UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FORM 10-Q

(Mark One)

[X]

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period EndedSeptember 30, 20172022

or

[  ]☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe Transition period fromto ______________to ______________

Commission File Number: IMAGING3, INC.000-50099

GRAPEFRUIT USA, INC.

(Exact name of registrant as specified in its charter)

3022 North Hollywood Way, Burbank, California 9150510866 Wilshire Blvd. Ste 225, Los Angeles, CA 90024

(Address of principal executive offices) (Zip Code)

(818) 260-0930310-575-1175

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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

As of November 13, 2017,18, 2022, the number of shares outstanding of the registrant’s class of common stock was 310,082,295.717,402,185.

TABLE OF CONTENTS

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.

PART I. FINANCIAL INFORMATION

Item1. CondensedItem 1. Financial Statements (Unaudited)

IMAGING3,GRAPEFRUIT USA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

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

IMAGING3,

GRAPEFRUIT USA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)(Unaudited)

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

IMAGING3,

GRAPEFRUIT USA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED

SEPTEMBER 30, 2017 AND 2016(Unaudited)

(UNAUDITED)

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

IMAGING3, INC.

Notes to Condensed Financial Statements

(Unaudited)

1.

GRAPEFRUIT USA, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

NOTE 1 – ORGANIZATION AND DESCRIPTIONNATURE OF BUSINESSOPERATIONS

Imaging3,Overview

Grapefruit Boulevard Investments, Inc. (the “Company”(“we”, “our”, “us”, “we”“Grapefruit”, “Imaging3”“GBI”, or “the Company”) iswas formed as a California corporation incorporated on October 29, 1993 as Imaging Services, Inc. The Company filed a certificate of amendment of articles of incorporation to change its name toAugust 28, 2017 and began operation in September 2017. On July 10, 2019, Grapefruit acquired Imaging3, Inc. on August 20, 2002.(“IGNG”) in a reverse acquisition (the “Acquisition”). Under the terms of a Share Exchange Agreement by and among IGNG, Grapefruit and Grapefruit’s shareholders, IGNG issued to Grapefruit’s existing shareholders approximately 81% of the post-Acquisition IGNG common shares and the IGNG shareholders retained 19% of the post-Acquisition IGNG common shares. As a result, our financial statements are prepared using the acquisition method of accounting with Grapefruit as the accounting acquirer and IGNG treated as the legal acquirer and accounting acquiree. On December 16, 2019, Grapefruit filed the necessary paperwork with the Financial Industry Regulatory Authority (“FINRA”) and OTC Markets to effect the Company Name and Ticker symbol changes from “IGNG” to “GPFT” formally changing our corporate name from Imgaing3, Inc. to Grapefruit USA, Inc., a Delaware corporation whose stock is trading under the Ticker Symbol “GPFT”.

The Company’s primary business is refurbishmentannual 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 salewill not until construction of medical equipment, partsour cultivation facility has been substantially completed. We own two acres of fully entitled cannabis real property located in the Coachillin’ Industrial Cultivation and servicesAncillary Canna-Business Park where we intend to hospitals, surgery centers, research labs, physician officesbuild a 30,000 square foot fully licensed cannabis facility as more fully described below. The location within Coachillin’ allows the Company to apply for and veterinarians. Equipment sales include new c-arms, c-arms tables, remanufactured c-arms, used c-armhold every cannabis license available under the California Cannabis laws.

The “Mothership” Cultivation & Lab Facility

In July 2021, Grapefruit obtained a development permit to build a 30,000 square foot “Mothership” facility intended to house a state-of-the-art indoor grow as well as a separately licensed distribution hub and surgical tables. Part sales comprise new or renewed replacement partslaboratory that will produce the patented Hourglass line of topical creams as well as high quality extracts from trim generated by processing the indoor cannabis flowers. We intend to obtain CGMP certification for c-arms.

