UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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TABLE OF CONTENTS
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, 2021 (the “Annual Report”) and our other filings with the Securities and Exchange Commission (“SEC”).
Forward-looking statements may include statements about:
| ● | the marketability of our products; |
| ● | financial condition and liquidity of our customers; |
| ● | competition in the hemp markets; |
| ● | industry and market conditions; |
| ● | requisition of our services by major customers and our ability to renew processing 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; |
ii
| ● | 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, especially with respect to the industry in which we operate; |
| ● | potential legal proceedings and regulatory inquiries against us; and |
| ● | other risks identified in this report that are not historical. |
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, including risks specific to the 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.
iii
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Generation Hemp, Inc.
Unaudited Condensed Consolidated Balance Sheets
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | - | |||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Equity (Deficit) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | - | |||||||
| Payables to related parties | ||||||||
| Operating lease liability - related party | ||||||||
| Notes payable – related parties | ||||||||
| Other indebtedness - current | ||||||||
| Current liabilities of discontinued operations held for sale | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability - related party, net of current portion | ||||||||
| Long-term liabilities of discontinued operations held for sale | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Series B redeemable preferred stock, par value, $ | ||||||||
| Equity (Deficit): | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Generation Hemp equity (deficit) | ( | ) | ||||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total equity (deficit) | ( | ) | ||||||
| Total Liabilities and Equity (Deficit) | $ | $ | ||||||
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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| Post-harvest and midstream services | $ | $ | $ | $ | ||||||||||||
| Rental | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Cost of revenue (exclusive of items shown separately below) | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Merger and acquisition costs | ||||||||||||||||
| Impairment expense | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense (income): | ||||||||||||||||
| Other income | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in fair value of marketable security | ( | ) | ||||||||||||||
| Interest expense | ||||||||||||||||
| Total other expense (income) | ( | ) | ||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: net income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Generation Hemp | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings (loss) per common share: | ||||||||||||||||
| Loss from continuing operations | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss from discontinued operations | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Generation Hemp, Inc.
Unaudited Condensed Consolidated Statements of Equity (Deficit)
| 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, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Acquisition of Certain Assets of Halcyon Thruput, LLC | ||||||||||||||||||||||||||||||||||||||||
| Issuances of common stock units | ||||||||||||||||||||||||||||||||||||||||
| Warrant exercises | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for Convertible Promissory Note | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for Senior Secured Promissory Note | ||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Series B preferred stock redemptions | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common shares issued to vendor for services | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares for extension of secured note | ||||||||||||||||||||||||||||||||||||||||
| Change in common stock par value due to change in corporate domicile | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A preferred stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||
| Issuance of common shares for extension of secured note | ||||||||||||||||||||||||||||||||||||||||
| Modification of warrants for extension of promissory note to investor | ||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common shares for extensions of secured note | ||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common shares for extension of secured note | ||||||||||||||||||||||||||||||||||||||||
| Series B preferred stock dividend | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Generation Hemp, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
| For the nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Net loss from continuing operations | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss from continuing operations to net cash from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment expense | ||||||||
| Amortization of debt discount | ||||||||
| Stock-based compensation | ||||||||
| Common shares issued to vendor for services | ||||||||
| Modification of warrants for extension of promissory note to investor | ||||||||
| Other income - PPP Loan forgiveness | ( | ) | ||||||
| Change in fair value of marketable securities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Net cash from operating activities – continuing operations | ( | ) | ( | ) | ||||
| Net cash from operating activities – discontinued operations | ( | ) | ||||||
| Net cash from operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Capital expenditures | ( | ) | ||||||
| Acquisition of certain assets of Halcyon Thruput, LLC, net of acquired cash of $ | ( | ) | ||||||
| Proceeds from sale of investment in common stock | ||||||||
| Net cash from investing activities – continuing operations | ( | ) | ||||||
| Net cash from investing activities – discontinued operations | ||||||||
| Net cash from investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Issuance of common stock units | ||||||||
| Redemptions of Series B preferred stock | ( | ) | ||||||
| Series B preferred stock dividends paid | ( | ) | ||||||
| Proceeds from warrant exercises | ||||||||
| Repayment of Halcyon bank note | ( | ) | ||||||
| Proceeds from notes payable - related parties | ||||||||
| Repayments of notes payable - related parties | ( | ) | ||||||
| Proceeds from subordinated notes | ||||||||
| Repayment of subordinated notes | ( | ) | ( | ) | ||||
| Payment of mortgage payable | ( | ) | ( | ) | ||||
| Net cash from financing activities – continuing operations | ||||||||
| Net cash from financing activities – discontinued operations | ||||||||
| Net cash from financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
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
Generation
Hemp, Inc. (the “Company”) was incorporated on August 21, 2021 in the State of Delaware. The Company was originally incorporated
as Home Treasure Finders, Inc. (“HTF”) on July 28, 2008 in the State of Colorado. On November 27, 2019, HTF purchased approximately
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 hemp growers by drying, processing, cleaning and stripping harvested hemp
directly from the field and wetbaled at our
We also generate revenue from rental of our “Cannabis Zoned” (Hemp) warehouse property located in Denver, Colorado currently leased to an unaffiliated hemp seed company.
As of September 30, 2022, EHR held an approximate 8% working interest in an oil & gas property located in Cochran County, Texas within the Slaughter-Levelland Field of the San Andres formation in the Northwest Shelf of West Texas. EHR’s oil & gas activities are currently held for sale and are presented in these consolidated financial statements as discontinued operations for each of the periods presented.
Our management team has been and continues to actively review acquisition candidates involved in the hemp industry that operate within a number of vertical businesses, predominantly within the midstream sector that are attractive to us and are within the hemp supply chain. Additionally, the Company has been studying the Bitcoin mining space and anticipates future activity in this business sector.
Liquidity and Going Concern – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue its strategy and execute its acquisition plans.
In
the nine months ended September 30, 2022, the Company used $
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.
2. Summary of Significant Accounting Policies
Basis of Presentation – These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
5
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. Intercompany balances and transactions between consolidated entities are eliminated.
Fair Value Measurement – Our financial assets and liabilities consist of cash, accounts receivable, accounts payable and indebtedness. The fair values of these instruments approximate their carrying amounts at each reporting date.
Deferred
Revenue – In July 2022, the Company entered into an agreement for the sale of
Major Customer and Concentration of Credit Risk – We estimate an allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. An allowance for doubtful accounts was not needed as of September 30, 2022 or December 31, 2021.
During
the three and nine months ended September 30, 2022, one customer accounted for all of our post-harvest and midstream services revenue.
A total of $
Our rental revenue is derived from a single lessee on a commercial warehouse owned by the Company. There were no amounts due from this customer at September 30, 2022 or December 31, 2021.
Recent Accounting Pronouncements – There are no other new accounting pronouncements that are expected to have a material impact on the consolidated financial statements.
3. Property and Equipment
Property and equipment consisted of the following:
| Useful | September 30, | December 31, | ||||||||
| Life (yrs) | 2022 | 2021 | ||||||||
| Land | $ | $ | ||||||||
| Warehouse | ||||||||||
| Leasehold Improvements | ||||||||||
| Machinery and equipment | | |||||||||
| Vehicles | ||||||||||
| Computer equipment and software | ||||||||||
| Office furniture and equipment | 3-5 | 17,294 | 17,294 | |||||||
| Subtotal | ||||||||||
| Less accumulated depreciation and amortization | (929,292 | ) | (625,445 | ) | ||||||
| Total property and equipment, net | $ | $ | ||||||||
6
4. Intangible and Other Assets
The following table summarizes information related to definite-lived intangible assets:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Non-competition agreements | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Other
assets included $
5. Notes Payable – Related Parties
Notes payable – related parties consisted of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Subordinated Promissory Note to CEO | $ | $ | ||||||
| Convertible Promissory Note to CEO | ||||||||
| Secured Promissory Note to Coventry Asset Management, LTD. | ||||||||
| Subordinated Promissory Note to Investor | ||||||||
| Promissory Note to Investment Hunter, LLC | ||||||||
| Note payable to Director | ||||||||
| Total notes payable – related parties | $ | $ | ||||||
Subordinated
Promissory Note to CEO – Our CEO made advances to the Company during 2020 under a subordinated promissory note in the amount
of $
Convertible
Promissory Note to CEO – In 2021, our CEO made advances totaling $
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 $
7
Subordinated
Promissory Note and Warrants to Investor – On December 30, 2020, the Company issued a subordinated promissory note in principal
amount of $
The
holder of the subordinated note received a warrant to purchase
Promissory
Note to Investment Hunter, LLC – In 2022, Investment Hunter, LLC, a Texas LLC controlled by our CEO, made advances totaling
$
Director
Notes –
6. Other Indebtedness
The
Company is obligated under a mortgage payable dated September 15, 2014 secured by its warehouse property located in Denver, Colorado.
The
Company leases the Denver warehouse property to a tenant under an operating lease which was renewed with a new tenant and extended to
August 1, 2023 for a monthly rent of $
7. Leases
Office
Space – The Company leases office space in Fort Worth, Texas for managerial offices. This lease requires monthly payments of
$
Hemp
Processing Operating Facility – 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 $
8
Future
Bitcoin Mining Premises – The Company entered a five-year commercial lease for land and premises in Arkansas. We expect to
use these premises as a future Bitcoin mining location because of its favorable power rates and land availability. The lease commences
once the Company begins receiving power for its operations conducted at the location. The monthly rent will vary from a minimum of $
8. Commitments and Contingencies
Litigation – From time to time, we are subject to various litigation and other claims in the normal course of business. Below is a discussion of specific matters. We cannot estimate the ultimate outcome of these matters.
Generation Hemp, Inc. v. Colorado Mill Equipment, LLC
The
Defendant sold to the Company a faulty piece of equipment for $
Halcyon Thruput, LLC, Plaintiff v. United National Insurance Company, Defendant, United States District Court for the Northern District of Texas, Dallas Division, Case No. 3:21-CV-3136-K.
Halcyon
Thruput, LLC (Halcyon) obtained an all-risks commercial insurance policy, including an Equipment Breakdown Endorsement (Policy) from
United National Insurance Company (UNIC) to provide substantial coverages for Halcyon Thruput LLC’s (Halcyon) $
While
UNIC paid a number of Halcyon’s claims, Halcyon’s claim for the cost of the replacement Dryer of $
Buyer, a wholly owned subsidiary of the Company, pursuant to an Asset Purchase Agreement as twice amended, then acquired all the assets of Halcyon, except for the right to the proceeds of UNIC’s insurance policy since the Policy prohibited assignment. Halcyon and Buyer agreed that Buyer’s principal, Gary C. Evans, had the right to control the litigation, engage counsel for Halcyon and make all decisions relating to any proceeds received in the litigation by settlement or otherwise.
In
August 2022, the Company received a second payment from UNIC of $
JDONE, LLC v. Grand Traverse Holdings, LLC and John Gallegos, Denver District Court Case No. 2019CV33723
JDONE,
LLC (“JDONE”), a wholly owned subsidiary of the Company and landlord of a commercial warehouse building in Denver, brought
suit against Grand Traverse Holdings, LLC for default of its commercial lease of the warehouse from JDONE. This case settled in October
2022 and the Company received $
9
KBSIII Tower at Lake Carolyn, LLC and Prime US-Tower at Lake Carolyn, LLC (collectively – “KBSIII” v. Energy Hunter Resources, Inc.)
Plaintiff/Counterdefendant
KBSIII was seeking lost rent on office space for periods after EHR vacated office premises located in Las Colinas, Texas. EHR filed a
counter suit alleging specific damages due to uninhabitable premises of the office space due to the intolerable conduct of other tenants
located on the same floor. On December 23, 2020, the trial court entered a summary judgment against EHR for $
9. Income Taxes
Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. An income tax benefit for the three or nine months ended September 30, 2022 or 2021 was not recognized because tax losses incurred were fully offset by a valuation allowance against deferred tax assets. There were no uncertain tax positions as of September 30, 2022. The Company is delinquent in filing its 2021 income tax returns.
