GPFT Grapefruit USA Inc (PK)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS

Overview

Grapefruit Boulevard Investments, Inc. (“we”, “our”, “us”, “Grapefruit”, “GBI”, or “the Company”) was formed as a California corporation on August 28, 2017 and began operation in September 2017. On July 10, 2019, Grapefruit acquired Imaging3, Inc. (“IGNG”) in a reverse acquisition (the “Acquisition”). Under the terms of a Share Exchange Agreement by and among IGNG, Grapefruit and Grapefruit’s shareholders, IGNG issued to Grapefruit’s existing shareholders approximately 81% of the post-Acquisition IGNG common shares and the IGNG shareholders retained 19% of the post-Acquisition IGNG common shares. As a result, our financial statements are prepared using the acquisition method of accounting with Grapefruit as the accounting acquirer and IGNG treated as the legal acquirer and accounting acquiree. On December 16, 2019, Grapefruit filed the necessary paperwork with the Financial Industry Regulatory Authority (“FINRA”) and OTC Markets to effect the Company Name and Ticker symbol changes from “IGNG” to “GPFT” formally changing our corporate name from Imgaing3, Inc. to Grapefruit USA, Inc., a Delaware corporation whose stock is trading under the Ticker Symbol “GPFT”.

The Company’s annual distribution licensure renews again on June 13, 2023. Our annual manufacturing license was renewed by the California Department of Health. Grapefruit has not yet applied for a license to cultivate cannabis flowers and will not until construction of our cultivation facility has been substantially completed. We own two acres of fully entitled cannabis real property located in the Coachillin’ Industrial Cultivation and Ancillary Canna-Business Park where we intend to build a 30,000 square foot fully licensed cannabis facility as more fully described below. The location within Coachillin’ allows the Company to apply for and hold every cannabis license available under the California Cannabis laws.

The “Mothership” Cultivation & Lab Facility

In July 2021, Grapefruit obtained a development permit to build a 30,000 square foot “Mothership” facility intended to house a state-of-the-art indoor grow as well as a separately licensed distribution hub and laboratory that will produce the patented Hourglass line of topical creams as well as high quality extracts from trim generated by processing the indoor cannabis flowers. We intend to obtain CGMP certification for the lab pursuant to the Good Manufacturing Practice regulations enforced by the Federal Drug Administration (“FDA”). We expect that our facility will meet proper design, monitoring, and manufacturing control processes to assure the strength, quality, and purity of all Hourglass products we manufacture. We anticipate the FDA to mandate all cannabis facilities to be CGMP certified (Current Good Manufacturing Practice regulations enforced by the FDA) to continue in operation if cannabis becomes legalized by the federal government.

Summit Boys

In August 2021, the Company purchased control of Summit Boys, Inc., a cannabis extraction brand with product lines in retail stores throughout the State of California. The Company is continuing the Summit Boys’ business without interruption and is currently selling its branded products in California through Grapefruit.

Summit Boys’ premium extracts include sugar, crumble, badder, live resin, diamonds, budder, sauce, caviar and other extracted cannabis products, which are currently placed in licensed dispensaries throughout California and are protected by United States of America Trademark Reg. No. 6406802, July 6, 2021.

Grapefruit’s Business Development

In December 2020, we shifted our corporate focus from distribution operations to further development of our patented Hourglass™ Time Release THC+CBD-Infused Topical Cream. Hourglass is the first and only patented Full Spectrum THC+ Cannabinoid Topical delivery Cream that provides its users with a full body, synergistic entourage effect that was previously only available by smoking, vaping or eating cannabis products such as cannabis flowers and gummies. Our Topical Cream is scientifically designed to deliver the full effects of THC combined with a broad range of cannabinoids for a user’s overall health, wellness, and well-being. Hourglass products are laboratory tested. Test results published on every package via a designated QR Code. There is no other topical cream product on the market with our patented technology that provides users with the holistic benefits of the entourage effect of THC+CBD, CBN, CBG, Delta8, THCV and CBE. Hourglass™ is currently available in licensed retail and mobile cannabis dispensaries in Central California and Los Angeles County, California, USA. Hourglass™ is not intended for use to cure, mitigate, treat, or prevent disease and we are not making any such claims.