The Company has developed a proprietary medical technology designed to produce 3D medical diagnostic images in real time. We believe Imaging3 technology has the potential to contributelab pursuant to the improvement of healthcare. Our technology is designed to cause 3D images to be instantly constructed using high-resolution fluoroscopy. These images can be used as real time references for any current or new medical procedures in which multiple frames of reference are required to perform medical procedures on or inGood Manufacturing Practice regulations enforced by the human body. This technology is still in development and the Company intends to seek approval from the Food andFederal Drug Administration (“FDA”). We expect that our facility will meet proper design, monitoring, and manufacturing control processes to assure the strength, quality, and purity of all Hourglass products we manufacture. We anticipate the FDA to mandate all cannabis facilities to be CGMP certified (Current Good Manufacturing Practice regulations enforced by the FDA) to continue in operation if cannabis becomes legalized by the federal government.

Summit Boys

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

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

Grapefruit’s Business Development

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

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

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

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

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

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

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

Distribution

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

Manufacturing

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

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

Binding Letter of Intent to Acquire Diagnostic Lab Corporation

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

2.

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

Basis

The condensed consolidated interim financial statements of Presentation

On September 13, 2012 (the “Petition Date”), the Company filed a voluntary petitionGrapefruit USA, Inc. are unaudited. They have been prepared in accordance with the federal bankruptcy courtGenerally Accepted Accounting Principles in Los Angeles, California, to enter bankruptcy under Chapter 11 of the United States Bankruptcy Code. On or about July 15, 2013, our Plan of Reorganization was approved by the United States Bankruptcy Court. On July 30, 2013, we emerged from bankruptcy and continued operations under the terms and conditions of our Bankruptcy Reorganization Plan as it applies to post bankruptcy operations. For accounting purposes, management deemed the effective date of the Chapter 11 Plan (the “Plan”(“U.S. GAAP”) to be June 30, 2013. The Company’s operations between July 1, 2013 and July 30, 2013 were not significant. The Plan adopted by Imaging3, Inc. is a reorganizing plan. Payments under the Plan were made by utilizing existing cash on hand, borrowings on a secured and unsecured basis, future cash flow, if any, capital raised through the sale of our common stock in private placements, and by conversion of debt to equity.

Upon emergence from bankruptcy, Imaging3 adopted fresh-start accounting which resulted in Imaging3 becoming a new entity for financial reporting purposes. Imaging3 applied fresh start accounting as of July 1, 2013. As a result of the application of fresh start accounting and the effects of the implementation of the plan of reorganization, the financial statements on or after July 1, 2013 are not comparable with the financial statements prior to that date.

The accompanying unaudited interim financial statements havebeenpreparedinaccordanceinformation and with theapplicable rules and regulations of the U.S. Securities and Exchange Commissionforthe presentation of relating to interim financial information, butstatements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principlesU.S. GAAP for complete financial statements. In the opinion of management, all adjustments consisting(consisting of normal recurring adjustments,accruals) considered necessaryfora fair presentation have been included. ItissuggestedOperating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that thesemay be expected for any other reporting period.

These condensed consolidated interim financial statements should be readinconjunction with the Company’s audited consolidated financial statements and related notes thereto included in the Company’s annual reportits Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The2021.

Basis of Consolidation – Subsidiaries are entities controlled by the Company. Control exists when the Company followseither has a controlling voting interest or is the same accounting policiesinpreparation of interim reports. Results of operationsforthe interim periods are not indicative of annual results.

Going Concern

The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has historically incurred net losses. The continuing losses have adversely affected the liquidity of the Company.

In view of the matters described in the preceding paragraph, recoverabilityprimary beneficiary of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations.variable interest entity. The financial statements do not include any adjustments relating toof subsidiaries are included in the recoverability and classification of recorded asset amounts or amounts and classification of liabilitiesconsolidated financial statements from the date that might be necessary as a result ofcontrol commences until the Company’s going concern uncertainty. Management believes there is substantial doubt about the Company’s ability to continue as a going concern.date that control ceases. All significant intercompany transactions are eliminated.

