UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
Quarterly Period Ended June 30, 2020
or
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the Transition period from ______________to
______________
Commission
File Number: 000-50099
GRAPEFRUIT
USA, INC.
(Exact
name of registrant as specified in its charter)
DELEWARE |
|
95-4451059 |
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
Identification
No.) |
10866 Wilshire Blvd. Suite 225, Los Angeles, CA
90024
(Address
of principal executive offices) (Zip Code)
310-575-1175
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 |
None |
|
None |
|
None |
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.
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).
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 |
[ ] |
|
Non-accelerated
filer |
[ ] |
Smaller
reporting company |
[X] |
|
(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).
Indicate
the number of shares outstanding of each of the issuer’s classes of
common stock as of the latest practicable date.
As of
July 31, 2020, the number of shares outstanding of the registrant’s
class of common stock was 495,100,057.
TABLE
OF CONTENTS
PART I. FINANCIAL
INFORMATION
Item 1. Condensed Financial
Statements
GRAPEFRUIT
USA, INC.
CONDENSED BALANCE SHEETS
|
|
June 30, 2020 (Unaudited) |
|
|
December 31, 2019 (Unaudited) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
101,008 |
|
|
|
266,607 |
|
Accounts receivable |
|
|
17,695 |
|
|
|
- |
|
Inventory |
|
|
252,756 |
|
|
|
263,985 |
|
Other |
|
|
7,459 |
|
|
|
12,459 |
|
Total current assets |
|
|
378,918 |
|
|
|
543,051 |
|
NON-CURRENT
ASSETS: |
|
|
|
|
|
|
|
|
Property, plant and equipment,
net |
|
|
1,770,082 |
|
|
|
1,809,326 |
|
Operating right of use - assets |
|
|
176,579 |
|
|
|
219,961 |
|
Investment in hemp |
|
|
169,950 |
|
|
|
169,950 |
|
Intangible
asset |
|
|
- |
|
|
|
- |
|
TOTAL ASSETS |
|
$ |
2,495,529 |
|
|
|
2,742,288 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
484,164 |
|
|
|
351,569 |
|
Accrued loan interest |
|
|
575,710 |
|
|
|
398,720 |
|
Related party payable |
|
|
281,626 |
|
|
|
281,626 |
|
Legal settlements - current
portion |
|
|
165,137 |
|
|
|
159,543 |
|
Subscription payable |
|
|
210,118 |
|
|
|
891,738 |
|
Derivative liability |
|
|
2,591,234 |
|
|
|
1,433,597 |
|
Capital lease - current portion |
|
|
58,182 |
|
|
|
55,565 |
|
Operating right of use - liability -
current portion |
|
|
90,228 |
|
|
|
98,031 |
|
Convertible notes - current
portion |
|
|
829,072 |
|
|
|
371,173 |
|
Accounts
payable and accrued expenses |
|
|
1,167,812 |
|
|
|
1,073,876 |
|
Total current
liabilities |
|
|
6,453,283 |
|
|
|
5,115,438 |
|
|
|
|
|
|
|
|
|
|
Legal settlements - long-term |
|
|
45,065 |
|
|
|
50,659 |
|
Capital lease |
|
|
76,773 |
|
|
|
106,005 |
|
Operating right of use -
liability |
|
|
88,911 |
|
|
|
123,210 |
|
Long-term notes payable, net |
|
|
872,100 |
|
|
|
866,700 |
|
Long-term
convertible notes, net of discount |
|
|
904,385 |
|
|
|
914,303 |
|
Total long-term
liabilities |
|
|
1,987,234 |
|
|
|
2,060,877 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES |
|
|
8,440,517 |
|
|
|
7,176,315 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation for
non-employee |
|
|
(52,917 |
) |
|
|
(244,167 |
) |
Common stock ($0.0001 par value, 1,000,000,000 shares
authorized; 495,100,057 and 486,320,329 shares issued and
outstanding as of June 30, 2020 and December 31, 2019,
respectively) |
|
|
49,510 |
|
|
|
48,632 |
|
Preferred stock ($0.0001 par value, 1,000,000 shares
authorized; no shares issued and outstanding as of June 30, 2020
and December 31, 2019) |
|
|
- |
|
|
|
- |
|
Additional paid in capital |
|
|
3,703,459 |
|
|
|
3,026,006 |
|
Accumulated
deficit |
|
|
(9,645,040 |
) |
|
|
(7,264,498 |
) |
Total
stockholders’ deficit |
|
|
(5,944,988 |
) |
|
|
(4,434,027 |
) |
Noncontrolling
interest |
|
|
- |
|
|
|
- |
|
Total
Equity |
|
|
(5,944,988 |
) |
|
|
(4,434,027 |
) |
Total
liabilities and stockholders’ deficit |
|
$ |
2,495,529 |
|
|
|
2,742,288 |
|
The
accompanying notes are an integral part of these unaudited
condensed financial statements
GRAPEFRUIT USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
For
the three and six months ended June 30, 2020 and
2019
|
|
Three months ended |
|
|
Three months ended |
|
|
Six months
ended |
|
|
Six months
ended |
|
|
|
June 30, 2020 (Unaudited) |
|
|
June 30, 2019 (Unaudited) |
|
|
June 30, 2020 (Unaudited) |
|
|
June 30, 2019 (Unaudited) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk sales |
|
$ |
875,463 |
|
|
$ |
- |
|
|
$ |
1,269,022 |
|
|
$ |
324,000 |
|
Distribution services |
|
|
5,189 |
|
|
|
3,345 |
|
|
|
5,189 |
|
|
|
8,041 |
|
Retail sales |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Other |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total revenues |
|
|
880,652 |
|
|
|
3,345 |
|
|
|
1,274,211 |
|
|
|
332,041 |
|
Cost of goods
sold |
|
|
809,350 |
|
|
|
134,942 |
|
|
|
1,262,087 |
|
|
|
390,783 |
|
Gross profit (loss) |
|
|
71,302 |
|
|
|
(131,597 |
) |
|
|
12,124 |
|
|
|
(58,742 |
) |
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
General and administrative |
|
|
420,891 |
|
|
|
256,741 |
|
|
|
724,274 |
|
|
|
351,159 |
|
Other
costs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total operating
expenses |
|
|
420,891 |
|
|
|
256,741 |
|
|
|
724,274 |
|
|
|
351,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(349,589 |
) |
|
|
(388,338 |
) |
|
|
(712,150 |
) |
|
|
(409,901 |
) |
Other income
(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(437,066 |
) |
|
|
(34,096 |
) |
|
|
(810,814 |
) |
|
|
(44,430 |
) |
Change in value of derivative
instruments |
|
|
1,178,836 |
|
|
|
- |
|
|
|
(931,882 |
) |
|
|
- |
|
Gain (loss) on extinguishment of
debt |
|
|
- |
|
|
|
- |
|
|
|
74,304 |
|
|
|
(195,385 |
) |
Impairment charge - LVCA |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other income
