UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2019
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number: 333-212055
PURE HARVEST CANNABIS GROUP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Colorado 36-4752858
--------------------- ----------------------
(State of Incorporation) (IRS Employer ID Number)
929 Colorado Ave.
Santa Monica, CA 90401
----------------------
(Address of principal executive offices)
(800) 560-5148
---------------------
(Registrant's Telephone number)
(Former Address and phone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 for Regulation S-T (ss.232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," "smaller
reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth company [X]
1
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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of May 15, 2019 there were 31,803,330 outstanding shares of the registrant's
common stock.
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Trading Symbol(s) Name of each exchange
on which registered
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None N/A N/A
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2
Pure Harvest Cannabis Group, Inc,
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2019 2018
----------- ------------
ASSETS
Current assets
Cash $ 87,932 $ 22,501
Accounts receivable 6,072 22,802
Inventory 62,241 63,940
---------- --------
Total current assets 156,245 109,243
Fixed assets
Machinery and equipment 305,165 305,165
Accumulated depreciation (277,774) (274,615)
---------- --------
27,391 30,550
Other assets
Earnest money deposit 20,000 -
---------- --------
Total assets $ 203,636 $139,793
========== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable 180,778 104,329
Accrued expense - 36,000
Royalty payable 384 194
Due to related parties 138,797 19,889
Loans 117,000 117,000
Common stock to be issued 95,000 -
---------- --------
Total current liabilities 531,959 277,412
Commitments and contingencies
Stockholders' deficit
Preferred stock, $0.01 par value; 25,000,000
shares authorized; no shares issued and
outstanding at March 31, 2019 and
December 31, 2018 - -
Common stock, $0.01 par value; 100,000,000
shares authorized; 31,803,330 and 31,523,330
shares issued and outstanding at March 31,
2019 and December 31, 2018, respectively 318,034 315,234
Additional paid-in capital 118,661 (201,539)
Accumulated deficit (765,018) (251,314)
---------- --------
(328,323) (137,619)
---------- --------
Total liabilities and stockholder's deficit 203,636 139,793
========== ========
The accompanying notes are an integral part of
these consolidated financial statements.
3
Pure Harvest Cannabis Group, Inc,
Consolidated Statements of Operations
For The Three Months Ended March 31, 2019 and 2018
(unaudited)
2019 2018
------- --------
Royalty income $ 6,208
Costs of sales 2,026
---------- ----------
Gross margin 4,182
---------- ----------
Operating expenses
Advertising and promotion 12,875 -
General and administrative expenses
(including stock-based compensation
of $323,000 and $0, respectively) 483,772 46,169
Travel and entertainment 18,081 -
Depreciation expense 3,158 -
---------- ----------
Total costs and expenses 517,886 46,169
---------- ----------
Net loss $(513,704) $(46,169)
========== ==========
Basic and diluted net loss per common share $ (0.02) $ (0.00)
========== ==========
Basic and diluted weighted average number of
common shares outstanding $31,793,997 17,906,016
=========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
4
Pure Harvest Cannabis Group, Inc,
Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2019 and 2018
(unaudited)
2019 2018
------- --------
Cash flows provided by operating activities:
Net loss $ (513,704) $ (46,169)
Adjustment to reconcile net loss from
operations:
Depreciation 3,158 -
Stock-based compensation 323,000 -
Changes in Operating Assets and Liabilities
Accounts receivable 16,730 -
Inventory 1,699 -
Accounts payable 76,450 500
Accrued expenses (36,000) 36,000
Royalty payable 190 -
Due to related parties 94,194 8,542
---------- --------
Net cash used in operating activities (34,283) (1,127)
---------- --------
Cash flows from investing activities -
Earnest money deposit on lease (20,000) -
---------- --------
Net cash used by investing activities (20,000) -
---------- --------
Cash flows from financing activities:
Advances from related parties 24,714 -
Proceeds from issuance of common stock
to be issued 95,000 -
---------- --------
Net cash provided by financing activities 119,714 -
---------- --------
Net increase (decrease) in cash 65,431 (1,127)
Cash, beginning of period 22,501 1,127
---------- --------
Cash end of period $ 87,932 $ -
========== ========
The accompanying notes are an integral part of
these consolidated financial statements.
