Notes
to Consolidated Financial Statements
September
30, 2018
1.
Nature of Operations
GSRX
Industries Inc. (“the Company”) is a Nevada corporation formed under the name Cyberspace Vita, Inc. (“Cyberspace”)
on November 7, 2006. Cyberspace’s initial business plan was related to the online sale of vitamins and supplements. On May
11, 2017, the Company entered into a share exchange agreement (the “Exchange Agreement”) with Peter Zachariou, the
majority shareholder of Cyberspace (the “Shareholder”), Project 1493, LLC, a limited liability company organized under
the laws of the Commonwealth of Puerto Rico (“1493”), and Peach Management, LLC (“Peach”) 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,
Cyberspace 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.
On
June 21, 2018, the Board of Directors of GSRX Industries Inc. (the “Company”) unanimously adopted amended and restated
Bylaws of the Company (the “Amended and Restated Bylaws”), to, among other things, conform certain provisions of the
Amended and Restated Bylaws to the Company’s Amended Articles of Incorporation and the Nevada Revised Statutes, as well
as to revise the procedures relating to action by written consent of the Company’s stockholders.
On
June 22, 2018 the Board of Directors approved the resolution to change the name of the Corporation from “Green Spirit Industries
Inc.” to “GSRX Industries Inc.” in order to reflect the nature of the corporation following consummation of
the share exchange. The name change became effective July 16, 2018.
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.
Andalucia
511, LLC (“511”) was organized under the laws of the Commonwealth of Puerto Rico on March 19, 2018. 511 was formed
for the purpose of purchasing the building at 51 McLeary, San Juan, Puerto Rico.
Spirulinex,
LLC (“Spirulinex”) was organized under the laws of the State of California on October 12, 2017and had no operations
since its inception. On March 3, 2018, the Company entered into an operating agreement with Solunas Aqua Corp., a California corporation
(“Solunas”). Spirulinex was formed as a joint venture between the Company and Solunas (the “Joint Venture”)
for the purpose of carrying out the manufacturing cannabis and cannabinoid products for distribution in the State of California.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
Sunset
Connect Oakland, LLC (“Sunset”) was organized under the laws of the State of California on December 13, 2017 and had
no operations since its inception. On March 26, 2018, the Company entered into an operating agreement with Sunset Connect SF,
Inc. (formerly Happy VA Corp.), a California corporation (“Happy”). Sunset was formed as a joint venture between the
Company and Happy for the purpose of carrying out the growing of cannabis for distribution in the State of California.
Green
Spirit Essentials, LLC (“GS Essentials”) was organized under the laws of the State of California on December 12, 2017
and had no operations since its inception. On March 26, 2018, the Company entered into an operating agreement with Sunset Connect
SF, Inc. (formerly Happy VA Corp.), a California corporation (“Happy”). Sunset was formed as a joint venture between
the Company and Happy for the purpose of carrying out the extraction of cannabis oils for distribution in the State of California.
Green
Spirit Mendocino, LLC (“Mendocino”) was organized under the laws of the State of California on December 8, 2017 and
had no operations since inception. The Company entered into an operating agreement with Mendocino on March 26, 2018. The Company
is the sole member of Mendocino. On March 7, 2018, Mendocino entered into an asset purchase agreement with a third-party seller,
pursuant to which Mendocino acquired all of the assets relating to a non-operating retail cannabis lease in Point
Arena, Mendocino County, California for total cash consideration of $350,000.
Mendocino
began operations on April 2, 2018.
138
Main Street PA, LLC (“138 Main”) was organized under the laws of the State of California on March 16, 2018. 138 Main
was formed for the purpose of purchasing the building at 138 Main Street, Point Arena, California. The closing of the purchase
was on May 22, 2018. 138 Main will lease the building to Mendocino for $1,200 per month.
GSRX
SUSPES, LLC (“SUSPES”) was organized under the laws of the State of California on April 3, 2018. SUSPES was formed
for the purpose of payroll management for the operations in California.
The
Company is in the business of acquiring, developing and operating medical cannabis dispensaries throughout Puerto Rico and cannabis-related
business operations, such as manufacturing, extraction and cultivation, in California. The Company also owns and leases real property
in Puerto Rico.
