Notes to Condensed
Consolidated Financial Statements
September 30, 2021
(Unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
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 the outstanding common stock of Pure Harvest Cannabis Producers, Inc., (“PHCP”) in exchange for
17,906,016 (post-split) shares of the Company’s common stock. The transaction was accounted for as a reverse acquisition.
As a result of the
acquisition of PHCP, the Company now operates in various segments of the cannabis and hemp-CBD industries with 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 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 September 30,
2021, and the results of its operations for the three and nine months then ended. Significant accounting policies have been consistently
applied in the interim consolidated financial statements. The results reported in these interim financial statements are not necessarily
indicative of the expected results 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 Consolidated financial statements include the accounts of the Company and its majority owned subsidiaries.
All significant consolidated transactions and balances have been eliminated in consolidation.
Use
of Estimates
In preparing financial
statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates
include estimated fair market value of assets and liabilities acquired under business combinations, useful lives and potential impairment
of property and equipment, recoverability of goodwill and estimates of fair value of share-based payments.
Fair
Value of Financial Instruments
The Company applies
the accounting guidance under Financial Accounting Standards Board (“FASB” 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
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 non-performance.
The guidance also
establishes a fair value hierarchy for measurements of fair value as follows:
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Level 1 - quoted market prices in active markets for
identical assets or liabilities.
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Level 2 - inputs other
than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities,
quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable
or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 - unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the assets or liabilities.
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The carrying amount
of the Company’s financial instruments approximates their fair value as of September 30, 2021, and December 31, 2020, due to the
short-term nature of these instruments. The Company’s derivative liabilities are considered a Level 2 liability.
Net
Loss per Share
Net loss per common
share is computed by dividing net loss by the weighted average common shares outstanding during the period as defined by Financial Accounting
Standards, ASC Topic 260, “Earnings per Share”. Basic earnings per common share (“EPS”) calculations are determined
by dividing net income by the weighted average number of shares of common stock outstanding during the 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 during the period. For the three and nine months ended September 30, 2021 and 2020, dilutive instruments consisted of convertible
notes payable, options and warrants to purchase shares of the Company’s common stock totaling approximately 71.7 million and 28.4
million shares of common stock, respectively, the effects of which to the net loss are anti-dilutive.
Recent
Accounting Pronouncements
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. The Company adopted the new standard on January 1, 2021, which did not 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 the 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
During
the nine months ended September 30, 2021, the Company has not entered into any additional acquisitions other than those previously reported
in its Form 10-K for the year ending December 31, 2020. For information regarding the Company’s prior year acquisitions see the
Company’s Form 10-K for the year 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 September 30, 2021, and December 31, 2020, the Company has settled
and received payment in kind for one of the notes and the other loan was forgiven pursuant to the acquisition of Sofa King Medicinal
Wellness Products, LLC.
In
December 2019, the Company advanced $800,000 to How Smooth It Is, Inc. (“HSII”). In January 2020, the Company advanced an
additional $700,000 to HSII. The note receivable was due June 1, 2020 and incurs interest at 6% per annum for sixty days and then is
increased to 10% per annum thereafter. In March 2020, the Company entered into an acquisition agreement to acquire the entity for which
the note receivable was used to offset a portion of the purchase price. See the Company’s Form 10-K for the period ending December
31, 2020 for more information. During the year ended December 31, 2020, the Company advanced HSII as an additional $247,845 for operations.
The additional advances were due on 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 HSII
for $1,500,000 in cash and 7,000,000 shares of the Company’s restricted common stock. On July 29, 2020, the Company terminated
its agreement to acquire 51% of HSII. As a part of the termination agreement:
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The sole shareholder of
HSII agreed to pay the Company $2,150,000 by August 7, 2020, and
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HSII agreed to manufacture
up to 24 separate products for the Company (such as edibles and vaporizers) upon terms agreeable to both the Company and HSII. The
products manufactured by HSII will be sold under Pure Harvest brands with the Company receiving royalties from the sale of the products.
