UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period endedMarch 31,June 30, 2020

 

[  ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the transition period from __________ to ___________

 

Commission file number: 333-212055

 

PURE HARVEST CORPORATE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Colorado 36-4752858
(State of Incorporation) (IRS Employer ID Number)

 

2401 E. 2nd Avenue, Suite 600

Denver, CO 80206

(Address of principal executive offices)

 

(800) 560-5148

(Registrant’s Telephone number)

 

Pure Harvest Cannabis Group, Inc.

(Former Name, Former Address and Former fiscal year if changed since last report)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

 

Yes  [X] No  [  ]

 

Indicate by check mark whether the registrant has submitted electronically and, posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 for Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  [X] No  [  ]

 

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

 

Large accelerated filer[  ]Accelerated filer[  ]
Non-accelerated filer[X]Smaller reporting company[X]
Emerging growth company[X]  

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  [ ] No  [X]

 

As of June 23,August 12, 2020, there were 45,066,33052,196,792 outstanding shares of the registrant’s common stock.

 

 

 

 
 

 

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Balance Sheets

(Unaudited)

  As of
March 31, 2020		  As of
December 31, 2019		 
ASSETS        
Current assets        
Cash $1,481,898  $1,665,247 
Accounts receivable  -   1,653 
Interest receivable  72,937   8,194 
Inventory  166,985   70,091 
Deferred rent  -   93,333 
Prepaid acquisition costs  1,650,000   - 
Total current assets  3,371,820   1,838,518 
         
Long-term assets        
Machinery and equipment  334,835   331,383 
Accumulated depreciation  (291,891)  (287,249)
Deferred rent, net of current portion  204,223   132,223 
Right of use asset  165,902   184,685 
Notes receivable and advances on pending acquisitions, net allowance of $33,000  1,930,529   2,450,000 
Goodwill  141,453   141,453 
Other assets  15,000   15,000 
Total assets $5,871,871  $4,806,013 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)        
Current liabilities        
Accounts payable $99,915  $115,126 
Accrued interest  83,095   23,890 
Accrued expenses  112,114   75,131 
Royalty payable  -   770 
Due to related parties  72,917   116,667 
Notes payable, net of discount of $56,100 and $0, respectively  1,443,900   - 
Convertible notes payable, net of discount of $35,983 and $41,695, respectively  964,017   958,305 
Total current liabilities  2,775,958   1,289,889 
         
Long term liabilities        
Right of use liability  112,893   133,554 
Total liabilities  2,888,851  1,423,443 
         
Commitments and contingencies        
         
Stockholders’ deficit        
Preferred stock; $0.01 par value; 25,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019  -   - 
Common stock, $0.01 par value; 100,000,000 shares authorized, 38,066,330 and 37,716,330 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively  380,664   377,164 
Additional paid-in capital  4,616,296   4,391,587 
Accumulated deficit  (2,013,940)  (1,386,181)
Total stockholders’ deficit  2,983,020   3,382,570 
Total liabilities and stockholders’ deficit $5,871,871  $4,806,013 

  As of
June 30, 2020		  As of
December 31, 2019		 
ASSETS        
Current assets        
Cash $182,371  $1,665,247 
Accounts receivable  1,272   1,653 
Interest receivable  77,072   8,194 
Inventory  957,984   70,091 
Deferred rent  93,333   93,333 
Prepaids and other current assets  4,292   - 
Total current assets  1,316,324   1,838,518 
         
Long-term assets        
Machinery and equipment  1,282,739   331,383 
Accumulated depreciation  (320,838)  (287,249)
Deferred rent, net of current portion  89,557   132,223 
Right of use asset  271,520   184,685 
Notes receivable and advances on pending acquisitions, net allowance of $33,000  2,074,793   2,450,000 
Goodwill  3,820,178   141,453 
Other assets  26,553   15,000 
Total assets $8,560,826  $4,806,013 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Accounts payable $152,698  $115,126 
Accrued interest  163,013   23,890 
Accrued expenses  384,246   75,131 
Royalty payable  -   770 
Due to related parties  29,167   116,667 
Notes payable, net of discount of $0 and $0, respectively  1,000,000   - 
Convertible notes payable, net of discount of $30,271 and $41,695, respectively  969,729   958,305 
Related party convertible notes payable, net discount of $237,810 and $0, respectively  692,190   - 
Total current liabilities  3,391,043   1,289,889 
         
Long term liabilities        
Notes payable  86,000   - 
Right of use liability  147,250   133,554 
Related party convertible notes payable  360,000   - 
Derivative liabilities  152,430   - 
Total liabilities  4,136,723   1,423,443 
         