In July 2021, we decided to bring our patented Hourglass™ Time Release THC+CBD-Infused Topical Cream to the federally legalized Canadian cannabis marketplace. In January 2022, the company’s licensed Canadian distribution partner Medz Cannabis filed a Notice of New Cannabis Product (“NNCP”) with Health Canada on Grapefruit’s behalf for its Hourglass THC+CBD Topical cream. Health Canada is the Canadian federal government department that is responsible for national health policy. It approves and oversees the production of all cannabis products and is the licensing authority for all companies involved in the cannabis industry. Health Canada requires that all cannabis products meet federal regulatory requirements before they can be sold in Canada. Under Canada’s Federal Cannabis Regulatory scheme, Health Canada must be notified of a company’s intent to sell a cannabis product that has not previously been sold in the country.

On March 21, 2022, Health Canada approved the Company’s NNCP application authorizing Grapefruit to sell its patented Hourglass™ Time Release THC+CBD-Infused Topical Cream to licensed retail outlets throughout Canada under NNCP ID No. NP-V2EHUWO907.

In March 2022, we expanded our distribution efforts to include retail and wholesale sales of our Summit Boys branded products in California.

In September 2022, the Company entered into an exclusive licensing agreement with WWE Hall of Fame wrestler and cannabis pioneer Rob Van Dam to bring his branded cannabis products to the California retail marketplace. Rob Van Dam (“RVD”) is an American professional wrestler and actor best known for his tenures in Extreme Championship Wrestling (ECW), World Wrestling Entertainment (WWE) and Total Nonstop Action Wrestling (TNA)/Impact Wrestling. Van Dam is one of only two wrestlers in history to have held the WWE, ECW and TNA world championships. He was voted “Most Popular Wrestler” by readers of Pro Wrestling Illustrated magazine in 2001 and again in 2002. WWE named him the greatest star in ECW history in 2014.

Grapefruit holds its State of California annual licensing from the Bureau of Cannabis Control and the California Department of Public Health. The Company has a permanent annually renewable license as opposed to a provisional or temporary one. The Company is one of the earliest registered distribution companies in the State of California to have an annually renewable license as opposed to the provisional licenses previously granted.

Grapefruit operates within the Coachillin’ Industrial Cultivation and Ancillary Canna-Business Park (the “Park”), located in Desert Hot Springs, California, 14 miles north of downtown Palm Springs. The Park is the first and largest cooperative canna-business compound of its kind. It is unique in that the landowners each own a proportionate interest in a collaborative owner’s association, which allows them to share much of the park overhead such as clean cultivation water, park security and access to agricultural power rates.

Distribution

In early 2021, the Company temporarily suspended its ‘bulk’ purchase and distribution of wholesale cannabis flower due to negative market forces in the wholesale cannabis market beyond the control of the Company. The Company can and will resume wholesale ‘bulk’ cannabis sales and distribution operations when market forces indicate such resumption is appropriate. Nonetheless, the Company continues to distribute ‘bulk’ concentrates to support our Summit Boys brand in California. In March 2022, we expanded our distribution efforts to include retail and wholesale sales of our Summit Boys branded products in California.

Manufacturing

The Company owns a fully licensed ethanol extraction facility in the City of Desert Hot Springs, CA. The Company owns and operates a Type 6 Ethanol Extraction Plant which removes the essential cannabis compounds, such as THC Distillate, that we, and others use, to produce cannabis products.

Grapefruit manufactures its patented Hourglass™ Time Release THC+CBD-Infused Topical Cream at its Coachillin’ facility which allows us to maintain strict quality control standards. In addition, Grapefruit’s extraction lab produces high quality distillate or “Honey Oil” from cannabis trim sourced by Grapefruit. THC Honey Oil is a fundamental cannabis commodity which serves as the active ingredient in products from infused edibles to tinctures/creams. Grapefruit chose to set up its extraction laboratory in the City of Desert Hot Springs because, among other factors, the city does not tax the manufacture of oil by Grapefruit at its Desert Hot Springs extraction facility, thereby providing Grapefruit with an additional competitive advantage.