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On
December 31, 2020, the Company entered into an amended note receivable loan and security agreement with HSII 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 HSII in an effort to stall its obligations under the Business Loan and Security Agreement between
the Company and HSII. 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 September 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 to EdenFlo, LLC in connection with the potential acquisition of that entity by the Company.
The note receivable was due June 1, 2020 and incurs interest at 6% per annum for sixty days and then is increased to 10% per annum thereafter.
In addition, the note receivable is secured by all the asset of EdenFlo, LLC. In April 2020, EdenFlo was acquired by the Company and
the Note was consolidated into the acquisition, subsequently eliminating its balance on the Balance Sheet. See the Company’s Form
10-K for the period ending December 31, 2020 for more information regarding the acquisition of EdenFlo.
In 2020, prior to
Solar Cultivation Technologies Inc.’s (“SCT”) 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 and $1,600,000
at various dates prior to May 1, 2022. The Company issued the landlord 400,000 shares of its post-split common stock in consideration
for the option to purchase the property for which was recorded as deferred rent and is being amortized to rent expense using the straight-line
method over the term of the lease. At inception of the lease, the Company recorded a right of use asset and liability. The Company used
an effective borrowing rate of 10% within the calculation.
In
August 2020, a wholly owned subsidiary of the Company entered into a lease agreement for property to be used as a marijuana cultivation
and processing facility. The initial term of the lease is for a period of three years. At the inception of the lease, the Company
recorded a right of use asset and liability of $226,077. 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 assumed a lease for a hemp processing facility. At inception
of the lease, the Company recorded a right of use asset and liability of $140,988. The Company used an effective borrowing rate of 10%
within the calculation.
The
lease runs through September 2021. On October 1, 2021, the Company entered into a month-to-month tenancy
of the facility at an increased monthly lease rate.
In
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
Note Payable
During
the year ended December 31, 2019, the Company issued a series of convertible notes with original principal balances of $1,000,000. The
convertible notes had original maturity dates ranging from November 1, 2021 to December 1, 2021 and incur interest at 20% per annum.
In July 2020, the due date of the convertible notes was extended to November 1, 2023. In 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 nine months ended September 30, 2021. As of September
30, 2021, the balance due on the convertible notes was $1,300,000, net a discount of $21,060 recorded within convertible notes payable.
In
addition, the convertible notes are convertible upon issuance at a fixed price of $0.50 per common share. In connection with the issuance,
the Company recorded a beneficial conversion feature of $44,000 resulting in a discount to the convertible notes. The discount is being
amortized to interest expense using the straight-line method, due to the short-term nature of the convertible notes, over the term. During
the nine months ended September 30, 2021 and 2020, the Company amortized $28,152 and $13,376, respectively, to interest expense. Due
to the modification below, whereby the remaining discount was extinguished, as of September 30, 2021, no discount remained. 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.
On
August 31, 2021, the Company and the note holder agreed to settle the balance due under the convertible notes. The
Company agreed to make a cash payment to the note holder of $1,000,000 on or before January 4, 2022 and the note holder has the
option to elect to receive 2,000,000 shares of the Company’s restricted common stock in lieu of the $1,000,000 cash payment. Additionally,
the Company issued the note holder 2,000,000 shares of common stock and 6,000,000 warrants to purchase the Company’s common stock
which expire August 31, 2025. The common stock issued to the note holder is convertible to the Company’s preferred stock, at the
note holder’s option, should the Company issue a new class of Preferred Stock. The Company accounted for the transaction
as an extinguishment of the convertible note whereby the transaction was recorded as its fair market value. In connection with the extinguishment,
the Company recorded additional interest expense of $940,000 related to the fair market value of the common stock issued and $1,665,000
related to the fair market value of the warrants. The fair value of the warrants granted was estimated using a Black-Scholes Options
Pricing Model with the following assumptions:
Schedule of fair value warrants
granted Black-Scholes Options
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Exercise price per share
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$
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0.25
- $2.00
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Expected life (years)
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4.00
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Risk-free interest rate
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0.64
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%
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Expected volatility
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107
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Convertible
Note Payable – Up to $4,000,000
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. The borrowings have a variety of financial and non-financial covenants for which the Company is in compliance with as
of the filing date. 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 4,192,500 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 September 30, 2021, the principal balance due on the convertible notes was $2,450,000, and accrued interest of
$158,750, net a discount of $1,650,045 recorded within long-term convertible notes payable.