Commitments and contingencies        
         
Stockholders’ equity        
Preferred stock; $0.01 par value; 25,000,000 shares authorized; no shares issued and outstanding as of June 30, 2020 and December 31, 2019  -   - 
Common stock, $0.01 par value; 100,000,000 shares authorized, 52,125,144 and  37,716,330 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively  521,252   377,164 
Additional paid-in capital  10,777,309   4,391,587 
Accumulated deficit  (6,874,458)  (1,386,181)
Total stockholders’ equity  4,424,103   3,382,570 
Total liabilities and stockholders’ equity $8,560,826  $4,806,013 

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

2

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2020 and 2019

(Unaudited)

  For the Three
Months Ended
June 30, 2020		  For the Three
Months Ended
June 30, 2019		  For the Six
Months Ended
June 30, 2020		  For the Six
Months Ended
June 30, 2019		 
             
REVENUES                
Royalty income $3,951  $6,208  $5,041  $19,426 
                 
Cost of sales  40,066   2,026   40,066   8,900 
                 
Gross profit (loss)  (36,114)  4,182   (35,024)  10,526 
                 
OPERATING EXPENSES                
Advertising and promotion  50,043   12,875   52,602   23,375 
General and administrative expenses, including stock-based compensation of $3,026,036, $323,000, $3,039,538 and $323,000, respectively  3,885,523   505,328   4,406,022   746,415 
Travel and entertainment  7,026   18,081   42,177   38,163 
Depreciation expense  28,947   3,158   33,589   6,317 
Total operating expenses  3,971,539   539,442   4,534,390   814,270 
                 
Loss from operations  (4,007,653)  (535,260)  (4,569,414)  (803,744)
                 
Other income (expense):                
Interest expense  (194,608)  -   (325,349)  - 
Interest income  48,618   -   114,183   - 
Loss on extinguishment of notes payable  (756,254)  -   (756,254)  - 
Change in fair market value of derivative liabilities  49,380   -   49,380   - 
Bad debt expense  0   -   (823)  - 
Total other income (expense)  (852,864)  -   (918,863)  - 
                 
Loss before provision for income taxes  (4,860,517)  (535,260)  (5,488,277)  (803,744)
                 
Provision for income taxes  -   -   -   - 
                 
NET LOSS $(4,860,517) $(535,260) $(5,488,277) $(803,744)
                 
Basic and diluted net loss per common share $(0.10) $(0.02) $(0.13) $(0.03)
Basic and diluted weighted-average number of common shares outstanding  46,826,515   31,793,997   42,338,456   31,793,997 

 

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

 

23

 

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Statements of OperationsCash Flows

For the ThreeSix Months Ended March 31,June 30, 2020 and 2019

(Unaudited)

 

  For the Three Months Ended
March 31, 2020		  For the Three Months Ended
March 31, 2019		 
       
REVENUES        
Royalty income $1,090  $6,208 
         
Cost of sales  -   2,026 
         
Gross margin  1,090   4,182 
         
OPERATING EXPENSES        
Advertising and promotion  2,559   12,875 
General and administrative expenses, including stock-based compensation of $11,502 in 2020  520,499   483,772 
Travel and entertainment  35,151   18,081 
Depreciation expense  4,642   3,158 
Total operating expenses  562,851   517,886 
         
Loss from operations  (561,761)  (513,704)
         
Other income (expense):        
Interest expense  (130,741)  - 
Interest income  65,565   - 
Bad debt expense  (823)  - 
Total other income (expense)  (65,998)  - 
         
Loss before provision for income taxes  (627,759)  (513,704)
         
Provision for income taxes  -   - 
         
NET LOSS $(627,759) $(513,704)
         
Basic and diluted net loss per common share $(0.02) $(0.02)
Basic and diluted weighted-average number of common shares outstanding  37,894,108   31,793,997 

