Notes
to Consolidated Financial Statements
September
30, 2020
(Unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The
Pure Harvest Corporate Group, Inc. (the “Company”), formerly Pure Harvest Cannabis Group, Inc., was formed as a Colorado
corporation in April 2004.
On
December 31, 2018, the Company acquired all of the outstanding common stock of Pure Harvest Cannabis Producers, Inc., (“PHCP”)
in exchange for 17,906,016 (post-split) shares of the Company’s common stock. The transaction was accounted for as a reverse
acquisition.
As
a result of the acquisition of PHCP, the Company now operates in various segments of the cannabis and hemp-CBD industries, focusing
on health and wellness products and applying education, research and development, and technology to each sector. The Company’s
new business also involves the acquisition and operation of licensed marijuana cultivation facilities, manufacturing facilities
and dispensaries.
The
Company will continue to collect royalties for licensing the Company’s patent and the trademarks in connection with manufacturing
and sale of Pocket Shot branded specialty alcohol beverage pouches.
The
Company changed its name to Pure Harvest Cannabis Group, Inc. in February 2019.
The
Company changed its name to Pure Harvest Corporate Group on June 8, 2020.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
financial statements are presented in United States dollars and have been prepared in accordance with United States generally
accepted accounting principles.
In
the opinion of management, the accompanying unaudited consolidated financial statements contain all accruals and adjustments (each
of which is of a normal recurring nature) necessary for a fair presentation of the Company’s financial position as of September
30, 2020 and the results of its operations for the three and nine months then ended. Significant accounting policies have been
consistently applied in the interim consolidated financial statements. The results of operations for the three and nine months
ended September 30, 2020 are not necessarily indicative of the results to be expected for the entire year.
Going
Concern
The
Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues
to experience negative cash flows from operations. The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability
to do so. The financial statements do not include any adjustment to reflect the possible future effect on the recoverability and
classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue
as a going concern.
Management
plans to fund future operations by raising capital and or seeking joint venture opportunities.
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in Accounting Standards Codification (“ASC”)
810 Consolidation (“ASC 810”). The consolidated financial statements include the accounts of the Company and its majority
owned subsidiaries. All significant consolidated transactions and balances have been eliminated in consolidation.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates. Significant estimates include estimated fair market value of assets and liabilities acquired under business combinations,
useful lives and potential impairment of property and equipment, recoverability of goodwill, estimates of fair value of share-based
payments and valuation of deferred tax assets.
Derivative
Liabilities
A
derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward,
swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded
in other contracts and for hedging activities.
As
a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However,
the Company entered into certain debt financing transactions in during 2020, as disclosed in Note 6, containing certain conversion
features that have resulted in the instruments being deemed derivatives. The Company evaluates such derivative instruments to
properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments
indexed to our common shares on a first-in-first-out basis.
The
classification of a derivative instrument is reassessed at each reporting date. If the classification changes as a result of events
during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There
is no limit on the number of times a contract may be reclassified.
Instruments
classified as derivative liabilities are remeasured using the Black-Scholes model at each reporting period (or upon reclassification),
and the change in fair value is recorded on our consolidated statement of operations.
Fair
Value of Financial Instruments
The
Company applies the accounting guidance under Financial Accounting Standards Board (“FASB”) ASC 820-10, “Fair
Value Measurements”, as well as certain related FASB staff positions. This guidance defines fair value as the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair
value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions
that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and
risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
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Level
1 - quoted market prices in active markets for identical assets or liabilities.
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Level
2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
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Level
3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
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The
carrying amount of the Company’s financial instruments approximates their fair value as of September 30, 2020 and December
31, 2019, due to the short-term nature of these instruments. The Company’s derivative liabilities are considered a Level
2 liability.