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 September
30, 2021, the principal balance due on the convertible note was $500,000 and recorded within convertible notes payable.
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.
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 to the note holder 100,000 shares of its common stock, 100,000 shares of common stock for accrued
interest through execution date and provided the holder with the option to extend the payment to September 15, 2021, for which an additional
150,000 shares of common stock would be provided, if extended. In June 2021, the payment date was extended to September 15, 2021.
Effective
September 15, 2021, the holder of the note agreed to extend the due date for the note to October 31, 2021. In consideration for extending
the repayment date, the Company issued to the note holder 100,000 shares of its common stock and provided the holder with the option
to extend the payment to January 31, 2022, for which an additional 100,000 shares of common stock would be provided, if extended. If
the balance of the Note is unpaid on October 31, 2021, the note shall bear interest at a rate of 18% per annum beginning November 1,
2021.
The
Company recorded the fair market value of the common stock issued in connection with the above issuances of $233,500 as additional interest
expense during the nine months ended September 30, 2021.
Convertible
Notes - $400,000
On July 15, 2021,
the Company borrowed a total of $400,000 from two 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 addition, the holders received a total
of 76,500 shares of common stock. The Company recorded the value of the common stock issued and a beneficial conversion feature resulting
in a $263,000 discount to the convertible promissory notes. The Company amortized the entire discount to interest expense during the
nine months ended September 30, 2021. See Note 9 for subsequent events related to the transaction.
Convertible
Note Payable - $400,000
On August 26, 2021,
the Company completed the sale of a Promissory Note in the principal amount of $400,000 (the “Note”) to a third party for
a purchase price of $376,000. After payment of the legal fees and finder’s fees and closing cost, the sale of the Note resulted
in $358,000 in net proceeds to the Company. The Note matures on February 25, 2022, bears interest at a rate of 5% per annum for the first
three months and 10% per annum thereafter, and, following an event of default only, is convertible into shares of the Company’s
common stock at a conversion price equal to the lesser of 90% of the lowest trading price during (i) the 10 trading day period preceding
the issuance date of the note, or (ii) the 20 trading day period preceding date of conversion of the Note. The borrowings have a variety
of financial and non-financial covenants for which the Company is in compliance with as of the filing date.
Due to the variable
conversion price, the Company recorded a derivative liability of $134,485 upon issuance. The derivative liability was valued using similar
inputs to those disclosed below. In addition, the holder received 440,000 shares of common stock valued at $202,400 and an on issuance
discount of $24,000. These items resulted in a discount of $360,885 being recorded against the Note. During the nine months ended September
30, 2021, the Company amortized $70,608 of the discount to interest expense. As of September 30, 2021, a discount of $290,277 remained
which is being amortized using the straight-line method over the remaining term.
Derivative
Liabilities
The
derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During the nine
months ended September 30, 2021, the Company revalued the fair market value of the derivative liabilities at $1,583,894 resulting in
a gain of $470,367. The valuation of the derivative liabilities was based upon the following Black-Scholes option pricing model average
assumptions: an exercise price of $0.35 our stock price on the date of revalue of $0.33, expected dividend yield of 0%, expected volatility
of 108.00%, risk free interest rate of 0.01% and expected term of 0.96 years.
