NOTES PAYABLE

9 Months Ended

Sep. 30, 2021

NOTE 6 –NOTES PAYABLE

Convertible Note 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 nine months ended September 30, 2021. As of September 30, 2021, the balance due on the convertible notes was $1,300,000, net a discount of $21,060 recorded within convertible notes payable.

In addition, the 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 nine months ended September 30, 2021 and 2020, the Company amortized $28,152 and $13,376, respectively, to interest expense. Due to the modification below, whereby the remaining discount was extinguished, as of September 30, 2021, no discount remained. 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.

On August 31, 2021, the Company and the note holder agreed to settle the balance due under the convertible notes. The Company agreed to make a cash payment to the note holder of $1,000,000 on or before January 4, 2022 and the note holder has the option to elect to receive 2,000,000 shares of the Company’s restricted common stock in lieu of the $1,000,000 cash payment. Additionally, the Company issued the note holder 2,000,000 shares of common stock and 6,000,000 warrants to purchase the Company’s common stock which expire August 31, 2025. The common stock issued to the note holder is convertible to the Company’s preferred stock, at the note holder’s option, should the Company issue a new class of Preferred Stock. The Company accounted for the transaction as an extinguishment of the convertible note whereby the transaction was recorded as its fair market value. In connection with the extinguishment, the Company recorded additional interest expense of $940,000 related to the fair market value of the common stock issued and $1,665,000 related to the fair market value of the warrants. The fair value of the warrants granted was estimated using a Black-Scholes Options Pricing Model with the following assumptions:

Schedule of fair value warrants granted Black-Scholes Options
Exercise price per share	$	0.25 - $2.00
Expected life (years)		4.00
Risk-free interest rate		0.64	%
Expected volatility		107	%

Convertible Note Payable – Up to $4,000,000

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. The borrowings have a variety of financial and non-financial covenants for which the Company is in compliance with as of the filing date. 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 September 30, 2021, the principal balance due on the convertible notes was $2,450,000, and accrued interest of $158,750, net a discount of $1,650,045 recorded within long-term convertible notes payable.

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 September 30, 2021, the principal balance due on the convertible note was $500,000 and recorded within convertible notes payable.

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.

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. In June 2021, the payment date was extended to September 15, 2021.

Effective September 15, 2021, the holder of the note agreed to extend the due date for the note to October 31, 2021. In consideration for extending the repayment date, the Company issued to the note holder 100,000 shares of its common stock and provided the holder with the option to extend the payment to January 31, 2022, for which an additional 100,000 shares of common stock would be provided, if extended. If the balance of the Note is unpaid on October 31, 2021, the note shall bear interest at a rate of 18% per annum beginning November 1, 2021.

The Company recorded the fair market value of the common stock issued in connection with the above issuances of $233,500 as additional interest expense during the nine months ended September 30, 2021.

Convertible Notes - $400,000

On July 15, 2021, the Company borrowed a total of $400,000 from two third parties. The loans are evidenced by two convertible promissory notes which bear total interest of $30,000, are convertible at $0.40 per share, and mature on August 20, 2021. In addition, the holders received a total of 76,500 shares of common stock. The Company recorded the value of the common stock issued and a beneficial conversion feature resulting in a $263,000 discount to the convertible promissory notes. The Company amortized the entire discount to interest expense during the nine months ended September 30, 2021. See Note 9 for subsequent events related to the transaction.

Convertible Note Payable - $400,000

On August 26, 2021, the Company completed the sale of a Promissory Note in the principal amount of $400,000 (the “Note”) to a third party for a purchase price of $376,000. After payment of the legal fees and finder’s fees and closing cost, the sale of the Note resulted in $358,000 in net proceeds to the Company. The Note matures on February 25, 2022, bears interest at a rate of 5% per annum for the first three months and 10% per annum thereafter, and, following an event of default only, is convertible into shares of the Company’s common stock at a conversion price equal to the lesser of 90% of the lowest trading price during (i) the 10 trading day period preceding the issuance date of the note, or (ii) the 20 trading day period preceding date of conversion of the Note. The borrowings have a variety of financial and non-financial covenants for which the Company is in compliance with as of the filing date.

Due to the variable conversion price, the Company recorded a derivative liability of $134,485 upon issuance. The derivative liability was valued using similar inputs to those disclosed below. In addition, the holder received 440,000 shares of common stock valued at $202,400 and an on issuance discount of $24,000. These items resulted in a discount of $360,885 being recorded against the Note. During the nine months ended September 30, 2021, the Company amortized $70,608 of the discount to interest expense. As of September 30, 2021, a discount of $290,277 remained which is being amortized using the straight-line method over the remaining term.

Derivative Liabilities

The derivative liabilities are valued on the date the borrowings become convertible and revalued at each reporting period. During the nine months ended September 30, 2021, the Company revalued the fair market value of the derivative liabilities at $1,583,894 resulting in a gain of $470,367. The valuation of the derivative liabilities was based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.35 our stock price on the date of revalue of $0.33, expected dividend yield of 0%, expected volatility of 108.00%, risk free interest rate of 0.01% and expected term of 0.96 years.

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 and recorded as interest expense during nine months ended September 30, 2021. As of September 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 SKM acquisition, the Company assumed four notes payable totaling $275,756 with the former member. The notes are being paid by the Company according to the original terms between the note holders and SKM.

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 are being paid by the Company according to the original terms between the note holders and SKM.

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:

	●	$500,000, together with all accrued and unpaid interest, on April 13, 2020
	●	$1,000,000, together with all accrued and unpaid interest, on May 6, 2020

Accrued interest will be paid in shares of the Company’s common stock based upon a 25% discount to the ten-day average closing price of the Company’s common stock immediately prior to May 6, 2020. Accrued interest will include 150,000 additional shares of the Company’s common stock and warrants to purchase 150,000 shares of the Company’s common stock. The warrants are exercisable at any time on or before January 1, 2025 at a price of $2.00 per share. The first payment of $500,000 was made on a timely basis.

On 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 nine months ended September 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 year 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. As further consideration, the Company issued 100,000 shares of its restricted common stock to the lender. The note was repaid in full. 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. On September 30, 2021, the Company determined to terminate the note and began discussions with the note holder to affect the termination of the note. See Note 9 for subsequent events related to the transaction.

Note Payable – Up to $156,000

On July 26, 2021, the Company, through a subsidiary, obtained a line of credit for its cannabis operations in an amount up to $156,000 which is formalized in a Business Loan and Security Agreement. The line of credit is secured by invoices and accounts receivable and incurs interest at escalating rates based on the time of repayment. The borrowings have a variety of financial and non-financial covenants for which the Company is in compliance with as of the filing date. As of September 30, 2021, the Company’s subsidiary had not drawn on the line of credit.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References

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+ Details

Pure Harvest Corporate Group, Inc. 10-Q