Grapefruit USA, Inc - FORM 10-Q

Attached files

file	filename
EX-32.2 - Grapefruit USA, Inc	ex32-2.htm
EX-32.1 - Grapefruit USA, Inc	ex32-1.htm
EX-31.2 - Grapefruit USA, Inc	ex31-2.htm
EX-31.1 - Grapefruit USA, Inc	ex31-1.htm

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 September 30, 2020

[ ] 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)

DELAWARE		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.

Yes [X]

No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]

No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).

Large accelerated filer	[ ]	Accelerated filer	[ ]
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).

Yes [ ]

No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of November 3, 2020, the number of shares outstanding of the registrant’s class of common stock was 504,450,437.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements (Unaudited and Audited)	3
	Condensed Balance Sheets at September 30, 2020 (Unaudited) and December 31, 2019 (Audited)	3
	Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2020 (Unaudited) and 2019 (Unaudited)	4
	Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2020 (Unaudited) and 2019 (Unaudited)	5
	Condensed Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2020 (Unaudited) and 2019 (Unaudited)	6
	Notes to Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

SIGNATURES		25

PART I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

GRAPEFRUIT USA, INC.

CONDENSED BALANCE SHEETS

	September 30, 2020 (Unaudited)			December 31, 2019 (Audited)
ASSETS

CURRENT ASSETS:
Cash	$	165,843			266,607
Accounts receivable		-			-
Inventory		410,710			263,985
Other		25,000			12,459
Total current assets		601,553			543,051
NON-CURRENT ASSETS:
Property, plant and equipment, net		1,809,457			1,809,326
Operating right of use - assets		154,364			219,961
Investment in hemp		169,950			169,950
Other		7,459			-
TOTAL ASSETS	$	2,742,783			2,742,288

LIABILITIES AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES
Notes payable	$	339,912			351,569
Accrued loan interest		655,406			398,720
Related party payable		461,626			281,626
Legal settlements - current portion		168,892			159,543
Subscription payable		210,118			891,738
Derivative liability		9,765,844			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		1,044,687			1,073,876
Total current liabilities		13,623,967			5,115,438

Vehicle loan		35,130			-
Legal settlements - long-term		41,310			50,659
Capital lease		62,585			106,005
Operating right of use - liability		66,904			123,210
Long-term notes payable, net		874,800			866,700
Long-term convertible notes, net of discount		1,137,032			914,303
Total long-term liabilities		2,217,761			2,060,877

TOTAL LIABILITIES		15,841,728			7,176,315

STOCKHOLDERS’ DEFICIT

Stock compensation for non-employee		-			(244,167	)
Common stock ($0.0001 par value, 1,000,000,000 shares authorized; 504,450,437 and 486,320,329 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)		50,445			48,632
Preferred stock ($0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019)		-			-
Additional paid in capital		4,185,344			3,026,006
Accumulated deficit		(17,334,734	)		(7,264,498	)
Total stockholders’ deficit		(13,098,945	)		(4,434,027	)
Noncontrolling interest		-			-
Total deficit		(13,098,945	)		(4,434,027	)
Total liabilities and stockholders’ deficit	$	2,742,783			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 nine months ended September 30, 2020 and 2019

	Three months ended			Three months ended			Nine months ended			Nine months ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenues
Bulk sales	$	1,306,201		$	-		$	2,575,223		$	324,000
Distribution services		-			-			5,189			8,041
Total revenues		1,306,201			-			2,580,412			332,041
Cost of goods sold		1,123,717			-			2,385,804			526,843
Gross profit (loss)		182,484			-			194,608			(194,802	)
Operating expenses:
Sales		67,479			-			106,594			12,540
General and administrative		289,767			756,800			974,925			959,360
Other costs		-			-			-			-
Total operating expenses		357,246			756,800			1,081,519			971,900

Loss from operations		(174,762	)		(756,800	)		(886,911	)		(1,166,702	)
Other income (expense):
Interest expense		(532,410	)		(154,147	)		(1,343,224	)		(198,578	)
Change in value of derivative instruments		(7,014,164	)		(2,030,995	)		(7,946,046	)		(2,030,995	)
Gain (loss) on extinguishment of debt		31,642			73			105,945			73
Impairment charge - LVCA		-			25,553			-			(169,832	)
Other income (expense)		-			-			-			-
Total other income (expense)		(7,514,932	)		(2,159,516	)		(9,183,325	)		(2,399,332	)

