compute basic EPS  54,109,797   17,380,317   38,693,679   17,500,308 
Dilutive effect of convertible note  -   -   -   - 
Dilutive effect of preferred stock  59,913,657   75,947,376   72,641,084   75,947,376 
Dilutive effect of common stock warrants  9,042,419   -   11,126,327   - 
Weighted average shares used to compute diluted EPS  123,065,873   93,327,693   122,461,090   93,447,684 
                 
Earnings (loss) per share:            
Loss from continuing operations            
Basic $(0.03) $(0.01) $(0.11) $(0.07)
Diluted $(0.03) $(0.01) $(0.11) $(0.07)
(Loss) income from discontinued operations                
Basic $-  $-  $-  $- 
Diluted $-  $-  $-  $- 
Earnings (loss) per share                
Basic $(0.03) $(0.01) $(0.11) $(0.07)
Diluted $(0.03) $(0.01) $(0.11) $(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 warrants in periods when we report a loss. The dilutive effect of the assumed exercise of outstanding warrants was calculated using the treasury stock method.

13. Subsequent Events

In October 2021, the Company issued 416,667 common stock units to an accredited investor for total proceeds of $250,000. Each common stock unit consists of one share of common stock and a warrant for the purchase of one share of common stock for $0.60 each. Each warrant is exercisable any time before its expiration on the second anniversary of its issuance.

As disclosed in Note 5 above, (i) we amended the subordinated note to our CEO in the amount of $5,000,000 or more, then within five (5) business days$490,000 to a new maturity date of closing, repaymentJanuary 31, 2022, (ii) we amended the secured promissory note to Coventry Asset Management, LTD. to a new maturity date of all outstandingJanuary 31, 2022 with an earlier maturity date of December 31, 2021 in the event of a new equity capital raise is completed and granted the holder a limited option to convert part of the principal to common stock and interest on(iii) we amended the Subordinated Note will be due.subordinated promissory note with an investor to a new maturity date of March 31, 2022 with an earlier maturity date of December 31, 2021 in the event of a new equity capital raise is completed.

 

In addition, the holder of the Subordinated Note received a warrant to purchase 500,000 shares of Common Stock on terms and conditions substantially similar to those provided in the above described warrant.

12

Acquisition of Assets of Halcyon Thruput, LLCOn January 11,October 2021, the Company completed the acquisition of 100% of the assets of Halcyon Thruput, LLC (“Halcyon Thruput”) pursuantour CEO made advances totaling $15,000 to the Asset Purchase Agreement dated March 7, 2020, as amended on January 11, 2021.Company. The purchase consideration totaled approximately $5.1 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, aexisting convertible promissory note for $850 thousand issued by the Company’s subsidiary, GenH Halcyon Acquisition, LLC,was amended and guaranteed by Gary C. Evans, CEOrestated to a new balance of the Company,$635,000. The interest rate of 10% per annum and assumptionmaturity date of approximately $1.0 million of new indebtedness of Halcyon Thruput.January 1, 2022 were unchanged.

 

The Company will continue Halcyon Thruput’s businessAs disclosed in Note 6 above, the mortgage payable was amended to a new maturity date of providing post-harvest and midstream services to growers by drying, processing, cleaning, stripping harvested hemp directly from the field and wetbaled at its 48,000 square foot facility located in Hopkinsville, Kentucky.January 15, 2022.

 

Concurrent with the closing of the asset acquisition, the Company entered into term employment agreements with Jack Sibley and Watt Stephens to serve as Vice Presidents of GenH Halcyon Acquisition, LLC 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 as described therein.

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.

*      *      *      *      *


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”), as well as the financial statements and related notes appearing therein and elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Quarterly Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and in our Annual Report under the heading “Item 1A. Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

  

Overview

 

We are a holding company active within the “hemp” space. We were initiallyincorporated 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 completedpurchased approximately 94% of the Transaction withcommon stock of Energy Hunter Resources, Inc. (“EHR”) in a series of transactions accounted for as a reverse merger (the “Transaction”). As partUpon closing of the Transaction, we changed our name from Home Treasure Finders, Inc. to Generation Hemp, Inc.

