Notes
to Consolidated Financial Statements
June
30, 2017
References to the “Company,”
“Green Spirit,” “we,” “us,” and “our” refer to Green Spirit Industries Inc., a
Nevada corporation, and its wholly-owned subsidiary, Project 1493, LLC, a limited liability company organized under the laws of
the Commonwealth of Puerto Rico (“1493”).
1.
Nature of Operations
Green Spirit Industries Inc. (the “Company”)
is a Nevada corporation formed under the name Cyberspace Vita, Inc. (“Cyberspace”) on November 7, 2006. Our initial
business plan was related to the online sale of vitamins and supplements. On May 11, 2017, we entered into a share exchange agreement
(the “Exchange Agreement”) with Peter Zachariou, the majority shareholder of the Company (the “Shareholder”),
Project 1493, LLC, a limited liability company organized under the laws of the Commonwealth of Puerto Rico (“1493”),
and the sole member of 1493 (the “Member”), pursuant to which the Member transferred all of the outstanding membership
interests of 1493 to the Company in exchange for 16,690,912 restricted shares of common stock of the Company (the “Exchange
Shares”), warrants to purchase up to 3,000,000 shares of common stock at an exercise price of $0.50 per share for a period
of three (3) years from the date of issuance (the “Exchange Warrants”) and 1,000 shares of Series A Preferred Stock
that grants the holders thereof fifty-one percent (51%) voting power (the “Preferred Shares” and together with the
Exchange Shares, and the Exchange Warrants, the “Exchange Securities”). As a result of the Exchange Agreement, 1493
became a wholly-owned subsidiary of the Company, and the business of 1493 became the business of the Company. At the time of the
Exchange Agreement, the Company was not engaged in any business activity. The Company accounted for the acquisition of 1493 as
a reverse merger and all prior periods presented are those of 1493.
Project
1493, LLC (“1493”) was organized under the laws of the Commonwealth of Puerto Rico on March 17, 2017. The Company
was formerly known as Grey Finland Advisors, LLC (“Grey”), which was organized under the laws of the Commonwealth
of Puerto Rico on March 24, 2011, and has had no operations since that time. 1493 filed a Certificate of Restoration on March
17, 2017 and elected to change its name to Project 1493, LLC.
The Company will operate licensed cannabis
dispensaries throughout Puerto Rico. Currently, the Company is focused on identifying sites, purchasing pre-qualifications to
dispensary licenses, building sites and opening dispensaries for service. The Company has executed two Final Purchasing Agreements
(“FPA”) to acquire four cannabis dispensaries. See Note 7.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been omitted. However, in the opinion of management, all adjustments (which
include only normal recurring adjustments, unless otherwise indicated) necessary to present fairly the financial position and
results of operations for the periods presented have been made. The results for interim periods are not necessarily indicative
of trends or of results to be expected for the full year. These financial statements should be read in conjunction with the financial
statements of the Company for the year ended December 31, 2016 (including the notes thereto) set forth in Form 10-K.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
Use
of Estimates and Assumptions
The preparation of the financial statements
in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Cash
and cash equivalents
The
Company considers all cash on hand, cash in banks and all highly liquid debt instruments purchased with a maturity of three months
or less to be cash and cash equivalents. At times, cash and cash equivalent balances at a limited number of banks and financial
institutions may exceed insurable amounts. The Company believes it mitigates its risks by depositing cash or investing in cash
equivalents in major financial institutions.
At
June 30, 2017 the Company had a cash and escrow balance of $2,968,288.
Cash
held in escrow, in the name of the Company, is held by Sichenzia Ross Ference Kesner (“Sichenzia”). The escrow account
was established to hold the deposits from the sale of common stock. There are no restrictions on the funds held by Sichenzia on
the Company’s behalf.
Revenue
Recognition
The
Company will recognize revenue when:
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●
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Persuasive
evidence of an arrangement exists:
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●
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Delivery
has occurred;
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●
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Price
is fixed or determinable; and
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●
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Collectability
is reasonably assured.
|
The
Company follows the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (“ASC”)
605, “Revenue Recognition”, which includes the guidelines of Staff Accounting Bulletin No. 104 as described above.
Inventory
The
Company’s inventory will be stated at the lower of cost or market with cost being determined using the first-in, first-out
method.
