Notes
to Consolidated Financial Statements
September
30, 2019
(Unaudited)
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
The
Company was formed as a Colorado corporation in April 2004.
On
December 31, 2018 the Company acquired all of the outstanding common stock of Pure Harvest Cannabis Producers, Inc., (“PHCP”)
in exchange for 17,906,016 (post-split) shares of the Company’s common stock. The transaction was accounted for as a reverse
acquisition. The accompanying consolidated financial statements are those of PHCP prior to December 31, 2018 and exclude the financial
position, results of operations, cash flows and stockholders’ equity of the Pocket Shot Company prior to December 31, 2018.
See “Reverse Acquisition” below for additional information.
As
a result of the acquisition of PHCP, the Company’s new business involves the acquisitions and operations of licensed marijuana
cultivation facilities, manufacturing facilities and dispensaries.
The
Company will continue to collect royalties for licensing the Company’s patent and the trademarks in connection with manufacturing
and sale of Pocket Shot branded specialty alcohol beverage pouches.
The
Company changed its name to Pure Harvest Cannabis Group, Inc. in February 2019.
On
March 15, 2019, shareholders owning a majority of the Company’s outstanding shares approved the following amendments to
the Company’s Articles of Incorporation:
Increasing
the authorized capital stock of the Company to 250,000,000 shares of common stock, $0.01 par value, and 25,000,000 shares of preferred
stock, $0.01 par value. The preferred stock may be issued in one or more series as may be determined by the Company’s Board
of Directors. The designations, powers, rights, preferences, qualifications, restrictions and limitations of the preferred stock
shall be established from time to time by the Company’s Board of Directors; and
Forward
splitting the outstanding shares of the Company’s common stock on a two-for-one basis.
The
Company’s accounting year end is December 31.
Reverse
Acquisition
On
December 31, 2018 the Company (“The Pocket Shot Company”) acquired all of the outstanding common stock of PHCP in
exchange for 17,906,016 (post-split) shares of the Company’s common stock. In addition, the shareholders of PHCP were issued
warrants to purchase 17,906,016 (post-split) shares of the Company’s common stock. The warrants have an exercise price of
$4.00 per share and a life of three years. The issuance of the warrants did not have an impact on the financial statements and
was reflected similar to the shares issued to PHCP as discussed below.
The
transaction was accounted for as a reverse acquisition since: (i) the shareholders of PHCP owned the majority of the outstanding
common stock of the Company after the share exchange; (ii) a majority of the directors of the Company are also directors of PHCP;
and (iii) the old officers of the Company were replaced with officers designated by PHCP. Effective December 31, 2018, the Company’s
stockholders’ equity was retroactively recapitalized as that of PHCP, while the stockholders’ equity of the Company
was recorded as being acquired in the reverse acquisition. The Company and PHCP remain separate legal entities (with the Company
as the parent of PHCP). The accompanying consolidated financial statements are those of PHCP prior to December 31, 2018 and exclude
the financial position, results of operations, cash flows and stockholders’ equity of The Pocket Shot Company prior to December
31, 2018.
All
references to common stock, share and per share amounts have been retroactively restated to reflect as if the transaction had
taken place as of the beginning of the earliest period presented.
The
Company’s assets and liabilities pre- reverse acquisition:
Net
Assets Acquired:
Cash
|
|
$
|
22,501
|
|
Accounts receivable
|
|
|
22,802
|
|
Inventory
|
|
|
63,940
|
|
Machinery & equipment
|
|
|
30,550
|
|
Total Assets
|
|
$
|
139,793
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
14,765
|
|
Due to related parties
|
|
|
11,358
|
|
Total Liabilities
|
|
$
|
26,123
|
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
116,670
|
|
The
following summarized unaudited consolidated pro forma information shows the results of operations of the Company had the reverse
acquisition occurred on January 1, 2017:
Pro-forma:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
105,869
|
|
|
$
|
87,663
|
|
Net Loss
|
|
$
|
(103,460
|
)
|
|
$
|
(284,532
|
)
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(1.81
|
)
|
The
summarized consolidated pro forma results are not necessarily indicative of results which would have occurred if the reverse acquisition
had been in effect for the periods presented. Further, the summarized unaudited consolidated pro forma results are not intended
to be a projection of future results.
Restatement
On
April 8, 2020, management of Pure Harvest Cannabis Group, Inc. (the “Company”) that previously filed consolidated
financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 required restatement.
In May 2019, the Company leased a property which the Company intends to use as a marijuana retail dispensary. 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.