Income (loss) before income taxes		(7,689,694	)		(2,916,316	)		(10,070,236	)		(3,566,034	)

Tax provision		-			-			-			-

Net income (loss)		(7,689,694	)		(2,916,316	)		(10,070,236	)		(3,566,034	)

Less: Net income attributable to noncontrolling interests		-			-			-			(9,468	)

Net income (loss) attributable to Grapefruit USA, Inc.		(7,689,694	)		(2,916,316	)	$	(10,070,236	)	$	(3,575,502	)

Net loss per share - Basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.02	)	$	(0.02	)
Weighted average common stock outstanding - Basic and diluted		499,182,611			361,702,663			495,837,104			156,586,844

The accompanying notes are an integral part of these unaudited condensed financial statements

GRAPEFRUIT USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2020 and 2019

	Nine months ended			Nine months ended
	September 30, 2020			September 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(10,070,236	)	$	(3,575,502	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization expense		126,066			47,132
Amortization of right of use asset		-			1,277
Change in value of derivative		8,332,246			2,030,995
Fixed asset deposit forfeiture		-			97,000
Non-cash interest		(18,772	)		10,800
Loss on extinguishment of debt		479,531
Stock-based compensation for services		244,167
Impairment charge					195,385
Gain on sale of intangible asset					(25,553	)
Changes in operation assets and liabilities:
Accounts Receivables		-
Inventory		(146,726	)		(361,597	)
Other		(20,000	)		(181	)
Accounts payable and accrued expenses		(29,189	)		210,482
Accrued loan interest expense		256,687			48,300
Net cash (used for)/provided by used for operating activities		(846,226	)		(1,321,462	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land and equipment		(25,469	)		(206,486	)
Net cash used for investing activities		(25,469	)		(206,486	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayment of capital lease liability		(40,803	)		(27,992	)
Reduction of right of use liability		(64,109	)
Proceeds from convertible notes, net		707,500			1,822,405
Proceeds from loans, net		168,343			-
Proceeds from issuance of stock		-			135,000
Net cash proceeds from financing activities		770,931			1,929,413

NET INCREASE (DECREASE) IN CASH		(100,764	)		401,465

CASH, BEGINNING BALANCE		266,607			65,922

CASH, ENDING BALANCE	$	165,843		$	467,387

SUPLEMENTAL DISCLOSURE ON NON-CASH FINANCING ACTIVITY
Cash paid for interest expense		110,340			24,732
Debt converted to common stock		640,597			-
Compensation paid through issuance of common stock		388,572			-
Notes and accrued interest converted to common stock		79,754			404,162

The accompanying notes are an integral part of these unaudited condensed financial statements

GRAPEFRUIT USA, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2019 and 2019

	Equity (Deficit) Attributable to Grapefruit USA, Inc.

	Common Stock				Additional						Total Stockholders’			Non-			Total
	Number of				Paid in			Accumulated			Equity			controlling			Equity
	Shares		Amount		Capital			Deficit			(Deficit)			Interest			(Deficit)

Balance as of December 31, 2018		362,979,119		36,298		2,813,702			(2,655,466	)		194,534			15,085			209,619

Reorganization due to Recapitalization		97,393,688		9,739		(4,442,133	)		-			(4,432,394	)		-			(4,432,394	)

Shares issued for cash						235,000						235,000			-			235,000

Shares from the conversion of notes		9,432,671		943		403,718			-			404,661			-			404,661

Shares issued for services		5,500,000		550		79,900			-			80,450			-			80,450

Shares issued for Settlement		10,499,680		1,050		1,648,023			-			1,649,073			-			1,649,073

Reclassification of derivative liability associated with debt conversion		-		-		1,497,678			-			1,497,678			-			1,497,678

Noncontrolling interest LVCA		-		-		-			-			-			(15,085	)		(15,085	)

Net loss		-		-		-			(3,575,502	)		(3,575,502	)		-			(3,575,502	)

Balance as of September 30, 2019		485,805,158	$	48,580	$	2,235,888		$	(6,230,968	)	$	(3,946,500	)	$	-		$	(3,946,500	)

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		900,000		90		318,240						318,330						318,330

Shares issued for settlement		7,213,933		721		565,572						566,293						566,293

Shares issued with debt		915,795		92		44,782						44,874						44,874

Shares from the conversion of notes		9,100,380		910		79,844			-			80,754			-			80,754

Reclassification from derivative liability				-		395,067			-			395,067			-			395,067

Net loss		-		-		-			(10,070,236	)		(10,070,236	)		-			(10,070,236	)

Balance as of September 30, 2020		504,450,437	$	50,445	$	4,185,344		$	(17,334,734	)	$	(13,098,945	)	$	-		$	(13,098,945	)

The accompanying notes are an integral part of these unaudited condensed financial statements

GRAPEFRUIT USA, INC.