To
date, the Company has acquired all of the legal rights, permits, licenses, leasing contracts and assets of pre-qualified medical
cannabis dispensaries pursuant to three Final Purchasing Agreements (“FPA”).
The Company entered into
the FPAs with holders of licenses to operate medicinal cannabis dispensaries in Puerto Rico. Pursuant to the FPAs, the Company
acquired all of the legal rights, permits, pre-qualification licenses, and leases for five (5) medicinal cannabis dispensaries.
The pre-qualification licenses do not allow the holder to open a dispensary, but instead offers the opportunity to go through
the qualifying steps in order to obtain the requisite operating permit necessary to open the dispensary. Such steps include proving
financial viability, background checks, application of the final permit, proof of certificate of occupancy, employment of a security
firm, installation of security cameras, and other similar compliance matters.
The
cities and purchase price of the FPAs for the dispensaries are as follows:
Location
|
|
State/Territory
|
|
Date
Opened
|
|
Purchase
Price
|
|
Dorado
|
|
Puerto
Rico
|
|
March
28,2018
|
|
$
|
100,000
|
|
Fajardo*
|
|
Puerto
Rico
|
|
In
progress
|
|
$
|
100,000
|
|
Carolina
|
|
Puerto
Rico
|
|
June 1, 2018
|
|
$
|
100,000
|
|
Hato
Rey
|
|
Puerto
Rico
|
|
June 1, 2018
|
|
$
|
128,000
|
|
San
Juan (Andalucia)
|
|
Puerto
Rico
|
|
October 2,
2018
|
|
$
|
75,000
|
|
*As
of September 30, 2018, the Company is still awaiting issuance of the requisite operating permit from the Department of Health
of Puerto Rico.
The
FPAs have an indefinite life and are not being amortized.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
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 consolidated financial position and results of its 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 consolidated
financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31,
2017 (including the notes thereto) set forth in Form 10-K filed with the Securities and Exchange Commission on April 17, 2018.
Principles
of Consolidation
The
consolidated financial statements through September 30, 2018 include the accounts of the Company and the following entities, all
of which have fiscal year ends of December 31. (Note 1).
●
|
100%
owned subsidiary, Project 1493, LLC;
|
●
|
100%
owned subsidiary, Andalucia 511, LLC;
|
●
|
51%
majority owned subsidiary, Spirulinex, LLC;
|
●
|
55%
majority owned subsidiary, Sunset Connect Oakland, LLC;
|
●
|
55%
majority owned, Green Spirit Essentials, LLC;
|
●
|
100%
owned subsidiary, Green Spirit Mendocino, LLC; and
|
●
|
100%
owned subsidiary, 138 Main Street PA, LLC.
|
●
|
100%
owned subsidiary, GSRX SUPES, LLC
|
●
|
100%
owned subsidiary, Point Arena Supply Co., LLC
|
Use
of Estimates and Assumptions
The
preparation of the consolidated financial statements that are 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 consolidated financial statements.
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
at purchase 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. At September 30, 2018 the Company had $2,467,517 in excess of FDIC depository
insurance coverage. The Company believes it mitigates its risks by depositing cash or investing in cash equivalents in major financial
institutions.
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 and hold funds for businesses under letters of intents to purchase.
There are no restrictions on the funds held by Sichenzia on the Company’s behalf.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
Revenue
Recognition
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.”
This new standard replaced most existing revenue recognition guidance in U.S. GAAP and codified guidance under FASB Topic 606.
The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange
for those goods or services.
The
Company adopted ASU No. 2014-09 as of January 1, 2018 using the modified retrospective method. Results for the reporting period
beginning after January 1, 2018 are presented under Topic 606, while prior period amounts continue to be reported in accordance
with the Company’s historic accounting practices under previous guidance. However, given the nature of the Company’s
products and the terms and conditions applicable to sales to its customers, the timing and amount of revenue recognized based
on the underlying principles of ASU No. 2014-09 are consistent with the Company’s revenue recognition policy under previous
guidance.
The
Company incurs costs associated with product distribution, such as freight and handling costs. The Company has elected to treat
these costs as fulfillment activities and recognizes these costs at the same time that it recognizes the underlying product revenue.
As this policy election is in line with the Company’s previous accounting practices, the treatment of shipping and handling
activities under Topic 606 did not have any impact on the Company’s results of operations, financial condition and/or financial
statement disclosures.