Net
Loss per Share
Net
loss per common share is computed by dividing net loss by the weighted average common shares outstanding during the period as
defined by Financial Accounting Standards, ASC Topic 260, “Earnings per Share”. Basic earnings per common share (“EPS”)
calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during
the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number
of common shares and dilutive common share equivalents outstanding. For the three and nine months ended September 30, 2020 and
2019, dilutive instruments consisted of convertible notes payable, unvested restricted stock grants, warrants, options to purchase
shares of the Company’s common stock, the effects of which to the Company’s net loss are anti-dilutive.
Recent
Accounting Pronouncements
In
December 2019, the FASB issued guidance that simplifies the accounting for income taxes by removing certain exceptions in existing
guidance and improves consistency in application by clarifying and amending existing guidance. This guidance is effective for
annual periods beginning after December 15, 2020, and interim periods within those annual periods, where the transition method
varies depending upon the specific amendment. Early adoption is permitted, including adoption in any interim period. An entity
that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual
period that includes that interim period, and all amendments must be adopted in the same period. The Company has reviewed the
provisions of the new standard, but it is not expected to have a significant impact on the Company.
In
January 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-01, “Investments-Equity Securities
(Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the
Interactions between Topic 321, Topic 323, and Topic 815”, which clarifies the interaction of the accounting for equity
securities under Topic 321 and investments accounted for under the equity method of accounting under Topic 323, and the accounting
for certain forward contracts and purchased options accounted for under Topic 815. This guidance is effective for the Company
for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted.
The Company has reviewed the provisions of the new standard, but it is not expected to have a significant impact on the Company.
The
FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs issued to date, including those above,
that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii)
are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our consolidated
financial statements.
NOTE
3 – ACQUISITIONS
Love
Pharm, LLC
On
February 12, 2020, the Company entered into an Operating Agreement with Dr. James Rouse, MD regarding the ownership, operation,
and management of Love Pharm, LLC. Love Pharm was recently organized in December 2019 to formulate, develop, manufacture, and
brand hemp/CBD products for sale and distribution as well as to form a multi-channel media platform for public and patient education
regarding the endocannabinoid system utilizing Dr. Rouse’s name, public image and his extensive experience and expertise
in medicine and entrepreneurship. Under the Operating Agreement between the Company and Dr. Rouse, the Company owns 51% of Love
Pharm and has a right of first refusal to purchase the remaining 49% of Love Pharm from Dr. Rouse. Additionally, Dr. Rouse will
become the Company’s Chief Medical Advisor. Dr. Rouse will receive 400,000 shares of the Company’s common stock for
services provided to the Company. See Note 7 for additional information regarding issuance of common stock to Dr. Rouse. As of
the date of this filing Love Pharm has yet to commence operations.
How
Smooth It Is, Inc.
On
March 12, 2020, the Company entered into an agreement to acquire fifty-one percent (51%) of the outstanding membership interests
in How Smooth It Is, Inc. (“HSII”) for $1,500,000 in cash and 7,000,000 shares of the Company’s restricted common
stock. HSII is a state-licensed medical marijuana processor based in Riverdale, Michigan and plans to offer a wide range of cannabis-infused
products including chocolate bars, gummies, beverages, and other Pure Harvest branded products. HSII is based in a 5,800 square
foot facility and has the capability of extracting, processing and manufacturing an array of products containing THC and CBD.
HSII has also submitted applications for four dispensary licenses in Riverdale, White Cloud, Alma and Mount Pleasant, MI. The
acquisition of the 51% interest in HSII is subject to a number of conditions, including the approval of the Michigan Department
of Licensing and Regulatory Affairs (LARA). As of the date of this filing, the acquisition of HSII hasn’t been finalized.
HSII is in the development stage and as of September 30, 2020 has generated a limited amount of revenue.
Sofa
King Medicinal Wellness Products, LLC
On
March 13, 2020, the Company entered into an agreement to acquire all of the outstanding membership interests in Sofa King Medicinal
Wellness Products, LLC (“SKM”) for 3,000,000 shares of the Company’s common stock. The completion of the acquisition
is subject to a number of conditions, including the approval of the acquisition by the Colorado Marijuana Enforcement Division
(MED). SKM is a vertically integrated cannabis operator located in Dumont, CO. In August 2020, the acquisition of SKM was finalized
as the appropriate licenses have been approved. The operations of TK have been included within operations from the date of acquisition
of August 11, 2020.