At
inception of the lease on May 1, 2019, the Company should have recorded a “right of use” asset and liability due to
the Company adopting Accounting Standards Codification 842- Leases on January 1, 2019. In addition, the 400,000 shares issued
for the option to purchase the property should have been recorded as deferred rent and amortized to rent expense using the straight-line
method over the term of the lease.
The
following is the impact of the restatement on the consolidated balance sheet as of September 30, 2019:
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
|
Change
|
|
|
|
(as reported)
|
|
|
(as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
-
|
|
|
$
|
93,333
|
|
|
$
|
93,333
|
|
Total Current Assets
|
|
|
-
|
|
|
|
244,691
|
|
|
|
93,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent, net of current portion
|
|
|
-
|
|
|
|
147,778
|
|
|
|
147,778
|
|
Right of use asset
|
|
|
-
|
|
|
|
200,207
|
|
|
|
200,207
|
|
Total Assets
|
|
$
|
468,882
|
|
|
$
|
910,201
|
|
|
$
|
441,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
$
|
-
|
|
|
$
|
75,131
|
|
|
$
|
75,131
|
|
Total Current Liabilities
|
|
|
-
|
|
|
|
1,154,506
|
|
|
|
1,154,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of Use Liabilities, net of Current Portion
|
|
|
-
|
|
|
|
140,076
|
|
|
|
140,076
|
|
Total Liabilities
|
|
|
1,079,375
|
|
|
|
1,294,582
|
|
|
|
215,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
322,034
|
|
|
|
326,034
|
|
|
|
4,000
|
|
Additional Paid-in Capital
|
|
|
313,861
|
|
|
|
589,861
|
|
|
|
276,000
|
|
Accumulated Deficit
|
|
|
(1,246,387
|
)
|
|
|
(1,300,276
|
)
|
|
|
(53,889
|
)
|
Total Stockholders’ Deficit
|
|
|
(610,492
|
)
|
|
|
(384,381
|
)
|
|
|
226,111
|
|
Total Liabilites and Stockholders’ Deficit
|
|
$
|
468,882
|
|
|
$
|
910,201
|
|
|
$
|
441,318
|
|
The
following is the impact of the restatement on the consolidated statements of operations for the three and nine months ended September
30, 2019:
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Change
|
|
|
|
(as reported)
|
|
|
(as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
$
|
213,917
|
|
|
$
|
246,251
|
|
|
$
|
32,333
|
|
Total Costs and Expenses
|
|
|
222,401
|
|
|
|
254,734
|
|
|
|
32,333
|
|
Net Loss
|
|
$
|
(212,885
|
)
|
|
$
|
(245,219
|
)
|
|
$
|
(32,333
|
)
|
Basic and Diluted Net Loss per Common Share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Change
|
|
|
|
(as reported)
|
|
|
(as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
$
|
938,777
|
|
|
$
|
992,666
|
|
|
$
|
53,889
|
|
Total Costs and Expenses
|
|
|
1,015,115
|
|
|
|
1,069,003
|
|
|
|
53,889
|
|
Net Loss
|
|
$
|
(995,073
|
)
|
|
$
|
(1,048,962
|
)
|
|
$
|
(53,889
|
)
|
Basic and Diluted Net Loss per Common Share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.00
|
)
|
The
following is the impact of the restatement on the consolidated statement of cash flows for the nine months ended September 30,
2019:
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Change
|
|
|
|
(as reported)
|
|
|
(as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(995,073
|
)
|
|
$
|
(1,048,962
|
)
|
|
$
|
(53,889
|
)
|
Deferred Rent
|
|
|
-
|
|
|
|
38,889
|
|
|
|
38,889
|
|
Right of Use Asset and Liability
|
|
|
-
|
|
|
|
15,000
|
|
|
|
15,000
|
|
Net Cash Used in Operating Activities
|
|
$
|
(399,105
|
)
|
|
$
|
(399,105
|
)
|
|
$
|
(0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Investing and Financing Actity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Issued in Connection with Operating Lease
|
|
$
|
-
|
|
|
$
|
280,000
|
|
|
$
|
280,000
|
|
See
Note 5 for additional information.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
These
financial statements are presented in United States dollars and have been prepared in accordance with United States generally
accepted accounting principles.
In
the opinion of management, the accompanying unaudited condensed financial statements contain all accruals and adjustments (each
of which is of a normal recurring nature) necessary for a fair presentation of the Company’s financial position as of September
30, 2019 and the results of its operations for the nine months then ended. The condensed balance sheet as of December 31, 2018
is derived from the December 31, 2018 audited financial statements. Significant accounting policies have been consistently applied
in the interim financial statements. The results of operations for the nine months ended September 30, 2019 are not necessarily
indicative of the results to be expected for the entire year.