(expense) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total other
income (expense) |
|
|
741,770 |
|
|
|
(34,096 |
) |
|
|
(1,668,392 |
) |
|
|
(239,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
before income taxes |
|
|
392,181 |
|
|
|
(422,434 |
) |
|
|
(2,380,542 |
) |
|
|
(649,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
provision |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
|
392,181 |
|
|
|
(422,434 |
) |
|
|
(2,380,542 |
) |
|
|
(649,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net income attributable to noncontrolling interests |
|
|
- |
|
|
|
(119 |
) |
|
|
- |
|
|
|
(9,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Grapefruit USA, Inc. |
|
|
392,181 |
|
|
|
(422,553 |
) |
|
$ |
(2,380,542 |
) |
|
$ |
(659,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - Basic and diluted |
|
$ |
0.00 |
|
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
Weighted average common stock outstanding - Basic and diluted |
|
|
494,922,474 |
|
|
|
372,241,904 |
|
|
|
494,159,181 |
|
|
|
383,036,535 |
|
The
accompanying notes are an integral part of these unaudited
condensed financial statements
GRAPEFRUIT USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For
the six months ended June 30, 2020 and 2019
|
|
Six
months ended |
|
|
Six
months ended |
|
|
|
June 30, 2020 (Unaudited) |
|
|
June 30, 2019 (Unaudited) |
|
CASH FLOWS FROM
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(2,380,542 |
) |
|
$ |
(659,184 |
) |
Adjustments to
reconcile net loss to net cash used for operating activities: |
|
|
|
|
|
|
|
|
Depreciation and
amortization expense |
|
|
82,626 |
|
|
|
25,482 |
|
Fixed asset
deposit forfeiture |
|
|
- |
|
|
|
97,000 |
|
Change in value of derivative |
|
|
1,157,637 |
|
|
|
- |
|
Loss on investment
in LVCA |
|
|
- |
|
|
|
195,385 |
|
Non-cash
interest |
|
|
173,383 |
|
|
|
5,400 |
|
Loss on
extinguisment of debt |
|
|
(3,290 |
) |
|
|
|
|
Stock-based
compensation for services |
|
|
191,250 |
|
|
|
- |
|
Changes in
operation assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
Receivables |
|
|
(17,695 |
) |
|
|
- |
|
Inventory |
|
|
11,228 |
|
|
|
(153,100 |
) |
Other |
|
|
5,000 |
|
|
|
(10,600 |
) |
Accounts payable
and accrued expenses |
|
|
93,936 |
|
|
|
236,359 |
|
Accrued loan interest expense |
|
|
176,990 |
|
|
|
(34,276 |
) |
Net
cash (used for)/provided by used for operating activities |
|
|
(509,477 |
) |
|
|
(297,534 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of land
and equipment |
|
|
- |
|
|
|
(198,765 |
) |
Capitalized expenses in LVCA |
|
|
- |
|
|
|
(17,800 |
) |
Net
cash used for investing activities |
|
|
- |
|
|
|
(216,565 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Principal
repayment of capital lease liability |
|
|
(26,615 |
) |
|
|
(12,347 |
) |
Reduction of right
of use liability |
|
|
(42,102 |
) |
|
|
|
|
Proceeds from
convertible notes, net |
|
|
280,000 |
|
|
|
|
|
Proceeds from
loans, net |
|
|
132,595 |
|
|
|
274,000 |
|
Proceeds from issuance of stock |
|
|
- |
|
|
|
235,000 |
|
Net
cash proceeds from financing activities |
|
|
343,878 |
|
|
|
496,653 |
|
|
|
|
|
|
|
|
|
|
NET INCREASE
(DECREASE) IN CASH |
|
|
(165,599 |
) |
|
|
(17,446 |
) |
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING BALANCE |
|
|
266,607 |
|
|
|
65,922 |
|
|
|
|
|
|
|
|
|
|
CASH, ENDING
BALANCE |
|
$ |
101,008 |
|
|
$ |
48,476 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE ON NON-CASH FINANCING ACTIVITY |
|
|
|
|
|
|
|
|
Cash paid for
interest expense |
|
|
75,672 |
|
|
|
34,336 |
|
Debt converted to
common stock |
|
|
640,597 |
|
|
|
- |
|
Compensation paid
through issuance of common stock |
|
|
217,390 |
|
|
|
- |
|
The
accompanying notes are an integral part of these unaudited
condensed financial statements
GRAPEFRUIT
USA, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’
EQUITY
For
the six months ended June 30, 2019 and 2019
|
|
Equity
(Deficit) Attributable to Grapefruit USA, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Common
Stock |
|
|
Additional |
|
|
|
|
|
Stockholders’ |
|
|
Non- |
|
|
Total |
|
|
|
Number
of
Shares |
|
|
Amount |
|
|
Paid
in
Capital |
|
|
Accumulated
Deficit |
|
|
Equity
(Deficit) |
|
|
controlling
Interest |
|
|
Equity
(Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2018 |
|
|
362,979,119 |
|
|
|
36,298 |
|
|
|
2,813,702 |
|
|
|
(2,655,465 |
) |
|
|
194,535 |
|
|
|
15,085 |
|
|
|
209,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contribution |
|
|
|
|
|
|
|
|
|
|
235,000 |
|
|
|
|
|
|
|
235,000 |
|
|
|
|
|
|
|
235,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(659,184 |
) |
|
|
(659,184 |
) |
|
|
- |
|
|
|
(659,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2019 (Unaudited) |
|
|
362,979,119 |
|
|
|
36,298 |
|
|
|
3,048,702 |
|
|
|
(3,314,649 |
) |
|
|
(229,649 |
) |
|
|
15,085 |
|
|
|
(214,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2019 |
|
|
486,320,329 |
|
|
$ |
48,632 |
|
|
$ |
2,781,839 |
|
|
$ |
(7,264,498 |
) |
|
$ |
(4,434,027 |
) |
|
$ |
- |
|
|
$ |
(4,434,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for services |
|
|
650,000 |
|
|
|
65 |
|
|
|
258,348 |
|
|
|
|
|
|
|
258,413 |
|
|
|
|
|
|
|
258,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for settlement |
|
|
7,213,933 |
|
|
|
721 |
|
|
|
565,573 |
|
|
|
|
|
|
|
566,294 |
|
|
|
|
|
|
|
566,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued with debt |
|
|
915,795 |
|
|
|
92 |
|
|
|
44,782 |
|
|
|
|
|
|
|
44,874 |
|
|
|
|
|
|
|
44,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,380,542 |
) |
|
|
(2,380,542 |
) |
|
|
- |
|
|
|
(2,380,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2020 (Unaudited) |
|
|
495,100,057 |
|
|
$ |
49,510 |
|
|
$ |
3,650,542 |
|
|
$ |
(9,645,040 |
) |
|
$ |
(5,944,988 |
) |
|
$ |
- |
|
|
$ |
(5,944,988 |
) |
The
accompanying notes are an integral part of these unaudited
condensed financial statements
GRAPEFRUIT
USA, INC.
