UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
FORM 10-Q
(Mark One)☒ Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act Of 1934
For the quarterly period ended June 30, 20202021
☐ Transition Report Under Section 13 or 15(d) of the Securities Exchange Act Of 1934
For the transition period from __________ to _____________________
Commission file number: File Number: 333-212055
PURE HARVEST CORPORATE GROUP, INC.
(Exact name of registrant as specified in its charter)
Colorado | 71-0942431 | |
(State or other jurisdiction of | ( | |
incorporation or organization) | Identification No.) |
24017400 E. 2nd Avenue, Suite 600Crestline Cir. Ste. 130
Denver, Greenwood Village, CO 8020680111
(Address of principal executive offices)offices
(800) 560-5148924-3716
(Registrant’s Telephone number)telephone number, including area code)
Pure Harvest Cannabis Group, Inc.N/A
(Former Name, Former Address and Former fiscal yearname or former address if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading | Name of each exchange on which registered | ||
N/A | 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 pastpreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to thesuch filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and, every Interactive Data File required to be submitted and posted pursuant to Rule 405 forof 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated file,filer, an accelerated filer, a non-accelerated filer, 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 | ☒ | Smaller reporting company | ☒ | ||
Emerging growth company | ☒ |
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]Act ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 12, 2020,June 30, 2021, there were 52,196,792 outstanding shares of the registrant’s common stock.
Pure Harvest Corporate Group, Inc.
(formerly Pure Harvest Cannabis Group, Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
As of June 30, 2021 | As of December 31, 2020 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 452,033 | $ | 856,844 | ||||
Accounts receivable | 117,788 | 91,371 | ||||||
Inventory | 1,087,846 | 1,047,690 | ||||||
Deferred rent | 71,111 | 113,778 | ||||||
Prepaids and other current assets | 319,356 | 235,335 | ||||||
Notes receivable and advances on pending acquisitions, net of allowance of $533,000 and $33,000, respectively | 2,250,000 | 2,750,000 | ||||||
Total current assets | 4,298,134 | 5,095,018 | ||||||
Long-term assets | ||||||||
Property, plant and equipment | 1,628,574 | 1,599,088 | ||||||
Accumulated depreciation | (622,670 | ) | (469,315 | ) | ||||
Deferred rent, net of current portion | 0 | 26,446 | ||||||
Right of use asset | 401,736 | 537,393 | ||||||
Goodwill | 1,550,225 | 1,550,225 | ||||||
Intangible assets, net | 2,321,398 | 2,399,524 | ||||||
Other assets | 341,127 | 301,604 | ||||||
Total assets | $ | 9,918,524 | $ | 11,039,983 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 275,575 | $ | 91,741 | ||||
Accrued expenses | 1,283,079 | 1,324,936 | ||||||
Notes payable | 334,074 | 431,919 | ||||||
Convertible notes payable, net of discount of $21,060 and $146,967, respectively | 1,778,940 | 1,353,033 | ||||||
Related party convertible notes payable | 1,427,504 | 1,412,504 | ||||||
Total current liabilities | 5,099,172 | 4,614,133 | ||||||
Long term liabilities | ||||||||
Notes payable | — | 6,000 | ||||||
Right of use liability | 242,114 | 293,971 | ||||||
Convertible notes payable, net of discount of $1,865,146 and $1,723,835, respectively | 743,604 | 226,165 | ||||||
Derivative liabilities | 2,650,979 | 1,879,776 | ||||||
Total liabilities | 8,735,869 | 7,020,045 | ||||||
Commitments and contingencies (Note 9) | ||||||||
Stockholders’ equity | ||||||||
Preferred stock; $ | par value; shares authorized; shares issued and outstanding, respectively0 | 0 | ||||||
Series A Preferred stock; $ | par value; shares authorized; shares issued and outstanding at June 30, 2021.538,842 | 0 | ||||||
Common stock, $ | par value; shares authorized, and shares issued and outstanding, respectively673,409 | 641,179 | ||||||
Additional paid-in capital | 14,216,743 | 11,111,799 | ||||||
Accumulated deficit | (14,246,339 | ) | (7,733,040 | ) | ||||
Total stockholders’ equity | 1,182,655 | 4,019,938 | ||||||
Total liabilities and stockholders’ equity | $ | 9,918,524 | $ | 11,039,983 |
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 condensed consolidated financial statements
statements.
Pure Harvest Corporate Group, Inc.
(formerly Pure Harvest Cannabis Group, Inc.)
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 20202021 and 20192020
(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 | For the Three Months Ended June 30, 2021 | For the Three Months Ended June 30, 2020 | For the Six Months Ended June 30, 2021 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||
REVENUES | ||||||||||||||||||||||||||||||||
Royalty income | $ | 3,951 | $ | 6,208 | $ | 5,041 | $ | 19,426 | ||||||||||||||||||||||||
Product sales and royalty income | $ | 762,778 | $ | 3,951 | $ | 1,556,926 | $ | 5,041 | ||||||||||||||||||||||||
Cost of sales | 40,066 | 2,026 | 40,066 | 8,900 | 612,118 | 40,066 | 1,080,070 | 40,066 | ||||||||||||||||||||||||
Gross profit (loss) | (36,114 | ) | 4,182 | (35,024 | ) | 10,526 | ||||||||||||||||||||||||||
Gross profit | 150,660 | (36,114 | ) | 476,856 | (35,024 | ) | ||||||||||||||||||||||||||
OPERATING EXPENSES | ||||||||||||||||||||||||||||||||
Advertising and promotion | 50,043 | 12,875 | 52,602 | 23,375 | 25,804 | 50,043 | 42,818 | 52,602 | ||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||
General and administrative expenses, including stock-based compensation of $ | , $ , $ and $ , respectively2,487,327 | 3,892,549 | 4,043,885 | 4,448,199 | ||||||||||||||||||||||||||||
Research and development | 0 | 0 | 3,708 | 0 | ||||||||||||||||||||||||||||
Depreciation expense | 28,947 | 3,158 | 33,589 | 6,317 | 97,375 | 28,947 | 174,811 | 33,589 | ||||||||||||||||||||||||
Total operating expenses | 3,971,539 | 539,442 | 4,534,390 | 814,270 | 2,610,506 | 3,971,539 | 4,265,222 | 4,534,390 | ||||||||||||||||||||||||
Loss from operations | (4,007,653 | ) | (535,260 | ) | (4,569,414 | ) | (803,744 | ) | (2,459,846 | ) | (4,007,653 | ) | (3,788,366 | ) | (4,569,414 | ) | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest expense | (194,608 | ) | - | (325,349 | ) | - | (960,312 | ) | (194,608 | ) | (1,481,683 | ) | (325,349 | ) | ||||||||||||||||||
Interest income | 48,618 | - | 114,183 | - | 0 | 48,618 | 55,000 | 114,183 | ||||||||||||||||||||||||
Loss on extinguishment of notes payable | (756,254 | ) | - | (756,254 | ) | - | 0 | (756,254 | ) | 0 | (756,254 | ) | ||||||||||||||||||||
Change in fair market value of derivative liabilities | 49,380 | - | 49,380 | - | (576,701 | ) | 49,380 | (731,203 | ) | 49,380 | ||||||||||||||||||||||
