The Company's business plan involves 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 business plan may also
include asset purchases, management/consulting agreements, 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.
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 400,000 shares of the Company's
common stock for services provided to the Company.
As of September 30, 2021 Love Pharm had not generated any revenue.
Sofa King
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
recently moved its dispensary to a corner location along the busy I-70 corridor
between Denver and Colorado's world-class ski destinations.
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EdenFlo
On April 24, 2020, the Company acquired substantially all 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.
The Company expects EdenFlo will expand the Company's position in the national
Hemp/CBD industry. EdenFlo can produce pure CBD isolate and full-spectrum hemp
distillate. EdenFlo's 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 some of 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.
As of September 30, 2021 EdenFlo had not generated any revenue.
Test Kitchen
On August 17, 2020, the Company acquired all the outstanding shares of Test
Kitchen, Inc. for 50,000 shares of its restricted common stock.
Test Kitchen's only asset as of August 17, 2020, was a product containing CBD
oil. Test Kitchen filed a provisional patent application for this product on
June 12, 2020. There can be no assurance that a patent will be issued for this
product.
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-019 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.
20
Results of Operations
Three Months Ended September 30, 2021, compared to the Three Months Ended
September 30, 2020
Revenue
We generated $507,865 of revenues for the three-month period ended September 30,
2021, in comparison with $318,690 for the comparable quarter a year ago. The
increase of $189,175 is primarily due to operational sales from the Company's
acquisition in SKM, as well as wholesale sales of hemp distillate product sold
through Test Kitchen. During the three months ended September 30, 2021,
approximately 92% of the Company's revenue was from sales made by the Company's
SKM dispensary in Dumont, Colorado, and approximately 8% of the Company's
revenue was from sales made by Test Kitchen. During the three months ended
September 30, 2021, no sales were generated by Prolific Nutrition, Gratus
Living, Love Pharm or EdenFlo.
Cost of Goods Sold
We generated $334,147 of cost of goods sold for the three-month period ended
September 30, 2021, in comparison with $60,552 for the comparable quarter a year
ago. The increase of $273,595 is due to sales activity stated above.
Gross Profit/(Loss)
We generated $173,718 gross profit for the three-month period ended September
30, 2021, in comparison with gross profit of $258,138 for the comparable quarter
a year ago. The decrease of $84,420 is due to operational activity. The Company,
in prior years did not have on-going sales operations.
General and Administrative Expenses
General and administrative expenses for the three-month period ended September
30, 2021, totaled $1,841,290 in comparison with $1,177,949, for the comparable
quarter a year ago. The decrease of $663,341 is primarily due to a significant
amount of stock-based compensation recorded in the prior year in connection with
options and shares granted to officers.
Other Income / Expense
Other expense for the three-month period ended September 30, 2021, totaled
$2,178,549, in comparison with $3,719,913, for the comparable quarter a year
ago. The decreased expense of $1,541,364, is primarily due to changes in the
fair market value of derivative liabilities incurred.
Nine Months Ended September 30, 2021, compared to the Nine Months Ended
September 30, 2020
Revenue
We generated $2,064,791 of revenues for the nine-month period ended September
30, 2021, in comparison with $323,731 for the comparable quarter a year ago. The
increase of $1,741,060 is primarily due to operational sales from the Company's
acquisition in SKM, as well as wholesale sales of hemp distillate product sold
through Test Kitchen. During the nine months ended September 30, 2021,
approximately 86% of the Company's revenue was from sales made by the Company's
SKM dispensary in Dumont, Colorado, and approximately 14% of the Company's
revenue was from sales made by Test Kitchen. During the nine months ended
September 30, 2021, no sales were generated by Prolific Nutrition, Gratus
Living, Love Pharm or EdenFlo.
21
Cost of Goods Sold
We generated $1,414,217 of cost of goods sold for the nine-month period ended
September 30, 2021, in comparison with $100,617 for the comparable quarter a
year ago. The increase of $1,313,600 is due to sales activity stated above.
Gross Profit/(Loss)
We generated $650,574 gross profit for the nine-month period ended September 30,
2021, in comparison with gross profit of $223,114 for the comparable quarter a
year ago. The increase of $427,460 is due to operational activity. The Company,
in prior years did not have on-going sales operations.
General and Administrative Expenses
General and administrative expenses for the nine-month period ended September
30, 2021, totaled $5,885,175 in comparison with $5,626,148, for the comparable
quarter a year ago. The increase of $259,027 is primarily due to an increase in
operational activity from sales stated above.
Research and Development Expenses
Research and development expenses for the nine-month period ended September 30,
2021, totaled $6,993, in comparison with $0 for the comparable quarter a year
ago. The increase of $6,993 is due to product creation in the current year.
Other Income / Expense
Other expense for the nine-month period ended September 30, 2021, totaled
$4,903,482, in comparison with $4,638,776, for the comparable quarter a year
ago. The increased expense of $264,706, is primarily due to increased interest
from additional funding, an allocation of bad debt expense on a note receivable,
losses on investment valuation, and changes in the fair market value of
derivative liabilities incurred.
