Notes
to Financial Statements
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Grapefruit
USA, Inc (“we”, “our”, “us”, “GBI”, “Grapefruit”, or “the Company”)
was formed as a California corporation on August 28, 2017 and began operating in September 2017.
On
July 10, 2019, Grapefruit closed the Share Exchange after the completion of all conditions subsequent contemplated by the Share Exchange
Agreement among the parties thereto ( “SEA”), by which Imaging3, Inc. (“IGNG”) was acquired in a reverse acquisition
(the “Acquisition”) by the former shareholders of Grapefruit, the accounting acquirer. Under the terms of the SEA executed
on May 31, 2019, IGNG became obligated to issue to Grapefruit’s existing shareholders that number of newly issued restricted IGNG
common shares such that the former Grapefruit shareholders (now new IGNG shareholders) will own approximately 81% of the post-Acquisition
IGNG common shares and the current IGNG shareholders will retain 19% of the post-Acquisition IGNG common shares. At the time of the execution
of the SEA, IGNG had approximately 85,218,249 outstanding shares of common stock. Therefore, IGNG issued to Grapefruit’s shareholders
362,979,114 IGNG common shares to Grapefruit’s current shareholder on a pro rata basis with their then-current ownership of Grapefruit
of which Bradley Yourist and Daniel J. Yourist own a combined 72.26%, or approximately 259,967,136 shares. Accordingly, the financial
statements are prepared using the acquisition method of accounting with GBI as the accounting acquirer and IGNG treated as the legal
acquirer and accounting acquiree. Because Imaging3, Inc. did not meet the accounting definition of an operating business, having only
nominal assets, the reverse merger transaction was treated as a recapitalization and no goodwill was recognized.
The
Company has applied for and received our provisional distribution renewal licensure which allows us to operate through June 14, 2022.
Our annual manufacturing license has been renewed by the California Department of Health. Grapefruit has not yet applied for a license
to cultivate and will not until construction has begun on our cultivation facility. We own two acres of fully entitled cannabis real
property located in the Coachillin’ Industrial Cultivation and Ancillary Canna-Business Park. The location within Coachillin’
allows the Company to apply for and hold every cannabis license available under the California Cannabis laws.
We
intend to buildout out the real property into a distribution, manufacturing and high-tech cultivation facility to facilitate our goal
to become a seed to sale, fully vertically integrated Cannabis and CBD product Company. Grapefruit’s plans include an indoor 22,000
square foot multi-tiered canopy and adjoining tissue culture rooms.
We
became members of the Indian Canyon and 18th Property Association on September 19, 2017 and have an ownership interest of 1.46% based
upon the gross parcel square foot of our property located in an approximately 5.3 million square foot facility. As of December
31, 2021, the common areas continue to be built throughout the entire canna-business park and are not complete.
In August 2021, the Company entered into a
Stock Purchase Agreement acquiring the majority ownership and control of Summit Boys, Inc., a very well-known and established cannabis
extraction brand with product lines in retail stores throughout the State of California. The Company plans on continuing the business
without interruption and plans on licensing the Summit Boys brand in the State of Oklahoma under that State’s newly enacted legalized
statutory scheme for cannabis products. This non-significant and non-operating subsidiary has been consolidated with Grapefruit’s
financial statements. As consideration, the Company issued 4,545,455 shares of common stock for 51% ownership of Summit Boys, Inc.
2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S.
GAAP”).
The
audited financial statements as of December 31, 2021 and December 31, 2020, and for the year ended December 31, 2021 and December 31,
2020, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information
on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the
periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for
any future period. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore,
these financial statements should be read in conjunction with the Company’s audited financial statements and notes filed with the
SEC for the year ended December 31, 2020.
Use
of Estimates – The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates,
assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
as of the date of our financial statements and the reported amounts of revenues and expenses during the periods presented.
We
make our estimate of the ultimate outcome for these items based on historical trends and other information available when our financial
statements are prepared. We recognize changes in estimates in accordance with the accounting rules for the estimate, which is typically
in the period when new information becomes available. We believe that our significant estimates, assumptions and judgments are reasonable,
based upon information available at the time they were made. Our actual results could differ from these estimates, making it possible
that a change in these estimates could occur in the near term. The company’s most significant estimates related to useful life
for depreciation, the value of long-lived assets and related impairment, and provision for income taxes of property and equipment.
