Notes
to Condensed Financial Statements
(Unaudited)
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3,
Inc. (the “Company”, “us”, “we”, “Imaging3”) is a corporation incorporated on
October 29, 1993 as Imaging Services, Inc. in the state of California. The Company filed a certificate of amendment of articles
of incorporation to change its name to Imaging3, Inc. on August 20, 2002. In March of 2018, the Company incorporated in Delaware.
The
Company is a development stage medical device company. The Company has developed a portable proprietary imaging technology designed
to produce 3D x-ray images in real time. The Company’s devices have the potential to use less radiation and require less
specialized power sources than many currently available x-ray imaging devices. The Company’s lead device, the Dominion Smartscan,
for which the Company plans to submit a 510K application with the FDA in 2020, will be easily transportable and works off conventional
household current. While the primary focus is applications for the healthcare industry, there are many potential non-healthcare
related uses for the Company’s technology, including agriculture and security.
2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On
September 13, 2012 (the “Petition Date”), the Company filed a voluntary petition with the federal bankruptcy court
in Los Angeles, California, to enter bankruptcy under Chapter 11 of the United States Bankruptcy Code. On or about July 15, 2013,
our Plan of Reorganization was approved by the United States Bankruptcy Court. On July 30, 2013, we emerged from bankruptcy and
continued operations under the terms and conditions of our Bankruptcy Reorganization Plan as it applies to post bankruptcy operations.
For accounting purposes, management deemed the effective date of the Chapter 11 Plan (the “Plan”) to be June 30, 2013.
The Company’s operations between July 1, 2013 and July 30, 2013 were not significant. The Plan adopted by Imaging3, Inc.
is a reorganizing plan. Payments under the Plan were made by utilizing existing cash on hand, borrowings on a secured and unsecured
basis, future cash flow, if any, capital raised through the sale of our common stock in private placements, and by conversion
of debt to equity.
Upon
emergence from bankruptcy, Imaging3 adopted fresh-start accounting which resulted in Imaging3 becoming a new entity for financial
reporting purposes. Imaging3 applied fresh start accounting as of July 1, 2013. As a result of the application of fresh start
accounting and the effects of the implementation of the plan of reorganization, the financial statements on or after July 1, 2013
are not comparable with the financial statements prior to that date.
The
accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. It is suggested that
these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s
annual report on Form 10-K for the fiscal year ended December 31, 2018. The Company follows the same accounting policies in preparation
of interim reports. Results of operations for the interim periods are not indicative of annual results
Use
of Estimates
In
preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management
is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible
into cash to be cash equivalents. The Company maintains its cash in bank deposit accounts that may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company had no cash equivalents at June 30, 2019 or December
31, 2018.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) 2014-09,
Revenue
from
Contracts with Customers (Topic 606).
ASU 2014-09 supersedes the revenue
recognition requirements in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and is based
on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional
disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including
significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The
adoption of ASU 2014-09, using the modified retrospective approach, had no significant impact on the Company’s results of
operation, cash flows or financial position.
Revenue
is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services.
All revenue is recognized when the Company satisfies its performance obligations under the contract. The majority of the Company’s
contracts have a single performance obligation and are short term in nature. Generally, the Company extends credit to its customers
and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have
been within management’s expectations. The Company has a revenue receivables policy for service and warranty contracts.
Equipment sales usually have a one-year warranty of parts and service. After a one-year period, the Company contacts the buyer
to initiate the sale of a new warranty contract for one year. Warranty revenues are deferred and recognized on a straight-line
basis over the term of the contract or as services are performed.
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 is based
on the assumption 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 and 2019, potentially dilutive securities were excluded from the computation of weighted
average shares outstanding-diluted because their effect was anti-dilutive.
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
The
fair value accounting standard creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive
fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having
the highest priority and Level 3 having the lowest.
Level
1: Observable prices in active markets for identical assets or liabilities.
Level
2: Observable prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which all significant inputs are observable in the market.
Level
3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable. These unobservable assumptions
reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include
use of option pricing models, discounted cash flow models, and similar techniques.
The
Company had the following assets or liabilities measured at fair value on a recurring basis at June 30, 2019 and December 31,
2018 respectively.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities June 30, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
591,309
|
|
|
$
|
591,309
|
|
Derivative Liabilities December 31, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
677,990
|
|
|
$
|
677,990
|
|
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements or tax returns.