 

The Transaction was accounted for as a reverse merger, whereby EHR is considered to be the accounting acquirer and became a majority-owned subsidiary of the Company. Accordingly, the Company’s historical financial statements prior to the reverse merger were and will be replaced with the historical financial statements of EHR prior to the reverse merger and in this and all future filings with the U.S. Securities and Exchange Commission (the “SEC”). 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 businesses.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 own approximately 94%also generate revenue from rental of the issued and outstanding common stockour “Cannabis Zoned” (Hemp) warehouse property located in Denver, Colorado currently leased to a hemp seed company.

As of EHR. At December 31, 2019,September 30, 2021, EHR held an 8.0%approximate 8% working interest in certainan oil and& gas and/ or oil, gas and mineral leases, lands interests, and other propertiesproperty located in Cochran County, and a 28.125% interestTexas within the Slaughter-Levelland Field of the San Andres formation in certain oil and gas and/or oil, gas and mineral leases, lands interests, and other properties located in Karnes County.the Northwest Shelf of West Texas. EHR’s oil & gas activities are currently held for sale and are presented in thethese consolidated financial statements as discontinued operations for each of the periods presented.

 

In May 2020, Lubbock Energy Partners LLC (“LEP”)  completed the foreclosure of the Company’s remaining ownership interest in the Gap Band property in Karnes County due to the Company’s default on its $1.1 million non-recourse promissory note and accrued interest thereon. The Company recognized a gain of $24,008 in the second quarter of 2020 as a result of this disposal.

Going Concern and Management’s PlansLiquidity – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue its new strategy and execute its acquisition plans.

 

Management plansIn 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 fundingcapital raising opportunities in order for the Company to fund future acquisitions and meet its obligations as they become due and may not be successful in obtaining additional financing.due. In the event financing cannot be obtained, the Company may not be able to satisfy its obligations as they become due.

Based on these plans and obligations. These factors there israise 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.


Response to the Coronavirus Disease 2019 (COVID-19)Impact of COVID-19 Pandemic on Our BusinessOn March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close all businesses not deemed “essential,” isolate residents to their homes or places of residence and practice social distancing when engaging in essential activities. These actions and the global health crisis caused by COVID-19 have created significant volatility, uncertainty and economic disruption.


Our business, results of operations and financial condition werehave been adversely affected by the COVID-19 pandemic, especially beginning in mid-March and such impact has materially worsened to date in the second and third quarters.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.

The extent of the potential effect of the COVID-19 pandemic will depend on future actions and outcomes, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the short-term and long-term economic impact of the outbreak (including the effect on consumer discretionary spending and our employees in the markets in which we operate), the actions taken to mitigate the impact of the virus, and the pace of economic and financial market recovery when the COVID-19 pandemic subsides, among others.

Results of Operations

 

Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 20192020

 

The net loss for the three months ended September 30, 20202021 was $179 thousand$1.4 million as compared with a net loss of $384$179 thousand for the same period of 2019.2020. 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 was principally causeddue to the Halcyon acquisition. General and administrative expenses were higher by the Company’s anticipated exit from oil & gas activities as discussed further belowapproximately $1.0 million because of corporate staffing additions made this year and pending expansion of our new business activities.higher legal and professional fees incurred.

 

The Company reports its oil & gas activities as discontinued operations. Loss from discontinued operations was $8$2 thousand for the three months ended September 30, 20202021 as compared with a loss of $47$8 thousand in the 20192020 period.

The Company’s continuing Results of operations were limited in each period to merger and acquisition activities including preparing for and closing the Transaction in 2019 and the pending Halcyon Thruput, LLC transaction in 2020. The Company has incurred significant professional fees for the preparationCompany’s remaining oil & gas activities have been significantly reduced due to downturns in oil & gas pricing and audits or reviewsproduction and disposals of financial statements included in SEC filings.property interests.