Inventory
– Inventory is comprised of raw material, work in process and finished goods. The following sets forth selected items from
our inventory for the years ended December 31, 2021 and 2020:
SCHEDULE OF INVENTORY
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Raw material | |
$ | 84,951 | | |
$ | 16,892 | |
| Work in process | |
| - | | |
| 23,566 | |
| Finished goods | |
| 304,331 | | |
| 461,657 | |
| Total inventory | |
$ | 389,282 | | |
$ | 502,115 | |
We
periodically review the value of our inventory and provide a write-down of inventory based on our assessment of the market conditions.
Any write-down is charged to cost of goods sold.
Property,
Plant and Equipment, net – Our property and equipment are recorded at cost. Assets held under capital leases are capitalized
at the commencement of the lease at the lower of the present value of minimum lease payments at the inception of the lease or fair value.
Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over estimated useful lives
of four to seven years, and amortization is computed using the straight-line method over the life of the applicable lease. At the time
of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from our accounts and
any resulting gain or loss is reflected in our consolidated statements of operations.
Land
Improvements – Our land improvements are recorded at cost provided by our property association. These costs will continue
to be capitalized until construction has been completed. Land improvements will not be depreciated after the construction has been completed
by the property association.
Long-Lived
Assets Impairment Assessment – Our long-lived assets are subject to an impairment test if there is an indicator of impairment.
The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect
to generate from their use. If our expectations of future results and cash flows are significantly diminished, other long-lived assets
may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other
long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted
cash flow method or realizable value to determine whether an impairment exists, and then measure the impairment using discounted cash
flows.
Revenue
Recognition – The Company derives revenues from the sale of product in accordance to ASC Topic 606. Revenues are recognized
when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company
expects to be entitled to in exchange for transferring those goods or services.
Revenue
is recognized based on the following five step model:
| |
- |
Identification of the contract
with a customer |
| |
- |
Identification of the performance
obligations in the contract |
| |
- |
Determination of the transaction
price |
| |
- |
Allocation of the transaction
price to the performance obligations in the contract |
| |
- |
Recognition of revenue
when, or as, the Company satisfies a performance obligation |
Performance
Obligations
Sales
of products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial
substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance
obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives
and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred
and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of
ownership of the product has transferred to the customer. For contracts with multiple performance obligations, the Company allocates
the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of
the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone
selling price for separate performance obligations or a cost-plus margin approach when one is not available. Historically the Company’s
contracts have not had multiple performance obligations. The large majority of the Company’s performance obligations are recognized
at a point in time related to the sale of products.
Cost
of Goods Sold – Our cost of goods sold includes the costs directly attributable to revenue recognized and includes expenses
related to the production, packaging and labelling of cannabis products; personnel-related costs, fees for third-party services, such
as testing and transportation costs related to our distribution services.
Basic
and Diluted Net Income Per Share – Basic net income per share is based upon the weighted average number of common shares
outstanding. Diluted net income per share assumes that all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at
the average market price during the period.
SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Numerator: | |
| | | |
| | |
| Net income attributable
to common shareholders | |
$ | (5,504,670 | ) | |
| (4,056,996 | ) |
| Denominator: | |
| | | |
| | |
| Weighted-average number of
common shares outstanding during the period | |
| 515,339,023 | | |
| 498,230,051 | |
| Dilutive
effect of stock options, warrants, and convertible promissory notes | |
| - | | |
| - | |
| Common
stock and common stock equivalents used for diluted earnings per share | |
$ | (0.01 | ) | |
$ | (0.01 | ) |
Derivative
Financial Instruments - The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks
or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund
its business needs, including convertible notes and warrants and other instruments not indexed to our stock. The Company is required
to record its derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings in accordance
with ASC 815. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated
with warrants to purchase common stock and convertible notes.
Fair
Value of Financial Instruments – We value our financial assets and liabilities using fair value measurements. Fair value
is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable
in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy
is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels
(with Level 3 being the lowest) defined as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level
2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or
can be corroborated with observable market data.
Level
3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant
unobservable inputs.
The
carrying amount of our cash and cash equivalents approximates fair value because of the short-term nature of the instruments. The carrying
amount of our notes payable at December 31, 2021, approximates their fair values based on comparable borrowing rates available
to the company. The Company evaluated the fair market value of LVCA using Level 3 inputs. From that measurement, the Company recorded
an impairment of LVCA.
There
have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets or liabilities
for the year ended December 31, 2021.