NOTES TO FINANCIAL
STATEMENTS
June
30, 2020
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 81% of the post-Acquisition
IGNG common shares and the current IGNG shareholders will retain
19% of the post-Acquisition IGNG common shares. At the time of the
execution of the SEA, IGNG had approximately 85,218,249 outstanding
shares of common stock. Therefore, IGNG issued to Grapefruit’s
shareholders 362,979,114 IGNG common shares to Grapefruit’s current
shareholder on a pro rata basis with their then-current ownership
of Grapefruit of which Bradley Yourist and Daniel J. Yourist own a
combined 72.26%, or approximately 259,967,136 shares. Accordingly,
the financial statements are prepared using the acquisition method
of accounting with GBI as the accounting acquirer and IGNG treated
as the legal acquirer and accounting acquiree. Because Imaging3, Inc. did not meet the
accounting definition of an operating business, having only nominal
assets, the reverse merger transaction was treated as a
recapitalization and no goodwill was recognized.
The
Company has applied for and received our Distribution renewal
licensure which allows us to operate through May 13, 2021. Our
provisional 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 on building out the real property into a distribution,
manufacturing and high-tech cultivation facility to further its
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 June 30,
2020, the common areas continue to be built throughout the entire
canna-business park and are not complete.
NOTE
2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Interim
Financial Statements
The
unaudited condensed interim financial statements of the Company
have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim
financial information and the instructions to Form 10-Q and Rule
8-03 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included.”).
The
audited financial statements as of December 31, 2019 and December
31, 2018 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, 2019.
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 raw material ending balance as of
June 30, 2020 and December 31, 2019 was zero. Work in process
ending balance as of June 30, 2020 and December 31, 2019 was zero.
The cost of finished goods is recorded at lower of cost or market.
Finished goods ending balance as of June 30, 2020 and December 31,
2019 was $252,756 and $263,985, 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
revenues.
Property, Plant and Equipment, net – Our property and
equipment are recorded at cost. Assets held under capital leases
are capitalized at the commencement of the lease at the lower of
the present value of minimum lease payments at the inception of the
lease or fair value. Maintenance and repairs are expensed as
incurred. Depreciation is computed using the straight-line method
over estimated useful lives of four to seven years, and
amortization is computed using the straight-line method over the
life of the applicable lease. At the time of retirement or other
disposition of property and equipment, the cost and accumulated
depreciation are removed from our accounts and any resulting gain
or loss is reflected in our consolidated statements of
operations.
Land Improvements – Our land improvements are recorded at
cost provided by our property association. These costs will
continue to be capitalized until construction has been completed.
Land improvements will not be depreciated after the construction
has been completed by the property association.
Long-Lived Assets Impairment Assessment – Our long-lived
assets are subject to an impairment test if there is an indicator
of impairment. The carrying value and ultimate realization of these
assets is dependent upon our estimates of future earnings and
benefits that we expect to generate from their use. If our
expectations of future results and cash flows are significantly
diminished, other long-lived assets may be impaired and the
resulting charge to operations may be material. When we determine
that the carrying value of intangibles or other long-lived assets
may not be recoverable based upon the existence of one or more
indicators of impairment, we use the projected undiscounted cash
flow method or realizable value to determine whether an impairment
exists, and then measure the impairment using discounted cash
flows.
Revenue Recognition – The Company derives revenues from the
sale of product in accordance to ASC Topic 606. Revenues are
recognized when control of the promised goods or services is
transferred to the customer in an amount that reflects the
consideration the Company expects to be entitled to in exchange for
transferring those goods or services.
Revenue
is recognized based on the following five step model:
|
- |
Identification
of the contract with a customer |
|
- |
Identification
of the performance obligations in the contract |
|
- |
Determination
of the transaction price |
|
- |
Allocation
of the transaction price to the performance obligations in the
contract |
|
- |
Recognition
of revenue when, or as, the Company satisfies a performance
obligation |
Performance
Obligations
Sales
of products are recognized when all the following criteria are
satisfied: (i) a contract with an end user exists which has
commercial substance; (ii) it is probable the Company will collect
the amount charged to the end user; and (iii) the Company has
completed its performance obligation whereby the end user has
obtained control of the product. A contract with commercial
substance exists once the Company receives and accepts a purchase
order or once it enters into a contract with an end user. If
collectability is not probable, the sale is deferred and not
recognized until collection is probable or payment is received.
Control of products typically transfers when title and risk of
ownership of the product has transferred to the customer. For
contracts with multiple performance obligations, the Company
allocates the total transaction price to each performance
obligation in an amount based on the estimated relative standalone
selling prices of the promised goods or services underlying each
performance obligation. The Company uses an observable price to
determine the stand-alone selling price for separate performance
obligations or a cost-plus margin approach when one is not
available. Historically the Company’s contracts have not had
multiple performance obligations. The large majority of the
Company’s performance obligations are recognized at a point in time
related to the sale of products.
Cost of Goods Sold – Our cost of goods sold includes the
costs directly attributable to revenue recognized and includes
expenses related to the production, packaging and labeling of
cannabis products; personnel-related costs, fees for third-party
services, such as testing and transportation costs related to our
distribution services.
Basic and Diluted Net Income Per Share – Basic net income
per share is based upon the weighted average number of common
shares outstanding. Diluted net income per share assumes that all
dilutive convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period. During 2018, potentially dilutive securities were excluded
from the computation of weighted average shares outstanding-diluted
because their effect was anti-dilutive.
|
|
June 30,
2020 |
|
|
June 30,
2019 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income attributable to
common shareholders |
|
$ |
(2,380,542 |
) |
|
|
(659,184 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted-average number of common
shares outstanding during the period |
|
|
494,159,181 |
|
|
|
383,036,535 |
|
Dilutive effect
of stock options, warrants, and convertible promissory notes |
|
|
- |
|
|
|
- |
|
Common stock
and common stock equivalents used for diluted earnings per
share |
|
|
494,159,181 |
|
|
|
383,036,535 |
|
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 June 30, 2020, 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 June 30, 2020 and December 31,
2019.