Binding Letter of Intent to Acquire Diagnostic Lab Corporation

On March 22, 2022, the Company entered into a Memorandum of Understanding with Diagnostic Lab Corporation, Inc., a Delaware corporation (“DLC”). On June 30, 2022, the Company entered into a Binding Letter of Intent (“LOI”) with DLC. Pursuant to the LOI, the Company will acquire the assets of DLC, its IP and all of its affiliated entities for a combination of cash and a to-be-determined number of the Company’s $0.0001 par value common stock. The Company and DLC will jointly recapitalize the Company by raising $12.5 million (inclusive of a currently committed $5.5 million debt facility) which will enable the Company to construct its Good Manufacturing Practices (“cGMP”) certified Desert Hot Springs, CA, Coachillin Park. The “Mothership” facility which will house a state-of-the-art indoor cultivation, manufacturing laboratory and distribution facility. In addition, the recapitalization will fund the Company’s Hourglass 510K Project, the Medical Study of the effects of Hourglass powered products on osteoarthritis sufferers and afford sufficient working capital and interest payment reserves to allow the post-transaction Company to reach positive cash flow. As of September 30, 2022, the Company is in the process of finalizing its due diligence on DLC and is in the final stages of negotiating the terms of its anticipated financing and structuring of the transaction documents.

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated interim financial statements of Grapefruit USA, Inc. are unaudited. They have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) for interim financial information and with applicable rules and regulations of the U.S. Securities and Exchange Commission relating to interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. 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. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for any other reporting period.

These condensed consolidated interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021.

Basis of Consolidation – Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. All significant intercompany transactions are eliminated.

In August 2021, the Company entered into a Stock Purchase Agreement acquiring the majority ownership and control of Summit Boys, Inc., a very well-known and established cannabis extraction brand with product lines in retail stores throughout the State of California. The Company plans on continuing the business without interruption and plans on licensing the Summit Boys brand in the State of Oklahoma under that State’s newly enacted legalized statutory scheme for cannabis products. This non-significant and non-operating subsidiary has been consolidated with Grapefruit’s financial statements. As consideration, the Company issued 4,545,455 shares of common stock for 51% ownership if Summit Boys, Inc. There was no activity for the nine months ended September 30, 2022.

Segments – We have two reporting segments: Retail and Wholesale. For the three months ended September 30, 2022, we generated 70.5% of our total revenues from our retail segment and 29.5% of our total revenues from our wholesale segment. For the three months ended September 30, 2021, we generated 2.4% of our total revenues from our retail segment and 97.6% of our total revenues from our wholesale segment. For the nine months ended September 30, 2022, we generated 78.5% of our total revenues from our retail segment and 21.5% of our total revenues from our wholesale segment. For the nine months ended September 30, 2021, we generated 1.3% of our total revenues from our retail segment and 98.7% of our total revenues from our wholesale segment.

Our retail operations generate revenue primarily through the sale of our Summit Boys branded product, THC “Honey Oil” tinctures, and CBD-Infused Hourglass™ Topical Cream products through our online and third-party sales channels. Our wholesale revenues are generated from the sales of our THC-Infused Hourglass™ Topical Cream, RSO syringes, vape cartridges, and flower products through our pre-existing and newly acquired customers.

Financial information about our business segments and geographical areas is provided in Note 14, Segment Information, to our consolidated financial statements in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements (Unaudited),” in this Quarterly Report on Form 10-Q.

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 valued at the lower of cost and net realizable value, determined using weighted average cost. All direct and indirect costs related to inventory are capitalized as they are incurred, and they are subsequently recorded in cost of goods sold on the statements of loss and comprehensive loss at the time inventory is sold. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory and records write-downs for excess and obsolete inventories based on the Company’s estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s statements of financial position, statements of loss and comprehensive loss and statements of cash flows. When inspecting inventory this quarter, we found some inventory was damaged, which necessitated a $68,941 reduction in inventory. Most of the product was salvageable and will be ready for resale in November 2022.