Going
Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern, however, the
above conditions raise substantial doubt about the Company’s ability to do so. The financial statements do not include any
adjustment to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result should the Company be unable to continue as a going concern.
Management
plans to fund future operations by raising capital and or seeking joint venture opportunities.
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
consolidated financial statements include the accounts of the Company and its majority owned subsidiary, PHCP. All significant
consolidated transactions and balances have been eliminated in consolidation. The operations of the Company are included in the
consolidated financial statement from the date of the Agreement.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from
those estimates. Significant estimates include estimated useful lives and potential impairment of property and equipment, estimate
of fair value of share based payments and valuation of deferred tax assets.
Cash
and Cash Equivalents
The
Company considers all highly liquid temporary cash investments with an original maturity of six months or less to be cash equivalents.
Accounts
Receivable
We
record accounts receivable at net realizable value. This value includes an appropriate allowance for estimated uncollectible accounts
to reflect any loss anticipated on the accounts receivable balances and is charged to other income (expense) in the combined statements
of operations. We calculate this allowance based on our history of write-offs, the level of past-due accounts based on the contractual
terms of the receivables, and our relationships with, and the economic status of, our customers. As of September 30, 2019 and
December 31, 2018, an allowance for estimated, uncollectible accounts was determined to be unnecessary.
Inventory
Inventory
is reported at the lower of cost or market on the first-in, first-out (FIFO) method. Our inventory is subject to obsolescence.
Accordingly, quantities on hand are periodically monitored for items no longer being sold, which are written off. All inventory
is stored at the manufacturer and maintained by them. Inventory consists of pouches, display and shipping boxes and no inventory
is deemed obsolete.
Machinery
and Equipment
Machinery
and equipment is recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance,
and repairs are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations
for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line
method for financial statement purposes. The Company uses other depreciation methods (generally accelerated) for tax purposes
where appropriate. The estimated useful lives for significant machinery and equipment categories are as five years.
Revenue
Recognition
The
Company records revenue under the adoption of ASC 606 by analyzing exchanges with its customers using a five-step analysis such
as identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction
price and allocating the transaction price to each separate performance obligation. The Company’s policy is to record revenue
as earned when a firm commitment, indicating sales quantity and price exists, delivery has taken place and collectability is reasonably
assured. The Company records sales of finished products once the customer places the order and the product is shipped. Delivery
is considered to have occurred when title and risk of loss have transferred to the customer. Provisions for discounts, returns,
allowances, customer rebates and other adjustments are netted with gross sales. The Company accounts for such provisions during
the same period in which the related revenues are earned. Provisions for discounts, returns, allowances, customer rebates and
other adjustments are minimal and are recorded as a reduction of revenue
Cost
of Sales
The
costs associated with our royalty income are packaging, a royalty of $1.20 per case, and repair and maintenance costs of our filling
machines.
General
and Administrative
This
category includes costs of legal and accounting, telephone, office supplies, product samples, insurance, registration costs, and
consulting expenses.
Travel
and Entertainment
This
category includes the costs of air travel, hotels, meals and reimbursed automotive expenses.
Stock-Based
Compensation
The
Company accounts for share-based payments pursuant to ASC 718, “Stock Compensation” and, accordingly, the Company
records compensation expense for share-based awards based upon an assessment of the grant date fair value for stock options and
restricted stock awards using the Black-Scholes option pricing model. Share based expense paid through direct stock grants is
expensed over the vesting period or upon issuance for awards with no further service requirements. During the nine months ended
September 30, 2019 and 2018 the Company recognized stock-based compensation expense of $323,000 and $0, respectively.
Fair
Value of Financial Instruments
The
Company applies the accounting guidance under Financial Accounting Standards Board (“FASB”) ASC 820-10, “Fair
Value Measurements”, as well as certain related FASB staff positions. This guidance defines fair value as the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair
value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions
that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and
risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
|
●
|
Level
1 - quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 - inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets
for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
|
|
|
|
|
●
|
Level
3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
|
The
carrying amount of the Company’s financial instruments approximates their fair value as of September 30, 2019 and December
31, 2018, due to the short-term nature of these instruments.
