PHCG Pure Harvest Corporate Group Inc (PK)

Notes to Condensed Consolidated Financial Statements

June 30, 2021

(Unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS

Pure Harvest Corporate Group, Inc. (the “Company”), formerly Pure Harvest Cannabis Group, Inc., was formed as a Colorado corporation in April 2004.  

On December 31, 2018, the Company acquired all the outstanding common stock of Pure Harvest Cannabis Producers, Inc., (“PHCP”) in exchange for 17,906,016 (post-split) shares of the Company’s common stock. The transaction was accounted for as a reverse acquisition.

As a result of the acquisition of PHCP, the Company now operates in various segments of the cannabis and hemp-CBD industries with a focus on health and wellness products and applying education, research and development, and technology to each sector. The Company’s new business also involves the acquisition and operation of licensed marijuana cultivation facilities, manufacturing facilities, and dispensaries.

The Company changed its name to Pure Harvest Cannabis Group, Inc. in February 2019.

The Company changed its name to Pure Harvest Corporate Group, Inc. on June 8, 2020.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These financial statements are presented in United States dollars and have been prepared in accordance with United States generally accepted accounting principles.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all accruals and adjustments (each of which is of a normal, recurring nature) necessary for a fair presentation of the Company’s financial position as of June 30, 2021, and the results of its operations for the three and six months then ended. Significant accounting policies have been consistently applied in the interim consolidated financial statements. The results reported in these interim financial statements are not necessarily indicative of the expected results for the entire year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2020 and notes thereto that are included in the Company’s Annual Report on Form 10-K.

Going Concern

The Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The financial statements do not include any adjustment to reflect the possible future effect on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

Management plans to fund future operations by raising capital and / or seeking joint venture opportunities.

Principles of Consolidation

The Company evaluates the need to consolidate affiliates based on standards set forth in Accounting Standards Codification (“ASC”) 810 Consolidation (“ASC 810”). The Consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant consolidated transactions and balances have been eliminated in consolidation.

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include estimated fair market value of assets and liabilities acquired under business combinations, useful lives and potential impairment of property and equipment, recoverability of goodwill and estimates of fair value of share-based payments.

Fair Value of Financial Instruments

The Company applies the accounting guidance under Financial Accounting Standards Board (“FASB” ACS 820-10, “Fair Value Measurements”, as well as certain related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

The guidance also establishes a fair value hierarchy for measurements of fair value as follows:

The carrying amount of the Company’s financial instruments approximates their fair value as of June 30, 2021, and December 31, 2020, due to the short-term nature of these instruments. The Company’s derivative liabilities are considered a Level 2 liability.

Net Loss per Share

Net loss per common share is computed by dividing net loss by the weighted average common shares outstanding during the period as defined by Financial Accounting Standards, ASC Topic 260, “Earnings per Share”. Basic earnings per common share (“EPS”) calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding during the period. For the three and six months ended June 30, 2021 and 2020, dilutive instruments consisted of convertible notes payable, options and warrants to purchase shares of the Company’s common stock totalling approximately 57.5 million and 28.4 million shares of common stock, respectively, the effects of which to the net loss are anti-dilutive.

Recent Accounting Pronouncements

In January 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-01, “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815”, which clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting under Topic 323, and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The Company adopted the new standard on January 1, 2021, which did not have a significant impact on the Company.

The FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs issued to date, including the one above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our consolidated financial statements.

NOTE 3 – ACQUISITIONS

During the three months ended March 31, 2021, and the three months ended June 30, 2021, the Company has not entered into any additional acquisitions other than those previously reported in its Form 10-K for the period ending December 31, 2020. For information regarding the Company’s prior year acquisitions see the Company’s Form 10-K for the period ending December 31, 2020.

NOTE 4 – NOTES RECEIVABLE

In May and June 2019, the Company advanced $28,593 to two unrelated individuals in connection with potential acquisitions for the Company. The amounts were to be repaid, without interest, in October 2019. As of June 30, 2021, and December 31, 2020, the Company has settled and received payment in kind for one of the notes and has continued collection efforts on the other note receivable, but has provided an allowance of such due to the unlikelihood of closing the acquisitions or collecting on the notes receivable.