SUMMARY OF DERIVATIVE LIABILITIES
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
| Derivative
Liabilities 2021 | |
$ | - | | |
$ | - | | |
$ | 127,392 | | |
$ | 127,392 | |
| Derivative
Liabilities 2020 | |
$ | - | | |
$ | - | | |
$ | 118,641 | | |
$ | 118,641 | |
Income
Taxes – Income tax assets and liabilities are recorded using the asset and liability method. Under the asset and liability
method, tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryovers. Future
tax assets and liabilities are measured using the enacted tax rates expected to apply when the asset is realized, or the liability settled.
The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that enactment occurs.
To the extent that we do not consider it more likely than not that a future tax asset will be recovered, we will provide a valuation
allowance against the excess.
We
follow the provisions of ASC 740, Income Taxes. Because of ASC 740, we make a comprehensive review of our portfolio of tax positions
in accordance with recognition standards established by ASC 740.
When
tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in our consolidated financial statements in the period during which, based on
all available evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely
of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken
that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated
balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
We
have created our tax provision leveraging known tax court cases involving various marijuana dispensaries and other cannabis related businesses,
including the section of the IRS Tax code of 280E. The U.S. Tax Code Section 280E is the federal statute that states that a business
engaging in the trafficking of a Schedule I or II controlled substance, which includes cannabis and cannabis related products, are barred
from taking the tax deductions or credits in their federal tax returns which are not considered as part of the business’ cost of
goods sold. Given the guidance offered by the Tax code 280E we have prepared our tax provision according to this tax code.
Interest
and penalties associated with unrecognized tax benefits, if any, are classified as interest expense and penalties and are included in
selling, general and administrative expenses in our consolidated statements of operations.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate
tax rate to 21 percent, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international
income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform
had no significant impact on our income taxes for the year ended December 31, 2021 and 2020, respectively.
Research
and Development Expenses – Research and development (“R&D”) costs are charged to expense as incurred. Our
R&D expenses include, but are not limited to, consulting service fees and materials and supplies used in the development of our proprietary
products and services.
General
and Administrative Expenses – General and administrative expenses consist primarily of personnel-related costs, fees for
professional and consulting services, travel costs, rent, bad debt expense, general corporate costs, and other costs of administration
such as human resources, finance and administrative roles.
Commitments
and Contingencies – Certain conditions may exist as of the date our financial statements are issued, which may result in
a loss, but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are
pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of the legal proceedings
or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that
a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the
nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Net
Loss Per Share – We compute net loss per share in accordance with ASC 260, Earnings per Share. Under the provisions
of ASC 260, basic net loss per share includes no dilution and is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share takes into
consideration shares of common stock outstanding (computed under basic net loss per share) and potentially dilutive securities that are
not anti-dilutive.
Cash
and Cash Equivalents – The Company considers all highly liquid investment securities with remaining maturities at the date
of purchase of three months or less to be cash equivalents. Cash equivalents may be invested in money market funds, certificates of deposit
or other interest-bearing accounts.
Concentration
of Credit Risk – Financial instruments that potentially subject us to credit risk consist of cash. We maintain our cash
with high credit quality financial institutions; at times, such balances with any one financial institution may not be insured by the
FDIC.
Accounts
Receivable and Revenue – The accounts receivable balance was $278,422
as of December 31, 2021 and $39,480
as of December 31, 2021. In 2021, 82%
of accounts receivable consisted of four customers. In 2021, the were four customers that had over 54% of the sales. In 2020, 99%
of accounts receivable consisted of one customer. In 2020, 63%
of the net revenues generated with two customers.
Recently
Issued Accounting Pronouncements – From time to time, the FASB or other standards setting bodies issue new accounting pronouncements.
Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed,
we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material
impact on our condensed consolidated financial statements upon adoption.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In
August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815–40) (“ASU No. 2020-06”). ASU No. 2020-06
simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments
and contracts on an entity’s own equity. ASU No 2020-06 is part of the FASB’s simplification initiative, which aims to reduce
unnecessary complexity in U.S. GAAP. ASU No 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods
within those fiscal years. The Company does not expect the adoption of ASU No. 2020-06 to have a material impact on its consolidated
financial statements.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers. This update requires that an acquirer recognize and measure contract assets and contract liabilities
acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. This standard will be
effective for the Company in the first quarter of 2023 and will be applied prospectively to business combinations occurring on or after
the effective date of the standard. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating
the guidance and the impact on its consolidated financial statements and related disclosures.