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Derivative Liabilities June 30, 2020 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,591,234 |
|
|
$ |
2,591,234 |
|
Derivative
Liabilities December 31, 2019 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,433,597 |
|
|
$ |
1,433,597 |
|
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 three months ended June 30, 2020 and the year
ended December 31, 2019, respectively.
Research and Development Expenses – Research and
development (“R&D”) costs are charged to expense as incurred.
Our R&D expenses include, but are not limited to, consulting
service fees and materials and supplies used in the development of
our proprietary products and services.
General and Administrative Expenses – General and
administrative expenses consist primarily of personnel-related
costs, fees for professional and consulting services, travel costs,
rent, bad debt expense, general corporate costs, and other costs of
administration such as human resources, finance and administrative
roles.
Commitments and Contingencies – Certain conditions may
exist as of the date our financial statements are issued, which may
result in a loss, but which will only be resolved when one or more
future events occur or fail to occur. We assess such contingent
liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal
proceedings that are pending against us or unasserted claims that
may result in such proceedings, we evaluate the perceived merits of
the legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be
sought.
If
the assessment of a contingency indicates that it is probable that
a material loss has been incurred and the amount of the liability
can be estimated, the estimated liability would be accrued in our
consolidated financial statements. If the assessment indicates that
a potentially material loss contingency is not probable, but is
reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, together with an estimate
of the range of possible loss if determinable and material, would
be disclosed.
Loss
contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee
would be disclosed.
Net Loss Per Share – We compute net loss per share in
accordance with ASC 260, Earnings per Share. Under the
provisions of ASC 260, basic net loss per share includes no
dilution and is computed by dividing the net loss available to
common stockholders for the period by the weighted average number
of shares of common stock outstanding during the period. Diluted
net loss per share takes into consideration shares of common stock
outstanding (computed under basic net loss per share) and
potentially dilutive securities that are not
anti-dilutive.
Cash and Cash Equivalents – The Company considers all
highly liquid investment securities with remaining maturities at
the date of purchase of three months or less to be cash
equivalents. Cash equivalents may be invested in money market
funds, certificates of deposit or other interest-bearing
accounts.
Concentration of Credit Risk – Financial instruments that
potentially subject us to credit risk consist of cash. We maintain
our cash with high credit quality financial institutions; at times,
such balances with any one financial institution may not be insured
by the FDIC.
Accounts Receivable and Revenue – The accounts receivable
balance was $17,695 as of June 30, 2020 and $0 as for December 31,
2019. In the first and second quarter of 2020, the net revenues
were generated with one customer, 99% and 50%, respectively. In
addition, during the second quarter of 2020, 40% of the net
revenues generated with another customer. In 2019, 70% of net
revenues generated with one customer.
Recently Issued Accounting Pronouncements – From time to
time, the FASB or other standards setting bodies issue new
accounting pronouncements. Updates to the FASB ASCs are
communicated through issuance of an Accounting Standards Update
(“ASU”). Unless otherwise discussed, we believe that the impact of
recently issued guidance, whether adopted or to be adopted in the
future, is not expected to have a material impact on our condensed
consolidated financial statements upon adoption.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In
August 2020, the FASB issued ASU 2020-06, “Debt – Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)”
(“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain
financial instruments with characteristics of liabilities and
equity, including convertible instruments and contracts on an
entity’s own equity. The ASU is part of the FASB’s simplification
initiative, which aims to reduce unnecessary complexity in U.S.
GAAP. The ASU’s amendments are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal
years. The Company is currently evaluating the impact ASU 2020-06
will have on its financial statements.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement” (“ASU
2018-13”). ASU 2018-13 removes, modifies and adds certain
disclosure requirements in Topic 820 “Fair Value Measurement”. ASU
2018-13 eliminates certain disclosures related to transfers and the
valuations process, modifies disclosures for investments that are
valued based on net asset value, clarifies the measurement
uncertainty disclosure, and requires additional disclosures for
Level 3 fair value measurements. ASU 2018-13 is effective for the
Company for annual and interim reporting periods beginning July 1,
2020. The Company is currently evaluating the impact ASU 2018-13
will have on its financial statements.
Recently Issued Accounting Pronouncements Adopted
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic
842), which supersedes existing guidance on accounting for
leases in “Leases (Topic 840)” and generally requires all leases to
be recognized in the consolidated balance sheet. ASU 2016-02 is
effective for annual and interim reporting periods beginning after
December 15, 2018; early adoption is permitted. The provisions of
ASU 2016-02 are to be applied using a modified retrospective
approach.
In
March 2016, the FASB issued ASU 2016-09, Improvements to
Employee Share-Based Payment Accounting. This ASU affects
entities that issue share-based payment awards to their employees.
The ASU is designed to simplify several aspects of accounting for
share-based payment award transactions which include – the income
tax consequences, classification of awards as either equity or
liabilities, classification on the statement of cash flows and
forfeiture rate calculations. ASU 2016-09 became effective for the
Company in the first quarter of 2018.
In
August 2015, the FASB issued ASU 2015-14, Revenue from Contracts
with Customers (Topic 606) — Deferral of the Effective Date
(ASU 2015-14), which defers the effective date of ASU
2014-09 for one year and permits early adoption as early as the
original effective date of ASU 2014-09. The new revenue standard
may be applied retrospectively to each prior period presented or
retrospectively with the cumulative effect recognized as of the
date of adoption. In 2016, the FASB issued additional guidance to
clarify the implementation guidance (ASU 2016-08, Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations; ASU 2016-10, Revenue from Contracts with
Customers (Topic 606): Identifying Performance Obligations and
Licensing; and ASU 2016-12, Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients). ASU 2015-14 became effective for the Company in
the first quarter of 2018 and had no impact on the 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 six months ended June 30, 2020,
we incurred a net loss of $2,380,542, had a working capital deficit
of $6,074,365 and had an accumulated deficit of $9,645,040 at June
30, 2020. 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
when they come due. There is no assurance that these events will be
satisfactorily completed. As a result, there is substantial 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 assure you
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
will be reduced, stockholders may experience additional dilution,
or such equity securities may provide for rights, preferences or
privileges senior to those of the holders of our common stock. Our
ability to execute our business plan and continue as a going
concern may be adversely affected if we are unable to raise
additional capital or operate profitably.