Test
Kitchen, Inc.
On
August 14, 2020, the Company acquired Test Kitchen, Inc. (“TK”) in August of 2020 for 50,000 shares of restricted
stock. Test Kitchen, Inc., a newly formed Colorado-based company specializing in pharmacognosy research, has begun developing
and formulating new products using cutting edge technology and proprietary delivery systems. Test Kitchen was founded on the belief
in the power of full engagement of products to be combined with mind-body practices to unlock human potential and create predictable
experiences. The operations of TK have been included within operations from the date of acquisition.
Solar
Cultivation Technologies
On
September 29, 2020, the Company acquired all of the assets of Solar Cultivation Technologies, Inc. (“SCT”), a Denver-based
solar company focused on bringing solar to the cannabis industry in an effort to minimize the industry’s carbon footprint.
This acquisition will allow the Company to implement SCT’s solar, storage, and intelligent distribution technology throughout
its operations in addition to providing these technologies to other operators in the cannabis industry. The operations of TK have
been included within operations from the date of acquisition.
EdenFlo,
LLC
On
April 24, 2020, the Company acquired substantially all of the assets of EdenFlo, LLC (“EdenFlo”), a producer of CBD
extracts and concentrates, for 7,000,000 shares of the Company’s common stock and the release of its obligation of a previous
promissory note in the amount of $1,650,000, accrued interest of $46,879 and other advances made to EdenFlo to fund operations
of $384,409.
EdenFlo
joins Prolific Nutrition and Love Pharm, LLC to secure and expand the Company’s position in the national Hemp/CBD industry.
EdenFlo is a large-scale Colorado-based hemp-CBD producer and manufacturer of pure isolate and full-spectrum hemp. EdenFlo’s
wholesale isolate is made from the highest quality ingredients, utilizing only the best extraction and distillation methods to
ensure a final product of extreme purity. Their scientific procedures used for the remediation of THC provide the cleanest broad-spectrum
(distillate) oil available in the cannabis extraction industry. The acquisition of EdenFlo will support the Company’s manufacturing
operations by supplying the Company’s raw materials requirements for its branded products.
Purchase
Price and Allocations
The
transactions above were accounted for as business combinations in accordance with ASC Topic 805, Business Combinations. The Company
has determined preliminary fair values of the assets acquired and liabilities assumed. These values are subject to change as we
perform additional reviews of our assumptions utilized as well as valuations yet to be obtained. Goodwill is primarily attributable
to the go-to-market synergies that are expected to arise because of the acquisitions. The goodwill is not deductible for tax purposes.
The
calculation of the purchase prices are as follows:
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EdenFlo, LLC
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SKM
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TK
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SCT
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Notes receivable
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$
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1,650,000
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$
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-
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$
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-
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$
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-
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Interest receivable
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46,879
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-
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-
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-
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Additional advances
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384,409
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-
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-
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476,507
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Fair market value of common stock issued
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2,436,000
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1,440,000
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22,495
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119,183
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Cash received
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(2,398
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)
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-
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-
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-
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$
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4,514,890
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$
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1,440,000
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$
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22,495
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$
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595,690
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The
Company has made a provisional allocation of the purchase price in regard to the acquisitions related to the assets acquired and
the liabilities assumed as of the purchase dates. The following table summarizes the preliminary purchase price allocations:
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EdenFlo, LLC
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SKM
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TK
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SCT
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Preliminary
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Preliminary
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Preliminary
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Preliminary
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Purchase Price
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Purchase Price
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Purchase Price
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Purchase Price
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Allocation
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Allocation
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Allocation
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Allocation
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Cash
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$
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2,398
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$
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24,437
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$
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-
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$
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2,258
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Accounts receivable
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-
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-
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-
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24,525
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Inventory
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846,958
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-
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-
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11,102
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Prepaids and other current assets
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8,585
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-
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-
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16,929
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Property and equipment
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926,671
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123,249
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-
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10,680
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Other assets
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11,553
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199,500
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-
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-
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Goodwill
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3,678,725
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1,405,220
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22,495
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599,196
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Accounts payable and accrued liabilities
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-
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(36,650
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)
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-
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(69,000
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)
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Loans payable
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-
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(275,756
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)
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-
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-
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Loans payable - related party
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(960,000
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)
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-
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|
-
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|
|
-
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|
$
|
4,514,890
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$
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1,440,000
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$
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22,495
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$
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595,690
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The
Company has not completed the valuations necessary to finalize the acquisition fair values of the assets acquired and liabilities
assumed and related allocation of purchase price of the EdenFlo acquisition. Once the valuation process is finalized, there could
be changes to the reported values of the assets acquired and liabilities assumed, including goodwill and identifiable intangible
assets and those changes could differ materially from what is presented above.