In
accordance with the new guidance, the Company recognizes revenue at an amount that reflects the consideration that the Company
expects to be entitled to receive in exchange for transferring goods or services to its customers. The Company’s policy
is to record revenue when control of the goods transfers to the customer.
In
limited instances when products are sold under consignment arrangements, the Company does not recognize revenue until control
over such products has transferred to the end consumer.
The
following table presents the Company’s revenues disaggregated by type and by state/territory (unaudited):
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
Revenues
by Type
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
9,029
|
|
|
$
|
-
|
|
|
$
|
107,281
|
|
|
$
|
-
|
|
Retail
|
|
|
655,371
|
|
|
|
-
|
|
|
|
912,745
|
|
|
|
-
|
|
Total
|
|
$
|
664,400
|
|
|
$
|
-
|
|
|
$
|
1,020,026
|
|
|
$
|
-
|
|
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
Revenues
by State/Territory
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
136,457
|
|
|
$
|
-
|
|
|
$
|
356,918
|
|
|
$
|
-
|
|
Puerto Rico
|
|
|
527,943
|
|
|
|
-
|
|
|
|
663,108
|
|
|
|
-
|
|
Total
|
|
$
|
664,400
|
|
|
$
|
-
|
|
|
$
|
1,020,026
|
|
|
$
|
-
|
|
The
Company’s wholesale sales comprise of sub-lingual THC activated flakes, CBD and THC lotions and muscle rubs and bubble hash
to distributors for distribution to cannabis dispensaries.
The
Company’s retail sales comprise of THC in the form of flower, edibles, creams, oils and cannabis accessories as pipes, bowls
and cartridges.
Accounts
Receivable
The
Company carries its accounts receivable at their estimated realizable amounts and periodically evaluates the credit condition
of its customers. The allowance for uncollectible accounts receivable is based on the Company’s historical bad debt experience
and on management’s evaluation of collectability of the individual outstanding balances. As of September 30, 2018,
the Company had not identified any uncollectible accounts.
Inventory
The
Company’s inventory is stated at the lower of cost or market. Inventory consists of cannabis products, such as flower,
edibles, creams, oils and cannabis accessories as pipes, bowls and cartridges.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
Fixed
Assets
Fixed
assets are recorded at cost and are depreciated using the straight-line method over estimated useful lives as follows:
|
Type
of Asset
|
|
Estimated
Life
|
|
Computer
and technology
|
|
5
years
|
|
Furniture
and fixtures
|
|
10
years
|
|
Building
and Leasehold improvements
|
|
5
- 25 years
|
|
Machinery
and equipment
|
|
7
years
|
|
Vehicles
|
|
5
years
|
Intangible
Costs
The
Company incurred costs related to Patent Application Costs during the nine months ended September 30, 2018, consisting
of $632,368 of legal fees. The patent applications will continue to be filed over the next several quarters. As the patents
have not been issued as of September 30, 2018, no amortization has been applied against the patent costs. If the patents are approved,
the Company will amortize the patent application costs over their useful lives. If the patents are not approved, the patent application
costs will be expensed and charged against income. (Note 8).
Expenses
Cost
of goods sold includes the purchase of cannabis and cannabis-related products, labor directly associated with purchasing, inventory
control.
General
and administrative expense includes the costs associated with operating the businesses, and includes such items as bank charges,
insurance, labor costs, taxes, marketing, permits, repairs, security, utilities, rent, consulting fees, office expenses, travel
and other operating expenses incurred in the ordinary course of operating a retail business.
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 is
measured based on the estimated fair value of the equity or liability instruments issued. (See Note 3).
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, except for cash balances in excess of the
FDIC depository insurance coverage, to significant interest, currency or credit risks arising from these financial instruments.
Income
Taxes
The
Company follows 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 organized under
the laws of Nevada and therefore will be taxed at statutory 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 are computed by dividing the net loss by the weighted average number of common shares outstanding.
Potentially dilutive securities have been excluded from the Company’s earnings per share calculation due to the effect of
being anti-dilutive. The total number of potentially dilutive securities which have been excluded is 6,808,596. (Note 3).
