Pure Harvest Corporate Group, Inc. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act Of 1934

For the year ended December 31, 2020

[  ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act Of 1934

For the transition period from __________ to __________

Commission File Number: 333-212055

PURE HARVEST CORPORATE GROUP, INC.

(Exact name of registrant as specified in its charter)

7400 E. Crestline Cir. Ste. 130

Greenwood Village, CO 80111

Address of principal executive offices

(800) 924-3716

(Registrant’s telephone number, including area code)

N/A

(Former name or former address if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes [  ] No [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2020 was approximately $16,368,000.

State the number of shares outstanding of each of the registrant’s classes of common equity, as of the latest practicable date: 65,224,568 shares of common stock as of March 31, 2021.

PART I

Forward-Looking Statements

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “projects,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

On December 31, 2018 Pure Harvest Cannabis Producers, Inc. (“PHC”) was acquired by the Company. At the time of the acquisition, the Company had 13,617,314 outstanding shares of common stock. The Company issued 17,906,016 shares of its common stock, as well as warrants to purchase an additional 17,906,016 shares of the Company’s common stock to the shareholders of PHC in exchange for all of the outstanding shares of PHC. The warrants issued to the former shareholders of PHC allow the holder to acquire one share of the Company’s common stock at a price of $4.00 per share at any time on or before December 31, 2021. PHC is now a wholly owned subsidiary of the Company.

On February 5, 2019 the Company changed its name to Pure Harvest Cannabis Group, Inc. On March 15, 2019 shareholders owning a majority of the Company’s outstanding shares approved a two-for-one forward split of the Company’s common stock.

On June 16, 2020 the Company changed its name to Pure Harvest Corporate Group.

As a result of the acquisition of PHC the Company’s new business plan includes the acquisition of licensed medical and recreational marijuana dispensaries, cultivation facilities and production facilities in states which allow publicly traded companies to own and operate dispensaries, cultivation facilities and production facilities. Depending on the markets entered and state regulation, the Company’s plan may also include: asset purchases, management/consulting operating agreements, or similar allowable agreements. The Company plans to use a combination of cash, shares of common or preferred stock, notes, or other financing vehicles to complete these acquisitions.

As an alternative to a standard acquisition, the Company may use joint ventures and/or licensing arrangements to provide the Company with the same economic benefits as would be obtained from an outright acquisition.

The Company is dedicated to the research and development of the highest quality products to support patient health and well-being. The Company intends to develop into a large vertically integrated producer and distributor of cannabis initially targeting states with attractive markets that have legalized cannabis for both medicinal and adult-use. The Company will also enter markets that are in various stages of legalization with branded hemp derived CBD and terpene infused product lines. In addition to products tailored to marijuana retail dispensaries, the Company’s line will incorporate infused product options including beverages, edibles, topicals, concentrates, and distillates.

The Company’s goals include establishing the Company as an iconic consumer product brand that can be sold across multiple markets that have legalized cannabis and hemp-derived products either partially or fully. The Company’s products will include the highest quality natural ingredients to become synonymous with products consumers trust and rely on for active and healthy lifestyles.

The acquisition of a target company will be approved by the board of directors. The Company will not call a meeting of shareholders to approve the acquisition of a target company. Shareholders will not be entitled to dissenters’ rights in connection with the acquisition of a target company.

The Company may acquire companies that may be financially unstable or in their early stages of development or growth, which would subject the Company to the numerous risks inherent in such companies.

The Company is not prohibited from pursuing a business combination with a target that is affiliated with its officers or directors, or making the acquisition through a joint venture or other form of shared ownership with its officers or directors. In the event the Company plans to complete a business combination with a target that is affiliated with our executive officers or directors, the Company will not be required, to obtain an opinion from an independent firm that the business combination is fair to the Company from a financial point of view.

In evaluating a prospective target business, the Company expects to conduct an extensive due diligence review which will encompass, among other things, meetings with management and employees of the target business, document reviews, interviews of customers and suppliers, inspection of facilities, as well as a review of financial and other information which will be made available to us.

The time required to select and evaluate a target business and to structure and complete a business combination, and the costs associated with this process, are not currently ascertainable with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in the Company’s incurring losses and will reduce the funds the Company can use to complete another business combination.

Although the Company will assess the risks inherent in a particular target business which it may acquire, this assessment may not result in the identification of all risks that a target business may encounter. Furthermore, some of those risks may be outside of the Company’s control, meaning that the Company can do nothing to control or reduce the chances that those risks will adversely impact a target business.

The acquisition of marijuana dispensaries and cultivation/manufacturing/processing facilities is subject to the approval of government authorities which license and regulate marijuana dispensaries in their applicable jurisdictions. No assurance can be given that any such approvals can be obtained.

Prolific Nutrition

On September 6, 2019 the Company acquired all of the outstanding membership interests in Prolific Nutrition, LLC and Gratus Living, LLC (collectively “Prolific Nutrition”) for 400,000 shares of the Company’s restricted common stock.

Prolific Nutrition and Gratus Living have not generated any revenues.

In connection with this acquisition, Daniel Garza, a member of Prolific, was appointed as the Company’s Chief Marketing Officer and a director.

Love Pharm, LLC

On February 12, 2020, the Company entered into an Operating Agreement with Dr. James Rouse, MD regarding the ownership, operation, and management of Love Pharm, LLC. Love Pharm was organized to formulate, develop, manufacture, and brand hemp/CBD products for sale and distribution as well as to form a multi-channel media platform for public and patient education regarding the endocannabinoid system utilizing Dr. Rouse’s name, public image and his extensive experience and expertise in medicine and entrepreneurship. Under the Operating Agreement between the Company and Dr. Rouse, the Company owns 51% of Love Pharm and has a right of first refusal to purchase the remaining 49% of Love Pharm from Dr. Rouse. Additionally, Dr. Rouse will become the Company’s Chief Medical Advisor. Dr. Rouse will receive 100,000 shares of the Company’s common stock for services provided to the Company.

How Smooth It Is

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 cash and shares of the Company’s restricted common stock.

On July 29, 2020 the Company terminated its agreement to acquire 51% of HSII. As a part of the termination agreement, the sole shareholder of HSII, Leonard Cusenza, agreed to pay the Company $2,150,000 by August 7, 2020.