NOTE
4 – NOTES RECEIVABLE
In
May and June 2019, the Company advanced $28,593 to two unrelated individuals in connection with potential acquisitions for the
Company. The amounts were to be repaid, without interest, in October 2019. As of June 30, 2020 and December 31, 2019, the Company
has continued collection efforts on these notes receivable but has provided an allowance of such due to the unlikelihood of closing
the acquisitions or collecting on the notes receivable.
In
December 2019, the Company advanced $800,000 to How Smooth It Is, Inc., increased by $700,000 in January 2020, totaling $1,500,000
in connection with the potential acquisition of that entity by the Company. The note receivable was due June 1, 2020 and incurs
interest at 6% per annum for sixty days and then is increased to 10% per annum thereafter. In March 2020, the Company entered
into an acquisition agreement to acquire the entity for which the note receivable was used to offset a portion of the purchase
price, see Note 3 for additional information. On April 9, 2020, the Company submitted the required applications to the Michigan
Department of Licensing and Regulatory Affairs (LARA) to be approved and pre-qualified as a Processor to be added to the HSII
license. Upon approval, PHCG will become 51% owners and can participate in revenue. The transaction will not close until the appropriate
Michigan approvals are obtained. During the nine months ended September 30, 2020, the Company advanced HSIT as an additional $247,845
for operations. The additional advances are not under a formal arrangement and thus do not incur interest and are due on demand.
On
March 12, 2020 the Company entered into an agreement to acquire fifty-one percent (51%) of the outstanding membership interests
in How Smooth It Is, Inc. (“HSII”) for $3,000,000 in cash and 7,000,000 shares of the Company’s restricted common
stock. On July 29, 2020 the Company terminated its agreement to acquire 51% of HSII. As a part of the termination agreement:
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The
sole shareholder of HSII agreed to pay the Company $2,150,000 by August 7, 2020, and
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●
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HSII
agreed to manufacture up to 24 separate products for the Company (such as edibles and vaporizers) upon terms agreeable to
both the Company and HSII. The products manufactured by HSII will be sold under Pure Harvest brands with the Company receiving
royalties from the sale of the products.
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The required payment by HSII to the Company
on August 2, 2020 was not made, thus, the Company decided to record a full allowance on the note receivable and accrued interest.
However, the Company is actively pursuing the amounts due to them by HSII and by no means have they been forgiven.
In
December 2019, the Company advanced $1,650,000 to EdenFlo, LLC in connection with the potential acquisition of that entity by
the Company. The note receivable was due June 1, 2020 and incurs interest at 6% per annum for sixty days and then is increased
to 10% per annum thereafter. In addition, the note receivable is secured by all the asset of EdenFlo, LLC and the amount loaned
represents the expected cash portion to be paid in connection with the acquisition. See Note 3 for discussion regarding the acquisition
of EdenFlo in April 2020.
During
the nine months ended September 30, 2020, the Company advanced SCT $476,507 for operations. The additional advances are not under
a formal arrangement and thus do not incur interest and are due on demand. See Note 3 for discussion regarding the acquisition
of SCT.