10. Equity
Series
A Preferred Stock – Our Series A Preferred Stock was originally issued in connection with HTF’s acquisition of
EHR in 2019. On September 8, 2021, holders of the Company’s Series A Preferred Stock elected to convert such shares into shares
of the Company’s common stock. As a result,
Series
B Preferred Stock Units –
The
sale of the preferred stock units for $
Each
share of Series B Preferred Stock is initially convertible into
Any
or all of the Series B Preferred Stock may be converted, at their holder’s option, into
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At
any time after the occurrence of a “Qualifying Event,” the Company, upon 5-day written notice, shall have the right to cause
each share of Series B Preferred Stock (and all accrued in-kind dividends with respect thereto) to be converted into common stock. For
purposes of this automatic conversion of the Series B Preferred Stock, a “Qualifying Event” shall have occurred if (A) (1)
the rolling five-trading day volume-weighted average trading price of shares of the common stock exceeds $
The
Series B Preferred Stock may be redeemed by the Company for its stated value, plus accrued and unpaid dividends, at any time. Initially,
redemption payments of
Common
Stock –
| ● | Acquisition of Certain Assets of Halcyon – In January 2021, the Company issued 6,250,000 shares of common stock valued at $2.5 million ($0.40 per share; restricted from trading for a period of up to one year) in the acquisition. |
| ● | 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 consisted of one share of common stock and a warrant for the purchase of two shares of common stock for $0.50 each. Each warrant is exercisable any time before its expiration on the second anniversary of its issuance. The Company allocated the total proceeds based on the relative fair values of the common stock and warrants. The fair value of the warrants was determined using an options valuation model with key assumptions including a risk-free interest rate of 0.11% and historical volatility of 272%. A total of $263,293 was allocated to the warrants and reported in additional paid-in capital. |
| ● | Warrant Exercises – In the first quarter of 2021, the Company received $2,967,000 for the exercise of 8,428,976 outstanding warrants. In the fourth quarter of 2021, the Company received $375,000 for the exercise of 1,065,340 outstanding warrants. |
| ● | Issuances for Exchange or Conversion of Debt – The Company issued a total of 1,618,660 common shares for the exchange or conversion of outstanding debt in the first quarter of 2021. | |
| ● | Issuance 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. | |
| ● | 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 valued at $155,000 as incentive compensation to two executives who joined the Company in the first quarter of 2021. | |
| ● | Issuance for Extensions of Secured Note – The Company issued 110,000 common shares as consideration for extensions of the maturity of a senior note in 2022. Refer to Note 5. | |
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Common Stock Warrants Outstanding – Following is a summary of warrants outstanding as of September 30, 2022:
| #
of Warrants | Exercise Price (each) | Expiration Date | Method
of Exercise | |||||||||
| Issued in December 2020 with Series B preferred units (1) | $ | | ||||||||||
| Issued in December 2020 with subordinated note to investor | $ | |||||||||||
| Issued in Q1 2021 with common stock units (1) | $ | |||||||||||
| Issued in Q4 2021 with common stock units (1) | $ | |||||||||||
| Total warrants outstanding at September 30, 2022 | $ | |||||||||||
| (1) |
Following is a summary of outstanding stock warrants activity for the periods presented:
| Weighted | ||||||||
| Average | ||||||||
| # of Warrants | Exercise Price | |||||||
| Warrants as of December 31, 2021 | $ | |||||||
| Canceled | ( | ) | $ | |||||
| Warrants as of September 30, 2022 | $ | |||||||
11. Stock-Based Compensation
We award restricted stock or stock options as incentive compensation to employees and compensation to our Board of Directors for services. 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
In
the first quarter of 2021, the Company issued
In
the fourth quarter of 2021, the Company awarded options for
12
In
the third quarter of 2022, the Company awarded options for
We
recognized $
The following table summarizes options outstanding, as well as activity for the periods presented:
| Shares | Weighted Average Grant Date Fair Value | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | $ | ||||||||||||||
| Outstanding at September 30, 2022 | $ | $ | ||||||||||||||
The
remaining weighted average contractual life of exercisable options at September 30, 2022 was
12. Discontinued Operations
In 2019, management determined to fully divest of EHR’s oil and gas activities. As such, these activities are presented as discontinued operations for each of the periods presented. The following is a summary of the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets: | ||||||||
| Oil and natural gas properties held for sale, at cost | $ | $ | ||||||
| Accumulated DD&A | ( | ) | ( | ) | ||||
| Total assets of discontinued operations held for sale | $ | $ | ||||||
| Liabilities: | ||||||||
| Accrued liabilities | $ | $ | ||||||
| Asset retirement obligations | ||||||||
| Revenue payable | ||||||||
| Current liabilities of discontinued operations held for sale | ||||||||
| Asset retirement obligations - | ||||||||
| Long-term liabilities of discontinued operations held for sale | ||||||||
| Total liabilities of discontinued operations held for sale | $ | $ | ||||||
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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue - | ||||||||||||||||
| Oil and gas sales | $ | $ | $ | $ | ||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Lease operating expense | ||||||||||||||||
| Accretion | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Loss from discontinued operations | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
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13. Supplemental Cash Flow Information
| For the nine months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | ||||||||
| Noncash investing and financing activities: | ||||||||
| Acquisition of certain assets of Halcyon Thruput, LLC | ||||||||
| - issuance of common shares | ||||||||
| - issuance of subordinated note | ||||||||
| - assumption of Halcyon bank note | ||||||||
| Series B preferred stock dividend payable | ||||||||
| Issuance of common stock units previously subscribed | ||||||||
| Issuances of common shares for exchange or conversion of debt | ||||||||
14. 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, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Amounts attributable to Generation Hemp: | ||||||||||||||||
| Numerator | ||||||||||||||||
| Loss from continuing operations attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator | ||||||||||||||||
| Weighted average shares used to compute basic EPS | ||||||||||||||||
| Dilutive effect of convertible note | ||||||||||||||||
| Dilutive effect of preferred stock | ||||||||||||||||
| Dilutive effect of common stock options | ||||||||||||||||
| Dilutive effect of common stock warrants | ||||||||||||||||
| Weighted average shares used to compute diluted EPS | ||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||
| Loss from continuing operations | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss from discontinued operations | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Earnings (loss) per share | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The computation of diluted earnings per common share excludes the assumed conversion of the Series B Preferred Stock and outstanding convertible notes and exercise of common stock options and warrants in periods when we report a loss. The dilutive effect of the assumed exercise of outstanding options and warrants was calculated using the treasury stock method.
* * * * *
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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, 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.
We provide 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. The Company also offers safe storage services for processed hemp, which enables farmers to maximize strategic market timing. We market two retail products, Gas Monkey Spill-Jack, an all-natural, plant-based, sustainable, and biodegradable loose absorbent, and Rowdy Rooster, an animal bedding consumer goods product, each made from the hemp hurd byproduct that is produced from our 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 September 30, 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 –
New Business Line – During the second quarter of 2022, management and the Board decided to enter a new but related line of business – Bitcoin mining. Management determined after research that hemp biomass can be burned in a biomass boiler to generate heat and steam to drive a turbine for generating electricity. The BTU value of hemp is similar to wood waste generated at saw mills. Hemp plants grow to maturity within six to eight months whereas trees mature in excess of ten years.
The Company subsequently formed a new company, GenCrypto, LLC (a Delaware limited liability company) with a 50% partner, Cerberus Digital, LLC, an affiliate of Cryptech Solutions, Inc. Cryptech is one of the largest resellers of Bitcoin mining equipment in North America.
15
GenCrypto now has approximately ten different Bitcoin locations identified and either under contract, under letter of intent, or in final negotiating status, located in two states and in Costa Rica. All of these site locations are deemed “green” based upon the power being provided either from the local utility or co-op. They range in power size from 1.1 megawatts to 50 megawatts. GenCrypto has been contacted by several larger Bitcoin mining operators concerning utilizing some of these mining locations under “hosting” arrangements.
The Company anticipates closing its first acquisition which is currently operational in November 2022.
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 nine months ended September 30, 2022, the Company used $1.0 million of cash for its operating activities. At September 30, 2022, the Company’s current liabilities, including financing obligations due within one year, totaled $6.1 million as compared with its current assets of $1.0 million.
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.
Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
The net loss attributable to Generation Hemp for the three months ended September 30, 2022 was $1.5 million as compared with a net loss attributable to Generation Hemp of $1.4 million for the same period of 2021. The net loss attributable to Generation Hemp for the three months ended September 30, 2022 includes $1.3 million of stock-based compensation expense, $407 thousand for a non-cash impairment charge and $261 thousand for depreciation and amortization largely due to the Halcyon acquisition. Excluding these non-cash items, the Company had cash income of $561 thousand in the three months ended September 30, 2022 as compared with a cash loss of $1.0 million for the same period of 2021. Our hemp processing operations were fully operational during the third quarter of 2022. We also received $378 thousand for a partial settlement from a lawsuit during the third quarter of 2022.
The Company reports its oil & gas activities as discontinued operations. Income from discontinued operations was $10 thousand for the three months ended September 30, 2022 as compared with a loss of $2 thousand in the 2021 period, principally consisting of non-cash items each period.
16
Revenue. Revenue from continuing operations for the third quarter of 2022 totaled $1.2 million as compared with $502 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 $1.2 million in the third quarter of 2022 as compared with $487 thousand in the 2021 period. In June 2022, we commenced hemp processing of six million pounds of hemp biomass from last year’s harvest of our largest customer. We processed 3.2 million pounds of this stored hemp biomass in the third quarter of 2022 and are continuing processing at this time. Hemp processing in 2021 commenced later in the third quarter resulting in lower period over period volumes and revenues.
Rental revenue totaled $23 thousand in the 2022 period and $15 thousand in the 2021 period. 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 third quarter of 2022 was $375 thousand as compared with $280 thousand for the same period of last year. Our gross margin on hemp processing in the third quarter of 2022 was 69%. We expect these stronger margins to continue during processing periods. In periods when we are not processing, we take steps to reduce our operating expenses.
Impairment Expense. We recognized $407 thousand of impairment expense in the third quarter of 2022 as a result of the expiration of the Company’s option to purchase its facilities located in Hopkinsville, Kentucky. There was no impairment in the comparable period of 2021.
General and Administrative Expense. General and administrative expenses totaled $1.9 million for the three months ended September 30, 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 September 30, 2022 as compared with $39 thousand in the 2021 period.
Depreciation and Amortization. Depreciation and amortization expense totaled $261 thousand in the three months ended September 30, 2022 as compared with $316 thousand for the same period of 2021.
Other Income. Total other income was $378 thousand for the three months ended September 30, 2022. We reported no other income in the comparable 2021 period. We received $378 thousand for a partial settlement from a lawsuit during the third quarter of 2022.
Income (loss) from Discontinued Operations. In the three months ended September 30, 2022, we recognized income from discontinued operations of $10 thousand as compared with a loss of $2 thousand in the three months ended September 30, 2021. The major classes of line items constituting the loss on discontinued operations are presented in Item I, “Financial Statements – Note 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.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The net loss attributable to Generation Hemp for the nine months ended September 30, 2022 was $6.0 million as compared with a net loss attributable to Generation Hemp of $4.4 million for the same period of 2021. The net loss attributable to Generation Hemp for the 2022 period includes $4.0 million of stock-based compensation expense, $407 thousand for a non-cash impairment charge and $744 thousand for depreciation and amortization. Excluding these non-cash items, the Company’s cash loss was $916 thousand in the nine months ended September 30, 2022 as compared with a cash loss of $3.2 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 six months of each year to limit operating expenditures. As mentioned above, we commenced processing in June 2022 of hemp biomass harvested last year by our largest customer resulting in higher period over period volumes revenues. We also received $378 thousand for a partial settlement from a lawsuit during the third quarter of 2022.
Loss from discontinued operations was $30 thousand for the nine months ended September 30, 2022 as compared with a loss of $11 thousand in the 2021 period, principally consisting of non-cash items each period. Results of operations for the Company’s remaining oil & gas activities have been significantly reduced due to lower field productivity.
17
Revenue. Revenue from continuing operations for the first nine months of 2022 totaled $1.6 million as compared with $595 thousand for the same period of 2021.
Our post-harvest and midstream services revenue totaled $1.6 in the 2022 period as compared with $535 thousand in the 2021 period. The Company’s hemp processing facilities were shut-in for much of the first half of each year to limit operating expenditures. As mentioned, we commenced processing of hemp biomass for our largest customer in June 2022. In 2021, our processing was limited until the late-summer harvest.