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

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

Our retail operations generate revenue primarily through the sale of our Summit Boys branded product, THC “Honey Oil” tinctures, and CBD-Infused Hourglass™ Topical Cream products through our online and third-party sales volume, and continue seeking approvalchannels. Our wholesale revenues are generated from the FDA to bringtomarket our smart scan technology imaging platform. We cannot assure you that funds from these sources will be available when needed or, if available, will be on terms favorabletous ortoour stockholders.Ifwe raise additional funds or settle liabilities by issuing equity securities, the percentage ownershipsales 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 ofTHC-Infused Hourglass™ Topical Cream, RSO syringes, vape cartridges, and flower products through our common stock. Our ability to executepre-existing and newly acquired customers.

Financial information about our business plansegments and continue as a going concern may be adversely affectedifweare unablegeographical areas is provided in Note 14, Segment Information, to raise additional capital or operate profitably.our consolidated financial statements in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements (Unaudited),” in this Quarterly Report on Form 10-Q.

The Company anticipates that further equity/debt financings will be necessary to continue to fund operations in the future and there is no guarantee that such financings will be available or, if available, on acceptable terms.

A summaryUse of the Company’s significant accounting policies consistently applied in theEstimates – The preparation of the accompanying financial statements follows:

Use of Estimates

In preparingour financial statements in conformity with accounting principles generally acceptedinthe United States of America, management is requiredU.S. GAAP requires us tomake estimates, assumptions and assumptionsjudgments that affect the reported amounts of assetsandliabilities and the disclosure of contingent assetsandliabilities atas of the date of theour financial statements and the reported amounts of revenues and expenses during the reporting period.Actualperiods 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 those estimates.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.

CashInventory– Inventory is valued at the lower of cost and Cash Equivalents

The Company considers all liquid investments with a maturitynet 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 three months or less fromgoods sold on the date of purchase that are readily convertible into cash to be cash equivalents. The Company maintains its cash in bank deposit accounts that may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had no cash equivalents at September 30, 2017.

Revenue Recognition

Revenueisrecognized upon shipment, provided that evidence of an arrangement exists, title and riskstatements of loss have passedtoand comprehensive loss at the customer, fees are fixed or determinabletime 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 collectiontransportation. At the end of the related receivable is reasonably assured. Revenueisrecorded net of estimated product returns, which isbasedupon the Company’s return policy, sales agreements, management estimates of potential future product returns relatedtocurrent period revenue, current economic trends, changesincustomer composition and historical experience. The Company accrues for warranty costs, sales returns, and other allowances based onitsexperience. Generally, the Company extends credit to its customers and does not require collateral.TheCompany performs ongoing credit evaluations of its customersandhistoric credit losses have been within management’s expectations and has a revenue receivables policy for serviceandwarranty contracts. Equipment sales usually have a one-year warranty of parts and service. After a one-yeareach reporting period, the Company contactsperforms an assessment of inventory and records write-downs for excess and obsolete inventories based on the buyerCompany’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 toinitiate the saleCompany’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 new warranty contractforone year. Warranty revenues are deferred and recognized on a straight line basis over the term$68,941 reduction in inventory. Most of the contract or as services are performed.product was salvageable and will be ready for resale in November 2022.

Deferred Revenue

Deferred revenue consists substantially of amounts received from customers in advance of the Company’s performance service period. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.

Accounts Receivable

The Company’s customer base is geographically dispersed. The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivableProperty, Plant and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.

Property & Equipment,

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expenses as incurred and additions, renewals and betterments are capitalized. When net– Our property and equipment are retired or otherwise disposedrecorded at cost. Assets held under capital leases are capitalized at the commencement of the relatedlease 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 the respectiveour accounts and any resulting gain or loss is reflected in our consolidated statements of operations.