Loss on equity method investment | 0 | 0 | (73,047 | ) | 0 | |||||||||||||||||||||||||||
Other income (expense) | 0 | 0 | 6,000 | 0 | ||||||||||||||||||||||||||||
Bad debt expense | 0 | - | (823 | ) | - | — | (500,000 | ) | (823 | ) | ||||||||||||||||||||||
Total other income (expense) | (852,864 | ) | - | (918,863 | ) | - | (1,537,013 | ) | (852,864 | ) | (2,724,933 | ) | (918,863 | ) | ||||||||||||||||||
Loss before provision for income taxes | (4,860,517 | ) | (535,260 | ) | (5,488,277 | ) | (803,744 | ) | (3,996,859 | ) | (4,860,517 | ) | (6,513,299 | ) | (5,488,277 | ) | ||||||||||||||||
Provision for income taxes | - | - | - | - | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
NET LOSS | $ | (4,860,517 | ) | $ | (535,260 | ) | $ | (5,488,277 | ) | $ | (803,744 | ) | $ | (3,996,859 | ) | $ | (4,860,517 | ) | $ | (6,513,299 | ) | $ | (5,488,277 | ) | ||||||||
Basic and diluted net loss per common share | $ | (0.10 | ) | $ | (0.02 | ) | $ | (0.13 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.10 | ) | $ | (0.13 | ) | ||||||||
Basic and diluted weighted-average number of common shares outstanding | 46,826,515 | 31,793,997 | 42,338,456 | 31,793,997 | 66,775,124 | 46,826,515 | 66,016,310 | 42,338,456 |
The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.
Pure Harvest Corporate Group, Inc.
(formerly Pure Harvest Cannabis Group, Inc.)
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 20202021 and 20192020
(Unaudited)
For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | For the Six Months Ended June 30, 2021 | For the Six Months Ended June 30, 2020 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (5,488,277 | ) | $ | (803,744 | ) | $ | (6,513,299 | ) | $ | (5,488,277 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation | 33,589 | 6,317 | ||||||||||||||
Depreciation and amortization | 328,166 | 33,589 | ||||||||||||||
Stock-based compensation | 3,039,538 | 323,000 | 1,612,483 | 3,039,538 | ||||||||||||
Common stock issued for services | (34,400 | ) | 0 | |||||||||||||
Amortization of debt discount | 141,980 | - | 681,096 | 141,980 | ||||||||||||
Loss on extinguishment of notes payable | 756,254 | - | ||||||||||||||
Common stock issued for debt extension | 334,141 | 0 | ||||||||||||||
Allowance on notes receivable | 500,000 | — | ||||||||||||||
Change in fair value of derivative liability | (49,380 | ) | - | 731,203 | (49,380 | ) | ||||||||||
Loss on extinguishment of note payable | 0 | 756,254 | ||||||||||||||
Extension fee added to note payable | 81,667 | 0 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 381 | 18,922 | (26,417 | ) | 381 | |||||||||||
Interest receivable on notes receivable | (113,360 | ) | - | 0 | (113,360 | ) | ||||||||||
Inventory | (40,935 | ) | (29,063 | ) | (40,156 | ) | (40,935 | ) | ||||||||
Other assets | (151,372 | ) | 0 | |||||||||||||
Deferred rent | 42,666 | 15,556 | 69,113 | 42,666 | ||||||||||||
Prepaid acquisition costs | - | - | ||||||||||||||
Prepaid and other current assets | 4,293 | - | (84,021 | ) | 4,293 | |||||||||||
Accounts payable | 37,272 | 105,964 | 183,834 | 37,272 | ||||||||||||
Accrued interest | 170,885 | - | ||||||||||||||
Accrued expense | 309,115 | (36,000 | ) | 344,909 | 480,000 | |||||||||||
Royalty payable | (770 | ) | 118 | 0 | (770 | ) | ||||||||||
Right of use asset and liability | (73,139 | ) | 6,000 | 83,800 | (73,139 | ) | ||||||||||
Due to related parties | - | 188,388 | ||||||||||||||
Net cash used in operating activities | (1,229,888 | ) | (204,542 | ) | (1,899,253 | ) | (1,229,888 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Notes receivable and advances of pending acquisitions | (1,274,793 | ) | (28,593 | ) | 0 | (1,274,793 | ) | |||||||||
Notes receivable | 0 | |||||||||||||||
Net cash received (paid) in connection with acquisition | (382,010 | ) | - | 0 | (382,010 | ) | ||||||||||
Purchase of machinery and equipment | (24,685 | ) | - | (29,486 | ) | (24,685 | ) | |||||||||
Intangible assets | (75,227 | ) | 0 | |||||||||||||
Net cash used in investing activities | (1,681,488 | ) | (28,593 | ) | (104,713 | ) | (1,681,488 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Advances (payments) from (to) related parties, net | (87,500 | ) | (11,358 | ) | ||||||||||||
Advances (payments) from (to) related parties | 0 | (87,500 | ) | |||||||||||||
Proceeds from issuance of convertible notes payable | - | - | 500,000 | 0 | ||||||||||||
Proceeds from notes payable | 1,586,000 | - | 0 | 1,586,000 | ||||||||||||
Repayment of notes payable | (500,000 | ) | - | (103,845 | ) | (500,000 | ) | |||||||||
Proceeds from related party notes payable | 330,000 | 0 | 330,000 | |||||||||||||
Proceeds from sale of common stock | 100,000 | - | 543,000 | 100,000 | ||||||||||||
Proceeds from sale of common stock to be issued | - | 442,500 | ||||||||||||||
Proceeds from sale of preferred stock | 660,000 | 0 | ||||||||||||||
Net cash provided by financing activities | 1,428,500 | 431,142 | 1,599,155 | 1,428,500 | ||||||||||||
Change in cash and cash equivalents | (1,482,876 | ) | 198,007 | (404,811 | ) | (1,482,876 | ) | |||||||||
Cash and cash equivalents, beginning of period | 1,665,247 | 22,501 | 856,844 | 1,665,247 | ||||||||||||
Cash and cash equivalents, end of period | $ | 182,371 | $ | 220,508 | $ | 452,033 | $ | 182,371 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid for interest | $ | - | $ | - | $ | 160,541 | $ | 5,217 | ||||||||
Cash paid for income taxes | $ | - | $ | - | $ | 0 | $ | 0 | ||||||||
Non-cash investing and financing activities: | ||||||||||||||||
Discount on note payable due to common stock and warrants | $ | 116,707 | $ | - | ||||||||||||
Discount on note payable due to common stock, warrants or derivatives | $ | 460,000 | $ | 387,517 | ||||||||||||
Common stock issued for accrued interest | $ | 31,762 | $ | - | $ | 3,363 | $ | 31,762 | ||||||||
Common stock issued for business acquisitions | $ | 2,436,000 | $ | - | $ | 0 | $ | 2,436,000 | ||||||||
Exchange of note receivable for business acquisition | $ | 1,650,000 | $ | - | ||||||||||||
Exchange of note receivable and accrued interest for business acquisition | $ | 0 | $ | 1,650,000 | ||||||||||||
Common stock and warrants issued in connection with note extensions | $ | 308,803 | $ | - | $ | 311,500 | $ | 308,803 | ||||||||
Discounts due to common stock and derivative liabilities | $ | 270,810 | $ | - | ||||||||||||
Accrued interest and extension fee added to principal balance | $ | 300,000 | $ | 0 | ||||||||||||
Warrants issued with preferred stock | $ | 121,158 | $ | 0 | ||||||||||||
Common stock issued for license | $ | 128,750 | $ | 0 |
The accompanying notes are an integral part of these condensed consolidated financial statements
statements.