Liquidity and Capital Resources
Our principal source of liquidity has been funds received from the sale of our
common stock and issuance of notes including convertible notes. During the
current reporting period and subsequent we have funded our operations through
cash flows from operations and the following significant transactions.
On August 18, 2020, the Company entered into a Loan Agreement with an unrelated
third party. The Loan Agreement provides the Company with the option, subject to
certain conditions, to borrow up to $4,000,000 under the Loan Agreement. As of
November 16, 2020 the Company had borrowed $1,950,000 pursuant to the Loan
Agreement, which amount includes $146,250 which the Company will use to pay the
first six month's interest on the borrowed funds. The Company used $1,000,000 of
the initial advance to repay the $1,000,000 loan described above. The funds
remaining from the initial advance will be used to purchase raw materials for
the Company's products and for general corporate purposes. All funds borrowed
bear interest at 15% per year, are secured by substantially all of the Company's
assets, and are due and payable on August 18, 2023. The Lender will receive two
shares of the Company's restricted common stock for every $1.00 loaned to the
Company. At the option of the Lender, the amounts loaned to the Company may be
converted into shares of the Company's common stock. The number of shares to be
issued will be determined by dividing the amount to be converted by the
Conversion Price. The Conversion Price is the lessor of: (1) $2.00 or (2) 75% of
the average closing price of the Company's common stock for the 30 consecutive
trading days ending on the last business day immediately prior to the conversion
date.
22
On April 28, 2021, the Company received $500,000 related to additional
borrowings under the Loan Agreement.
During the nine-month period ended September 30, 2021, the Company received
$768,000 related to the sale of 1,907,413 shares of common stock.
In March 2021, the Company commenced and subsequently closed a private offering
of its preferred stock for up to $2 million in proceeds. The offering consisted
of 20,000 shares of preferred stock at a price of $100 per share. The purchaser
of the preferred stock has agreed to purchase the preferred stock in three
tranches provided certain sales milestones are met. Concurrently with each
issuance of preferred stock, the Company shall issue the preferred stockholder
500,000 warrants to purchase the Company's common stock at a price of $0.75 per
share. Preferred stockholders are entitled to a 10% dividend paid in additional
shares of preferred stock on a quarterly basis and will receive dividend and
liquidation preferences over the Company's common stockholders.
On May 14, 2021, the Company received $660,000 related to the issuance of the
first tranche of 660 shares of the Company's preferred stock and 500,000
warrants to purchase the Company's common stock at a price of $0.75.
Going forward we are dependent upon raising capital to the extent cash flows
from our operations are not significant enough to our cash flow needs. We
currently have various financing agreements in place, as disclosed above.
For the next 12 months our plan of operations is to expand our current activity
at SKM, increase consumer product offerings in Test Kitchen, and develop the
infrastructure required to support Phytocare's initial operations. We believe
that our current cash on hand, cash flows from operations, and expected proceeds
from ongoing investments will allow us to meet our cash flow requirements for a
period in excess of 12 months.
Cash Flows
Net Cash used in Operating Activities
We used cash in our operating activities due to our losses from operations. Net
cash used in operating activities was $2,551,370 for the nine-month period ended
September 30, 2021 in comparison to $2,098,433 for the comparable period a year
ago, an increase of $452,937 or 22%. The increase in cash used in operations was
primarily related to operating activities in the current year that did not exist
in the prior year.
Net Cash used in Investing Activities
Net cash used in our investing activities was $162,794 for the nine-month period
ended September 30, 2021 in comparison to $1,780,706 for the comparable period a
year ago, a decrease of $1,617,912 or 91%. The decrease in cash was primarily
related to the change in value of the note receivable with HSII.
Net Cash from Financing Activities
Net cash provided by financing activities was $2,266,677 for the nine-month
period ended September 30, 2021 in comparison to $2,529,333 for the comparable
period a year ago, an decrease of $262,656 or 10%. In the nine-month period
ended September 30, 2021, we raised $768,000 primarily through the issuance of
common stock, $660,000 through the sale of preferred stock and $976,000 from a
convertible note payable.
23
Adjusted EBITDA, for the purposes of these financial statements, shall mean:
The Company's loss before interest, taxes, depreciation, and amortization
adjusted to exclude the impact of (a) loss on impairment of tangible or
intangible assets; (b) gain or loss on disposal of assets, including notes
receivables; (c) gain or loss from the early extinguishment, redemption or
repurchase of debt, (d) stock-based compensation expense and (e) the loss from
derivative liabilities. Adjusted EBITDA will also exclude any expenses incurred
by the Company in connection with the Company's evaluation, pursuit, or
consummation of one or more acquisitions or transactions (which such expenses
are considered to be incurred in connection with extraordinary, unusual, or
infrequently occurring events reported in the Company's public filings).
During the nine-month period ended September 30, 2021, Adjusted EBITDA decreased
to $2,020,502 from $3,229,130 in the prior comparable year.
Off Balance Sheet Arrangements
As of September 30, 2021, the Company did not have any off-balance sheet
arrangements.
Critical Accounting Policies and Estimates
See Note 2 to the September 30, 2021, financial statements included as part of
this report for a description of the Company's critical accounting policies and
estimates.
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PURE HARVEST CORPORATE GROUP, INC. 