Land Improvements – Our land improvements are recorded at cost provided by our property association and is included in operations. Depreciation ofthe property, plant and equipment is provided usingequipment. These costs will continue to be capitalized until construction has been completed. Land improvements will not be depreciated until the straight-line method for all assets with estimated lives of three to eight years.construction has been completed by the property association.

Impairment of Long-Lived Assets

Long-lived Impairment Assessment – Our long-lived assets are reviewed forsubject to an impairment whenever events or changes in circumstances indicatetest 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 amountvalue of an assetintangibles or other long-lived assets may not be recoverable throughbased upon the estimatedexistence of one or more indicators of impairment, we use the projected undiscounted cash flows expectedflow method or realizable value to resultdetermine whether an impairment exists, and then measure the impairment using discounted cash flows.

Revenue Recognition– The Company derives revenues from the use and eventual dispositionsale of product in accordance to ASC Topic 606. Revenues are recognized when control of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

The Company tests long-lived assets, including property, plant, equipment and intangible assets subject to periodic amortization, for recoverability at least annuallypromised goods or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amountservices is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment, and then compares the carrying amount of the assettransferred to the future estimated cash flows expected to result fromcustomer in an amount that reflects the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows,consideration the Company measures the amount of impairment by comparing the carrying amount of the assetexpects to its fair value. The estimation of fair valuebe entitled to in exchange for transferring those goods or services.

Revenue is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair valuerecognized based on the information available in making whatever estimates, judgments and projections are considered necessary.following five step model:

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

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

Basic and Diluted Net Income Per Share

– Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is basedonthe assumptionassumes that all dilutive convertible shares and stock options were converted or exercised. Dilutioniscomputed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (oratthetime of issuance,iflater), and asiffunds obtained thereby were usedtopurchase common stock at the average market price during the period. During 2016, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.

SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF 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 financingtofund its business needs, including convertible notes and warrants and other instruments not indexedtoour stock. The Companyisrequiredtorecord its derivative instruments at their fair value. Changesinthe fair value of derivatives are recognizedinearnings in accordance with ASC 815. The Company’s only asset or liability measuredatfair value on a recurring basisisits derivative liability associated with warrants to purchase common stock and convertible notes.

Fair Value of Financial Instruments

The– We value our financial assets and liabilities using fair value accounting standard createsmeasurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a three-level hierarchy to prioritizeliability 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 usedare observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation techniqueshierarchy is based on the lowest level of input that is significant to derive fair values. The basis forthe fair value measurements for each level within themeasurement. The hierarchy is described below withprioritized 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, havingsuch 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 highest priorityfair 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 having the lowest.

The Company had the followingcategorizations 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.

SUMMARY OF DERIVATIVE LIABILITIES

Items measured at fair value on a recurringnon-recurring basis

The Company’s prepaids and other current assets, long lived assets, including property and equipment, and goodwill are measured at September 30, 2017.fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of deferred – Income tax assets and liabilities forare recorded using the expected futureasset and liability method. Under the asset and liability method, tax consequences of events that have been included in the financial statements or tax returns.

Under this method, deferred income taxesassets and liabilities are recognized for the tax consequences in future years ofattributable to differences between thefinancial statement carrying amounts of existing assets and liabilities and their respective tax bases of assetsas well as net operating loss andliabilitiesandtheir financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expectedtoaffect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assetstothe amount expectedtobe realized. The provision for income taxes represents the tax payableforthe period and the change during the period in deferredcredit carryovers. Future tax assets and liabilities.

Inventory

Inventory is stated at the lower of cost or net realizable value with cost determinedliabilities are measured using the first-in, first-out method.

Researchenacted tax rates expected to apply when the asset is realized, or the liability settled. The effect on future tax assets and Development

Costs and expenses that can be clearly identified as research and development are charged to expense as incurredliabilities of a change in accordance with FASB ASC 730-10. Includedtax rates is recognized in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well as costs to acquire technology licenses.