5
Pure Harvest Cannabis Group, Inc,
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2018
(unaudited)
Common Stock Additional Total
--------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------------ ------------- ----------- ----------- -------------
Balance, December 31, 2017 17,906,016 179,060 $ (179,035) $ (205,145) $ (205,120)
Net loss for three months ended
March 31, 2018 - (46,169) (46,169)
----------- --------- ---------- ---------- ----------
Balance, March 31, 2018 17,906,016 179,060 $ (179,035) $ (251,314) $ (251,289)
=========== ========== ========== ========== ==========
Balance, December 31, 2018 31,523,330 315,234 (201,539) (251,314) (137,619)
Stock-based compensation 280,000 2,800 320,200 - 323,000
Net loss for the three months
ended March 31, 2019 - - - (513,704) (513,704)
----------- --------- ---------- ---------- ----------
Balance, March 31, 2019 31,803,330 318,034 118,661 $ (765,018) $ (328,323)
=========== ========== ========== ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
6
Pure Harvest Cannabis Group, Inc.
(Formerly The Pocket Shot Company)
Notes to Consolidated Financial Statements
March 31, 2019
(Unaudited)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company was formed as a Colorado corporation in April 2004.
On December 31, 2018 the Company acquired all of the outstanding common stock of
Pure Harvest Cannabis Producers, Inc., ("PHCP") in exchange for 17,906,016
(post-split) shares of the Company's common stock. The transaction was accounted
for as a reverse acquisition. The accompanying consolidated financial statements
are those of PHCP prior to December 31, 2018 and exclude the financial position,
results of operations, cash flows and stockholders' equity of the Pocket Shot
Company prior to December 31, 2018. See "Reverse Acquisition" below for
additional information.
As a result of the acquisition of PHCP, the Company's new business involves the
acquisitions and operations 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.
On March 15, 2019, shareholders owning a majority of the Company's outstanding
shares approved the following amendments to the Company's Articles of
Incorporation:
Increasing the authorized capital stock of the Company to 250,000,000
shares of common stock, $0.01 par value, and 25,000,000 shares of
preferred stock, $0.01 par value. The preferred stock may be issued in
one or more series as may be determined by the Company's Board of
Directors. The designations, powers, rights, preferences,
qualifications, restrictions and limitations of the preferred stock
shall be established from time to time by the Company's Board of
Directors; and
Forward splitting the outstanding shares of the Company's common stock
on a two-for-one basis.
The Company's accounting year end is December 31.
Reverse Acquisition
On December 31, 2018 the Company ("The Pocket Shot Company") acquired all of the
outstanding common stock of PHCP in exchange for 17,906,016 (post-split) shares
of the Company's common stock. In addition, the shareholders of PHCP were issued
warrants to purchase 17,906,016 (post-split) shares of the Company's common
stock. The warrants have an exercise price of $4.00 per share and a life of
three years. The issuance of the warrants did not have an impact on the
financial statements and was reflected similar to the shares issued to PHCP as
discussed below.
The transaction was accounted for as a reverse acquisition since: (i) the
shareholders of PHCP owned the majority of the outstanding common stock of the
Company after the share exchange; (ii) a majority of the directors of the
Company are also directors of PHCP; and (iii) the old officers of the Company
were replaced with officers designated by PHCP. Effective December 31, 2018, the
Company's stockholders' equity was retroactively recapitalized as that of PHCP,
while the stockholders' equity of the Company was recorded as being acquired in
the reverse acquisition. The Company and PHCP remain separate legal entities
(with the Company as the parent of PHCP). The accompanying consolidated
financial statements are those of PHCP prior to December 31, 2018 and exclude
the financial position, results of operations, cash flows and stockholders'
equity of The Pocket Shot Company prior to December 31, 2018.
7
All references to common stock, share and per share amounts have been
retroactively restated to reflect as if the transaction had taken place as of
the beginning of the earliest period presented.