 

Revenue.Revenue. Revenue from continuing operations is presently limited.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 Company leases itslease of the Company’s Denver warehouse underwas recently extended with a leasenew tenant to August 1, 2023 for $7,500$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.Costs. We incurred $7 thousand of costs for evaluating acquisition opportunities during the three months ended September 30, 2020 and $183 thousand in such expenses in the comparable 2019 period.2020. The amount of future expenses of this type that we incur will depend upon our future acquisition activities.

 

General and Administrative Expense.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, 20202021 as compared with $91$67 thousand in 2019 period. Approximately two-thirds of these expenses were for professional fees for the preparation and audits or reviewscomparable 2020 period. The largest item of our financial statements included in SEC filings.

Depreciation and Amortization. Total depreciation and amortizationtotal other expense was not significant in the 2020 or 2019 periods. We expectis interest expense which has increased due to having higher levels of depreciationindebtedness. Interest expense as our asset base grows.for the 2021 period includes $34 thousand of amortization of debt discounts and $33 thousand of interest for the arbitration settlement discussed above.

 

Other Income/Expense. Total other expense was $67 thousand forLoss from Discontinued Operations. In the three months ended September 30, 2020, as compared with $59 thousand for the comparable 2019 period. Higher levels of interest expense in the 2020 period were partially offset by the lower impact of the change in fair value of the marketable security we hold.

Income from Discontinued Operations. In the three months ended September 30, 2019, we recognized a loss from discontinued operations of $47$8 thousand as compared with $8a 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.


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.


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—Statements – Note 3—4 – Discontinued Operations.”


On March 1, 2019, the Company entered into a Termination, Repurchase and Release Agreement (the “Agreement”) with LEP wherein the Company reassigned a 52% working interest in the oil & gas assets acquired in the San Andres Acquisition #1 back to LEP (with the Company continuing to hold an 8% working interest in those assets). Since the March 1, 2019 disposal and with continued downturns in oil & gas pricing and production for our remaining property interests, results of operations for the Company’s oil & gas activities have been significantly reduced. As a result, the Company recorded a substantial impairment of its oil and gas properties in the fourth quarter of 2019.

In May 2020, LEP completed the foreclosure of the Company’s remaining ownership interest in the Gap Band property in Karnes County due to the Company’s default on its $1.1 million non-recourse promissory note and accrued interest thereon. The Company recognized a gain of $24,008 in the second quarter of 2020 as a result of this disposal.

Until we fully dispose of our remaining oil & gas property interests, we expect thatlower future revenues and costs will be substantially lower than incurred in previous periods as our ownership interests are lower and production activities have declined substantially. We do not anticipate making future investment of growth capital into these properties.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The net loss for the nine months ended September 30, 2020 was $1.2 million as compared with net income of $520 thousand for the same period of 2019. The loss in the 2020 period was principally caused by the Company’s anticipated exit from oil & gas activities as discussed further below and pending expansion of our new business activities.

The Company reports its oil & gas activities as discontinued operations. Loss from discontinued operations was $5 thousand for the nine months ended September 30, 2020 as compared with income of $2.2 million in the 2019 period. We recognized a gain on partial disposal of our oil & gas properties of $1.7 million in the nine months ended September 30, 2019. Since that disposal and with continued downturns in oil & gas pricing and production for our remaining property interests, results of operations for the Company’s oil & gas activities have been significantly reduced.

The Company’s continuing operations were limited in each period to merger and acquisition activities including preparing for and closing the Transaction in 2019 and the pending Halcyon transaction in 2020. The Company has incurred significant professional fees for the preparation and audits or reviews of financial statements included in SEC filings.

Revenue. Revenue from continuing operations is presently limited. The Company leases its Denver warehouse under a lease for $7,500 per month.

Impairment Expense. The Company recognized a $247 thousand impairment of its right-to-use asset for leased office space in the first quarter of 2019.

