UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
Quarterly Period Ended
or
For the Transition period from ______________to ______________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of exchange on which registered | ||
| OTCQB |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| No ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes ☐ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
As of November 5, 2021, the number of shares outstanding of the registrant’s class of common stock was .
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, plans and objectives of management and markets for our common stock are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our most recent Annual Report on Form 10-K and any updates described in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”). You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to the reports we file with the SEC, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAPEFRUIT USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Licensee agreement | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating right of use - assets | ||||||||
| Investment in hemp | ||||||||
| Goodwill | - | |||||||
| Other | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Notes payable | $ | $ | ||||||
| Accrued loan interest | ||||||||
| Related party payable | ||||||||
| Legal settlements - current portion | ||||||||
| Subscription payable | ||||||||
| Derivative liability | ||||||||
| Capital lease - current portion | ||||||||
| Operating right of use - liability - current portion | ||||||||
| Convertible notes - current portion | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Legal settlements - long-term | - | |||||||
| Capital lease | ||||||||
| Operating right of use - liability | - | |||||||
| Long-term notes payable, net | ||||||||
| Long-term convertible notes, net of discount | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Common stock ($ par value, shares authorized; and shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively) | ||||||||
| Preferred stock ($ par value, shares authorized; shares issued and outstanding as of September 30, 2021 and December 31, 2020) | - | - | ||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | |||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | - | |||||
| Total deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLERS' DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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GRAPEFRUIT USA, INC.
CONDENSED CONSOLIDTED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales | ||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||
| Stock option expense | - | - | ||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in value of derivative instruments | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on extinguishment of debt | - | ( | ) | |||||||||||||
| Gain (loss) on extinguishment of debt - related parties | - | - | ( | ) | - | |||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Tax provision | - | - | - | - | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss attributable to noncontrolling interest | ( | ) | - | ( | ) | - | ||||||||||
| Net (loss) income attributable to Grapefruit USA, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share - Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common stock outstanding - Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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GRAPEFRUIT USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | - | |||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount | - | |||||||
| Change in value of derivative | ( | ) | ||||||
| Stock-based compensation for services | ||||||||
| Stock option expense | - | |||||||
| Loss on extinguishment of debt | ||||||||
| Non-cash interest | - | ( | ) | |||||
| Loss on extinguishment of debt - related parties | - | |||||||
| Changes in operation assets and liabilities: | ||||||||
| Accounts Receivables | ( | ) | - | |||||
| Inventory | ( | ) | ||||||
| Prepaid expense and current assets | ( | ) | - | |||||
| Investment in hemp | - | |||||||
| Right-of-use assets | - | |||||||
| Accounts payable | ( | ) | ||||||
| Other | - | ( | ) | |||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued loan interest expense | ||||||||
| Right-of-use liability | ( | ) | ( | ) | ||||
| Net cash (used for)/provided by used for operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net cash received from acquisition | - | |||||||
| Purchase of land and equipment | ( | ) | ( | ) | ||||
| Net cash used for investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Principal repayment of capital lease liability | ( | ) | ( | ) | ||||
| Repayment of legal liability | ( | ) | - | |||||
| Proceeds from convertible notes, net | ||||||||
| Proceeds from (repayment of) loans, net | - | |||||||
| Repayment of loan principal | ( | ) | - | |||||
| Proceeds from related parties | - | |||||||
| Contributions from non-controlling interest | - | |||||||
| Proceeds from exercise of warrants | - | |||||||
| Proceeds from sale of common stock | - | |||||||
| Net cash proceeds from financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ( | ) | ||||
| CASH, BEGINNING BALANCE | ||||||||
| CASH, ENDING BALANCE | $ | $ | ||||||
| SUPLEMENTAL DISCLOSURE ON CASH FINANCING ACTIVITY | ||||||||
| Cash paid for interest expense | ||||||||
| SUPLEMENTAL DISCLOSURE ON NON-CASH FINANCING ACTIVITY | ||||||||
| Shares issued for legal settlement | - | |||||||
| Shares issued for conversion of notes payable | ||||||||
| Shares issued for debt settlement with related parties | - | |||||||
| Shares issued for compensation | - | |||||||
| Shares issued for settlement of debt | - | |||||||
| Shares issued for acquisition | - | |||||||
| Reclassification of derivative liabilities to APIC | - | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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GRAPEFRUIT USA, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Unaudited)
| Deficit Attributable to Grapefruit USA, Inc. | ||||||||||||||||||||||||||||
| Common Stock | Additional | Total | Non- | |||||||||||||||||||||||||
| Number of | Paid in | Accumulated | Stockholders' | controlling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||
| Shares issued for settlement | ||||||||||||||||||||||||||||
| Shares issued with debt | ||||||||||||||||||||||||||||
| Shares issued for note conversion | ||||||||||||||||||||||||||||
| Reclassification from derivative liability | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||
| Shares issued for settlement | ||||||||||||||||||||||||||||
| Shares issued upon warrant exercise | ||||||||||||||||||||||||||||
| Shares issued for note conversion | ||||||||||||||||||||||||||||
| Shares issued for related party debt | ||||||||||||||||||||||||||||
| Stock options granted pursuant to board of director agreement | - | |||||||||||||||||||||||||||
| Shares issued for purchase of stock | ||||||||||||||||||||||||||||
| Shares issued for acquisition | ||||||||||||||||||||||||||||
| Equity investment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
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GRAPEFRUIT USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
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 % of the post-Acquisition IGNG common shares and the current IGNG shareholders will retain % of the post-Acquisition IGNG common shares. At the time of the execution of the SEA, IGNG had approximately outstanding shares of common stock. Therefore, IGNG issued to Grapefruit’s shareholders 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 %, or approximately 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
We
became members of the Indian Canyon and 18th Property Association on September 19, 2017 and have an ownership interest of
NOTE 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 unaudited financial statements as of September 30, 2021 and December 31, 2020, and for the nine months ended September 30, 2021 and September 30, 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.
Basis of Consolidation – Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
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 shares of common stock
for
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.
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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 as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Raw material | $ | $ | ||||||
| Work in process | - | |||||||
| Finished goods | ||||||||
| $ | $ | |||||||
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 to
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 |
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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.
| September 30, 2021 | December 31, 2020 | |||||||
| Numerator: | ||||||||
| Net income attributable to common shareholders | $ | ( | ) | ( | ) | |||
| Denominator: | ||||||||
| Weighted-average number of common shares outstanding during the period | ||||||||
| Dilutive effect of stock options, warrants, and convertible promissory notes | - | - | ||||||
| Common stock and common stock equivalents used for diluted earnings per share | $ | ( | ) | $ | ( | ) | ||
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.
