Notes
to Consolidated Financial Statements
December
31, 2019 and 2018
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 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.
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
$4.00 per share and a life of three years. The issuance of the warrants did not have an impact on the financial statements and
was reflected similar to the shares issued to PHCP as discussed below.
The
transaction was accounted for as a reverse acquisition since: (i) the shareholders of PHCP owned the majority of the outstanding
common stock of the Company after the share exchange; (ii) a majority of the directors of the Company are also directors of PHCP;
and (iii) the old officers of the Company were replaced with officers designated by PHCP. Effective December 31, 2018, the Company’s
stockholders’ equity was retroactively recapitalized as that of PHCP, while the stockholders’ equity of the Company
was recorded as being acquired in the reverse acquisition. The Company and PHCP remain separate legal entities (with the Company
as the parent of PHCP). The accompanying consolidated financial statements are those of PHCP prior to December 31, 2018 and exclude
the financial position, results of operations, cash flows and stockholders’ equity of The Pocket Shot Company prior to December
31, 2018.
All
references to common stock, share and per share amounts have been retroactively restated to reflect as if the transaction had
taken place as of the beginning of the earliest period presented.
The
Company’s assets and liabilities pre- reverse acquisition:
Net
Assets Acquired:
Cash
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$
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22,501
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Accounts receivable
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22,802
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Inventory
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63,940
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Machinery & equipment
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30,550
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Total Assets
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$
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139,793
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Accounts payable and other current liabilities
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$
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14,765
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Due to related parties
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11,358
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Total Liabilities
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$
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26,123
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Net Assets Acquired
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$
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116,670
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The
following summarized unaudited consolidated pro forma information shows the results of operations of the Company had the reverse
acquisition occurred on January 1, 2018:
Pro-forma:
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2018
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Revenues
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$
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105,869
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Net Loss
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$
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(103,460
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)
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)
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Net loss per common share – basic and diluted
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$
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(0.01
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)
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)
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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
consolidated financial statements are presented in United States dollars and have been prepared in accordance with United States
generally accepted accounting principles.
Going
Concern
The
accompanying consolidated 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 ASC 810 Consolidation (“ASC 810”).
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, PHCP and Prolific Nutrition
(Note 10). All significant consolidated transactions and balances have been eliminated in consolidation. The operations of PHCP
are included in the consolidated financial statement from the date of acquisition of December 31, 2018 onward. The operations
of Prolific Nutrition are included in the consolidated financial statement from the date of acquisition of September 30, 2019
onward.
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 December 31, 2019 and 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 five years.
Impairment
of Long-Lived Assets and Intangible Assets
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets, including intangible assets, may not be recoverable. When such events occur, the Company compares the carrying
amounts of the assets to their undiscounted expected future cash flows. If the Company determines that the carrying value of the
asset is not recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived
asset exceeds its fair value. There were no impairments recorded during the year ended December 31, 2019.
Goodwill
Goodwill
represents the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill
is not amortized, but tested for impairment, or if circumstances occur that more likely than not reduce the fair value of the
reporting unit below its carrying amount. The Company performed its annual test on December 31, 2019 for which no impairments
were recorded.
Lease
Commitments
The
Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement
conveys to the Company the right to control the use of an explicitly or implicitly identified fixed asset for a period of time
in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to
direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company has lease
agreements which include lease and non-lease components, which the Company has elected to account for as a single lease component
for all classes of underlying assets. Lease expense for variable lease components are recognized when the obligation is probable.
Operating
lease right of use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value
of lease payments over the lease term. Operating lease payments are recognized as lease expense on a straight-line basis over
the lease term. The Company primarily leases buildings (real estate) which are classified as operating leases. ASC 842 requires
a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily
determined, its incremental borrowing rate. As an implicit interest rate is not readily determinable in the Company’s leases,
the incremental borrowing rate is used based on the information available at commencement date in determining the present value
of lease payments.
The
lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods
covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise,
or an option to extend (or not to terminate) the lease controlled by the lessor. Options for lease renewals have been excluded
from the lease term (and lease liability) for the majority of the Company’s leases as the reasonably certain threshold is
not met.
Lease
payments included in the measurement of the lease liability are comprised of fixed payments, variable payments that depend on
index or rate, and amounts probable to be payable under the exercise of the Company option to purchase the underlying asset if
reasonably certain.