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
Recent
Accounting Pronouncements
As
of September 30, 2018 and through October 30, 2018, 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.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over
12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset
initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases
on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating
lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. This standard
will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective
basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements. Early adoption is permitted. We are currently evaluating the timing of adoption and the potential impact of this standard
on our consolidated financial position, but we do not expect it to have a material impact on our results of operations.
3.
Equity
Authorized
and Outstanding Capital Stock
The
Company has authorized 100,000,000 shares of common stock, par value $0.001, of which 44,131,842 are currently issued and outstanding;
an additional 1,019,600 shares were purchased but not issued and 43,602 shares were authorized for consulting fees but not issued
as of September 30, 2018. The Company currently has 9,999,000 shares of “blank check” preferred stock, and 1,000 shares
of Series A Preferred Stock which are issued and outstanding.
Common
Stock
The
holders of common stock are entitled to one vote per share. In addition, the holders of the common stock will be entitled to receive
ratably dividends, if any, declared by the board of directors out of legally available funds; however, the current policy of the
board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the
holders of common stock will be entitled to share ratably in all assets that are legally available for distribution. The holders
of common stock will have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges
of holders of 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 the board of directors and issued in the future.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
The
following table illustrates the common stock transactions for the nine months ended September 30, 2018:
|
|
Preferred
|
|
|
Common
|
|
Category
|
|
Shares
|
|
|
Shares
|
|
Cash,
common shares
|
|
|
0
|
|
|
|
1,083,671
|
|
Services
|
|
|
0
|
|
|
|
1,953,134
|
|
Services,
authorized but not issued
|
|
|
0
|
|
|
|
43,602
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
0
|
|
|
|
200,000
|
|
Cash,
common shares purchased but not issued as of
the statement date
|
|
|
0
|
|
|
|
1,019,600
|
|
Total
|
|
|
0
|
|
|
|
4,300,007
|
|
On
July 1, 2018 the Company issued 417 shares to Dr. Harlan Ribnik, Board Director, per letter agreement dated February 12, 2018.
In connection with the appointment of Dr. Ribnik, the Board authorized to pay Dr. Ribnik compensation as a member of the Board
of the Corporation a quarterly fee of shares of the Corporation’s Common Stock in an amount equal to One Thousand Five Hundred
Dollars ($1,500) based on the market price per share of the Corporation’s Common Stock on the last trading day of each quarter.
On
July 1, 2018 the Company issued 417 shares to Steve Farkas, Board Director, per letter agreement dated February 12, 2018. In connection
with the appointment of Mr. Farkas, the Board authorized to pay Mr. Farkas compensation as a member of the Board of the Corporation
as follows: (i) a monthly fee of One Thousand Dollars ($1,000); and (ii) a quarterly fee of shares of the Corporation’s
common stock, par value $0.001 per share (the “Common Stock”), in an amount equal to One Thousand Five Hundred Dollars
($1,500) based on the market price per share of the Corporation’s Common Stock on the last trading day of each quarter.
On
July 1, 2018 the Company issued 5,000 shares to Luis Toledo-Bayouth, Non-Executive Board Advisory Consultant, per letter agreement
dated April 17, 2018. In connection with the appointment of Mr. Toledo-Bayouth, the Board authorized to pay Mr. Toledo-Bayouth
compensation as a member of the Advisory Board of the Corporation as follows: 5,000 restricted shares of common stock, par value
$0.001 per share (the “Common Stock”) every quarter for the duration of his term as Non-Executive Board Advisory Consultant.
On
July 1, 2018 the Company issued 5,000 shares to Juan Bauza Salas, Non-Executive Board Advisory Consultant, per letter agreement
dated April 17, 2018. In connection with the appointment of Mr. Salas, the Board authorized to pay Mr. Salas compensation as a
member of the Advisory Board of the Corporation as follows: (i) a monthly fee of Three Thousand Dollars ($3,000); and (ii) 5,000
restricted shares of common stock, par value $0.001 per share (the “Common Stock”) every quarter for the duration
of his term as Non-Executive Board Advisory Consultant.