  For the
Six Months Ended
June 30, 2020		  For the
Six Months Ended
June 30, 2019		 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(5,488,277) $(803,744)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  33,589   6,317 
Stock-based compensation  3,039,538   323,000 
Amortization of debt discount  141,980   - 
Loss on extinguishment of notes payable  756,254   - 
Change in fair value of derivative liability  (49,380)  - 
Changes in operating assets and liabilities:        
Accounts receivable  381   18,922 
Interest receivable on notes receivable  (113,360)  - 
Inventory  (40,935)  (29,063)
Deferred rent  42,666   15,556 
Prepaid acquisition costs  -   - 
Prepaid and other current assets  4,293   - 
Accounts payable  37,272   105,964 
Accrued interest  170,885   - 
Accrued expense  309,115   (36,000)
Royalty payable  (770)  118 
Right of use asset and liability  (73,139)  6,000 
Due to related parties  -   188,388 
Net cash used in operating activities  (1,229,888)  (204,542)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Notes receivable and advances of pending acquisitions  (1,274,793)  (28,593)
Net cash received (paid) in connection with acquisition  (382,010)  - 
Purchase of machinery and equipment  (24,685)  - 
Net cash used in investing activities  (1,681,488)  (28,593)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Advances (payments) from (to) related parties, net  (87,500)  (11,358)
Proceeds from issuance of convertible notes payable  -   - 
Proceeds from notes payable  1,586,000   - 
Repayment of notes payable  (500,000)  - 
Proceeds from related party notes payable  330,000     
Proceeds from sale of common stock  100,000   - 
Proceeds from sale of common stock to be issued  -   442,500 
Net cash provided by financing activities  1,428,500   431,142 
         
Change in cash and cash equivalents  (1,482,876)  198,007 
Cash and cash equivalents, beginning of period  1,665,247   22,501 
Cash and cash equivalents, end of period $182,371  $220,508 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $-  $- 
Cash paid for income taxes $-  $- 
         
Non-cash investing and financing activities:        
Discount on note payable due to common stock and warrants $116,707  $- 
Common stock issued for accrued interest $31,762  $- 
Common stock issued for business acquisitions $2,436,000  $- 
Exchange of note receivable for business acquisition $1,650,000  $- 
Common stock and warrants issued in connection with note extensions $308,803  $- 
Discounts due to common stock and derivative liabilities $270,810  $- 

 

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

 

34

 

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Statements of Cash FlowsStockholders’ Deficit

For the Three and Six Months Ended March 31,June 30, 2020 and 2019

(Unaudited)

 

  For the Three Months Ended March 31, 2020  For the Three Months Ended March 31, 2019 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(627,759) $(513,704)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  4,642   3,158 
Stock-based compensation  11,502   323,000 
Amortization of debt discount  66,319   - 
Changes in operating assets and liabilities:        
Accounts receivable  1,653   16,730 
Interest receivable on notes receivable  (64,743)  - 
Inventory  (96,894)  1,699 
Deferred rent  21,333   - 
Accounts payable  (15,211)  76,450 
Accrued interest  59,205   - 
Accrued expense  36,983   (36,000)
Royalty payable  (770)  190 
Right of use asset and liability  (1,878)  - 
Due to related parties  -   94,194 
Net cash used in operating activities  (605,618)  (34,283)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Notes receivable and advances of pending acquisitions  (1,130,529)  - 
Purchase of machinery and equipment  (3,452)  - 
Earnest money deposit on lease  -   (20,000)
Net cash used in investing activities  (1,133,981)  (20,000)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Advances (payments) from (to) related parties, net  (43,750)  24,714 
Proceeds from notes payable  1,500,000   - 
Proceeds from sale of common stock  100,000   95,000 
Net cash provided by financing activities  1,556,250   119,714 
         
Change in cash and cash equivalents  (183,349)  65,431 
Cash and cash equivalents, beginning of period  1,665,247   22,501 
Cash and cash equivalents, end of period $1,481,898  $87,932 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $5,217  $- 
Cash paid for income taxes $-  $- 
         
Non-cash investing and financing activities:        
Discount on note payable due to common stock and warrants $116,707  $- 

              Additional     Total 
  Preferred Stock  Common Stock  Paid-in  Accumulated  Stockholders’ 
  Shares  Amount  Shares  Amount  Capital  Deficit  Deficit 
Balance, March 31, 2020  -   -   38,066,330  $380,664  $4,616,296  $(2,013,940)    2,983,020 
                             
Stock-based compensation  -   -   -   -   457,492   -   457,492 
Issuance of common stock for services  -   -   6,528,000   65,280   2,505,264   -   2,570,544 
Issuance of common stock for acquisition  -   -   7,000,000   70,000   2,366,000   -   2,436,000 
Issuance of common stock for accrued interest  -   -   80,814   808   30,954   -   31,762 
Issuance of common stock and warrants for extension of notes payable  -   -   400,000   4,000   304,803   -   308,803 
Discount on convertible notes payable related party due to common stock issued and derivative liabilty  -   -   50,000   500   68,500   -   69,000 
Extinguishment of related party notes payable     -         -   -   -   428,000   -   428,000 
Net loss  -   -   -   -   -   (4,860,518)  (4,860,518)
Balance, June 30, 2020  -  $-   52,125,144  $521,252  $10,777,309  $(6,874,458) $4,424,103 