Variable
lease payments not dependent on a rate or index associated with the Company’s leases are recognized when the event, activity,
or circumstance in the lease agreement on which those payments are assessed as probable. Variable lease payments are presented
as operating expenses in the Company’s statement of operations in the same line item as expense arising from fixed lease
payments. As of December 31, 2019, management determined that there were no variable lease costs.
Convertible
Debt and Convertible Preferred Stock
When
the Company issues convertible debt or convertible preferred stock, it first evaluates the balance sheet classification of the
convertible instrument in its entirety to determine whether the instrument should be classified as a liability under ASC 480,
“Distinguishing Liabilities from Equity”, and second whether the conversion feature should be accounted for separately
from the host instrument. A conversion feature of a convertible debt instrument or certain convertible preferred stock would be
separated from the convertible instrument and classified as a derivative liability if the conversion feature, were it a standalone
instrument, meets the definition of an “embedded derivative” in ASC 815, Derivatives and Hedging. Generally, characteristics
that require derivative treatment include, among others, when the conversion feature is not indexed to the Company’s equity,
as defined in ASC 815-40, or when it must be settled either in cash or by issuing stock that is readily convertible to cash. When
a conversion feature meets the definition of an embedded derivative, it would be separated from the host instrument and classified
as a derivative liability carried on the consolidated balance sheet at fair value, with any changes in its fair value recognized
currently in the consolidated statements of operations.
If
a conversion feature does not meet the conditions to be separated and accounted for as an embedded derivative liability, the Company
then determines whether the conversion feature is “beneficial”. A conversion feature would be considered beneficial
if the conversion feature is “in the money” when the host instrument is issued or, under certain circumstances, later.
If convertible debt contains a beneficial conversion feature (“BCF”), the amount of the amount of the proceeds allocated
to the BCF reduces the balance of the convertible debt, creating a discount which is amortized over the debt’s term to interest
expense in the consolidated statements of operations.
When
a convertible preferred stock contains a BCF, after allocating the proceeds to the BCF, the resulting discount is either amortized
over the period beginning when the convertible preferred stock is issued up to the earliest date the conversion feature may be
exercised, or if the convertible preferred stock is immediately exercisable, the discount is fully amortized at the date of issuance.
The amortization is recorded similar to a dividend.
Offering
Costs
The
Company accounts for offering costs in accordance with FASB ASC 340, “Other Assets and Deferred Costs” Prior to the
completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering
costs will be charged to stockholders’ equity or as a reduction of debt upon the completion of an offering or to expense
if the offering is not completed.
Business
Combinations
The
Company accounts for businesses it acquires in accordance with ASC Topic 805, “Business Combinations”, which allocates
the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities
is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant
estimates and assumptions. Acquisition-related expenses and transaction costs associated with business combinations are expensed
as incurred.
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis such
as identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction
price and allocating the transaction price to each separate performance obligation. The Company’s policy is to record revenue
as earned when a firm commitment, indicating sales quantity and price exists, delivery has taken place and collectability is reasonably
assured. The Company records sales of finished products once the customer places the order and the product is shipped. Delivery
is considered to have occurred when title and risk of loss have transferred to the customer. Provisions for discounts, returns,
allowances, customer rebates and other adjustments are netted with gross sales. The Company accounts for such provisions during
the same period in which the related revenues are earned. Provisions for discounts, returns, allowances, customer rebates and
other adjustments are minimal and are recorded as a reduction of revenue
Cost
of Sales
The
costs associated with our royalty income are packaging, a royalty of $1.20 per case, and repair and maintenance costs of our filling
machines.
General
and Administrative
This
category includes salaries and 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.
Income
Taxes
The
Company is taxed as a C-Corporation, whereby it is subject to federal and state income taxes. The Company follows ASC 740, Income
Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference
between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable
when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based
on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets
to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision
for deferred income taxes in the period of change.
Deferred
income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and
tax purposes in different periods.
In
addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex
tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is
to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses
the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company
continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, income taxes payable
and deferred taxes in the period in which the facts that give rise to a revision become known.
As
of December 31, 2019 and 2018, the Company’s deferred tax assets consisted entirely of net operating losses to which there
is a full valuation allowance applied. In addition, as of December 31, 2019 all tax years since 2016 are open for examination
for which not current examinations are in progress.
Fair
Value of Financial Instruments
The
Company applies the accounting guidance under Financial Accounting Standards Board (“FASB”) ASC 820-10, “Fair
Value Measurements”, as well as certain related FASB staff positions. This guidance defines fair value as the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair
value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions
that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and
risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
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Level
1 - quoted market prices in active markets for identical assets or liabilities.