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 and is included in the property, plant and equipment. These costs will continue to be capitalized until construction has been completed. Land improvements will not be depreciated until the construction has been completed by the property association.

Long-Lived Assets Impairment Assessment – Our long-lived assets are subject to an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, other long-lived assets may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method or realizable value to determine whether an impairment exists, and then measure the impairment using discounted cash flows.

Revenue Recognition – The Company derives revenues from the sale of product in accordance to ASC Topic 606. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services.

Revenue is recognized based on the following five step model:

Performance Obligations – Sales of products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. Historically the Company’s contracts have not had multiple performance obligations. The large majority of the Company’s performance obligations are recognized at a point in time related to the sale of products.

Cost of Goods Sold – Our cost of goods sold includes the costs directly attributable to revenue recognized and includes expenses related to the production, packaging and labelling of cannabis products; personnel-related costs, fees for third-party services, such as testing and transportation costs related to our distribution services.

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.

Derivative Financial Instruments - The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund its business needs, including convertible notes and warrants and other instruments not indexed to our stock. The Company is required to record its derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings in accordance with ASC 815. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with warrants to purchase common stock and convertible notes.

Fair Value of Financial Instruments – We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

The carrying amount of our cash and cash equivalents approximates fair value because of the short-term nature of the instruments. The carrying amount of our notes payable at December 31, 2019, approximates their fair values based on comparable borrowing rates available to the company.

There have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets or liabilities for the nine months ended September 30, 2022 and year ended December 31, 2021.

Items measured at fair value on a non-recurring basis

The Company’s prepaids and other current assets, long lived assets, including property and equipment, and goodwill are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.

Income Taxes – Income tax assets and liabilities are recorded using the asset and liability method. Under the asset and liability method, tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating loss and tax credit carryovers. Future tax assets and liabilities are measured using the enacted tax rates expected to apply when the asset is realized, or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that enactment occurs. To the extent that we do not consider it more likely than not that a future tax asset will be recovered, we will provide a valuation allowance against the excess.

We follow the provisions of ASC 740, Income Taxes. Because of ASC 740, we make a comprehensive review of our portfolio of tax positions in accordance with recognition standards established by ASC 740.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in our consolidated financial statements in the period during which, based on all available evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

We have created our tax provision leveraging known tax court cases involving various marijuana dispensaries and other cannabis related businesses, including the section of the IRS Tax code of 280E. The U.S. Tax Code Section 280E is the federal statute that states that a business engaging in the trafficking of a Schedule I or II controlled substance, which includes cannabis and cannabis related products, are barred from taking the tax deductions or credits in their federal tax returns which are not considered as part of the business’ cost of goods sold. Given the guidance offered by the Tax code 280E we have prepared our tax provision according to this tax code.

Interest and penalties associated with unrecognized tax benefits, if any, are classified as interest expense and penalties and are included in selling, general and administrative expenses in our consolidated statements of operations.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate tax rate to 21 percent, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform had no significant impact on our income taxes for the nine months ended September 30, 2022 and 2021, 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 $22,977 as of September 30, 2022 and $278,422 as of December 31, 2021. As of September 30, 2022, 100% of accounts receivable consisted of one customer and the remaining accounts receivable was determined to be uncollectible. During the three months ended September 30, 2022, 35% of the sales came from Summit Boys product third party sellers, 36% came from online sales, and the remainder of the sales was distributed between all other customers. During the three months ended September 30, 2021, we diversified our customer base, but still have 30% of the revenues from one customer.

We periodically review the value of our accounts receivable and provide an allowance for doubtful accounts based on our assessment of the age of the receivable and its collectability. During the nine months ended September 30, 2022, the Company reviewed the accounts receivable and based on the aging and likelihood of collectability, an allowance for doubtful accounts was created in the amount of $250,054. Any allowance is charged to general and administrative expenses.