Rental revenue totaled $67 thousand in the 2022 period and $60 thousand in the 2021 period. 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 nine months of 2022 was $644 thousand as compared with $550 thousand in the same period of last year. Our gross margin on post-harvest processing and midstream services are expected to be 50% or more during peak operating periods. In the first part of each year, we take steps to reduce operating costs by idling our facilities.
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 nine months ended September 30, 2022.
Impairment Expense. We recognized $407 thousand of impairment expense in the third quarter of 2022 as a result of the expiration of the Company’s option to purchase its facilities located in Hopkinsville, Kentucky. There was no impairment in the comparable period of 2021.
General and Administrative Expense. General and administrative expenses totaled $5.8 million for the nine months ended September 30, 2022 as compared with $2.8 million in 2021 period. The increase in general and administrative expense is principally due to non-cash charges for stock-based compensation which totaled $4.0 million in the 2022 period as compared with $120 thousand in the 2021 period. The Company also had lower legal and professional expenses during the 2022 period.
Depreciation and Amortization. Depreciation and amortization expense totaled $744 thousand in the nine months ended September 30, 2022 as compared with $1.0 million for the same period of 2021.
Other Income. Total other income was $378 thousand for the nine months ended September 30, 2022 as compared with $25 thousand for the comparable 2021 period. We received $378 thousand for a partial settlement from a lawsuit during the third quarter of 2022.
Loss from Discontinued Operations. In the nine months ended September 30, 2022, we recognized a loss from discontinued operations of $30 thousand as compared with a loss of $11 thousand in the same period of 2021. The major classes of line items constituting the loss on discontinued operations are presented in Item I, “Financial Statements – Note 12 – Discontinued Operations.” We revised our estimates of future asset retirement obligations for changes in inflation and interest rates in the second quarter of 2022 period resulting in higher non-cash expense. 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.
18
Cash flow information from continuing operations for the first nine months of 2022 was as follows:
| ● | Cash used in operating activities was $1.0 million 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 $1.1 million from advances under notes payable made by our CEO, his related company and other related parties to fund our cash needs. |
We used $3 thousand of cash for discontinued operations in the first nine 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. |
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, 2022 is presented in Item I, “Financial Statements – Note 5 – Notes Payable – Related Parties” and in Item I, “Financial Statements—Note 6 – Other Indebtedness.”
Subsequently, the Company has received additional advances under new and existing note arrangements. Refer to Item I, “Financial Statements—Note 15 – Subsequent Events.”
Off-Balance Sheet Arrangements
As of September 30, 2022, we had no material off-balance sheet arrangements.
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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.
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, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were ineffective as of September 30, 2022 due to the material weaknesses previously identified as described below.
Previously Reported Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
We previously identified material weaknesses in our internal control over financial reporting. Based on our assessment for the year ended December 31, 2021, management identified a material weakness in internal control over financial reporting related to the accounting for business combination transactions.
Management Plans to Remediate Material Weakness. The Company has continued the process of designing and implementing effective internal control measures to improve its internal controls over financial reporting and remediate the reported material weakness. The Company’s efforts include implementing additional reviews of business combination transactions and modifying the Company’s instructions to valuation specialists and reviews of their work product. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.
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.
We are taking actions to remediate the material weaknesses relating to our internal control over financial reporting, as described above. Except as otherwise described herein, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 7 – Commitments and Contingencies” in the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report.
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Since July 1, 2022, we have sold or issued securities without registering the securities under the Securities Act as shown below:
Issuance for Extension of Secured Note – The Company issued 50,000 common shares as consideration extension of the maturity of a senior note in the third quarter of 2022. Refer to Item I, “Financial Statements – Note 5 – Notes Payable – Related Parties”.
Item 4. Mine Safety Disclosures
No response required.
Item 5. Other Information
No response required.
Item 6. Exhibits
| * | 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. |
21
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. | ||
| November 14, 2022 | By: | /s/ Gary C. Evans |
| Gary C. Evans | ||
| Chairman and Chief Executive Officer | ||
22
Exhibit 10.1
AMENDED AND RESTATED CONVERTIBLE PROMISSORY NOTE
| $1,107,069.28 | September 30, 2022 |
For value received, GENERATION HEMP, INC., a Delaware corporation (the “Borrower”), promises to pay to GARY C. EVANS, an individual, or his assigns (the “Holder”), the principal sum of $1,107,069.28 (U.S. Dollars), together with all accrued and unpaid interest thereon as set forth below. It is expressly understood that the commitment to provide the principal sums set forth on Exhibit A were agreed to on the dates thereon and all provisions of this unsecured promissory note shall be deemed effective as of such dates and all financial obligations shall accrue from such dates with respect to such amounts. All payments of principal and interest hereunder shall be made by check or wire transfer pursuant to wire transfer instructions that may be provided by the Holder to the Borrower from time to time.
| 1. | Payments; Conversion. The Borrower shall make the principal payment on January 1, 2023 to the Holder, together with accrued and unpaid interest hereunder. Notwithstanding to the contrary, all outstanding principal and all accrued and unpaid interest hereunder shall be due and payable in full at that time. In addition, the Holder shall have the option to convert the then outstanding balance of principal and interest under this Note into restricted shares of the Borrower’s Common Stock at a conversion price equal to $0.30 per share of Common Stock. |
| 2. | Alternative Payment. Any time prior to January 1, 2023, if Borrower raises new equity capital in the amount of three million dollars ($3,000,000.00) or greater, then within five (5) business days of closing, repayment of all outstanding principal and interest on this Convertible Promissory Note will be due. |
| 3. | Interest Rate. Simple interest on the unpaid principal balance of this Note shall accrue at the lesser of ten percent (10%) per annum and the highest rate permitted by law. If an Event of Default (as defined below) shall occur under this Note, interest shall immediately commence accruing at a default rate of fourteen percent (14%) per annum. |
| 4. | Default. The occurrence of any of the following events of default (each, an “Event of Default”) shall, at the option of the Holder thereof, make all principal and interest (to the extend accrued) then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable, upon written demand, without presentment, or grace period, all of which hereby are expressly waived, except as set forth below: |
| (a) | Failure to Pay Principal or Interest. The Borrower fails to pay any installment of principal or interest due under this Note when due and such failure continues for a period of five (5) days after written notice. |
| PROMISSORY NOTE – Page 1 |
| (b) | Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver of trustee shall otherwise be appointed without the consent of the Borrower, which shall constitute an automatic Event of Default and shall result in all remaining unpaid principal and interest due hereon immediately due and payable without the written demand from the Holder. |
| (c) | Bankruptcy. Bankruptcy, insolvency, reorganization, or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Borrower, which shall constitute an automatic Event of Default and shall result in all remaining unpaid principal and interest due hereon immediately due and payable without the written demand from the Holder. |
| 5. | Termination. Upon payment of all cash amounts due to the Holder as provided in this Note, the Borrower will forever be released from all of its payment obligations and liabilities under this Note and the Holder agrees to promptly return to the Borrower the Note marked “paid in full”. This Note may be prepaid, in whole or in part, without the prior consent of the Holder. |
| 6. | Miscellaneous |
| (a) | Successors and Assigns. This Note shall be binding upon successors and assigns of the Borrower, and shall inure to the benefit of the successors and permitted assigns of the Holder. |
| (b) | Severability. The unenforceability or invalidity of any provision or provisions of this Note shall not render any other provision or provisions herein contained unenforceable or invalid. |
| (c) | Notice. Any notice or communication required to be given hereunder may be delivered by hand or deposited with an overnight courier (with overnight delivery instructions), if to the Borrower, to the address of the Borrower’s corporate headquarters, and if to the Holder, to the last address of the Holder set forth in the Borrower’s books and records. Notice shall be deemed given and received on the date sent if sent by personal delivery; and one (1) day after the date sent if sent by overnight courier. |
| PROMISSORY NOTE – Page 2 |
| (d) | Entire Agreement. This Note contains the entire and complete understanding between the parties concerning its subject matter and all representations, agreements, arrangements, and understandings between or among the parties, whether oral or written, have been fully merged herein and are superseded thereby, except for representations, agreements, and understandings between or among the parties made pursuant to the Purchase Agreement and any other agreements entered into in connection therewith and herewith. The Note may be modified only by a writing signed by both parties. |
| (e) | Governing Law; Attorneys’ Fees. This Note shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its principles regarding conflicts of law. Upon default, the breaching party agrees to pay to the non-breaching party reasonable attorneys’ fees, plus all other reasonable expenses, incurred by the non-breaching party in exercising any of the non-breaching party’s rights and remedies. |
| (f) | Jurisdiction. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of the State of Texas, Dallas County, and to the jurisdiction of the United States District Court for the State of Texas, for the purpose of any suit, action, or other proceeding arising out of or based upon this Note; (b) agree not to commence any suit, action, or other proceeding arising out of or based upon this Note except in the state courts of the State of Texas, Dallas County, or the United States District Court for the State of Texas; and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action, or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action, or proceeding is brought in an inconvenient forum, that the venue of the suit, action, or proceeding is improper or that this Note or the subject matter hereof may not be enforced in or by such court. |
| (g) | FINAL AGREEMENT. THIS NOTE AND ALL OTHER INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED BY THE BORROWER IN CONNECTION WITH THE INDEBTEDNESS EVIDENCED BY THIS NOTE EMBOTY THE FINAL, ENTIRE AGREEMENT OF THE BORROWER AND THE HOLDER WITH RESPECT TO THE INDEBTEDNESS EVIDENCED BY THIS NOTE AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE INDEBTEDNESS EVIDENCED BYT HIS NOTE AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE BORROWER AND THE HOLDER. THERE ARE NO ORAL AGREEMENTS BETWEEN THE BORROWER AND THE HOLDER. |
| (h) | Subordination. By its acceptance hereof, the Holder agrees that the indebtedness evidenced by this Note, including the principal of and interest thereon, shall be subordinate to and subject in right of payment, to the extent hereinafter set forth, to the prior payment in full of all principal, interest, and any other sums then due on all existing or future Senior Indebtedness of the Borrower. The term “Senior Indebtedness” shall mean secured and unsecured indebtedness of the Borrower, or with respect to which the Borrower is a guarantor, for money borrowed by the Borrower from any financial institution or other sources prior to the date of this unsecured promissory note. |
Signature Page Follows
| PROMISSORY NOTE – Page 3 |
IN WITNESS WHEREOF, the Borrower has executed this Note as of the date set forth above.
| GENERATION HEMP, INC., | ||||
| a Delaware Corporation | ||||
| By: | /s/ Joe McClaugherty | September 30, 2022 | ||
| Joe McClaugherty | Date | |||
| Lead Director | ||||
| PROMISSORY NOTE – Page 4 |
PROMISSORY NOTE
Exhibit A
Schedule of Principal Sums Drawn under Promissory Note
| Principal Sum Draw Date | Principal Sum Drawn | |||
| July 20, 2021 | $ | 100,000.00 | ||
| August 3, 2021 | 100,000.00 | |||
| August 23, 2021 | 100,000.00 | |||
| September 9, 2021 | 50,000.00 | |||
| September 23, 2021 | 50,000.00 | |||
| September 29, 2021 | 220,000.00 | |||
| October 19, 2021 | 15,000.00 | |||
| November 10, 2021 | 50,000.00 | |||
| November 29, 2021 reduction in principal | (299,999.74 | ) | ||
| December 8, 2021 | 25,000.00 | |||
| March 24, 2022 | 10,000.00 | |||
| March 30, 2022 | 37,069.02 | |||
| April 4, 2022 | 250,000.00 | |||
| April 14, 2022 | 100,000.00 | |||
| April 21, 2022 | 50,000.00 | |||
| April 27, 2022 | 100,000.00 | |||
| May 17, 2022 | 10,000.00 | |||
| May 19, 2022 | 20,000.00 | |||
| May 24, 2022 | 50,000.00 | |||
| August 4, 2022 | 51,000.00 | |||
| August 8, 2022 | 7,000.00 | |||
| August 11, 2022 | 12,000.00 | |||
| Total | $ | 1,107,069.28 | ||
PROMISSORY NOTE – Page 5
Exhibit 10.2
REVISED AND AMENDED UNSECURED PROMISSORY NOTE
| $492,000.00 | September 30, 2022 |
For value received, GENERATION HEMP, INC., a Delaware corporation (the “Borrower”), promises to pay to Investment Hunter, LLC, a Texas LLC, or its assigns (the “Holder”), the principal sum of $492,000.00 (U.S. Dollars), together with all accrued and unpaid interest thereon as set forth below. It is expressly understood that the commitment to provide the individual principal sums which total $492,000.00 was agreed to on the date of each individual loan advance, as presented in Exhibit A, attached hereto, and all provisions of this unsecured promissory note shall be deemed effective as of such date and all financial obligations shall accrue from such date with respect to each amount.