Recent Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. The revenue recognition standard is required to be applied retrospectively, including any combination of practical expedients as allowedincome in the standard. We are evaluatingperiod that enactment occurs. To the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issuedASU2014-15,Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.ASU2014-15 changes to the disclosure of uncertainties about an entity’s abilitytocontinue as a going concern. These changes require an entity’s managementtoevaluate whether there are conditions or events, consideredinthe aggregate,extent that raise substantial doubt about the entity’s abilitytocontinue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be madeinthe financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or eventsinrelation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intendedtoat least mitigate the conditions or events that raise substantial doubt, and (iv)ifthe latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s abilitytocontinue as a going concern. These changes became effective for the Company for the 2017 annual period. The adoption of these changes did nothavea material impact on the financial statements.

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In March 2016, the FASB issuedASU2016-09,ImprovementstoEmployee Share-Based Payment Accounting. ThisASUaffects entities that issue share-based payment awards to their employees. TheASUis 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.ASU2016-09 will become effective for the Companyinthe first quarter of fiscal 2018. Early adoptionispermittedinany interim or annual period. The Companyiscurrently evaluating the impact of this guidance on its consolidated financial statements.

In April 2016, the FASB issued AS 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this updatewe do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

3. ACCRUED EXPENSES

During 2003, the Company paid payroll net of taxesandaccrued said taxes without payment due to cash flow limitations resultingfroma2002warehouse fire that incinerated our inventory. The Company subsequently received a tax lien in 2005 related to 2003 payroll taxes from the Internal Revenue Serviceandcontinued to accrue interestandpenalty charges. The original amount was $104,052. In 2008, payments were made and the Internal Revenue Service issued a tax lien release for this amount and the liability carried on the Company’s books was relieved. In 2009, the Company was notified by the Internal Revenue Service that additional payroll taxes, interest, and penalty charges were still owed. After researching,consider it is believed that the Internal Revenue Service double booked the original payments made and releasedthelieninerror. Settlement was reached and the Companyiscurrently paying $2,578 per month on a total liability of $24,474 as of September 30, 2017, including interest. The Company recognized a reduction of accrued liability of approximately $200,000 relating to the settlement with the Internal Revenue Service, which was recorded as other income in 2016. This agreement will cure any default of the Company’s plan payments. The final payment is due on April 16, 2018.

4. INCOME TAXES

The Company’s book lossesandother timing differences resultina net deferred income tax benefit which is offset by a valuation allowance for anetdeferred asset of zero. The Company has concluded,inaccordance with the applicable accounting standards, thatit ismore likely than not that the Company may not realize the benefit of all of its deferreda future tax assets. Accordingly, management has providedasset will be recovered, we will provide a 100% valuation allowance against its deferredthe excess.