Merger and Acquisition Costs. We incurred $100 thousand of costs for evaluating acquisition opportunities during the nine months ended September 30, 2020 and $361 thousand in such expenses in the comparable 2019 period. 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 $884 thousand for the nine months ended September 30, 2020 as compared with $708 thousand in 2019 period. Approximately two-thirds of these expenses were for professional fees for the preparation and audits or reviews of our financial statements included in SEC filings.

Depreciation and Amortization. Total depreciation and amortization expense was not significant in the 2020 or 2019 periods. We expect higher levels of depreciation expense as our asset base grows.

Other Income/Expense. Total other expense was $220 thousand for the nine months ended September 30, 2020 as compared with $369 thousand for the comparable 2019 period. Higher levels of interest expense in the 2020 period were partially offset by the lower impact of the change in fair value of the marketable security we hold.

 


Income from Discontinued Operations. In the nine months ended September 30, 2019, we recognized income from discontinued operations of $2.2 million as compared with a loss of $5 thousand in the nine months ended September 30, 2020. The major classes of line items constituting the loss on discontinued operations is presented in Item I, “Financial Statements—Note 3—Discontinued Operations.”

On March 1, 2019, the Company entered into a Termination, Repurchase and Release Agreement (the “Agreement”) with LEP wherein the Company reassigned a 52% working interest in the oil & gas assets acquired in the San Andres Acquisition #1 back to LEP (with the Company continuing to hold an 8% working interest in those assets) in exchange for the return and cancellation of 412,500 shares of the Company’s Series A Preferred Stock plus all accrued and unpaid dividends thereon and LEP’s assumption of the Company’s obligations under its Senior Subordinated Debentures totaling $400,000. Operatorship of the oil & gas assets was transferred by the Company to LEP, and amounts owed by the Company to LEP and all trade payables associated with the assets were memorialized in the form of a non-recourse promissory note totaling $1.1 million. The Company and LEP also entered into certain financial arrangements and mutual releases in order to settle all existing disputes relating to the assets arising prior to the effective date. The promissory note was due March 1, 2020, bore interest at 5% per annum and required no payments until maturity. The Company recognized a gain on disposal of $1.7 million within income from discontinued operations in the first quarter of 2019. In May 2020, the $1.1 million non-recourse promissory note and accrued interest thereon was settled upon LEP’s foreclosure of the Company’s Gap Band property interest. The Company recognized a gain of $24,008 in the second quarter of 2020 as a result of this disposal.

We recognized other income of $882 thousand in 2019 as part of discontinued operations for option and promote fees on oil & gas property interest transactions with third parties. We do not expect such activities in the future.

Since the March 1, 2019 disposal and with continued downturns in oil & gas pricing and production for our remaining property interests, results of operations for the Company’s oil & gas activities have been significantly reduced. As a result, the Company recorded a substantial impairment of its oil and gas properties in the fourth quarter of 2019.

Until we fully dispose of our remaining oil & gas property interests, we expect that future revenues and costs will be substantially lower than incurred in previous periods as our ownership interests are lower and 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 is limited presently toincludes post-harvest and midstream services and rental income for the lease of our hemp warehouse in Denver, Colorado.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 duringwas $2.7 million principally due to the nine months ended September 30, 2020 was $654 thousand as compared with $669 thousandnet loss adjusted for the same period of 2019.non-cash items.

Net cash used in investing activities was not significanttotaled $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 either period.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.

Cash flowsNet cash from financing activities were $603 thousand and $975 thousand fortotaled $1.6 million. This amount included $3.3 million of cash inflows from the nine months ended September 30, 2020 and 2019, respectively, which was primarily due to net borrowings and private placementsissuance of common stock units duringand 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 periods.Series B preferred stock. In the third quarter of 2021, our CEO advanced $620 thousand under a convertible promissory note.

 


Cash flow informationWe had no cash flows from discontinued operations was as follows:in the first nine months of 2021.