On
July 1, 2018 the Company issued 1,750 shares to Jeffrey Jump, Non-Executive Board Advisory Consultant, per letter agreement dated
May 31, 2018. In connection with the appointment of Mr. Jump, the Board authorized to pay Mr. Jump compensation as a member of
the Advisory Board of the Corporation as follows: 1,750 restricted shares of common stock, par value $0.001 per share (the “Common
Stock”) every quarter for the duration of his term as Non-Executive Board Advisory Consultant.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
On
July 17, 2018, the Company authorized the issuance of 5,000 shares of common stock at $3.02 to John Grainer for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 20,000 shares of common stock at $3.02 to Gustavo Pinto for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 5,000 shares of common stock at $3.02 to Michael Dillingham for services
rendered to the Company.
On
July 17, 2018, the Company authorized the issuance of 1,000 shares of common stock at $3.02 to Jolene Enns for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 1,000 shares of common stock at $3.02 to Ryan Moser for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 1,000 shares of common stock at $3.02 to Jennifer McClain for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 500 shares of common stock at $3.02 to Allee Picatccio for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 1,000 shares of common stock at $3.02 to Mark Young for services rendered
to the Company.
On
July 17, 2018, the Company authorized the issuance of 1,000 shares of common stock at $3.02 to Sara Moody for services rendered
to the Company.
On
September 30, 2018, the Company authorized the issuance of 15,000 shares of common stock at $1.62 to Peach Management, LLC (Note
7) for services rendered to the Company.
On
September 30, 2018, the Company authorized the issuance of 15,000 shares of common stock at $1.62 to Thomas Gingerich, Chief Financial
Officer (Note 7), for services rendered to the Company.
On
September 30, 2018 the Company issued 926 shares to Dr. Harlan Ribnik, Board Director, per letter agreement dated February 12,
2018. In connection with the appointment of Dr. Ribnik, the Board authorized to pay Dr. Ribnik compensation as a member of the
Board of the Corporation a quarterly fee of shares of the Corporation’s Common Stock in an amount equal to One Thousand
Five Hundred Dollars ($1,500) based on the market price per share of the Corporation’s Common Stock on the last trading
day of each quarter.
On
September 30, 2018 the Company issued 926 shares to Steve Farkas, Board Director, per letter agreement dated February 12, 2018.
In connection with the appointment of Mr. Farkas, the Board authorized to pay Mr. Farkas compensation as a member of the Board
of the Corporation as follows: (i) a monthly fee of One Thousand Dollars ($1,000); and (ii) a quarterly fee of shares of the Corporation’s
common stock, par value $0.001 per share (the “Common Stock”), in an amount equal to One Thousand Five Hundred Dollars
($1,500) based on the market price per share of the Corporation’s Common Stock on the last trading day of each quarter.
On
September 30, 2018 the Company issued 5,000 shares to Luis Toledo-Bayouth, Non-Executive Board Advisory Consultant, per letter
agreement dated April 17, 2018. In connection with the appointment of Mr. Toledo-Bayouth, the Board authorized to pay Mr. Toledo-Bayouth
compensation as a member of the Advisory Board of the Corporation as follows: 5,000 restricted shares of common stock, par value
$0.001 per share (the “Common Stock”) every quarter for the duration of his term as Non-Executive Board Advisory Consultant.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
On
September 30, 2018 the Company issued 5,000 shares to Juan Bauza Salas, Non-Executive Board Advisory Consultant, per letter agreement
dated April 17, 2018. In connection with the appointment of Mr. Salas, the Board authorized to pay Mr. Salas compensation as a
member of the Advisory Board of the Corporation as follows: (i) a monthly fee of Three Thousand Dollars ($3,000); and (ii) 5,000
restricted shares of common stock, par value $0.001 per share (the “Common Stock”) every quarter for the duration
of his term as Non-Executive Board Advisory Consultant.
On
September 30, 2018 the Company issued 1,750 shares to Jeffrey Jump, Non-Executive Board Advisory Consultant, per letter agreement
dated May 31, 2018. In connection with the appointment of Mr. Jump, the Board authorized to pay Mr. Jump compensation as a member
of the Advisory Board of the Corporation as follows: 1,750 restricted shares of common stock, par value $0.001 per share (the
“Common Stock”) every quarter for the duration of his term as Non-Executive Board Advisory Consultant.
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. All Series A Preferred
stock issued and outstanding is held by Peach Management, LLC. (Note 7).
Blank
Check Preferred Stock
The
board of directors will be authorized, subject to any limitations prescribed by law, without further vote or action by the common
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 the board of directors, which may include, among others, dividend rights, voting rights, liquidation
preferences, conversion rights and preemptive rights.