On December 31, 2020, the Company entered into an amended note receivable with HSII for $2,750,000 which had an initial maturity date of March 31, 2021. The note bore interest at 8% per year through March 31, 2021. The loan was subsequently extended to July 31, 2021. During the three month period ending July 31, 2021 the interest rate increases to 12% per year. In addition, the Company receives royalties on various products sold by HSII for a period of three years commencing on April 1, 2021. The loan is guaranteed by the sole shareholder of HSII.

Sofa King Medical

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.

On August 11, 2020, following receipt of approval of the transaction by the Colorado Marijuana Enforcement Division, the Company closed the acquisition of SKM and the change of ownership on SKM’s six licenses (now owned by the Company) was completed.

SKM is a vertically integrated cannabis operator located in Dumont, CO and has recently been approved to move its dispensary to a corner location along the busy I-70 corridor between Denver and Colorado’s world-class ski destinations.

On May 3, 2019 the Company leased two buildings, consisting of approximately 2,750 square feet combined, located in Dumont, Colorado. The lease expires on April 30, 2022, but may be renewed for an additional five years at the option of the Company. The monthly rent is $8,000 for the initial three year term, increasing to $10,000 per month if the Company elects to extend the term of the lease. The lease is a “triple net” lease, which requires the Company, in addition to the monthly rent, to pay the cost of all utilities, insurance, repairs, maintenance and real estate taxes. The Company plans to remodel the buildings so they can be used by SKM.

The Company has an option to purchase the buildings at price 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 buildings

EdenFlo, LLC

On April 24, 2020, the Company acquired substantially all of the assets of EdenFlo, LLC, a producer of CBD extracts and concentrates, for 7,000,000 shares of the Company’s restricted common stock and the release of its obligation of a previous promissory note in the amount of $1,650,000.

EdenFlo will join Prolific Nutrition and Love Pharm, LLC to secure and expand the Company’s position in the national Hemp/CBD industry. EdenFlo is a large-scale Colorado-based hemp-CBD producer and manufacturer of pure isolate and full-spectrum hemp. EdenFlo’s wholesale isolate is made from the highest quality ingredients, utilizing only the best extraction and distillation methods to ensure a final product of extreme purity. The scientific procedures used for the remediation of THC provide the cleanest broad-spectrum (distillate) oil available in the cannabis extraction industry. The acquisition of EdenFlo will support the Company’s manufacturing operations by supplying the Company’s raw materials requirements for its branded products.

Test Kitchen, Inc.

On August 17, 2020, the Company acquired all of the outstanding shares of Test Kitchen, Inc. for 50,000 shares of its restricted common stock.

Test Kitchen’s only assets as of August 17, 2020 was a product containing CBD oil. Test Kitchen filed a patent application for this product on June 12, 2020. There can be no assurance that a patent will be issued for this product.

Solar Cultivation Technologies, Inc.

On September 29, 2020 the Company acquired all of the assets of Solar Cultivation Technologies, Inc. for 1,200,792 shares of the Company’s common stock. SCT provides commercial cannabis cultivators with solar, battery storage, and high-efficiency lighting.

On November 12, 2020, the Company contributed SCT’s assets valued at $530,000 less the cash consideration provided by DC Energy Group, LLC (“DCEG”) of $200,000 for a 40% interest in DC Energy Group, LLC, an entity which is focused on low energy lamination. The investment is accounted for using the equity method.

Market Conditions

Legal marijuana sales in the United States reached $17.5 billion in 2020, according to ArcView Market Research/BDS Analytics. The research firm projects sales to increase to $41.3 billion by the end of 2026.

Adult-Use marijuana is now legal in 17 states and the District of Columbia, and medical marijuana is legal in 36 states and the District of Columbia.

While the industry is growing rapidly, the cannabis industry faces three major obstacles that challenge its growth and profitability. First, the cultivation of cannabis is a very capital-intensive enterprise. Many cannabis entrepreneurs do not have access to the capital required to build the infrastructure required to meet growing demand and sales projections. Traditional sources of financing, such as banks, are not available currently to cannabis producers and retailers. Second, there is shortage of knowledge related to virtually all areas of the cannabis business. When new states are added to the list of regulated cannabis markets, there may be a scarcity of experience and expertise to serve the needs of growers and retailers in these states. Third, as explained below, marijuana is illegal under federal law.

Government Regulation

Cannabis is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law.

A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. However, the Department of Justice defines Schedule 1 controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the Controlled Substances Act in Colorado with respect to marijuana, persons that are charged with distributing, possessing with intent to distribute, or growing marijuana could be subject to fines and terms of imprisonment, the maximum being life imprisonment and a $50 million fine.

As of March 31, 2021, 36 states and the District of Columbia allowed their citizens to use medical Marijuana. Additionally, 17 states, the District of Columbia and the country of Canada have legalized cannabis for recreational use by adults. However, the state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level.

The previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. In this regard, the prior DOJ Deputy Attorney General of the Obama administration issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA.

The Cole Memo noted that the Department of Justice is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provided guidance to Department of Justice attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following in preventing:

On March 21, 2018, President Trump signed a $1.3 trillion budget bill that includes a provision that prevents the Justice Department, including the Drug Enforcement Administration, from using funds to arrest or prosecute patients, caregivers, and businesses that are acting in compliance with state medical marijuana laws. This provision, known as the Rohrabacher-Blumenauer Amendment, prohibits the Justice Department from using federal funds to interfere with state medical marijuana programs.

During the confirmation hearings of U.S. attorney general William Barr, he made comments that he would not prosecute marijuana businesses operating within state law. Additionally, in April of 2019 Mr. Barr stated that he would prefer that Congress enact legislation allowing states to legalize marijuana instead of continuing the current approach under which a growing number of states have ended cannabis prohibition in conflict with federal law. The above notwithstanding, there can be no assurance that the Federal government will not seek to uphold federal law and supersede state law to prosecute cannabis companies.

On February 22, 2021, President Biden’s nominee for U.S. attorney general, Judge Merrick Garland, reiterated that he does not feel the Department of Justice should use its resources to prosecute people acting in compliance with state marijuana laws. This stance suggests enforcement and prioritization of marijuana-related activity will reflect that of the Obama administration.

General

Our principal executive offices are located at 7400 E. Crestline Cir. Ste. 130 Greenwood Village, CO 80111. Our main telephone number is (800) 924-3716. Our website is www.pureharvestcannabis.com. As of March 31, 2021 we had 25 full time employees.

Certain risks, including those described below, which could adversely affect the value of the Company’s common stock. The Company does not make, nor has it authorized any other person to make, any representation about the future market value of its common stock. In addition to the other information contained in this report, the following factors should be considered carefully in evaluating an investment in the Company’s securities.