NOTES TO FINANCIAL STATEMENTS

September 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 provisional distribution renewal licensure which allows us to operate through May 13, 2021. Our annual manufacturing license has been renewed by the California Department of Health. Grapefruit has not yet applied for a license to cultivate and will not until construction has begun on our cultivation facility. We own two acres of fully entitled cannabis real property located in the Coachillin’ Industrial Cultivation and Ancillary Canna-Business Park. The location within Coachillin’ allows the Company to apply for and hold every cannabis license available under the California Cannabis laws.

We intend 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 September 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 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. In the opinion of management they 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 may affect 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 relate to useful life for depreciation, the value of long-lived assets and related impairment.

Inventory – Inventory is comprised of raw material, work in process and finished goods. The raw material ending balance as of September 30, 2020 and December 31, 2019 was zero. Work in process ending balance as of September 30, 2020 and December 31, 2019 was $10,319 and zero, respectively. The cost of finished goods is recorded at lower of cost or market. Finished goods ending balance as of September 30, 2020 and December 31, 2019 was $389,891 and $263,985, respectively. Consignment inventory ending balance as of September 30, 2020 and December 31, 2019 was $10,500 and zero, 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.

	September 30, 2020			September 30, 2019
Numerator:
Net income attributable to common shareholders	$	(10,070,236	)		(3,575,502	)
Denominator:
Weighted-average number of common shares outstanding during the period		495,837,104			156,586,844
Dilutive effect of stock options, warrants, and convertible promissory notes		-			-
Common stock and common stock equivalents used for diluted earnings per share		495,837,104			156,586,844

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 September 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 September 30, 2020 and December 31, 2019.

	Level 1		Level 2		Level 3		Total
Derivative Liabilities September 30, 2020	$	-	$	-	$	9,765,844	$	9,765,844
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 September 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.

Sales Expenses – Sales expense consists primarily of commissions paid to sales representatives.

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 $0 as of September 30, 2020 and December 31, 2019. In the first and second quarter of 2020, the net revenues were generated with one customer, 99% and 50%, respectively. Through the third quarter of 2020, we acquired a new customer, which accounted for 50% of the sales in that quarter. With the mix of customers year-to-date, there are two customers that account for 30% of the revenues each. 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 nine months ended September 30, 2020, we incurred a net loss of $10,070,236, had a working capital deficit of $13,022,414 and had an accumulated deficit of $17,334,734 at September 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 $1,030,000 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 September 30, 2020, the first, second and third tranches of this financing were completed. The Company has received gross proceeds of $3,052,750. On October 14, 2020, the Company received the final, $1,000,000, bringing the total gross proceeds to $4,052,750.

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 annual 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 $154,364, right-of-use liability of $157,132 as of September 30, 2020. Operating lease expense for the three months ended September 30, 2020 was $11,561.

The following table provides the maturities of lease liabilities at September 30, 2020:

Maturity of Lease Liabilities
2020	$	24,723
2021		96,471
2022		44,756
2023		-
2024		-
2025 and thereafter		-
Total future undiscounted lease payments		165,950
Less: Interest		(8,818	)
Present value of lease liabilities	$	157,132

NOTE 5 – INVENTORY

At September 30, 2020 and December 31, 2019, our inventory was, as follows:

	September 30, 2020		December 31, 2019
Raw materials	$	-	$	-
Work-in-process		10,319		-
Finish goods		389,891		263,985
Consignment inventory		10,500
	$	410,710	$	263,985

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net of accumulated depreciation and amortization, at September 30, 2020 and December 31, 2019 was as follows:

	September 30, 2020			December 31, 2019
Vehicles	$	41,142		$	-
Extraction equipment		283,135			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		(147,879	)		(87,410	)
Property, plant and equipment	$	1,809,457		$	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 September 30, 2020 and 2019 is $21,225 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 September 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:

	September 30, 2020
Remainder 2020	$	19,530
2021		78,120
2022		32,337
2023		7,740
2024		-
Thereafter		-
Total minimum lease payments		137,727
Less: amount representing interest		(16,959	)
Capital lease liability	$	120,768

NOTE 8 – NOTES PAYABLE

In October 2017, in connection with our purchase of two acres of fully entitled cannabis real property located in the Coachillin’ Industrial Cultivation and Ancillary Canna-Business Park, the Company issued a first and second trust deed note in the amounts of $700,000 and $200,000, respectively. The first and second trust deed notes are long-term notes and are interest only notes, at 13.0%, and mature in August 2022, with the principal payment due at maturity. For the $700,000 loan, the monthly payment is approximately $7,500. For the $200,000 loan, the monthly payment is approximately $2,200. The 1st and 2nd trust deeds are secured by the land as well as property owned by two officers of the company and three other related parties. Also, each party has personally guaranteed or pledged additional collateral. The notes include a debt discount as of September 30, 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 September 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 $209,375. 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. As of September 30, 2020, the note was past due. On October 20, 2020, this note was paid in full.

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 nine months ended September 30, 2020, one note was converted. In August 2020, 9,100,380 shares were issued to settle $80,754 debt of a note and accrued interest resulting in a loss of $5,225. 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 $688,864 and $0 for the nine months ended September 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 was funded the day the SEC declares the registration statement effective and the fourth tranche of $1,030,000 was funded 90 days after effectiveness. As of September 30, 2020, the first, second and third tranches of this financing were completed. The Company has received gross proceeds of $3,052,750. On October 14, 2020, the Company received the final, $1,000,000, bringing the total gross proceeds to $4,052,750. 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 relation to the four tranches, there is $1,385,319 of note discounts that will be amortized over the life of the two year notes.

In addition, the Company has eleven other convertible notes comprising $298,673 outstanding and they are currently in default. The interest on these notes vary from 5-10%.

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

Notes payable to officers and directors as of September 30, 2020 and 2019 are due on demand and consisted of the following:

	September 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		306,377		126,377
	$	461,626	$	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 related party payable as of September 30, 2020, there is $180,000 of related party expenses. The expenses are non-interest bearing expenses.

NOTE 11 – EQUITY

Preferred Stock

The Company has authorized 1,000,000 shares of $0.0001 par value preferred stock. As of September 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 nine months ended September 30, 2020 a total of 900,000 shares were issued for services rendered valued at $33,140; 915,795 shares were issued upon receiving a loan valued at $44,874; , 9,100,380 shares were issued to settle $80,754 debt of a note and accrued interest resulting in a loss of $5,225; and 7,213,933 shares were issued related to for a settlement valued at $640,597.

During the nine months ended September 30, 2019, the Company issued a total of 470,000 shares of common stock for cash in the amount of $235,000; 4,500,000 shares were issued for services rendered valued at $382,500 of which none has been expensed; and 9,432,671 shares were issued related to conversion of notes payable. As a result of the acquisition, 460,702,487 shares were issued to Grapefruit shareholders and other parties involved with the acquisition.

As of September 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 September 30, 2020, there were 504,450,437 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 September 30, 2020, the full amount has been expensed.

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, 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, September 30, 2020		250,000	$	1.00		4.82
Exercisable, September 30, 2020		250,000	$	1.00		4.82

The weighted average remaining contractual life of options outstanding issued under the Plan was 4.82 years at September 30, 2020.

NOTE 12 — WARRANTS

Following is a summary of warrants outstanding at September 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 13 — 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 nine-month period ended September 30, 2020:

12-31-19 Balance	$	1,433,597
Creation/acquisition		876,012
Reclassification of equity		(389,811	)
Change in Value		7,846,046
9-30-20 Balance	$	9,765,844

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 14 – 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 fourth quarter of 2020.

NOTE 15 – CONCENTRATION

Customers

For the nine months ended September 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 60% of the Company’s total revenues for the period ended September 30, 2020 and a different customer accounted for over 70% of the Company’s total revenue for the period ended September 30, 2019.

Suppliers

For the nine months ended September 30, 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 66% of the Company’s total inventory purchase for both of the nine months ended September 30, 2020 and 2019.

