UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
Quarterly Period Ended
or
For the Transition period from ______________to ______________
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of exchange on which registered | ||
| OTCQB |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| No ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes ☐ |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
As of November 18, 2022, the number of shares outstanding of the registrant’s class of common stock was .
TABLE OF CONTENTS
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, plans and objectives of management and markets for our common stock are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our most recent Annual Report on Form 10-K and any updates described in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”). You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to the reports we file with the SEC, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
| 3 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAPEFRUIT USA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2022 (Unaudited) | December 31, 2021 (Audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Licensee agreement | ||||||||
| Prepaid investor relation expense | ||||||||
| Other | ||||||||
| Total current assets | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating right of use - assets | ||||||||
| Intangible asset | ||||||||
| Other | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Notes payable | $ | $ | ||||||
| Accrued loan interest – nonrelated parties | ||||||||
| Accrued loan interest – related parties | ||||||||
| Related party payable | ||||||||
| Legal settlements - current portion | ||||||||
| Subscription payable | ||||||||
| Derivative liability | ||||||||
| Capital lease - current portion | ||||||||
| Operating right of use - liability - current portion | ||||||||
| Convertible notes (net of discount of $ | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Total current liabilities | ||||||||
| Capital lease | ||||||||
| Operating right of use - liability | ||||||||
| Long-term notes payable, net | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Common stock ($ par value, shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively) | ||||||||
| Preferred stock ($ par value, shares authorized; shares issued and outstanding as of September 30, 2022 and December 31, 2021) | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ( | ) | ( | ) | ||||
| Total deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
GRAPEFRUIT USA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Operating expenses: | ||||||||||||||||
| Sales | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in value of derivative instruments | ||||||||||||||||
| Gain (loss) on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of debt - related parties | ( | ) | ||||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Tax provision | ||||||||||||||||
Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to Grapefruit USA, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share – Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common stock outstanding - Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 5 |
GRAPEFRUIT USA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2022 | September 30, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: | ||||||||
| Net loss attributable to non-controlling interest | ( | ) | ||||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount | ||||||||
| Change in value of derivative | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt - related parties | ||||||||
| Loss on extinguishment of debt | ||||||||
| Stock-based compensation for services | ||||||||
| Interest expense | ||||||||
| Stock option expense | ||||||||
| Loss on bad debts | ||||||||
| Loss on legal settlement | ||||||||
| Loss on inventory valuation | ||||||||
| Changes in operation assets and liabilities: | ||||||||
| Accounts Receivables | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expense and current assets | ( | ) | ||||||
| Right-of-use assets | ( | ) | ||||||
| Hemp investment | ||||||||
| Derivatives | ||||||||
| Accounts payable | ||||||||
| Accrued executive compensation | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued loan interest expense | ( | ) | ||||||
| Right-of-use liability | ( | ) | ||||||
| Net cash (used for)/provided by used for operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Net cash received from acquisition | ||||||||
| Purchase of land and equipment | ( | ) | ||||||
| Net cash used for investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Principal repayment of capital lease liability | ( | ) | ( | ) | ||||
| Repayment of legal liability | ( | ) | ( | ) | ||||
| Proceeds from convertible notes (net of discount $ | ||||||||
| Proceeds from loans, net | ||||||||
| Repayment of loan principal | ( | ) | ( | ) | ||||
| Proceeds from related party notes | ||||||||
| Repayment of related party note principal | ( | ) | ||||||
| Contributions from non-controlling interest | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from sale of common stock | ||||||||
| Net cash proceeds from financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH, BEGINNING BALANCE | ||||||||
| CASH, ENDING BALANCE | $ | $ | ||||||
| SUPLEMENTAL DISCLOSURE ON CASH FINANCING ACTIVITY | ||||||||
| Cash paid for interest expense | ||||||||
| SUPLEMENTAL DISCLOSURE ON NON-CASH FINANCING ACTIVITY | ||||||||
| Shares issued for legal settlement | ||||||||
| Shares issued for conversion of notes payable | ||||||||
| Shares issued for debt settlement with related parties | ||||||||
| Shares issued for compensation | ||||||||
| Shares issued for acquisition | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