All payments of principal and interest hereunder shall be made by check or wire transfer pursuant to wire transfer instructions that may be provided by the Holder to the Borrower from time to time.
| 1. | Payments. The Borrower shall make the principal payment on January 1, 2023 to the Holder, together with accrued and unpaid interest hereunder. Notwithstanding to the contrary, all outstanding principal and all accrued and unpaid interest hereunder shall be due and payable in full at that time. |
| 2. | Alternative Payment. Any time prior to January 1, 2023, if Borrower raises new equity capital in the amount of three million dollars ($3,000,000.00) or greater, then within five (5) business days of closing, repayment of all outstanding principal and interest on this Convertible Promissory Note will be due. |
| 3. | Interest Rate. Simple interest on the unpaid principal balance of this Note shall accrue at the lesser of ten percent (10%) per annum and the highest rate permitted by law. If an Event of Default (as defined below) shall occur under this Note, interest shall immediately commence accruing at a default rate of fourteen percent (14%) per annum. |
| 4. | Default. The occurrence of any of the following events of default (each, an “Event of Default”) shall, at the option of the Holder thereof, make all principal and interest (to the extend accrued) then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable, upon written demand, without presentment, or grace period, all of which hereby are expressly waived, except as set forth below: |
| (a) | Failure to Pay Principal or Interest. The Borrower fails to pay any installment of principal or interest due under this Note when due and such failure continues for a period of five (5) days after written notice. |
| (b) | Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors, or applies for or consents to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver of trustee shall otherwise be appointed without the consent of the Borrower, which shall constitute an automatic Event of Default and shall result in all remaining unpaid principal and interest due hereon immediately due and payable without the written demand from the Holder. |
INVESTMENT HUNTER, LLC
PROMISSORY NOTE – Page 1
| (c) | Bankruptcy. Bankruptcy, insolvency, reorganization, or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Borrower, which shall constitute an automatic Event of Default and shall result in all remaining unpaid principal and interest due hereon immediately due and payable without the written demand from the Holder. |
| 5. | Termination. Upon payment of all cash amounts due to the Holder as provided in this Note, the Borrower will forever be released from all of its payment obligations and liabilities under this Note and the Holder agrees to promptly return to the Borrower the Note marked “paid in full”. This Note may be prepaid, in whole or in part, without the prior consent of the Holder. |
| 6. | Miscellaneous |
| (a) | Successors and Assigns. This Note shall be binding upon successors and assigns of the Borrower, and shall inure to the benefit of the successors and permitted assigns of the Holder. |
| (b) | Severability. The unenforceability or invalidity of any provision or provisions of this Note shall not render any other provision or provisions herein contained unenforceable or invalid. |
| (c) | Notice. Any notice or communication required to be given hereunder may be delivered by hand or deposited with an overnight courier (with overnight delivery instructions), if to the Borrower, to the address of the Borrower’s corporate headquarters, and if to the Holder, to the last address of the Holder set forth in the Borrower’s books and records. Notice shall be deemed given and received on the date sent if sent by personal delivery; and one (1) day after the date sent if sent by overnight courier. |
INVESTMENT HUNTER, LLC
PROMISSORY NOTE – Page 2
| (d) | Entire Agreement. This Note contains the entire and complete understanding between the parties concerning its subject matter and all representations, agreements, arrangements, and understandings between or among the parties, whether oral or written, have been fully merged herein and are superseded thereby, except for representations, agreements, and understandings between or among the parties made pursuant to the Purchase Agreement and any other agreements entered into in connection therewith and herewith. The Note may be modified only by a writing signed by both parties. |
| (e) | Governing Law; Attorneys’ Fees. This Note shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to its principles regarding conflicts of law. Upon default, the breaching party agrees to pay to the non-breaching party reasonable attorneys’ fees, plus all other reasonable expenses, incurred by the non-breaching party in exercising any of the non-breaching party’s rights and remedies. |
| (f) | Jurisdiction. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of the State of Texas, Dallas County, and to the jurisdiction of the United States District Court for the State of Texas, for the purpose of any suit, action, or other proceeding arising out of or based upon this Note; (b) agree not to commence any suit, action, or other proceeding arising out of or based upon this Note except in the state courts of the State of Texas, Dallas County, or the United States District Court for the State of Texas; and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action, or proceeding, any claim that it is not subject personally to the jurisdiction of the above named courts, that its property is exempt or immune from attachment or execution, that the suit, action, or proceeding is brought in an inconvenient forum, that the venue of the suit, action, or proceeding is improper or that this Note or the subject matter hereof may not be enforced in or by such court. |
| (g) | FINAL AGREEMENT. THIS NOTE AND ALL OTHER INSTRUMENTS, DOCUMENTS, AND AGREEMENTS EXECUTED AND DELIVERED BY THE BORROWER IN CONNECTION WITH THE INDEBTEDNESS EVIDENCED BY THIS NOTE EMBOTY THE FINAL, ENTIRE AGREEMENT OF THE BORROWER AND THE HOLDER WITH RESPECT TO THE INDEBTEDNESS EVIDENCED BY THIS NOTE AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE INDEBTEDNESS EVIDENCED BYT HIS NOTE AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE BORROWER AND THE HOLDER. THERE ARE NO ORAL AGREEMENTS BETWEEN THE BORROWER AND THE HOLDER. |
| (h) | Subordination. By its acceptance hereof, the Holder agrees that the indebtedness evidenced by this Note, including the principal of and interest thereon, shall be subordinate to and subject in right of payment, to the extent hereinafter set forth, to the prior payment in full of all principal, interest, and any other sums then due on all existing or future Senior Indebtedness of the Borrower. The term “Senior Indebtedness” shall mean secured and unsecured indebtedness of the Borrower, or with respect to which the Borrower is a guarantor, for money borrowed by the Borrower from any financial institution or other sources prior to the date of this unsecured promissory note. |
Signature Page Follows
INVESTMENT HUNTER, LLC
PROMISSORY NOTE – Page 3
IN WITNESS WHEREOF, the Borrower has executed this Note as of the date set forth above.
| GENERATION HEMP, INC. | GENERATION HEMP, INC. | |
| a Delaware Corporation | a Delaware Corporation | |
| /s/ Gary C. Evans | /s/ Joe L. McClaugherty | |
| By: Gary C. Evans, CEO | By: Joe L. McClaugherty, Lead Director |
INVESTMENT HUNTER, LLC
PROMISSORY NOTE – Page 4
PROMISSORY NOTE
Exhibit A
Schedule of Principal Sums Drawn under Promissory Note
| Principal Sum Draw Date | Principal Sum Drawn | |||
| 1/4/22 | $ | 60,000.00 | ||
| 1/11/22 | 25,000.00 | |||
| 1/20/22 | 60,000.00 | |||
| 1/28/22 | 75,000.00 | |||
| 2/10/22 | 25,000.00 | |||
| 2/14/22 | 25,000.00 | |||
| 2/17/22 | 65,000.00 | |||
| 3/1/22 | 40,000.00 | |||
| 3/3/22 | 20,000.00 | |||
| 3/17/22 | 44,000.00 | |||
| 3/23/22 | 1,500.00 | |||
| 5/11/22 | 40,000.00 | |||
| 7/21/22 | 10,500.00 | |||
| 8/11/22 | 1,000.00 | |||
| Total | $ | 492,000.00 | ||
INVESTMENT HUNTER, LLC
PROMISSORY NOTE – Page 5
Exhibit 10.3
SECURED PROMISSORY NOTE AMENDMENT AND EXTENSION AGREEMENT
This Secured Promissory Note Amendment and Extension Agreement (the “Agreement”) is entered into by JDone LLC, a Colorado limited liability company (the “Borrower”) and Thomas S. Yang (the “Holder”), as of October 10, 2022 and effective as of October 1, 2022.
Reference is made to that certain original Secured Promissory Note between the Borrower and the Holder, dated as of September 15, 2014 and amended on October 1, 2019, and most recently April 15, 2022, together with all amendments thereto (the “Note”), together with all associated notes, pledge agreements, guaranties, deeds of trust, security agreements, affidavits and other instruments and documents executed and delivered by the Borrower, the Holder and any Guarantors (the “Loan Documents”). Each of the Loan Documents shall be deemed to be amended in connection with the terms of this Agreement and the terms of this Agreement and the Note, as amended and extended hereby, shall be the controlling document with respect to the Note and the Loan Documents.
All capitalized terms used herein, but not otherwise defined, shall have the meaning ascribed to such terms in the Note and the Loan Documents.
At the execution of this Agreement, the Borrower shall undertake the following, and the Note shall be amended as follows:
| (i) | The Holder and Borrower agree that the outstanding principal balance under the Note is 423,190.48 after application of the August 2022 payment; |
| (ii) | the Borrower shall pay a principal payment in the amount of $73,190.48 plus accrued interest on October 15, 2022; |
| (iii) | the Borrower shall pay a principal payment in the amount of $50,000 plus accrued interest on November 15, 2022; |
| (iv) | the Borrower shall pay a principal payment in the amount of $50,000 plus accrued interest on December 15, 2022; |
| (v) | the Note shall be amended to change the Maturity Date to January 15, 2023; |
| (vi) | after the October, November, and December 2022 principal and interest payments, the outstanding principal balance under the note as of January 15, 2023 will be $250,000; and |
| (vii) | Borrower may pay off the loan at any time prior to the Maturity Date without penalty. | |
| (viii) | Any time prior to January 15, 2023, if Borrower raises new equity capital in the amount of five million dollars ($5,000,000.00) or greater, then within ten (10) business days of closing, repayment of all outstanding principal and interest on this Secured Promissory Note will be due to Holder. |
All other terms contained in the Note and the Loan Documents shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the Borrower and the Holder have executed this Agreement as of the date first written above and effective as the date stated above.
BORROWER:
JDone LLC
By: Generation Hemp, Inc.
/s/ Gary C. Evans
By:
Gary C. Evans
Chairman and Chief Executive Officer
ACKNOWLEDGED AND AGREED:
HOLDER:
/s/ Thomas S. Yang
By:
Thomas S. Yang
Exhibit 10.4
AMENDED AND RESTATED SUBORDINATED PROMISSORY NOTE
Dated September 30, 2022
Principal Amount $523,550.92
FOR VALUE, Generation Hemp, Inc., a Delaware corporation (“Borrower”), whose mailing address is P.O. Box 540308, Dallas, Texas 75354, promises and agrees to pay to the order of Gary C. Evans, a Texas resident (“Lender”), whose address is 8533 Midway Road, Dallas, Texas 75209, or at such other location as the holder of this Amended and Restated Subordinated Promissory Note (the “Note”), originally issued on November 20, 2020 (the “Original Note”), may designate by written notice to Borrower, the sum of five hundred twenty-three thousand five hundred fifty dollars and ninety-two cents ($523,550.92) in the lawful currency of the United States with interest at a rate of 10 % per annum, but in no event higher than the Highest Lawful Rate (as hereinafter defined). This Note amends and restates the Original Note and all amendments, allonges and modifications thereto, in its collective entirety.
“Highest Lawful Rate” means the maximum nonusurious rate of interest permitted by applicable federal or Texas law from time to time.
Interest on this Note shall be computed for the actual number of days elapsed and on the basis of a year consisting of 360 days, and a month consisting of 30 days, unless the Highest Lawful Rate would thereby be exceeded, in which event, to the extent necessary to avoid exceeding the Highest Lawful Rate, interest shall be computed on the basis of the actual number of days elapsed in the applicable calendar year in which accrued. It is understood that interest will begin to accrue on the date of each principal amount advanced as outlined on Exhibit “A.” If an Event of Default (as defined below) shall occur under this Note, interest shall immediately commence accruing at a default rate of fourteen percent (14%) per annum.
The principal amount of this Note and all accrued, unpaid interest thereon is due and payable in full on the 1st day of January, 2023 (the “Payment Date”). This Note may be prepaid in whole or in part at any time prior to the payment date stated in the preceding sentence without penalty as to principal, and any partial payments shall be applied to the principal due on this Note in inverse order of maturity with interest being adjusted accordingly.