NOTE 16 – EXCLUSIVE LICENSE AGREEMENT

The Company has entered into an exclusive license agreement and is in the final development stage of its topical cream known as Hourglass by Grapefruit ™. The Hourglass topical cream is a patented full spectrum time-released THC and Cannabinoid delivery cream that provides users with a defined “time released” dose of THC and CBD. The Hourglass topical cream is an innovative and patented THC and Cannabinoid delivery system that has solved the inherent difficulties of efficient skin absorption of THC and other cannabinoids. Grapefruit developed this innovative product as an efficient means to deliver THC and Cannabinoids to those who need it. However, this product is not intended for use to cure, mitigate, treat, or prevent disease and we are not claiming otherwise. We anticipate bringing Hourglass by Grapefruit ™ Topical Cream to the California marketplace prior to the end of the fourth quarter of 2020.

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 October 14, 2020, the Company received the final, $1,000,000, bringing the total gross proceeds under the SPA to $4,052,750.

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 September 30, 2020 as compared to the Three Months Ended September 30, 2019.

The following sets forth selected items from our statements of operations for three months ended September 30, 2020 and for the three months ended September 30, 2019.

	Three months ended			Three months ended
	September 30, 2020			September 30, 2019

Net revenues	$	1,306,201		$	-
Cost of goods sold		1,123,717			-
Gross profit		182,484			-
Sales expense		67,479			-
General and administrative expense		289,767			756,800
Loss from operations		(174,762	)		(756,800	)
Change in value of derivatives		(7,014,164	)		(2,030,995	)
Interest and other expense		(500,768	)		(128,521	)
Provision for income taxes		-			-
Net loss	$	(7,689,694	)	$	(2,916,316	)

Revenue for the three months ended September 30, 2020 was $1,306,201 compared to $0 for the corresponding period in 2019. Sales during the quarter ended September 30, 2020 consisted primarily of bulk flower product. During the quarter ended September 30, 2019, management of the company determined to focus its effort on effectuating the Share Exchange and the reverse merger. Thus, the increase reflects the refocused efforts of the company on its core operations during the quarter ended September 30, 2020, subsequent to its completed efforts to effectuate the reverse merger. We expect that revenues will continue to significantly increase quarter over quarter throughout 2020.

Cost of goods sold for the three months ended September 30, 2020 were $1,123,717 as compared to $0 for the corresponding period in 2019, primarily as a result of the increase in bulk flower sales. During the quarter ended September 30, 2020, we were able to significantly increase our profit margin on product sales. The company had historically sold product at low margins to introduce our product to the market begin gaining brand recognition, which strategy continued into the second quarter of 2020. During the third quarter of 2020, the company consistently posted significant sales with higher margins approaching market prices. We expect these higher and improved margins to continue into the fourth quarter of 2020. During the quarter ended September 30, 2019, the company incurred no cost of goods sold due to the fact that there were no sales as management focused on the reverse merger.

Our resulting gross profit for the three months ended September 30, 2020 and 2019 were $182,484 and $0, 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 September 30, 2020 were $289,767 compared to $756,800 for the corresponding period in 2019. Included in general and administrative expenses is $280,324 of consulting expense that is not expected to continue into future periods. The higher in costs in 2019 are primarily due to additional consulting and auditing fee related to the reverse acquisition.

Our resulting net loss from operations for the three months ended September 20, 2020 and 2019 were $174,762 and $756,800, respectively, a decrease of $582,038 or 77%.

The Company acquired derivative liabilities with the Share Exchange on July 10, 2019. During the three months ended September 30, 2020 and 2019, we recorded a decrease in the value of derivatives of $7,014,164 and $2,060,995, respectively.

Interest and other expense for the three months ended September 30, 2020 were $500,768 as compared to $128,521 for the corresponding period in 2019, as a result of debt issued to fund the company’s operations.

During the three months ended September 30, 2020, as a result of the COVID-19 pandemic in the U.S., a significant number of the Company’s retail customers’ and potential customers’ stores continued to be challenged by remaining temporarily closed or closing permanently. Those stores that are open are also faced with operating at reduced staff levels and at reduced operating hours, which has continued to negatively impact sales and demand for our cartridges. The continued negative impact on the Company’s results has been as expected during the three months ended September 30, 2020. The Company anticipates that cartridge sales will continue to be negatively impacted as a result of the pandemic.

Results of Operations for the Nine Months Ended September 30, 2020 as compared to the Nine Months Ended September 30, 2019.