The Company has a limited operating history with respect to its new business and may never be profitable.

Since the Company only recently began its new business, it is difficult for potential investors to evaluate the Company’s future prospectus. The Company will need to raise enough capital to be able to fund its operations. There can be no assurance that the Company will be profitable.

Any forecasts the Company makes concerning its operations may prove to be inaccurate. The Company’s prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stage of development. As a result of these risks, challenges, and uncertainties, an investment in the Company’s common stock could be completely lost.

The Company needs capital to implement its business plan.

The Company needs capital in order to operate. The Company does not know what the terms of any future capital raising may be but any future sale of the Company’s equity securities will dilute the ownership of existing stockholders. The failure of the Company to obtain the capital which it requires may result in the slower implementation of the Company’s business plan.

The Company may not be able to effectively manage its growth which would impair results of operations.

The Company intends to expand the scope of our operations activities significantly. If the Company is successful in executing its business plan, it will experience business growth that could place a significant strain on operations, finances, management, and other resources.

The ability to effectively manage growth may require the Company to substantially expand the capabilities of administrative and operational resources and to attract, train, manage, and retain qualified management and other personnel. There can be no assurance that the Company will be successful in recruiting and retaining new employees or retaining existing employees.

The Company cannot provide assurances that management will be able to manage this growth effectively. The failure to successfully manage growth could materially adversely affect business, financial condition, or results of operations.

A drop in the retail price of medical and adult use marijuana products may negatively impact business.

The Company’s future revenue will depend in part on the price of commercially grown marijuana. Fluctuations in economic and market conditions that impact the prices of commercially grown marijuana, such as increases in the supply of marijuana and the decrease in the price of products using commercially grown marijuana, could result in a decline in revenue.

The Company may not be able to successfully execute on its merger and acquisition strategy.

The Company’s business plan depends on acquiring marijuana dispensaries and cultivation facilities. The success of any acquisition will depend upon, among other things, the ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses, and to retain their customers. Any acquisition may be dilutive to financial results and/or result in impairment charges and write-offs. The Company may also spend time and money investigating and negotiating with potential acquisition or investment targets, but not complete the transaction.

Although the Company expects to realize strategic, operational and financial benefits as a result of its acquisitions, the Company cannot predict whether and to what extent such benefits will be achieved. There are significant challenges to successfully operating an acquired business.

Any future acquisition could involve other risks, including the assumption of unidentified liabilities for which the Company, as a successor owner, may be responsible. Acquisitions of businesses typically involve a number of risks that present financial and other challenges, including the future discovery of existing but unknown disputes, liabilities, contingencies or changes in the industry, location, or regulatory or political environment in which these businesses operate. Such due diligence may not adequately uncover or predict such hidden problems associated with a target acquisition.

The Company’s business is dependent on laws pertaining to the marijuana industry.

Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress for the industry, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact the Company’s proposed business.

In December 2018 the Agriculture Improvement Act was signed into law. Amongst other things this law removed Hemp from the Controlled Substance Act, which means it will no longer be an illegal substance under the federal law. The FDA issued a statement following the passage of the law clarifying that it remains unlawful under the Food Drug and Cosmetic Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.

As of March 31, 2021, 36 states in the U.S. and the District of Columbia allow its citizens to use medical marijuana. Additionally, 11 states, the District of Columbia and the country of Canada have legalized cannabis for recreational use by adults. However, the state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. However, there is no guarantee that the Trump administration will not materially change its stated policy regarding the low-priority enforcement of federal laws. Additionally, the Trump administration, and any new administration that follows, could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to the Company and its shareholders.

The marijuana industry faces strong opposition.

It is believed by many that large well-funded businesses may have a strong economic opposition to the marijuana industry. The Company believes that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue. For example, medical marijuana will likely adversely impact the existing market for the current “marijuana pill” sold by mainstream pharmaceutical companies. Further, the medical marijuana industry could face a material threat from the pharmaceutical industry, should marijuana displace other drugs or encroach upon the pharmaceutical industry’s products. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry could make in halting or impeding the marijuana industry could have a detrimental impact on the Company’s proposed business.

Marijuana remains illegal under Federal law.

Marijuana is a schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in the Company’s inability to proceed with its business plan.

Laws and regulations affecting the medical marijuana industry are constantly changing, which could detrimentally affect the Company’s proposed operations.

Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require the Company to incur substantial costs associated with compliance or alter its business plan. In addition, violations of these laws, or allegations of such violations, could disrupt the Company’s business and result in a material adverse effect on its operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to the Company’s proposed business. The Company cannot predict the nature of any future laws, regulations, interpretations or applications, nor can the Company determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on its business.

The Company may have difficulty accessing the service of banks, which may make it difficult to operate.

Since the use of marijuana is illegal under federal law, many banks will not accept for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept them as customers. The inability to open or maintain bank accounts may make it difficult to operate medical and adult marijuana use businesses. If any of the Company’s bank accounts are closed, the Company may have difficulty processing transactions in the ordinary course of business, including paying suppliers, employees and vendors, which could have a significant negative effect on operations.

Potential competitors could duplicate the Company’s business model.

There is no aspect of the Company’s business which is protected by patents, copyrights, trademarks, or trade names. As a result, potential competitors could duplicate the Company’s business model with little effort.

The Company is dependent on its management and the loss of any of its officers could harm the Company’s business.

The Company’s future success depends largely upon the experience, skill, and contacts of the Company’s officers. The loss of the services of these officers may have a material adverse effect upon the Company’s business.

Impact of the Coronavirus

The Company’s business could be disrupted and materially adversely affected by the recent outbreak of COVID-19. As a result of measures imposed by the governments in affected regions, businesses and schools have temporarily closed due to quarantines intended to contain this outbreak. The spread of COVID-19 from China to other countries has resulted in the Director General of the World Health Organization declaring COVID-19 a pandemic on March 11, 2020. International stock markets have reflected the uncertainty associated with the slow-down in the world economies. The significant declines in the Dow Industrial Average were also largely attributed to the effects of COVID-19. The Company is still assessing the impact COVID-19 may have on its business, but there can be no assurance that this analysis will enable the Company to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally. The extent to which the COVID-19 pandemic and global efforts to contain its spread will impact the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the pandemic and the actions taken to contain or treat the COVID-19 pandemic.

Disclosure requirements pertaining to penny stocks may reduce the level of trading activity in the market for the Company’s common stock and owners of the Company’s common stock may find it difficult to sell their shares.