The Company's assets and liabilities pre- reverse acquisition:
Net Assets Acquired:
Cash $ 22,501
Accounts receivable 22,802
Inventory 63,940
Machinery & Equipment 30,550
----------
Total Assets $ 139,793
==========
Accounts payable and other current
liabilities $ 14,765
Due to related parties 11,358
----------
Total Liabilities $ 26,123
==========
Net Assets Acquired $ 113,670
----------
The following summarized unaudited consolidated pro forma information shows the
results of operations of the Company had the reverse acquisition occurred on
January 1, 2017:
Pro-forma 2018 2017
---- ----
Revenues $ 105,869 $ 87,633
Net loss $(103,460) $(284,532)
Net loss per common share - basic
and diluted $ (0.01) $ (1.81)
The summarized consolidated pro forma results are not necessarily indicative of
results which would have occurred if the reverse acquisition had been in effect
for the periods presented. Further, the summarized unaudited consolidated pro
forma results are not intended to be a projection of future results.
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 condensed financial
statements contain all accruals and adjustments (each of which is of a normal
recurring nature) necessary for a fair presentation of the Company's financial
position as of March 31, 2019 and the results of its operations for the three
months then ended. The condensed balance sheet as of December 31, 2018 is
derived from the December 31, 2018 audited financial statements. Significant
accounting policies have been consistently applied in the interim financial
statements. The results of operations for the three months ended March 31, 2019
are not necessarily indicative of the results to be expected for the entire
year.
Going Concern
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.
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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 ASC 810 Consolidation ("ASC 810").
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiary, PHCP. All significant consolidated transactions
and balances have been eliminated in consolidation. The operations of the
Company are included in the consolidated financial statement from the date of
the Agreement.
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 useful lives and
potential impairment of property and equipment, estimate of fair value of share
based payments and valuation of deferred tax assets.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an
original maturity of six months or less to be cash equivalents.
Accounts Receivable
We record accounts receivable at net realizable value. This value includes an
appropriate allowance for estimated uncollectible accounts to reflect any loss
anticipated on the accounts receivable balances and is charged to other income
(expense) in the combined statements of operations. We calculate this allowance
based on our history of write-offs, the level of past-due accounts based on the
contractual terms of the receivables, and our relationships with, and the
economic status of, our customers. As of March 31, 2019 and December 31, 2018,
an allowance for estimated, uncollectible accounts was determined to be
unnecessary.
Inventory
Inventory is reported at the lower of cost or market on the first-in, first-out
(FIFO) method. Our inventory is subject to obsolescence. Accordingly, quantities
on hand are periodically monitored for items no longer being sold, which are
written off. All inventory is stored at the manufacturer and maintained by them.
Inventory consists of pouches, display and shipping boxes and no inventory is
deemed obsolete.
Machinery and Equipment
Machinery and equipment is recorded at cost. Expenditures for major additions
and improvements are capitalized and minor replacements, maintenance, and
repairs are charged to expense as incurred. When property and equipment is
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method
for financial statement purposes. The Company uses other depreciation methods
(generally accelerated) for tax purposes where appropriate. The estimated useful
lives for significant machinery and equipment categories are as five years.
Revenue Recognition
The Company records revenue under the adoption of ASC 606 by analyzing exchanges
with its customers using a five-step analysis such as identifying performance
obligations in the contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction price to each
separate performance obligation. The Company's policy is to record revenue as
earned when a firm commitment, indicating sales quantity and price exists,
delivery has taken place and collectability is reasonably assured. The Company
9
records sales of finished products once the customer places the order and the
product is shipped. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. Provisions for discounts, returns,
allowances, customer rebates and other adjustments are netted with gross sales.
The Company accounts for such provisions during the same period in which the
related revenues are earned. Provisions for discounts, returns, allowances,
customer rebates and other adjustments are minimal and are recorded as a
reduction of revenue
Cost of Sales
The costs associated with our royalty income are packaging, a royalty of $1.20
per case, and repair and maintenance costs of our filling machines.
General and Administrative
This category includes costs of legal and accounting, telephone, office
supplies, product samples, insurance, registration costs, and consulting
expenses.
Travel and Entertainment
This category includes the costs of air travel, hotels, meals and reimbursed
automotive expenses.