We follow the provisions of ASC 740, Income Taxes. Because of ASC 740, we make a comprehensive review of our portfolio of tax assets untilsuchtime as management believes thatitsprojections of future profits aswellas expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differencesinfuture results from our estimates could resultinmaterial differencesinthe realization of these assets. The Company has recorded a full valuation allowance related toallof its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax assetpositions in accordance with FASBrecognition standards established by ASC 740-10, “Accounting for Income Taxes.” This assessment included740.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the evaluation of scheduled reversals of deferred tax liabilities,taxing authorities, while others are subject to uncertainty about the availability of carry forwardsandestimates of projected future taxable income. The availabilitymerits of the Company’s net operating loss carry forwards is subjecttolimitationifthereisa 50%position taken or more changeinthe ownershipamount of the Company’s stock.position that would be ultimately sustained. The provision for income taxes consists of the state minimum tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accountingforuncertainty in income taxes recognized inanenterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement processforfinancial statement recognition and measurementbenefit of a tax position taken or expected to be takenis recognized ina tax return. In making this assessment, a company must determine whether our consolidated financial statements in the period during which, based on all available evidence, we believe it is more likely than not that a taxthe position will be sustained upon examination, based solely onincluding the technical meritsresolution 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 position and must assumebenefits associated with tax positions taken that exceeds the tax position will be examinedbytaxing authorities.TheCompany’s policyamount measured as described above istoinclude interestandpenalties relatedto reflected as a liability for unrecognized tax benefits in incomethe 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 expense.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 Company hasU.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 recognized anyconsidered 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, anddoesnothaveif any, are classified as interest expense and penalties and are included in selling, general and administrative expenses in our consolidated statements of operations.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. U.S. tax reform introduced many changes, including lowering the U.S. corporate tax rate to 21 percent, changes in incentives, provisions to prevent U.S. base erosion and significant changes in the taxation of international income, including provisions which allow for the repatriation of foreign earnings without U.S. tax. The enactment of U.S. tax reform had no significant impact on our income taxes for the nine months ended September 30, 2022 and 2021, respectively.

Research and Development Expenses– Research and development (“R&D”) costs are charged to expense as incurred. Our R&D expenses include, but are not limited to, consulting service fees and materials and supplies used in the development of our proprietary products and services.

General and Administrative Expenses– General and administrative expenses consist primarily of personnel-related costs, fees for professional and consulting services, travel costs, rent, bad debt expense, general corporate costs, and other costs of administration such as human resources, finance and administrative roles.

Commitments and Contingencies – Certain conditions may exist as of the date our financial statements are issued, which may result in a loss, but which will only be resolved when one or penaltiesmore 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 relatedtouncertain tax positions legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of the legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

Net Loss Per Share – We compute net loss per share in accordance with ASC 260, Earnings per Share. Under the provisions of ASC 260, basic net loss per share includes no dilution and is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share takes into consideration shares of common stock outstanding (computed under basic net loss per share) and potentially dilutive securities that are not anti-dilutive.

Cash and Cash Equivalents– The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents may be invested in money market funds, certificates of deposit or other interest-bearing accounts.

Concentration of Credit Risk – Financial instruments that potentially subject us to credit risk consist of cash. We maintain our cash with high credit quality financial institutions; at times, such balances with any one financial institution may not be insured by the FDIC.

Accounts Receivable and Revenue – The accounts receivable balance was $22,977 as of September 30, 2017.2022 and $278,422 as of December 31, 2021. As of September 30, 2022, 100% of accounts receivable consisted of one customer and the remaining accounts receivable was determined to be uncollectible. During the three months ended September 30, 2022, 35% of the sales came from Summit Boys product third party sellers, 36% came from online sales, and the remainder of the sales was distributed between all other customers. During the three months ended September 30, 2021, we diversified our customer base, but still have 30% of the revenues from one customer.

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

Recently Issued Accounting Pronouncements – From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our condensed consolidated financial statements upon adoption.

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

Recently Issued Accounting Pronouncements Adopted

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

NOTE 3 – GOING CONCERN

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

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

NOTE 4 – RIGHT OF USE ASSET AND LIABILITY

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

The Company entered into a 18-month lease agreement for office space in July 2019 at $6,304 a month, with an approximate 3% increase annually.

The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company used an estimated incremental borrowing rate of 10% to estimate the present value of the right of use liability.

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

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

SCHEDULE OF MATURITIES OF LEASE LIABILITIES

5.

NOTE 5 – INVENTORY

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

SCHEDULE OF INVENTORY

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

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

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET

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

SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT, NET

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

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

NOTE 7 – CAPITAL LEASE PAYABLE

Capital lease payable consists of a capital lease agreement entered into in April 2018 to finance the purchase of various lab and manufacturing equipment. The outstanding balance on the 48-month installment capital lease was $0 and $8,822 as of September 30, 2022 and December 31, 2021, respectively. The terms of the 48-month capital lease specify monthly payments of $4,575. The interest rate implicit in the lease is about 15% and the maturity date was February 2022. The lease has been paid in full and we now retain ownership of the equipment.