Trades of the Company’s common stock, may be subject to Rule 15g-9 of the Securities and Exchange Commission, which rule imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in “penny stocks”. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker/ dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.

Owners of the Company’s common stock may have difficulty depositing their shares with a broker or selling shares of our common stock which you acquire in this offering.

Many securities brokers will not accept securities for deposits and will not sell securities which:

Further, for a securities broker which will, under certain circumstances sell securities which fall under any or all of the three categories listed above, the customer, before the securities broker will accept the shares for deposit, must often complete a questionnaire detailing how the customer acquired the shares, provide the securities broker with an opinion of an attorney concerning the ability of the shares to be sold in the public market, and pay a “legal review” fee which in some cases can exceed $1,000.

None.

None.

Not applicable.

PART II

Our common stock is currently quoted on the OTCQB market under the symbol “PHCG”.

The following table sets forth the high and low bid quotations for our common stock as reported on the OTC Pink for the periods indicated.

Holders of our common stock are entitled to receive dividends as may be declared by the Board of Directors. The Board of Directors is not restricted from paying any dividends but is not obligated to declare a dividend. No cash dividends have ever been declared and it is not anticipated that cash dividends will ever be paid.

Our Articles of Incorporation authorize our Board of Directors to issue up to 25,000,000 shares of preferred stock. The provisions in the Articles of Incorporation relating to the preferred stock allow directors to issue preferred stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the holders of common stock. The issuance of preferred stock with these rights may make the removal of management difficult even if the removal would be considered beneficial to shareholders generally and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by our management. As of March 31, 2021, no preferred shares were outstanding.

Not applicable.

On December 31, 2018 Pure Harvest Cannabis Producers, Inc. (“PHC”) was acquired by the Company. At the time of the acquisition, the Company had 13,617,314 (post-split) outstanding shares of common stock. The Company issued 17,906,016 (post-split) shares of its common stock, as well as warrants to purchase an additional 17,906,016 (post-split) shares of the Company’s common stock to the shareholders of PHC in exchange for all of the outstanding shares of PHC. The warrants issued to the former shareholders of PHC allow the holder to acquire one share of the Company’s common stock at a price of $4.00 per share at any time on or before December 31, 2021. PHC is now a wholly owned subsidiary of the Company.

The transaction was accounted for as a reverse acquisition since: (i) the shareholders of PHC owned the majority of the outstanding common stock of the Company after the share exchange; (ii) a majority of the directors of the Company are also directors of PHC; and (iii) the old officers of the Company were replaced with officers designated by PHC. Effective December 31, 2018, the Company’s stockholders’ equity was retroactively recapitalized as that of PHC. The Company and PHC remain separate legal entities (with the Company as the parent of PHC).

As a result of the acquisition of PHC the Company’s new business plan includes the acquisition of licensed medical and recreational marijuana dispensaries, cultivation facilities and production facilities in states which allow publicly traded companies to own and operate dispensaries, cultivation facilities and production facilities. Depending on the markets entered and state regulation, the Company’s plan may also include: asset purchases, management/consulting operating agreements, or similar allowable agreements. The Company plans to use a combination of cash, shares of common or preferred stock, notes, or other financing vehicles to complete these acquisitions.

The Company will continue to collect royalties for licensing the Company’s patent and trademarks in connection with the manufacturing and sale of the Pocket Shot branded specialty alcohol beverage pouches.

Results of Operations

During the year ended December 31, 2020 approximately 97% of the Company’s revenue was from sales made by the Company’s SKM dispensary in Dumont, Colorado. During the year ended December 31, 2020 no sales were generated by Prolific Nutrition, Gratus Living, Love Pharm, EdenFlo or Test Kitchen.

Material changes in the line items in the Company’s Statement of Operations for the year ended December 31, 2020 as compared to the same period last year, are discussed below:

Capital Resources and Liquidity

The Company’s sources and (uses) of cash for the years ended December 31, 2020 and 2019 are shown below:

See Note 6 to the December 31, 2020 financial statements included as part of this report for information concerning our notes payable.

Except as disclosed elsewhere in this report, the Company does not know of any trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, the Company’s liquidity increasing or decreasing in any material way.

The Company may sell additional shares of common stock and/or other securities to raise capital for its operations. There is no assurance that the Company will be successful in raising any additional capital.

Off Balance Sheet Arrangements

As of December 31, 2020, the Company did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

See Note 2 to the December 31, 2020 financial statements included as part of this report for a description of the Company’s significant accounting policies.

Not applicable.

See financial statements included as part of this report.

Not applicable.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. As a result of this evaluation, management concluded that our disclosure controls and procedures were not effective as of December 31, 2020 for the same reasons that our internal control over financial reporting was not effective:

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) and SEC guidance on conducting such assessments. Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

None.

PART III

Matthew Gregarek has been our Chief Executive, Chairman, and Financial and Accounting Officer since July 29, 2019. Mr. Gregarek founded Alternity Capital Management, LLC (ACM) in 2010, which specializes in providing alternative investments to the private sector that are non-correlated to the typical capital markets, mainly focusing in the automobile financial sector. He has grown ACM to $15mm in assets under management, and has performed duties at ACM involving financial management since 2012. Prior to founding ACM, Mr. Gregarek was the managing partner of Access Capital Investment Group, LLC, (“ACIG”) and the manager of a privately funded auto acquisition company called Capex Acquisitions, LLC, where he specialized in portfolio management business development, and investor relations. He helped grow ACIG to $20 million under management before selling all of his interest in ACIG in May, 2010. Mr. Gregarek has been a director of the Company since July 2, 2015. Mr. Gregarek received a B.S. in finance from the University of Colorado. We believe Mr. Gregarek is qualified to act as a director as a result of his experience in finance and business development.

David Burcham has been one of our directors since April 2020. Mr. Burcham left a senior management position at a prominent Colorado bank in 2013 to start his own real estate development company in the Denver metro area. His business quickly grew and now oversees more than 100 residential and commercial units. In July 2018, Mr. Burcham set his sights on the growing hemp and CBD industry and teamed up with a well-respected chemist and partner of a small 10-year-old CBD extraction business. Mr. Burcham transformed the business into an advanced, pharmaceutical grade, CBD extraction company and co-founded EdenFlo, LLC where he is the Chief Executive Officer.