On
July 10, 2019, Grapefruit USA, Inc. and Imaging3, Inc. (“IGNG”)
closed a Share Exchange after the completion of all conditions
subsequent contemplated by the Share Exchange Agreement among the
parties thereto (the “SEA”), by which IGNG was acquired in a
reverse acquisition (the “Acquisition”) by the former shareholders
of Grapefruit Boulevard Investments, Inc (“Grapefruit). Under the
terms of the SEA executed on May 31, 2019 IGNG became obligated to
issue to Grapefruit’s existing shareholders that number of newly
issued restricted IGNG common shares such that the former
Grapefruit shareholders (now new IGNG shareholders) own
approximately 81% of the post-Acquisition IGNG common shares and
the current IGNG shareholders retain approximately 19% of the
post-Acquisition IGNG common shares.
In
connection with and dependent upon the successful consummation of
the above transaction, on May 31, 2019, the Company executed a
Securities Purchase Agreement (the “SPA”), with Auctus Fund, LLC of
Boston MA (the “Investor”) pursuant to the terms of which IGNG
agreed to sell $4,000,000 of Convertible Notes (the “Notes”) and
issue $6,200,000 of callable warrants (“the Warrants”) to the
Investor. Pursuant to the SPA, Auctus became obligated to purchase
the $4,000,000 of Notes from IGNG 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 million will be funded the day the SEC declares the
registration statement effective and the fourth tranche of $1
million will be funded 90 days after effectiveness. As of June 30,
2020, the first and second tranches of this financing were
completed and along with advances on the third tranche of $530,000,
the Company has received gross proceeds of $2,552,750. On July 24,
2020, the Company received the remainder of the third tranche,
$470,000, bringing the total gross proceeds to
$3,022,750.
NOTE
4 – RIGHT OF USE ASSET AND LIABILITY
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.
Construction
of our facility has not been completed, and we have been provided
an estimated completion date of September 2022. 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.
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. We entered into this
operating agreement in order to obtain our provisional cannabis
licenses for manufacturing and distribution during 2020.
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 $176,579, right-of-use liability
of $179,139 as of June 30, 2020. Operating lease expense for the
three months ended June 30, 2019 was $24,292.
The
following table provides the maturities of lease liabilities at
June 30, 2020:
Maturity of Lease Liabilities |
|
|
|
2020 |
|
$ |
49,447 |
|
2021 |
|
|
96,471 |
|
2022 |
|
|
44,756 |
|
2023 |
|
|
- |
|
2024 |
|
|
- |
|
2025 and
thereafter |
|
|
- |
|
Total future undiscounted lease
payments |
|
|
190,674 |
|
Less:
Interest |
|
|
(11,536 |
) |
Present
value of lease liabilities |
|
$ |
179,138 |
|
NOTE
5 – INVENTORY
At
June 30, 2020 and December 31, 2019, our inventory was, as
follows:
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
Raw materials |
|
$ |
- |
|
|
$ |
- |
|
Work-in-process |
|
|
- |
|
|
|
- |
|
Finish goods |
|
|
252,756 |
|
|
|
263,985 |
|
|
|
$ |
252,756 |
|
|
$ |
263,985 |
|
NOTE
6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net of accumulated depreciation and
amortization, at June 30, 2020 and December 31, 2019 was as
follows:
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
Extraction equipment |
|
$ |
263,677 |
|
|
$ |
263,677 |
|
Extraction laboratory |
|
|
126,707 |
|
|
|
126,707 |
|
Warehouse facility |
|
|
50,158 |
|
|
|
50,158 |
|
Land and land improvements |
|
|
1,456,194 |
|
|
|
1,456,194 |
|
Accumulated
depreciation and amortization |
|
|
(126,654 |
) |
|
|
(87,410 |
) |
Property, plant
and equipment |
|
$ |
1,770,082 |
|
|
$ |
1,809,326 |
|
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 was 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 three months ended
June 30, 2020 and 2019 is $19,622 and $9,073,
respectively.
NOTE
7 – CAPITAL LEASE PAYABLE
Capital
lease payable consists 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 $134,955 and $161,570 as of June 30, 2020 and
December 31, 2019, 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:
|
|
June 30, 2020 |
|
Remainder 2020 |
|
$ |
39,060 |
|
2021 |
|
|
78,120 |
|
2022 |
|
|
32,337 |
|
2023 |
|
|
7,740 |
|
2024 |
|
|
- |
|
Thereafter |
|
|
- |
|
Total minimum lease payments |
|
|
157,257 |
|
Less: amount
representing interest |
|
|
(22,301 |
) |
Capital
lease liability |
|
$ |
134,956 |
|
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 June 30, 2020 of $27,900.
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 June 30, 2020, 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 $200,000. The note is past
due. Two officers of the Company have personally guaranteed the
loan.
In
September 2019, the Company issued another note of $102,569 to an
unrelated party with 5% interest, which has a balance of $86,278
and is past due.
There
are two settlements: one of $136,000 with no interest and another
of $74,202 with 10% interest (Item 1. Legal
Proceedings).
NOTE
9 – CONVERTIBLE NOTES PAYABLE
During
the six months ended June 30, 2020, no notes were converted. During
2019, debt and accrued interest in the amount of $429,843 were
converted to 9,947,843 shares of common stock. As a result of these
conversions, the Company recognized approximately $77 as a gain on
extinguishment of debt.
Amortization
of note discounts, which is included in interest expense, amounted
to $423,738 and $0 for the six months ended June 30, 2020 and 2019,
respectively.
Grapefruit
acquired convertible notes in its acquisition of Imaging3, Inc. on
July 10, 2019. (See Note 15.) On May 31, 2019, the Company executed
a Securities Purchase Agreement (the “SPA”), with Auctus Fund, LLC
of Boston MA (the “Investor”) pursuant to the terms of which the
Company will sell $4,000,000 of Convertible Notes (the “Notes”) and
issue $6,200,000 of callable warrants (“the Warrants”) to the
Investor. Pursuant to the SPA, Auctus will purchase the $4,000,000
of Notes from the Company 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 million will be funded the day the SEC declares the
registration statement effective and the fourth tranche of $1
million will be funded 90 days after effectiveness. As of June 30,
2020, the first and second tranches of this financing were
completed and along with advances on the third tranche of $530,000,
the Company has received gross proceeds of $2,552,750. On July 24,
2020, the Company received the remainder of the third tranche,
$470,000, bringing the total gross proceeds to $3,022,750. The
Notes have a two-year term and will bear interest at 10%. The notes
are redeemable at any time between the date of issuance and
maturity at 150% of face value. The Notes will be convertible into
shares of IGNG common stock at 95% of the mathematical average of
the five lowest trading prices for IGNG common stock on the OTCQB
for the period from the Closing to the maturity date of the Note
being converted less $0.01 for conversions at less than $0.15 and
less $0.02 for conversions at more than $0.15.