Pure Harvest Corporate Group, Inc.
(formerly Pure Harvest Cannabis Group, Inc.)
Condensed Consolidated Statements of Stockholders’ DeficitStockholder’s Equity
For the Three and Six Months Ended June 30, 20202021 and 20192020
(Unaudited)
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 |
Three Months Ended June 30, 2021 | Preferred Stock | Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||||||||
Balance, March 31, 2021 | — | — | 65,354,522 | $ | 653,546 | $ | 11,922,301 | $ | (10,249,480 | ) | 2,326,367 | |||||||||||||||||
Stock-based compensation | — | — | — | — | 1,262,077 | — | 1,262,077 | |||||||||||||||||||||
Issuance of common stock to note holder | — | — | 1,600,000 | 16,000 | 732,000 | — | 748,000 | |||||||||||||||||||||
Issuance of common stock for license | — | — | 250,000 | 2,500 | 126,250 | — | 128,750 | |||||||||||||||||||||
Issuance of common stock for cash | — | — | 136,243 | 1,363 | 61,637 | — | 63,000 | |||||||||||||||||||||
Issuance of preferred stock for cash | 6,660 | 538,842 | — | — | 121,158 | — | 660,000 | |||||||||||||||||||||
Series A preferred stock dividends | — | — | — | — | (8,680 | ) | — | (8,680 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | (3,996,859 | ) | (3,996,859 | ) | |||||||||||||||||||
Balance, June 30, 2021 | 6,660 | $ | 538,842 | 67,340,765 | $ | 673,409 | $ | 14,216,743 | $ | (14,246,339 | ) | $ | 1,182,655 |
Three Months Ended June 30, 2020 | Preferred Stock | Common Stock | Additional | Accumulated | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||||
Additional | Total | Shares | Amount | Shares | Amount | Paid-in Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | — | $ | — | 38,066,330 | $ | 380,664 | $ | 4,616,296 | $ | (2,013,940 | ) | $ | 2,983,020 | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 468,994 | - | 468,994 | — | — | — | — | 457,492 | — | 457,492 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for services | - | - | 6,528,000 | 65,280 | 2,505,264 | - | 2,570,544 | — | — | 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 | — | — | 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 | — | — | 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 | — | — | 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 | — | — | 50,000 | 500 | 68,500 | — | 69,000 | ||||||||||||||||||||||||||||||||||||||||||
Extinguishment of related party notes payable | - | - | - | - | 428,000 | - | 428,000 | — | — | — | — | 428,000 | — | 428,000 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (5,488,277 | ) | (5,488,277 | ) | — | — | — | — | — | (4,860,518 | ) | (4,860,517 | ) | ||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2020 | - | $ | - | 52,125,144 | $ | 521,252 | $ | 10,777,309 | $ | (6,874,458 | ) | $ | 4,424,103 | — | $ | — | 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 | ) |
Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
Preferred Stock, Series A | Common Stock | Additional | Accumulated | Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-in Capital | Deficit | Deficit | ||||||||||||||||||||||
Balance, December 31, 2020 | — | $ | — | 64,117,846 | $ | 641,179 | $ | 11,111,799 | $ | (7,733,040 | ) | $ | 4,019,938 | |||||||||||||||
Stock-based compensation | — | — | — | — | 1,612,483 | — | 1,612,483 | |||||||||||||||||||||
Issuance of common stock for services | — | — | (80,000 | ) | (800 | ) | (33,600 | ) | — | (34,400 | ) | |||||||||||||||||
Issuance of common stock to note holder | — | — | 1,650,000 | 16,500 | 755,000 | — | 771,500 | |||||||||||||||||||||
Issuance of common stock for accrued interest | — | — | 8,515 | 85 | 3,278 | — | 3,363 | |||||||||||||||||||||
Issuance of common stock for license | — | — | 250,000 | 2,500 | 126,250 | — | 128,750 | |||||||||||||||||||||
Issuance of common stock for cash | — | — | 1,394,404 | 13,945 | 529,055 | — | 543,000 | |||||||||||||||||||||
Issuance of preferred stock for cash | 6,660 | 538,842 | — | — | 121,158 | — | 660,000 | |||||||||||||||||||||
Series A preferred stock dividends | (8,680 | ) | (8,680 | ) | ||||||||||||||||||||||||
Net loss | — | — | — | — | — | (6,513,299 | ) | (6,513,299 | ) | |||||||||||||||||||
Balance, June 30, 2021 | 6,660 | $ | 538,842 | 67,340,765 | $ | 673,409 | $ | 14,216,743 | $ | (14,246,339 | ) | $ | 1,182,655 |
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 | ) |
Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
Preferred Stock, Series A | Common Stock | Additional | Accumulated | Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-in 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 |
The accompanying notes are an integral part of these condensed consolidated financial statements
statements.
Pure Harvest Corporate Group, Inc.
(formerly Pure Harvest Cannabis Group, Inc.)
Notes to Condensed Consolidated Financial Statements
June 30, 20202021
(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 (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 focusingwith a focus 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, Inc. 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 June 30, 20202021, 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 June 30, 2020reported in these interim financial statements are not necessarily indicative of the expected results to be expected for the entire year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2020 and notes thereto that are included in the Company’s Annual Report on Form 10-K.