In December 2019, the Company advanced $800,000 to How Smooth It Is, Inc. In January 2020, the Company advanced an additional $700,000 to HSII. The note receivable was due June 1, 2020 and incurs interest at 6% per annum for sixty days and then is increased to 10% per annum thereafter. In March 2020, the Company entered into an acquisition agreement to acquire the entity for which the note receivable was used to offset a portion of the purchase price see the Company’s Form 10-K for the period ending December 31, 2020 for more information. 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 HSII as an additional $247,845 for operations. The additional advances were due on November 1, 2020, and accrue interest at a rate of 7.5% per annum.

On March 12, 2020, the Company entered into an agreement to acquire fifty-one percent (51%) of the outstanding membership interests in How Smooth It Is, Inc. (“HSII”) for $1,500 ,000 in cash and 7,000,000 shares of the Company’s restricted common stock. On July 29, 2020, the Company terminated its agreement to acquire 51% of HSII. As a part of the termination agreement:

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. Under the agreement, if the loan is not repaid by March 31, 2021, if there have been no defaults, the loan will be extended to July 31, 2021. During the extended period, the interest rate increases to 12% per annum. In addition, with the extended period, the Company receives various royalties on products sold by the borrower for a period of three year commencing on April 1, 2021. On March 31, 2021, the note was extended to July 31, 2021, in accordance with the terms. The loan is secured by all the assets of HSII.

On April 14, 2021, the Company was sued by How Smooth It Is, Inc. in an effort to stall its obligations under the Business Loan and Security Agreement between the Company and HSII effective December 31, 2020. The Company has submitted its response and counterclaims to HSII’s complaint. The Company believes that the suit is meritless and that the Company will likely prevail should the case go to trial. In the interim, the Company has provided a default notice to HSII and increased the interest rate on the amounts due to 25% as provided by the Business Loan and Security Agreement. As of June 30, 2021, the Company has recorded a reserve of $500,000 against the outstanding note receivable.

In December 2019, the Company advanced $1,650,000 to EdenFlo, LLC in connection with the potential acquisition of that entity by the Company. The note receivable was due June 1, 2020, and incurs interest at 6% per annum for sixty days and then is increased to 10% per annum thereafter. In addition, the note receivable is secured by all the asset of EdenFlo, LLC. In April 2020, EdenFlo was acquired by the Company and the Note was consolidated into the acquisition, subsequently eliminating its balance on the Balance Sheet. See the Company’s Form 10-K for the period ending December 31, 2020 for more information regarding the acquisition of EdenFlo.

In 2020, prior to SCT’s acquisition, the Company advanced SCT $476,507 for operations. The additional advances were not under a formal arrangement and thus did not incur interest and were due on demand. See the Company’s Form 10-K for the period ending December 31, 2020 for more information regarding the acquisition of SCT.

NOTE 5 – LEASE AGREEMENTS

In May 2019, the Company entered into a lease agreement for property to be used as a marijuana retail store. The initial term of the lease is for a period of three years. The Company has an option to purchase the property at prices ranging between $1,400,000 and $1,600,000 at various dates prior to May 1, 2022. The Company issued the landlord 400,000 shares of its post-split common stock in consideration for the option to purchase the property for which was recorded as deferred rent and is being amortized to rent expense using the straight-line method over the term of the lease. At inception of the lease, the Company recorded a right of use asset and liability. The Company used an effective borrowing rate of 10% within the calculation.

In April 2020, in connection with the EdenFlo asset acquisition, the Company assumed a lease for a hemp processing facility. At inception of the lease, the Company recorded a right of use asset and liability of $140,988. The Company used an effective borrowing rate of 10% within the calculation. The lease runs through September 2021.

In May 2020, the Company entered into a lease for its corporate offices. The lease requires monthly payments ranging from $12,330 to $12,861 through the maturity of the lease in October 2023. At inception of the lease, the Company recorded a right of use asset and liability of $399,766. The Company used an effective borrowing rate of 10.35% within the calculation.