Cash flows from operating activities totaled $32 thousand during the 2020 period as compared with $38 thousand in 2019.
Net cash used in investing activities was $17 thousand for the nine months ended September 30, 2019. We had no cash flows from investing activities in the current year as we significantly curtailed oil & gas development efforts in 2019 as we were making our decision to exit this business.
There were no cash flows from financing activities in the nine months ended September 30, 2020 or 2019.

Funding Requirements

 

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses willmay increase substantially if and as we grow our hemp business.

 

We expect that we will require additional capital to fund operations, including hiring additional employees, and completing acquisitions and funding capital expenditures during the next twelve (12) monthtwelve-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.

 


Indebtedness

 

The Company’s indebtedness at September 30,, 2020 2021 is presented in Item I, “Financial Statements—Statements – Note 4—5 – Notes Payable—Payable – Related Parties” and in Item I, “Financial Statements—Note 5—6—Other Indebtedness.”

 

We have also secured additional funding including certain indebtedness as discussed in Item I, “Financial Statements—Note 11—Subsequent Events.”

Off-Balance Sheet Arrangements

 

As of September 30,, 2020, 2021, we had no material off-balance sheet arrangements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Quantitative and qualitative disclosures about market risk are included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2019.Report.

 


Item 4.Controls and Procedures

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, theour principal executive officer believesand principal financial officer concluded that the Company’s disclosure controls and procedures are not effective due to the following material weaknesses.

We lacked the ability to have adequate segregation of duties in the financial statement preparation process. Further the Company did not maintain adequate documentation for review and supporting matters impacting financial reporting in gathering, analyzing and disclosing information needed to ensure that the information required to be disclosed by the Company in its periodic reports is recorded, summarized and processed timely.

Plan for Remediation of Material Weaknesses

Since these entity level controls have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

We believe that we have improved our internal control over financial reporting by taking certain corrective steps that we believe minimize the likelihood of a recurrence. We have designed a disclosure controls and procedures regime pursuant to which our management has, among other things:

(a)identified the definition, objectives, application and scope of our internal control over financial reporting;

(b)delineated the duties of each member of the group responsible for maintaining the adequacy of our internal control over financial reporting. This group consists of our Chief Executive Officer and independent consultants who were engaged to prepare and assure compliance with both our internal control over financial reporting as well as our disclosure controls and procedures and review our disclosure controls and procedures on a regular basis, subject to our management’s supervision.

We continue implementation of required key controls, the necessary steps required for procedures to ensure the appropriate communication and review of inputs necessary for the financial statement closing process, as well as for the appropriate presentation of disclosures within the financial statements. The remediation steps taken are subject to the Chief Executive Officer’s oversight. While management believes there have been significant improvements of internal controls over financial reporting since the year ended December 31, 2019, management anticipates that further continuing efforts will be needed to effectively remediate the material deficiencies relating to segregation of duties and maintaining adequate supporting documentation to substantiate the information reported in the financial statements which existed as of December 31, 2019, and to assure that complex transactions are properly recorded as the business continues to grow. Our management has been actively engaged in planning for, designing and implementing the corrective steps described above to enhance the effectiveness of our disclosure controls and procedures were effective as well as our internal control over financial reporting. Our management is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity, and will take further steps to ensure that personnel are adequate in terms of sophistication and quantity to adequately assure that the financial reporting process is efficient and operated withend of the sufficient level of integrity to meet and surpass all regulatory standards.period covered by this quarterly report, at the reasonable assurance level.

 


While management is implementing corrective steps to remediate its internal control deficiencies, we cannot assure you that they will be sufficient enough to be free of a material weakness. If we should in the future conclude that our internal control over financial reporting suffers from a material weakness, we will be required to expend additional resources to improve it. Any additional instances of material deficiencies could require a restatement of our financial statements. If such restatements are required, there could be a material adverse effect on our investors’ confidence that our financial statements fairly present our financial condition and results of operations, which in turn could materially and adversely affect the market price of our common stock.