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 March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326) (“ASU No. 2022-02”). ASU No. 2022-02 eliminates the existing troubled debt restructuring recognition and measurement guidance, and instead aligns the accounting treatment to that of other loan modifications. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU No. 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and is to be adopted prospectively. The Company does not expect the adoption of ASU No. 2022-02 to have a material impact on its condensed consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”), which amends existing guidance for earnings per share (EPS) in accordance with Topic 260. ASU 2021-04 is effective for the Company beginning June 1, 2022. This update should be applied prospectively on or after the effective date of the amendments. The Company is currently evaluating the effect of adopting this ASU.

Recently Issued Accounting Pronouncements Adopted

Convertible Debt, and Derivatives and Hedging In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. ASU 2020-06 will be effective for the Company in the first quarter of 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.

NOTE 3 – GOING CONCERN

Our consolidated financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. During the nine months ended September 30, 2022, we incurred a net loss of $2,607,703, had a working capital deficit of $7,268,825 and had an accumulated deficit of $19,433,867 at September 30, 2022. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations as they come due. There is no assurance that these events will be satisfactorily completed. As a result, there is doubt about our ability to continue as a going concern for one year from the issuance date of these financial statements

Management’s plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities and obtaining funds through the issuance of debt. We cannot be certain that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If we raise additional funds or settle liabilities by issuing equity securities, the percentage ownership of our stockholders may be reduced, stockholders may experience additional dilution, or such equity securities may provide for rights, preferences and/or privileges senior to those of the holders of our common stock. Our ability to execute our business plan and continue as a going concern may be adversely affected if we are unable to raise additional capital or operate profitably.

NOTE 4 – RIGHT OF USE ASSET AND LIABILITY

We lease capital equipment in a suitable, compliant cannabis facility located in the city of Desert Hot Springs. In addition, we entered into this operating land lease agreement with Coachillin’ Holdings LLC on September 1, 2018 to rent approximately 2,268 square feet of leasable land area. The operating lease renews annually and has a base rent of $0.50 square foot of leasable area of the designated premise assigned by Coachillin’ Holdings LLC. We paid an initial non-refundable prepaid rent of $3,402 which was expensed during the three months following the signed agreement, and we will continue to pay $1,134 monthly.

The Company entered into a 18-month lease agreement for office space in July 2019 at $6,304 a month, with an approximate 3% 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 10% to estimate the present value of the right of use liability.

The Company has right-of-use assets of $102,475, right-of-use liability of $102,475 as of September 30, 2022. Operating lease expense for the nine months ended September 30, 2022 was $72,180.

The following table provides the maturities of lease liabilities at September 30, 2022:

NOTE 5 – INVENTORY

At September 30, 2022 and December 31, 2021, our inventory was, as follows:

At September 30, 2022 and December 31, 2021, finished goods included $690 and $20,904 on consignment, respectively. In addition, some finished goods product needed to be reworked and is temporarily moved to work in process.

We periodically review the value of our inventory and provide a write-down of inventory based on our assessment of the market conditions. Any write-down is charged to cost of goods sold. When inspecting inventory this quarter, we found some inventory was damaged, which necessitated a $68,941 reduction in inventory. Most of the product was salvageable and will be ready for resale in November 2022.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net of accumulated depreciation and amortization, at September 30, 2022 and December 31, 2021 was as follows:

The Company acquired the extraction equipment, laboratory, and warehouse facility during 2018 and 2019 and prepared and final testing for future production. Final preparations for certain extraction and warehouse work were completed, and these related assets were placed in service on April 1, 2019, at which time we commenced depreciating this asset.

The amount of related depreciation expense for the nine months ended September 30, 2022 and 2021 is $58,988 and $69,598, respectively.

NOTE 7 – CAPITAL LEASE PAYABLE

Capital lease payable consists of a capital lease agreement entered into in April 2018 to finance the purchase of various lab and manufacturing equipment. The outstanding balance on the 48-month installment capital lease was $0 and $8,822 as of September 30, 2022 and December 31, 2021, 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 was February 2022. The lease has been paid in full and we now retain ownership of the equipment.