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 consolidatedConsolidated 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 and estimates of fair value of share-based payments and valuation of deferred tax assets.payments.
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 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 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 ACS 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.non-performance.
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. |
The carrying amount of the Company’s financial instruments approximates their fair value as of June 30, 20202021, and December 31, 2019,2020, due to the short-term nature of these instruments. The Company’s derivative liabilities are considered a Level 2 liability.
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.period. 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.outstanding during the period. For the three and six months ended June 30, 20202021 and 2019,2020, dilutive instruments consisted of convertible notes payable, unvested restricted stock grants,options and warrants options to purchase shares of the Company’s common stock totalling approximately million and million shares of common stock, respectively, 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 ofadopted the new standard but it ison January 1, 2021, which did 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 thosethe one 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,During the Company entered into an Operating Agreement with Dr. James Rouse, MD regardingthree months ended March 31, 2021, and 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 ofthree months ended June 30, 2020 has generated a limited amount of revenue.
Sofa King Medicinal Wellness Products, LLC
On March 13, 2020,2021, 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.
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.
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 |
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 completedentered into any additional acquisitions other than those previously reported in its Form 10-K for 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 financialperiod ending December 31, 2020. For information hasn’t been presented as the operations of EdenFlo were insignificant toregarding the Company’s operations atprior year acquisitions see the time ofCompany’s Form 10-K for the asset acquisition.period ending December 31, 2020.
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, 20202021, and December 31, 2019,2020, the Company has settled and received payment in kind for one of the notes and has continued collection efforts on these notesthe other note 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$800,000 to How Smooth It Is, Inc., increased by $700,000 in In January 2020, totaling $1,500,000 in connection with the potential acquisition of that entity by the Company.Company advanced an additional $700,000 to HSII. The note receivable was due June 1, 2020 and incurs interest at 6%6% per annum for sixty days and then is increased to 10%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 3the Company’s Form 10-K for additionalthe period ending December 31, 2020 for more 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%51% owners and can participate in revenue. The transaction will not close until the appropriate Michigan approvals are obtained. During the six monthsyear ended June 30,December 31, 2020, the Company advanced HSITHSII as an additional $247,845$247,845 for operations. The additional advances are not under a formal arrangement and thus do not incur interest and arewere due on demand.November 1, 2020, and accrue interest at a rate of 7.5% per annum.
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 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. |
On December 31, 2020, the Company entered into an amended note receivable loan and security agreement for $2,750,000 with an initial maturity date of March 31, 2021. The note incurs interest at 8% per annum through the initial maturity date. Under the agreement, if the loan is not repaid by March 31, 2021, if there have been no defaults, the loan will be extended to July 31, 2021. During the extended period, the interest rate increases to 12% per annum. In addition, with the extended period, the Company receives various royalties on products sold by the borrower for a period of three year commencing on April 1, 2021. On March 31, 2021, the note was extended to July 31, 2021, in accordance with the terms. The loan is secured by all the assets of HSII.
On April 14, 2021, the Company was sued by How Smooth It Is, Inc. in an effort to stall its obligations under the Business Loan and Security Agreement between the Company and HSII effective December 31, 2020. The Company has submitted its response and counterclaims to HSII’s complaint. The Company believes that the suit is meritless and that the Company will likely prevail should the case go to trial. In the interim, the Company has provided a default notice to HSII and increased the interest rate on the amounts due to 25% as provided by the Business Loan and Security Agreement. As of June 30, 2021, the Company has recorded a reserve of $500,000 against the outstanding note receivable.
In December 2019, the Company advanced $1,650,000$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%6% per annum for sixty days and then is increased to 10%10% per annum thereafter. In addition, the note receivable is secured by all the asset of EdenFlo, LLCLLC. In April 2020, EdenFlo was acquired by the Company and the amount loaned representsNote was consolidated into the expected cash portion to be paid in connection withacquisition, subsequently eliminating its balance on the acquisition.Balance Sheet. See Note 3the Company’s Form 10-K for discussionthe period ending December 31, 2020 for more information regarding the acquisition of EdenFlo in April 2020.EdenFlo.
In 2020, prior to SCT’s acquisition, the Company advanced SCT $476,507 for operations. The additional advances were not under a formal arrangement and thus did not incur interest and were due on demand. See the Company’s Form 10-K for the period ending December 31, 2020 for more information 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$1,400,000 and $1,600,000$1,600,000 at various dates prior to May 1, 2022. The Company issued the landlord 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 linestraight-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 assumeassumed a lease for a marijuana retail store.hemp processing facility. At inception of the lease, the Company recorded a right of use asset and liability of $140,988.$140,988. The Company used an effective borrowing rate of 10 percent% within the calculation. The lease runs through September 2021.
NOTE 6 –NOTES PAYABLEIn May 2020, the Company entered into a lease for its corporate offices. The lease requires monthly payments ranging from $12,330 to $12,861 through the maturity of the lease in October 2023. At inception of the lease, the Company recorded a right of use asset and liability of $399,766. The Company used an effective borrowing rate of 10.35% within the calculation.
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.$1,000,000. The convertible notes mature athad original maturity dates ranging from November 1, 2021 to December 1, 2021 and incur interest at 20%20% per annum. In July 2020, the due date of the convertible notes was extended to November 1, 2023. In April 2021, the convertible notes were further amended to define the timing for quarterly interest payments due under the convertible notes and impose a penalty payable in cash and stock for late interest payments. In connection with this amendment, the Company increased the principal balance by $233,333 of accrued interest and $66,667 classified as an extension fee for the remaining accrued interest of $114,568 for which the payment was extended until early July 2021. The extension fee was recorded as interest expense during the six months ended June 30, 2021. As of June 30, 2021, the balance due on the convertible note was $1,300,000, net a discount of $21,060 recorded within convertible notes payable.
In addition, convertible notes are convertible upon issuance at a fixed price of $0.50$0.50 per common share. In connection with the issuance, the Company recorded a beneficial conversion feature of $44,000$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 six months ended June 30, 20202021 and 2019,2020, the Company amortized $11,424$7,092 and $0,$11,424, respectively, to interest expense. The remaining discount of $30,271$21,060 is expected to be amortized in 2020 of $11,486 andthroughout 2021 of $18,785.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.
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. In 2020, the Company issued the holder shares of common stock in connection with the convertible note. The agreement also includes a variety of other provisions related to inventory sold with specific discounts, markups, etc.