Changes in Internal Control over Financial Reporting

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.

 

Other than the remediation activities undertaken by us as disclosed above, thereThere have been no changes in our internal control over financial reporting during the quarter ended September 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

20


 

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 

Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. While the outcome of these proceedings cannot be predicted with certainty, in the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, individually or in the aggregate, will have a material adverse effect on our financial condition, cash flows or results of operations. For a description of our legal proceedings, see Item I, “Financial Statements – Note 6 to7 – Commitments and Contingencies” in the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report.

Item 1A. Risk Factors

 

Item 1A.Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results.

 

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Annual Report.

Item 4.Mine Safety Disclosures

 

No response required.

Item 5. Other Information

 

No response required.


Item 6. Exhibits

 

*31.13.1Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed on August 9, 2011 (file number 333-176154))
3.2Bylaws (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed on August 9, 2011 (file number 333-176154))
3.3Certificate of Designation of Rights, Preferences and Limitations of the Series A Convertible Voting Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 4, 2019 (file number 000-176154)) 
3.4Certificate of Designation of Rights, Preferences and Limitations of the Series B Redeemable Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 6, 2021 (file number 000-55019))
4.12020 Form of Generation Hemp Warrant (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed on December 15, 2020 (file number 333-176154))
4.1Form of Warrant (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on January 6, 2021 (file number 000-55019))
10.1Biomass Tolling Agreement, dated July 11, 2021, between GENH Halcyon Acquisition, LLC and GenCanna Acquisition Corp. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 14, 2021 (file number 000-55019).)
10.2Unsecured Promissory Note, dated August 11, 2021, with Gary C. Evans as Holder and Generation Hemp, Inc. as Borrower. (filed as Exhibit 10.2 to the Company’s Quarterly Report for the period ended June 30, 2021 filed on August 13, 2021)
10.3Biomass Services Agreement, dated August 11, 2021, between GENH Halcyon Acquisition, LLC and KushCo Holdings, Inc. (filed as Exhibit 10.3 to the Company’s Quarterly Report for the period ended June 30, 2021 filed on August 13, 2021)
10.4Amended and Restated Promissory Note, dated September 9, 2021, between Generation Hemp, Inc. and Gary C. Evans, filed as Exhibit 10.1 to the Company’s Current Report filed on Form 8-K on September 10, 2021.
10.5Amended and Restated Promissory Note, dated September 28, 2021, between Generation Hemp, Inc. and Gary C. Evans, filed as Exhibit 10.1 to the Company’s Current Report filed on Form 8-K on September 29, 2021.
10.6Amended and Restated Promissory Note, dated October 22, 2021, between Generation Hemp, Inc. and Gary C. Evans, filed as Exhibit 10.1 to the Company’s Current Report filed on Form 8-K on October 28, 2021.
10.7Letter Agreement, dated November 11, 2021, with Coventry Asset Management, Ltd amending that certain Secured Promissory Note Issued by Halcyon Thruput, LLC, dated December 30, 2020.
10.8Amended and Restated Subordinated Promissory Note, dated November 11, 2021, between Generation Hemp, Inc. and Gary C. Evans.
10.9Amended and Restated Promissory Note, dated November 1, 2021 between Generation Hemp, Inc. and Gary C. Evans.
31.1Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
32.1***32.1Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSInline XBRL Instance Document
101.SCHInline XBRL Schema Document
101.CALInline XBRL Calculation Linkbase Document
101.DEFInline XBRL Definition Linkbase Document
101.LABInline XBRL Label Linkbase Document
101.PREInline XBRL Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*Exhibit filed herewith.

**Furnished herewith. Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability under Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.

 

SIGNATURES

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 GENERATION HEMP, INC.
   
January 29,November 15, 2021By:Gary C. Evans
  Gary C. Evans
  Chairman and Chief Executive Officer

 

 

2223

 

 

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