 

              Additional     Total 
  Preferred Stock  Common Stock  Paid-in  Accumulated  Stockholders’ 
  Shares  Amount  Shares  Amount  Capital  Deficit  Deficit 
Balance, December 31, 2019  -  $-   37,716,330  $377,164  $4,391,587  $(1,386,181) $  3,382,570 
                             
Stock-based compensation  -   -   -   -   468,994   -   468,994 
Issuance of common stock for services  -   -   6,528,000   65,280   2,505,264   -   2,570,544 
Issuance of common stock for acquisition  -   -   7,000,000   70,000   2,366,000   -   2,436,000 
Issuance of common stock to note holder  -   -   150,000   1,500   115,207   -   116,707 
Issuance of common stock for accrued interest  -   -   80,814   808   30,954   -   31,762 
Issuance of common stock and warrants for extension of notes payable  -   -   400,000   4,000   304,803   -   308,803 
Issuance of common stock to investor  -   -   200,000   2,000   98,000   -   100,000 
Discount on convertible notes payable related party due to common stock issued and derivative liabilty  -   -   50,000   500   68,500   -   69,000 
Extinguishment of related party notes payable      -   -   -   -   428,000   -   428,000 
Net loss  -         -   -   -   -   (5,488,277)  (5,488,277)
Balance, June 30, 2020  -  $-   52,125,144  $521,252  $10,777,309  $(6,874,458) $4,424,103 

  Preferred Stock  Common Stock  

Additional

Paid-in

  Accumulated  Total

Stockholders’

 
  Shares  Amount  Shares  Amount  Capital  Deficit  Deficit 
Balance, March 31, 2019  -  $-   31,803,330  $318,034  $118,661  $(765,018) $      (328,323)
                             
Stock-based compensation  -   -   -   -   -   -   - 
Stock issued for option to purchase property    -         -   400,000   4,000   276,000   -   280,000 
Net loss  -   -   -   -   -   (290,040)  (290,040)
Balance, June 30, 2019  -  $-   32,203,330  $322,034  $394,661  $(1,055,058) $(338,363)

              Additional     Total 
  Preferred Stock  Common Stock  

Paid-in

  Accumulated  Stockholders’ 
  Shares  Amount  Shares  Amount  Capital  Deficit  Deficit 
Balance, December 31, 2018    -  $      -   31,523,330  $315,234  $(201,539) $(251,314) $      (137,619)
                             
Stock-based compensation  -   -   280,000   2,800   320,200   -   323,000 
Stock issued for option to purchase property  -   -   400,000   4,000   276,000   -   280,000 
Net loss  -   -   -   -   -   (803,744)  (803,744)
Balance, June 30, 2019  -  $-   32,203,330  $322,034  $394,661  $(1,055,058) $(338,363)

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

 

45

 

Pure Harvest Corporate Group, Inc.

Consolidated Statements of Stockholders’ Deficit

For the Three Months Ended March 31, 2020 and 2019

(Unaudited)

        Additional     Total 
  Common Stock  Paid-in  Accumulated  Stockholders’ 
  Shares  Amount  Capital  Deficit  Deficit 
Balance, December 31, 2019  37,716,330  $377,164  $4,391,587  $(1,386,181) $3,382,570 
                     
Stock-based compensation  -   -   11,502   -   11,502 
Issuance of common stock to note holder  150,000   1,500   115,207   -   116,707 
Issuance of common stock to investor  200,000   2,000   98,000   -   100,000 
Net loss  -   -   -   (627,759)  (627,759)
Balance, March 31, 2020  38,066,330  $380,664  $4,616,296  $(2,013,940) $2,983,020 

        Additional     Total 
  Common Stock  Paid-in  Accumulated  Stockholders’ 
  Shares  Amount  Capital  Deficit  Deficit 
Balance, December 31, 2018  31,523,330  $315,234  $(201,539) $(251,314) $(137,619)
                     
Stock-based compensation  280,000   2,800   320,200   -   323,000 
Net loss  -   -   -   (513,704)  (513,704)
Balance, March 31, 2019  31,803,330  $318,034  $118,661  $(765,018) $(328,323)

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

5

(formerly Pure Harvest CorporateCannabis Group, Inc.)

Notes to Consolidated Financial Statements

March 31,June 30, 2020

(Unaudited)

 

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

 

The CompanyPure 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 CorporateCannabis 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 March 31,June 30, 2020 and the results of its operations for the three and six months then ended. Significant accounting policies have been consistently applied in the interim consolidated financial statements. The results of operations for the three and six months ended March 31,June 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 subsidiary, PHCP.subsidiaries. All significant consolidated transactions and balances have been eliminated in consolidation. The operations of the Company are included in the consolidated financial statement from the date of the Agreement.