Recently
Issued Accounting Pronouncements Adopted
On
January 1, 2021, the Company adopted 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)
(“ASU No. 2020-01”). ASU No. 2020-01 clarifies the interaction of accounting for the transition into and out of the equity
method as well as measuring certain purchased options and forward contracts to acquire investments. The adoption of ASU No. 2020-01 did
not have an impact on the Company’s consolidated financial statements.
On
January 1, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
No. 2019-12”). ASU No. 2019-12 eliminates certain exceptions and simplifies the application of U.S. GAAP-related changes in enacted
tax laws or rates and employee stock option plans. The adoption of ASU No. 2019-12 did not have an impact on the Company’s consolidated
financial statements.
Company
performs ongoing credit evaluations of its customers and historic credit losses have been within management’s expectations. The
Company has a revenue receivables policy for service and warranty contracts. Equipment sales usually have a one-year warranty of parts
and service. After a one-year period, the Company contacts the buyer to initiate the sale of a new warranty contract for one year. Warranty
revenues are deferred and recognized on a straight-line basis over the term of the contract or as services are performed.
3.
INCOME TAXES
The
Company has generated losses before income tax of approximately $and $as of December 31, 2021 and 2020, respectively.
The company recognized a deferred tax asset of approximately $351,700
and $257,100
for the related NOL carry forward as of December
31, 2021 and 2020, respectively. The Company operates in the cannabis industry, which incurs regulatory taxes in addition to comparable
taxes of other industries.
On
December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act was enacted, which contains significant changes
to U.S. tax law and was leveraged in our tax provision process.
The
Company’s effective income tax differs from the statutory federal income tax as follows:
SUMMARY OF EFFECTIVE RECONCILIATION OF PROVISION FOR INCOME TAXES
| | |
2021 | | |
2020 | |
| | |
| | | |
| | |
| Expected federal tax expense | |
| (1,156,100 | ) | |
| (852,000 | ) |
| Increase (decrease) in income
tax resulting from: | |
| | | |
| | |
| Permanent
differences | |
| 1,215,000 | | |
| 910,000 | |
| State
and local income taxes, net of Federal benefit | |
| (384,400 | ) | |
| (283,300 | ) |
| Change
in valuation allowance | |
| 325,500 | | |
| 224,400 | |
| Current
year tax provision | |
$ | - | | |
$ | - | |
In
2021, the net operating loss led to a deferred tax asset of approximately $351,700
and a deferred tax liability of $26,200
related to property and equipment. On December
31, 2021 and 2020, based on the guidance in ASC 740-10-45-10A, we provided an allowance of $224,400
and $325,500,
respectively, related to these tax benefits given
the uncertainty of utilizing the asset.
4.
NOTES PAYABLE
In
October 2017, in connection with our purchase of two acres of fully entitled cannabis real property located in the Coachillin’
Industrial Cultivation and Ancillary Canna-Business Park, the Company issued a first and second trust deed note in the amounts of $700,000
and $200,000, respectively. The first and second trust deed notes are long-term notes and are interest only notes, at 13.0%, and mature
in August 2022, with the principal payment due at maturity. For the $700,000 loan, the monthly payment is approximately $7,500. For the
$200,000 loan, the monthly payment is approximately $2,200. The 1st and 2nd trust deeds are secured by the land as well as property owned
by two officers of the company and three other related parties. Also, each party has personally guaranteed or pledged additional collateral.
The notes include a debt discount as of December 31, 2021 of $11,700.
In
April 2018, the Company issued a note due 60 days after funding with a principal amount of $250,000 and interest totaling $125,000. As
of December 31, 2021, the note has not been repaid and was amended to add an interest rate of 10% of the total balance due, which
is included in our current liabilities. The note is past due. Two officers of the Company have personally guaranteed the loan.
In
2021, the Company issued another note of $6,000 to cover operational costs. In addition, there is a balance of $27,156 on the loan for
the vehicle on which we make $689 monthly payment until July 2025.
5.
NOTES PAYABLE, RELATED PARTY PAYABLES, AND OPERATING LEASE – RELATED PARTY
Notes
payable to officers and directors as of December 31, 2021 and related party payables to officers and directors as of December 31, 2020
are due on demand and consisted of the following:
SCHEDULE OF NOTES PAYABLE TO OFFICERS AND DIRECTORS
| | |
Related
Party Notes
Payable December
31, 2021 | | |
Related
Party
Payables December
31, 2020 | |
| Payable to an
officer and director | |
$ | 528,404 | | |
$ | 82,056 | |
| Payable to an individual affiliate
of an officer and director | |
| 47,560 | | |
| 40,000 | |
| Payable
to a company affiliate to an officer and director | |
| 126,617 | | |
| 366,377 | |
| | |
$ | 702,581 | | |
$ | 488,433 | |
Related
party notes payable bear interest at 10%.