Any time prior to January 1, 2023, if Borrower raises new equity capital in the amount of three million dollars ($3,000,000.00) or greater, then within five (5) business days of closing, repayment of all outstanding principal and interest on this Subordinated Promissory Note will be due.
If one of the following events occurs, Maker shall be in default (“Default”) and this Note shall, at Lender’s option, become immediately due and payable without demand or notice:
| (i) | the failure of Borrower to pay the principal and any accrued interest in full on or before the Payment Date; |
| (ii) | the filing of bankruptcy proceedings involving the Borrower as a debtor; |
| (iii) | the making of a general assignment for the benefit of the Borrower’s creditors; or the uncured breach by Borrower under any of the security documents executed in conformity with this Note, which remains uncured following any applicable cure period. |
| Promissory Note – Page 1 |
If any payment date falls on a Saturday, Sunday, or a federal holiday, then payment will be due on the next business day and such extension of time shall in such case be included in the computation or payment of interest hereunder. All past due principal and interest on this Note shall bear interest at the Highest Lawful Rate.
To the extent that waiver of notice is permitted by applicable law, the Borrower and any and all co-makers, endorsers, guarantors, and sureties jointly and severally waive notice (including, but not limited to, notice of intent to accelerate and notice of acceleration), demand, presentment for payment, protest and the filing of suit for the purpose of fixing liability and consent that the time of payment hereof may be extended and re-extended from time to time without notice to them or any of them, and each agree that his, her, or its liability on or with respect to this Note shall not be affected by any release of or change in any security at any time existing or by any failure to perfect or to maintain perfection of any lien on or security interest in any such security.
This Note has been executed and delivered in Dallas, Dallas County, Texas, and shall be governed by and construed in accordance with the laws of the State of Texas and the United States of America from time to time in effect without regard to the choice of law provisions thereof, and shall be enforceable in Dallas County, Texas.
Regardless of any provision contained in this Note, the Payee shall never be deemed to have contracted for or be entitled to receive, collect or apply as interest on the Note, any amount in excess of the maximum rate of interest permitted to be charged by applicable law and, in the event Payee ever receives, collects or applies as interest any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note; and, if the principal balance of this Note is paid in full, any remaining excess shall forthwith be paid to Maker. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Maker and Payee shall, to the maximum extent permitted under applicable law, (i) exclude voluntary prepayments and the effect thereof, and (ii) spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout such term.
This Promissory Note is intended to be an obligation of Borrower and, by the execution of this Promissory Note, Borrower agrees that Borrower shall not be entitled to sell, transfer, assign, or convey in any manner whatsoever, this Promissory Note and Borrower shall remain obligated under this Promissory Note until the obligation set forth herein is paid in full.
If this Note is placed in the hands of any attorney for collection, or if it is collected through any legal proceedings at law or in equity or in bankruptcy, receivership or other court proceedings, Maker joint and severally agrees to pay all costs of collection, including, but not limited to court costs and reasonable attorney’s fees.
IN WITNESS WHEREOF, the undersigned Borrower has duly executed this Note effective as of the date first written above.
| By: | /s/ Joe McClaugherty | September 30, 2022 | ||
| Name: | Joe McClaugherty | DATE | ||
| Title: | Generation Hemp, Inc. Lead Director |
Promissory Note – Page 2
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Gary C. Evans, certify that:
| 1) | I have reviewed this Quarterly Report of Generation Hemp, Inc. on Form 10-Q; |
| 2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
| 4) | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have; |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure the material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5) | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls over financial reporting. |
| DATE: November 14, 2022 | By: | /s/ Gary C. Evans |
Gary C. Evans Chairman Chief Executive Officer (Principal Executive Officer and |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT 0F 2002
In connection with the Quarterly Report of Generation Hemp, Inc. (the Company”) on Form 10-Q for the period ended herein as filed with the Securities and Exchange Commission (the “Report”), I, Gary C. Evans, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fully presents, in all material respects, the financial condition and results of operations or the Company. |
| DATE: November 14, 2022 | By: | /s/ Gary C. Evans |
Gary C. Evans Chairman Chief Executive Officer (Principal Executive Officer and |
Unaudited Condensed Consolidated Balance Sheets (Parentheticals) - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Preferred stock, par value (in Dollars per share) | $ 0.00001 | $ 0.00001 |
| Preferred stock, shares authorized | 200,000,000 | 200,000,000 |
| Preferred stock, shares outstanding | ||
| Common stock, par value (in Dollars per share) | $ 0.00001 | $ 0.00001 |
| Common stock, shares authorized | 200,000,000 | 200,000,000 |
| Common stock, shares issued | 113,204,002 | 113,094,002 |
| Common stock, shares outstanding | 113,204,002 | 113,094,002 |
| Series B Redeemable Preferred Stock | ||
| Preferred stock, par value (in Dollars per share) | ||
| Preferred stock, stated Value (in Dollars) | $ 10,000 | $ 10,000 |
| Preferred stock, shares authorized | 300 | 300 |
| Preferred stock, shares issued | 118 | 135 |
| Preferred stock, shares outstanding | 118 | 135 |
Unaudited Condensed Consolidated Statements of Operations - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Revenue: | ||||
| Post-harvest and midstream services | $ 1,227,123 | $ 487,088 | $ 1,559,056 | $ 535,053 |
| Rental | 22,500 | 15,000 | 67,500 | 60,000 |
| Total revenue | 1,249,623 | 502,088 | 1,626,556 | 595,053 |
| Costs and Expenses: | ||||
| Cost of revenue (exclusive of items shown separately below) | 375,269 | 279,621 | 644,113 | 549,881 |
| Depreciation and amortization | 261,490 | 315,729 | 743,730 | 1,006,804 |
| Merger and acquisition costs | 16,115 | |||
| Impairment expense | 407,000 | 407,000 | ||
| General and administrative | 1,933,281 | 1,128,298 | 5,825,809 | 2,763,529 |
| Total costs and expenses | 2,977,040 | 1,723,648 | 7,620,652 | 4,336,329 |
| Operating loss | (1,727,417) | (1,221,560) | (5,994,096) | (3,741,276) |
| Other expense (income): | ||||
| Other income | (378,304) | (378,304) | (25,424) | |
| Change in fair value of marketable security | (11,770) | |||
| Interest expense | 116,999 | 155,505 | 404,272 | 651,807 |
| Total other expense (income) | (261,305) | 155,505 | 25,968 | 614,613 |
| Loss from continuing operations | (1,466,112) | (1,377,065) | (6,020,064) | (4,355,889) |
| Income (loss) from discontinued operations | 10,386 | (1,630) | (29,877) | (11,349) |
| Net loss | (1,455,726) | (1,378,695) | (6,049,941) | (4,367,238) |
| Less: net income (loss) attributable to noncontrolling interests | (58) | (1,137) | (4,067) | (284) |
| Net loss attributable to Generation Hemp | $ (1,455,668) | $ (1,377,558) | $ (6,045,874) | $ (4,366,954) |
| Loss from continuing operations | ||||
| Basic (in Dollars per share) | $ (0.01) | $ (0.03) | $ (0.05) | $ (0.11) |
| Diluted (in Dollars per share) | (0.01) | (0.03) | (0.05) | (0.11) |
| Loss from discontinued operations | ||||
| Basic (in Dollars per share) | ||||
| Diluted (in Dollars per share) | ||||
| Earnings (loss) per share | ||||
| Basic (in Dollars per share) | (0.01) | (0.03) | (0.05) | (0.11) |
| Diluted (in Dollars per share) | $ (0.01) | $ (0.03) | $ (0.05) | $ (0.11) |
Unaudited Condensed Consolidated Statements of Cash Flows (Parentheticals) - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Statement of Cash Flows [Abstract] | ||
| Net of acquired cash | $ 224,530 | $ 224,530 |
Business |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Business [Abstract] | |
| Business | 1. Business
Generation Hemp, Inc. (the “Company”) was incorporated on August 21, 2021 in the State of Delaware. The Company was originally incorporated as Home Treasure Finders, Inc. (“HTF”) on July 28, 2008 in the State of Colorado. On November 27, 2019, HTF purchased approximately 94% of the common stock of Energy Hunter Resources, Inc. (“EHR”) in a series of transactions accounted for as a reverse merger. Upon closing, HTF changed its name to Generation Hemp, Inc.
On January 11, 2021, we completed the acquisition of certain assets of Halcyon Thruput, LLC (“Halcyon”). With this acquisition, we commenced providing post-harvest and midstream services to hemp 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. The Company also offers safe storage services for processed hemp, which enables farmers to maximize strategic market timing. We market two retail products, Gas Monkey Spill-Jack, an all-natural, plant-based, sustainable, and biodegradable loose absorbent, and Rowdy Rooster, an animal bedding consumer goods product, each made from the hemp hurd byproduct that is produced from our hemp processing operations.
We also generate revenue from rental of our “Cannabis Zoned” (Hemp) warehouse property located in Denver, Colorado currently leased to an unaffiliated hemp seed company.
As of September 30, 2022, EHR held an approximate 8% working interest in an oil & gas property located in Cochran County, Texas within the Slaughter-Levelland Field of the San Andres formation in the Northwest Shelf of West Texas. EHR’s oil & gas activities are currently held for sale and are presented in these consolidated financial statements as discontinued operations for each of the periods presented.
Our management team has been and continues to actively review acquisition candidates involved in the hemp industry that operate within a number of vertical businesses, predominantly within the midstream sector that are attractive to us and are within the hemp supply chain. Additionally, the Company has been studying the Bitcoin mining space and anticipates future activity in this business sector.
Liquidity and Going Concern – The Company is dependent upon obtaining additional funding to continue ongoing operations and to pursue its strategy and execute its acquisition plans.
In the nine months ended September 30, 2022, the Company used $1.0 million of cash for its operating activities. At September 30, 2022, the Company’s current liabilities, including financing obligations due within one year, totaled $6.1 million as compared with its current assets of $1.0 million.
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. |
Summary of Significant Accounting Policies |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Accounting Policies [Abstract] | |
| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Basis of Presentation – These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. Intercompany balances and transactions between consolidated entities are eliminated.
Fair Value Measurement – Our financial assets and liabilities consist of cash, accounts receivable, accounts payable and indebtedness. The fair values of these instruments approximate their carrying amounts at each reporting date.
Deferred Revenue – In July 2022, the Company entered into an agreement for the sale of 66,782 pounds of dried hemp biomass from its inventories on-hand for a sales price of $1.50 per pound. Deliveries and payment of the $100,173 sales proceeds are scheduled monthly through December 2022 and are reported as deferred revenue in the consolidated balance sheets. We expect to recognize revenue for these amounts when the contract is completed and product is shipped in the fourth quarter of 2022.
Major Customer and Concentration of Credit Risk – We estimate an allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. An allowance for doubtful accounts was not needed as of September 30, 2022 or December 31, 2021.
During the three and nine months ended September 30, 2022, one customer accounted for all of our post-harvest and midstream services revenue. A total of $656,344 was outstanding from this customer as a receivable at September 30, 2022.
Our rental revenue is derived from a single lessee on a commercial warehouse owned by the Company. There were no amounts due from this customer at September 30, 2022 or December 31, 2021.
Recent Accounting Pronouncements – There are no other new accounting pronouncements that are expected to have a material impact on the consolidated financial statements. |
Property and Equipment |
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| Property and Equipment | 3. Property and Equipment
Property and equipment consisted of the following:
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Intangible and Other Assets |
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| Intangible and Other Assets | 4. Intangible and Other Assets
The following table summarizes information related to definite-lived intangible assets:
Other assets included $407,000 at December 31, 2021 for the Company’s option to purchase the 48,000 square foot facility located in Hopkinsville, Kentucky presently leased from Halcyon. Under this agreement, the Company had the option to purchase the facility on or before August 25, 2022, as amended, for a purchase price of $993,000. This agreement was not renewed upon its expiration. Impairment expense totaling $407,000 was recognized in the third quarter of 2022 as a result. |
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Notes Payable – Related Parties |
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| Notes Payable – Related Parties [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable – Related Parties | 5. Notes Payable – Related Parties
Notes payable – related parties consisted of the following:
Subordinated Promissory Note to CEO – Our CEO made advances to the Company during 2020 under a subordinated promissory note in the amount of $523,551 initially due September 30, 2021. This note was amended to a new maturity date of January 1, 2023. If the Company raises new equity capital of $3 million or more, then the full amount outstanding under the note is due within five days. The note bears interest at 10% per annum. Accrued interest on this subordinated promissory note totaled $46,761 at September 30, 2022.
