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.
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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.
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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.
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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.
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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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