The following sets forth selected items from our statements of operations for nine months ended September 30, 2020 and for the nine months ended September 30, 2019.

	Nine months ended			Nine months ended
	September 30, 2020			September 30, 2019

Net revenues	$	2,580,412		$	332,041
Cost of goods sold		2,385,804			526,843
Gross profit (loss)		194,608			(194,802	)
Sales expense		106,594			12,540
General and administrative expense		974,925			959,360
Loss from operations		(886,911	)		(1,166,702	)
Change in value of derivatives		(7,946,046	)		(2,030,995	)
Interest and other expense		(1,237,279	)		(368,337	)
Net income attributable to noncontrolling interest		-			(9,468	)
Net loss	$	(10,070,236	)	$	(3,575,502	)

Revenue for the nine months ended September 30, 2020 was $2,580,412, which is over seven time greater than 2019 corresponding period’s revenue of $332,041. 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. The third quarter revenue was greater than the combined first and second quarter revenues in 2020. We expect that revenue for the fourth quarter of 2020 will follow a similar growth pattern from the prior quarters of this year.

Cost of goods sold for the nine months ended September 30, 2020 were $2,385,804 as compared to $526,843. The increase was primarily due to the increase in bulk flower sales.

Our resulting gross profit (loss) for the nine months ended September 30, 2020 and 2019 were $194,608 and $(194,802), respectively. Because of our increased volume of revenues to $2,580,412 in 2020 from $332,041 from the previous year, we were able to cover all fixed cost of goods sold and to achieve a positive gross profit. Due to our continuing increase in revenue and our current product pricing strategies, we expect our profit margins in future periods to continue to improve.

Our sales expenses for the nine months ended September 30, 2020 was $106,594 compared to $12,540 for the corresponding period in 2019. The increase is due to increased sales.

Our general and administrative expenses for the nine months ended September 30, 2020 was $974,925 compared to $959,360 for the corresponding period in 2019.

Our resulting net loss from operations for the nine months ended September 30, 2020 and 2019 were $886,911 and $1,166,702, respectively, decrease of $279,790 or 24%.

The Company acquired derivative liabilities with the Share Exchange on July 10, 2019. During the nine months ended September 30, 2020 and 2019, we recorded a decrease in the value of derivatives of $7,946,046 and $2,030,995, respectively.

Interest and other expense for the nine months ended September 30, 2020 were $1,237,279 as compared to $368,337 for the corresponding period in 2019, which consist primarily of interest expense for the nine months ended September 30, 2020 and includes an impairment charge related to an investment in LVCA of $195,385 for the quarter ended September 30,2019.

During the nine months ended September 30, 2020, as a result of the COVID-19 pandemic in the U.S., a significant number of the Company’s retail customers’ and potential customers’ stores continued to be challenged by remaining temporarily closed or closing permanently. Those stores that are open are also faced with operating at reduced staff levels and at reduced operating hours, which has continued to negatively impact sales and demand for our cartridges. The continued negative impact on the Company’s results has been as expected during the nine months ended September 30, 2020. The Company anticipates that cartridge sales will continue to be negatively impacted as a result of the pandemic.

Liquidity and Capital Resources

Our cash position was $165,843 as of September 30, 2020 from $266,607 as of December 31, 2019. Our total current assets were $601,553 as of September 30, 2020, compared to $543,051 as of December 31, 2019.

Our total current liabilities were $13,623,967 as of September 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 nine months ended September 30, 2020, net cash used for operating activities was $846,226, as compared $1,321,462 used during the nine months ended September 30, 2019. Net cash used in investing activities during the nine months ended September 30, 2020 was $25,469, as compared to $206,486 during the nine months ended September 30, 2019. Net cash provided by financing activities during the nine months ended September 30, 2020 was $770,931 as compared to $1,929,413 during the nine months ended September 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

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 September 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 September 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 September 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 September 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.

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, 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

EXHIBIT NO.		DESCRIPTION

31.1		Section 302 Certification of Chief Executive Officer
31.2		Section 302 Certification of Chief Financial Officer
32.1		Section 906 Certification
32.2		Section 906 Certification
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Bradley J. Yourist		Dated: November 13, 2020
Bradley J. Yourist
Chief Executive Officer

/s/ Kenneth J. Biehl		Dated: November 13, 2020
Kenneth J. Biehl
Chief Financial Officer

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