GRAPEFRUIT USA, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Unaudited)
| Deficit Attributable to Grapefruit USA, Inc. | ||||||||||||||||||||||||||||
| Common Stock | Additional | Total | Non- | |||||||||||||||||||||||||
| Number of | Paid in | Accumulated | Stockholders’ | controlling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | Interest | Deficit | ||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||
| Shares issued for settlement | ||||||||||||||||||||||||||||
| Shares issued upon warrant exercise | ||||||||||||||||||||||||||||
| Shares issued for note conversion | ||||||||||||||||||||||||||||
| Shares issued for related party | ||||||||||||||||||||||||||||
| Stock options granted pursuant to board of director agreement | - | |||||||||||||||||||||||||||
| Shares issued for purchase of stock | ||||||||||||||||||||||||||||
| Shares issued for acquisition | ||||||||||||||||||||||||||||
| Equity investment | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||
| Shares issued for settlement | ||||||||||||||||||||||||||||
| Shares issued for note conversion | ||||||||||||||||||||||||||||
| Stock options granted pursuant to board of director agreement | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 7 |
GRAPEFRUIT USA, INC. AND SUBSIDIARY
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 % of the post-Acquisition IGNG common shares and the IGNG shareholders retained % 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
The “Mothership” Cultivation & Lab Facility
In
July 2021, Grapefruit obtained a development permit to build a
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.
| 8 |
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 $ par value common stock. The Company and DLC will jointly recapitalize the Company by raising $
| 9 |
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 shares of common stock
for
Segments
– We have two reporting segments: Retail and Wholesale. For the three months ended September 30, 2022, we generated
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.
| 10 |
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 $
Property,
Plant and Equipment, net – Our property and equipment are recorded at cost. Assets held under capital leases are capitalized
at the commencement of the lease at the lower of the present value of minimum lease payments at the inception of the lease or fair value.
Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over estimated useful lives
of to
Land Improvements – Our land improvements are recorded at cost provided by our property association 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:
| - | 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 |
| 11 |
Performance Obligations – Sales of products are recognized when all the following criteria are satisfied: (i) a contract with an end user exists which has commercial substance; (ii) it is probable the Company will collect the amount charged to the end user; and (iii) the Company has completed its performance obligation whereby the end user has obtained control of the product. A contract with commercial substance exists once the Company receives and accepts a purchase order or once it enters into a contract with an end user. If collectability is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Control of products typically transfers when title and risk of ownership of the product has transferred to the customer. For contracts with multiple performance obligations, the Company allocates the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations or a cost-plus margin approach when one is not available. Historically the Company’s contracts have not had multiple performance obligations. The large majority of the Company’s performance obligations are recognized at a point in time related to the sale of products.
Cost of Goods Sold – Our cost of goods sold includes the costs directly attributable to revenue recognized and includes expenses related to the production, packaging and labelling of cannabis products; personnel-related costs, fees for third-party services, such as testing and transportation costs related to our distribution services.
| September 30, 2022 | December 31, 2021 | |||||||
| Numerator: | ||||||||
| Net loss attributable to common shareholders | $ | ( | ) | ( | ) | |||
| Denominator: | ||||||||
| Weighted-average number of common shares outstanding during the period | ||||||||
| Dilutive effect of stock options, warrants, and convertible promissory notes | ||||||||
| Common stock and common stock equivalents used for diluted earnings per share | $ | ( | ) | $ | ( | ) | ||
Derivative Financial Instruments - The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund its business needs, including convertible notes and warrants and other instruments not indexed to our stock. The Company is required to record its derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings in accordance with ASC 815. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with warrants to purchase common stock and convertible notes.
Fair Value of Financial Instruments – We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
| 12 |
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.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Liabilities September 30, 2022 | $ | $ | $ | $ | ||||||||||||
| Derivative Liabilities 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
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.
| 13 |
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
Research and Development Expenses – Research and development (“R&D”) costs are charged to expense as incurred. Our R&D expenses include, but are not limited to, consulting service fees and materials and supplies used in the development of our proprietary products and services.