Share
based Compensation
Compensation
cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized
in the consolidated financial statements and covers a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. That cost will
be measured based on the estimated fair value of the equity or liability instruments issued. See Note 3.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
Fair
Value of Financial Instruments
The
carrying value of the Company’s current liabilities approximates fair value because of the short maturity of these instruments.
Unless otherwise noted, it is management’s opinion the Company is not exposed to significant interest, currency or credit
risks arising from these financial instruments.
Income
Taxes
The Company will follow the accrual method
of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the estimated
tax consequences attributable to differences between the financial statement carrying values and their respective income tax basis
(temporary differences). The effect on the deferred income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company was incorporated in Nevada, and therefore will be taxed at
normal U.S. federal corporate income tax rates.
Basic
Earnings per Share
The Company computes net loss per share in
accordance with FASB ASC 260 “Earnings per Share”, which specifies the computation, presentation and disclosure requirements
for earnings (loss) per share for entities with publicly held common stock.
Basic net loss per share amounts is computed
by dividing the net loss by the weighted average number of common shares outstanding. Diluted earnings per share are the same
as basic earnings per share due to the Company’s net loss. Potentially dilutive securities have been excluded from the Company’s
earnings per share calculation due to the effect being anti-dilutive. The total number of potentially dilutive securities which
have been excluded is 6,038,462. See Note 3.
Recent
Accounting Pronouncements
As of June 30, 2017
and through August 14, 2017, there were several new accounting pronouncements issued by the Financial Accounting Standards Board.
Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption
of any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or
future operating results. The Company will monitor these emerging issues to assess any potential future impact on its financial
statements.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
3.
Equity
Authorized
and Outstanding Capital Stock
We
have authorized 100,000,000 shares of common stock, par value $0.001, of which 30,000,005 are currently issued and outstanding.
We currently have 9,999,000 shares of “blank check” preferred stock, and 1,000 shares of Series A Preferred Stock.
Common
Stock
The
holders of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled
to receive ratably dividends, if any, declared by our board of directors out of legally available funds; however, the current
policy of our board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up,
the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution. The
holders of our common stock will have no preemptive, subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any
series of preferred stock, which may be designated solely by action of our board of directors and issued in the future.
The
following table illustrates the common stock transactions for the six months ended June 30, 2017:
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Preferred
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Common
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Category
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Shares
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Shares
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Cash
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8,461,538
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Share Exchange Agreement
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1,000
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16,690,912
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Debt Exchange Agreement
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0
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1,600,000
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|
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Services
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0
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3,000,000
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Total
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1,000
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|
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29,752,450
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On
May 11, 2017, the Company authorized the issuance of 16,690,912 shares of common stock at $.39 and 1,000 shares of preferred stock
at $1.00 per share, (100% of the preferred stock issued) to Peach Management, LLC (“Peach”) in accordance with the
Share Exchange Agreement. See Note 7.
On
May 11, 2017, the Company authorized the issuance of 1,600,000 shares of common stock at $.39 to Peter Zachariou for the Debt
Exchange Agreement. See Note 7.
On
May 11, 2017, the Company authorized the issuance of 235,000 shares of common stock at $.39 to Leslie Ball, Chief Executive Officer,
for services rendered to the Company.
On
May 11, 2017, the Company authorized the issuance of 50,000 shares of common stock at $.39 to Thomas Gingerich, Chief Financial
Officer, for services rendered to the Company.
On
May 11, 2017, the Company authorized the issuance of 1,000,000 shares of common stock at $.39 to RedChip Companies, Inc. for investor
relation services rendered to the Company.
On
May 11, 2017, the Company authorized the issuance of 750,000 shares of common stock at $.39 to RD3 Acquisitions, LLC for investor
relation services rendered to the Company.
On
May 11, 2017, the Company authorized the issuance of 665,000 shares of common stock at $.39 to Darrin Ocasio for legal services
rendered to the Company.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
On
May 11, 2017, the Company authorized the issuance of 150,000 shares of common stock at $.39 to ACB Management, Inc. for legal
services rendered to the Company.
On
May 11, 2017, the Company authorized the issuance of 150,000 shares of common stock at $.39 to Granada Investments, LLC for professional
services rendered to the Company.