Convertible Promissory Note to CEO – In 2021, our CEO made advances totaling $410,000 to the Company under a convertible promissory note. Additional advances made in 2022 through September 30 totaled $697,069. The convertible note initially matured on January 1, 2022 but was subsequently amended to extend the maturity date to January 1, 2023. If the Company raises new equity capital of $3 million or more, then the full amount outstanding under the note is due within five days. The note bears interest at 10%. The principal and interest due on the convertible note may be converted, at the option of the holder, into restricted shares of the Company’s common stock at an initial conversion price of $0.50 per share but that was lowered in July 2022 to $0.30 per share. Accrued interest on this convertible promissory note totaled $79,493 at September 30, 2022.
Secured Promissory Note and Warrants to Coventry Asset Management, LTD. – On December 30, 2020, the Company received proceeds from issuance of a secured promissory note in principal amount of $1,000,000 to Coventry Asset Management, LTD, a Company stockholder. The promissory note is secured by the property acquired in the acquisition of certain assets of Halcyon. The unpaid balance of the secured promissory note bears interest at a rate of 10% per annum and initially matured on June 30, 2021. The promissory note has been extended six times including the issuance of 20,000 restricted common shares as extension fees each for the first five extensions and the issuance of 50,000 restricted common shares for the sixth extension. The maturity date of the promissory note is December 31, 2022, as amended. If before December 31, 2022, the Company raises new equity capital of $5 million or more, then the full amount outstanding under the promissory note is due within five days. As amended, a payment of 25% of the principal balance of the note is due by October 31, 2022. The Company did not make the principal payment due on October 31, 2022 and, as a result, this note is presently in default. If the promissory note is not paid in full by December 31, 2022, the interest rate increases to 14% per annum. Accrued interest on this secured note totaled $175,069 at September 30, 2022.
Subordinated Promissory Note and Warrants to Investor – On December 30, 2020, the Company issued a subordinated promissory note in principal amount of $500,000 to an accredited investor who is also a Company stockholder. The unpaid balance of the Subordinated Note bears interest at a rate of 10% per annum. The Company made a principal payment of $250,000 in April 2021. The subordinated note principal together with accrued and unpaid interest was due, as previously amended, on March 31, 2022 but was subsequently extended. As subsequently amended, a payment of $50,000 was made in April 2022 and the remaining principal of $200,000 together with accrued interest was due on June 30, 2022. The Company did not make the principal payment due on June 30, 2022 and, as a result, this note is presently in default. Accrued interest on this subordinated promissory note totaled $36,990 at September 30, 2022.
The holder of the subordinated note received a warrant to purchase 500,000 shares of common stock exercisable for cash at an exercise price of $0.352 per share. As consideration for the April 2022 extension, the term of this warrant was extended by one year to December 30, 2023. The Company recognized $68,756 of interest expense in 2022 for this extension of the warrant term.
Promissory Note to Investment Hunter, LLC – In 2022, Investment Hunter, LLC, a Texas LLC controlled by our CEO, made advances totaling $492,000 to the Company under a promissory note due January 1, 2023, as amended. If the Company raises new equity capital of $3 million or more, then the full amount outstanding under the note is due within five days. The note bears interest at 10% per annum. Accrued interest on this subordinated promissory note totaled $30,193 at September 30, 2022.
Director Notes – In August 2022, the Company received proceeds totaling $105,000 from unsecured notes payable to three members of our board of directors. The notes bear interest at 10% per annum and matured on September 12, 2022. Two of the notes were repaid in September 2022. The remaining note, having an outstanding principal balance of $35,000 at September 30, 2022, was repaid in October 2022. |
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Other Indebtedness |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Other Indebtedness [Abstract] | |
| Other Indebtedness | 6. Other Indebtedness
The Company is obligated under a mortgage payable dated September 15, 2014 secured by its warehouse property located in Denver, Colorado. The note has been amended a number of times to a maturity date of January 15, 2023. In the latest extension, the Company made a principal payment of $73,190 plus accrued interest in October 2022 and agreed to make two additional principal payments of $50,000 plus accrued interest on November 15, 2022 and December 15, 2022. The interest rate on the mortgage payable is 12%. If before the final maturity of the mortgage payable, the Company raises new equity capital of $5 million or more, then the full amount outstanding is due within ten days.
The Company leases the Denver warehouse property to a tenant under an operating lease which was renewed with a new tenant and extended to August 1, 2023 for a monthly rent of $7,500. The lease requires a true-up with the tenant for property taxes and insurance paid by the Company and requires the tenant to maintain the interior and exterior of the warehouse (except for the roof). The lease provides for a rent abatement in the first and last month of the contracted extension. Minimum future rents for the remainder of 2022 are $22,500 and for 2023 are $52,500. |
Leases |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Leases [Abstract] | |
| Leases | 7. Leases
Office Space – The Company leases office space in Fort Worth, Texas for managerial offices. This lease requires monthly payments of $2,000 and is month-to-month. Lease expense for this facility totaled $6,000 and $18,000 for the three and nine months ended September 30, 2022, respectively. In the three and nine months ended September 30, 2021, lease expense for this facility was $6,000 and $16,000, respectively.
Hemp Processing Operating Facility – The Company leases its operating facility in Kentucky from Oz Capital, LLC, a related party, under a lease expiring May 31, 2024. The lease provides for monthly payments of $10,249. Oz Capital, LLC is responsible for all taxes and maintenance under the lease. Lease expense for this facility totaled $30,747 and $92,241 in the three and nine months ended September 30, 2022, respectively. In the three and nine months ended September 30. 2021, lease expense for this facility was $30,747 and $88,604, respectively. A right-of-use asset and lease liability is recorded for this lease. As the lease does not provide an implicit rate, the Company used its estimated incremental borrowing rate of 10% in determining the present value of the lease payments.
Future Bitcoin Mining Premises – The Company entered a five-year commercial lease for land and premises in Arkansas. We expect to use these premises as a future Bitcoin mining location because of its favorable power rates and land availability. The lease commences once the Company begins receiving power for its operations conducted at the location. The monthly rent will vary from a minimum of $1,000 per megawatt of power usage monthly up to $4,000 per megawatt monthly depending on the average power usage over a trailing 90-day period. We anticipate commencing operations at the leased premises in the first quarter of 2023. |
Commitments and Contingencies |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies | 8. Commitments and Contingencies
Litigation – From time to time, we are subject to various litigation and other claims in the normal course of business. Below is a discussion of specific matters. We cannot estimate the ultimate outcome of these matters.
Generation Hemp, Inc. v. Colorado Mill Equipment, LLC
The Defendant sold to the Company a faulty piece of equipment for $16,000 and will not refund to the Company the purchase price after repeated attempts to return their equipment. An original lawsuit filed by the Company against Colorado Mill Equipment in January 2022 in Dallas County was subsequently dismissed due to jurisdiction. A second lawsuit was filed in El Paso County, Colorado and is currently pending.
Halcyon Thruput, LLC, Plaintiff v. United National Insurance Company, Defendant, United States District Court for the Northern District of Texas, Dallas Division, Case No. 3:21-CV-3136-K.
Halcyon Thruput, LLC (Halcyon) obtained an all-risks commercial insurance policy, including an Equipment Breakdown Endorsement (Policy) from United National Insurance Company (UNIC) to provide substantial coverages for Halcyon Thruput LLC’s (Halcyon) $1,203,735 hemp processing dryer (Dryer) at its facility in Hopkinsville, Kentucky. During the Policy period, the Dryer caught fire due to the Dryer being defectively designed.
While UNIC paid a number of Halcyon’s claims, Halcyon’s claim for the cost of the replacement Dryer of $1,498,848 was denied as described below.
Buyer, a wholly owned subsidiary of the Company, pursuant to an Asset Purchase Agreement as twice amended, then acquired all the assets of Halcyon, except for the right to the proceeds of UNIC’s insurance policy since the Policy prohibited assignment. Halcyon and Buyer agreed that Buyer’s principal, Gary C. Evans, had the right to control the litigation, engage counsel for Halcyon and make all decisions relating to any proceeds received in the litigation by settlement or otherwise.
Halcyon’s suit against UNIC, which was removed to federal court, seeks $796,865.53 (the cost of the replacement dryer of $1,498,848, less a credit for $583,508.47 previously paid by UNIC to Halcyon for the Dryer fire=$915,339.53) plus statutory interest on that sum from August 10, 2020 for violating the Texas Insurance Code’s requirement that claims be promptly paid, additional statutory penalties, and attorneys’ fees. Certain documents have been executed between the Company, Halcyon and legal counsel, which provide for a sharing of costs and expenses and awards, if any, against UNIC. Mediation of the case was held in April 2022 where no agreement was reached by the parties. Depositions of the Company’s expert witnesses were completed in July 2022 and of UNIC’s representatives in September 2022.
In August 2022, the Company received a second payment from UNIC of $357,143 as a partial settlement of this claim.
JDONE, LLC v. Grand Traverse Holdings, LLC and John Gallegos, Denver District Court Case No. 2019CV33723
JDONE, LLC (“JDONE”), a wholly owned subsidiary of the Company and landlord of a commercial warehouse building in Denver, brought suit against Grand Traverse Holdings, LLC for default of its commercial lease of the warehouse from JDONE. This case settled in October 2022 and the Company received $122,500 from the defendant.
KBSIII Tower at Lake Carolyn, LLC and Prime US-Tower at Lake Carolyn, LLC (collectively – “KBSIII” v. Energy Hunter Resources, Inc.)
Plaintiff/Counterdefendant KBSIII was seeking lost rent on office space for periods after EHR vacated office premises located in Las Colinas, Texas. EHR filed a counter suit alleging specific damages due to uninhabitable premises of the office space due to the intolerable conduct of other tenants located on the same floor. On December 23, 2020, the trial court entered a summary judgment against EHR for $230,712. The judgment provides for post-judgment interest at a rate of 5% per annum until paid and further provides for additional amounts owed should EHR pursue unsuccessful appeals to higher courts. At September 30, 2022, the Company had accrued $252,583 for this judgment, which is exclusively an EHR obligation. |
Income Taxes |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Income Taxes [Abstract] | |
| Income Taxes | 9. Income Taxes
Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. An income tax benefit for the three or nine months ended September 30, 2022 or 2021 was not recognized because tax losses incurred were fully offset by a valuation allowance against deferred tax assets. There were no uncertain tax positions as of September 30, 2022. The Company is delinquent in filing its 2021 income tax returns. |
Equity |
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| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity | 10. Equity
Series A Preferred Stock – Our Series A Preferred Stock was originally issued in connection with HTF’s acquisition of EHR in 2019. On September 8, 2021, holders of the Company’s Series A Preferred Stock elected to convert such shares into shares of the Company’s common stock. As a result, 6,328,948 shares of Series A Preferred Stock were converted into 75,947,376 shares of common stock, with each share of Series A Preferred Stock converting into 12 shares of restricted common stock pursuant to the applicable Certificate of Designations.
Series B Preferred Stock Units – On December 30, 2020, the Company sold to certain accredited investors, including Gary C. Evans, our Chief Executive Officer, an aggregate of 135 preferred stock units comprised of (i) one share of Series B Redeemable Convertible Preferred Stock, no par value, and (ii) one warrant exercisable for 50,000 shares of common stock of the Company until December 30, 2022 at an exercise price of $0.352 per share.
The sale of the preferred stock units for $10,000 each resulted in aggregate gross proceeds of approximately $1.35 million, before deducting estimated offering expenses payable by the Company. Substantially all of the proceeds raised in the offering were used to fund the acquisition of assets of Halcyon, expenses related thereto and for general corporate purposes.
Each share of Series B Preferred Stock is initially convertible into 25,000 shares of common stock, subject to adjustment. Holders of Series B Preferred Stock are entitled to receive dividends of 6.00% per annum based on the stated value equal to $10,000 per share. Except as otherwise required by law, the Series B Preferred Stock does not have voting rights. However, as long as any shares of Series B Preferred Stock are outstanding, the Company will not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series B Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series B Preferred Stock, (b) alter or amend the related certificate of designation, (c) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series B Preferred Stock, (d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its common stock, (e) enter into any agreement with respect to any of the foregoing, or (f) pay cash dividends or distributions on any equity securities of the Company other than pursuant to the terms of the outstanding Series B Preferred Stock. The Series B Preferred Stock does not have a preference upon any liquidation, dissolution or winding-up of the Company.