Warrants
As
of September 30, 2018, the Company had outstanding warrants to purchase 6,808,596 shares of common stock (the “Warrants”).
Each Warrant represents the right to purchase one share of common stock at various exercise prices per share for a period of three
(3) years from the date of issuance.
|
|
|
Warrants
Issued
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
May
11, 2017
|
|
|
|
6,038,462
|
|
|
$
|
0
.50
|
|
|
May
11, 2020
|
February
23, 2018
|
|
|
|
232,334
|
|
|
$
|
6.00
|
|
|
February
23, 2021
|
October
5, 2018
|
|
|
|
537,800
|
|
|
$
|
2.50
|
|
|
October
5, 2018
|
Total
|
|
|
|
6,808,596
|
|
|
|
|
|
|
|
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
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.
All
of the outstanding warrants granted were fully vested on the grant date.
2018
Stock Offering
On
February 23, 2018, the Company entered into a subscription agreement (the “February Agreement”) with selected accredited
investors. Pursuant to the terms of the February Agreement, the Company sold in a private placement (the “February Offering”)
an aggregate of 155,167 units (each, a “Unit” and collectively, the “Units”) at a purchase price of $3.00
per Unit. The Offering resulted in $465,500 total gross proceeds. Each Unit consists of (i) one (1) share of the Company’s
common stock, par value $0.001 per share (the “Shares”); and (ii) one (1) warrant to purchase shares of the Company’s
common stock, par value $0.001 per share. Each Warrant shall be exercisable at any time on or after the date of issuance
for a period of three (3) years at an exercise price per share equal to $6.00 per share, subject to adjustment as provided in
the Warrant agreement.
April
2018 Stock Offering
In
April and May 2018
, the Company entered into a subscription
agreement (the “April Agreement”) with selected accredited investors. Pursuant to the terms of the April Agreement,
the Company offered up to $10,000,000 of shares of the Company’s common stock, par value $0.001 per share, at a purchase
price of $3.50 per share (the “April Offering”). In the April Offering, the Company sold an aggregate of 738,504 shares
of common stock, par value $0.001 per share, resulting in total gross proceeds of $2,584,765 The Offering closed on June 7, 2018.
June
2018 Stock Offering
In
June and July
2018, the
Company entered into a subscription agreement (the “June Agreement”) with selected accredited investors. Pursuant
to the terms of the June Agreement, the Company offered up to $2,000,000 of shares of the Company’s common stock,
par value $0.001 per share, at a purchase price of $2.50 per share (the “June Offering”). In the June Offering, the
Company sold an aggregate of 190,000 shares of common stock, par value $0.001 per share, resulting in total gross proceeds of
$475,000. The June Offering closed on July 18, 2018.
August
2018 Stock Offering
In
August, September and October
2018, the Company entered into
a subscription agreement (the “August Agreement”) with selected accredited investors. Pursuant to the terms of the
August Agreement, the Company offered up to $1,500,000 in units (each, a “Unit” and collectively, the “Units”)
at a purchase price of $1.25 per Unit (the “August Offering”). Each Unit consisted of (i) one (1) share
of the Company’s common stock, par value $0.001 per share (the “Shares”); and (ii) warrants to purchase shares
of the Company’s common stock, par value $0.001 per share (the “
Warrants
”). The number of shares underlying
each Warrant was equal to 50% of the number of Shares subscribed for by such Investor. The Warrants are
exercisable at any time on or after the date of issuance for a period of two (2) years at an exercise price per share equal
to $2.50. In the August Offering, the Company sold an aggregate of 1,035,600 Units, resulting in total gross proceeds of $1,294,500.
As a result, the Company issued to the investors a total of 1,035,600 Shares and 517,800 Warrants. The August Offering closed
on October 5, 2018.
Non-Controlling
Interests
Non-controlling
interest is shown as a component of stockholders’ equity on the consolidated balance sheets and the share of net income
(loss) attributable to non-controlling interest is shown as a component of net income (loss) in the consolidated statements of
operations.