In addition, the Company entered into additional 48-month leases in May 2019 for production facilities and storage of product. Monthly payments for the facility and storage totals $1,935.

A summary of minimum lease payments on capital lease payable for future years is as follows:

SUMMARY OF MINIMUM LEASE PAYMENTS ON CAPITAL LEASE

NOTE 8 – NOTES PAYABLE

During 2015In October 2017, in connection with our purchase of two acres of fully entitled cannabis real property located in the Coachillin’ Industrial Cultivation and 2016,Ancillary Canna-Business Park, the Company issued promissory notesa first and second trust deed note in the aggregate amountamounts of $942,850$700,000 and $200,000, respectively. The first and second trust deed notes are long-term notes and are interest only notes, at 13.0%, and mature in August 2022, with the full principal payment due at maturity. For the $700,000 loan, the monthly interest payment is approximately $7,500. For the $200,000 loan, the monthly interest payment is approximately $2,200. Unpaid interest as of September 30, 2022 is $37,888 and $6,495, for cash proceeds of $872,500. These notes bear interest at 5%-10% per annumthe two loans respectively. The 1st and several were due on various dates throughout 2015 and 2016 and several are due in 2017. These notes2nd trust deeds are secured by substantially all assetsthe land as well as property owned by two officers of the Company.company and three other related parties. Also, each party has personally guaranteed or pledged additional collateral. The convertible promissory notes are convertible into sharesinclude a debt discount as of September 30, 2022 of $9,000. The Company plans to repay these notes with the Company’s common stock at a rate equalproceeds from the recapitalization disclosed in the “Binding Letter of Intent to $0.01-$0.05 per share, subject to downward adjustments for future equity issuances. Acquire Diagnostic Lab Corporation” in “Grapefruit’s Business Development” in Note 1.

In connection with these convertible promissory notes,April 2018, the Company issued warrantsa note due 60 days after funding to purchase 66,500,000 sharesan unrelated third party with a principal amount of common stock at$250,000 and immediate interest charge totaling $125,000. As of September 30, 2022, the note has not been repaid and was amended to carry an exercise price of $0.01 per share, subject to downward adjustments for future equity issuances. The warrants have a term of 7 years from the date of issuance. The Company is in default under the terms of these notes.

The conversion features and warrants are considered derivative liabilities pursuantto ASC815 and were measured at their grant-date fair value and recorded as a liability and note discount on the date of issuance. Subsequent changestothe valueadditional 10% interest rate of the derivative liabilities are recorded in earnings. As a result, during the year ended December 31, 2016,total balance due. Accrued interest for this loan totals $284,375. The note is past due. Two officers of the Company recordedhave personally guaranteed the loan.

In March and May 2022, the Company issued another note of $40,000 and $10,000, respectively, to an initial note discount of $455,000,unrelated party with10% interest, which will mature in 6 months. In October 2021, there was an additional immediate chargenote for $6,000. The unrelated party has notes totaling $56,000, all with similar terms. Each note as it matures will continue to accrue interest at the stated rate until repayment.

NOTE 9 – CONVERTIBLE NOTES PAYABLE

Amortization of note discounts, which is included in interest expense, of $749,809 relatingtothe excess value of the derivative liabilities over the promissory notes. Amortization of the note discount amounted to approximately $290,000$313,731 during the nine months ended September 30, 20172022 and $272,000$692,129 for the nine months ended September 30, 2016.2021.