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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, 2019, 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 nine months ended September 30, 2021 and year ended December 31, 2020.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Liabilities September 30, 2021 | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities December 31, 2020 | $ | $ | $ | $ | ||||||||||||
Items measured at fair value on a non-recurring basis
The Company’s prepaids and other current assets, long lived assets, including property and equipment, and goodwill are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
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
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.
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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
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.
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 $
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.
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Recently Issued Accounting Pronouncements Not Yet Adopted
Convertible Debt, and Derivatives and Hedging 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. ASU 2020-06 will be effective for the Company in the first quarter of 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Adopted
Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
Equity Securities, Equity-method Investments and Certain Derivatives In January 2020, the FASB issued ASU 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. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. ASU 2020-01 became effective for the Company in the first quarter of 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
NOTE 3 – 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 nine months ended September 30, 2021,
we incurred a net loss of $
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
May 31, 2019, the Company executed the Stock Purchase Agreement (“SPA”) with Auctus pursuant to the terms of which the Company
agreed to sell $
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In
the first quarter of 2021, Auctus exercised
NOTE 4 – RIGHT OF USE ASSET AND LIABILITY
We
lease capital equipment in a suitable, compliant cannabis facility located in the city of Desert Hot Springs. In addition, we entered
into this operating land lease agreement with Coachillin’ Holdings LLC on September 1, 2018 to rent approximately
The
Company entered into a
The
Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily
determinable. The Company used an estimated incremental borrowing rate of
The
Company has right-of-use assets of $
The following table provides the maturities of lease liabilities at September 30, 2021:
| Maturity of Lease Liabilities | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | - | |||
| 2024 | - | |||
| 2025 | ||||
| 2026 and thereafter | - | |||
| Total future undiscounted lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
NOTE 5 – INVENTORY
At September 30, 2021 and December 31, 2020, our inventory was, as follows:
| September 30, 2021 | December 31, 2020 | |||||||
| Raw material | $ | $ | ||||||
| Work in process | - | |||||||
| Finished goods | ||||||||
| $ | $ | |||||||
At
September 30, 2021 and December 31, 2020, finished goods included $
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.
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NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net of accumulated depreciation and amortization, at September 30, 2021 and December 31, 2020 was as follows:
September 30, 2021 | December 31, 2020 | |||||||
| Vehicle | $ | $ | ||||||
| Furniture and equipment | - | |||||||
| Extraction equipment | ||||||||
| Extraction laboratory | ||||||||
| Warehouse facility | ||||||||
| Land and land improvement/development | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant and equipment | $ | $ | ||||||
The Company acquired the extraction equipment, laboratory, and warehouse facility during 2018 and 2019 and made preparations and final testing for future production. Final preparations for certain extraction and warehouse work were completed, and these related assets were placed in service on April 1, 2019, at which time we commenced depreciating this asset.
The
amount of related depreciation expense for the nine months ended September , 2021 and 2020 is $
NOTE 7 – CAPITAL LEASE PAYABLE
Capital
lease payable consists of a capital lease agreement entered into in April 2018 to finance the purchase of various lab and manufacturing
equipment. The outstanding balance on the 48-month installment capital lease was $
In
addition, the Company entered into additional
A summary of minimum lease payments on capital lease payable for future years is as follows:
| September 30, 2021 | ||||
| Remainder 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | - | |||
| 2025 | - | |||
| Thereafter | - | |||
| Total minimum lease payments | ||||
| Less: amount representing interest | ( | ) | ||
| Capital lease liability | $ | |||
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NOTE 8 – 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 $
In
April 2018, the Company issued a note due
In September 2019, the Company issued another note of $ to an unrelated party with % interest, which was repaid in full on .
NOTE 9 – CONVERTIBLE NOTES PAYABLE
In
August 2020, shares were issued to settle $ debt of a note and accrued interest resulting in a loss of $
Amortization
of note discounts, which is included in interest expense, amounted to $
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 $
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 of $
On
February 26, 2021, the company issued a $
In
addition, the Company has eleven other convertible notes comprising $
During
the nine months ended September 30, 2021, a total of $
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NOTE 10 – NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY
Notes payable to officers and directors as of September 30, 2021 and December 31, 2020 are due on demand and consisted of the following:
| September 30, 2021 | December 31, 2020 | |||||||
| Payable to an officer and director | $ | $ | ||||||
| Payable to an individual affiliate of an officer and director | ||||||||
| Payable to a company affiliate to an officer and director | ||||||||
| $ | $ | |||||||
Notes
payables bear interest at
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 $
On
May 17, 2021, related parties converted $
NOTE 11 – EQUITY
Preferred Stock
The Company has authorized shares of $ par value preferred stock. As of September 30, 2021, and December 31, 2020, there are shares of preferred stock outstanding.
Common Stock
The Company is authorized to issue shares of $ par value common stock.
During
the nine months ended September 30, 2021 the Company issued a total of shares for services rendered valued at $
As of September 30, 2021, there were approximately 613 record holders of our common stock, not including shares held in “street name” in brokerage accounts the number of which is unknown. As of September 30, 2021, there were 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 shares
of common stock had been reserved for issuance.
Stock Options
As of September 30, 2021, employees of the Company hold options to purchase shares of common stock granted in 2016 at an exercise price of $. On March 28, 2021, the Company granted a board member an option to purchase shares of common stock at $. There are six month vesting periods for a block of shares starting October 1, 2021.
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| Transactions in FY 2021 | Quantity | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Life | |||||||||
| Outstanding, December 31, 2020 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Cancelled/Forfeited | ||||||||||||
| Outstanding, September 30, 2021 | $ | |||||||||||
| Exercisable, September 30, 2021 | $ | |||||||||||
The weighted average remaining contractual life of options outstanding issued under the agreements was years at September 30, 2021.
NOTE 12 — WARRANTS
Following is a summary of warrants outstanding at September 30, 2021:
| Number of Warrants | Exercise Price | Expiration Date | ||||||
Grapefruit recorded warrants to issue common stock upon exercise in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) As part of the SEA, the Company also issued warrants to purchase shares of the Company’s common stock at an exercise price of $ per share, warrants to purchase shares of the Company’s common stock at an exercise price of $ per share, warrants to purchase shares of the Company’s common stock at an exercise price of $ per share for a period of two year from the date of issuance.
In
addition to the Notes in connection with the SPA agreement, GPFT issued to the Investor a warrant to purchase
On
February 26, 2021,
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NOTE 13 — DERIVATIVE LIABILITIES
Grapefruit recorded derivative instruments in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) 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 $
The following table summarizes activity in the Company’s derivative liability during the nine-month period ended September 30, 2021:
| 12-31-20 Balance | $ | |||
| Creation/acquisition | ||||
| Reclassification of equity | ||||
| Change in Value | ( | ) | ||
| 6-30-21 Balance | $ |
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 Binomial Tree 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:
| Term | ||||
| Dividend Yield | % | |||
| Risk-free rate | % | |||
| Volatility | % |
NOTE 14 – 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 during this quarter.