Net
Loss per Share
Net
loss per common share is computed by dividing net loss by the weighted average common shares outstanding during the period as
defined by Financial Accounting Standards, ASC Topic 260, “Earnings per Share”. Basic earnings per common share (“EPS”)
calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during
the year. 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 September 30, 2019 and 2018, dilutive instruments consisted
of warrants to purchase shares of the Company’s common stock, the effects of which due to the net loss are anti-dilutive.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU, Leases, which requires lessees to recognize most leases on their balance sheets as a right-of-use
asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative
and quantitative disclosures are also required. The Company adopted the standard effective January 1, 2019 using the cumulative-effect
adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative
periods presented. The Company adopted the following practical expedients and elected the following accounting policies related
to this standard update:
|
●
|
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.
|
|
|
|
|
●
|
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
|
|
|
|
|
●
|
The
option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles
and work equipment.
|
|
|
|
|
●
|
The
package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing
contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii)
not reassessing initial direct costs for any existing leases.
|
The
Company has inventoried all leases where the Company is a lessee as of the initial date of application and has examined other
contracts with suppliers, vendors, customers and other outside parties to identify whether such contracts contain an embedded
lease as defined under the new guidance.
The
adoption of ASC 842 had a material effect on the consolidated financial statements, see Note 5 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 nine months ended September 30, 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 David Lamadrid and Sterling Scott 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, will be cancelled and will 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 September
30, 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 product, a plastic pouch containing
specialty alcohol beverages. The initial term of the agreement was for five years, expiring in 2010, with automatic renews for
succeeding terms of two years each unless either party has given a written notice of its election to terminate the agreement at
least one hundred, eighty calendar days prior to the end of any initial or extended term.
The
Licensee is required to pay the Company a royalty per case as provided in the agreement. All royalties due to the Company accrue
upon the sale of the products, regardless of the time of collection by the Licensee. In addition, all of the Company’s revenues,
prior to the reverse acquisition, have been historically generated from this contract. The loss of this royalty would have a substantial
impact on the Company’s operations. Prior to the reverse acquisition, the Company has operated in a single business segment,
licensing its product to customers in the United States.
NOTE
5 - EARNEST MONEY DEPOSIT
In
February 2019 the Company entered into an agreement to buy property located approximately 35 miles west of Denver, Colorado. As
required by the agreement, the Company placed an earnest money deposit of $20,000 with an escrow agent. The deposit of $20,000
was to be applied to the purchase price at closing. The Company subsequently assigned its rights to purchase the property to an
unrelated third party and then leased the property from the unrelated third party. The Company has determined it will not receive
any credit for the deposit and has charged the amount to general and administrative expense.
NOTE
6 –NOTES PAYABLE
In
2017, the Company entered into three promissory notes with third parties. Total proceeds received were $117,000 for which were
used for operations. The promissory notes are unsecured, payable on demand and do not incur interest.
NOTE
7 – 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.
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
connection with the employment agreements discussed in Note 3, the Company entered into an agreement to issue a total of 1,600,000
shares of common stock to two officers. The shares vest over a one year period commencing on January 1, 2019. The Company valued
the common stock at $760,000, using the closing market price of the Company’s common stock on the date of the agreement.
The Company is expensing the value of off the common stock over the vesting period which mirrors the service period. During the
nine months ended September 30, 2019, the Company recognized $760,000 of stock-based compensation since all shares were vested
as part of the agreement referenced in Footnote 3.
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 nine months ended September 30, 2019, the Company
received deposits of $442,500 related to the sale of 885,000 shares of common stock and warrants. The Company has reflected the
deposits as a current liability as the related common stock and warrants have yet to be issued and the offering is still open.
Reverse
Acquisition
See
Note 1 for shares issued in connection with the reverse acquisition.
NOTE
9 – LEASE AGREEMENT (AS RESTATED)
In
May 2019, the Company entered into a lease agreement for the property referred to above. 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. See Note 1 for additional information.
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 400,000 shares of the Company’s restricted common stock.
Prolific
Nutrition and Gratus Living are Colorado-based hemp/CBD companies that have developed and now market a line of CBD products direct
to consumers. Prolific Nutrition and Gratus Living currently offer CBD oil tincture, CBD oil gummies, CBD oil capsules, CBD oil
lotion, hemp oil and lip balm. Prolific Nutrition and Gratus Living have also developed and now market hemp extract dietary supplements,
hemp extract capsules for pain and hemp extract pet treats for dogs and cats.
We
accounted for the transaction as follows:
Cash
|
|
$
|
(15,000
|
)
|
Payable on Acquisition
|
|
|
(50,000
|
)
|
Common Stock
|
|
|
(4,000
|
)
|
APIC
|
|
|
(195,200
|
)
|
Cash (Acquired)
|
|
|
750
|
|
AR
|
|
|
3,711
|
|
AR Allowance
|
|
|
(3,711
|
)
|
Goodwill
|
|
|
263,450
|
|
NOTE
11 – SUBSEQUENT EVENTS
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.