Stock-Based Compensation
The Company accounts for share-based payments pursuant to ASC 718, "Stock
Compensation" and, accordingly, the Company records compensation expense for
share-based awards based upon an assessment of the grant date fair value for
stock options and restricted stock awards using the Black-Scholes option pricing
model. Share based expense paid through direct stock grants is expensed over the
vesting period or upon issuance for awards with no further service requirements.
During the three months ended March 31, 2019 and 2018 the Company recognized
stock-based compensation expense of $323,000 and $0, respectively. See Note 6
for additional information.
Fair Value of Financial Instruments
The Company applies the accounting guidance under Financial Accounting Standards
Board ("FASB") ASC 820-10, "Fair Value Measurements", as well as certain related
FASB staff positions. This guidance defines fair value as the price that would
be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required to
be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact business and considers
assumptions that marketplace participants would use when pricing the asset or
liability, such as inherent risk, transfer restrictions, and risk of
nonperformance.
The guidance also establishes a fair value hierarchy for measurements of fair
value as follows:
o Level 1 - quoted market prices in active markets for identical assets or
liabilities.
o 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.
o 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 March 31, 2019 and December 31, 2018, due to the short-term
nature of these instruments.
Net Loss per Share
Net loss per common share is computed by dividing net loss by the weighted
average common shares outstanding during the period as defined by Financial
Accounting Standards, ASC Topic 260, "Earnings per Share". Basic earnings per
common share ("EPS") calculations are determined by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
10
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. As of March 31, 2019 and 2018 , dilutive instruments
consisted of warrants to purchase shares of the Company's common stock, the
effects of which due to the net loss are anti-dilutive.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU, Leases, which requires lessees to
recognize most leases on their balance sheets as a right-of-use asset with a
corresponding lease liability. Lessor accounting under the standard is
substantially unchanged. Additional qualitative and quantitative disclosures are
also required. The Company adopted the standard effective January 1, 2019 using
the cumulative-effect adjustment transition method, which applies the provisions
of the standard at the effective date without adjusting the comparative periods
presented. The Company adopted the following practical expedients and elected
the following accounting policies related to this standard update:
o The option to not reassess prior conclusions related to the
identification, classification and accounting for initial direct costs
for leases that commenced prior to January 1, 2019.
o Short-term lease accounting policy election allowing lessees to not
recognize right-of-use assets and liabilities for leases with a term
of 12 months or less; and
o The option to not separate lease and non-lease components for certain
equipment lease asset categories such as freight car, vehicles and
work equipment.
o The package of practical expedients applied to all of its leases,
including (i) not reassessing whether any expired or existing
contracts are or contain leases, (ii) not reassessing the lease
classification for any expired or existing leases, and (iii) not
reassessing initial direct costs for any existing leases.
The Company has inventoried all leases where the Company is a lessee as of the
initial date of application and has examined other contracts with suppliers,
vendors, customers and other outside parties to identify whether such contracts
contain an embedded lease as defined under the new guidance. As of March 31,
2019 Company's only lease was a month to month lease, which is immaterial to the
consolidated financial statements.
As a result of the above, the adoption of ASC 842 did not have a material effect
on the consolidated financial statements. The Company will review for the
existence of embedded leases in future agreements.
In June 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting." These amendments expand the scope of Topic 718, Compensation -
Stock Compensation (which currently only includes share-based payments to
employees) to include share-based payments issued to nonemployees for goods or
services. Consequently, the accounting for share-based payments to nonemployees
and employees will be substantially aligned. The ASU supersedes Subtopic 505-50,
Equity - Equity-Based Payments to Non-Employees. This standard is effective for
public companies for annual periods beginning after December 15, 2018, including
interim periods within those fiscal years, with early adoption permitted as long
as ASU 2014-09 has been adopted. The Company adopted the guidance on January 1,
2019. The adoption did not have a material impact on our consolidated financial
statements.
The Company reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.
NOTE 3 - RELATED PARTY TRANSACTIONS
Effective January 1, 2019, the Company entered into employment agreements with
its two officers. Under the terms of the agreement the combined minimum annual
compensation is $350,000. During the three months ended March 31, 2019, the
Company accrued $94,194 in connection with these agreements and $24,174 for
expenses, both of which are included in due to related parties on the
accompanying consolidated balance sheet and within general and administrative
expenses on the accompanying statement of operations. See Note 6 for discussion
regarding common stock issued in connection with the employment agreements.