General and Administrative Expenses – General and administrative expenses consist primarily of personnel-related costs, fees for professional and consulting services, travel costs, rent, bad debt expense, general corporate costs, and other costs of administration such as human resources, finance and administrative roles.
Commitments and Contingencies – Certain conditions may exist as of the date our financial statements are issued, which may result in a loss, but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of the legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Cash and Cash Equivalents – The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents may be invested in money market funds, certificates of deposit or other interest-bearing accounts.
Concentration of Credit Risk – Financial instruments that potentially subject us to credit risk consist of cash. We maintain our cash with high credit quality financial institutions; at times, such balances with any one financial institution may not be insured by the FDIC.
Accounts
Receivable and Revenue – The accounts receivable balance was $
| 14 |
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 $
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.
| 15 |
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
$
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
The
Company entered into a
The
Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily
determinable. The Company used an estimated incremental borrowing rate of
The
Company has right-of-use assets of $
The following table provides the maturities of lease liabilities at September 30, 2022:
| Maturity of Lease Liabilities | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total future undiscounted lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ |
| 16 |
NOTE 5 – INVENTORY
At September 30, 2022 and December 31, 2021, our inventory was, as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Raw material | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
At
September 30, 2022 and December 31, 2021, finished goods included $
We
periodically review the value of our inventory and provide a write-down of inventory based on our assessment of the market conditions.
Any write-down is charged to cost of goods sold. When inspecting inventory this quarter, we found some inventory was damaged, which necessitated
a $
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:
| September 30, 2022 | December 31, 2021 | |||||||
| Vehicle | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Extraction equipment | ||||||||
| Extraction laboratory | ||||||||
| Warehouse facility | ||||||||
| Land and land improvement/development | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant, and equipment | $ | $ | ||||||
The Company acquired the extraction equipment, laboratory, and warehouse facility during 2018 and 2019 and 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 $
NOTE 7 – CAPITAL LEASE PAYABLE
Capital
lease payable consists of a capital lease agreement entered into in April 2018 to finance the purchase of various lab and manufacturing
equipment. The outstanding balance on the 48-month installment capital lease was $
In
addition, the Company entered into additional
A summary of minimum lease payments on capital lease payable for future years is as follows:
| September 30, 2022 | ||||
| Remainder 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: amount representing interest | ( | ) | ||
| Capital lease liability | $ | |||
| 17 |
NOTE 8 – NOTES PAYABLE
In
October 2017, in connection with our purchase of
In
April 2018, the Company issued a note due
In
March and May 2022, the Company issued another note of $ and $, respectively, to an unrelated party with % interest, which
will mature in months. In October 2021, there was an additional note for $. The unrelated party has notes totaling $
NOTE 9 – CONVERTIBLE NOTES PAYABLE
Amortization
of note discounts, which is included in interest expense, amounted to $
Grapefruit
acquired convertible notes in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) On May 31, 2019, the Company executed
the SPA with Auctus pursuant to the terms of which the Company agreed to sell $
On
April 15, 2021, the company renegotiated the debt agreement related to these notes modifying the convertible notes conversion price from
a variable rate to a fixed rate conversion price of $
| 18 |
On
February 26, 2021, the company issued a convertible note for $
On
June 22, 2022, Auctus converted $
On
September 1, 2022, the company issued a convertible note for $
In
addition, the Company has eleven other convertible notes comprising $
| December 31, 2021 Balance | $ | |||
| Additional notes | ||||
| Note conversions/repayment | ( | ) | ||
| Note discount | ( | ) | ||
| September 30, 2022 Balance | $ |
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:
| September 30, 2022 | December 31, 2021 | |||||||
| Payable to an officer and director | $ | $ | ||||||
| Payable to an individual affiliate of an officer and director | ||||||||
| Payable to a company affiliate to an officer and director | ||||||||
| $ | $ | |||||||
Notes
payables bear interest at
A
related party leased two eco-pods in April 2019 and May 2019, which are refurbished shipping containers, located on this specific parcel
within Coachillin’. The lease is treated as an operating lease and payment responsibility is ultimately the responsibility of the
related party. The Company assumed these lease payment obligations in May 2019. The monthly payments are $
On
May 17, 2021, related parties converted $
For the nine months ending September 30, 2022, payables
to related parties came in the form of unpaid salary to executives, $
NOTE 11 – EQUITY
Preferred Stock
The Company has authorized shares of $ par value preferred stock. As of September 30, 2022, and December 31, 2021, there are shares of preferred stock outstanding.
| 19 |
Common Stock
The Company is authorized to issue shares of $ par value common stock.