6

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, estimaterecoverability of goodwill, estimates of fair value of share-based payments and valuation of deferred tax assets.

 

CashDerivative 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 Cash Equivalentsfor 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 June 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 Company considers all highly liquid temporary cash investments with an original maturityclassification of six months or less toa 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 cash equivalents.reclassified.

 

Accounts Receivable

We record accounts receivableInstruments classified as derivative liabilities are remeasured using the Black-Scholes model at net realizable value. Thiseach reporting period (or upon reclassification), and the change in fair value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the accounts receivable balances and is charged to other income (expense) in the combined statements of operations. We calculate this allowance basedrecorded on our historyconsolidated statement of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and our relationships with, and the economic status of, our customers. As of March 31, 2020 and December 31, 2019, an allowance for estimated, uncollectible accounts was determined to be unnecessary.

Inventory

Inventory is reported at the lower of cost or market on the first-in, first-out (FIFO) method. Our inventory is subject to obsolescence. Accordingly, quantities on hand are periodically monitored for items no longer being sold, which are written off. All inventory is stored at the manufacturer and maintained by them. Inventory consists of pouches, display and shipping boxes and no inventory is deemed obsolete.

Revenue Recognition

The Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis such as identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company’s policy is to record revenue as earned when a firm commitment, indicating sales quantity and price exists, delivery has taken place and collectability is reasonably assured. The Company records sales of finished products once the customer places the order and the product is shipped. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Provisions for discounts, returns, allowances, customer rebates and other adjustments are netted with gross sales. The Company accounts for such provisions during the same period in which the related revenues are earned. Provisions for discounts, returns, allowances, customer rebates and other adjustments are minimal and are recorded as a reduction of revenue

Cost of Sales

The costs associated with our royalty income are packaging, a royalty of $1.20 per case, and repair and maintenance costs of our filling machines.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:

 

 ●Level 1 - quoted market prices in active markets for identical assets or liabilities.
   
 ●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.
   
 ●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 March 31,June 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 six months ended March 31,June 30, 2020 and 2019, dilutive instruments consisted of convertible notes payable, andunvested 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.

8

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 March 31,June 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.As of the date of this filing, In August 2020, the acquisition of SKM hasn’twas finalized as the appropriate licenses have been finalized.approved.

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 stockand the release of its obligation of a previous promissory note in the amount of $1,650,000.$1,650,000, accrued interest of $46,879 and other advances made to EdenFlo to fund operations of $384,409.

 

EdenFlo will joinjoins 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.

The EdenFlo transaction was accounted for as a business combination 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. Goodwill is primarily attributable to the go-to-market synergies that are expected to arise because of the acquisition. The goodwill is not deductible for tax purposes.

The calculation of the purchase price is as follows:

Notes receivable $1,650,000 
Interest receivable  46,879 
Additional advances  384,409 
Fair market value of common stock issued  2,436,000 
Cash received  (2,398)
  $4,514,890 

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The Company has made a provisional allocation of the purchase price in regard to the acquisition related to the assets acquired and the liabilities assumed as of the purchase date. The following table summarizes the preliminary purchase price allocation:

  Preliminary 
  Purchase Price 
  Allocation 
    
Cash $2,398 
Inventory  846,958 
Prepaids and other current assets  8,585 
Property and equipment  926,671 
Other assets  11,553 
Goodwill  3,678,725 
Loans payable - related party  (960,000)
  $4,514,890 

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.

The unaudited pro-forma financial information hasn’t been presented as the operations of EdenFlo were insignificant to the Company’s operations at the time of the asset acquisition.

 

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 March 31,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 iswas 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 113 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 six months ended June 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.

 

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 iswas 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.

 

910

 

NOTE 5 – LEASE AGREEMENTAGREEMENTS

 

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 mature at dates ranging from November 1, 2021 to December 1, 2021 and incur interest at 20% per annum. 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 threesix months ended March 31,June 30, 2020 and 2019, the Company amortized $5,712$11,424 and $0, respectively, to interest expense. The remaining discount of $35,983$30,271 is expected to be amortized in 2020 of $17,198$11,486 and 2021 of $18,785. 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.

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.

On June 15, 2020 and June 30, 2020, the Company borrowed $200,000 and $100,000 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 on December 10, 2020. 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, one of the holders was issued 50,000 shares of common stock.