Any or all of the Series B Preferred Stock may be converted, at their holder’s option, into 25,000 shares of common stock, as adjusted for any stock dividends, splits, combinations or similar events.
At any time after the occurrence of a “Qualifying Event,” the Company, upon 5-day written notice, shall have the right to cause each share of Series B Preferred Stock (and all accrued in-kind dividends with respect thereto) to be converted into common stock. For purposes of this automatic conversion of the Series B Preferred Stock, a “Qualifying Event” shall have occurred if (A) (1) the rolling five-trading day volume-weighted average trading price of shares of the common stock exceeds $1.00, and (2) there shall be an effective registration statement under the Securities Act of 1933, as amended covering all of the shares of common stock which would be issuable upon conversion of all of the outstanding shares of Series B Preferred Stock or (B) the Company closes a firm commitment underwriting of the common stock on a Form S-1 Registration Statement with aggregate gross proceeds of at least $5,000,000 at a price per share equal to or greater than $1.00. In each instance, a conversion may not be made unless the Company has filed an amendment to its Articles of Incorporation effecting an increase in its authorized common stock so that the Company has a sufficient number of authorized and unissued shares of common stock so as to permit the conversion of all outstanding shares.
The Series B Preferred Stock may be redeemed by the Company for its stated value, plus accrued and unpaid dividends, at any time. Initially, redemption payments of 12.5% each of the total amount of Series B Preferred Stock then outstanding plus accrued dividends were due from the Company to each Holder of Series B Preferred Stock at the end of each calendar quarter of 2021. The first required redemption payments totaling $137,500 were made in April 2021. In May, June and October of 2021, the three holders of the Series B Preferred Stock, including the Company’s chief executive officer, entered into transactions in which they accepted the mandatory redemption payment required pursuant to the Series B Preferred Stock certificate of designation in a number of Series B Units to effectively waive the redemption requirement. All other terms of the Series B Units remain unchanged and the holders’ ownership interest in the Series B Preferred Units remains the same as it was before such transactions.
Common Stock – At September 30, 2022, the Company had 113,204,002 common shares outstanding. Following is a discussion of common stock issuances during the periods presented:
Common Stock Warrants Outstanding – Following is a summary of warrants outstanding as of September 30, 2022:
Following is a summary of outstanding stock warrants activity for the periods presented:
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Stock-Based Compensation |
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| Share-Based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-Based Compensation | 11. Stock-Based Compensation
We award restricted stock or stock options as incentive compensation to employees and compensation to our Board of Directors for services. 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. On the one-year anniversary date of the 2021 Plan, the number of shares of common stock reserved for issuance automatically increased to 20% of the fully diluted common shares outstanding, including shares issuable upon the conversion of preferred shares, as calculated on an as-converted basis.
In the first quarter of 2021, the Company issued 500,000 restricted shares valued at $155,000 as incentive compensation to two executives who joined the Company. Compensation expense related to these awards totaled $38,750 and $81,000 for the three and six months ended June 30, 2021, respectively. These awards became fully vested in January 2022.
In the fourth quarter of 2021, the Company awarded options for 13,850,000 shares of the Company’s common stock as incentive compensation to management and the Board of Directors. One-third of the awarded options vested immediately with the remaining options vesting in two equal annual tranches over the next two years. Vested options may be exercised at any time until their expiration after 10 years at an exercise price of $0.76 per share. Unvested options are forfeited upon termination of service. The fair value of the awards at the date of grant was determined using the Black-Scholes option pricing model. Key assumptions included a risk-free interest rate ranging from 1.18% to 1.28%, historical volatility ranging from 331% to 643% and an expected life of the stock options ranging from five to six years.
In the third quarter of 2022, the Company awarded options for 1,915,000 shares of the Company’s common stock as incentive compensation to its CEO and board of directors. The awarded options vest over the next three years. Vested options may be exercised at any time until their expiration ranging from eight to 10 years at their exercise prices ranging from $0.30 to $0.33 per share. Unvested options are forfeited upon termination of service. The fair value of the awards at the date of grant was determined using the Black-Scholes option pricing model. Key assumptions included a risk-free interest rate ranging from 2.87% to 3.03%, historical volatility ranging from 251% to 408% and an expected life of the stock options ranging from four to seven years.
We recognized $1.3 million of compensation expense for these option awards in each of the quarters ended September 30, 2022. As of September 30, 2022, there was $2.7 million of total unrecognized compensation cost related to options to be recognized over a remaining weighted average period of 21 months.
The following table summarizes options outstanding, as well as activity for the periods presented:
The remaining weighted average contractual life of exercisable options at September 30, 2022 was nine years. |
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Discontinued Operations |
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| Discontinued Operations | 12. Discontinued Operations
In 2019, management determined to fully divest of EHR’s oil and gas activities. As such, these activities are presented as discontinued operations for each of the periods presented. The following is a summary of the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale:
The following is a summary of the major classes of line items constituting loss on discontinued operations shown in the consolidated statements of operations:
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Supplemental Cash Flow Information |
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| Supplemental Cash Flow Information | 13. Supplemental Cash Flow Information
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Earnings (Loss) Per Share |
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| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings (Loss) per Share | 14. Earnings (Loss) per Share
The following is the computation of earnings (loss) per basic and diluted share:
The computation of diluted earnings per common share excludes the assumed conversion of the Series B Preferred Stock and outstanding convertible notes and exercise of common stock options and warrants in periods when we report a loss. The dilutive effect of the assumed exercise of outstanding options and warrants was calculated using the treasury stock method. |
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Accounting Policies, by Policy (Policies) |
9 Months Ended |
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Sep. 30, 2022 | |
| Accounting Policies [Abstract] | |
| Basis of Presentation | Basis of Presentation – These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. Intercompany balances and transactions between consolidated entities are eliminated.
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| Fair Value Measurement | Fair Value Measurement – Our financial assets and liabilities consist of cash, accounts receivable, accounts payable and indebtedness. The fair values of these instruments approximate their carrying amounts at each reporting date.
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| Deferred Revenue | Deferred Revenue – In July 2022, the Company entered into an agreement for the sale of 66,782 pounds of dried hemp biomass from its inventories on-hand for a sales price of $1.50 per pound. Deliveries and payment of the $100,173 sales proceeds are scheduled monthly through December 2022 and are reported as deferred revenue in the consolidated balance sheets. We expect to recognize revenue for these amounts when the contract is completed and product is shipped in the fourth quarter of 2022.
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| Major Customer and Concentration of Credit Risk | Major Customer and Concentration of Credit Risk – We estimate an allowance for doubtful accounts based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. An allowance for doubtful accounts was not needed as of September 30, 2022 or December 31, 2021.
During the three and nine months ended September 30, 2022, one customer accounted for all of our post-harvest and midstream services revenue. A total of $656,344 was outstanding from this customer as a receivable at September 30, 2022.
Our rental revenue is derived from a single lessee on a commercial warehouse owned by the Company. There were no amounts due from this customer at September 30, 2022 or December 31, 2021.
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements – There are no other new accounting pronouncements that are expected to have a material impact on the consolidated financial statements. |
Property and Equipment (Tables) |
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| Schedule of property and equipment |
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Intangible and Other Assets (Tables) |
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| Schedule of intangible asset |
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Notes Payable – Related Parties (Tables) |
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| Schedule of notes payable – related parties |
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Equity (Tables) |
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of warrants outstanding |
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| Schedule of outstanding stock warrants activity |
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Stock-Based Compensation (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-Based Payment Arrangement [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of summarizes options outstanding |
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Discontinued Operations (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discontinued Operations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of discontinued operations to assets and liabilities held for sale |
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| Schedule of discontinued operations shown in the consolidated statements of operations |
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Supplemental Cash Flow Information (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Supplemental Cash Flow Information [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of supplemental cash flow information |
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Earnings (Loss) Per Share (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of earnings (loss) per basic and diluted share |
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Business (Details) $ in Millions |
1 Months Ended | 9 Months Ended | |
|---|---|---|---|
|
Jan. 11, 2021
$ / ft²
|
Nov. 27, 2019 |
Sep. 30, 2022
USD ($)
|
|
| Business (Details) [Line Items] | |||
| Square Foot Facility (in Dollars per Square Foot) | $ / ft² | 48,000 | ||
| Cash for its operating activities | $ 1.0 | ||
| Financing obligations | 6.1 | ||
| Current Assets | $ 1.0 | ||
| Description of business, description | As of September 30, 2022, EHR held an approximate 8% working interest in an oil & gas property located in Cochran County, Texas within the Slaughter-Levelland Field of the San Andres formation in the Northwest Shelf of West Texas. EHR’s oil & gas activities are currently held for sale and are presented in these consolidated financial statements as discontinued operations for each of the periods presented. | ||
| Financing obligations terms | 1 year | ||
| Energy Hunter Resources, Inc. [Member] | |||
| Business (Details) [Line Items] | |||
| Percentage of common stock | 94.00% |
Summary of Significant Accounting Policies (Details) - USD ($) |
1 Months Ended | 9 Months Ended |
|---|---|---|
Jul. 31, 2022 |
Sep. 30, 2022 |
|
| Accounting Policies [Abstract] | ||
| Sale of pounds | $ 66,782 | |
| Sale price per pound (in Dollars per share) | $ 1.5 | |
| Deliveries and payment amount | $ 100,173 | |
| Outstanding amount | $ 656,344 |
Intangible and Other Assets (Details) - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Other assets | $ 407,000 | |
| Option to purchase, description | the Company’s option to purchase the 48,000 square foot facility located in Hopkinsville, Kentucky presently leased from Halcyon. Under this agreement, the Company had the option to purchase the facility on or before August 25, 2022, as amended, for a purchase price of $993,000. | |
| Impairment expense | $ 407,000 |
Intangible and Other Assets (Details) - Schedule of intangible asset - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Finite-Lived Intangible Assets [Line Items] | ||
| Gross Carrying Amount | $ 2,675,825 | $ 2,675,825 |
| Accumulated Amortization | (1,257,800) | (817,917) |
| Net | 1,418,025 | 1,857,908 |