In August 2021, the Company received an additional $500,000 under the terms of the initial agreement. In connection with this tranche, the Company issued 1.0 million shares of common stock. Due to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance. Upon initial valuation, the derivative liabilities value of $395,891, as well as the fair market value of the 1.0 million shares of common stock exceeded the face values of the convertible notes payable by $355,891, which was recorded as a day one loss on derivative liabilities. The variables to value the derivatives on issuance were similar to those disclosed below. As of June 30, 2021, the principal balance due on the convertible notes was $2,450,000, and accrued interest of $158,750, net a discount of $1,865,146 recorded within long-term convertible notes payable.
The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During the six months ended June 30, 2021, the Company revalued the fair market value of the derivative liabilities at $2,379,080 resulting in a loss of $234,032. The valuation of the derivative liabilities was based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.34 our stock price on the date of revalue of $0.51, expected dividend yield of 0%, expected volatility of 98.00%, risk free interest rate of % and expected term of 2.12 years.
In connection with the derivative liabilities and common stock issued, the Company recorded a total discount related to the two notes of $2,450,000. The discount is being amortized over the term of the borrowings using the straight-line method due to the short-term nature. During the six months ended June 30, 2021, the Company amortized $358,689 of the discount to interest expense. As of June 30, 2021, a discount of $1,865,146 remained for which will be amortized in periods from 2021 to 2023.
Related Party Convertible Notes Payable
On June 15, 2020, the Company borrowed $30,000$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%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$0.40 was the closing market price of the Company’s common stock and thus a beneficial conversion feature wasn’twas not recorded. In September 2020, the note was converted into shares of common stock.
On June 15, 2020 and June 30,At various times in 2020, the Company borrowed $200,000 and $100,000a total of $430,000 from an individual related to a director of the Company and a director of the Company, respectively. unrelated third party.Company. The loans are evidenced by a promissory notesnote which bearsbear interest at 12%12% per year and are due and payable on at dates ranging from December 10, 2020.2020, 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$0.30 or 80%80% of the ten dayten-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 waswere issued 50,000 shares of common stock.stock in connection with the notes. On December 7, 2020, the loans were amended whereby the various promissory notes were consolidated into two notes with a maturity date of June 30, 2021, and the variable conversion price was removed. See below for additional accounting impact. On April 23, 2021, the consolidated promissory notes were amended to allow the Company to extend the maturity date of the consolidated notes to December 31, 2021, in exchange for an aggregate of 250,000 shares of common stock and $15,000 added to the principal balance of the note. The shares of common stock were valued at $115,000 ad recorded as interest expense during six months ended June 30, 2021. As of June 30, 2021, the principal balance due on the convertible notes was $1,427,504 and recorded within related party convertible notes payable.
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-monthsyear ended June 30,December 31, 2020, the Company recorded initial derivative liabilities of $204,750$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 50,000 shares of common stock exceeded the face values of the convertible notes payable by $2,940,$2,940, which was recorded as a day one loss in derivative liability. On June 30,December 7, 2020, the derivative liabilities were revalued at $152,430$540,475 resulting in a loss of $241,562. The value of the derivatives of $540,475 was recorded as a gain on extinguishment due to the modification of $52,320.the exercise price. 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$396,223 discount. The discount is being amortized over the term of the convertible note using the straight linestraight-line method due to the short termshort-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,December 31, 2020, ano discount of $237,810 remained for which will be amortized in 2020.remained.
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$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$0.30 per share. The modification was treated as an extinguishment of the original note for which a loss on extinguishment of $448,000$448,000 was recorded.
In connection with the SKM acquisition, the Company assumed four notes payable totalling $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 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$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$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$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 $1,000,000payment from May 6, 2020 to June 15, 2020.2020. 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 shares of the Company’s common stock. The warrants are exercisable at a price of $2.00$2.00 per share and expire January 1, 2025.2025. A late payment penalty of $5,000$5,000 per day will be due if the $1,000,000$1,000,000 is not paid by June 15, 2020.2020. 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.$157,784.
On June 9, 2020, the holder of the Note agreed to further extend the due date for the $1,000,000$1,000,000 payment to July 15, 2020.2020. 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 shares of the Company’s common stock. The warrants are exercisable at a price of $2.00$2.00 per share and expire January 1, 2025.2025. 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.$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 twelve months ended December 31, 2020, the Company issued 52,293 in accrued interest.
shares of common stock in satisfaction of $The note was paid in full in August 2020.
Note Payable - $200,000
On October 9, 2020, the Company borrowed $200,000 from an unrelated third party. The note incurred interest at 12% per annum and was due by November 9, 2020. The note was repaid. As further consideration, the Company issued shares of its restricted common stock to the lender. The Company recorded the fair market value of the shares as a discount of $40,000 to the note for which all was amortized to interest expense during the year ended December 31, 2020.
Note Payable - $173,705
On November 1, 2020, the Company entered into an agreement to convert accounts payable of $173,705 into a note payable. The note incurred interest at 8% per annum and is payable in monthly payments.
Convertible Note Payable - $500,000
On November 17, 2020, the Company borrowed $500,000 from an unrelated third party. The note incurs interest at 8% per annum and initially matured on January 31, 2021. See below for discussion regarding the extension of the note. 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 75% of the ten-day average closing price of the Company’s common stock immediately prior to the date of conversion or $0.50. As of June 30, 2021, the principal balance due on the convertible note was $500,000 and recorded within convertible notes payable.
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. On June 30, 2021, the derivative liabilities were revalued at $271,897 resulting in a gain of $13,223. The derivative liabilities were revalued based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.38 our stock price on the date of revalue of $ , expected dividend yield of 0%, expected volatility of 113.00%, risk free interest rate of 0.01% and expected term of 0.50 years.
In connection with the derivative liabilities and common stock issued, the Company recorded a $287,454 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 six months ended June 30, 2021, the Company amortized $118,815 of the discount to interest expense. As of June 30, 2021, no discount remained.
On January 31, 2021, the holder of the note agreed to extend the due date for the note to April 2, 2021. In consideration for extending the repayment date to April 2, 2021, the Company issued to the note holder 50,000 shares of its common stock and the interest rate of the Note was increased to 10% per annum. The Company recorded the fair market value of the common stock issued of $23,500 as a discount to the note for which was fully amortized to interest expense during the six months ended June 30, 2020,2021.
On April 16, 2021, the holder of the Note agreed to extend the due date for the note to June 18, 2021. In consideration for extending the repayment date, the Company issued 80,814to the note holder shares of its common stock, shares of common stock in satisfaction of $31,762 infor accrued interest.