During
the nine months ended September 30, 2022 the Company issued a total of shares for services rendered valued at $
During
the nine months ended September 30, 2021 the Company issued a total of shares for services rendered valued at $
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 shares of our common stock outstanding on record.
Stock Option Plan
During
2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of shares
of common stock had been reserved for issuance.
Stock Options
As of September 30, 2022, employees of the Company hold options to purchase shares of common stock granted in 2016 at an exercise price of $. On March 28, 2021, the Company granted a board member an option to purchase shares of common stock at $. There are nine month vesting periods for a block of shares starting October 1, 2021.
| Transactions in FY 2022 | Quantity | Weighted-Average Exercise Price Per Share | Weighted-Average Remaining Contractual Life | |||||||||
| Outstanding, December 31, 2021 | $ | |||||||||||
| Granted | $ | |||||||||||
| Exercised | ||||||||||||
| Cancelled/Forfeited | ||||||||||||
| Outstanding, September 30, 2022 | $ | |||||||||||
| Exercisable, September 30, 2022 | $ | |||||||||||
The weighted average remaining contractual life of options outstanding issued under the agreements was years at September 30, 2022.
NOTE 12 — WARRANTS
Following is a summary of warrants outstanding at September 30, 2022:
| Number of Warrants | Exercise Price | Expiration Date | ||||||
| 20 |
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 warrants to purchase shares of the Company’s common stock at an exercise price of $ per share, warrants to purchase shares of the Company’s common stock at an exercise price of $ per share, warrants to purchase shares of the Company’s common stock at an exercise price of $ per share for a period of two year from the date of issuance. (See Note 9)
In
addition to the Notes in connection with the SPA agreement, GPFT issued to the Investor a warrant to purchase
On
February 26, 2021,
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 $
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:
| December 31, 2021 Balance | $ | |||
| Creation/acquisition | ||||
| Reclassification of equity | ||||
| Change in Value | ( | ) | ||
| September 30, 2022 Balance | $ |
| 21 |
The Company classifies the fair value of these derivative liabilities under level 3 of the fair value hierarchy of financial instruments. The fair value of the derivative liability was calculated using a Binomial Tree model. The Company’s stock price and estimates of volatility are the most sensitive inputs in validation of assets and liabilities at fair value. The liabilities were measured using the following assumptions:
| Term | ||||
| Dividend Yield | % | |||
| Risk-free rate | % | |||
| Volatility | % |
NOTE 14 – 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:
| Segment | Description | |
| Retail | The retail segment includes products sold through our online stores and third-party sales teams. | |
| Wholesale | The wholesale segment includes products sold to our preexisting and newly acquired customers. |
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:
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Revenue | ||||||||||||||||
| Retail | $ | $ | $ | $ | ||||||||||||
| Wholesale | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Gross margin | ||||||||||||||||
| Retail | $ | $ | $ | $ | ||||||||||||
| Wholesale | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
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 $
| 22 |
Galileo Surgery Center LP/Cypress Ambulatory Surgery Center LP vs Imaging3, Inc. Settlement
The
Company came to a settlement with Galileo Surgery Center LP/Cypress Ambulatory Surgery Center LP (“Galileo”) for $
Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP
The
Company came to a settlement agreement with Greenberg Glusker Fields Claman & Machtinger LLP (“Greenberg”). Three $
NOTE 17 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10Q and determined that there have been no events that have occurred that would require adjustments to our disclosures in the financial statements.