NOTE
5 – LEASE AGREEMENTS
In
May 2019, the Company entered into a lease agreement for property to be used as a marijuana retail store. The initial term of
the lease is for a period of three years. The Company has an option to purchase the property at prices ranging between $1,400,000
and $1,600,000 at various dates prior to May 1, 2022. The Company issued the landlord 400,000 shares of its post-split common
stock in consideration for the option to purchase the property for which was recorded as deferred rent and is being amortized
to rent expense using the straight line method over the term of the lease. At inception of the lease, the Company recorded a right
of use asset and liability. The Company used an effective borrowing rate of 10 percent within the calculation.
In
April 2020, in connection with the EdenFlo asset acquisition, the Company assume a lease for a marijuana retail store. At inception
of the lease, the Company recorded a right of use asset and liability of $140,988. The Company used an effective borrowing rate
of 10 percent within the calculation. The lease runs through September 2021.
NOTE
6 –NOTES PAYABLE
Convertible
Notes Payable
During
the year ended December 31, 2019, the Company issued a series of convertible notes with original principal balances of $1,000,000.
The convertible notes had original maturity dates ranging from November 1, 2021 to December 1, 2021 and incur interest at 20%
per annum. In July 2020, the due date of the convertible notes was extended to November 1, 2023. In addition, convertible notes
are convertible upon issuance at a fixed price of $0.50 per common share. In connection with the issuance, the Company recorded
a beneficial conversion feature of $44,000 resulting in a discount to the convertible notes. The discount is being amortized to
interest expense using the straight-line method, due to the short-term nature of the convertible notes, over the term. During
the nine months ended September 30, 2020 and 2019, the Company amortized $13,376 and $0, respectively, to interest expense. The
remaining discount of $30,624 is expected to be amortized throughout 2020 to 2023. The convertible notes include other provisions
such as first right of refusal on additional capital raises, authorization of holder to incur debts senior to the convertible
notes, etc. Additionally, should the holder exercise the option to exercise, a warrant to purchase an additional share of common
stock for which the terms are not defined in the agreement. Thus, the issuance of the warrant is contingent to which the Company
has not accounted for. Should warrants be ultimately issued, the Company expects to record the fair value of such as additional
interest expense.
Convertible
Notes Payable
In
August 2020, the Company entered into an agreement for borrowings up to $4.0 million. Upon closing, the Company received $1,950,000
and provided for a six-month interest reserve. Additional amounts are advanced as varies milestones are reached. The borrowing
incur interest at 15% per annum with principal and outstanding interest due three years from the date of issuance. The Company’s
assets secure the borrowings. In addition, the borrowings have a variety of financial and non-financial covenants. In addition,
the borrowings are convertible at the lesser of $2.00 or 75% of the average closing price of the Company’s common stock
for the preceding 30 days. Additionally, for every dollar advanced under the borrowing, the holder receives two shares of common
stock. As of September 30, 2020, the Company owed the holder approximately 3.9 million shares for which the value has been reflected
on the accompanying consolidated balance sheet as common stock to be issued. The agreement also include a variety of other provisions
related to inventory sold with specific discounts, markups, etc.
Due
to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance.
The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During
the nine months ended September 30, 2020, the Company recorded initial derivative liabilities of $1,634,080 based upon the following
Black-Scholes option pricing model average assumptions: an exercise price of $0.36 our stock price on the date of grant of $0.45,
expected dividend yield of 0%, expected volatility of 103.00%, risk free interest rate of 0.64% and expected term of 3.0 years.
Upon initial valuation, the derivative liabilities, as well as the fair market value of the 3.9 million shares of common stock
exceeded the face values of the convertible notes payable by $1,439,080, which was recorded as a day one loss in derivative liability.
On September 30, 2020, the derivative liabilities were revalued at $1,678,457 resulting in a loss of $44,377. The inputs to value
the derivative liabilities were similar to those on the date of issuance.
