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,
2021 filed with the Securities and Exchange Commission ("SEC"), as well as the
financial statements and related notes appearing therein and elsewhere in this
Quarterly Report. The following discussion contains forward-looking statements
that reflect our future plans, estimates, beliefs and expected performance. The
forward-looking statements are dependent upon events, risks and uncertainties
that may be outside our control. We caution you that our actual results could
differ materially from those discussed in these forward-looking statements.
Factors that could cause or contribute to such differences are discussed
elsewhere in this Quarterly Report, particularly in the "Cautionary
Note Regarding Forward-Looking Statements" and in our Annual Report under the
heading "Item 1A. Risk Factors," all of which are difficult to predict. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed may not occur. We do not undertake any obligation to publicly update
any forward-looking statements except as otherwise required by applicable law.
Overview
We are a holding company active within the "hemp" space. We were incorporated on
August 21, 2021 in the State of Delaware. The Company was originally
incorporated on July 28, 2008 in the State of Colorado. On November 27, 2019, we
purchased approximately 94% of the common stock of Energy Hunter Resources, Inc.
("EHR") in a series of transactions accounted for as a reverse merger. Upon
closing, we changed our name to Generation Hemp, Inc.
There is limited historical financial information about our Company upon which
to base an evaluation of our future performance. We cannot guarantee that we
will be successful in the hemp business. We are subject to the risks associated
with the regulatory environment in the industry in which we operate. In
addition, we are subject to risks inherent in a small company, including limited
capital resources, delays and cost overruns due to price and cost increases.
There is no assurance that future financing will be available to our Company on
acceptable terms. Additional equity financing could result in dilution to
existing shareholders.
On January 11, 2021, we completed the acquisition of certain assets of Halcyon
Thruput, LLC ("Halcyon"). With this acquisition, we commenced providing
post-harvest and midstream services to growers by drying, processing, cleaning
and stripping harvested hemp directly from the field and wetbaled at our 48,000
square foot facility located in Hopkinsville, Kentucky. Additionally, the
Company offers safe storage services for processed hemp, which enables farmers
to maximize strategic market timing. In August 2021, the Company launched its
animal bedding consumer goods product line made from the hemp hurd byproduct
that is produced from its hemp processing operations.
We also generate revenue from rental of our "Cannabis Zoned" (Hemp) warehouse
property located in Denver, Colorado currently leased to a hemp seed company.
As of March 31, 2022, EHR held an approximate 8% working interest in an oil &
gas property located in Cochran County, Texas within the Slaughter-Levelland
Field of the San Andres formation in the Northwest Shelf of West Texas. EHR's
oil & gas activities are currently held for sale and are presented in the
consolidated financial statements as discontinued operations.
Recent Activities -
Hemp Processing - we received a request from one of our largest customers to
begin toll processing of up to 6 million pounds of hemp biomass under a
previously agreed tolling arrangement at approximately $0.40 per pound. This
processing should commence sometime in the next 45 days. The pre-processed
material is currently stored in the Company's warehouse facility in
Hopkinsville, Kentucky.
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Grant Funding Opportunity- The U.S. Department of Agriculture has recently made
available a funding opportunity for the Partnerships for Climate-Smart
Commodities projects of up to $1 billion in order to build markets and invest in
America's climate-smart farmers, ranchers and forest owners to strengthen U.S.
rural and agricultural communities. Within this opportunity is the goal to
develop markets and promote the resulting climate-smart commodities. The
Company, through its wholly-owned subsidiary GENH Halcyon Acquisition, LLC, is
an established floral hemp processor that has provided years of drying,
cleaning, stripping and storing hemp, along with acting as a conduit between the
supply side of hemp through farmers and the demand side of hemp through
extraction labs, buyers and downstream products. Since its inception, the
Company has also been a proponent and developer of climate-smart applications of
fiber hemp for industry and has helped develop two new U.S. market products to
utilize hemp hurd that was previously a waste product.
On May 6, 2022, the Company applied for a substantial grant under this funding
opportunity that will contractually engage farmers to grow specific hemp
genetics, thereby providing them lower risk costs that will be included in grant
funding. Under this project, the Company will also build out a hemp supercenter
from the nucleus of its current, established operation that will provide the
necessary processing capacity for all varieties of hemp at one central location.
This will include storage, logistics, testing and tracking capabilities. The
Company has obtained a large group of commitments from industry players who have
agreed to participate in the program.
Liquidity - The Company is dependent upon obtaining additional funding to
continue ongoing operations and to pursue its strategy and execute its
acquisition plans.
In the three months ended March 31, 2022, the Company used $505 thousand of cash
for its operating activities. At March 31, 2022, the Company's current
liabilities, including financing obligations due within one year, totaled $5.3
million as compared with its current assets of $251 thousand.
The Company will continue to pursue additional capital raising opportunities in
order to fund future acquisitions and meet its obligations as they become due.
We may not be successful in obtaining additional financing needed. In the event
financing cannot be obtained, the Company may not be able to satisfy these plans
and obligations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Impact of COVID-19 Pandemic on Our Business - Our business, results of
operations and financial condition were adversely affected by the COVID-19
pandemic in 2020. The COVID-19 pandemic and measures taken to contain it
subjected our business, results of operations, financial condition, stock price
and liquidity to a number of material risks and uncertainties, all of which may
continue or may worsen.