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:

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 full principal payment due at maturity. For the $700,000 loan, the monthly interest payment is approximately $7,500. For the $200,000 loan, the monthly interest payment is approximately $2,200. Unpaid interest as of September 30, 2022 is $37,888 and $6,495, for the two loans respectively. The 1st and 2nd trust deeds are secured by the land as well as property owned by two officers of the company and three other related parties. Also, each party has personally guaranteed or pledged additional collateral. The notes include a debt discount as of September 30, 2022 of $9,000. The Company plans to repay these notes with the proceeds from the recapitalization disclosed in the “Binding Letter of Intent to Acquire Diagnostic Lab Corporation” in “Grapefruit’s Business Development” in Note 1.

In April 2018, the Company issued a note due 60 days after funding to an unrelated third party with a principal amount of $250,000 and immediate interest charge totaling $125,000. As of September 30, 2022, 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 $284,375. The note is past due. Two officers of the Company have personally guaranteed the loan.

In March and May 2022, the Company issued another note of $40,000 and $10,000, respectively, to an unrelated party with 10% interest, which will mature in 6 months. In October 2021, there was an additional note for $6,000. The unrelated party has notes totaling $56,000, all with similar terms. Each note as it matures will continue to accrue interest at the stated rate until repayment.

NOTE 9 – CONVERTIBLE NOTES PAYABLE

Amortization of note discounts, which is included in interest expense, amounted to $313,731 during the nine months ended September 30, 2022 and $692,129 for the nine months ended September 30, 2021.

Grapefruit acquired convertible notes in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) On May 31, 2019, the Company executed the SPA with Auctus pursuant to the terms of which the Company agreed to sell $4,000,000 of the Notes and issue $6,200,000 of callable warrants (the “Warrants” and, together with the Notes, the “Securities”) to Auctus. Auctus is the Selling Security Holder. In addition, on May 31, 2019, we also entered into a registration rights agreement with Auctus (the “Registration Rights Agreement”) whereby we are obligated to file a registration statement to register the resale of the shares underlying the Securities. On July 25, 2019 (as amended on January 17, 2020), a registration statement was filed to comply with the Registration Rights Agreement. Pursuant to the SPA, Auctus became obligated to purchase the $4,000,000 of Notes from Grapefruit in four tranches as follows: $600,000 at the SPA closing, which was funded on June 6, 2019; the second tranche of $1,422,750 on the day IGNG filed the registration statement, which was funded on August 16, 2019; the third tranche of $1,030,000 was funded the day the SEC declares the registration statement effective and the fourth tranche of $1 million was funded 90 days after effectiveness. As of December 31, 2020, all tranches of this financing were completed. The Company has received gross proceeds of $4,052,750. The Notes have a two-year term and will bear interest at 10%, with a default interest rate of 24%. As of September 30, 2022, three notes are in default.

On April 15, 2021, the company renegotiated the debt agreement related to these notes modifying the convertible notes conversion price from a variable rate to a fixed rate conversion price of $0.075 per share with an effective date of December 31, 2021. As a result of the agreement, the Company recorded a noncash expense for the change in the value of derivative instruments of $40,372,883, which was simultaneously offset by a noncash gain of $39,640,477 from the extinguishment of debt, resulting a net loss of $732,406 from the renegotiation of the debt.

On February 26, 2021, the company issued a convertible note for $450,000. The note has an interest rate of 10% and matures in 12 months. Note is currently in default with no updated maturity date. The note continues to accrue interest, which has an accrued interest balance of $87,150 as of September 30, 2022. This note was included in the amendment making it convertible at $0.075 per share.

On June 22, 2022, Auctus converted $1,200,000 of convertible notes and $545,818 of accrued interest at the fixed rate of $0.075 for 23,277,573 shares.