In
connection with the derivative liabilities and common stock issued, the Company recorded a $1,950,000 discount. The discount is
being amortized over the term of the borrowings using the straight-line method due to the short term nature. During the nine months
ended September 30, 2020, the Company amortized $114,517 of the discount to interest expense. As of September 30, 2020, a discount
of $1,835,483 remained for which will be amortized in 2020.
Related
Party Convertible Notes Payable
On
June 15, 2020, the Company borrowed $30,000 from an individual related to a significant member of management. The loan is evidenced
by a promissory note which bears interest at 10% per year and is due and payable on October 8, 2020. At the option of the lender,
the note principal and any accrued interest may be converted into shares of the Company’s common stock. The number of shares
of the Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted
by $0.40. On the date of issuance, the conversion price of $0.40 was the closing market price of the Company’s common stock
and thus a beneficial conversion feature wasn’t recorded. In September 2020, the note was converted into 75,000 shares of
common stock.
At
various times in 2020, the Company has borrowed a total of $430,000 from an individual related to a director of the Company and
a director of the Company, respectively. unrelated third party. The loans are evidenced by a promissory notes which bears interest
at 12% per year and are due and payable at dates ranging from December 10, 2020 to January 10, 2021. The proceeds were used for
operations. At the option of the holders, the note principal and any accrued interest may be converted into shares of the Company’s
common stock. The number of shares of the Company’s common stock which will be issued upon any conversion will be determined
by dividing the amount to be converted by the lesser of $0.30 or 80% of the ten day average closing price of the Company’s
common stock immediately prior to the date of conversion. The holders also have the option to convert $900,000 owed to them from
EdenFlo, LLC, as disclosed below, which debt was assumed the Company in connection with the acquisition of EdenFlo, at a price
of $0.30 per share for a period of 12 months. Additionally, the holders were issued 215,000 shares of common stock in connection
with the notes.
Due
to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance.
The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting
period. During the nine months ended September 30, 2020, the Company recorded initial derivative liabilities of $298,913 based
upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.30 our stock price on the date
of grant ranging from $0.40 - $0.49, expected dividend yield of 0%, expected volatility of 103.00%, risk free interest rate of
0.64% and expected terms of 0.5 years. Upon initial valuation, the derivative liabilities, as well as the fair market value of
the 215,000 shares of common stock exceeded the face values of the convertible notes payable by $2,940, which was recorded as
a day one loss in derivative liability. On September 30, 2020, the derivative liabilities were revalued at $243,240 resulting
in a gain of $55,672. The inputs to value the derivative liabilities were similar to those on the date of issuance.
In
connection with the derivative liabilities and common stock issued, the Company recorded a $396,223 discount. The discount is
being amortized over the term of the convertible note using the straight line method due to the short term nature. During the
nine months ended September 30, 2020, the Company amortized $242,143 of the discount to interest expense. As of September 30,
2020, a discount of $154,080 remained for which will be amortized in 2020 and early 2021.
In
connection with the EdenFlo asset acquisition, the Company assumed two notes payable with the former shareholders. Under the terms
of the agreements $600,000 is payable on June 1, 2021 and does not incur interest and $300,000 is due on August 1, 2022 and does
not incur interest. As disclosed above, both notes were modified to include a conversion feature at a price of $0.30 per share.
The modification was treated as an extinguishment of the original note for which a loss on extinguishment of $448,000 was recorded.
In
connection with the SKM, the Company assumed four notes payable totaling $275,756 with the former membership. The notes do not
incur interest and are due on demand.
Notes
Payable
On
March 6, 2020, the Company borrowed $1,500,000 from an unrelated third party. The loan is evidenced by a promissory note which
bears interest at 8% per year.
The
note is due and payable as follows:
|
●
|
$500,000,
together with all accrued and unpaid interest, on April 13, 2020
|
|
●
|
$1,000,000,
together with all accrued and unpaid interest, on May 6, 2020
|
Accrued
interest will be paid in shares of the Company’s common stock based upon a 25% discount to the ten-day average closing price
of the Company’s common stock immediately prior to May 6, 2020. Accrued interest will include 150,000 additional shares
of the Company’s common stock and warrants to purchase 150,000 shares of the Company’s common stock. The warrants
are exercisable at any time on or before January 1, 2025 at a price of $2.00 per share. The first payment of $500,000 was made
on a timely basis.