NOTE 6 –NOTES PAYABLE

Convertible 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 April 2021, the convertible notes were further amended to define the timing for quarterly interest payments due under the convertible notes and impose a penalty payable in cash and stock for late interest payments. In connection with this amendment, the Company increased the principal balance by $233,333 of accrued interest and $66,667 classified as an extension fee for the remaining accrued interest of $114,568 for which the payment was extended until early July 2021. The extension fee was recorded as interest expense during the six months ended June 30, 2021. As of June 30, 2021, the balance due on the convertible note was $1,300,000, net a discount of $21,060 recorded within convertible notes payable.

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 six months ended June 30, 2021 and 2020, the Company amortized $7,092 and $11,424, respectively, to interest expense. The remaining discount of $21,060 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.

In August 2020, the Company entered into an agreement for borrowings up to $4.0 million. Upon closing, the Company received $1,950,000 and provided for a six-month interest reserve. Additional amounts are advanced as varies milestones are reached. The borrowing incur interest at 15% per annum with principal and outstanding interest due three years from the date of issuance. The Company’s assets secure the borrowings. 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. In 2020, the Company issued the holder 4,192,500 shares of common stock in connection with the convertible note. The agreement also includes a variety of other provisions related to inventory sold with specific discounts, markups, etc.

In August 2021, the Company received an additional $500,000 under the terms of the initial agreement. In connection with this tranche, the Company issued 1.0 million shares of common stock. Due to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance. Upon initial valuation, the derivative liabilities value of $395,891, as well as the fair market value of the 1.0 million shares of common stock exceeded the face values of the convertible notes payable by $355,891, which was recorded as a day one loss on derivative liabilities. The variables to value the derivatives on issuance were similar to those disclosed below. As of June 30, 2021, the principal balance due on the convertible notes was $2,450,000, and accrued interest of $158,750, net a discount of $1,865,146 recorded within long-term convertible notes payable.

The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During the six months ended June 30, 2021, the Company revalued the fair market value of the derivative liabilities at $2,379,080 resulting in a loss of $234,032. The valuation of the derivative liabilities was based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.34 our stock price on the date of revalue of $0.51, expected dividend yield of 0%, expected volatility of 98.00%, risk free interest rate of 0.01% and expected term of 2.12 years.

In connection with the derivative liabilities and common stock issued, the Company recorded a total discount related to the two notes of $2,450,000. The discount is being amortized over the term of the borrowings using the straight-line method due to the short-term nature. During the six months ended June 30, 2021, the Company amortized $358,689 of the discount to interest expense. As of June 30, 2021, a discount of $1,865,146 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 was not recorded. In September 2020, the note was converted into 75,000 shares of common stock.

At various times in 2020, the Company borrowed a total of $430,000 from an individual related to a director of the Company and a director of the Company. The loans are evidenced by a promissory note which bear interest at 12% per year and are due and payable at dates ranging from December 10, 2020, to January 10, 2021. The proceeds were used for operations. At the option of the holders, the note principal and any accrued interest may be converted into shares of the Company’s common stock. The number of shares of the Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by the lesser of $0.30 or 80% of the ten-day average closing price of the Company’s common stock immediately prior to the date of conversion. The holders also have the option to convert $900,000 owed to them from EdenFlo, LLC, as disclosed below, which debt was assumed the Company in connection with the acquisition of EdenFlo, at a price of $0.30 per share for a period of 12 months. Additionally, the holders were issued 215,000 shares of common stock in connection with the notes. On December 7, 2020, the loans were amended whereby the various promissory notes were consolidated into two notes with a maturity date of June 30, 2021, and the variable conversion price was removed. See below for additional accounting impact. On April 23, 2021, the consolidated promissory notes were amended to allow the Company to extend the maturity date of the consolidated notes to December 31, 2021, in exchange for an aggregate of 250,000 shares of common stock and $15,000 added to the principal balance of the note. The shares of common stock were valued at $115,000 ad recorded as interest expense during six months ended June 30, 2021. As of June 30, 2021, the principal balance due on the convertible notes was $1,427,504 and recorded within related party convertible notes payable.