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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 six-months ended June 30, 2020, the Company recorded initial derivative liabilities of $204,750 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 50,000 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 June 30, 2020, the derivative liabilities were revalued at $152,430 resulting in a gain of $52,320. 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 $270,810 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 six months ended June 30, 2020, the Company amortized $33,000 of the discount to interest expense. As of June 30, 2020, a discount of $237,810 remained for which will be amortized in 2020.

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.

 

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 threesix months ended March 31,June 30, 2020, the Company amortized $60,607$92,256 to interest expense. As of March 31, 2020, a discount of $56,100 remained for which will be expensed during 2020.

 

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.

10

 

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.

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In addition, during the six months ended June 30, 2020, the Company issued 80,814 shares of common stock in satisfaction of $31,762 in accrued interest.

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 threesix months ended March 31,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.

 

In January 2020 theIssuances

The Company has entered into anvarious employment agreement with an individualand advisory agreements for which called for the grant of 100,000 shares of common stock. These shares will vest in 25% increments every six months during the two-yearstock are issued with a variety of vesting period.provisions. The Company valuedtypically determines the common stock at $50,000 based on the closingfair market pricevalue of the Company’s common stockthese awards on the date of the agreement. The Company isgrant and expensing thethat value of the common stock over the vesting period which mirrors the service period.

 

In FebruaryMay 2020, the Company entered into an advisory agreementtwo-year employment agreements with Dr. Rouse as discussed in Note 3. In connection withMatthew Gregarek, the advisory agreement,Company’s Chairman and Chief Executive Officer, David Burcham, the Company agreedCompany’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 grant 400,000purchase shares of the Company’s common stock. Under these agreements, a total of 6,300,000 fully vested shares of common stock to Dr. Rouse. These shares are subject to a two-year vesting period, with 100,000 shares vesting every six months. The Company valued the common stock at $126,000 based on the closing market pricewere granted upon execution of the Company’s common stock on the date of the agreement. The Company is expensing the value of the common stock over the vesting period which mirrors the service period.

As of March 31, 2020, noagreements. An additional 1,300,000 shares of common stock have vested in connection withwere awarded that will vest on April 1, 2021. The agreements also provide for the two agreements discussed above. future grant of additional shares of common stock should the individuals remain employed following the April 1, 2021 expiration date.

During the threesix months ended March 31,June 30, 2020, the Company has recognized stock-based compensation of $11,502$2,617,162 in connection with the employment and other agreements noted above. In addition, under these agreements.arrangements a total of 9.4 million shares of common stock are issuable upon final vesting. The remaining stock-based compensation of $164,498$1,029,838 will be recognized over the remaining service periods as follows: $66,211$297,801 during the remainder of the year ending December 31, 2020, $87,880$594,880 during the year ending December 31, 2021 and $10,407$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 six months ended June 30, 2020, the Company recorded $308,832 as stock-based compensation. The remaining expense outstanding through May 1, 2021 is $747,863.

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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 threesix months ended March 31,June 30, 2020, the Company received $100,000 related to the sale of 200,000 shares of common stock and warrants.

 

Common Stock and Warrants Issued with Notes Payable

See Note 6 for issuance of shares in connection with a note agreement.agreements.

11

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

As of March 31,June 30, 2020 and December 31, 2019, the Company has $72,917$42,489 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 June 30, 2020.

See Note 6 for discussion related to related party convertible notes payable.

 

NOTE 9 – SUBSEQUENT EVENTS

 

IssuancesExtension of Common StockNotes Payable

In MaySubsequent to June 30, 2020, the holder of the $1,000,000 note payable discussed in Note 6 extended the note to August 15, 2020. In consideration for extending the repayment date, the Company entered into two-year employment agreements with Matthew Gregarek,issued to 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 ofnote holder an additional 200,000 shares of the Company’s restricted common stock and optionswarrants to purchase 200,000 shares of the Company’s common stock. Under these agreements,The warrants are exercisable at a totalprice of 6,300,000 fully vested shares of common stock were granted upon execution$2.00 per share and expire January 1, 2025.

Related Party Convertible Notes Payable

On July 30, 2020, the Company borrowed $100,000 from an officer and director of the agreements. An additional 1,300,000 sharesCompany. At the option 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 shouldholder, the individuals remain employed following the April 1, 2021 expiration date. The individuals were also granted a total of 5,750,000 options to purchasenote principal and any accrued interest may be converted into shares of the Company’s common stock. These options will vest in tranches at various dates through May 1, 2020 with escalating exercise prices ranging from $0.50 to $7.50. All options expire on June 1, 2025.