Under
this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents
the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with
FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical
trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well
as costs to acquire technology licenses.
Recent
Accounting Pronouncements
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. The adoption of this standard had no
material impact on the Company’s financial position or results of operations.
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 fiscal 2018. The adoption of this standard had no material impact on the Company’s financial position
or results of operations.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
Form instruments) with down round features that require fair value measurement of the entire instrument or conversion option.
Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the
existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the
indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities
and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting
effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The
adoption of this standard had no material impact on the Company’s financial position or results of operations.
3.
INCOME TAXES
The
Company’s book losses and other timing differences result in a net deferred income tax benefit which is offset by a valuation
allowance for a net deferred asset of zero. The Company has concluded, in accordance with the applicable accounting standards,
that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, management
has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections
of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not.
Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates
could result in material differences in the realization of these assets. The Company has recorded a full valuation allowance related
to all of its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization
of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included
the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected
future taxable income. The availability of the Company’s net operating loss carry forwards is subject to limitation if there
is a 50% or more change in the ownership of the Company’s stock. The provision for income taxes consists of the state minimum
tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely
than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position
will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position
will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized
tax benefits in income tax expense. The Company has not recognized any unrecognized tax benefits and does not have any interest
or penalties related to uncertain tax positions as of December 31, 2018 or June 30, 2019.
4.
NOTES PAYABLE
During
the first quarter of 2018, the Company issued a promissory note in the amount of $10,000 that bears interest of 10%. The note
matured as of April 15, 2018 and was paid back with cash.
During
the first quarter of 2019, the Company issued two short-term promissory notes in the amount of $30,000 that bears interest at
$6,000 per month. The notes matured within twenty days of issuance but are extendable at the Company’s option and were converted
to shares as of July 16, 2019.
During
2018, debt and accrued interest in the amount of $574,524 were converted to 6,811,151 shares of common stock. As a result of these
conversions, the Company recognized approximately $100,000 as a gain on extinguishment of debt, accrued interest, and derivative
liabilities.
During
the first quarter ended March 31, 2019, debt and accrued interest in the amount of $54,338 were converted to 14,027,800 shares
of common stock. As a result of these conversions, the Company recognized approximately $50,000 as a loss on extinguishment of
debt, accrued interest, and derivative liabilities.
During
the second quarter ended June 30, 2019, debt and accrued interest in the amount of $1,703,423 were converted to 15,407,367 shares
of common stock, of which 6,601,669 have been issued. As a result of these conversions, the Company recognized approximately $9,000
as a loss on extinguishment of debt, accrued interest, and derivative liabilities during the second quarter.
Amortization
of note discounts amounted to $179,307 during the six months ended June 30, 2018 and $25,000 for the six months ended June 30,
2019.
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 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 IGNG in four tranches as follows: $600,000.00 at the SPA closing, which was funded on June 6, 2019;
the second tranche of $1,400,000.00 will be funded by Auctus on the day IGNG files its required registration statement on Form
S-1 registering the IGNG shares underlying tranches 1 and 2 (the “Registration Statement”); the third tranche will
be funded the day the SEC declares the Registration Statement effective and the fourth tranche will be funded 90 Days after the
Effective Date. 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.
5.
STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 1,000,000 shares of preferred stock. During 2017, 2,000 shares of preferred shares were cancelled. As of
June 30, 2019, and December 31, 2018, there are no shares of preferred stock outstanding.
Common
Stock
The
Company is authorized to issue 1,000,000,000 shares of no-par value common stock.
During
the six months ended June 30, 2018, the Company issued a total of 2,904,171 shares of common stock for cash in the amount of $493,223
and 18,058,539 shares were issued for services rendered valued at $5,442,076. During the six months ended June 30, 2018, 3,000,000
of these shares were cancelled.
During
the six months ended June 30, 2019, the Company issued 10,544,985 shares for $273,283 of subscription payable received before
December 31, 2018 and $358,500 for cash during the current year, 20,629,469 shares related to conversions of notes payable of
$1,945,615. During the six months ended June 30, 2019, 8,000,000 shares of stock to a former officer were canceled. The Company
awarded directors, officers and key consultants 5,750,000 shares for services rendered. 5,280,000 of these shares were issued
during the quarter ending June 30, 2019 totaling an amount of $87,800. At June 30, 2019, the company is also in the process of
issuing 14,811,440 shares of common stock for the balance of subscription payable at June 30, 2019, which is mainly comprised
of debt conversion.