Related Party
Convertible Notes Payable
On
June 15, 2020, the Company borrowed $30,000 from an individual related to a significant member of management. The loan is evidenced by
a promissory note which bears interest at 10% per year and is due and payable on October 8, 2020. At the option of the lender, the note
principal and any accrued interest may be converted into shares of the Company’s common stock. The number of shares of the Company’s
common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by $0.40. On the date
of issuance, the conversion price of $0.40 was the closing market price of the Company’s common stock and thus a beneficial conversion
feature was not recorded. In September 2020, the note was converted into 75,000 shares of common stock.
At
various times in 2020, the Company borrowed a total of $430,000 from an individual related to a director of the Company and a director
of the Company. The loans are evidenced by a promissory note which bear interest at 12% per year and are due and payable at dates ranging
from December 10, 2020, to January 10, 2021. The proceeds were used for operations. At the option of the holders, the note principal
and any accrued interest may be converted into shares of the Company’s common stock. The number of shares of the Company’s
common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by the lesser of $0.30
or 80% of the ten-day average closing price of the Company’s common stock immediately prior to the date of conversion. The holders
also have the option to convert $900,000 owed to them from EdenFlo, LLC, as disclosed below, which debt was assumed the Company in connection
with the acquisition of EdenFlo, at a price of $0.30 per share for a period of 12 months. Additionally, the holders were issued 215,000
shares of common stock in connection with the notes. 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 and recorded as interest expense during nine
months ended September 30, 2021. As of September 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 year ended December 31, 2020, the Company recorded initial derivative liabilities of $298,913 based upon the following Black-Scholes
option pricing model average assumptions: an exercise price of $0.30 our stock price on the date of grant ranging from $0.40 - $0.49,
expected dividend yield of 0%, expected volatility of 103.00%, risk free interest rate of 0.64% and expected terms of 0.5 years. Upon
initial valuation, the derivative liabilities, as well as the fair market value of the 215,000 shares of common stock exceeded the face
values of the convertible notes payable by $2,940, which was recorded as a day one loss in derivative liability. On December 7, 2020,
the derivative liabilities were revalued at $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 the exercise price. The inputs to value the derivative liabilities were similar
to those on the date of issuance.
In
connection with the SKM acquisition, the Company assumed four notes payable totaling $275,756 with the former member. The notes are being
paid by the Company according to the original terms between the note holders and SKM.
In
connection with the EdenFlo asset acquisition, the Company assumed two notes payable with the former shareholders. Under the terms of
the agreements $600,000 is payable on June 1, 2021 and does not incur interest and $300,000 is due on August 1, 2022 and does not incur
interest. As disclosed above, both notes were modified to include a conversion feature at a price of $0.30 per share. The modification
was treated as an extinguishment of the original note for which a loss on extinguishment of $448,000 was recorded.
In
connection with the SKM acquisition, the Company assumed four notes payable totalling $275,756 with the former membership. The notes
are being paid by the Company according to the original terms between the note holders and SKM.
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:
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$500,000, together with all accrued and unpaid interest,
on April 13, 2020
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$1,000,000, together with all accrued and unpaid interest,
on May 6, 2020
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Accrued
interest will be paid in shares of the Company’s common stock based upon a 25% discount to the ten-day average closing price of
the Company’s common stock immediately prior to May 6, 2020. Accrued interest will include 150,000 additional shares of the Company’s
common stock and warrants to purchase 150,000 shares of the Company’s common stock. The warrants are exercisable at any time on
or before January 1, 2025 at a price of $2.00 per share. The first payment of $500,000 was made on a timely basis.
On
issuance, the Company valued the 150,000 shares of common stock and the 150,000 warrants for common stock and recorded the relative fair
market of $116,707 as a discount to the note payable. The Company is amortizing the discount over the term of the note payable using
the straight-line method due to the short term of the note. During the nine months ended September 30, 2020, the Company amortized $92,256
to interest expense.