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Level
2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
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●
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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 December 31, 2019 and 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. 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 December 31, 2019 and 2018, dilutive instruments consisted
of convertible notes payable and warrants to purchase shares of the Company’s common stock, the effects of which to net
loss are anti-dilutive.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU, Leases (ASC 842), 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:
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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.
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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
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The
option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles
and work equipment.
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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.
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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 December 31, 2019, the Company has one lease to which requires treatment under
ASC 842. The lease was entered into during May 2019 and didn’t impact periods prior to then. The adoption of ASC 842 had
a material effect on the consolidated financial statements. In addition, the Company will review for the existence of embedded
leases in future agreements. See Note 9 for additional information.
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 year ended December 31, 2019, the Company accrued $188,388 in connection with
these agreements and $24,715 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.
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.
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 December
31, 2019 and 2018 under the agreement were insignificant.
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 Pocket Shot 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. 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. The Company has determined it will not receive
any credit for the deposit and has charged the amount to general and administrative expense. See Note 9 for additional information.
NOTE
6 –NOTES PAYABLE
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. In 2019, one of the note
holders and existing shareholder forgave their promissory note and transferred shares of common stock held by the shareholder
to the other note holders in satisfaction of the promissory notes. The promissory notes were reclassed to additional paid-in capital
due the transaction being for the behalf of the Company by the shareholder.
Convertible
Notes Payable
During
the year ended December 31, 2019, the Company issued a series of convertible notes with original principal balances of $1,000,000.
The convertible notes mature at dates ranging from November 1, 2021 to December 1, 2021 and incur interest at 20% per annum. In
addition, convertible notes are convertible upon issuance at a fixed price of $0.50 per common share. In connection with the issuance,
the Company recorded a beneficial conversion feature of $44,000 resulting in a discount to the convertible notes. The discount
is being amortized to interest expense using the straight-line method, due to the short-term nature of the convertible notes,
over the term. During the year ended December 31, 2019, the Company amortized $2,305 to interest expense. The remaining discount
of $41,695 is expected to be amortized in 2020 of $22,910 and 2021 of $18,795. 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 aren’t defined in the agreement. Thus, the issuance of the warrant is a contingent to which the
Company hasn’t accounted for. Should warrants be ultimately issued, the Company expects to record the fair value of such
as additional interest expense.
NOTE
7 – 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 are to be repaid, without interest, in October 2019. As of December 31, 2019, the Company has continued collection
efforts on these notes receivable but has provided an allowance of such due to the unlikelihood of closing the acquisitions or
collecting on the notes receivable.
In
December 2019, the Company advanced $800,000 to How Smooth It Is, Inc. in connection with the potential acquisition of that entity
by the Company. The note receivable is due June 1, 2020 and incurs interest at 6% per annum for sixty days and then is increased
to 10% per annum thereafter. In March 2020, the Company entered into an acquisition agreement to acquire the entity for which
the note receivable was used to offset a portion of the purchase price, see Note 11 for additional information. On
April 9, 2020, the company submitted the required applications to the Michigan Department of Licensing and Regulatory Affairs
(LARA) to be approved and pre-qualified as a Processor to be added to the HSII license. Upon approval, PHCG will become 51% owners
and can participate in revenue.
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 is due June 1, 2020 and incurs interest at 6% per annum for sixty days and then is increased
to 10% per annum thereafter. In addition, the note receivable is secured by all the asset of EdenFlo, LLC and the amount loaned
represents the expected cash portion to be paid in connection with the acquisition. As of
the date of this filing the Company is still reviewing the Share Exchange Agreement and anticipates closing on Eden Flow by the
end of April 2020 or sooner.
NOTE
8 – 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
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 year ended December 31, 2019, the Company received
$4,045,500 related to the sale of 8,091,000 shares of common stock and warrants. As of December 31, 2019, all shares of common
stock have been issued and thus recorded within common stock and additional paid-in capital. Additionally, in connection with
the private offering the Company issued warrants to purchase 8,091,000 shares of common stock based upon the terms disclosed above.