Series
A Preferred Stock
The holder of Series A Preferred Stock
shall
have full voting rights and shall vote together as a single class with the holders of the Company’s common stock. The holder
of Series A Preferred Stock is entitled to fifty-one percent (51%) of the total votes on all matters brought before shareholders
of the Company, regardless of the actual number of shares of Series A Preferred Stock then outstanding. In addition, the Company
is prohibited from issuing any other class of preferred stock without first obtaining the prior approval of the holders of Series
A Preferred Stock.
Blank
Check Preferred Stock
Our
board of directors will be authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders,
to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have the number
of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined
by our board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion
rights and preemptive rights.
Warrants
As
of June 30, 2017, we have outstanding warrants to purchase 6,038,462 shares of common stock (the “
Warrants
”).
Each Warrant represents the right to purchase one share of our common stock at an exercise price of $0.50 per share for a period
of three (3) years from the date of issuance.
The Company may issue warrants to non-employees
in capital raising transactions or for services. In accordance with guidance in ASC Topic 718, the cost of warrants issued to
non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option
pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects
to receive the benefit, which is generally the vesting period. During the six months ended June 30, 2017, $310,000 was charged
to expense.
The
fair value of stock warrants was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes
option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free
rate, and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected
to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee
exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate
is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instrument. The dividend
yield assumption is based on historical patterns and future expectations for the Company dividends.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
The following table includes the estimates and assumptions used
in the Black Scholes model:
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Stock price
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$
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0.96
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Exercise price
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$
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0.50
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Expected term
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3
years
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Expected volatility
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72.0
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%
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Annual risk-free rate
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1.55
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%
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Dividend yield
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0.00
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%
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The following table is a summary of outstanding
stock warrants at June 30, 2017 and activity during the six months then ended:
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Weighted
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Number of
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Exercise
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Average
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Shares
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Price
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Price
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Issued during quarter ended June 30, 2017
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6,038,462
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$
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0.50
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$
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0.50
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Expired and forfeited
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-
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-
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-
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Exercised
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-
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-
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-
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Warrants as of June 30, 2017
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6,038,462
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$
|
0.50
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$
|
0.50
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|
All
of the outstanding warrants granted during the period ended June 30, 2017 were fully vested on the grant date.
Subsidiary
Equity
On March 17, 2017, 1493 authorized the issuance
of 1,000 units to Peach for $1,000, used for prepaid expenses on behalf of the Company. Peach is beneficially owned 100% by the
Briggs Family 2017 Trust, Peach’s sole manager.
4.
Income Taxes
Deferred income taxes
are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred
tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported
amounts
of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment. Current and accumulated deferred tax benefit will be at the effective
U.S. Federal corporate income tax rates.
5.
Related Party Transactions
On April 18, 2017, Peach made a short term
advance of $150,000 to the Company. The proceeds of the advance were used as a 50% deposit for the purchase of the first three
dispensaries, according to the Memorandum of Understanding with Puerto Rico Industrial Commercial Holdings Biotech Corporation
(“PRICHBC”), an unrelated third party. The advance was repaid on May 12, 2017. See Note 7.
6.
Construction in progress
On
June 8, 2017 the Company entered into construction contracts for the construction and finish out of two dispensaries for the Carolina
and Dorado locations for $123,700 and $84,800, respectively. As of June 30, 2017, the Company has paid $63,747 on interim payment
applications to the contractor.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
7.
Commitments and Contingencies
Share
Exchange Agreement
On May 11, 2017, the Company entered into
a share exchange agreement (the “Exchange Agreement”) with Peter Zachariou, the majority shareholder of the Company
(the “Shareholder”), Project 1493, LLC, a limited liability company organized under the laws of the Commonwealth of
Puerto Rico (“1493”), and the sole member of 1493 (the “Member”), pursuant to which the Member transferred
all of the outstanding membership interests of 1493 to the Company in exchange for 16,690,912 restricted shares of common stock
of the Company (the “Exchange Shares”), warrants to purchase up to 3,000,000 shares of common stock at an exercise
price of $0.50 per share for a period of three (3) years from the date of issuance (the “Exchange Warrants”) and 1,000
shares of Series A Preferred Stock that grants the holders thereof fifty-one percent (51%) voting power (the “Preferred
Shares” and together with the Exchange Shares, and the Exchange Warrants, the “Exchange Securities”). The transaction
closed on May 11, 2017 (the “Closing Date”).