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NOTE 15 – 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 $
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 $
Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP
The
Company came to a settlement agreement with Greenberg Glusker Fields Claman & Machtinger LLP (“Greenberg”). Three $
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements
This Form 10-Q contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about Grapefruit’s financial condition, results of operations and business. These statements include, among others, statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10-K. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Form 10-K. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important facts that could prevent us from achieving our stated goals include, but are not limited to, the following:
| (a) | volatility or decline of our stock price; | |
| (b) | potential fluctuation in quarterly results; | |
| (c) | our failure to earn revenues or profits; | |
| (d) | inadequate capital to continue the business and barriers to raising the additional capital or to obtaining the financing needed to implement our business plans; | |
| (e) | failure to make sales; | |
| (f) | changes in demand for our products and services; | |
| (g) | rapid and significant changes in markets; | |
| (h) | litigation with or legal claims and allegations by outside parties, causing us to incur substantial losses and expenses; | |
| (i) | insufficient revenues to cover operating costs; | |
| (j) | dilution in the ownership of the Company through the issuance by us of additional securities and the conversion of outstanding warrants, notes and other securities; |
We cannot assure that we will be profitable. We may not be able to develop, manage or market our products and services successfully. We may not be able to attract or retain qualified executives and technology personnel. We may not be able to obtain customers for our products or services. Our products and services may become obsolete. Government regulation may hinder our business. Additional dilution in outstanding stock ownership will be incurred due to the issuance or exercise of more shares, warrants and other convertible securities.
Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on the statements, which speak only as of the date of this Form 10-Q. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may make. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
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The following discussion should be read in conjunction with our financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.
Results of Operations for the Three Months Ended September 30, 2021 as compared to the Three Months Ended September 30, 2020.
| Three months ended | Three months ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Net revenues | $ | 153,476 | $ | 1,306,201 | ||||
| Cost of goods sold | 346,073 | 1,123,717 | ||||||
| Gross income (loss) | (192,597 | ) | 182,484 | |||||
| Sales expense | 3,800 | 67,479 | ||||||
| Stock based compensation | 25,980 | - | ||||||
| Stock option expenses | 32,877 | - | ||||||
| General and administrative expense | 352,462 | 289,767 | ||||||
| Loss from operations | (607,716 | ) | (174,762 | ) | ||||
| Change in value of derivatives | 13,877 | (7,014,164 | ) | |||||
| Interest and other income (expense) | (388,273 | ) | (500,768 | ) | ||||
| Net loss before income taxes | (982,112 | ) | (7,689,694 | ) | ||||
| Tax provision | - | - | ||||||
| Net loss | (982,112 | ) | (7,689,694 | ) | ||||
| Loss attributable to noncontrolling interest | (270 | ) | - | |||||
| Net loss attributable to Grapefruit USA, Inc. | $ | (981,842 | ) | $ | (7,689,694 | ) | ||
The following sets forth selected items from our statements of operations for three months ended September 30, 2021 and for the three months ended September 30, 2020.
Revenue for the three months ended September 30, 2021 was $153,476 compared to $1,306,201 for the corresponding period in 2020, a decrease of $1,152,725 or 88.3%. This decrease in revenue is primarily due to the fact that there was a very strong cannabis crop in the last quarter of 2020, which drove down wholesale cannabis prices significantly and limited the profitability of our distribution and trading operations. The Company expects such cyclical revenue deviations to be mitigated in 2021 and following years by a significant growth of revenue from our HourGlass products, which will be unaffected by these cyclical events.
Cost of goods sold for the three months ended September 30, 2021 was $346,073 as compared to $1,123,717 for the corresponding period in 2020, a decrease of $777,644, or 69.2%. Included in cost of goods sold the three months ended September 30, 2021 and 2020 are plant operation and other direct overhead expenses incurred to maintain our production facilities. Included in the cost of goods sold is the markdown of the hemp investment of $85,000. These fixed carrying costs affect our gross margin more significantly at lower revenues than at our anticipated full operating activity levels. Consequently, we expect our gross margins to significantly improve in future periods as sales increase.
Our resulting gross loss for the three months ended September 30, 2021 was $192,597 as compared with the gross income of $182,484 for the corresponding period in 2020, a decrease of $375,081, or 205.5%.
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Sales expense for the three months ended September 30, 2021 was $3,800 compared to the $67,479 for 2020, a decrease of $63,679. The decrease was a result of all sales being made in-house by management. Stock based compensation for the three months ended September 30, 2021 was $25,980 compared to $0 for 2020, an increase of $25,980. Stock option expenses for the three months ended September 30, 2021 were $32,877 compared to $0 for 2020, an increase of $32,877. General and administrative expenses for the three months ended September 30, 2021 were $352,462 compared to $289,767 for 2020, an increase of $62,695, or 21.6%.
Our resulting net loss from operations for the three months ended September 30, 2021 was $607,716 as compared to $174,762 for the corresponding period for 2020, an increase of $432,954, or 247.7%.
Our resulting net loss attributable to Grapefruit USA, Inc. for the three months ended September 30, 2021 was $982,112 as compared to $7,689,694 for the corresponding period for 2020, a decrease of $6,707,582, or 87.2%. The decrease is due largely to the $7,014,164 non-cash loss from the change in value of derivative for the quarter ended September 30, 2020.
Results of Operations for the Nine Months Ended September 30, 2021 as compared to the Nine Months Ended September 30, 2020.
| Nine Months Ended | Nine Months Ended | |||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Net revenues | $ | 586,780 | $ | 2,580,412 | ||||
| Cost of goods sold | 926,671 | 2,385,804 | ||||||
| Gross income (loss) | (339,891 | ) | 194,608 | |||||
| Sales expense | 5,760 | 106,594 | ||||||
| Stock based compensation | 265,024 | - | ||||||
| Stock option expenses | 65,754 | - | ||||||
| General and administrative expense | 1,011,199 | 974,925 | ||||||
| Loss from operations | (1,687,628 | ) | (886,911 | ) | ||||
| Change in value of derivatives | 91,210 | (7,946,046 | ) | |||||
| Interest and other income (expense) | (2,149,021 | ) | (1,237,279 | ) | ||||
| Net loss before income taxes | (3,745,439 | ) | (10,070,236 | ) | ||||
| Tax provision | - | - | ||||||
| Net loss | (3,745,439 | ) | (10,070,236 | ) | ||||
| Loss attributable to noncontrolling interest | (270 | ) | - | |||||
| Net loss attributable to Grapefruit USA, Inc. | $ | (3,745,169 | ) | $ | (10,070,236 | ) | ||
The following sets forth selected items from our statements of operations for nine months ended September 30, 2021 and for the nine months ended September 30, 2020.