See Note 8interest through execution date and provided the holder with the option to extend the payment to September 15, 2021, for information relating to loans fromwhich 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 1,600,000additional shares of common stock would be provided, if extended. The payment date was extended to two officers. The shares were to vest over a one-year period commencing on January 1, 2019.September 15, 2021 at the option of the note holder in June 2021. The Company valuedrecorded the fair market value of the common stock at $760,000, using the closing market priceissued 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$173,000 as additional interest expense 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.2021.
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.NOTE 7 – STOCKHOLDER’S EQUITY
2020 IssuancesStock-Based Compensation
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 that will vest onwith a , of which have vested. The agreements also provide for the future grant of 1,300,000 additional shares of common stock should the individuals remain employed following the expiration date.
Duringdate, 400,000 of which have been cancelled and will not be subject to issuance. For the six months ended June 30, 2021, the Company recorded $ as stock-based compensation. The remaining expense outstanding is $58,364 for which will be recorded through 2022.
During the year ended December 31, 2020, the Company has recognized stock-based compensation of $2,617,162 in connectionentered into agreements with the employmentconsultants for which provided investor awareness, research materials and other agreements noted above. In addition, under these arrangements a total of 9.4 millionservices. During the three months ended March 31, 2021, shares of common stock are issuable upon final vesting.were returned to the Company and cancelled. The remainingCompany recorded a reduction to stock-based compensation of $1,029,838 will be recognized$ during the six months ended June 30, 2021.
On April 5, 2021 the Company issued 250,000 shares to a third party for assignment of intellectual property, including patents and patent applications, agreed to on January 26, 2021. The common stock was valued at $128,750 for which is being amortized over the remaining service periods as follows: $297,801 during the remainderterm 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.licensing agreement.
Options
In May 2020, effective April 1, 2020, the individuals noted above were also granted a total of will vestvested in tranches at various dates through May 1, 2021 with escalating exercise prices ranging from $0.50$ to $7.50$ and are exercisable for tenapproximately five years. These options were valued at $1,056,695$1,056,695 using a Black-Scholes Options Pricing Model.
The fair value of the options granted in 2020 are estimated using a Black-Scholes Options Pricing Model with the following assumptions:
Schedule of Fair Value Black-Scholes Options Pricing | ||||
Exercise price per share |
| $ | 3.40 |
|
Expected life (years) |
|
| 2.97 |
|
Risk-free interest rate |
|
| 0.64 | % |
Expected volatility |
|
| 135 | % |
In 2021, the Company granted options to purchase
shares of common stock to employees and consultants. Some of the grants had effective dates within the 2020 calendar year. These options will vest in tranches at various points through 2023 with escalating prices ranging from $ to $ and are exercisable through various points through 2023.These options were valued at $2,287,556 using a Black-Scholes Options Pricing Model. For the six months ended June 30, 2020,2021, the Company recorded $308,832$ as stock-based compensation. The remaining expense outstanding is $ for which will be recorded through May 1, 2021 is $747,863.
2024.
The fair value of the options isgranted in 2021 are estimated using a Black-Scholes Options Pricing Model with the following assumptions:
Exercise price per share | $ | 0.96 |
Expected life (years) | 2.56 | |||
Risk-free interest rate | 0.64 | % | ||
Expected volatility | 122 | % |
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 receivereceived a warrant to purchase one additional share of common stock at a price of $2.00$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 shares per day. During the six monthsyear ended June 30,December 31, 2020, the Company received $100,000$150,000 related to the sale of 200,000 shares of common stock and warrants.
On October 23, 2020, the Company sold 1,000,000 in proceeds.
shares of its common stock to a private investor for $Between December 28 and December 30, 2020, the Company received $100,000 related to the sale of 200,000 shares of common stock and warrants.
During the six months ended June 30, 2021, the Company received $543,000 related to the sale of shares of common stock.
Offering of Preferred Stock
In March 2021, the Company commenced and subsequently closed a private offering of its preferred stock for up to $2 million in proceeds. The offering consisted of 20,000 shares of preferred stock at a price of $100 per share. The purchaser of the preferred stock has agreed to purchase the preferred stock in three tranches provided certain sales milestones are met. Concurrently with each issuance of preferred stock, the Company shall issue the preferred stockholder 500,000 warrants to purchase the Company’s common stock at a price of $0.75 per share. Preferred stockholders are entitled to a 10% dividend paid in additional shares of preferred stock on a quarterly basis and will receive dividend and liquidation preferences over the Company’s common stockholders. During the six months ended June 30, 2021, the Company received $660,000 related to the sale of shares of preferred stock. In connection with the sale, the Company issued the holder warrants to purchase 500,000 shares of the Company’s common stock at $0.75 per share for a period of four years. The Company valued the warrants at $148,400 using the Black-Scholes pricing model for which a discount of $121,158 using the relative fair market value was recorded preferred stock and the offset to additional paid-in capital. In addition, the holders of the preferred stock receive dividends at a rate of 10% per annum. As of June 30, 2021, the Company recorded accrued dividends of $8,680 as an increase to accrued liabilities and an offset to additional paid-in capital. Each share of preferred stock is convertible into 200 shares of common stock.
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 June 30, 2020 and December 31, 2019, the Company has $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 deferred salaries and bonuses of $225,000$531,823 and $225,000 as of June 30, 2020.2021, respectively.
See Note 6 for discussion related to related party convertible notes payable.
NOTE 9 – SUBSEQUENT EVENTS
Extension of Notes Payable
Subsequent 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 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.
Related Party Convertible Notes Payable
On July 30, 2020, the Company borrowed $100,000 from an officer and director of the Company. At the option of the holder, 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. As further consideration, the Company issued 50,000 shares of its restricted common stock to the holder.
Pending Acquisitions
See Note 3 for a discussion of the acquisition of SKM.
On March 12, 20202, 2021, the Company entered into an agreement to acquire fifty-one percent (51%)with a third party for an equity investment of $30,000,000 in two tranches beginning August 16, 2021. For the first tranche, the investor will purchase preferred stock for $15,000,000, valued at $0.40 per share of common stock. For the second tranche, the investor will make an additional equity investment of $15,000,000, valued at $0.455 per share of common stock, within ninety (90) days of the outstanding membership interests in How Smooth It Is, Inc. (“HSII”) for $3,000,000 in cash and 7,000,000 sharesfunding of the Company’s restricted common stock.first tranche.
On July 29, 20202, 2021, the Company terminated itsentered into an assignment agreement with a third party under which the Company obtained the rights to acquireprovide CBD and other plant-based health and wellness products to patients covered under corporate health insurance plans. In consideration for assigning such rights, the Company entered into a profit-sharing arrangement with the third party whereby the Company shall receive 51% of HSII. As a partthe total profits and pay the third party 49% of the termination agreement:profits derived from such product sales.