Due to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance. The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting period. During the year ended December 31, 2020, the Company recorded initial derivative liabilities of $298,913 based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.30 our stock price on the date of grant ranging from $0.40 - $0.49, expected dividend yield of 0%, expected volatility of 103.00%, risk free interest rate of 0.64% and expected terms of 0.5 years. Upon initial valuation, the derivative liabilities, as well as the fair market value of the 215,000 shares of common stock exceeded the face values of the convertible notes payable by $2,940, which was recorded as a day one loss in derivative liability. On December 7, 2020, the derivative liabilities were revalued at $540,475 resulting in a loss of $241,562. The value of the derivatives of $540,475 was recorded as a gain on extinguishment due to the modification of the exercise price. The inputs to value the derivative liabilities were similar to those on the date of issuance.

In connection with the 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. 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 totalling $275,756 with the former membership. The notes do not incur interest and are due on demand.

Notes Payable

On March 6, 2020, the Company borrowed $1,500,000 from an unrelated third party. The loan is evidenced by a promissory note which bears interest at 8% per year.

The note is due and payable as follows:

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.

In addition, during the twelve months ended December 31, 2020, the Company issued 124,425 shares of common stock in satisfaction of $52,293 in accrued interest.

The note was paid in full in August 2020.

Note Payable - $200,000

On October 9, 2020, the Company borrowed $200,000 from an unrelated third party. The note incurred interest at 12% per annum and was due by November 9, 2020. 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.

Convertible Note Payable - $500,000

On November 17, 2020, the Company borrowed $500,000 from an unrelated third party. The note incurs interest at 8% per annum and initially matured on January 31, 2021. See below for discussion regarding the extension of the note. At the option of the lender, the loan and any accrued interest may be converted into shares of the Company’s common stock. The number of shares of the Company’s common stock which will be issued upon any conversion will be determined by dividing the amount to be converted by the lesser of 75% of the ten-day average closing price of the Company’s common stock immediately prior to the date of conversion or $0.50. As of June 30, 2021, the principal balance due on the convertible note was $500,000 and recorded within convertible notes payable.

Due to the variable conversion price, the Company recorded derivative liabilities for the conversion feature on the date of issuance. The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. On June 30, 2021, the derivative liabilities were revalued at $271,897 resulting in a gain of $13,223. The derivative liabilities were revalued based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.38 our stock price on the date of revalue of $0.51, expected dividend yield of 0%, expected volatility of 113.00%, risk free interest rate of 0.01% and expected term of 0.50 years.

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 six months ended June 30, 2021, the Company amortized $118,815 of the discount to interest expense. As of June 30, 2021, no discount remained.

On January 31, 2021, the holder of the note agreed to extend the due date for the note to April 2, 2021. In consideration for extending the repayment date to April 2, 2021, the Company issued to the note holder 50,000 shares of its common stock and the interest rate of the Note was increased to 10% per annum. The Company recorded the fair market value of the common stock issued of $23,500 as a discount to the note for which was fully amortized to interest expense during the six months ended June 30, 2021.

On April 16, 2021, the holder of the Note agreed to extend the due date for the note to June 18, 2021. In consideration for extending the repayment date, the Company issued to the note holder 100,000 shares of its common stock, 100,000 shares of common stock for accrued interest through execution date and provided the holder with the option to extend the payment to September 15, 2021, for which an additional 150,000 shares of common stock would be provided, if extended. The payment date was extended to September 15, 2021 at the option of the note holder in June 2021. The Company recorded the fair market value of the common stock issued of $173,000 as additional interest expense during the six months ended June 30, 2021.

NOTE 7 – STOCKHOLDER’S EQUITY

Stock-Based Compensation

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

In May 2020, the Company entered into two-year employment agreements with Matthew Gregarek, the Company’s Chairman and Chief Executive Officer, David Burcham, the Company’s President, and Daniel Garza, the Company’s Chief Marketing Officer. Among various other salary and bonus terms, the agreements also provide for the award of shares of the Company’s restricted common stock and options to purchase shares of the Company’s common stock. Under these agreements, a total of 6,300,000 fully vested shares of common stock were granted upon execution of the agreements. An additional 1,300,000 shares of common stock were awarded with a vesting date of April 1, 2021, 900,000 of which have vested. The agreements also provide for the future grant of 1,300,000 additional shares of common stock should the individuals remain employed following the April 1, 2021 expiration date, 400,000 of which have been cancelled and will not be subject to issuance. For the six months ended June 30, 2021, the Company recorded $20,664 as stock-based compensation. The remaining expense outstanding is $58,364 for which will be recorded through 2022.