On
issuance, the Company valued the 150,000 shares of common stock and the 150,000 warrants for common stock and recorded the relative
fair market of $116,707 as a discount to the note payable. The Company is amortizing the discount over the term of the note payable
using the straight-line method due to the short term of the note. During the six months ended June 30, 2020, the Company amortized
$92,256 to interest expense.
On
April 20, 2020, the holder of the Note agreed to extend the due date for the $1,000,000 payment from May 6, 2020 to June 15, 2020.
In consideration for extending the repayment date for the second amount to June 15, 2020, the Company issued to the note holder
200,000 shares of its common stock and warrants to purchase 200,000 shares of the Company’s common stock. The warrants are
exercisable at a price of $2.00 per share and expire January 1, 2025. A late payment penalty of $5,000 per day will be due if
the $1,000,000 is not paid by June 15, 2020. The Company determined the extension resulted in debt extinguishment accounting whereby
the fair value of the additional consideration provided was in excess of the carrying value of the original note payable resulting
in an extinguishment loss of $157,784.
On
June 9, 2020, the holder of the Note agreed to further extend the due date for the $1,000,000 payment to July 15, 2020. In consideration
for extending the repayment date, the Company issued to the note holder an additional 200,000 shares of the Company’s common
stock and warrants to purchase 200,000 shares of the Company’s common stock. The warrants are exercisable at a price of
$2.00 per share and expire January 1, 2025. The Company determined the extension resulted in debt extinguishment accounting whereby
the fair value of the additional consideration provided was in excess of the carrying value of the original note payable resulting
in an extinguishment loss of $170,470.
On
July 14, 2020, the holder of the Note agreed to further extend the due date for the $1,000,000 payment to August 15, 2020. In
consideration for extending the repayment date, the Company issued to the note holder an additional 100,000 shares of the
Company’s common stock and warrants to purchase 200,000 shares of the Company’s common stock. The warrants are
exercisable at a price of $2.00 per share and expire January 1, 2025. The Company determined the extension resulted in debt
extinguishment accounting whereby the fair value of the additional consideration provided was in excess of the carrying value
of the original note payable resulting in an extinguishment loss of $120,721.
In
addition, during the nine months ended September 30, 2020, the Company issued 124,425 shares of common stock in satisfaction of
$52,293 in accrued interest.
The
note was paid in full in August 2020.
See
Note 8 for information relating to loans from an Officer and Director of the Company.
NOTE
7 – STOCKHOLDERS’ DEFICIT
Stock-Based
Compensation
2019
Issuances
Effective
January 1, 2019, the Company entered into agreements to issue a total of 1,600,000 shares of common stock to two officers. The
shares were to vest over a one-year period commencing on January 1, 2019. The Company valued the common stock at $760,000, using
the closing market price of the Company’s common stock on the date of the agreement. The Company was expensing the value
of off the common stock over the vesting period which mirrors the service period. During the six months ended June 30, 2019, the
Company recognized $190,000 of stock-based compensation. On July 30, 2019, the two officers referred to above resigned as officers
and directors of the Company. In connection with their resignations, Mr. Lamadrid agreed to return to the Company 1,750,000 shares,
and Mr. Scott agreed to return to the Company 1,200,000 shares of the Company’s common stock. These shares, upon their return
to the Company, were cancelled and now represent authorized but unissued shares.
In
January 2019, the Company authorized the issuance of 140,000 shares of common stock to a consultant for services rendered. The
Company valued the common stock at $133,000, using the closing market price of the Company’s common stock on the date of
the agreement. The Company expensed the value of the common stock upon issuance as there were no additional performance criteria.
2020
Issuances
The
Company has entered into various employment and advisory agreements for which shares of common stock are issued with a variety
of vesting provisions. The Company typically determines the fair market value of these awards on the date of grant and expensing
that value over the vesting period which mirrors the service period.