| 23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements
This Form 10-Q contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about Grapefruit’s financial condition, results of operations and business. These statements include, among others, statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10-K. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Form 10-K. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important facts that could prevent us from achieving our stated goals include, but are not limited to, the following:
| (a) | volatility or decline of our stock price; | |
| (b) | potential fluctuation in quarterly results; | |
| (c) | our failure to earn revenues or profits; | |
| (d) | inadequate capital to continue the business and barriers to raising the additional capital or to obtaining the financing needed to implement our business plans; | |
| (e) | failure to make sales; | |
| (f) | changes in demand for our products and services; | |
| (g) | rapid and significant changes in markets; | |
| (h) | litigation with or legal claims and allegations by outside parties, causing us to incur substantial losses and expenses; | |
| (i) | insufficient revenues to cover operating costs; | |
| (j) | dilution in the ownership of the Company through the issuance by us of additional securities and the conversion of outstanding warrants, notes and other securities; |
| 24 |
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, 2022 as compared to the Three Months Ended September 30, 2021.
| Three months ended | Three months ended | |||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Net revenues | $ | 2,962 | $ | 153,476 | ||||
| Cost of goods sold | 62,758 | 346,073 | ||||||
| Gross income (loss) | (59,796 | ) | (192,597 | ) | ||||
| Sales expense | 1,172 | 3,800 | ||||||
| Stock based compensation | 106,011 | 25,980 | ||||||
| Stock option expenses | 6,008 | 32,877 | ||||||
| General and administrative expense | 229,643 | 352,462 | ||||||
| Loss from operations | (402,630 | ) | (607,716 | ) | ||||
| Change in value of derivatives | 14,187 | 13,877 | ||||||
| Interest and other expense | (369,763 | ) | (388,273 | ) | ||||
| Net loss before income taxes | (758,207 | ) | (982,112 | ) | ||||
| Tax provision | - | - | ||||||
| Net loss | (758,207 | ) | (982,112 | ) | ||||
| Loss attributable to noncontrolling interest | - | (270 | ) | |||||
| Net loss attributable to Grapefruit USA, Inc. | $ | (758,207 | ) | $ | (981,842 | ) | ||
The following sets forth selected items from our statements of operations for three months ended September 30, 2022 and for the three months ended September 30, 2021.
Revenue for the three months ended September 30, 2022 was $2,962 compared to $153,476 for the corresponding period in 2021, a decrease of $150,514 or 98.1%. The decrease was primarily due to the decline of our distribution business caused by a combination of decreased demand for and an over-supply of cannabis flowers in California. As a result of these market forces beyond our control we have severely limited our distribution operations and commenced the process of transitioning into a canna-biotech firm focusing on further developing and marketing of cannabis products based on our patented Hourglass Technology. On March 21, 2022, we received approval of our NNCP from Health Canada (NNCP ID No. NP-V2EHUWO907) which authorizes us to manufacture and sell our Hourglass™ products throughout Canada. As the Company expands marketing efforts, we anticipate to see additional growth.
| 25 |
Cost of goods sold for the three months ended September 30, 2022 was $62,758 as compared to $346,073 for the corresponding period in 2021, a decrease of $283,315, or 81.9%. Included in cost of goods sold are plant operation and other direct overhead expenses incurred to maintain our production facilities. These fixed carrying costs affect our gross margin more significantly at lower revenues than at our anticipated full operating activity levels. When inspecting inventory this quarter, we found some inventory was damaged, which necessitated a $68,500 reduction in inventory. Most of the product was salvageable and will be ready for resale in November 2022.
Our resulting gross loss for the three months ended September 30, 2022 was $59,796 as compared with the gross loss of $192,597 for the corresponding period in 2021, a decrease of $132,801, or 69.0%. The decrease was a result of the general decrease in sales and the associated costs of goods sold.
Sales expense for the three months ended September 30, 2022 were $1,172 compared to $3,800 for 2021, decrease of $2,628, or 69.2%. Stock based compensation for the three months ended September 30, 2022 were $106,011 compared to $25,980 for 2021, an increase of $80,031, or 308%. Stock option expenses for the three months ended September 30, 2022 were $6,008 compared to $32,877 for 2021, a decrease of $26,869, or 81.7%. General and administrative expenses for the three months ended September 30, 2022 were $229,643 compared to $352,462 for 2021, a decrease of $122,819, or 34.8%.