Peyton Bowman has been our Chief Operating Officer since January, 2021. Mr. Bowman previously oversaw the acquisition and consolidation of various businesses for a private equity firm in New York, New York. Mr. Bowman brings a wealth of knowledge and experience in corporate acquisitions and business operations to the Company and has substantial expertise in supply chain management.

Alexander Glueckler has been our Chief Financial and Accounting Officer since January, 2021. Mr. Glueckler, who will support the evolving financial and accounting operations of the Company and its subsidiaries, is an experienced professional with a proven track record for leading effective, cross-functional teams. Mr. Glueckler has held executive level positions in the cannabis industry since 2014 and has significant experience with all aspects of cannabis business operations.

Donnie Emmi has been one of our Directors since December 2020. Mr. Emmi has been a practicing attorney in Denver, Colorado since 2007.

The Company’s directors serve until the next annual meeting of our shareholders and until their successors have been duly elected and qualified. The Company’s officers serve at the discretion of our directors. The Company does not compensate any person for acting as a director.

We believe our directors are qualified to act as such for the following reasons:

Audit Committee, Independent Directors and Financial Expert

We do not have an Audit Committee; our board of directors currently acts as our Audit Committee. None of our directors are independent, as that term is defined in the rules of the NYSE American. None of our directors is considered a “Financial Expert”.

Code of Ethics

We have not adopted a Code of Business Conduct and Ethics that applies to our executive officers.

The following table sets forth the compensation paid to our officers during the fiscal years ended December 31, 2020 and 2019.

Peyton Bowman and Alexander Glueckler were appointed officers in January 2021.

In May 2020, we entered into two-year employment agreements with Matthew Gregarek, our Chairman and Chief Executive Officer, David Burcham, our President, and Daniel Garza, our then Chief Marketing Officer.

The employment agreement with Mr. Gregarek provides for:

The employment agreement with Mr. Burcham provides for:

The employment agreement with Mr. Garza provides for:

Each employment agreement provides that the signing bonus can be deferred until we generate sufficient revenue. Each employment agreement also provided for the award of shares of our restricted common stock and options to purchase shares of our common stock.

A portion of these shares/ options are subject to vesting requirements.

Refer to our 8-K report dated May 11, 2020 (including the exhibits to the report), for the complete terms of the employment agreements.

Mr. Garza’s Employment Agreement terminated in March 2021 upon his resignation as an officer and a director.

During the two years ended December 31, 2020 none of our officers or directors exercised any options.

As of March 31, 2021, we had outstanding warrants which allowed the holders to purchase up to 500,000 shares of our common stock at a price of $4.00 per share at any time on or before December 31, 2021.

We do not currently compensate our Directors for acting such as.

The following shows the amounts we expect to pay to our officers and the amount of time these persons expect to devote to our business during the year ending December 31, 2021.

The following table shows the ownership, as of April 15, 2021, of those persons owning beneficially 5% or more of the Company’s common stock and the number and percentage of outstanding shares owned by each of the Company’s directors and officers and by all officers and directors as a group. Unless otherwise indicated, each owner has sole voting and investment power over their shares of common stock.

Mr. Gregarek acquired 1,000,000 of his shares in connection with the Company’s acquisition of PHC.

In connection with the Company’s acquisition of PHC the Company issued warrants to the former shareholders of PHC, including the person shown below:

None.

The following table sets forth fees billed to us by our independent auditors for the years ended December 31, 2020 and 2019 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.

Audit fees and audit related fees represent amounts billed for professional services rendered for the audit of our annual financial statements and the review of our interim financial statements. Before our independent accountants were engaged by to render these services, their engagement was approved by our Directors.

PURE HARVEST CANNABIS GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020 and 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Pure Harvest Corporation Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Pure Harvest Corporation Group, Inc. (the Company) as of December 31, 2020 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Report of Independent Registered Public Accounting Firm

To the shareholders and the board of directors of Pure Harvest Cannabis Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Pure Harvest Cannabis Group, Inc. as of December 31, 2019, the related statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, 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. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Statements of Operations

For the Years Ended December 31, 2020 and 2019

The accompanying notes are an integral part of these consolidated financial statements

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2020 and 2019

The accompanying notes are an integral part of these consolidated financial statements

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Consolidated Statements of Stockholders’ Deficit

For the Years Ended December 31, 2020 and 2019

The accompanying notes are an integral part of these consolidated financial statements

Pure Harvest Corporate Group, Inc.

(formerly Pure Harvest Cannabis Group, Inc.)

Notes to Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

The Pure Harvest Corporate Group, Inc. (the “Company”), formerly Pure Harvest Cannabis Group, Inc., was formed as a Colorado corporation in April 2004. The Company changed its name to Pure Harvest Cannabis Group, Inc. in February 2019. The Company changed its name to Pure Harvest Corporate Group on June 8, 2020.

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.

As a result of the acquisition of PHCP, the Company now operates in various segments of the cannabis and hemp-CBD industries, focusing 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.

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.

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. We may seek to sell additional equity or convertible securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible securities, these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. If we raise additional funds through collaboration and licensing agreements with third parties, it may be necessary to relinquish valuable rights to our product candidates or future revenue streams or to grant licenses on terms that may not be favorable to us.

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, estimates 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, 2020 and 2019, an allowance for estimated, uncollectible accounts was determined to be unnecessary.

Inventory

Inventory is reported at the lower of cost or net realizable value 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 cannabis plants, process materials, finished cannabis goods, raw hemp materials, packaging and other materials and no inventory is deemed obsolete. As of December 31, 2020 and 2019, inventory consisted of the following:

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 furniture, fixtures, machinery and equipment categories are approximately five years. Leasehold improvements are the shorter or the asset life or the lease.

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 years ended December 31, 2020 and 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, 2020 for which an impairment of $141,453 related to Gratus and Prolific’s goodwill was recorded as the Company expects to dispose of these entities.

Equity Method and Non-marketable Equity Investments

Equity investments for which we have significant influence, but not control, over the investee and are not the primary beneficiary of the investee’s activities are accounted for under the equity method. The Company’s share of gains and losses in equity method investments are recorded in investment and other income, net. The Company monitors equity method investments for events or circumstances that could indicate the investments are impaired, such as a deterioration in the investee’s financial condition and business forecasts and lower valuations in recently completed or anticipated financings, and recognize a charge to investment and other income, net for the difference between the estimated fair value and the carrying value. For equity method investments, we record impairment losses in earnings only when impairments are considered other-than-temporary.

Lease Commitment

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 as expense arising from fixed lease payments. As of December 31, 2020 and 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 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.