As
of June 30, 2019, there were approximately 591 record holders of our common stock, not including shares held in “street
name” in brokerage accounts which is unknown. As of June 30, 2019, there were 68,881,437 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 27,000,000
shares of common stock had been reserved for issuance. The Stock Option Plan will terminate in September 2024.
Stock
Options
Transactions in 2018
|
|
Quantity
|
|
|
Weighted-
Average
Exercise
Price
Per
Share
|
|
|
Weighted-
Average Remaining
Contractual
Life
|
|
Outstanding, December 31, 2018
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.57
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2019
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.08
|
|
Exercisable, June 30, 2019
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions in FY2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
7.57
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.57
|
|
Exercisable, December 31, 2018
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.57
|
|
As
of June 30, 2019, former employees of the Company hold options to purchase 250,000 shares of common stock at an exercise price
of $1.00.
6.
WARRANTS
Following
is a summary of warrants outstanding at June 30, 2019:
Number of Warrants
|
|
Exercise Price
|
|
|
Expiration Date
|
37,500
|
|
$
|
0.10
|
|
|
April 2022
|
500,000
|
|
$
|
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
|
During
the six months ended June 30, 2019, the Company issued of 8,960,000 warrants to purchase 8,960,000 shares of the Company’s
common stock at an exercise price of $0.10 per share for a period of two years from the date of issuance. 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.
7.
DERIVATIVE LIABILITIES
The
Company’s only asset or liability measured at fair value on a recurring basis was its derivative liability associated with
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 months ended June 30, 2019 and
the year ended December 31, 2018:
12-31-18 Balance
|
|
$
|
677,990
|
|
Creation
|
|
|
558,879
|
|
Reclassification of equity
|
|
|
(1,548,956
|
)
|
Change in Value
|
|
|
903,396
|
|
6-30-19 Balance
|
|
$
|
591,309
|
|
|
|
|
|
|
12-31-2017 Balance
|
|
$
|
701,347
|
|
Creation
|
|
|
-
|
|
Reclassification to Equity
|
|
|
(202,996
|
)
|
Change in Value
|
|
|
179,639
|
|
12-31-2018 Balance
|
|
$
|
677,990
|
|
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
|
|
|
2.33% - 2.49
|
%
|
Volatility
|
|
|
65-168
|
%
|
8.
COMMITMENTS AND CONTINGENCIES
Bankruptcy
Closure
On
January 31, 2017, United States Bankruptcy Judge for the Central District of California, Neil Bason, granted the Company’s
unopposed motion for entry of final decree and also granted approval of the two stipulations regarding payment of court-approved
fees. As a result, the Imaging3 Chapter 11 proceeding is now closed. The Company is no longer subject to the jurisdiction of the
Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.
Alpha
and Brio Settlement
On
Monday, April 15, 2019, Imaging3, Alpha Capital Anstalt (“Alpha”) and Brio Capital Master Fund (“Brio”)
agreed to terms settling the outstanding judgment against the Company, issued by the United States District Court for the Southern
District of New York (the “Court”) on July 27, 2018 (the “Agreement”). The Court awarded Alpha $804,770.08
and Brio $669,805.43, respectively. On June 6, 2019 per terms of the Agreement, the Company paid $100,000 cash to both Alpha and
Brio at the time of the closing of the Acquisition. The balance of the judgments will be converted to IGNG restricted common shares
at the conversion price of $0.164 per share, translating to 4,191,070 (four million, one hundred, ninety thousand, and seventy)
Shares of IGNG’s common stock to Alpha and 3,514,628 (three million, five hundred fourteen thousand, six hundred and twenty)
Shares to Brio, which is included in the subscription payable. The settlement resulted in a gain of $12,075 recorded in the second
quarter of 2019.
9.
RELATED PARTY TRANSACTIONS
On
June 7, 2019, the Company advanced $300,000 to Grapefruit Boulevard Investments (“Grapefruit”), an entity substantially
owned by two officers of the Company. On June 28, 2019, $35,950 of the advance was repaid. The balance of $264,050 is included
in other receivables as of June 30, 2019. As described in Note 10, On July 10, 2019, the Company completed a transaction by which
IGNG was acquired in a reverse acquisition by Grapefruit.