The
following schedule discloses the effects of changes in the Company’s ownership interest in its subsidiaries on the Company’s
equity:
|
|
For
the Three Months
Ending
September 30, 2018
|
|
|
For
the Nine Months
Ending
September 30, 2018
|
|
Net loss attributable
to GSRX Industries Inc.
|
|
$
|
(1,655,745
|
)
|
|
$
|
(13,647,636
|
)
|
Decrease in
additional paid in capital related to Recognition of Non-Controlling Interest Attributable to Spirulinex
|
|
|
(622,721
|
)
|
|
|
(622,721
|
)
|
Change in
net loss attributable to GSRX Industries Inc. and transfers to Non-Controlling Interest
|
|
$
|
(2,318,466
|
)
|
|
$
|
(14,310,357
|
)
|
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
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.
5.
Licenses
On
March 7, 2018, Mendocino entered into an asset purchase agreement with a third-party seller, pursuant to which Mendocino acquired
all of the assets relating to a non-operating retail cannabis lease in Point Arena, Mendocino County, California
for total cash consideration of $350,000.
The
amount assigned to the Licenses intangible asset was $309,300. The licenses and permits renew annually for nominal fees.
6.
Construction in progress
Construction
in progress includes direct and indirect expenditures for the construction and expansion of the Company’s facilities and
is stated at its acquisition cost. Independent contractors perform substantially all of the construction and expansion efforts
of our facility.
Construction
in progress includes construction progress payments, engineering costs, equipment not placed in service and other costs directly
related to the construction of the facilities. Expenditures are capitalized during the construction period and construction in
progress is transferred to the relevant class of property, plant and equipment when the assets are available for use, at which
point the depreciation of the asset commences.
The
following represents the construction in progress as of September 30, 2018:
|
|
Contract
|
|
|
Date
|
|
|
|
Facility
|
|
Price
|
|
|
Completed
|
|
Payments
|
|
Andalucia
(1)
|
|
$
|
167,200
|
|
|
May
14, 2018*
|
|
$
|
175,483
|
|
Fajardo
(2)
|
|
|
177,600
|
|
|
May 14,
2018
|
|
|
160,988
|
|
Isla
Verde
|
|
|
180,150
|
|
|
In
progress
|
|
|
93,877
|
|
Bayamon
|
|
|
1999,546
|
|
|
In
progress
|
|
|
89,798
|
|
Guaynabo
|
|
|
212,025
|
|
|
In
progress
|
|
|
27,090
|
|
420
|
|
|
35,000
|
|
|
In
progress
|
|
|
16,380
|
|
Sunset
Connect
|
|
|
350,000
|
|
|
In
progress
|
|
|
31,087
|
|
Total
|
|
|
|
|
|
|
|
$
|
594,703
|
|
|
(1)
|
Commenced
operations on October 2, 2018 following issuance of requisite operating permit from the DHPR. (Note 10).
|
|
|
|
|
(2)
|
While
construction at the Fajardo facility is completed as of September 30, 2018, the Company is awaiting the issuance of the requisite
operating permits and licenses from the DHPR in order to commence operations.
|
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
7.
Related Party Transactions
The
Company entered into executive consulting agreements with its Chief Executive Officer (“CEO”)
and Chief Financial Officer (“CFO”) effective as of January 1, 2018. Pursuant to the agreement with the CEO, the
Company agreed to pay to the CEO a monthly fee of $20,000, plus expenses for his services and duties customarily
performed by and customary to the role of CEO. Pursuant to the agreement with the CFO, the Company agreed to pay to the CFO a
monthly fee of $17,500, plus expenses for his services and duties customarily performed by and customary to the
role of CFO. On July 24, 2018, the Company entered into an amended and restated executive consulting agreement with the
CFO. Pursuant to the agreement, the Company agreed to pay the CFO compensation as follows: (i) a monthly cash fee of $10,000,
payable in accordance with the Company’s standard payroll practices; and (ii) 15,000 restricted shares of the Company’s
common stock, par value $0.001 per share, payable quarterly, effective immediately.
The
two officers performed their executive and financial duties for the Company since March 17, 2017. During the nine months ended
September 30, 2018, the CEO and CFO were paid $180,000 and $136,250, respectively. During the nine months ended September 30,
2018 the CEO and CFO received 375,000 and 565,000 restricted shares of the Company’s common stock, respectively, with a
fair value of $1,876,250 and $2,931,800, respectively.