Our resulting net loss from operations for the three months ended September 30, 2022 was $402,630 as compared to $607,716 for the corresponding period for 2021, a decrease of $205,086, or 33,7%. Change in value of derivatives gain for the three months ended September 30, 2022 was $14,187 as compared to $13,877 for 2021, a decrease of $310, or 2.2%. Interest and other expense for the three months ended September 30, 2022 was $369,763 as compared to $388,273 for 2021, a decrease of $18,510, or 4.8%.
Net loss for the three months ended September 30, 2022 was $758,207 as compared to $982,112 for the corresponding period for 2021, a decrease of $223,905, or 22.8%. Loss attributable to noncontrolling interest for the three months ended September 30, 2022 was $0 as compared to $270 the corresponding period for 2021, a decrease of $270. Our resulting net loss attributable to Grapefruit USA, Inc. and subsidiary for the three months ended September 30, 2022 was $758,207 as compared to $981,842 for the corresponding period for 2021, a decrease of $223,635, or 22.8%.
Results of Operations for the Nine Months Ended September 30, 2022 as compared to the Nine Months Ended September 30, 2021.
| Nine months ended | Nine months ended | |||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Net revenues | $ | 32,673 | $ | 586,780 | ||||
| Cost of goods sold | 297,069 | 926,671 | ||||||
| Gross income (loss) | (264,396 | ) | (339,891 | ) | ||||
| Sales expense | 6,744 | 5,760 | ||||||
| Stock based compensation | 301,916 | 265,024 | ||||||
| Stock option expenses | 27,006 | 65,754 | ||||||
| General and administrative expense | 974,685 | 1,011,199 | ||||||
| Loss from operations | (1,574,747 | ) | (1,687,628 | ) | ||||
| Change in value of derivatives | 138,081 | 91,210 | ||||||
| Interest and other expense | (1,171,036 | ) | (2,149,021 | ) | ||||
| Net loss before income taxes | (2,607,702 | ) | (3,745,439 | ) | ||||
| Tax provision | - | - | ||||||
| Net loss | (2,607,702 | ) | (3,745,439 | ) | ||||
| Loss attributable to noncontrolling interest | - | (270 | ) | |||||
| Net loss attributable to Grapefruit USA, Inc. | $ | (2,607,702 | ) | $ | (3,745,169 | ) | ||
| 26 |
The following sets forth selected items from our statements of operations for nine months ended September 30, 2022 and for the nine months ended September 30, 2021.
Revenue for the nine months ended September 30, 2022 was $32,673 compared to $586,780 for the corresponding period in 2021, a decrease of $554,107 or 94.4%. The decrease was primarily due to the decline of our distribution business caused by a combination of decreased demand for and an over-supply of cannabis flowers in California. As a result of these market forces beyond our control we have severely limited our distribution operations and commenced the process of transitioning into a canna-biotech firm focusing on further developing and marketing of cannabis products based on our patented Hourglass Technology. On March 21, 2022, we received approval of our NNCP from Health Canada (NNCP ID No. NP-V2EHUWO907), which authorizes us to manufacture and sell our Hourglass™ products throughout Canada. As the Company expands marketing efforts, we anticipate to see additional growth.
Cost of goods sold for the nine months ended September 30, 2022 was $297,069 as compared to $926,671 for the corresponding period in 2021, a decrease of $629,602, or 67.9%. Included in cost of goods sold are plant operation and other direct overhead expenses incurred to maintain our production facilities. These fixed carrying costs affect our gross margin more significantly at lower revenues than at our anticipated full operating activity levels. When inspecting inventory this quarter, we found some inventory was damaged, which necessitated a $68,500 reduction in inventory. Most of the product was salvageable and will be ready for resale in November 2022.
Our resulting gross loss for the nine months ended September 30, 2022 was $264,396 as compared with the gross loss of $339,891 for the corresponding period in 2021, a decrease of $75,495, or 22.2%. The decrease was a result of the general decrease in sales and the associated costs of goods sold.