Grapefruit acquired convertible notes in its acquisition of Imaging3, Inc. on July 10, 2019. (See Note 15.) On January 5, 2017May 31, 2019, the Company executed the SPA with Auctus pursuant to the terms of which the Company agreed to sell $4,000,000 of the Notes and issue $6,200,000 of callable warrants (the “Warrants” and, together with the Notes, the “Securities”) to Auctus. Auctus is the Selling Security Holder. In addition, on May 31, 2019, we also entered into a financing arrangementregistration rights agreement with five accredited investorsAuctus (the “Investors”“Registration Rights Agreement”), whereby amendmentswe are obligated tocertain convertible note agreements totaling $662,000 were enacted. The amendments file a registration statement to register the convertible note agreements involved(1)extending the maturity datesresale of the note agreements; and (2) amendingshares underlying the optional conversion provisionsSecurities. On July 25, 2019 (as amended on January 17, 2020), a registration statement was filed to comply with the Registration Rights Agreement. Pursuant to the SPA, Auctus became obligated to purchase the $4,000,000 of Notes from Grapefruit in four tranches as follows: $600,000 at the original note agreementstonow describe an adjustable conversion price basedSPA closing, which was funded on June 6, 2019; the second tranche of $1,422,750 on the completionday IGNG filed the registration statement, which was funded on August 16, 2019; the third tranche of a qualified$1,030,000 was funded the day the SEC declares the registration statement effective and the fourth tranche of $1 million was funded 90 days after effectiveness. As of December 31, 2020, all tranches of this financing offering. If the cumulativewere completed. The Company has received gross proceeds of such offerings exceed $2.5 million,theconversionprice$4,052,750. The Notes have a two-year term and will be adjusted automaticallytomatchbear interest at 10%, with a default interest rate of 24%. As of September 30, 2022, three notes are in default.

On April 15, 2021, the offering’scompany renegotiated the debt agreement related to these notes modifying the convertible notes conversion price and conversionfrom a variable rate tocommon shares will occur automatically. If the cumulative gross proceeds of such offerings remain below $2.5 million, the a fixed rate conversion price adjusts to matchof $0.075 per share with an effective date of December 31, 2021. As a result of the offering conversion priceagreement, the Company recorded a noncash expense for the Investors. Should there be an event of default under these amended notes, the Investors will have,inadditiontoall the other rights describedinthat certain Securities Purchaser Agreement, the right, at each Investor’s option, to convert the notes into common shares at $0.01 per share. The Company and certain Investors agreedtoamend its warrant agreements to reduce the number of warrants by 75%to16,625,000. The exercise price remains at $0.01 per share. In consideration of this reduction of the number of warrants, the Company issued to the Investors new convertible promissory notesintotal principal amount of $124,688change in the same form asvalue of derivative instruments of $40,372,883, which was simultaneously offset by a noncash gain of $39,640,477 from the original convertible notes described above as amended. These additional convertible notes accrue interest beginning on January 9, 2017 and are due May 18, 2018.

The amendment to the notes and warrants were accounted for as an extinguishment of debt, resulting a net loss of $732,406 from the renegotiation of the debt.

On February 26, 2021, the company issued a convertible note for $450,000. The note has an interest rate of 10% and matures in 12 months. Note is currently in default with no updated maturity date. The note continues to accrue interest, which resulted in a gain on extinguishmenthas an accrued interest balance of debt totaling $3,668,776 for the nine months ended September 30, 2017. The outstanding derivative liability relating to the amended notes and warrants was approximately $86,930$87,150 as of September 30, 2017.2022. This note was included in the amendment making it convertible at $0.075 per share.

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

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

In addition, the Company up to $200,000, in increments of $50,000, at the Company’s discretion (the “Additional Loans”), as long as the Original Noteshas eleven other convertible notes comprising $296,000 outstanding and they are notcurrently in default. These loans will be evidenced by note agreementsThe interest on these notes varies from 5-10%. We are in the process of converting eight of the notes amounting to $241,000.

SCHEDULE OF CONVERTIBLE NOTES

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:

SCHEDULE OF NOTES PAYABLE TO OFFICERS AND DIRECTORS