Derivative Liabilities

A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts and for hedging activities.

As a matter of policy, the Company does not invest in separable financial derivatives or engage in hedging transactions. However, the Company entered into certain debt financing transactions during 2020, as disclosed in Note 6, containing certain conversion features that have resulted in the instruments being deemed derivatives. The Company evaluates such derivative instruments to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.

The classification of a derivative instrument is reassessed at each reporting date. If the classification changes as a result of events during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.

Instruments classified as derivative liabilities are remeasured using the Black-Scholes model at each reporting period (or upon reclassification), and the change in fair value is recorded on our consolidated statement of operations.

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. A bargain purchase is recorded if the net fair value of the assets acquired is in excess of the consideration provided. 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

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, 2020 and 2019, 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, 2020 all tax years since 2016 are open for examination for which no 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:

The carrying amount of the Company’s financial instruments approximates their fair value as of December 31, 2020 and 2019, 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 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. For the years ended December 31, 2020 and 2019, dilutive instruments consisted of convertible notes payable, unvested restricted stock grants, warrants, options to purchase shares of the Company’s common stock, summarized below. The effects of which to the Company’s net loss are anti-dilutive.

Recent Accounting Pronouncements

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes by removing certain exceptions in existing guidance and improves consistency in application by clarifying and amending existing guidance. This guidance is effective for annual periods beginning after December 15, 2020, and interim periods within those annual periods, where the transition method varies depending upon the specific amendment. Early adoption is permitted, including adoption in any interim period. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period, and all amendments must be adopted in the same period. The Company has reviewed the provisions of the new standard, but it is not expected to have a significant impact on the Company.

In January 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”, which clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting under Topic 323, and the accounting for certain forward contracts and purchased options accounted for under Topic 815. This guidance is effective for the Company for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company has reviewed the provisions of the new standard, but it is not expected to have a significant impact on the Company.

The FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs issued to date, including those 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

Prolific Nutrition and Gratus Living

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. As of December 31, 2020, Prolific Nutrition and Gratus Living have recorded no revenues from operations. Prolific Nutrition’s and Grotus Living’s results of operations have been included in the Company’s operating results for the period subsequent to the acquisition on September 30, 2019.

Love Pharm, LLC

On February 12, 2020, the Company entered into an Operating Agreement with Dr. James Rouse, MD regarding the ownership, operation, and management of Love Pharm, LLC. Love Pharm was recently organized in December 2019 to formulate, develop, manufacture, and brand hemp/CBD products for sale and distribution as well as to form a multi-channel media platform for public and patient education regarding the endocannabinoid system utilizing Dr. Rouse’s name, public image and his extensive experience and expertise in medicine and entrepreneurship. Under the Operating Agreement between the Company and Dr. Rouse, the Company owns 51% of Love Pharm and has a right of first refusal to purchase the remaining 49% of Love Pharm from Dr. Rouse. Additionally, Dr. Rouse will become the Company’s Chief Medical Advisor. Dr. Rouse will receive 400,000 shares of the Company’s common stock for services provided to the Company. See Note 7 for additional information regarding issuance of common stock to Dr. Rouse. As of the date of this filing Love Pharm has yet to commence operations.

How Smooth It Is, Inc.

On March 12, 2020, the Company entered into an agreement to acquire fifty-one percent (51%) of the outstanding membership interests in How Smooth It Is, Inc. (“HSII”) for $1,500,000 in cash and 7,000,000 shares of the Company’s restricted common stock. HSII is a state-licensed medical marijuana processor based in Riverdale, Michigan and plans to offer a wide range of cannabis-infused products including chocolate bars, gummies, beverages, and other Pure Harvest branded products. HSII is based in a 5,800 square foot facility and has the capability of extracting, processing and manufacturing an array of products containing THC and CBD. HSII has also submitted applications for four dispensary licenses in Riverdale, White Cloud, Alma and Mount Pleasant, MI. The acquisition of the 51% interest in HSII is subject to a number of conditions, including the approval of the Michigan Department of Licensing and Regulatory Affairs (LARA). The acquisition of HSII has been terminated, see Note 4 for additional information.

Sofa King Medicinal Wellness Products, LLC

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. In August 2020, the acquisition of SKM was finalized as the appropriate licenses have been approved. The operations of SKM have been included within operations from the date of acquisition of August 11, 2020.

Test Kitchen, Inc.

On August 14, 2020, the Company acquired Test Kitchen, Inc. (“TK”) in August of 2020 for 50,000 shares of restricted stock. Test Kitchen, Inc., a newly formed Colorado-based company specializing in pharmacognosy research, has begun developing and formulating new products using cutting edge technology and proprietary delivery systems. Test Kitchen was founded on the belief in the power of full engagement of products to be combined with mind-body practices to unlock human potential and create predictable experiences. The operations of TK have been included within operations from the date of acquisition.

Solar Cultivation Technologies

On September 29, 2020, the Company acquired all of the assets of Solar Cultivation Technologies, Inc. (“SCT”), a Denver-based solar company focused on bringing solar to the cannabis industry in an effort to minimize the industry’s carbon footprint. This acquisition will allow the Company to implement SCT’s solar, storage, and intelligent distribution technology throughout its operations in addition to providing these technologies to other operators in the cannabis industry. The operations of SCT have been included within operations from the date of acquisition. In November 2020, the Company transferred SCT assets for an interest in a partnership, see Note 8 for additional information.

EdenFlo, LLC

On April 24, 2020, the Company acquired substantially all of the assets of EdenFlo, LLC (“EdenFlo”), a producer of CBD extracts and concentrates, for 7,000,000 shares of the Company’s common stock and the release of its obligation of a previous promissory note in the amount of $1,650,000, accrued interest of $46,879 and other advances made to EdenFlo to fund operations of $384,409.

EdenFlo joins Prolific Nutrition and Love Pharm, LLC to secure and expand the Company’s position in the national Hemp/CBD industry. EdenFlo is a large-scale Colorado-based hemp-CBD producer and manufacturer of pure isolate and full-spectrum hemp. EdenFlo’s wholesale isolate is made from the highest quality ingredients, utilizing only the best extraction and distillation methods to ensure a final product of extreme purity. Their scientific procedures used for the remediation of THC provide the cleanest broad-spectrum (distillate) oil available in the cannabis extraction industry. The acquisition of EdenFlo will support the Company’s manufacturing operations by supplying the Company’s raw materials requirements for its branded products.