In
addition, the Company has thirteen other convertible notes
comprising $314,000 outstanding and they are currently in default.
The interest on these notes vary from 5-10%.
NOTE
10 – EMPLOYMENT AGREEMENT
We
entered into an employment agreement with our former chief
executive officer, John Hollister, which commenced in November
2017. Mr. Hollister’s employment agreement provides for him to be
paid an initial Salary of $17,500 per month rising to $26,500 per
month if he achieves certain goals, and an annual bonus of up to
$200,000 and certain Special Bonuses at the discretion of the
Company’s board of directors. As of June 3, 2019, Mr. Hollister’s
contract was terminated, and he has received no compensation since
then.
The
Company has not yet entered into employment agreements with Mr.
Bradley Yourist or Mr. Dan Yourist but expects to do so in the
future.
NOTE
11 – NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING
LEASE – RELATED PARTY
Notes
payable to officers and directors as of June 30, 2020 and 2019 are
due on demand and consisted of the following:
|
|
June
30, 2020 |
|
|
December
31, 2019 |
|
Payable
to an officer and director |
|
$ |
115,249 |
|
|
$ |
115,249 |
|
Payable
to an individual affiliate of an officer and director |
|
|
40,000 |
|
|
|
40,000 |
|
Payable
to a company affiliate to an officer and director |
|
|
126,377 |
|
|
|
126,377 |
|
|
|
$ |
281,626 |
|
|
$ |
281,626 |
|
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.
Included
in accounts payable and accrued expenses as of June 30, 2020, there
is $120,000 of related party expenses. The expenses are
non-interest bearing expenses.
NOTE
12 – EQUITY
Preferred
Stock
The
Company has authorized 1,000,000 shares of $0.0001 par value
preferred stock. As of June 30, 2020, and December 31, 2019, there
are no shares of preferred stock outstanding.
Common
Stock
The
Company is authorized to issue 1,000,000,000 shares of $0.0001 par
value common stock.
During
the six months ended June 30, 2020 the Company issued a total of
650,000 shares were issued for services rendered valued at $26,140;
915,795 shares were issued upon receiving a loan valued at $44,874;
and 7,213,933 shares were issued related to for a settlement valued
at $640,597.
During
the six months ended June 30, 2019, the Company received a capital
contribution of $235,000.
As of
June 30, 2020, there were approximately 614 record holders of our
common stock, not including shares held in “street name” in
brokerage accounts which is unknown. As of June 30, 2020, there
were 495,100,057 shares of our common stock outstanding on
record.
Stock
Compensation for Non-employee
In
August 2019, the Company issued 4,500,000 shares of common stock to
a cannabis specialist to sit on an advisory board. The value of the
shares totaled $382,500 and is to be expensed over a twelve-month
period. As of June 30, 2020, $329,583 has been expensed and $52,917
has not been expense.
Stock
Option Plan
During
2014, the Board of Directors adopted, and the shareholders
approved, the 2014 Stock Option Plan under which a total of
1,811,401 shares of common stock had been reserved for issuance.
The 2014 Stock Option Plan will terminate in September
2024.
Stock
Options
As of
June 30, 2020, employees of the Company hold options to purchase
250,000 shares of common stock at an exercise price of
$1.00.
Transactions in FY 2019 |
|
Quantity |
|
|
Weighted-Average
Exercise Price
Per Share |
|
|
Weighted-Average
Remaining
Contractual Life |
|
Outstanding, December 31, 2019 |
|
|
250,000 |
|
|
$ |
1.00 |
|
|
|
5.57 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited |
|
|
- |
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2020 |
|
|
250,000 |
|
|
$ |
1.00 |
|
|
|
5.07 |
|
Exercisable, June 30, 2020 |
|
|
250,000 |
|
|
$ |
1.00 |
|
|
|
5.07 |
|
The
weighted average remaining contractual life of options outstanding
issued under the Plan was 5.07 years at June 30, 2020.
NOTE
13 — WARRANTS
Following
is a summary of warrants outstanding at June 30, 2020:
Number of Warrants |
|
|
Exercise Price |
|
|
Expiration Date |
|
37,500 |
|
|
$ |
0.10 |
|
|
April 2022 |
|
500,00 |
|
|
$ |
0.10 |
|
|
August 2022 |
|
575,000 |
|
|
$ |
0.10 |
|
|
April 2023 |
|
125,000 |
|
|
$ |
0.10 |
|
|
May 2023 |
|
162,500 |
|
|
$ |
0.10 |
|
|
August 2023 |
|
2,800,000 |
|
|
$ |
0.40 |
|
|
May 2022 |
|
302,776 |
|
|
$ |
0.10 |
|
|
January 2024 |
|
12,000,000 |
|
|
$ |
0.10 |
|
|
March 2021 |
|
2,160,000 |
|
|
$ |
0.10 |
|
|
June 2021 |
|
16,000,000 |
|
|
$ |
0.125 |
|
|
May 2021 |
|
15,000,000 |
|
|
$ |
0.15 |
|
|
May 2021 |
|
8,000,000 |
|
|
$ |
0.25 |
|
|
May 2021 |
|
200,000 |
|
|
$ |
0.10 |
|
|
October 2020 |
Grapefruit
acquired 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 16,000,000 warrants to
purchase 16,000,000 shares of the Company’s common stock at an
exercise price of $0.125 per share, 15,000,000 warrants to purchase
15,000,000 shares of the Company’s common stock at an exercise
price of $0.15 per share, 8,000,000 warrants to purchase 8,000,000
shares of the Company’s common stock at an exercise price of $0.25
per share for a period of two year from the date of
issuance.
In
addition to the Notes in connection with the SPA agreement, IGNG
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 IGNG stock trades
on the OTCQB at 200% or more of a given exercise price for 5
consecutive days.
NOTE
14 — DERIVATIVE LIABILITIES
Grapefruit
acquired 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.