10.
SUBSEQUENT EVENTS
Administrative
Claim of Greenberg Glusker Fields Claman & Machtinger LLP
On
Friday July 5, 2019 the Company and Greenberg Glusker Fields Claman & Machtinger, LLP executed a Settlement Agreement (the
“Greenberg Settlement Agreement”), with its former bankruptcy counsel and largest trade creditor Greenberg Glusker
Fields Claman & Machtinger LLP (“GG”). The Greenberg Settlement Agreement calls for IGNG/Grapefruit to liquidate
the outstanding GG balance of $1,245,380.00 (the “Balance”) by the payment of $204,000 to GG in three payments of
$68,000.00 to be made by no later than November 30, 2019 and the immediate issuance of 6,351,126 IGNG common shares (The “Settlement
Shares”) at an agreed value of $.164 per share to GG. The Settlement Shares will be the subject of a Section 3(a)(10) of
the Securities Act of 1933 action (the “3(a)(10) Action”) to be expeditiously filed by GG, by which the Court hearing
the 3(a)(1) action will be asked to approve the Agreement and after such approval the Settlement Shares shall be immediately eligible
for resale in the public markets. The Greenberg Settlement Agreement calls for the issuance of “Make Whole” shares
to GG, if after the sale of all the Settlement Shares by GG in the public market it fails to realize sufficient funds to liquidate
the balance. The Greenberg Settlement Agreement also contains a “leak out” provision limiting sales of the Settlement
Shares by GG to ensure that such sale do not disrupt the market for IGNG shares while such shares are being liquidated.
Final
Closing on Grapefruit Acquisition
On
Wednesday July 10, IGNG closed the Share Exchange after the completion of all conditions subsequent contemplated by the Share
Exchange Agreement among the parties thereto (the “SEA”), including the execution of the Greenberg Settlement Agreement
as set forth above, by which IGNG was acquired in a reverse acquisition (the “Acquisition”) by the former shareholders
of Grapefruit Boulevard Investments, Inc (“Grapefruit”)., a California corporation and privately held cannabis products
company based in Westwood, Los Angeles, CA. 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 eighty-five million two hundred eighteen thousand two hundred forty-nine (85,218,249) outstanding shares of common
stock. Therefore, IGNG issued to Grapefruit’s shareholders three hundred sixty-two million nine hundred seventy-nine thousand
one hundred fourteen (362,979,114) IGNG common shares to Grapefruit’s current shareholder on a pro rata basis with their
current ownership of Grapefruit of which Bradley Yourist and Daniel J. Yourist own a combined 72.26% or approximately two hundred
fifty nine million nine hundred sixty seven thousand one hundred thirty six (259,967,136) shares. In addition, IGNG issued approximately
twenty-three million three hundred thirty-seven thousand two hundred fifty-two (23,337,251) new restricted common shares to an
advisor to Grapefruit in connection with structuring of the Acquisition and the Investment. As a result, at the conclusion of
the Acquisition, IGNG has issued a total of approximately four hundred seventy-one million six hundred twenty-six thousand eight
hundred fourteen 471,626,814 common shares issued and outstanding.
Within
75 days of the Closing the Company shall file a Form 8-K with the SEC which will include, along with all other required disclosures,
pro forma consolidated financial statements of IGNG and GBI.
Conversion
of Liability
In
July 2019, a former chairman and a director of the company converted accrued compensation in the amount of $105,000 for
2,200,000 shares and 4,400,000 warrants exercisable at $0.10 per share.
11.
GOING CONCERN
The
Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has
historically incurred net losses and as of June 30, 2019 had an accumulated deficit totaling $23.5 million. During the six months
ended June 30, 2019 and the years ended December 31, 2018 and 2017, the Company utilized an aggregate of $1.8 million of cash
in operating activities and incurred an aggregate net loss of $18.7 million. The continuing losses have adversely affected the
liquidity of the Company.
In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s
ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary as a result of the Company’s going concern uncertainty.
Management’s
plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities, 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.
The
Company anticipates that further equity/debt financings will be necessary to continue to fund operations in the future and there
is no guarantee that such financings will be available or, if available, on acceptable terms.