Purchase Price and Allocations

The transactions above were accounted for as business combinations in accordance with ASC Topic 805, Business Combinations. The Company has determined fair values of the assets acquired and liabilities assumed. These values were estimated by management as well as information obtained from a third party. Goodwill is primarily attributable to the go-to-market synergies that are expected to arise because of the acquisitions. The goodwill is not deductible for tax purposes.

The calculation of the purchase prices are as follows:

The Company has made a provisional allocation of the purchase price in regard to the acquisitions related to the assets acquired and the liabilities assumed as of the purchase dates. The following table summarizes the proforma effects of the acquisitions as if they had been occurred at the beginning of all periods presented.

The Company has completed the valuations necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed and related allocation of purchase price of these acquisitions.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the Company’s financial results as if the acquisitions noted above had occurred as of January 1, 2019. The unaudited pro forma financial information is not necessarily indicative of what the financial results actually would have been had the acquisition been completed on this date. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project the Company’s future financial results. The pro forma information does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisitions:

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 December 31, 2020 and 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., increased by $700,000 in January 2020, totaling $1,500,000 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 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 3 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. The transaction will not close until the appropriate Michigan approvals are obtained. During the year ended December 31, 2020, the Company advanced HSIT an additional $247,845 for operations. The additional advances are not under a formal arrangement and thus do not incur interest and are due on demand.

On March 12, 2020 the Company entered into an agreement to acquire fifty-one percent (51%) of the outstanding membership interests in How Smooth It Is, Inc. (“HSII”) for $3,000,000 in cash and 7,000,000 shares of the Company’s restricted common stock. On July 29, 2020 the Company terminated its agreement to acquire 51% of HSII. As a part of the termination agreement:

On December 31, 2020, the Company entered into an amended note receivable loan and security agreement for $2,750,000 with an initial maturity date of March 31, 2021. The note incurs interest at 8% per annum through the initial maturity date. As of the date of these financial statements the required monthly interest payments have been received. Under the agreement, if the loan isn’t repaid by March 31, 2021, as long as 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 and all the shares of HSII held by the sole shareholder.

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 and the amount loaned represents the expected cash portion to be paid in connection with the acquisition. See Note 3 for discussion regarding the acquisition of EdenFlo in April 2020.

During the year ended December 31, 2020, the Company advanced SCT $476,507 for operations. The additional advances were not under a formal arrangement and thus do not incur interest and are due on demand. See Note 3 for discussion regarding the acquisition of SCT as these advanced were treated as additional consideration within the purchase price.

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 percent within the calculation.

In April 2020, in connection with the EdenFlo asset acquisition, the Company assumed a lease for a marijuana retail store. 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 percent within the calculation. The lease runs through September 2021.

In May 2020, the Company entered into a lease for their 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 percent within the calculation.

The following are the expected lease payments as of December 31, 2020, including the total amount of imputed interest related:

Total rent expense for the years ended December 31, 2020 and 2019 was $339,415 and $163,466, respectively.

NOTE 6 –NOTES PAYABLE

Convertible Notes Payable

During the year ended December 31, 2019, the Company issued a series of convertible notes with original principal balances of $1,000,000. 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 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, 2020 and 2019, the Company amortized $15,848 and $0, respectively, to interest expense. The remaining discount of $28,152 is expected to be amortized throughout 2021 to 2023. The convertible notes include other provisions such as first right of refusal on additional capital raises, authorization of holder to incur debts senior to the convertible notes, etc. Additionally, should the holder exercise the option to exercise, a warrant to purchase an additional share of common stock for which the terms are not defined in the agreement. Thus, the issuance of the warrant is contingent to which the Company has not accounted for. Should warrants be ultimately issued, the Company expects to record the fair value of such as additional interest expense.

Convertible Notes Payable

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 of $146,250. Additional amounts are advanced as varies milestones are reached. The borrowing incur interest at 15% per annum with principal and outstanding interest due three years from the date of issuance. The Company’s assets secure the borrowings. In addition, the borrowings have a variety of financial and non-financial covenants. In addition, the borrowings are convertible at the lesser of $2.00 or 75% of the average closing price of the Company’s common stock for the preceding 30 days. Additionally, for every dollar advanced under the borrowing, the holder receives two shares of common stock. As of December 31, 2020, the Company issued the holder 4,192,500 shares. The agreement also includes a variety of other provisions related to inventory sold with specific discounts, markups, etc.

Due to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance. The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During the year ended December 31, 2020, the Company recorded initial derivative liabilities of $1,756,636 based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.36 our stock price on the date of grant of $0.45, expected dividend yield of 0%, expected volatility of 103.00%, risk free interest rate of 0.64% and expected term of 3.0 years. Upon initial valuation, the derivative liabilities, as well as the fair market value of the 4.2 million shares of common stock exceeded the face values of the convertible notes payable by [$1,886,625], which was recorded as a day one loss in derivative liability. On December 31, 2020, the derivative liabilities were revalued at $1,879,774 resulting in a loss of $123,139. The inputs to value the derivative liabilities were similar to those on the date of issuance.

In connection with the derivative liabilities and common stock issued, the Company recorded a $1,950,000 discount. The discount is being amortized over the term of the borrowings using the straight-line method due to the short term nature. During the year ended December 31, 2020, the Company amortized $226,164 of the discount to interest expense. As of December 31, 2020, a discount of $1,723,836 remained for which will be amortized in periods from 2021 to 2023.

Related Party Convertible Notes Payable

On June 15, 2020, the Company borrowed $30,000 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 wasn’t recorded. In September 2020, the note was converted into 75,000 shares of common stock.

At various times in 2020, the Company has 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 notes which bears 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 variable conversion price was removed. See below for additional accounting impact.

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 derivative liabilities and common stock issued, the Company recorded a $396,223 discount. The discount is being amortized over the term of the convertible note using the straight line method due to the short term nature. During the year ended December 31, 2020, the Company amortized $396,223 of the discount to interest expense. As of December 31, 2020, no discount remained.

In connection with the EdenFlo asset acquisition, the Company assumed two notes payable with the former shareholders. Under the terms of the agreements $600,000 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 totaling $313,300 with the former membership. The notes do not incur interest and are due on demand.

See Note 8 for information relating to loans from an Officer and Director of the Company.

Notes Payable - $1.5 Million

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:

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 six months ended June 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. The note was paid in full in August 2020.

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.