The
following table summarizes activity in the Company’s derivative
liability during the six-month period ended June 30,
2020:
12-31-19 Balance |
|
$ |
1,433,597 |
|
Creation/acquisition |
|
|
225,755 |
|
Reclassification of equity |
|
|
- |
|
Change in
Value |
|
|
931,882 |
|
6-30-20
Balance |
|
$ |
2,591,234 |
|
The
Company classifies the fair value of these derivative liabilities
under level 3 of the fair value hierarchy of financial instruments.
The fair value of the derivative liability was calculated using a
Black Scholes model. The Company’s stock price and estimates of
volatility are the most sensitive inputs in validation of assets
and liabilities at fair value. The liabilities were measured using
the following assumptions:
Term |
|
0.01
years -5.0 years |
|
Dividend
Yield |
|
|
0 |
% |
Risk-free
rate |
|
|
0.15%
- 2.49 |
% |
Volatility |
|
|
65-168 |
% |
NOTE
15 – INVESTMENTS
Acquisition
of Lake Victoria Mining Company
In
December 2018, we purchased a public shell company, Lake Victoria
Mining Company. (“LVCA”), for $150,000 cash and $30,300, which
included a noncontrolling interest of $15,085 for a total
investment amount of $195,385, through which we originally intended
to effectuate becoming a public company through a reverse merger
transaction. We accounted for the purchase as an asset acquisition
whereby the total investment amount was recorded as an intangible
asset. In early 2019 however, we determined that LVCA was not a
suitable entity through which we could accomplish our objective.
Accordingly, we recorded a permanent impairment charge related to
the intangible asset in the amount of $195,385, leaving a net
realizable value of $0 as of December 31, 2019.
In
July 2019, we sold our investment in LVCA to an entity owned by the
CEO and COO of the Company for $1,000 and the assumption of $24,553
of liabilities resulting in a net gain of $25,553.
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 third quarter of 2020.
NOTE
16 – CONCENTRATION
Customers
For
the six months ended June 30, 2020 and 2019, our Company earned net
revenues of $1,274,211 and $332,041, respectively. The vast
majority of the revenues for these periods were derived from a
limited number of customers. Two customers accounted for over 93%
of the Company’s total revenues for the period ended June 30, 2020
and a different customer accounted for over 90% of the Company’s
total revenue for the period ended June 30, 2019.
Suppliers
For
the six months ended June, 2020 and 2019, we purchased products for
sale from a limited number of suppliers located in California. A
substantial portion of the Company’s inventory was purchased from
two suppliers. The two suppliers accounted for over 65% of the
Company’s total inventory purchase for both of the six months ended
June 30, 2020 and 2019.
NOTE
17 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet
date but before the financial statements are issued. Based upon the
evaluation, the Company did not identify any recognized or
non-recognized subsequent events that would have required
adjustment or disclosure in the financial statements, except as
disclosed. On July 24, 2020, the Company received the remainder of
the third tranche, $470,000, bringing the total gross proceeds
under the SPA to $3,022,750.
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-Q. 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-Q. 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.
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 June 30, 2020 as compared
to the Three Months Ended June 30, 2019.
The
following sets forth selected items from our statements of
operations for three months ended June 30, 2020 and for the three
months ended June 30, 2019.
|
|
Three Months
Ended
June 30, 2020 |
|
|
Three Months
Ended
June 30, 2019 |
|
Net revenues |
|
$ |
880,652 |
|
|
$ |
3,345 |
|
Cost of goods
sold |
|
|
809,350 |
|
|
|
134,942 |
|
Gross profit |
|
|
71,302 |
|
|
|
(131,597 |
) |
General and
administrative expense |
|
|
420,241 |
|
|
|
256,741 |
|
Income (loss) from operations |
|
|
(348,939 |
) |
|
|
(388,338 |
) |
Change in value of derivatives |
|
|
1,178,836 |
|
|
|
- |
|
Interest and other income
(expense) |
|
|
(437,066 |
) |
|
|
(34,096 |
) |
Provision for
income taxes |
|
|
- |
|
|
|
- |
|
Net income
(loss) |
|
$ |
392,181 |
|
|
$ |
(422,434 |
) |
Revenue for the three months ended June 30, 2020 was $880,652
comprised primarily of bulk flower distribution operations compared
to $3,345 for the corresponding period in 2019. During the quarter
ended June 30, 2019, management of the company determined to focus
its efforts on finalizing the reverse acquisition of Imaging3, Inc.
and completing the audit of Grapefruit Boulevard Investments, Inc.
As a result, the bulk flower distribution business was suspended
from April 2019 until August 2019. Therefore, the large
year-to-year revenue increase was the result of the Company
returning to normal distribution operations from the fall of 2019
through the second quarter of 2020. Management anticipates that
revenues will continue to significantly increase quarter over
quarter throughout 2020 and into 2021.
Cost of goods sold for the three months ended June 30, 2020 were
$809,350 as compared to $134,942 for the corresponding period in
2019. A comparison of these results to the corresponding quarter of
the prior year is of less relevance as operations were suspended
during the prior period. A more relevant comparison is to the
sequential quarter over quarter results in 2020. Revenues for the
quarter ended June 30, 2020 were $880,652 as compared to $393,559
for the quarter ended March 31, 2020, reflecting a 124% increase
over the previous quarter. Furthermore, the June 30, 2020 quarter
costs of goods sold of $809,350 amounted to 92% of revenues as
opposed to the March 31, 2020 quarter cost of goods sold of
$454,987, which actually exceeded revenues, resulting in negative
gross margin for the March 31, 2020 quarter. These comparatively
high costs of goods sold and negative gross margins for the March
31, 2020 quarter were the result of price concessions to regain
customers and to uncertainty from the COVID-19 pandemic and its
effect on the wholesale market. During the quarter ended June 30,
2020, we were able to achieve positive gross margins due to the
restart of our distribution operation. By the end of the second
quarter of 2020, the company continued to accelerate its revenue
growth with better margins. We expect expansion of revenues and
improvement of margins to continue into the third and fourth
quarter of 2020 and beyond.
Our
resulting gross profit (loss) for the three months ended June 30,
2020 and 2019 were $71,302 and $(131,597), respectively. We expect
our profit margins in future periods to significantly improve as a
result of our current pricing strategies.
Our
general and administrative expenses for the three months ended June
30, 2020 was $420,241 compared to $256,741 for the corresponding
period in 2019. Included in general and administrative expenses is
$105,621 of consulting expense that is not expected to continue
into future periods. The increase in costs is primarily due to
additional consulting, investor relations, and corporate salaries
and occupancy costs offset by a reduction in auditing
fees.