On
April 20, 2020, the holder of the Note agreed to extend the due date for the $1,000,000 payment from May 6, 2020 to June 15, 2020. In
consideration for extending the repayment date for the second amount to June 15, 2020, the Company issued to the note holder 200,000
shares of its common stock and warrants to purchase 200,000 shares of the Company’s common stock. The warrants are exercisable
at a price of $2.00 per share and expire January 1, 2025. A late payment penalty of $5,000 per day will be due if the $1,000,000 is not
paid by June 15, 2020. The Company determined the extension resulted in debt extinguishment accounting whereby the fair value of the
additional consideration provided was in excess of the carrying value of the original note payable resulting in an extinguishment loss
of $157,784.
On
June 9, 2020, the holder of the Note agreed to further extend the due date for the $1,000,000 payment to July 15, 2020. In consideration
for extending the repayment date, the Company issued to the note holder an additional 200,000 shares of the Company’s common stock
and warrants to purchase 200,000 shares of the Company’s common stock. The warrants are exercisable at a price of $2.00 per share
and expire January 1, 2025. The Company determined the extension resulted in debt extinguishment accounting whereby the fair value of
the additional consideration provided was in excess of the carrying value of the original note payable resulting in an extinguishment
loss of $170,470.
On
July 14, 2020, the holder of the Note agreed to further extend the due date for the $1,000,000 payment to August 15, 2020. In consideration
for extending the repayment date, the Company issued to the note holder an additional 100,000 shares of the Company’s common stock
and warrants to purchase 200,000 shares of the Company’s common stock. The warrants are exercisable at a price of $2.00 per share
and expire January 1, 2025. The Company determined the extension resulted in debt extinguishment accounting whereby the fair value of
the additional consideration provided was in excess of the carrying value of the original note payable resulting in an extinguishment
loss of $120,721.
In
addition, during the year ended December 31, 2020, the Company issued 124,425 shares of common stock in satisfaction of $52,293 in accrued
interest.
The note was
paid in full in August 2020.
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. As further consideration, the Company issued 100,000 shares of its restricted common stock to the lender. The note
was repaid in full. 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. On September 30, 2021, the Company determined to terminate the note and
began discussions with the note holder to affect the termination of the note. See Note 9 for subsequent events related to the transaction.
Note Payable
– Up to $156,000
On
July 26, 2021, the Company, through a subsidiary, obtained a line of credit for its cannabis operations in an amount up to $156,000 which
is formalized in a Business Loan and Security Agreement. The line of credit is secured by invoices and accounts receivable and incurs
interest at escalating rates based on the time of repayment. The borrowings have a variety of financial and non-financial covenants for
which the Company is in compliance with as of the filing date. As of September 30, 2021, the Company’s subsidiary had not drawn
on the line of credit.
NOTE
7 – STOCKHOLDER’S EQUITY
Stock-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 former Chief Marketing Officer. Among various
other salary and bonus terms, the agreements also provide for the award of shares of the Company’s restricted common stock and
options to purchase shares of the Company’s common stock. Under these agreements, a total of 6,300,000 fully vested shares of common
stock were granted upon execution of the agreements. An additional 1,300,000 shares of common stock were awarded with a vesting date
of April 1, 2021, 900,000 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 April 1, 2021 expiration date, 400,000 of which have been cancelled and will
not be subject to issuance. For the nine months ended September 30, 2021, the Company recorded $21,000 as stock-based compensation. The
remaining expense outstanding is $18,000 for which will be recorded through 2022.
During
the year ended December 31, 2020, the Company entered into agreements with consultants for which provided investor awareness, research
materials and other services. In addition, during the nine months ended the Company entered into agreements for legal, marketing, consulting,
etc for which 203,357 shares of common stock were issued. The Company recorded stock-based compensation of $111,013 during the nine months
ended September 30, 2021 in connection with the common stock issued for services.
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 term of the
licensing agreement.