Subsequent to March 31, 2020, the holderThe number of shares of the $1,500,000 note payable discussed in Note 6Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted a portionby the lesser of $0.30 or 80% of the interest due underten day average closing price of the note into 56,408Company’s common stock immediately prior to the date of conversion. As further consideration, the Company issued 50,000 shares of its restricted common stock.

stock to the holder.

Acquisition

Pending Acquisitions

 

See Note 3 for a discussion of the acquisition of EdenFlo, LLC.SKM.

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:

●The sole shareholder of HSII agreed to pay the Company $2,150,000 by August 7, 2020, and
●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.

 

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.

 

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Company’s business plan involves the acquisition of licensed medical and recreational marijuana dispensaries, cultivation facilities and production facilities in states which allow publicly traded companies to own and operate dispensaries, cultivation facilities and production facilities. Depending on the markets entered and state regulation, the Company’s plan may also include: asset purchases, management/consulting operating agreements, or similar allowable agreements. The Company plans to use a combination of cash, shares of common or preferred stock, notes, or other financing vehicles to complete these acquisitions.

 

Prolific Nutrition

 

On September 6, 2019, the Company acquired all of the outstanding membership interests in Prolific Nutrition, LLC and Gratus Living, LLC (collectively “Prolific Nutrition”) for 400,000 shares of the Company’s restricted common stock.

 

Prolific Nutrition and Gratus Living are Colorado-based hemp/CBD companies that have developed and now market a line of CBD products direct to consumers. Prolific Nutrition and Gratus Living currently offer CBD oil tincture, CBD oil gummies, CBD oil capsules, CBD oil lotion, hemp oil and lip balm. Prolific Nutrition and Gratus Living have also developed and now market hemp extract dietary supplements, hemp extract capsules for pain and hemp extract pet treats for dogs and cats.

 

Solar Cultivation Technologies, Inc.

 

On November 4, 2019, the Company signed an Agreement which provides the Company the option to acquire all of the assets of Solar Cultivation Technologies, Inc. (“SCT”). SCT has developed a proprietary set of technologies and processes to cultivate cannabis using solar power and battery storage.

 

The Agreement provides the Company with two alternatives (either of which can be selected by the Company in its sole discretion) for acquiring the assets of SCT.

 

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Valuation Method One:

 

(ANI x PE) - L = A

 

A/ASP = S

 

Where:

 

ANI=Annual Net Income of SCT for most recent fiscal year
   
PE=Price Earnings Ratio (Same PE ratio applicable to Pure Harvest. If Pure Harvest does not have net income, PE ratio will be 10)
   
L=Total liabilities of SCT.
   
A=Amount to be paid for all assets of SCT.
   
ASP=Pure Harvest’s average closing price for 30 days prior to exercising option to acquire all assets of SCT.
   
S=Number of Pure Harvest shares to be issued for all assets of SCT.

 

If option is exercised, Pure Harvest will assume all disclosed liabilities of SCT.

 

Requirements

Option to acquire the assets of SCT pursuant to Alternative One cannot be exercised:

 

 ●unless ANI is at least $1,500,000;
   
 ●after April 1 2022;
   
 ●unless SCT has positive shareholder’s equity, and
   
 ●unless the total liabilities of SCT do not exceed 150% of SCT’s net cash flow from operating activities during the prior twelve months.

 

Valuation Method Two:

 

Where:

Where:

 

A/ASP=S
   
A=Price to be paid for all assets of SCT. Price will equal value of SCT based upon an independent third party valuation.
   
ASP=Pure Harvest’s average closing price for 30 days prior to exercising option to acquire all assets of SCT
   
S=Number of Pure Harvest shares to be issued for all assets of SCT.

 

If option is exercised, Pure Harvest will assume all disclosed liabilities of SCT.

Requirements

 

Option to acquire the assets of SCT pursuant to Alternative Two cannot be exercised:

 

●after April 1, 2022.

 

As of June 23,August 14, 2020, SCT had not generated any revenuerevenues of approximately $125,000 and had nominal assets and liabilities.

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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 organized 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.

 

As of June 23,August 14, 2020 Love Pharm had not generated any revenue.

 

How Smooth It Is

 

OnAs explained in Note 3 to the accompanying financial statements, 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$3,000,000 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.

 

In connection with this acquisition, Leonard Cusenza,On July 29, 2020 the principal shareholderCompany terminated its agreement to acquire 51% of HSII, was appointed as HSII’s Chief Executive Officer. Mr. Cusenza brings over 20 years of business and confectionary manufacturing experience to the HSII’s operations. He has been operatingHSII. As a family owned candy business in Michigan for decades and has an exceptional depth of knowledge regarding confection and manufacturing operations.