A
related party leased two eco-pods in April 2019 and May 2019, which are refurbished shipping containers, located on this specific parcel
within Coachillin’. The lease is treated as an operating lease and payment responsibility is ultimately the responsibility of the
related party. The Company assumed these lease payment obligations in May 2019. The monthly payments are $1,055 and $880, for the duration
of the lease terms of four and five years, respectively.
6.
LEGAL SETTLEMENTS
As
of December 31, 2021, legal settlements consist of a $58,826 balance and $482,871 balance bearing interest at 10% and 6%, respectively.
(Note 12 Commitments and contingencies).
7.
CONVERTIBLE NOTES PAYABLE
Amortization
of note discounts, which is included in interest expense, amounted to $922,902 during the year ended December 31, 2021 and $1,425,234
for the year ended December 31, 2020.
Grapefruit
acquired convertible notes in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) On May 31, 2019, the Company executed
the SPA with Auctus pursuant to the terms of which the Company agreed to sell $4,000,000 of the Notes and issue $6,200,000 of callable
warrants (the “Warrants” and, together with the Notes, the “Securities”) to Auctus. Auctus is the Selling Security
Holder. In addition, on May 31, 2019, we also entered into a registration rights agreement with Auctus (the “Registration Rights
Agreement”) whereby we are obligated to file a registration statement to register the resale of the shares underlying the Securities.
On July 25, 2019 (as amended on January 17, 2020), a registration statement was filed to comply with the Registration Rights Agreement
. Pursuant to the SPA, Auctus became obligated to purchase the $4,000,000 of Notes from Grapefruit in four tranches as follows: $600,000 at the SPA closing, which was funded on June 6, 2019; the second tranche of $1,422,750 on the day IGNG filed the registration statement, which was funded on August 16, 2019; the third tranche of $1,030,000 was funded the day the SEC declares the registration statement effective and the fourth tranche of $1 million was funded 90 days after effectiveness. As of December 31, 2020, all tranches of this financing were completed. The Company has received gross proceeds of $4,052,750. The Notes have a two-year term and will bear interest at 10%.
On
April 15, 2021, the company renegotiated the debt agreement related to these notes modifying the convertible notes conversion price from
a variable rate to a fixed rate conversion price with an effective date of December 31, 2020. As a result of the agreement, the Company
recorded a noncash expense for the change in the value of derivative instruments of $40,372,883, which was simultaneously offset by a
noncash gain of $39,640,477 from the extinguishment of debt, resulting a net loss of $753,699 from the renegotiation of the debt.
On
February 26, 2021, the company issued a convertible note for $450,000. The note has an interest rate of 10% and matures in 12 months.
This note was included in the amendment making it convertible at $0.075 per share. The note is unpaid at this point.
In
addition, the Company has eleven other convertible notes comprising $296,000 outstanding and they are currently in default. The interest
on these notes varies from 5-10%. We are in the process of converting eight of the notes amounting to $241,000.
8.
GOING CONCERN
Our consolidated financial statements have been
prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course
of business for the foreseeable future. During the year ended December 31, 2021, we incurred a net loss of $5,504,670,
had a working capital deficit of $6,989,374 and had an accumulated deficit of $16,826,517 at December 31, 2021.
Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and, or, obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations as they come
due. There is no assurance that these events will be satisfactorily completed. As a result, there is doubt about our ability to continue
as a going concern for one year from the issuance date of these financial statements.
Management’s
plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities and obtaining
funds through the issuance of debt. We cannot be certain that funds from these sources will be available when needed or, if available,
will be on terms favorable to us or to our stockholders. If we raise additional funds or settle liabilities by issuing equity securities,
the percentage ownership of our stockholders may be reduced, stockholders may experience additional dilution, or such equity securities
may provide for rights, preferences and/or privileges senior to those of the holders of our common stock. Our ability to execute our
business plan and continue as a going concern may be adversely affected if we are unable to raise additional capital or operate profitably.
On
July 10, 2019, Grapefruit USA, Inc. and Imaging3, Inc. (“IGNG”) closed a Share Exchange after the completion of all conditions
subsequent contemplated by the Share Exchange Agreement among the parties thereto (the “SEA”), by which IGNG was acquired
in a reverse acquisition (the “Acquisition”) by the former shareholders of Grapefruit Boulevard Investments, Inc (“Grapefruit).