Revenue for the nine months ended September 30, 2021 was $586,780 compared to $2,580,412 for the corresponding period in 2020, a decrease of $1,993,632 or 77.3%. This decrease in revenue is primarily due to the fact that there was a very strong cannabis crop in the last quarter of 2020, which drove down wholesale cannabis prices significantly and limited the profitability of our distribution and trading operations. The Company expects such cyclical revenue deviations to be mitigated in 2021 and following years by a significant growth of revenue from our HourGlass products, which will be unaffected by these cyclical events.
Cost of goods sold for the nine months ended September 30, 2021 was $926,671 as compared to $2,385,804 for the corresponding period in 2020, a decrease of $1,459,133, or 61.2%. Included in cost of goods sold the nine months ended September 30, 2021 and 2020 are plant operation and other direct overhead expenses incurred to maintain our production facilities. These fixed carrying costs affect our gross margin more significantly at lower revenues than at our anticipated full operating activity levels. Consequently, we expect our gross margins to significantly improve in future periods as sales increase.
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Our resulting gross loss for the nine months ended September 30, 2021 was $339,891 as compared with the gross income of $194,608 for the corresponding period in 2020, a decrease of $534,499.
Sales expense for the three months ended September 30, 2021 were $5,760 compared to the $106,594 for 2020, a decrease of $100,834, or 94.6%. The decrease was a result of the majority sales being made in-house by management. Stock based compensation for the nine months ended September 30, 2021 were $265,024 compared to $0 for 2020, an increase of $265,024. Stock option expenses for the nine months ended September 30, 2021 were $65,754 compared to $0 for 2020, an increase of $65,754. General and administrative expenses for the nine months ended September 30, 2021 were $1,011,199 compared to $974,925 for 2020, an increase of $36,274, or 3.7%.
Our resulting net loss from operations for the nine months ended September 30, 2021 was $1,687,628 as compared to $886,911 for the corresponding period for 2020, an increase of $800,717, or 90.3%.
As part of the reverse merger in July 2019, the Company recorded derivative liabilities substantially in the form of convertible notes and related warrants with variable conversion features. On April 15, 2021, the company renegotiated the debt agreement with the lender modifying the convertible notes conversion price from a variable rate to a fixed rate conversion price for $4,502,750 of convertible notes, with an effective date of December 31, 2020. The change in value of derivatives, a non-cash gain, for the nine months ended September 30, 2021, was $91,210 as compared to a non-cash expense of $7,946,046 for the corresponding period for 2020.
Included in interest and other expense for the nine months ended September 30, 2021 is a non-cash expense of $513,267 related to shares issued as part of a make-whole agreement (see Note 15 Commitments and contingencies) and $491,998 loss on extinguishment of debt for related parties.
Our resulting net loss attributable to Grapefruit USA, Inc. for the nine months ended September 30, 2021 was $3,745,169 as compared to $10,070,236 for the corresponding period for 2020, a decrease of $6,325,067, or 62.8%.
Development of hi-tech cultivation facility.
During 2018 we reviewed various facilities and identified a suitable, compliant cannabis facility located in the city of Dessert Hot Springs, to build our manufacturing and distribution facility. This commercial park is owned and operated by Coachillin’ Holding LLC and we purchased land rights from Coachillin’ Holding LLC on December 21, 2017 to secure our specific location within their commercial park. As a result, we own approximately two acres of real property located in the Coachillin’ Industrial Cultivation and Ancillary Canna-Business Park in Desert Hot Springs, located on the extension of North Canyon Rd., approximately 10 miles north of the center of Palm Springs.
Grapefruit intends to build out its real property into a distribution, manufacturing and high-tech cultivation facility in two phases to further its goal to become a seed to sale, fully vertically integrated Cannabis and CBD product Company. Grapefruit’s plans include an indoor 40,000 square foot multi-tiered canopy and adjoining tissue culture rooms divided into two separate buildings on our Coachillin property. The development of the lot will take place in two phases.
On July 29, 2021, Grapefruit obtained its development permit to construct phase one. Phase one will be comprised of a 30,000 square foot facility containing a 10,000 square foot state-of-the-art indoor canopy, a separately licensed Distribution facility and Manufacturing lab that will carry a Type 7 volatile manufacturing license. The canopy is estimated to produce thousands of pounds of the highest quality indoor cultivars of cannabis annually. We are in the process of securing construction financing for Phase one.
In order for us to obtain California cannabis licensing from state and local officials we entered into an operating lease with Coachillin’ Holdings to temporarily occupy an area near the location of our permanent location within the Coachillin’ commercial park.
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COVID-19 Impact
During the nine months ended September 30, 2021, the company experienced severe restrictions on consumers and the retail locations at which consumers purchase our products. As a result of these restrictions, we believe demand for our products was subdued during the period. During the comparable nine months in 2020, and as a result of the COVID-19 pandemic, we saw an increase in demand for our cannabis products driven by consumer pantry-loading and increased consumption of our products due to concerns about future availability of products and or concerns about whether retail locations that sell our products would remain open. Despite the COVID-19 pandemic, we have been able to keep up with fluctuating consumer demand for our products and have continued to introduce new products in the market.
The full extent to which COVID-19 may impact our business, including our operations and the market for our securities and our financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the pandemic, the development and availability of effective treatments and vaccines, and further action taken by the government and other third parties in response to the pandemic. In particular, COVID-19 and government efforts to curtail COVID-19 could impede our production facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations and require additional expenditures to be incurred.
Liquidity and Capital Resources
Our cash position decreased to $37,317 as of September 30, 2021 from $299,895 as of December 31, 2020. Our total current assets decreased to $847,939 as of September 30, 2021, from $948,862 as of December 31, 2020.
Our total current liabilities increased to $4,786,109 as of September 30, 2021 from $4,379,581 as of December 31, 2020.
During the nine months ended September 30, 2021, we used $998,581 of net cash for operating activities, as compared to cash used by operations of $910,335 used during the nine months ended September 30, 2020. Net cash used in investing activities during the nine months ended September 30, 2021 was $62,319, as compared to $25,469 during the nine months ended September 30, 2020. Net cash provided by financing activities during the nine months ended September 30, 2021 was $798,253, as compared to $835,040 during the nine months ended September 30, 2020.
During the nine months ended September 30, 2021, the Company converted $966,620 of principal and accrued interest for shares of common stock. We expect to continue to exchange the long-term convertible notes to equity in the future.