During the year ended December 31, 2020, the Company entered into agreements with consultants for which provided investor awareness, research materials and other services. During the three months ended March 31, 2021, 80,000 shares of common stock were returned to the Company and cancelled. The Company recorded a reduction to stock-based compensation of $34,400 during the six months ended June 30, 2021.

On April 5, 2021 the Company issued 250,000 shares to a third party for assignment of intellectual property, including patents and patent applications, agreed to on January 26, 2021. The common stock was valued at $128,750 for which is being amortized over the term of the licensing agreement.

Options

In May 2020, effective April 1, 2020, the individuals noted above were also granted a total of 5,750,000 options to purchase shares of the Company’s common stock. These options vested in tranches at various dates through May 1, 2021 with escalating exercise prices ranging from $0.50 to $7.50 and are exercisable for approximately five 5 years. These options were valued at $1,056,695 using a Black-Scholes Options Pricing Model.

The fair value of the options granted in 2020 are estimated using a Black-Scholes Options Pricing Model with the following assumptions:

In 2021, the Company granted options to purchase 9,647,500 shares of common stock to employees and consultants. Some of the grants had effective dates within the 2020 calendar year. These options will vest in tranches at various points through 2023 with escalating prices ranging from $0.05 to $7.50 and are exercisable through various points through 2023.

These options were valued at $2,287,556 using a Black-Scholes Options Pricing Model. For the six months ended June 30, 2021, the Company recorded $1,591,819 as stock-based compensation. The remaining expense outstanding is $698,737 for which will be recorded through 2024.

The fair value of the options granted in 2021 are 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 shares of common stock at a purchase price of $0.50 per share. In addition, for each share purchased the investor received a warrant to purchase one additional share of common stock at a price of $2.00 per share. The warrants expire on December 31, 2021, or sooner at the Company’s option, if the Company’s stock trades for a price of $3.00 per share for 10 days with an average volume of 100,000 shares per day. During the year ended December 31, 2020, the Company received $150,000 related to the sale of 300,000 shares of common stock and warrants.

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.

Between December 28 and December 30, 2020, the Company received $100,000 related to the sale of 200,000 shares of common stock and warrants.

During the six months ended June 30, 2021, the Company received $543,000 related to the sale of 1,394,404 shares of common stock.

Offering of Preferred Stock

In March 2021, the Company commenced and subsequently closed a private offering of its preferred stock for up to $2 million in proceeds. The offering consisted of 20,000 shares of preferred stock at a price of $100 per share. The purchaser of the preferred stock has agreed to purchase the preferred stock in three tranches provided certain sales milestones are met. Concurrently with each issuance of preferred stock, the Company shall issue the preferred stockholder 500,000 warrants to purchase the Company’s common stock at a price of $0.75 per share. Preferred stockholders are entitled to a 10% dividend paid in additional shares of preferred stock on a quarterly basis and will receive dividend and liquidation preferences over the Company’s common stockholders. During the six months ended June 30, 2021, the Company received $660,000 related to the sale of 6,660 shares of preferred stock. In connection with the sale, the Company issued the holder warrants to purchase 500,000 shares of the Company’s common stock at $0.75 per share for a period of four years. The Company valued the warrants at $148,400 using the Black-Scholes pricing model for which a discount of $121,158 using the relative fair market value was recorded preferred stock and the offset to additional paid-in capital. In addition, the holders of the preferred stock receive dividends at a rate of 10% per annum. As of June 30, 2021, the Company recorded accrued dividends of $8,680 as an increase to accrued liabilities and an offset to additional paid-in capital. Each share of preferred stock is convertible into 200 shares of common stock.

Common Stock and Warrants Issued with Notes Payable

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

NOTE 8 – RELATED PARTY TRANSACTIONS

See Note 7 for shares and options issued to management under employment contracts. In connection with the employment contracts, the Company accrued total deferred salaries and bonuses of $531,823 and $225,000 as of June 30, 2021, respectively.

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