Under the terms of the SEA executed on May 31, 2019 IGNG became obligated to issue to Grapefruit’s existing shareholders that number
of newly issued restricted IGNG common shares such that the former Grapefruit shareholders (now new IGNG shareholders) own approximately
81% of the post-Acquisition IGNG common shares and the current IGNG shareholders retain approximately 19% of the post-Acquisition IGNG
common shares.
In
connection with and dependent upon the successful consummation of the above transaction, on May 31, 2019, the Company executed the SPA
with Auctus pursuant to the terms of which the Company agreed to sell $4,000,000 of the Notes and issue $6,200,000 of callable warrants
(the “Warrants” and, together with the Notes, the “Securities”) to Auctus. Auctus is the Selling Security Holder.
In addition, on May 31, 2019, we also entered into a registration rights agreement with Auctus (the “Registration Rights Agreement”)
whereby we are obligated to file a registration statement to register the resale of the shares underlying the Securities. On July 25,
2019 (as amended on January 17, 2020), a registration statement was filed to comply with the Registration Rights Agreement . Pursuant to the SPA, Auctus became obligated to purchase the $4,000,000 of Notes from Grapefruit in four tranches as follows: $600,000 at the SPA closing, which was funded on June 6, 2019; the second tranche of $1,422,750 on the day IGNG filed the registration statement, which was funded on August 16, 2019; the third tranche of $1,030,000 was funded the day the SEC declares the registration statement effective and the fourth tranche of $1 million was funded 90 days after effectiveness. As of December 31, 2020, all tranches of this financing
were completed. The Company has received gross proceeds of $4,052,750.
In the first quarter of 2021, Auctus exercised
2,000,000 warrants at $.125 in relation to the “SPA.” In addition, the company issued a $450,000 convertible
to Auctus bearing 12% interest and 1-year maturity date. Principal payments shall be made in six (6) installments each in the amount
of $75,000 commencing one hundred and eighty (180) days following the Issue Date and continuing thereafter each thirty (30) days
for six (6) months. Notwithstanding the forgoing, the final payment of Principal and Interest shall be due on the Maturity Date.
The conversion price is $0.75.
9.
STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 1,000,000 shares of $0.0001 par value preferred stock. As of December 31, 2021, and 2020, there are no shares
of preferred stock outstanding.
Common
Stock
The
Company is authorized to issue 1,000,000,000 shares of $0.0001 par value common stock.
During
the year ended December 31, 2021 the Company issued a total of 8,849,937 shares
for services rendered valued at $352,644; 11,710,465 shares
were issued related debt settlement with related parties valued at $1,191,234;
9,004,086 shares were issued related to legal settlement valued at 1,113,260; 13,352,264 shares
were issued related to the conversion of convertible notes valued at $996,620; 2,000,000 shares
were issued for a stock purchase valued at $0.075 per
share; 2,000,000 shares
were issued for warrant exercised at $0.125 per
share; and 4,545,455 shares
were issued for the Summit Boys acquisition (Note – 14 Investments) valued at $250,000.
During
the year ended December 31, 2020 a total of 1,150,000
shares were issued for services rendered valued at $
288,032; 915,795
shares were issued upon receiving a loan valued at $44,874; 9,100,380
shares were issued to settle $80,754
debt of a note and accrued interest resulting in a loss of $5,225;
and 7,213,933
shares were issued related to for a settlement valued at $566,294.
In 2021, 1,000,000
shares were issued for a licensing agreement valued at $38,700
put into effect in 2020.
As
of December 31, 2021, there were approximately 608 record holders of our common stock, not including shares held in “street name”
in brokerage accounts which is unknown. As of December 31, 2021, there were 559,512,622 shares of our common stock outstanding on record.
Stock
Option Plan
During
2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 1,811,401 shares
of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.
Stock
Options
As
of September 30, 2021, employees of the Company hold options to purchase 250,000
shares of common stock granted in 2016 at an
exercise price of $1.00.
On March 28, 2021, the Company granted a board member an option to purchase 750,000
shares of common stock at $0.025.
There are six month vesting periods for a block of 250,000
shares starting October 1, 2021. Options were
valued at fair value using the Binomial Tree method and has been expensed over the life of the option. For the year ended December 31,
2021, the company has $80,744 in stop option expense.