We expect our working capital requirements in the next year to be met primarily by the proceeds of issuance of debt, equity and other securities to our existing creditors, shareholders, and other investors, as well as from cash flow from operations. We also expect that, as in the past, significant amounts of our convertible debt with a major lender will be converted into equity. We expect to need additional working capital from outside sources to cover our anticipated operating expenses. There is no assurance that the Company will be able to raise sufficient additional capital or financing to continue in business or to effectively execute its business plan.
Going Concern Qualification
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 nine months ended September 30, 2021, we incurred a net loss of $3,745,439, had a working capital deficit of $3,938,170 and had an accumulated deficit of $15,066,663 at September 30, 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
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
| 25 |
Item 4. Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive and financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
As of September 30, 2021, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of September 30 2021, our internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting through the date of this report or during the quarter ended September 30, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This report does not include an attestation report from our registered public accounting firm regarding internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
Smaller reporting companies are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the period covered by this quarterly report.
| 26 |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
| EXHIBIT NO. | DESCRIPTION | |
| 31.1 | Section 302 Certification of Chief Executive Officer | |
| 31.2 | Section 302 Certification of Chief Financial Officer | |
| 32.1 | Section 906 Certification | |
| 32.2 | Section 906 Certification | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| 27 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| /s/ Bradley J. Yourist | Dated: November 22, 2021 | |
| Bradley J. Yourist | ||
| Chief Executive Officer | ||
| /s/ Kenneth J. Biehl | Dated: November 22, 2021 | |
| Kenneth J. Biehl | ||
| Chief Financial Officer |
| 28 |
EXHIBIT 31.1
CERTIFICATION
I, Bradley J. Yourist, certify that:
| 1. | I have reviewed this report on Form 10-Q of Grapefruit USA, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (of persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
| Dated: November 22, 2021 | |
| /s/ Bradley J. Yourist | |
| Bradley J. Yourist | |
| Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Kenneth J. Biehl, certify that:
| 1. | I have reviewed this report on Form 10-Q of Grapefruit USA, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (of persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Dated: November 22, 2021
| /s/ Kenneth J. Biehl | |
| Kenneth J. Biehl, | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Grapefruit USA, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2021 (the “Report”) I, Bradley J. Yourist, Chief Executive Officer of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Bradley J. Yourist | Dated: November 22, 2021 | |
| Bradley J. Yourist | ||
| Chief Executive Officer |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Grapefruit USA, Inc. (the “Company”) on Form 10-Q/A for the period ending September 30, 2021 (the “Report”) I, Kenneth J. Biehl, Chief Financial Officer (Principal Financial/Accounting Officer) of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Kenneth J. Biehl | Dated: November 22, 2021 | |
| Kenneth J. Biehl | ||
| Chief Financial Officer |
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 1,000,000,000 | 1,000,000,000 |
| Common stock, shares issued | 554,162,744 | 505,700,437 |
| Common stock, shares outstanding | 554,162,744 | 505,700,437 |
| Preferred stock, par value | $ 0.0001 | $ 0.0001 |
| Preferred stock, shares authorized | 1,000,000 | 1,000,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Income Statement [Abstract] | ||||
| Revenue | $ 153,476 | $ 1,306,201 | $ 586,780 | $ 2,580,412 |
| Cost of goods sold | 346,073 | 1,123,717 | 926,671 | 2,385,804 |
| Gross profit (loss) | (192,597) | 182,484 | (339,891) | 194,608 |
| Operating expenses: | ||||
| Sales | 3,800 | 67,479 | 5,760 | 106,594 |
| Stock based compensation | 25,980 | 265,024 | ||
| Stock option expense | 32,877 | 65,754 | ||
| General and administrative | 352,462 | 289,767 | 1,011,199 | 974,925 |
| Total operating expenses | 415,119 | 357,246 | 1,347,737 | 1,081,519 |
| Loss from operations | (607,716) | (174,762) | (1,687,628) | (886,911) |
| Other income (expense): | ||||
| Interest expense | (388,273) | (532,410) | (1,258,650) | (1,343,224) |
| Change in value of derivative instruments | 13,877 | (7,014,164) | 91,210 | (7,946,046) |
| Gain (loss) on extinguishment of debt | 31,642 | (398,373) | 105,945 | |
| Gain (loss) on extinguishment of debt - related parties | (491,998) | |||
| Total other income (expense) | (374,396) | (7,514,932) | (2,057,811) | (9,183,325) |
| Income (loss) before income taxes | (982,112) | (7,689,694) | (3,745,439) | (10,070,236) |
| Tax provision | ||||
| Net income (loss) | (982,112) | (7,689,694) | (3,745,439) | (10,070,236) |
| Loss attributable to noncontrolling interest | (270) | (270) | ||
| Net (loss) income attributable to Grapefruit USA, Inc. | $ (981,842) | $ (7,689,694) | $ (3,745,169) | $ (10,070,236) |
| Net loss per share - Basic and diluted | $ (0.00) | $ (0.02) | $ (0.01) | $ (0.02) |
| Weighted average common stock outstanding - Basic and diluted | 550,277,467 | 499,182,611 | 515,339,023 | 495,837,104 |
ORGANIZATION AND NATURE OF OPERATIONS |
9 Months Ended |
|---|---|
Sep. 30, 2021 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| ORGANIZATION AND NATURE OF OPERATIONS | NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
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 % of the post-Acquisition IGNG common shares and the current IGNG shareholders will retain % of the post-Acquisition IGNG common shares. At the time of the execution of the SEA, IGNG had approximately outstanding shares of common stock. Therefore, IGNG issued to Grapefruit’s shareholders 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 %, or approximately 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 77,156 gross parcel square foot of our property located in an approximately 5.3 million square foot facility. As of September 30, 2021, the common areas continue to be built throughout the entire canna-business park and are not complete.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 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 unaudited financial statements as of September 30, 2021 and December 31, 2020, and for the nine months ended September 30, 2021 and September 30, 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.
Basis of Consolidation – Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
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 shares of common stock for 51% ownership if Summit Boys, Inc.
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 as of September 30, 2021 and December 31, 2020:
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 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:
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.
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, 2019, 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 nine months ended September 30, 2021 and year ended December 31, 2020.
Items measured at fair value on a non-recurring basis
The Company’s prepaids and other current assets, long lived assets, including property and equipment, and goodwill are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
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 nine months ended September 30, 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.