| Customer relationships [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Gross Carrying Amount | 2,612,649 | 2,612,649 |
| Accumulated Amortization | (1,220,948) | (796,858) |
| Net | 1,391,701 | 1,815,791 |
| Non-competition agreements [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Gross Carrying Amount | 63,176 | 63,176 |
| Accumulated Amortization | (36,852) | (21,059) |
| Net | $ 26,324 | $ 42,117 |
Other Indebtedness (Details) |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
USD ($)
| |
| Other Indebtedness [Abstract] | |
| Mortgage payable, description | The note has been amended a number of times to a maturity date of January 15, 2023. In the latest extension, the Company made a principal payment of $73,190 plus accrued interest in October 2022 and agreed to make two additional principal payments of $50,000 plus accrued interest on November 15, 2022 and December 15, 2022. |
| Interest rate | 12.00% |
| Interest expenses | $ 5,000,000 |
| Lease and rental expense | 7,500 |
| Minimum future of remainder of 2022 | 22,500 |
| Minimum future of remainder of 2023 | $ 52,500 |
Leases (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Leases (Details) [Line Items] | ||||
| Lease payment | $ 2,000 | |||
| Lease expense | $ 6,000 | $ 6,000 | $ 18,000 | $ 16,000 |
| Borrowing rate percentage | 10.00% | |||
| Minimum [Member] | ||||
| Leases (Details) [Line Items] | ||||
| Monthly rent | $ 1,000 | |||
| Maximum [Member] | ||||
| Leases (Details) [Line Items] | ||||
| Monthly rent | 4,000 | |||
| Oz Capital, LLC [Member] | ||||
| Leases (Details) [Line Items] | ||||
| Lease payment | 10,249 | |||
| Lease expense | $ 30,747 | $ 30,747 | $ 92,241 | $ 88,604 |
Commitments and Contingencies (Details) - USD ($) |
1 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Dec. 23, 2020 |
Sep. 30, 2022 |
Oct. 31, 2022 |
Dec. 31, 2018 |
|
| Commitments and Contingencies (Details) [Line Items] | ||||
| Purchase price of equipment | $ 16,000 | |||
| Insurance claim for replacement | $ 1,498,848 | |||
| Description of suit against UNIC | Halcyon’s suit against UNIC, which was removed to federal court, seeks $796,865.53 (the cost of the replacement dryer of $1,498,848, less a credit for $583,508.47 previously paid by UNIC to Halcyon for the Dryer fire=$915,339.53) plus statutory interest on that sum from August 10, 2020 for violating the Texas Insurance Code’s requirement that claims be promptly paid, additional statutory penalties, and attorneys’ fees. Certain documents have been executed between the Company, Halcyon and legal counsel, which provide for a sharing of costs and expenses and awards, if any, against UNIC. | |||
| Partial settlement claim | $ 357,143 | |||
| Amount of summary judgment | $ 230,712 | |||
| Litigation settlement interest percentage | 5.00% | |||
| Amount accrued for judgment | $ 252,583 | |||
| Halcyon Thruput LLC’s [Member] | ||||
| Commitments and Contingencies (Details) [Line Items] | ||||
| Substantial coverages | $ 1,203,735 | |||
| Grand Traverse Holdings, LLC [Member] | Subsequent Event [Member] | ||||
| Commitments and Contingencies (Details) [Line Items] | ||||
| Amount received from defendant | $ 122,500 |
Equity (Details) - USD ($) |
1 Months Ended | 9 Months Ended | |||
|---|---|---|---|---|---|
Dec. 30, 2020 |
Sep. 30, 2022 |
Jul. 31, 2022 |
Sep. 08, 2021 |
Apr. 30, 2021 |
|
| Equity (Details) [Line Items] | |||||
| Converted into shares of common stock | 25,000 | ||||
| Sale of preferred stock units (in Dollars) | $ 10,000 | ||||
| Aggregate gross proceeds (in Dollars) | $ 1,350,000 | ||||
| Price per share (in Dollars per share) | $ 1 | ||||
| Redemption payments percentage | 12.50% | ||||
| Redemption payments total (in Dollars) | $ 137,500 | ||||
| Warrant per share (in Dollars per share) | $ 1.5 | ||||
| Weighted average market price of common stock exceed (in Dollars per share) | $ 1 | ||||
| Shares of Common stock | 25,000 | ||||
| Common Stock [Member] | |||||
| Equity (Details) [Line Items] | |||||
| Equity, description | At September 30, 2022, the Company had 113,204,002 common shares outstanding. Following is a discussion of common stock issuances during the periods presented: ● Acquisition of Certain Assets of Halcyon – In January 2021, the Company issued 6,250,000 shares of common stock valued at $2.5 million ($0.40 per share; restricted from trading for a period of up to one year) in the acquisition. ● 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 consisted of one share of common stock and a warrant for the purchase of two shares of common stock for $0.50 each. Each warrant is exercisable any time before its expiration on the second anniversary of its issuance. The Company allocated the total proceeds based on the relative fair values of the common stock and warrants. The fair value of the warrants was determined using an options valuation model with key assumptions including a risk-free interest rate of 0.11% and historical volatility of 272%. A total of $263,293 was allocated to the warrants and reported in additional paid-in capital. ● Warrant Exercises – In the first quarter of 2021, the Company received $2,967,000 for the exercise of 8,428,976 outstanding warrants. In the fourth quarter of 2021, the Company received $375,000 for the exercise of 1,065,340 outstanding warrants. ● Issuances for Exchange or Conversion of Debt – The Company issued a total of 1,618,660 common shares for the exchange or conversion of outstanding debt in the first quarter of 2021. ● Issuance 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. ● 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 valued at $155,000 as incentive compensation to two executives who joined the Company in the first quarter of 2021. ● Issuance for Extensions of Secured Note – The Company issued 110,000 common shares as consideration for extensions of the maturity of a senior note in 2022. Refer to Note 5. | ||||
| Aggregate gross proceeds (in Dollars) | $ 5,000,000 | ||||
| Price per share (in Dollars per share) | $ 1 | ||||
| Warrant [Member] | |||||
| Equity (Details) [Line Items] | |||||
| Warrant per share (in Dollars per share) | $ 0.0001 | ||||
| Series A Preferred Stock [Member] | |||||
| Equity (Details) [Line Items] | |||||
| Shares of preferred stock | 6,328,948 | ||||
| Converted into shares of common stock | 75,947,376 | ||||
| Converting into shares of restricted common stock | 12 | ||||
| Series B Preferred Stock [Member] | |||||
| Equity (Details) [Line Items] | |||||
| Converted into shares of common stock | 25,000 | ||||
| Equity, description | On December 30, 2020, the Company sold to certain accredited investors, including Gary C. Evans, our Chief Executive Officer, an aggregate of 135 preferred stock units comprised of (i) one share of Series B Redeemable Convertible Preferred Stock, no par value, and (ii) one warrant exercisable for 50,000 shares of common stock of the Company until December 30, 2022 at an exercise price of $0.352 per share. | ||||
| Dividends percentage | 6.00% | ||||
| Stated value per share (in Dollars) | $ 10,000 |
Equity (Details) - Schedule of outstanding stock warrants activity |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
$ / shares
shares
| |
| Schedule Of Outstanding Stock Warrants Activity Abstract | |
| Number of Warrants, Warrants beginning | shares | 8,808,333 |
| Weighted Average Exercise Price, Warrants beginning | $ / shares | $ 0.407 |
| Number of Warrants, Warrants cancelled | shares | (250,000) |
| Weighted Average Exercise Price, Cancelled | $ / shares | $ 0.4 |
| Number of Warrants, Warrants ending | shares | 8,558,333 |
| Weighted Average Exercise Price, Warrants ending | $ / shares | $ 0.407 |
Stock-Based Compensation (Details) - USD ($) |
3 Months Ended | 6 Months Ended | 9 Months Ended | 12 Months Ended | |||
|---|---|---|---|---|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
Jun. 30, 2021 |
Mar. 31, 2021 |
Jun. 30, 2021 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Stock-Based Compensation (Details) [Line Items] | |||||||
| Diluted common shares outstanding percentage | 20.00% | ||||||
| Compensation expense related to awards | $ 38,750 | $ 81,000 | |||||
| Common stock incentive compensation | 1,915,000 | 13,850,000 | |||||
| Weighted average contractual life | 10 years | 9 years | |||||
| Exercise price per share | 0.76 | 0.76 | |||||
| Compensation expense | 1,300,000 | ||||||
| Total unrecognized compensation cost | $ 2,700,000 | ||||||
| Awarded options vest over year | 3 years | ||||||
| Minimum [Member] | |||||||
| Stock-Based Compensation (Details) [Line Items] | |||||||
| Weighted average contractual life | 8 years | ||||||
| Exercise price per share | 0.3 | 0.3 | |||||
| Risk free interest rate | 2.87% | 1.18% | |||||
| Volatility ranging | 251.00% | 331.00% | |||||
| Stock options range | 4 years | 5 years | |||||
| Maximum [Member] | |||||||
| Stock-Based Compensation (Details) [Line Items] | |||||||
| Weighted average contractual life | 10 years | ||||||
| Exercise price per share | 0.33 | 0.33 | |||||
| Risk free interest rate | 3.03% | ||||||
| Risk free interest rate | 1.28% | ||||||
| Volatility ranging | 408.00% | 643.00% | |||||
| Stock options range | 7 years | 6 years | |||||
| 2021 Plan [Member] | |||||||
| Stock-Based Compensation (Details) [Line Items] | |||||||
| common stock for issuance | 15,000,000 | ||||||
| Number of shares | 15,000,000 | ||||||
| Restricted Stock [Member] | |||||||
| Stock-Based Compensation (Details) [Line Items] | |||||||
| Restricted shares, issued | 500,000 | ||||||
| Restricted shares, value | $ 155,000 | ||||||
Stock-Based Compensation (Details) - Schedule of summarizes options outstanding |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
USD ($)
$ / shares
shares
| |
| Schedule Of Summarizes Options Outstanding Abstract | |
| Shares Beginning (in Shares) | shares | 13,850,000 |
| Weighted Average Grant Date Fair Value Beginning | $ 0.76 |
| Weighted Average Exercise Price Beginning | $ 0.76 |
| Aggregate Intrinsic Value Beginning (in Dollars) | $ | |
| Shares Granted (in Shares) | shares | 1,915,000 |
| Weighted Average Grant Date Fair Value Granted | $ 0.3 |
| Weighted Average Exercise Price Granted | $ 0.31 |
| Aggregate Intrinsic Value Granted (in Dollars) | $ | |
| Shares Ending (in Shares) | shares | 15,765,000 |
| Weighted Average Grant Date Fair Value Ending | $ 0.7 |
| Weighted Average Exercise Price Ending | $ 0.71 |
| Aggregate Intrinsic Value Ending (in Dollars) | $ |
Discontinued Operations (Details) - Schedule of discontinued operations to assets and liabilities held for sale - Discontinued Operations [Member] - USD ($) |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Assets: | ||
| Oil and natural gas properties held for sale, at cost | $ 1,874,849 | $ 1,874,849 |
| Accumulated DD&A | (1,874,849) | (1,874,849) |
| Total assets of discontinued operations held for sale | ||
| Liabilities: | ||
| Accrued liabilities | 39,956 | 48,997 |
| Asset retirement obligations | 52,368 | 52,368 |
| Revenue payable | 52,117 | 52,117 |
| Current liabilities of discontinued operations held for sale | 144,441 | 153,482 |
| Long-term liabilities of discontinued operations held for sale | 199,046 | 162,948 |
| Total liabilities of discontinued operations held for sale | $ 343,487 | $ 316,430 |
Discontinued Operations (Details) - Schedule of discontinued operations shown in the consolidated statements of operations - Discontinued Operations [Member] - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Revenue - | ||||
| Oil and gas sales | $ 41,077 | $ 55,140 | $ 116,870 | $ 93,248 |
| Costs and Expenses: | ||||
| Lease operating expense | 25,461 | 53,919 | 110,649 | 94,714 |
| Accretion | 5,230 | 2,851 | 36,098 | 9,883 |
| Total costs and expenses | 30,691 | 56,770 | 146,747 | 104,597 |
| Loss from discontinued operations | $ 10,386 | $ (1,630) | $ (29,877) | $ (11,349) |
Supplemental Cash Flow Information (Details) - Schedule of supplemental cash flow information - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Schedule Of Supplemental Cash Flow Information Abstract | ||
| Cash paid for interest | $ 50,690 | $ 127,812 |
| Cash paid for taxes | ||
| 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 | 60,035 | 39,137 |
| Issuance of common stock units previously subscribed | 50,000 | |
| Issuances of common shares for exchange or conversion of debt | $ 2,160,269 | |
Earnings (Loss) Per Share (Details) - Schedule of earnings (loss) per basic and diluted share - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Numerator | ||||
| Loss from continuing operations attributable to common stockholders | $ (1,465,404) | $ (1,376,030) | $ (6,017,867) | $ (4,356,315) |
| Income (loss) from discontinued operations | 9,736 | (1,528) | (28,007) | (10,639) |
| Less: preferred stock dividends | (19,668) | (16,125) | (60,035) | (56,625) |
| Net loss attributable to common stockholders | $ (1,475,336) | $ (1,393,683) | $ (6,105,909) | $ (4,423,579) |
| Denominator | ||||
| Weighted average shares used to compute basic EPS | 113,204,002 | 54,109,797 | 113,149,973 | 38,693,679 |
| Dilutive effect of convertible note | 1,164,773 | 1,164,773 | ||
| Dilutive effect of preferred stock | 2,950,000 | 59,913,657 | 2,950,000 | 72,641,084 |
| Dilutive effect of common stock options | 125,490 | 122,052 | ||
| Dilutive effect of common stock warrants | 47,560 | 9,042,419 | 1,709,576 | 11,126,327 |
| Weighted average shares used to compute diluted EPS | 117,491,825 | 123,065,873 | 119,096,374 | 122,461,090 |
| Loss from continuing operations | ||||
| Basic | $ (0.01) | $ (0.03) | $ (0.05) | $ (0.11) |
| Diluted | (0.01) | (0.03) | (0.05) | (0.11) |
| Loss from discontinued operations | ||||
| Basic | ||||
| Diluted | ||||
| Earnings (loss) per share | ||||
| Basic | (0.01) | (0.03) | (0.05) | (0.11) |
| Diluted | $ (0.01) | $ (0.03) | $ (0.05) | $ (0.11) |
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