The
Company incurred offering costs of $50,100 to placement agent in connection with the private offering. These offering costs have
been offset against the proceeds received from the private offering. In addition, these placement agents received the option to
purchase units at a $1.00 to per unit which consists of 2,000 shares of common stock and 2,000 warrants to purchase shares of
common stock. The warrants have the same terms as the offering disclosed above. As of December 31, 2019, the placement agents
had an option to purchase 41.50 units for which represent 83,500 shares of common stock and 83,500 warrants. An entry for the
fair market value of common stock and warrants was not recorded as the entry would have been an increase and decrease to additional
paid-in capital due to the common stock and warrants being issued in connection with the private offering.
Reverse
Acquisition
See
Note 1 for shares issued in connection with the reverse acquisition.
Satisfaction
of Promissory Notes
See
Note 4 for shares transferred by a shareholder in satisfaction of promissory notes.
NOTE
9 – LEASE AGREEMENT
In
May 2019, the Company entered into a lease agreement for the property referred to in Note 5. The Company intends to use this property
for a marijuana retail store. The initial term of the lease is for a period of three years. The Company has an option to purchase
the property at prices ranging between $1,400,000 and $1,600,000 at various dates prior to May 1, 2022. The Company issued the
landlord 400,000 shares of its post-split common stock in consideration for the option to purchase the property for which was
recorded as deferred rent and is being amortized to rent expense using the straight line method over the term of the lease. At
inception of the lease, the Company recorded a right of use asset and liability. The Company used an effective borrowing rate
of 10 percent within the calculation. The following are the expected lease payments as of December 31, 2019, including the total
amount of imputed interest related:
Years
ending December 31,:
2020
|
|
$
|
96,000
|
|
2021
|
|
|
96,000
|
|
2022
|
|
|
56,000
|
|
Total
|
|
|
248,000
|
|
Less: Imputed Interest
|
|
|
(39,315
|
)
|
Total
|
|
$
|
208,685
|
|
NOTE
10 – ACQUISITION
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 172,000 shares of the Company’s restricted common stock. The Company
valued the shares of common stock at $85,656 based upon the closing market price of the Company’s common stock on the date
of acquisition.
Prolific
Nutrition and Gratus Living are Colorado-based hemp/CBD companies that have developed and now market a line of CBD products directly
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.
The
Company accounted for the transaction as follows:
Cash
|
|
$
|
(15,000
|
)
|
Payable on Acquisition
|
|
|
(50,000
|
)
|
Common Stock
|
|
|
(1,720
|
)
|
APIC
|
|
|
(83,936
|
)
|
Cash (Acquired)
|
|
|
9,203
|
|
Goodwill
|
|
|
141,153
|
|
The
purchase price for the acquisition was allocated to the fair value of the assets acquired and liabilities assumed based on the
estimates of the fair values at the acquisition date, with the amount exceeding the estimated fair values being recorded as goodwill.
The goodwill is not expected to be deductible for tax purposes.
Prolific
Nutrition’s results of operations have been included in the Company’s operating results for the period subsequent
to the acquisition on September 30, 2019. Prolific Nutrition contributed revenues of approximately $3,000 during the year ended
December 31, 2019.
NOTE
11 – SUBSEQUENT EVENTS
On
March 6, 2020, the Company borrowed $1,500,000 from an unrelated third party. The loan is evidenced by a promissory note which
bears interest at 8% per year.
The
note is due and payable as follows:
|
●
|
$500,000,
together with all accrued and unpaid interest, on April 13, 2020
|
|
●
|
$1,000,000,
together with all accrued and unpaid interest, on May 6, 2020
|
Accrued
interest will be paid in shares of the Company’s common stock based upon a 25% discount to the ten day average closing price
of the Company’s common stock immediately prior to May 6, 2020. Accrued interest will include 150,000 additional shares
of the Company’s common stock and warrants to purchase 150,000 shares of the Company’s common stock. The warrants
are exercisable at any time on or before January 1, 2025 at a price of $2.00 per share.
The
first payment of $500,000 was made on a timely basis.
On
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.
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 100,000 shares of the Company’s common stock for services provided to the Company. As of
April 20, 2020 Love Pharm had not generated any revenue.
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).
HSII
is in the development stage and as of March 31, 2020 had generated only limited revenue.
On
March 13, 2020 the Company entered into an agreement to acquire all of the outstanding membership interests in Sofa King Medicinal
Wellness Products, LLC (“SKM”) for 3,000,000 shares of the Company’s common stock. The completion of the acquisition
is subject to a number of conditions, including the approval of the acquisition by the Colorado Marijuana Enforcement Division
(MED). SKM is a vertically integrated cannabis operator located in Dumont, CO.
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.