SCHEDULE OF STOCK OPTIONS ACTIVITY
| Transactions
in FY 2021 | |
Quantity | | |
Weighted- Average Exercise
Price Per
Share | | |
Weighted- Average Remaining Contractual
Life | |
| Outstanding, December 31, 2020 | |
| 250,000 | | |
$ | 1.00 | | |
| 3.57 | |
| Granted | |
| 750,000 | | |
| 0.025 | | |
| 5.25 | |
| Exercised | |
| - | | |
| | | |
| | |
| Cancelled/Forfeited | |
| - | | |
| | | |
| | |
| Outstanding, December 31, 2021 | |
| 1,000,000 | | |
$ | 0.27 | | |
| 4.83 | |
| Exercisable, December 31, 2021 | |
| 500,000 | | |
$ | 0.51 | | |
| 4.16 | |
The
weighted average remaining contractual life of options outstanding issued under the Plan was 4.16 years at December 31, 2021.
10.
WARRANTS
Following
is a summary of warrants outstanding at December 31, 2021:
SUMMARY OF WARRANTS OUTSTANDING
Number
of Warrants | | |
Exercise Price | | |
Expiration
Date |
| | 37,500 | | |
$ | 0.10 | | |
April 2022 |
| | 500,00 | | |
$ | 0.10 | | |
August 2022 |
| | 575,000 | | |
$ | 0.10 | | |
April 2023 |
| | 125,000 | | |
$ | 0.10 | | |
May 2023 |
| | 162,500 | | |
$ | 0.10 | | |
August 2023 |
| | 2,800,000 | | |
$ | 0.40 | | |
May 2022 |
| | 302,776 | | |
$ | 0.10 | | |
January 2024 |
| | 12,000,000 | | |
$ | 0.10 | | |
March 2021 |
| | 2,160,000 | | |
$ | 0.10 | | |
June 2021 |
| | 16,000,000 | | |
$ | 0.125 | | |
May 2021 |
| | 15,000,000 | | |
$ | 0.15 | | |
May 2021 |
| | 8,000,000 | | |
$ | 0.25 | | |
May 2021 |
Grapefruit
acquired warrants to issue common stock upon exercise in its acquisition of Imaging3, Inc. on July 10, 2019. As part of the SPA, the
Company also issued 16,000,000 warrants to purchase 16,000,000 shares of the Company’s common stock at an exercise price of $0.125
per share, 15,000,000 warrants to purchase 15,000,000 shares of the Company’s common stock at an exercise price of $0.15 per share,
8,000,000 warrants to purchase 8,000,000 shares of the Company’s common stock at an exercise price of $0.25 (collectively, the
“Warrants”) per share for a period of two year from the date of issuance. The Warrants are “cash only” and are
callable if Grapefruit stock trades on the OTCQB at 200% or more of a given exercise price for 5 consecutive days.
In
the first quarter of 2021, Auctus exercised 2,000,000 warrants at $.125 in relation to the SPA. On April 15, 2021, the Company restructured
a large majority of their convertible notes, and as part of the agreement an additional 20,000,000 warrants were issued with an exercise
price of $0.075 per share. In relation to these 20,000,000 warrants, the holder may elect to receive warrant shares pursuant to a cashless
exercise, in lieu of a cash exercise, equal to the value of this warrant.
11.
DERIVATIVE LIABILITIES
Grapefruit
recorded derivative instruments in its acquisition of Imaging3, Inc. on July 10, 2019. The Company’s only asset
or liability measured at fair value on a recurring basis was its derivative liability associated with related warrants to purchase common
stock and the conversion features embedded in convertible promissory notes.
In
connection with financing transactions, the Company issued warrants to purchase common stock and convertible promissory notes. These
instruments included provisions that could result in a reduced exercise price based on specified full-ratchet anti-dilution provisions.
The “reset” provisions were triggered in the event the Company subsequently issued common stock, stock warrants, stock options
or convertible debt with a stock price, exercise price or conversion price lower than contractually specified amounts. Upon triggering
the “reset” provisions, the exercise / conversion price of the instrument will be reduced. Accordingly, pursuant to ASC 815,
these instruments were not considered to be solely indexed to the Company’s own stock and were not afforded equity treatment.
On
April 15, 2021, the company renegotiated conversion terms on $4,502,750 of convertible notes with Auctus. All variable conversion prices
were replaced with a fixed conversion price of $0.075. In addition, the Company issued an additional 20,000,000 warrants with an exercise
price of $0.075 per share.