Prior to the reverse acquisition, the Company entered into an agreement with
Jarrold R. Bachmann, a former officer and a current shareholder, to pay
royalties of $1.20 on a per case basis for sales of the Company's product The
Pocket Shot. Amounts due as of March 31, 2019 and 2018 under the agreement were
insignificant.
11
NOTE 4 - ROYALTY INCOME
Under the terms of an existing license agreement, for which was entered into
prior to the reverse acquisition, the Company receives royalty income in
exchange for the license to manufacture, fill and distribute the Company's
product, a plastic pouch containing specialty alcohol beverages. The initial
term of the agreement was for five years, expiring in 2010, with automatic
renews for succeeding terms of two years each unless either party has given a
written notice of its election to terminate the agreement at least one hundred,
eighty calendar days prior to the end of any initial or extended term.
The Licensee is required to pay the Company a royalty per case as provided in
the agreement. All royalties due to the Company accrue upon the sale of the
products, regardless of the time of collection by the Licensee. In addition, all
of the Company's revenues, prior to the reverse acquisition, have been
historically generated from this contract. The loss of this royalty would have a
substantial impact on the Company's operations. Prior to the reverse
acquisition, the Company has operated in a single business segment, licensing
its product to customers in the United States.
NOTE 5 - EARNEST MONEY DEPOSIT
In February 2019 the Company entered into an agreement to buy property located
approximately 35 miles west of Denver, Colorado. As required by the agreement,
the Company placed an earnest money deposit of $20,000 with an escrow agent. The
deposit of $20,000 was to be applied to the purchase price at closing. The
Company subsequently assigned its rights to purchase the property to an
unrelated third party and then leased the property from the unrelated third
party. (See Note 8). The Company does not know if it will be repaid, or receive
any rent credit, for the deposit.
NOTE 6 - PROMISSORY NOTES
In 2017, the Company entered into three promissory notes with third parties.
Total proceeds received were $117,000 for which were used for operations. The
promissory notes are unsecured, payable on demand and do not incur interest.
NOTE 7 - STOCKHOLDERS' DEFICIT
Change in Articles of Incorporation
On March 15, 2019, shareholders owning a majority of the Company's outstanding
shares approved the following amendments to the Company's Articles of
Incorporation:
Increasing the authorized capital stock of the Company to 250,000,000
shares of common stock, $0.01 par value, and 25,000,000 shares of
preferred stock, $0.01 par value. The preferred stock may be issued in
one or more series as may be determined by the Company's Board of
Directors. The designations, powers, rights, preferences,
qualifications, restrictions and limitations of the preferred stock
shall be established from time to time by the Company's Board of
Directors; and
Forward splitting the outstanding shares of the Company's common stock
on a two-for-one basis.
The name change, trading symbol change (PCKK to PHCG) and forward stock split
became effective in the public market on May 2, 2019 and have been retroactively
reflected for all periods presented.
Stock-Based Compensation
In connection with the employment agreements discussed in Note 3, the Company
entered into an agreement to issue a total of 1,600,000 shares of common stock
to two officers. The shares vest over a one year period commencing on January 1,
2019. The Company valued the common stock at $760,000, using the closing market
price of the Company's common stock on the date of the agreement. The Company is
expensing the value of off the common stock over the vesting period which
mirrors the service period. During the three months ended March 31, 2019, the
Company recognized $190,000 of stock based compensation. As of March 31, 2019,
remaining stock-based compensation of $570,000 for which will be recognized
through the remainder of 2019.
12
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.
Offering of Common Stock and Warrants
In February 2019, the Company commenced a private offering of its common stock
for up to $10 million in proceeds. The Company is offering up to 20 million
shares of common stock at a purchase price of $0.50 per share. In addition, for
each share purchased the investor will receive a warrant to purchase one
additional share of common stock at a price of $2.00 per share. The warrants
expire on December 31, 2021 or sooner at the Company's option, if the Company's
stock trades for a price of $3.00 per share for 10 days with an average volume
of 100,000 shares per day. During the three months ended March 31, 2019, the
Company received deposits of $95,000 related to the sale of 190,000 shares of
common stock and warrants. The Company has reflected the deposits as a current
liability as the related common stock and warrants have yet to be issued and the
offering is still open.