Our
resulting net loss from operations for the three months ended June
20, 2020 and 2019 were $348,939 and $388,338,
respectively.
The Company
acquired derivative liabilities with the Share Exchange on July 10,
2019. During the three months ended June 30, 2020, we recorded a
change in the value of derivatives of $1,178,836. There were no
derivatives held by the Company during the three months ended June
30, 2019; hence, there was $0 of related expense during that
period.
Interest
and other expense for the three months ended June 30, 2020 were
$437,066 as compared to $34,096 for the corresponding period in
2019, as a result of debt issued to fund the company’s
operations.
Results
of Operations for the Six Months Ended June 30, 2020 as compared to
the Six Months Ended June 30, 2019.
The
following sets forth selected items from our statements of
operations for six months ended June 30, 2020 and for the six
months ended June 30, 2019.
|
|
Six Months
Ended
June 30, 2020 |
|
|
Six Months
Ended
June 30, 2019 |
|
Net revenues |
|
$ |
1,274,211 |
|
|
$ |
332,041 |
|
Cost of goods
sold |
|
|
1,262,087 |
|
|
|
390,783 |
|
Gross profit |
|
|
12,124 |
|
|
|
(58,742 |
) |
General and
administrative expense |
|
|
724,274 |
|
|
|
351,159 |
|
Income (loss) from operations |
|
|
(712,150 |
) |
|
|
(409,901 |
) |
Change in value of derivatives |
|
|
(931,882 |
) |
|
|
- |
|
Interest and other income
(expense) |
|
|
(736,510 |
) |
|
|
(239,815 |
) |
Provision for
income taxes |
|
|
- |
|
|
|
- |
|
Net (loss)
income |
|
$ |
(2,380,542 |
) |
|
$ |
(649,716 |
) |
Revenue
for the six months ended June 30, 2020 was $1,274,211 compared to
$332,041 for the corresponding period in 2019 nearly quadrupled.
The increase reflects the refocused efforts of the company on its
core operations subsequent to its completed efforts to effectuate
the reverse merger into a public company during the fourth quarter
of 2019. We expect that revenue for the second half of 2020 will
more than double our performance for the first half of the
year.
Cost
of goods sold for the six months ended June 30, 2020 were
$1,262,087 as compared to $390,783. The increase was primarily due
to the increase in bulk flower sales.
Our
resulting gross profit (loss) for the six months ended June 30,
2020 and 2019 were $12,124 and $(58,742), respectively. Due to our
current product pricing strategies as discussed above, we expect
our profit margins in future periods to significantly
improve.
Our
general and administrative expenses for the six months ended June
30, 2020 was $724,274 compared to $351,159 for the corresponding
period in 2019. The increase is due to additional legal, audit,
accounting, and investor relations expenses, as well as salaries,
commissions and wages. Included in general and administrative
expenses is $172,254 of consulting expense that is not expected to
continue into future periods. The increase in costs is primarily
due to additional legal, accounting, consulting, investor
relations, and corporate salaries.
Our
resulting net loss from operations for the six months ended June
30, 2020 and 2019 were $712,150 and $409,901,
respectively.
The
Company acquired derivative liabilities with the Share Exchange on
July 10, 2019. During the six months ended June 30, 2020, we
recorded a change in the value of derivatives of $(931,882). There
were no derivatives held by the Company during the six months ended
June 30, 2019; hence, there was $0 of related expense during that
period.
Interest
and other expense for the three months ended June 30, 2020 were
$736,510 as compared to $239,815 for the corresponding period in
2019, which consist primarily of interest expense for the quarter
ended June 30, 2020 and includes an impairment charge related to an
investment in LVCA of $195,385 for the quarter ended June
30,2019.
Liquidity
and Capital Resources
Our
cash position was $101,008 as of June 30, 2020 from $266,607 as of
December 31, 2019. Our total current assets were $378,918 as of
June 30, 2020, compared to $543,051 as of December 31,
2019.
Our
total current liabilities were $6,453,283 as of June 30, 2020
compared to $5,115,438 as of December 31, 2019. The change is
primarily due to the change of value of the derivative liability,
an increase in convertible debt and accrued interest, offset by a
decrease in subscription payables.
During
the six months ended June 30, 2020, net cash used for operating
activities was $509,477, as compared $297,534 used during the six
months ended June 30, 2019. Net cash used in investing activities
during the six months ended June 30, 2020 was $0, as compared to
$216,565 during the six months ended June 30, 2019. Net cash
provided by financing activities during the six months ended June
30, 2020 was $343,878 as compared to $496,653 during the six months
ended June 30, 2019.
We
expect our working capital requirements in the next twelve months
to be met primarily by the proceeds of issuance of debt,
convertible instruments and other securities to our existing
creditor, shareholders, and other investors, as well as from cash
flow from operations. 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 three months ended June 30,
2020, we incurred a net loss of $2,380,542, had a working capital
deficit of $6,074,365 and had an accumulated deficit of $9,645,040
at June 30, 2020. 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 when they come due. There is no assurance that these
events will be satisfactorily completed. As a result, there is
substantial 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.
Item 4. Controls and
Procedures
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934, as amended.
Our management assessed the effectiveness of our internal control
over financial reporting as of June 30, 2020. In making this
assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control-Integrated (2013Framework). A material
weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of our annual
or interim financial statements will not be prevented or detected
on a timely basis. We have identified the following material
weakness:
1. As
of June 30, 2020, we did not maintain adequate segregation of
duties. Accordingly, management has determined that this control
deficiently constitutes a material weakness.
Because
of this material weakness, management has concluded that we did not
maintain effective internal control over financial reporting as of
June 30, 2020, based on the criteria established in “Internal
Control-Integrated Framework” issued by the COSO.
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 June 30, 2020, 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 March 2020, the Company agreed to issue an
additional aggregate of 2,822,654 shares the Company’s stock to
these defendants in final settlement of the dispute. This share
issuance is currently awaiting court approval.
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, 7,628,567 shares are to be
issued as part of the settlement agreement—7,213,933 of the shares
were issued as of June 30, 2020.
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.
Item 3. Defaults Upon Senior
Securities
None.
Item 4. Mine Safety
Disclosures
Not
Applicable.
Item 5. Other
Information
None.
Item 6. Exhibits
(a)
Exhibits
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: August 11, 2020 |
Bradley
J. Yourist |
|
|
Chief
Executive Officer |
|
|
|
|
|
/s/
Kenneth J. Biehl |
|
Dated: August
11, 2020 |
Kenneth
J. Biehl |
|
|
Chief
Financial Officer |
|
|
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