On July 15, 2021, the Company borrowed a total of $400,000 from unrelated third parties. The loans are evidenced by two convertible promissory notes which bear total interest of $30,000, are convertible at $0.40 per share, and mature on August 20, 2021.
In July 2021, the Company received $125,000 related to the sale of 290,787 shares of common stock.
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.
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 business plan may also include: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.
Valuation Method One:
(ANI x PE) - L = A
A/ASP = S
Where:
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:
Valuation Method Two:
Where:
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:
As of August 14, 2020, SCT had generated revenues of approximately $125,000 and had nominal assets and liabilities.
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. 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.
As of August 14, 2020June 30, 2021 Love Pharm had not generated any revenue.
How Smooth It Is
As 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 $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:
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
On August 11, 2020, following receipt of the acquisition is subject to a number of conditions, including the approval of the acquisitiontransaction by the Colorado Marijuana Enforcement Division, (MED).the Company closed the acquisition of SKM and the change of ownership on SKM’s six licenses (now owned by the Company) was completed.
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 stock and 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 ofcan produce pure CBD isolate and full-spectrum hemp.hemp distillate. 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 some of 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.
Test Kitchen
On August 17, 2020, the Company acquired all the outstanding shares of Test Kitchen, Inc. for 50,000 shares of its restricted common stock.
Test Kitchen’s only assets as of August 17, 2020, was a product containing CBD oil. Test Kitchen filed a provisional patent application for this product on June 12, 2020. There can be no assurance that a patent will be issued for this product.
Solar Cultivation Technologies, Inc.
On September 29, 2020, the Company acquired all the assets of Solar Cultivation Technologies, Inc. for 1,200,792 shares of the Company’s common stock. SCT provides commercial cannabis cultivators with solar, battery storage, and high-efficiency lighting.
On November 12, 2020, the Company contributed SCT’s assets valued at $530,000 less the cash consideration provided by DC Energy Group, LLC (“DCEG”) of $200,000 for a 40% interest in DC Energy Group, LLC, an entity which is focused on renewable energy generation, storage, and distribution. The investment is accounted for using the equity method.
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 changesThree Months Ended June 30, 2021, compared to the Three Months Ended June 30, 2020
Revenue
We generated $762,778 of revenues for the three-month period ended June 30, 2021, in comparison with $3,951 for the line items incomparable quarter a year ago. The increase of $758,827 is primarily due to operational sales from the Company’s Statementacquisition in SKM, as well as wholesale sales of Operations forhemp distillate product sold through Test Kitchen. During the three and six months ended June 30, 2020 as2021, approximately 84% of the Company’s revenue was from sales made by the Company’s SKM dispensary in Dumont, Colorado, and approximately 16% of the Company’s revenue was from sales made by Test Kitchen. During the three months ended June 30, 2021, no sales were generated by Prolific Nutrition, Gratus Living, Love Pharm or EdenFlo.
Cost of Goods Sold.
We generated $612,118 of cost of goods sold for the three-month period ended June 30, 2021, in comparison with $40,066 for the comparable quarter a year ago. The increase of $572,052 is due to sales activity stated above.
Gross Profit/(Loss).
We generated $150,660 gross profit for the three-month period ended June 30, 2021, in comparison with gross loss of ($36,114) for the comparable quarter a year ago. The increase of $186,774 is due to operational activity. The Company, in prior years did not have on-going sales operations.
General and Administrative Expenses
General and administrative expenses for the three-month period ended June 30, 2021, totalled $2,487,327 in comparison with $3,892,549, for the comparable quarter a year ago. The decrease of $1,405,222 or 36% is primarily due to a significant amount of stock-based compensation recorded in the prior year in connection with options and shares granted to officers.
Other Income / Expense
Other expense for the three-month period ended June 30, 2021, totalled $1,537,013, in comparison with $852,864, for the comparable quarter a year ago. The increased expense of $684,149, is primarily due to increased interest from additional funding and discount amortization, fair value of common stock issued for note extensions, losses on investment valuation, and changes in the fair market value of derivative liabilities incurred.
Six Months Ended June 30, 2021, compared to the same periods last year, are discussed below:
The factors that will most significantly affect the Company’s future operating results will be:
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.Six Months Ended June 30, 2020
Capital Resources and LiquidityRevenue
We generated $1,556,926 of revenues for the six-month period ended June 30, 2021, in comparison with $5,041 for the comparable quarter a year ago. The increase of $1,551,885 is primarily due to operational sales from the Company’s sources and (uses)acquisition in SKM, as well as wholesale sales of cash forhemp distillate product sold through Test Kitchen. During the six months ended June 30, 2020 are shown below:2021, approximately 85% of the Company’s revenue was from sales made by the Company’s SKM dispensary in Dumont, Colorado, and approximately 15% of the Company’s revenue was from sales made by Test Kitchen. During the six months ended June 30, 2021, no sales were generated by Prolific Nutrition, Gratus Living, Love Pharm or EdenFlo.
2020 | 2019 | |||||||
Cash used in operations | $ | (1,229,888 | ) | $ | (204,542 | ) | ||
Loans and advances | (1,274,793 | ) | (28,593 | ) | ||||
Net cash paid in connection with acquisition | (382,010 | ) | -- | |||||
Repayment of advances from (advances to) related parties | (87,500 | ) | (11,358 | ) | ||||
Net proceeds from note payable and convertible notes payable | 1,516,000 | -- | ||||||
Sale of common stock | 100,000 | 442,500 | ||||||
Other | (24,685 | ) | -- |
Cost of Goods Sold.
We generated $1,080,070 of cost of goods sold for the six-month period ended June 30, 2021, in comparison with $40,066 for the comparable quarter a year ago. The increase of $1,040,004 is due to sales activity stated above.
Gross Profit/(Loss).
We generated $476,856 gross profit for the six-month period ended June 30, 2021, in comparison with gross loss of ($35,024) for the comparable quarter a year ago. The increase of $511,880 is due to operational activity. The Company, in prior years did not have on-going sales operations.
General and Administrative Expenses
General and administrative expenses for the six-month period ended June 30, 2021, totalled $4,043,885 in comparison with $4,448,199, for the comparable quarter a year ago. The decrease of $404,314 or 9% is primarily due to a significant amount of stock-based compensation recorded in the prior year in connection with options and shares granted to officers.
Research and Development Expenses
Research and development expenses for the six-month period ended June 30, 2021, totalled $3,708, in comparison with $0 for the comparable quarter a year ago. The increase of $3,708 is due to product creation in the current year.
Other Income / Expense
Other expense for the three-month period ended June 30, 2021, totalled $2,724,933, in comparison with $918,863, for the comparable quarter a year ago. The increased expense of $1,806,070, is primarily due to increased interest from additional funding, an allocation of bad debt expense on a note receivable, losses on investment valuation, and changes in the fair market value of derivative liabilities incurred.