Debt
Exchange Agreement
On May 11, 2017, the Company also entered
into a debt exchange agreement (the “Debt Exchange”) with Fountainhead Capital Management Limited (“Fountainhead”),
a related party, whereby Fountainhead agreed to cancel a promissory note in the aggregate amount of $510,652 plus accrued interest
of $129,265. As consideration, Fountainhead received an aggregate of 1,800,000 shares of the Common Stock, of which 200,000 shares
of Common Stock had already been issued.
Escrow
Agreement
On
April 18, 2017, the Company entered into an escrow agreement with PRIHBC with the intention of purchasing three pre-qualified
medicinal cannabis licenses for $300,000. The agreement states the funds will be held by the escrow agent, Sichenzia Ross Ference
Kesner (“Sichenzia”). The Company deposited $150,000 into the escrow account as of June 30, 2017. The escrow agreement
expired June 2, 2017. As of June 30, 2017, the Company had not paid PRIHBC towards the purchase of the dispensaries. The Company
paid $200,000 and $100,000 on July 7, 2017 and August 1, 2017, paying the obligation in full.
Memorandum
of Understanding and Final Purchasing Agreement - PRIHBC
On
April 19, 2017, the Company entered into a Memorandum of Understanding (“MOU”) with PRIHBC to purchase three pre-qualified
medical marijuana licenses in Puerto Rico for $300,000. The Company deposited $150,000 into escrow with Sichenzia for a deposit
towards the purchase price. The agreement sells all legal rights, permits, licenses, leasing contracts and assets of the three
dispensaries from PRIHBC to the Company. As of June 30, 2017 the funds had not been disbursed from escrow. During the due diligence
period, the Company has exclusive negotiation rights regarding the proposed acquisition.
On July 7, 2017, the Company entered into
a final purchasing agreement (the “PRIHBC Agreement”) with Puerto Rico Industrial Holdings Biotech Corporation, a
corporation formed under the laws of the Commonwealth of Puerto Rico (“PRIHBC”), pursuant to which we acquired all
of the legal rights, permits, licenses, leasing contracts and assets pertaining to three dispensaries located in Carolina, Dorado
and Fajardo, in exchange for $300,000, $150,000 of which shall be deposited into an escrow account until the closing of the PRIHBC
Agreement. The Company paid $200,000 and $100,000 on July 7, 2017 and August 1, 2017, paying the obligation in full.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
In
connection with the PRIHBC Agreement, 1493, PRIHBC and
Heras
P.M. & I, Corp., a corporation formed under the laws of the Commonwealth of Puerto Rico (“Heras”),
entered
into an assignment of lease on June 15, 2017, (the “Carolina Lease Assignment”) which transfers and/or assigns the
rights under the lease agreement for the location of the Carolina Dispensary to 1493. PRIHBC entered into such lease agreement,
dated August 26, 2016,
with Heras to lease approximately 2,500 rentable square feet
for a term of five (5) years, commencing on September 1, 2016. The lease payments for such location will be $4,500 per month,
with an annual increase of 5%.
1493, PRIHBC and
Efron
Dorado, S.E., a corporation formed under the laws of the Commonwealth of Puerto Rico (“Efron”),
entered
into an assignment of lease on June 7, 2017, (the “Dorado Lease Assignment”) which transfers and/or assigns the rights
under the lease agreement for the location of the
dispensary in Dorado
to 1493.
PRIHBC
entered into such lease agreement, dated August 30, 2016, with Efron to lease approximately 1,900 rentable square feet for a term
of three (3) years, commencing on December 1, 2016. The lease payments for such location will be an annual amount of $57,000,
with an additional monthly marketing fee of $158.33.
Pursuant to a non-compete clause set forth
in the PRIHBC Agreement, PRIHBC has agreed not to establish a medical cannabis dispensary within a two-mile radius from any of
the three dispensaries. Each of the parties to the PRIH Agreement has made customary representations and considerations in the
PRIH Agreement.