In
May 2020, the Company entered into two-year employment agreements with Matthew Gregarek, the Company’s Chairman and Chief
Executive Officer, David Burcham, the Company’s President, and Daniel Garza, the Company’s Chief Marketing Officer.
Among various other salary and bonus terms, the agreements also provide for the award of shares of the Company’s restricted
common stock and options to purchase shares of the Company’s common stock. Under these agreements, a total of 6,300,000
fully vested shares of common stock were granted upon execution of the agreements. An additional 1,300,000 shares of common stock
were awarded that will vest on April 1, 2021. The agreements also provide for the future grant of additional shares of common
stock should the individuals remain employed following the April 1, 2021 expiration date.
During
the nine months ended September 30, 2020, the Company has recognized stock-based compensation of $2,765,822 in connection with
the employment and other agreements noted above. In addition, under these arrangements a total of 9.4 million shares of common
stock are issuable upon final vesting. The remaining stock-based compensation of $881,178 will be recognized over the remaining
service periods as follows: $149,141 during the remainder of the year ending December 31, 2020, $594,880 during the year ending
December 31, 2021 and $137,157 during the year ending December 31, 2022.
Options
In
May 2020, effective April 1, 2020, the individuals noted above were also granted a total of 5,750,000 options to purchase shares
of the Company’s common stock. These options will vest in tranches at various dates through May 1, 2021 with escalating
exercise prices ranging from $0.50 to $7.50 and are exercisable for ten years. These options were valued at $1,056,695 using a
Black-Scholes Options Pricing Model. For the nine months ended September 30, 2020, the Company recorded $617,664 as stock-based
compensation. The remaining expense outstanding through May 1, 2021 is $439,031.
The
fair value of the options is estimated using a Black-Scholes Options Pricing Model with the following assumptions:
Exercise price per share
|
|
$
|
3.40
|
|
Expected life (years)
|
|
|
2.97
|
|
Risk-free interest rate
|
|
|
0.64
|
%
|
Expected volatility
|
|
|
135
|
%
|
Offering
of Common Stock and Warrants
In
February 2019, the Company commenced a private offering of its common stock for up to $10 million in proceeds. The Company is
offering up to 20 million shares of common stock at a purchase price of $0.50 per share. In addition, for each share purchased
the investor will receive a warrant to purchase one additional share of common stock at a price of $2.00 per share. The warrants
expire on December 31, 2021 or sooner at the Company’s option, if the Company’s stock trades for a price of $3.00
per share for 10 days with an average volume of 100,000 shares per day. During the nine months ended September 30, 2020, the Company
received $150,000 related to the sale of 300,000 shares of common stock and warrants.
Common
Stock and Warrants Issued with Notes Payable
See
Note 6 for issuance of shares in connection with note agreements.
NOTE
8 – RELATED PARTY TRANSACTIONS
As
of September 30, 2020 and December 31, 2019, the Company has $75,188 and $116,667, respectively, due to related parties. These
amounts generally consist of accrued salaries and various expense reimbursements.
See
Note 7 for shares and options issued to management under employment contracts. In connection with the employment contracts, the
Company accrued total bonuses of $225,000 as of September 30, 2020.
See
Note 6 for discussion related to related party convertible notes payable.
NOTE
9 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the filing date of these consolidated financial statements and has disclosed that
there are no other events that are material to the financial statements to be disclosed.
On
October 9, 2020, the Company borrowed $200,000 from an unrelated third party. At the option of the lender, the loan and any accrued
interest may be converted into shares of the Company’s common stock. The number of shares of the Company’s common
stock which will be issued upon any conversion will be determined by dividing the amount to be converted by the lesser of $0.35
or 75% of the ten day average closing price of the Company’s common stock immediately prior to the date of conversion. As
further consideration, the Company issued 100,000 shares of its restricted common stock to the lender.
On
October 23, 2020 the Company sold 2,750,000 shares of its common stock to a private investor for $1,000,000 ($0.3636 per share).