Reverse Acquisition
See Note 1 for shares issued in connection with the reverse acquisition.
NOTE 8 - SUBSEQUENT EVENTS
In May 2019 the Company entered into a lease agreement for a property in
Colorado intended to be used in a planned retail store front. The initial term
of the lease is for a period of 3 years and the Company has approved a
commitment fee of 400,000 shares of common stock as part of the agreement.
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On December 31, 2018 Pure Harvest Cannabis Producers, Inc. ("PHC") was
acquired by the Company. At the time of the acquisition, the Company had
13,617,314 (post-split) outstanding shares of common stock. The Company issued
17,906,016 (post-split) shares of its common stock, as well as warrants to
purchase an additional 17,906,016 (post-split) shares of the Company's common
stock to the shareholders of PHC in exchange for all of the outstanding shares
of PHC. The warrants issued to the former shareholders of PHC allow the holder
to acquire one share of the Company's common stock at a price of $4.00 per share
at any time on or before December 31, 2021. PHC is now a wholly owned subsidiary
of the Company.
The transaction was accounted for as a reverse acquisition since: (i) the
shareholders of PHC owned the majority of the outstanding common stock of the
Company after the share exchange; (ii) a majority of the directors of the
Company are also directors of PHC; and (iii) the old officers of the Company
were replaced with officers designated by PHC. Effective December 31, 2018, the
Company's stockholders' equity was retroactively recapitalized as that of PHC.
The Company and PHC remain separate legal entities (with the Company as the
parent of PHC).
On February 5, 2019 the Company changed its name to Pure Harvest Cannabis
Group, Inc. On March 15, 2019 shareholders owning a majority of the Company's
outstanding shares approved a two-for-one forward split of the Company's common
stock. The name change, forward stock split and the change in the Company's
trading symbol (from "PCKK" to "PHCG") become effective in the public market May
2, 2019.
As a result of the acquisition of PHC the Company's new business plan
includes the acquisition of licensed medical and recreational marijuana
dispensaries, cultivation facilities and production facilities in states which
allow publicly traded companies to own and operate dispensaries, cultivation
facilities and production facilities. Depending on the markets entered and state
regulation, the Company's plan may also include: asset purchases,
management/consulting operating agreements, or similar allowable agreements. The
Company plans to use a combination of cash, shares of common or preferred stock,
notes, or other financing vehicles to complete these acquisitions.
As an alternative to a standard acquisition, the Company may use joint
ventures and/or licensing arrangements to provide the Company with the same
economic benefits as would be obtained from an outright acquisition.
The Company is dedicated to the research and development of the highest
quality products to support patient health and well-being. The Company intends
to develop into a large vertically integrated producer and distributor of
cannabis initially targeting states with attractive markets that have legalized
cannabis for both medicinal and adult-use. The Company will also enter markets
that are in various stages of legalization with branded hemp derived CBD and
terpene infused product lines. In addition to products tailored to marijuana
retail dispensaries, the Company's line will incorporate infused product options
including beverages, edibles, topicals, concentrates, and distillates.
On January 15, 2019 the Company signed a Non-Binding Letter of Intent with
an unrelated third party to acquire the assets of a licensed marijuana
dispensary located west of Denver, Colorado. The Letter of Intent provides that
the Company will pay $280,000 in cash, assume certain liabilities and issue
2,500,000 restricted shares of the Company's post-split common stock for the
assets that are purchased.
On May 3, 2019 the Company leased two buildings, consisting of
approximately 2,750 square feet combined, located along Interstate 70
approximately 38 miles west of Denver, Colorado. The lease expires on April 30,
2022, but may be renewed for an additional five years at the option of the
Company. The monthly rent is $8,000 for the initial three year term, increasing
to $10,000 per month if the Company elects to extend the term of the lease. The
lease is a "triple net" lease, which requires the Company, in addition to the
monthly rent, to pay the cost of all utilities, insurance, repairs, maintenance
and real estate taxes. The Company plans to remodel the buildings so they can be
used for the marijuana retail dispensary described above.