On September 1, 2022, the company issued a convertible note for $104,250. The note has an interest rate of 8% and matures in 12 months. After 180 days, the note holder has the option of converting the note. The conversion price is 65% of the lowest trading price 10 days prior to the date of conversion.

In addition, the Company has eleven other convertible notes comprising $296,000 outstanding and they are currently in default. The interest on these notes varies from 5-10%. We are in the process of converting eight of the notes amounting to $241,000.

NOTE 10 – NOTES PAYABLE, RELATED PARTY NOTES PAYABLES, AND OPERATING LEASE – RELATED PARTY

Notes payable to officers and directors as of September 30, 2022 and December 31, 2021 are due on demand and consisted of the following:

Notes payables bear interest at 10%.

A related party leased two eco-pods in April 2019 and May 2019, which are refurbished shipping containers, located on this specific parcel within Coachillin’. The lease is treated as an operating lease and payment responsibility is ultimately the responsibility of the related party. The Company assumed these lease payment obligations in May 2019. The monthly payments are $1,055 and $880, for the duration of the lease terms of four and five years, respectively.

On May 17, 2021, related parties converted $699,236 of principal and accrued interest, a total of 11,710,465 shares of common stock.

For the nine months ending September 30, 2022, payables to related parties came in the form of unpaid salary to executives, $450,000; and cash loans and direct payment to vendors, $320,751. In addition, there was a repayment of principal of $8,135 to one of the related parties.

NOTE 11 – EQUITY

Preferred Stock

The Company has authorized 1,000,000 shares of $0.0001 par value preferred stock. As of September 30, 2022, and December 31, 2021, 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 nine months ended September 30, 2022 the Company issued a total of 24,025,354 shares for services rendered valued at $473,890; 2,325,878 shares were issued related to legal settlement valued at $47,039; 23,277,573 shares were issued for the conversion of notes and accrued interest.

During the nine months ended September 30, 2021 the Company issued a total of 7,449,937 shares for services rendered valued at $303,544; 20,114,651 shares were issued related to legal settlement and debt settlement with related parties valued at $2,281,695; 13,352,264 shares were issued related to the conversion of convertible notes valued at $996,620; 1,000,000 shares were issued for a stock purchase valued at $0.075 per share; 2,000,000 shares were issued for warrant exercised at $0.125 per share; and 4,545,455 shares were issued for the Summit Boys acquisition valued at $250,000.

As of September 30, 2022, there were approximately 610 record holders of our common stock, not including shares held in “street name” in brokerage accounts the number of which is unknown. As of September 30, 2022, there were 606,791,549 shares of our common stock outstanding on record.

Stock Option Plan

During 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 1,811,401 shares of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.

Stock Options

As of September 30, 2022, employees of the Company hold options to purchase 250,000 shares of common stock granted in 2016 at an exercise price of $1.00. On March 28, 2021, the Company granted a board member an option to purchase 750,000 shares of common stock at $0.025. There are nine month vesting periods for a block of 250,000 shares starting October 1, 2021.

The weighted average remaining contractual life of options outstanding issued under the agreements was 4.08 years at September 30, 2022.

NOTE 12 — WARRANTS

Following is a summary of warrants outstanding at September 30, 2022:

Grapefruit recorded warrants to issue common stock upon exercise in its acquisition of Imaging3, Inc. on July 10, 2019. 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. (See Note 9)

In addition to the Notes in connection with the SPA agreement, GPFT issued to the Investor a warrant to purchase 16,000,000 shares of its common stock at $0.125 per share, a warrant to purchase 15,000,000 shares at $0.15 per share and a warrant to purchase 8,000,000 shares at $0.25 per share (collectively, the “Warrants”). The Warrants are “cash only” and are callable if GPFT stock trades on the OTCQB at 200% or more of the given exercise price for 5 consecutive days.

On February 26, 2021, 2,250,000 warrants were issue with an exercise price of $0.125 in relation to the convertible note (See Note 9 Convertible note payable). On April 15, 2021 as part of the renegotiated terms of the convertible notes, 20,000,000 additional warrants were issued at an exercise price of $0.075.