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 $285,622 as of September 30, 2021 and $39,480 as of December 31, 2020. As the September 30, 2021, 61% of accounts receivable was split between two customers. In 2020, 99% of accounts receivable consisted of one customer. During the nine months ended September 30, 2021, we continue to diversify our customer base, and no more than 17% of the revenues with any one customer. For the nine months ended September 30, 2020, 60% 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
Convertible Debt, and Derivatives and Hedging 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. ASU 2020-06 will be effective for the Company in the first quarter of 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Adopted
Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
Equity Securities, Equity-method Investments and Certain Derivatives In January 2020, the FASB issued ASU 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. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. ASU 2020-01 became effective for the Company in the first quarter of 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
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GOING CONCERN |
9 Months Ended |
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Sep. 30, 2021 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| GOING CONCERN | NOTE 3 – 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 nine months ended September 30, 2021, we incurred a net loss of $3,745,169, had a working capital deficit of $3,938,170 and had an accumulated deficit of $15,066,663 at September 30, 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 May 31, 2019, the Company executed the Stock Purchase Agreement (“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 $0.125, for proceeds to the Company of $250,000 and issued a $450,000 convertible note to Auctus. During the second quarter of 2021, the Company sold shares at $.
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RIGHT OF USE ASSET AND LIABILITY |
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| RIGHT OF USE ASSET AND LIABILITY | NOTE 4 – RIGHT OF USE ASSET AND LIABILITY
We lease capital equipment in a suitable, compliant cannabis facility located in the city of Desert Hot Springs. In addition, we entered into this operating land lease agreement with Coachillin’ Holdings LLC on September 1, 2018 to rent approximately 2,268 square feet of leasable land area. The operating lease renews annually and has a base rent of $0.50 square foot of leasable area of the designated premise assigned by Coachillin’ Holdings LLC. We paid an initial non-refundable prepaid rent of $3,402 which was expensed during the three months following the signed agreement, and we will continue to pay $1,134 monthly.
The Company entered into a 36-month lease agreement for office space in July 2019 at $6,963 a month, with an approximate 2% increase annually.
The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company used an estimated incremental borrowing rate of 6% to estimate the present value of the right of use liability.
The Company has right-of-use assets of $62,942, right-of-use liability of $65,486 as of September 30, 2021. Operating lease expense for the nine months ended September 30, 31, 2021 was $73,662.
The following table provides the maturities of lease liabilities at September 30, 2021:
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INVENTORY |
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Sep. 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORY | NOTE 5 – INVENTORY
At September 30, 2021 and December 31, 2020, our inventory was, as follows:
At September 30, 2021 and December 31, 2020, finished goods included $8,404 and $34,331 on consignment, respectively.
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.
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PROPERTY, PLANT AND EQUIPMENT, NET |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT, NET | NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net of accumulated depreciation and amortization, at September 30, 2021 and December 31, 2020 was as follows:
The Company acquired the extraction equipment, laboratory, and warehouse facility during 2018 and 2019 and made preparations and final testing for future production. Final preparations for certain extraction and warehouse work were completed, and these related assets were placed in service on April 1, 2019, at which time we commenced depreciating this asset.
The amount of related depreciation expense for the nine months ended September , 2021 and 2020 is $69,598 and $60,469, respectively.
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CAPITAL LEASE PAYABLE |
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| CAPITAL LEASE PAYABLE | NOTE 7 – CAPITAL LEASE PAYABLE
Capital lease payable consists of a capital lease agreement entered into in April 2018 to finance the purchase of various lab and manufacturing equipment. The outstanding balance on the 48-month installment capital lease was $148,511 and $161,570 as of September 30, 2021 and December 31, 2020, respectively. The terms of the 48-month capital lease specify monthly payments of $4,575. The interest rate implicit in the lease is about 15% and the maturity date is February 2022.
In addition, the Company entered into additional 48-month leases in May 2019 for production facilities and storage of product. Monthly payments for the facility and storage totals $1,935.
A summary of minimum lease payments on capital lease payable for future years is as follows:
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NOTES PAYABLE |
9 Months Ended |
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Sep. 30, 2021 | |
| Debt Disclosure [Abstract] | |
| NOTES PAYABLE | NOTE 8 – 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 September 30, 2021 of $30,600.
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 September 30, 2021, the note has not been repaid and was amended to carry an additional 10% interest rate of the total balance due, Accrued interest for this loan totals $190,625. The note is past due. Two officers of the Company have personally guaranteed the loan.
In September 2019, the Company issued another note of $ to an unrelated party with % interest, which was repaid in full on .
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CONVERTIBLE NOTES PAYABLE |
9 Months Ended |
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Sep. 30, 2021 | |
| Convertible Notes Payable | |
| CONVERTIBLE NOTES PAYABLE | NOTE 9 – CONVERTIBLE NOTES PAYABLE
In August 2020, shares were issued to settle $ debt of a note and accrued interest resulting in a loss of $5,225.
Amortization of note discounts, which is included in interest expense, amounted to $509,817 during the nine months ended September 30, 2021 and $423,738 for the nine months ended September 30, 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 -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 of $0.075 per share 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 $450,000 convertible to Auctus bearing 12% interest and -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 set at $0.075.
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%.
During the nine months ended September 30, 2021, a total of $996,620 of convertible notes had been converted to common stock. It comprised of $832,750 of principal and $163,120 of accrued interest and $750 of fees for a total of shares of common stock.
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NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY |
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| Related Party Transactions [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY | NOTE 10 – NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY
Notes payable to officers and directors as of September 30, 2021 and December 31, 2020 are due on demand and consisted of the following:
Notes payables 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.
On May 17, 2021, related parties converted $699,236 of principal and accrued interest for a total of shares of common stock.
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EQUITY |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EQUITY | NOTE 11 – EQUITY
Preferred Stock
The Company has authorized shares of $ par value preferred stock. As of September 30, 2021, and December 31, 2020, there are shares of preferred stock outstanding.
Common Stock
The Company is authorized to issue shares of $ par value common stock.
During the nine months ended September 30, 2021 the Company issued a total of shares for services rendered valued at $303,545; shares were issued related to legal settlement and debt settlement with related parties valued at $; shares were issued related to the conversion of convertible notes valued at $996,620; shares were issued for a stock purchase valued at $ per share; shares were issued for warrant exercised at $0.125 per share; and shares were issued for the Summit Boys acquisition (Note – 14 Investments) valued at $250,000.
As of September 30, 2021, there were approximately 613 record holders of our common stock, not including shares held in “street name” in brokerage accounts the number of which is unknown. As of September 30, 2021, there were 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 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 shares of common stock granted in 2016 at an exercise price of $. On March 28, 2021, the Company granted a board member an option to purchase shares of common stock at $. There are six month vesting periods for a block of shares starting October 1, 2021.
The weighted average remaining contractual life of options outstanding issued under the agreements was years at September 30, 2021.
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WARRANTS |
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| WARRANTS | NOTE 12 — WARRANTS
Following is a summary of warrants outstanding at September 30, 2021:
Grapefruit recorded warrants to issue common stock upon exercise in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) As part of the SEA, the Company also issued warrants to purchase shares of the Company’s common stock at an exercise price of $ per share, warrants to purchase shares of the Company’s common stock at an exercise price of $ per share, warrants to purchase shares of the Company’s common stock at an exercise price of $ per share for a period of two year from the date of issuance.