Memorandum
of Understanding and Final Purchasing Agreement – Good Vibes Distributors, LLC (“GVD”)
On April 6, 2017, the Company entered into
a MOU with Good Vibes Distributors, LLC (“GVD”) to purchase one medicinal cannabis dispensary in Puerto Rico for $75,000
(the “San Juan Dispensary”). The MOU called for $7,500 funded into escrow with Sichenzia for a deposit towards the
purchase price. The agreement sells all assets, rights and licenses from GVD to the Company.
On July 7, 2017, the Company entered into
a final purchasing agreement (the “GVD Agreement”) with Good Vibes Distributors, LLC, a corporation formed under the
laws of the Commonwealth of Puerto Rico (“GVD”), pursuant to which it acquired the dispensary prequalification license
for the San Juan Dispensary, in exchange for $75,000. Pursuant to the GVD Agreement, the Company agreed to deposit the $7,500
to an escrow account until the closing of the GVD Agreement. The Company paid $75,000 on July 7, 2017, paying the obligation in
full
Pursuant
to non-compete clause set forth in the GVD Agreement, GVD has agreed not to establish a Medical Cannabis dispensary within a two-mile
radius from the San Juan Dispensary. Each of parties to the GVD Agreement has made customary representations and considerations
in the GVD Agreement.
On July 11, 2017, the Company entered into
a lease agreement (the “Lease Agreement”) with Olympic Properties, Inc., a corporation formed under the laws of the
Commonwealth of Puerto Rico, to lease approximately 1,500 square feet and 8 parking spaces on the first floor of 509-511 Andalucia
Street in San Juan, Puerto Rico, for the location of the San Juan Dispensary. The lease payments pursuant to the Lease Agreement
shall be $1,600 per month for the initial three (3) years commencing on August 1, 2017, after which the lease payment shall increase
each year by 5% commencing on July 31, 2020.
Green
Spirit Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2017
Long
Term Supply Agreement
On April 18, 2017, the Company entered into
a long term supply agreement (“supply agreement”) to purchase flower and manufactured products for the dispensaries
upon approval of the appropriate licensing by the Puerto Rico Department of Health. The Company will purchase at least 50% of
all flower and manufactured products to be sold in the dispensaries owned by the Company or its affiliates. The supply agreement
is valid for ten years from the moment of its coming into effect. If neither party announces termination of the supply agreement
thirty days before its stated expiration, the supply agreement shall be automatically extended for each subsequent year with no
limit of years.
Risk
of Prosecution for Marijuana-Related Companies
A company that is connected to the marijuana
industry must be aware that marijuana-related companies may be at risk of federal, and perhaps state, criminal prosecution. The
Department of Treasury recently issued guidance noting: “The Controlled Substances Act” (“CSA”) makes
it illegal under federal law to manufacture, distribute, or dispense marijuana. Many states impose and enforce similar prohibitions.
As of June 30, 2017, the Company has not been notified of any pending investigations regarding its planned business activities,
and is not currently involved in any such investigations with any regulators.
8.
Subsequent Events
On July 7, 2017, the Company entered into
a final purchasing agreement (the “PRIHBC Agreement”) with Puerto Rico Industrial Holdings Biotech Corporation, a
corporation formed under the laws of the Commonwealth of Puerto Rico (“PRIHBC”), pursuant to which we acquired all
of the legal rights, permits, licenses, leasing contracts and assets pertaining to dispensaries located in Carolina, Dorado and
Fajardo, in exchange for $300,000, $150,000 of which shall be deposited into an escrow account until the closing of the PRIHBC
Agreement. The Company paid $200,000 and $100,000 on July 7, 2017 and August 1, 2017, paying the obligation in full.
On July 7, 2017, the Company entered into
a final purchasing agreement (the “GVD Agreement”) with Good Vibes Distributors, LLC, a corporation formed under the
laws of the Commonwealth of Puerto Rico (“GVD”), pursuant to which we acquired the dispensary prequalification license
for the San Juan Dispensary, in exchange for $75,000. Pursuant to the GVD Agreement, the Company agreed to deposit the $7,500
to an escrow account until the closing of the GVD Agreement. The Company paid $75,000 on July 7, 2017, paying the obligation in
full