Liquidity and Capital Resources
Our principal source of liquidity has been funds received from the sale of our common stock and issuance of notes including convertible notes. During the current reporting period and subsequent we have funded our operations through cash flows from operations and the following significant transactions.
On August 18, 2020, the Company entered into a Loan Agreement with an unrelated third party. The Loan Agreement provides the Company with the option, subject to certain conditions, to borrow up to $4,000,000 under the Loan Agreement. As of November 16, 2020 the Company had borrowed $1,950,000 pursuant to the Loan Agreement, which amount includes $146,250 which the Company will use to pay the first six month’s interest on the borrowed funds. The Company used $1,000,000 of the initial advance to repay the $1,000,000 loan described above. The funds remaining from the initial advance will be used to purchase raw materials for the Company’s products and for general corporate purposes. All funds borrowed bear interest at 15% per year, are secured by substantially all of the Company’s assets, and are due and payable on August 18, 2023. The Lender will receive two shares of the Company’s restricted common stock for every $1.00 loaned to the Company. At the option of the Lender, the amounts loaned to the Company may be converted into shares of the Company’s common stock. The number of shares to be issued will be determined by dividing the amount to be converted by the Conversion Price. The Conversion Price is the lessor of: (1) $2.00 or (2) 75% of the average closing price of the Company’s common stock for the 30 consecutive trading days ending on the last business day immediately prior to the conversion date.
On April 28, 2021, the Company received $500,000 related to additional borrowings under the Loan Agreement.
During the six months ended June 30, 2021, the Company received $543,000 related to the sale of 1,394,404 shares of common stock.
In March 2021, the Company commenced and subsequently closed a private offering of its preferred stock for up to $2 million in proceeds. The offering consisted of 20,000 shares of preferred stock at a price of $100 per share. The purchaser of the preferred stock has agreed to purchase the preferred stock in three tranches provided certain sales milestones are met. Concurrently with each issuance of preferred stock, the Company shall issue the preferred stockholder 500,000 warrants to purchase the Company’s common stock at a price of $0.75 per share. Preferred stockholders are entitled to a 10% dividend paid in additional shares of preferred stock on a quarterly basis and will receive dividend and liquidation preferences over the Company’s common stockholders.
On May 14, 2021, the Company received $660,000 related to the issuance of the first tranche of 660 shares of the Company’s preferred stock and 500,000 warrants to purchase the Company’s common stock at a price of $0.75.
Going forward we are dependent upon raising capital to the extent cash flows from our operations are not significant enough to our cash flow needs. We currently have two financing agreements in place, as disclosed above.
For the next 12 months our plan of operations is to expand our current activity at SKM and increase consumer product offerings in Test Kitchen. We believe that our current cash on hand, cash flows from operations and expected proceeds from financing agreements in place will allow us to meet our cash flow requirements for a period in excess of 12 months.
Cash Flows
Net Cash used in Operating Activities.
We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was $1,899,253 for the six-month period ended June 30, 2021 in comparison to $1,229,888 for the comparable period a year ago, an increase of $669,365 or 54%. The increase in cash used in operations was primarily related to operating activities in the current year that did not exist in the prior year.
Net Cash used in Investing Activities.
Net cash used in our investing activities was $104,713 for the six-month period ended June 30, 2021 in comparison to $1,681,488 for the comparable period a year ago, a decrease of $1,576,775 or 94%. The decrease in cash was primarily related to the change in value of the note receivable with HSII.
Net Cash from Financing Activities.
Net cash provided by financing activities was $1,599,155 for the six-month period ended June 30, 2021 in comparison to $1,428,500 for the comparable period a year ago, an increase of $170,655 or 12%. In the six-month period ended June 30, 2021, we raised $543,000 primarily through the issuance of common stock, $660,000 through the sale of preferred stock and $500,000 from a convertible note payable. In the six-month period ended June 30, 2020, we raised $1,586,000 primarily through the issuance of notes.
Adjusted EBITDA, for the purposes of these financial statements, shall mean:
The Company’s loss before interest, taxes, depreciation, and amortization adjusted to exclude the impact of (a) loss on impairment of tangible or intangible assets; (b) gain or loss on disposal of assets, including notes receivables; (c) gain or loss from the early extinguishment, redemption or repurchase of debt, (d) stock-based compensation expense and (e) the loss from derivative liabilities. Adjusted EBITDA will also exclude any expenses incurred by the Company does not knowin connection with the Company’s evaluation, pursuit, or consummation of any trends, demands, commitments,one or more acquisitions or transactions (which such expenses are considered to be incurred in connection with extraordinary, unusual, or infrequently occurring events or uncertainties that will result in, or that are reasonable likely to resultreported in the Company’s liquidity increasing or decreasing in any material degree.
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.public filings).
During the six months ended June 30, 2021, EBITDA decreased to $2,233,899 from $3,005,477 in the prior comparable year.
Off Balance Sheet Arrangements
As of June 30, 2020,2021, the Company did not have any off balanceoff-balance sheet arrangements.
Critical Accounting Policies and Estimates
See Note 2 to the June 30, 20202021, 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 June 30, 20202021, 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
On January 11, 2021, the Company hired Alexander Glueckler as its CFO to reduce reliance on independent financial reporting consultants for review or critical accounting areas, disclosures, and material nonstandard transactions. The hiring of Mr. Glueckler has allowed the Company to take greater internal control over its financial reporting in the three months ended June 30, 2021.
There were no other changes in our internal control over financial reporting that occurred during the quarter ended June 30, 20202021, that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Financial Statements included as part of this report.
ITEM 2.UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s sale of unregistered securities during the six months ended June 30, 2021 are shown in the Statement of Stockholders Equity which is part of the financial statements included as part of this report. Refer also to Note 7 to these financial statements.
The Company relied upon the exemption provided by Section 4(a)(2) of the Securities Act of 1933 in connection with issuance of the shares described above. The persons who acquired the shares were sophisticated investors and were provided full information regarding the Company’s business and operations. There was no general solicitation in connection with the issuance of the shares. The persons who acquired the shares acquired them for their own accounts. No commissions or other form of remuneration was paid in consideration with the issuance of these shares.
ITEM 6. | EXHIBITS |
(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 |
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 August 17, 2020.13 2021.
PURE HARVEST CORPORATE GROUP, INC. | ||
By: | /s/ Matthew Gregarek | |
Matthew Gregarek | ||
Principal Executive |
By: | /s/ Alexander Glueckler | |
Alexander Glueckler | ||
Principal Financial and Accounting Officer |