In addition to the Notes in connection with the SPA agreement, GPFT issued to the Investor a warrant to purchase 16,000,000 shares of its common stock at $0.125 per share, a warrant to purchase 15,000,000 shares at $0.15 per share and a warrant to purchase 8,000,000 shares at $0.25 per share (collectively, the “Warrants”). The Warrants are “cash only” and are callable if GPFT stock trades on the OTCQB at 200% or more of the given exercise price for 5 consecutive days.
On February 26, 2021, 2,250,000 warrants were issue with an exercise price of $0.125 in relation to the convertible note (See Note 9 Convertible note payable). On April 15, 2021 as part of the renegotiated terms of the convertible notes, 20,000,000 additional warrants were issued at an exercise price of $0.075.
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DERIVATIVE LIABILITIES |
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| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE LIABILITIES | NOTE 13 — DERIVATIVE LIABILITIES
Grapefruit recorded derivative instruments in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) 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 nine-month period ended September 30, 2021:
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 Binomial Tree 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:
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INVESTMENTS |
9 Months Ended |
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Sep. 30, 2021 | |
| Investments in and Advances to Affiliates [Abstract] | |
| INVESTMENTS | NOTE 14 – 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 during this quarter.
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COMMITMENTS AND CONTINGENCIES |
9 Months Ended |
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Sep. 30, 2021 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| COMMITMENTS AND CONTINGENCIES | NOTE 15 – 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 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 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 shares the Company’s stock to these defendants in final settlement of the dispute.
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.
Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP
The Company came to a settlement agreement with Greenberg Glusker Fields Claman & Machtinger LLP (“Greenberg”). Three $68,000 payments are to be made in relation to the timing of the three latter tranches mentioned in “Auctus Financing” or before November 30, 2019. As of now, $68,000 has been paid; late penalties are currently being assessed. In addition, shares are to be issued as part of the settlement agreement— of the shares were issued as of September 30, 2020. In May 2021, the Company issued shares as part of the make-whole clause in the agreement. On October 26, 2021, the Company issued shares as part of the make-whole clause in the agreement. Additional shares may need to be issued in the future.
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SUBSEQUENT EVENTS |
9 Months Ended |
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Sep. 30, 2021 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the financial statements. |
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Basis of Consolidation | Basis of Consolidation – Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
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 shares of common stock for 51% ownership if Summit Boys, Inc.
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| Use of Estimates | 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.
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| Inventory | Inventory – Inventory is comprised of raw material, work in process and finished goods. The following sets forth selected items from our inventory as of September 30, 2021 and December 31, 2020:
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.
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| Property, Plant and Equipment, net | 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 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.
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| Land Improvements | 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.
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| Long-Lived Assets Impairment Assessment | 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.
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| Revenue Recognition | 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:
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.
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| Cost of Goods Sold | 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.
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| Basic and Diluted Net Income Per Share |
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| Derivative Financial Instruments | 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.
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| Fair Value of Financial Instruments | 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, 2019, 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 nine months ended September 30, 2021 and year ended December 31, 2020.
Items measured at fair value on a non-recurring basis
The Company’s prepaids and other current assets, long lived assets, including property and equipment, and goodwill are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
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| Income Taxes | 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 nine months ended September 30, 2021 and 2020, respectively.
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| Research and Development Expenses | 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.
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| General and Administrative Expenses | 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.
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| Commitments and Contingencies | 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.
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| Cash and Cash Equivalents | 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.
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| Concentration of Credit Risk | 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.
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| Accounts Receivable and Revenue | Accounts Receivable and Revenue – The accounts receivable balance was $285,622 as of September 30, 2021 and $39,480 as of December 31, 2020. As the September 30, 2021, 61% of accounts receivable was split between two customers. In 2020, 99% of accounts receivable consisted of one customer. During the nine months ended September 30, 2021, we continue to diversify our customer base, and no more than 17% of the revenues with any one customer. For the nine months ended September 30, 2020, 60% of the net revenues generated with two customers.
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| Recently Issued Accounting Pronouncements | 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
Convertible Debt, and Derivatives and Hedging 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): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. ASU 2020-06 will be effective for the Company in the first quarter of 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Adopted
Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
Equity Securities, Equity-method Investments and Certain Derivatives In January 2020, the FASB issued ASU 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. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. ASU 2020-01 became effective for the Company in the first quarter of 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements. |
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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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| SUMMARY OF INVENTORY |
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| SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE |
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| SUMMARY OF DERIVATIVE LIABILITIES | 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 nine months ended September 30, 2021 and year ended December 31, 2020.
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RIGHT OF USE ASSET AND LIABILITY (Tables) |
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| SCHEDULE OF MATURITIES OF LEASE LIABILITIES | The following table provides the maturities of lease liabilities at September 30, 2021:
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INVENTORY (Tables) |
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| SCHEDULE OF INVENTORY | At September 30, 2021 and December 31, 2020, our inventory was, as follows:
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PROPERTY, PLANT AND EQUIPMENT, NET (Tables) |
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| SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT, NET | Property, plant and equipment, net of accumulated depreciation and amortization, at September 30, 2021 and December 31, 2020 was as follows:
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CAPITAL LEASE PAYABLE (Tables) |
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| SUMMARY OF MINIMUM LEASE PAYMENTS ON CAPITAL LEASE | A summary of minimum lease payments on capital lease payable for future years is as follows:
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NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY (Tables) |
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| SCHEDULE OF NOTES PAYABLE TO OFFICERS AND DIRECTORS | Notes payable to officers and directors as of September 30, 2021 and December 31, 2020 are due on demand and consisted of the following:
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EQUITY (Tables) |
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| SCHEDULE OF STOCK OPTIONS ACTIVITY |
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WARRANTS (Tables) |
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| SUMMARY OF WARRANTS OUTSTANDING | Following is a summary of warrants outstanding at September 30, 2021:
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DERIVATIVE LIABILITIES (Tables) |
9 Months Ended | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2021 | ||||||||||||||||||||||||||
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||
| SUMMARY OF DERIVATIVE LIABILITY | The following table summarizes activity in the Company’s derivative liability during the nine-month period ended September 30, 2021:
|
|||||||||||||||||||||||||
| SCHEDULE OF ASSUMPTIONS USED |
|
SUMMARY OF INVENTORY (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Accounting Policies [Abstract] | ||
| Raw material | $ 56,299 | $ 16,892 |
| Work in process | 23,566 | |
| Finished goods | 354,382 | 461,657 |
| Total inventory | $ 410,681 | $ 502,115 |
SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE (Details) - USD ($) |
3 Months Ended | 9 Months Ended | 12 Months Ended | ||
|---|---|---|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
Sep. 30, 2021 |
Sep. 30, 2020 |
Dec. 31, 2020 |
|
| Accounting Policies [Abstract] | |||||
| Net income attributable to common shareholders | $ (981,842) | $ (7,689,694) | $ (3,745,169) | $ (10,070,236) | $ (4,229,851) |
| Weighted-average number of common shares outstanding during the period | 550,277,467 | 499,182,611 | 515,339,023 | 495,837,104 | 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 | $ (0.00) | $ (0.02) | $ (0.01) | $ (0.02) | $ (0.00) |
SUMMARY OF DERIVATIVE LIABILITIES (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Defined Benefit Plan Disclosure [Line Items] | ||
| Derivative Liabilities | $ 27,431 | $ 118,641 |
| Fair Value, Inputs, Level 1 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Derivative Liabilities | ||
| Fair Value, Inputs, Level 2 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Derivative Liabilities | ||
| Fair Value, Inputs, Level 3 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Derivative Liabilities | $ 27,431 | $ 118,641 |
SCHEDULE OF MATURITIES OF LEASE LIABILITIES (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Right Of Use Asset And Liability | ||
| 2021 | $ 22,378 | |
| 2022 | 44,756 | |
| 2023 | ||
| 2024 | ||
| 2026 and thereafter | ||
| Total future undiscounted lease payments | 67,134 | |
| Less: Interest | (1,648) | |
| Present value of lease liabilities | $ 65,486 | $ 82,038 |
SCHEDULE OF INVENTORY (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Raw material | $ 56,299 | $ 16,892 |
| Work in process | 23,566 | |
| Finished goods | 354,382 | 461,657 |
| Total inventory | $ 410,681 | $ 502,115 |
INVENTORY (Details Narrative) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Finished goods in consignment | $ 8,404 | $ 34,331 |
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT, NET (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Property, Plant and Equipment [Abstract] | ||
| Vehicle | $ 41,142 | $ 41,142 |
| Furniture and equipment | 7,494 | |
| Extraction equipment | 296,747 | 287,029 |
| Extraction laboratory | 126,707 | 126,707 |
| Warehouse facility | 50,158 | 50,158 |
| Land and land improvement/development | 1,501,300 | 1,456,193 |
| Accumulated depreciation and amortization | (239,897) | (170,299) |
| Property, plant and equipment | $ 1,783,651 | $ 1,790,930 |
PROPERTY, PLANT AND EQUIPMENT, NET (Details Narrative) - USD ($) |
9 Months Ended | |
|---|---|---|
Sep. 30, 2021 |
Sep. 30, 2020 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation expense | $ 69,598 | $ 60,469 |
SUMMARY OF MINIMUM LEASE PAYMENTS ON CAPITAL LEASE (Details) |
Sep. 30, 2021
USD ($)
|
|---|---|
| Capital Lease Payable | |
| Remainder 2021 | $ 19,530 |
| 2022 | 32,337 |
| 2023 | 7,739 |
| 2024 | |
| 2025 | |
| Thereafter | |
| Total minimum lease payments | 59,606 |
| Less: amount representing interest | (2,763) |
| Capital lease liability | $ 56,843 |
CAPITAL LEASE PAYABLE (Details Narrative) - USD ($) |
1 Months Ended | |||
|---|---|---|---|---|
May 31, 2019 |
Apr. 30, 2018 |
Sep. 30, 2021 |
Dec. 31, 2020 |
|
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||||
| Finance lease, liability | $ 56,843 | |||
| Capital lease, term | 48 months | 48 months | ||
| Capital lease monthly payments | $ 1,935 | $ 4,575 | ||
| Capital lease, interest rate percentage | 15.00% | |||
| Capital lease, maturity date | February 2022 | |||
| Capital Lease Agreement [Member] | ||||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||||
| Finance lease, liability | $ 148,511 | $ 161,570 | ||
SCHEDULE OF NOTES PAYABLE TO OFFICERS AND DIRECTORS (Details) - USD ($) |
Sep. 30, 2021 |
Dec. 31, 2020 |
|---|---|---|
| Short-term Debt [Line Items] | ||
| Notes payable to officers and directors | $ 420,872 | $ 488,433 |
| Notes Payable [Member] | ||
| Short-term Debt [Line Items] | ||
| Notes payable to officers and directors | 420,872 | 488,433 |
| Payable to an Officer and Director [Member] | Notes Payable [Member] | ||
| Short-term Debt [Line Items] | ||
| Notes payable to officers and directors | 335,780 | 82,056 |
| Payable to an individual Affiliate of an Officer and Director [Member] | Notes Payable [Member] | ||
| Short-term Debt [Line Items] | ||
| Notes payable to officers and directors | 40,000 | |
| Payable to a Company Affiliate to an Officer and Director [Member] | Notes Payable [Member] | ||
| Short-term Debt [Line Items] | ||
| Notes payable to officers and directors | $ 85,092 | $ 366,377 |
NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY (Details Narrative) - USD ($) |
1 Months Ended | ||||
|---|---|---|---|---|---|
May 31, 2019 |
Sep. 30, 2021 |
May 17, 2021 |
Feb. 26, 2021 |
Dec. 31, 2020 |
|
| Short-term Debt [Line Items] | |||||
| Common stock, shares, issued | 554,162,744 | 11,710,465 | 505,700,437 | ||
| Four Years [Member] | |||||
| Short-term Debt [Line Items] | |||||
| Monthly payments | $ 1,055 | ||||
| Five Years [Member] | |||||
| Short-term Debt [Line Items] | |||||
| Monthly payments | $ 880 | ||||
| Notes Payable [Member] | |||||
| Short-term Debt [Line Items] | |||||
| Debt interest rate | 10.00% | ||||
| Convertible Notes Payable [Member] | |||||
| Short-term Debt [Line Items] | |||||
| Debt instrument, face amount | $ 699,236 | $ 450,000 |
SUMMARY OF DERIVATIVE LIABILITY (Details) |
9 Months Ended |
|---|---|
|
Sep. 30, 2021
USD ($)
| |
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
| 12-31-20 Balance | $ 118,641 |
| Creation/acquisition | |
| Reclassification of equity | |
| Change in Value | (91,210) |
| 6-30-21 Balance | $ 27,431 |
DERIVATIVE LIABILITIES (Details Narrative) |
Apr. 15, 2021
USD ($)
$ / shares
shares
|
|---|---|
| Exercise price per share | $ 0.075 |
| Auctus Fund LLC [Member] | |
| Renegotiated conversion terms of convertible note | $ | $ 4,502,750 |
| Conversion price per share | $ 0.075 |
| Issued of additional warrants, shares | shares | 20,000,000 |
| Exercise price per share | $ 0.075 |