Results of Operations
Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
The net loss for the three months ended March 31, 2022 was $2.5 million as
compared with a net loss of $1.8 million for the same period of 2021. The net
loss for the three months ended March 31, 2022 includes $1.3 million of
stock-based compensation expense for stock options and $221 thousand for
depreciation and amortization largely due to the Halcyon acquisition. Excluding
these non-cash items, the Company's cash loss was $920 thousand in the three
months ended March 31, 2022 as compared with a loss of $1.4 million in the same
period of 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. The Company's hemp processing facilities were
shut-in for much of the first quarter of each year to limit operating
expenditures.
The Company reports its oil & gas activities as discontinued operations. Loss
from discontinued operations was $13 thousand for the three months ended March
31, 2022 as compared with a loss of $4 thousand in the 2021 period. Results of
operations for the Company's remaining oil & gas activities have been
significantly reduced due to lower field productivity.
Revenue. Revenue from continuing operations for the first quarter of 2022
totaled $23 thousand as compared with $67 thousand for the same period of 2021.
We generate revenue from post-harvest and midstream services in the hemp
industry and from rental to a hemp seed company of our warehouse property
located in Colorado.
Our post-harvest and midstream services revenue totaled $33 in the first quarter
of 2022 as compared with $45 thousand in the 2021 period. The Company's hemp
processing facilities were shut-in for much of the first quarter of each year to
limit operating expenditures. By agreement with one of our larger customers, we
expect to commence hemp processing in the second quarter of 2022 of 6 million
pounds of hemp biomass currently stored at our facilities.
Rental revenue totaled $23 thousand in the 2022 and 2021 periods. The lease of
the Company's Denver warehouse expires on August 1, 2023 and provides for a
rental of $7.5 thousand per month.
Cost of Revenue. Cost of revenue for the first quarter of 2022 was $104 thousand
as compared with $158 thousand in the same period of last year. We had lower
costs in 2022 as the post-harvest and midstream services plant was idled
operationally for the quarter.
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Merger and Acquisition Costs. We incurred $16 thousand of costs for acquisition
costs in the 2021 period for closing of the Halcyon acquisition. The amount of
future expenses of this type that we incur will depend upon our future
acquisition activities. The Company incurred no such expenses during the three
months ended March 31, 2022.
General and Administrative Expense. General and administrative expenses totaled
$2.0 million for the three months ended March 31, 2022 as compared with $1.1
million in 2021 period. The increase in general and administrative expense is
principally due to non-cash charges for stock-based compensation which totaled
$1.3 million in the three months ended March 31, 2022 as compared with $42
thousand in the 2021 period. The Company had lower legal and professional
expenses during the 2022 period.
Depreciation and Amortization. Depreciation and amortization expense totaled
$221 thousand in the three months ended March 31, 2022 as compared with $350
thousand for the same period of 2021.
Other Income/Expense. Total other expense was $164 thousand for the three months
ended March 31, 2022 as compared with $252 thousand for the comparable 2021
period. The largest item of total other expense is interest expense which has
decreased due to conversions of indebtedness to equity in 2021.
Loss from Discontinued Operations. In the three months ended March 31, 2022, we
recognized a loss from discontinued operations of $13 thousand as compared with
a loss of $4 thousand in the three months ended March 31, 2021. The major
classes of line items constituting the loss on discontinued operations are
presented in Item I, "Financial Statements - Note 12 - Discontinued Operations."
Until we fully dispose of our remaining oil & gas property interests, we expect
lower future revenues and costs as production activities have declined
substantially. We do not anticipate making future investment of growth capital
into these properties.
Liquidity and Capital Resources
Our primary source of cash from continuing operations includes post-harvest and
midstream services and rental revenue. Our primary uses of cash include our
operating costs, general and administrative expenses and merger and acquisition
expenses.
Cash flow information from continuing operations for the first three months of
2022 was as follows:
? Cash used in operating activities was $503 thousand principally due to the net
loss adjusted for non-cash items.
? The Company had no net cash used for investing activities during the period.
? Net cash from financing activities totaled $486 thousand from advances under
notes payable made by our CEO and his related company to fund our cash needs.
We used $3 thousand of cash for discontinued operations in the first three
months of 2022.
Funding Requirements
We expect to continue to incur significant expenses and operating losses for the
foreseeable future. We anticipate that our expenses may increase substantially
as we grow our hemp business.
We expect that we will require additional capital to fund operations, including
hiring additional employees, completing acquisitions and funding capital
expenditures during the next twelve-month period.
Because of the numerous risks and uncertainties associated with the development
and commercialization of our business, we are unable to estimate the amounts of
increased capital outlays and operating expenses. Our future capital
requirements will depend on many factors, including:
? our success in identifying and making acquisitions of profitable operations;
? our ability to negotiate operating contracts with growers and others within
the hemp industry on favorable terms, if at all;
? deriving revenue from our assets and operations; and
? the cost of such operations and costs of being a public company.
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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 March 31, 2022 is presented in Item I, "Financial
Statements - Note 6 - Notes Payable - Related Parties" and in Item I, "Financial
Statements-Note 7 - Other Indebtedness."
Subsequently, the Company has received advances totaling $550,000 under two
notes. Refer to Item I, "Financial Statements-Note 15 - Subsequent Events."
Off-Balance Sheet Arrangements
As of March 31, 2022, we had no material off-balance sheet arrangements.
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