The
following table summarizes activity in the Company’s derivative liability during the year ended December 31, 2021:
SUMMARY OF DERIVATIVE LIABILITY
| | |
| | |
| 12-31-2020
Balance | |
$ | 118,641 | |
| Creation | |
| - | |
| Reclassification of equity | |
| - | |
| Settlement of debt | |
| - | |
| Change
in Value | |
| 8,751 | |
| 12-31-2021
Balance | |
$ | 127,392 | |
The
Company classifies the fair value of these derivative liabilities under level 3 of the fair value hierarchy of financial instruments.
The fair value of the derivative liability was calculated using a Black Scholes model. The Company’s stock price and estimates
of volatility are the most sensitive inputs in validation of assets and liabilities at fair value. The liabilities were measured using
the following assumptions:
SCHEDULE OF ASSUMPTIONS USED
| Term | |
0.01 years -5.0
years | |
| Dividend Yield | |
| 0 | % |
| Risk-free rate | |
| 2.33%
- 2.49 | % |
| Volatility | |
| 65-220 | % |
12.
COMMITMENTS AND CONTINGENCIES
Alpha
Capital Anstalt and Brio Capital Master Fund, LTD
On
September 13, 2017, Alpha Capital Anstalt and Brio Capital Master Fund, LTD, two minority members of a group of investors in the Company
(the “Plaintiff”) filed a lawsuit seeking damages and injunctive relief in the United States District Court for the Southern
District of New York claiming that the Company breached certain Note and Warrant agreements among the parties to the action. The holders
of the majority of the investment involved in the above lawsuit chose not to join in the lawsuit and have informed the Company that they
believe the lawsuit to be baseless. On November 21, 2017, the Court denied the Plaintiff’s request for injunctive relief against
the Company. As a result, the case essentially became an action for money damages against the Company, which the Company believed to
be without merit and defended vigorously. However, on July 27, 2018 United States District Court for the Southern District of New York
granted the plaintiffs motion for summary judgement, awarding them approximately $1.4 million dollars. On April 15, 2019 the Company
executed a settlement agreement (the “Settlement Agreement”) with the defendants to settle the matter by agreeing to pay
the defendants an aggregate of $200,000 and issuing them an aggregate of 7,705,698 of the Company’s common shares (subject to certain
possible adjustments to the amount of shares to be issued to the Defendants by the Company). The Company paid this $200,000 to the defendants
and issued the 7,705,698 shares to the defendants in the fourth quarter of 2019. Subsequently, the defendant’s claimed the aforementioned
share adjustment had been triggered and made a demand that the Company issue additional shares pursuant to the terms of the Settlement.
In April 2021, the Company issued an additional aggregate of 2,822,654 shares the Company’s stock to these defendants in final
settlement of the dispute.
Administrative
Claim of Greenberg Glusker Fields Claman & Machtinger LLP
The
Company came to a settlement agreement with Greenberg Glusker Fields Claman & Machtinger LLP (“Greenberg”). The full
debt of $1,117,547 bearing on interest of 6% is to be repaid. Three $68,000 payments are to be made in relation to the timing of the
three tranches mentioned in “Auctus Financing” or before November 30, 2019. As of now, $68,000 has been paid. In addition,
7,628,567 shares are to be issued as part of the settlement agreement—7,213,933 of the shares were issued as of December 31, 2020.
The settlement includes a make-whole provision in which additional shares are to be issued if the above mentions shares do not repay
the debt in full. In 2021, 4,520,865 shares have been issued as part of the make-whole provision. We anticipate issuing additional shares
in 2022.
Galileo
Surgery Center LP/Cypress Ambulatory Surgery Center LP vs Imaging3, Inc. Settlement
The
Company came to a settlement with Galileo Surgery Center LP/Cypress Ambulatory Surgery Center LP (“Galileo”) for $75,572
with an interest rate of 10%, requiring payments of $7,300 per month beginning in August 2021 until paid in full.
13.
INVESTMENTS
Investment
in Hemp
In
September 2019, the Company invested in hemp product that was purchased and stored by a third party. The Company expects to sell the
product by the beginning of next year. Due to the increased harvests, the salability of the product decreased, necessitating the markdown
this year.
14.
SEGMENT INFORMATION
Accounting
Standards Codification subtopic Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding
operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial
reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available
for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess
performance. At this time, Grapefruit does not have any reportable segments.
15.
SUBSEQUENT
EVENTS
On
March 8, 2022, Grapefruit USA, Inc. was contacted by an attorney about outstanding litigation with Mentor Group, Inc. against Imagaing3,
Inc. Judgement against Imaging3 now falls to Grapefruit in the amount of $36,462.