NOTE 13 — DERIVATIVE LIABILITIES

Grapefruit recorded derivative instruments in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) The Company’s only asset or liability measured at fair value on a recurring basis was its derivative liability associated with related warrants to purchase common stock and the conversion features embedded in convertible promissory notes.

In connection with financing transactions, the Company issued warrants to purchase common stock and convertible promissory notes. These instruments included provisions that could result in a reduced exercise price based on specified full-ratchet anti-dilution provisions. The “reset” provisions were triggered in the event the Company subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than contractually specified amounts. Upon triggering the “reset” provisions, the exercise / conversion price of the instrument will be reduced. Accordingly, pursuant to ASC 815, these instruments were not considered to be solely indexed to the Company’s own stock and were not afforded equity treatment.

On April 15, 2021, the company renegotiated conversion terms on $4,502,750 of convertible notes with Auctus. All variable conversion prices were replaced with a fixed conversion price of $0.075. In addition, the Company issued an additional 20,000,000 warrants with an exercise price of $0.075 per share.

On September 1, 2022, with the issuance of the convertible note mentioned in Note 9 – Convertible Notes Payable, a new derivative was created and will be tracked for the life of the note.

The following table summarizes activity in the Company’s derivative liability during the nine-month month period ended September 30, 2022:

The Company classifies the fair value of these derivative liabilities under level 3 of the fair value hierarchy of financial instruments. The fair value of the derivative liability was calculated using a Binomial Tree model. The Company’s stock price and estimates of volatility are the most sensitive inputs in validation of assets and liabilities at fair value. The liabilities were measured using the following assumptions:

NOTE 14 – SEGMENT INFORMATION

Segment reporting is prepared on the same basis that the Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, manages the business, makes operating decisions and assesses performance.

As of September 30, 2022 the Company’s two segments are as follows:

The majority of costs are run through the wholesale segment, which includes the fixed costs associated with production of inventory. The Company has begun to promote sales of Summit Boys branded product, which is primarily sold direct to consumer, and felt is necessary to differentiate between the two segments. Segment information is summarized below:

NOTE 15 – INVESTMENTS

Investment in Hemp

In September 2019, the Company invested in hemp product that was purchased and stored by a third party. The Company expects to sell the product by the beginning of next year. Due to the increased harvests, the salability of the product decreased, necessitating the complete mark down, which occurred in 2021.

NOTE 16 – COMMITMENTS AND CONTINGENCIES

Mentor Group, Inc. vs Imaging3, Inc. Settlement

On March 8, 2022, Grapefruit USA, Inc. was contacted by an attorney about outstanding litigation between Mentor Group, Inc. and Imagaing3, Inc. The settlement was for $27,593 of past debt, $8,869 in attorney fees, and $3,644 of interest. Currently no payment plan is in place. This debt is related Imaging3, Inc.’s prior business activities which preceded Grapefruit’s acquisition of Imaging3, Inc., and was inherited or assumed by Grapefruit. As of September 30, 2022, the Company is still continuing to make payments.

Galileo Surgery Center LP/Cypress Ambulatory Surgery Center LP vs Imaging3, Inc. Settlement

The Company came to a settlement with Galileo Surgery Center LP/Cypress Ambulatory Surgery Center LP (“Galileo”) for $75,572 with an interest rate of 10%, requiring payments of $7,300 per month beginning in August 2021 until paid in full. This debt is related Imaging3, Inc.’s prior business activities which preceded Grapefruit’s acquisition of Imaging3, Inc., and was inherited or assumed by Grapefruit. As of September 30, 2022, the Company is still continuing to make payments.

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 September 30, 2022. In May 2021, the Company issued 3,920,865 shares as part of the make-whole clause in the agreement. On October 26, 2021, the Company issued 600,000 shares as part of the make-whole clause in the agreement. Additional shares may need to be issued in the future. This debt is related Imaging3, Inc.’s prior financing activities which preceded Grapefruit’s acquisition of Imaging3, Inc., and was ‘inherited’ or ‘assumed’ by Grapefruit.