The acquisitionpart 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).termination agreement:

 

HSII is in the development stage and as of June 23, 2020 had generated only limited revenue.

●The sole shareholder of HSII agreed to pay the Company $2,150,000 by August 7, 2020, and
●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.

 

Sofa King

 

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 and recently moved its dispensary to a corner location along the busy I-70 corridor between Denver and Colorado’s world-class ski destinations.

 

EdenFlo

 

On April 24, 2020, the Company acquired substantially all of the assets of EdenFlo, LLC, a producer of CBD extracts and concentrates, for 7,000,000 shares of the Company’s restricted common stockand the release of its obligation of a previous promissory note in the amount of $1,650,000.

 

EdenFlo will join 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.

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Impact of the Coronavirus

 

The Company’s business could be disrupted and materially adversely affected by the recent outbreak of COVID-19. As a result of measures imposed by the governments in affected regions, businesses and schools have temporarily closed due to quarantines intended to contain this outbreak. The spread of COVID-19 from China to other countries has resulted in the Director General of the World Health Organization declaring COVID-19 a pandemic on March 11, 2020. International stock markets have reflected the uncertainty associated with the slow-down in the world economies. The significant declines in the Dow Industrial Average were also largely attributed to the effects of COVID-19. The Company is still assessing the impact COVID-19 may have on its business, but there can be no assurance that this analysis will enable the Company to avoid part or all of any impact from the spread of COVID-019 or its consequences, including downturns in business sentiment generally. The extent to which the COVID-19 pandemic and global efforts to contain its spread will impact the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic.

 

Results of Operations

 

Material changes in the line items in the Company’s Statement of Operations for the three and six months ended March 31,June 30, 2020 as compared to the same periodperiods last year, are discussed below:

 

 Increase (I) or    
Item Decrease (D) Reason
Operating Expenses I Increase in business activity
Interest Expense I Increase in note payable to an unrelated third party
Loss on Extinguishment of Notes PayableIRefinancing and payoff of notes

The factors that will most significantly affect the Company’s future operating results will be:

 

 ●state by state regulatory changes with respect to marijuana in the United States;
   
 ●rescheduling of marijuana by the federal government; and
   
 ●impact of COVID-19 virus.

 

Other than the forgoing the Company does not know of any trends, events or uncertainties that have had, or are reasonably expected to have, a material impact on its revenues or expenses.

 

Capital Resources and Liquidity

 

The Company’s sources and (uses) of cash for the threesix months ended March 31,June 30, 2020 are shown below:

 

 2020 2019  2020 2019 
          
Cash used in operations $(605,618) $(34,283) $(1,229,888) $(204,542)
Loans and advances  (1,130,529)  —   (1,274,793)  (28,593)
Net cash paid in connection with acquisition  (382,010)  -- 
Repayment of advances from (advances to) related parties  43,750   (24,714)  (87,500)  (11,358)
Proceeds from note payable  1,500,000   — 
Net proceeds from note payable and convertible notes payable  1,516,000   -- 
Sale of common stock  100,000   95,000   100,000   442,500 
Other  (3,452)  (20,000)  (24,685)  -- 

 

The Company does not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, the Company’s liquidity increasing or decreasing in any material degree.

 

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The Company may sell additional shares of common stock and/or other securities to raise capital for its operations. There is no assurance that the Company will be successful in raising any additional capital.

 

Off Balance Sheet Arrangements

 

As of March 31,June 30, 2020, the Company did not have any off balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

See Note 2 to the March 31,June 30, 2020 financial statements included as part of this report for a description of the Company’s critical accounting policies and estimates.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act, as amended) as of the end of the period covered by this report. As a result of this evaluation, management concluded that our disclosure controls and procedures were not effective as of March 31,June 30, 2020 due to the following material weakness:

 

 ●Lack of appropriate segregation of duties,
 
●Lack of control procedures that include multiple levels of supervision and review, and
 ●An overreliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material, nonstandard transactions.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31,June 30, 2020 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 6.EXHIBITS

 

Exhibit  
Number Description
   
3.1 Articles of Incorporation (1)
3.2 Amended Articles of Incorporation (1)
3.3 Bylaws (1)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

 

(1)Incorporated by reference to the same exhibit filed with the Company’s annual report on Form 10-K for the year ended December 31, 2018

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on June 26,August 17, 2020.

 

 PURE HARVEST CORPORATE GROUP, INC.
   
 By:/s/ Matthew Gregarek
  Matthew Gregarek
  Principal Executive and Financial Officer

 

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