Options
In
May 2020, effective April 1, 2020, the individuals noted above were also granted a total of 5,750,000 options to purchase shares of the
Company’s common stock. These options vested in tranches at various dates through May 1, 2021, with escalating exercise prices
ranging from $0.50 to $7.50 and are exercisable for approximately 5five years. These options were valued at $1,056,695 using a Black-Scholes
Options Pricing Model.
The
fair value of the options granted in 2020 is 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
|
%
|
During
the nine months ended September 30, 2021, the Company granted options to purchase 12,015,700 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 $0.05 to $7.50 and are exercisable through various points through 2025.
These
options were valued at $3,163,622 using a Black-Scholes Options Pricing Model. For the nine months ended September 30, 2021, the Company
recorded $2,350,834 as stock-based compensation. The remaining expense outstanding is $806,629 for which will be recorded through 2024.
During the nine months ended September 30, 2021, 660,000 options were either cancelled or forfeited.
The
fair value of the options granted in 2021 is estimated using a Black-Scholes Options Pricing Model with the following assumptions:
Exercise price per share
|
|
$
|
1.03
|
|
Expected life (years)
|
|
|
2.22
|
|
Risk-free interest rate
|
|
|
0.64
|
%
|
Expected volatility
|
|
|
111
|
%
|
Offering of
Common Stock and Warrants
In
February 2019, the Company commenced a private offering of shares of common stock at a purchase price of $0.50 per share. In addition,
for each share purchased the investor received 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 year ended December 31, 2020, the Company received
$150,000 related to the sale of 300,000 shares of common stock and warrants.
In
the year ending December 31, 2020, the Company received $100,000 related to the sale of 200,000 shares of common stock and warrants.
During
the nine months ended September 30, 2021, the Company received $768,000 related to the sale of 1,907,413 shares of common stock.
On
July 2, 2021, the Company entered into an agreement 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 funding
of the first tranche. On August 25, 2021, the Company and the investor amended the definitive share purchase agreement to allow
the investor more time to complete the first tranche of funding and provide for a penalty if the funds were not received. See Note 9
for subsequent events related to the transaction.
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 nine months ended September
30, 2021, the Company received $660,000
related to the sale of 6,660
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 September 30, 2021, the Company recorded accrued dividends
of $25,180 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
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 $474,744
and $225,000
as of September 30, 2021, respectively.
See Note 6 for
discussion related to related party convertible notes payable.
NOTE
9 – SUBSEQUENT EVENTS
On October 22, 2021,
the Company provided written notice of termination to the investor in the equity investment in Note 7 as a result of the investor’s
breach of the Definitive Share Purchase Agreement, as amended, between the purchaser and the Company. Per the Agreement, the termination
occurred after the investor was provided written notice of its breach and given ten (10) days to cure the breach. The investor and the
Company are currently in discussions to renegotiate terms and settle any potential damages and liabilities arising from the investor’s
breach of the Agreement. However, the Company is also preparing to pursue legal remedies in the event such action becomes necessary.
Effective October
1, 2021, the Company and the note holder terminated the note in the amount of $173,705 described in Note 6. Pursuant to the terms of
the note, the Company transferred the collateral securing payment of the note to the note holder in exchange for terminating the agreement
and cancelling all amounts due under the note.
In
October 2021, the Company entered into a material agreement with a third-party (“Client”) to distribute health and wellness
products to customers of the Client through a subsidiary named Phytocare, Inc. Under the terms of the agreement, Phytocare, Inc will
have exclusive rights to distribute plant-based health and wellness products to the Clients network and customers. The initial products
are currently being developed and formulated in Quarter 4 with manufacturing and product launch by Q2 2022.
On
November 4, 2021, the Company amended the terms of the notes in the amount of $400,000 described in Note 6 to extend the payment date
of the notes to December 19th, 2021, issue an additional 225,000 shares as interest over the extension, and provide for semi-monthly
payments of the principal balance of the notes.
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.