The Company has an option to purchase the buildings at prices ranging
between $1,400,000 and $1,600,000 at various dates prior to May 1, 2022.
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The Company issued the landlord 400,000 shares of its post-split common
stock in consideration for the option to purchase the buildings
On January 26, 2019 the Company signed a Non-Binding Letter of Intent with
an unrelated third party to acquire the assets of a licensed marijuana
cultivation facility located in Denver, Colorado. The Letter of Intent provides
that the Company will pay $400,000 in cash, assume certain liabilities, and
issue 2,000,000 restricted shares of the Company's post-split common stock for
the assets that are purchased.
On February 17, 2019 the Company signed a Non-Binding Letter of Intent with
unrelated third parties to acquire a 51% interest in a California corporation
which plans to develop a CBD oil infused yerba mate beverage. The Letter of
Intent provides that the Company will pay $400,000 in cash and issue 1,000,000
restricted shares of the Company's post-split common stock for a 51% interest in
the California corporation. If the acquisition is completed, the Company has the
option to acquire an additional 30% interest in the California corporation for
$1,500,000. As of May 15, 2019, the California corporation was in the start-up
stage and had not generated any revenue.
The non-binding Letters of Intent which we have signed do not prevent the
other parties from entering into Letters of Intents or binding agreements with
third parties.
The acquisition of marijuana dispensaries, cultivation facilities and
manufacturing facilities in Colorado, California or other jurisdictions is
subject to the approval of government authorities which license and regulate
marijuana dispensaries in their applicable jurisdictions. No assurance can be
given that any such approvals can be obtained.
As of May 15, 2019, the Company had not acquired any dispensaries,
cultivation facilities or any other entities and did not have any definitive
agreements relating to any acquisition.
The Company will continue to collect royalties for licensing the Company's
patent and trademarks in connection with the manufacturing and sale of the
Pocket Shot branded specialty alcohol beverage pouches.
Results of Operations
Material changes in the line items in the Company's Statement of Operations
for the three months ended March 31, 2019 as compared to the same period last
year, are discussed below:
Increase (I)
Item or Decrease Reason
(D)
-------------------------------------------------------------------------------
General and I Increase was primarily due to salary expenses,
administrative and legal and accounting services as the
expenses Company commenced its new business.
Capital Resources and Liquidity
The Company's sources and (uses) of cash for the three months ended March
31, 2019 and 2018 are shown below:
2019 2018
------------- -------------
Cash used in operations $ (34,283) $ (1,127)
Earnest money deposit (20,000) --
Advances from related parties 24,714 --
Sale of common stock 95,000 --
The Company does not know of any trends, demands, commitments, events or
uncertainties that will result in, or that are reasonable likely to result in,
the Company's liquidity increasing or decreasing in any material way.
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.
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Off Balance Sheet Arrangements
As of March 31, 2019, the Company did not have any off balance sheet
arrangements.
Critical Accounting Policies and Estimates
See Note 2 to the March 31, 2019 financial statements included as part of
this report for a description of the Company's critical accounting policies and
estimates.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by us in the reports filed under the
Securities Exchange Act of 1934, is recorded, processed, summarized and reported
within the time periods specified by the Commission's rules and forms.
Disclosure controls are also designed with the objective of ensuring that this
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. We evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act, as amended) as of the end of the period covered by
this report. As a result of this evaluation, management concluded that our
disclosure controls and procedures were not effective as of March 31, 2019 due
to the following material weakness:
o Lack of appropriate segregation of duties,
o Lack of control procedures that include multiple levels of supervision
and review, and
o An overreliance upon independent financial reporting consultants for
review of critical accounting areas and disclosures and material,
nonstandard transactions.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2019 that materially affect, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 15th day of May 2019.
PURE HARVEST CANNABIS GROUP, INC.
By:/s/ David Lamadrid
-------------------------------------
David Lamadrid
Principal Executive and Financial
Officer
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