Sales expense for the nine months ended September 30, 2022 was $6,744 compared to the $5,760 for 2021, an increase of $984, or 17.1%. Stock based compensation for the nine months ended September 30, 2022 were $301,916 compared to $265,024 for 2021, an increase of $36,892 or 13.9%. Stock option expenses for the nine months ended September 30, 2022 were $27,006 compared to $65,754 for 2021, a decrease of $38,748, or 58.9%. General and administrative expense for the nine months ended September 30, 2022 were $974,685 compared to $1,011,199 for 2021, a decrease of $36,514, or 3.6%.
Our resulting net loss from operations for the nine months ended September 30, 2022 was $1,574,747 as compared to $1,687,628 for the corresponding period for 2021, a decrease of $112,881, or 6.7%. Change in value of derivatives gain for the nine months ended September 30, 2022 was $138,081 as compared to $91,210 for 2021, an increase of $46,871, or 51.4%. Interest and other expense for the nine months ended September 30, 2022 was $1,171,036 as compared to $2,149,021 for 2021, a decrease of $977,985, or 45.5%.
Net loss for the nine months ended September 30, 2022 was $2,607,702 as compared to $3,745,439 for the corresponding period for 2021, a decrease of $1,137,737, or 30.4%. Loss attributable to noncontrolling interest for the nine months ended September 30, 2022 was $0 as compared to $270 for the corresponding period for 2021, a decrease of $270. Our resulting net loss attributable to Grapefruit USA, Inc. and subsidiary for the nine months ended September 30, 2022 was $2,607,702 as compared to $3,745,169 for the corresponding period for 2021, a decrease of $1,137,467, or 30.4%.
Liquidity and Capital Resources
Our cash position increased to $23,583 as of September 30, 2022 from $9,095 as of December 31, 2021. Our total current assets decreased to $644,496 as of September 30, 2021, from $714,199 as of December 31, 2021.
Our total current liabilities increased to $7,913,321 as of September 30, 2022 from $7,703,573 as of December 31, 2021.
| 27 |
During the nine months ended September 30, 2022, we used $317,552 of net cash for operating activities, as compared to cash used by operations of $998,581 used during the nine months ended September 30, 2021. Net cash used in investing activities during the nine months ended September 30, 2022 was $0, as compared to $62,250 during the nine months ended September 30, 2021. Net cash provided by financing activities during the nine months ended September 30, 2022 was $332,040, as compared to $798,253 during the nine months ended September 30, 2021.
We expect our working capital requirements in the next year to be met primarily by the proceeds of issuance of debt, equity and other securities to our existing creditors, shareholders, and other investors, as well as from cash flow from operations. We also expect that, as in the past, significant amounts of our convertible debt with a major lender will be converted into equity. We expect to need additional working capital from outside sources to cover our anticipated operating expenses. There is no assurance that the Company will be able to raise sufficient additional capital or financing to continue in business or to effectively execute its business plan.
COVID-19 Impact
The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantine and shelter-in-place orders. The COVID-19 pandemic has at times significantly curtailed global economic activity and caused significant volatility and disruption in global financial markets. The COVID-19 pandemic and the measures taken by many countries in response have affected and could in the future materially impact the Company’s business, results of operations and financial condition.
Certain of the Company’s outsourcing partners, component suppliers and logistical service providers have experienced disruptions during the COVID-19 pandemic, resulting in supply shortages. Similar disruptions could occur in the future.
Going Concern Qualification
Our consolidated financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. During the nine months ended September 30, 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
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive and financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
| 28 |
As of September 30, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of September 30, 2022, our internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting through the date of this report or during the quarter ended September 30, 2022, 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
None.
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 | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| 29 |
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 18, 2022 | |
| Bradley J. Yourist | ||
| Chief Executive Officer | ||
| /s/ Kenneth J. Biehl | Dated: November 18, 2022 | |
| Kenneth J. Biehl | ||
| Chief Financial Officer |
| 30 |