Note Payable - $200,000

On October 9, 2020, the Company borrowed $200,000 from an unrelated third party. The note incurred interest at 12% per annum and was due by November 9, 2020. The note was repaid. As further consideration, the Company issued 100,000 shares of its restricted common stock to the lender. The Company recorded the fair market value of the shares as a discount of $40,000 to the note for which all was amortized to interest expense during the year ended December 31, 2020.

Note Payable - $173,705

On November 1, 2020, the Company entered into an agreement to convert accounts payable of $173,705 into a note payable. The note incurred interest at 8% per annum and is payable in monthly payments.

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 matures on January 31, 2020. 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.

Due to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance. The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During the year ended December 31, 2020, the Company recorded initial derivative liabilities of $287,454 based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.24 our stock price on the date of grant of $0.37, expected dividend yield of 0%, expected volatility of 103.00%, risk free interest rate of 0.21% and expected term of 0.25 years. On December 31, 2020, the derivative liabilities were revalued at $134,303 resulting in a gain of $153,151. The inputs to value the derivative liabilities were similar to those on the date of issuance.

In connection with the derivative liabilities and common stock issued, the Company recorded a $287,454 discount. The discount is being amortized over the term of the borrowings using the straight-line method due to the short term nature. During the year ended December 31, 2020, the Company amortized $168,639 of the discount to interest expense. As of December 31, 2020, a discount of $118,815 remained for which will be amortized in early 2021.

NOTE 7 – STOCKHOLDERS’ DEFICIT

Stock-Based Compensation

2019 Issuances

Effective January 1, 2019, the Company entered into agreements to issue a total of 1,600,000 shares of common stock to two officers. The shares were to 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 was expensing the value of the common stock over the vesting period which mirrors the service period. During the six months ended June 30, 2019, the Company recognized $190,000 of stock-based compensation. On July 30, 2019, the two officers referred to above resigned as officers and directors of the Company. In connection with their resignations, Mr. Lamadrid agreed to return to the Company 1,750,000 shares, and Mr. Scott agreed to return to the Company 1,200,000 shares of the Company’s common stock. These shares, upon their return to the Company, were cancelled and now represent authorized but unissued shares.

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.

2020 Issuances

The Company has entered into various employment and advisory agreements for which shares of common stock are issued with a variety of vesting provisions. The Company typically determines the fair market value of these awards on the date of grant and expensing that value over the vesting period which mirrors the service period.

In May 2020, the Company entered into two-year employment agreements with Matthew Gregarek, the Company’s Chairman and Chief Executive Officer, David Burcham, the Company’s President, and Daniel Garza, the Company’s Chief Marketing Officer. Among various other salary and bonus terms, the agreements also provide for the award of shares of the Company’s restricted common stock and options to purchase shares of the Company’s common stock. Under these agreements, a total of 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 that vested on April 1, 2021. The agreements also provide for the future grant of additional shares of common stock should the individuals remain employed following the April 1, 2021 expiration date.

During the year ended December 31, 2020, the Company has recognized stock-based compensation of $299,657 in connection with the employment and other agreements noted above. In addition, under these arrangements a total of 9.4 million shares of common stock are issuable upon final vesting. The remaining stock-based compensation of $76,234 will be recognized over the remaining service periods as follows: $61,986 during the year ending December 31, 2021 and $14,248 during the year ending December 31, 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. Under the terms of the agreements, the Company issued 724,444 shares of common stock which was initially valued at $320,400 based upon the closing market price of the Company’s common stock on the date of the agreement. The Company recorded expense of $187,067 within general and administrative expense for the year ended December 31, 2020. The remaining $133,333 has been recorded as a prepaid and will be expensed throughout 2021.

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 will vest in tranches at various dates through May 1, 2021 with escalating exercise prices ranging from $0.50 to $7.50 and are exercisable for ten years. These options were valued at $40,790 using a Black-Scholes Options Pricing Model. For the year ended December 31, 2020, the Company recorded $37,006 as stock-based compensation. The remaining expense outstanding through May 1, 2021 is $3,784.

The fair value of the options is estimated using a Black-Scholes Options Pricing Model with the following assumptions:

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, 2020, the Company received $150,000 related to the sale of 300,000 shares of common stock and warrants.

On October 23, 2020, the Company sold 2,750,000 shares of its common stock to a private investor for $1,000,000 in proceeds.

Common Stock and Warrants Issued with Notes Payable

See Note 6 for issuance of shares in connection with note agreements.

NOTE 8 – EQUITY METHOD INVESTMENT

On November 12, 2020, the Company contributed SCT’s assets valued at $530,000 less the cash consideration provided by DC Energy Group, LLC of $200,000 for a 40% interest in DC Energy Group, LLC, an entity which is focused on low energy lamination. The investment is included within other assets on the accompanying consolidated balance sheet. The investment is accounted for using the equity method. Condensed financial information for the partnership is as follows:

Condensed balance sheet as of December 31, 2020:

Condensed statement of operations for the year ended December 31, 2020:

NOTE 9 – INCOME TAXES

As of December 31, 2020 and 2019, deferred taxes consisted of the following:

The following is the provision for income taxes for the years ended December 31, 2020 and 2019.

As of December 31, 2020 and 2019, the Company has recorded a full valuation allowance on the deferred tax assets. As of December 31, 2020, the Company had net operating loss carry forwards for Federal and State income tax purposes of approximately $2.9 million. The California state net operating loss will begin to expire in 2032. The difference between the statutory tax rate and the effect tax rate is primarily due to permanent differences and the valuation allowance.

The Company has filed all its United States Federal and State tax returns. The Company has identified the United States Federal tax returns as its “major” tax jurisdiction. The United States Federal return year 2017 through 2020 are still subject to tax examination by the United States Internal Revenue Service. The Company is subject to examination by State Tax Boards for the years ended 2016 through 2020. The Company currently does not have any ongoing tax examinations.

NOTE 10 – RELATED PARTY TRANSACTIONS

As of December 31, 2020 and 2019, the Company has $0 and $116,667, respectively, due to related parties. These amounts generally consist of accrued salaries and various expense reimbursements.

See Note 7 for shares and options issued to management under employment contracts. In connection with the employment contracts, the Company accrued total deferred salaries and bonuses of $406,750 and $225,000 as of December 31, 2020, respectively.

See Note 6 for discussion related to related party convertible notes payable.

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.

PART IV

None.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 19 day of April 2021.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act

The Company has not sent an annual report or proxy statement to its shareholders. The Company does not intend to send an annual report to its shareholders subsequent to the filing of this 10-K report.