On
July 24, 2018, the Company entered into an amended and restated consulting agreement with Peach Management, LLC, an entity
controlled by Mr. Christian Briggs, Chairman of our Board of Directors (the “Consultant”). Pursuant to the
agreement, the Consultant provides certain consulting services relating to the execution of the Company’s business plan
as more fully described in the agreement (the “Consulting Services”). In consideration of the Consulting
Services, the Company agreed to pay to the Consultant compensation as follows: (i) a monthly cash fee of $10,000, payable in
accordance with the Company’s standard payroll practices; and (ii) 15,000 restricted shares of the Company’s
common stock, par value $0.001 per share, payable quarterly, effective immediately. During the nine months ended September
30, 2018, Peach was paid $182,500. During the nine months ended September 30, 2018, the Consultant received 815,000 restricted shares of the
Company’s common stock, with a fair value of $4,054,300.
8.
Patent Application Costs
The
operating agreement which governs the terms of Spirulinex, includes among other things, the requirement that: the
Company contribute to Spirulinex an aggregate of 200,000 restricted shares of common stock valued at $4.75 per share, par
value $0.001 per share; the Company contribute to Spirulinex a total of $350,000 to fund the business operations of Spirulinex;
and Solunas Aqua Corp. enter into an IP assignment agreement and IP purchase agreement with Spirulinex for all intellectual property
and provisional patents relating to the business.
The
Company has applied for patents which it believes are a new, original and ornamental design for Oral Consumable Flakes. The patents
use the methods of preparing solulizable, encapsulated plant-based compositions.
During
the nine months ended September 30, 2018, the Company has paid $632,368 in legal and associated costs for the multiple
patent applications.
As
the patents have not been issued as of September 30, 2018, no amortization has been applied against the patent costs. If the
patents are approved, the Company will amortize the patent application costs over their useful lives. If the patents are not approved,
the patent application costs will be expensed and charged against income.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
9.
Commitments and Contingencies
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 Department of Health of Puerto Rico. Pursuant
to the terms of the Supply Agreement, the Company agreed to 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 has a term of ten years from the moment
of its coming into effect. If neither party announces termination of the Supply Agreement at least thirty (30) days before its
stated expiration, the Supply Agreement shall automatically extend for a period of one year, and renewing until such time as either
party provides notice of termination in accordance with the terms and conditions of the Supply Agreement.
Option
to Purchase Building
On
May 14, 2018, Andalucia 511, LLC, through its parent company, Project 1493, LLC remitted $50,000 in the form of an option to purchase
a building located at 1022 Ashford Avenue in Santuree, Puerto Rico. The option gives the Company an exclusive ninety day option
to purchase the building for $1,150,000, which can be executed by written consent, specifying the closing date. The Company will
also pay $5,000 rent for the duration of the option agreement. On October 26, 2018, the Company extended its option to purchase
the building to March 15, 2019.
Letter
of Intent – Progressive Collectives, LLC
On
January 26, 2018, the Company entered into a binding letter of intent with Progressive Collectives, LLC (“Progressive”),
pursuant to which Progressive would sell and transfer the assets of a cannabis dispensary business, and the Company would purchase
and assume the assets of such cannabis dispensary business, subject to the terms and conditions of the letter of intent with Progressive.
Subject to a satisfactory due diligence investigation by the Company, and entry into a definitive agreement by and among the parties,
the anticipated closing date of the proposed transaction shall be on or before February 2, 2018, subject to the right of the Company
to extend such time for a period of forty-five days thereafter in the event the Company requires additional time to conduct its
due diligence investigation. The Company and Progressive have signed extensions of time to complete the due diligence, the most
recent one on March 23, 2018, extending the period for due diligence until ten days after Progressive files its 2017 Federal income
tax return. As of the date of this statement, Progressive has not filed its Federal income tax return. On October 12, 2018 the
Company terminated the LOI with Progressive.
Letter
of Intent – Dispensarios 420
On
August 22, 2018, Project 1493, LLC, the Company’s wholly-owned subsidiary, entered into a Final Purchasing Agreement (the
“Agreement”) with Dispensarios 420, LLC, a limited liability company established under the laws of the Commonwealth
of Puerto Rico (the “Seller”), pursuant to which the Seller agreed to sell and the Company agreed to purchase substantially
all of the assets pertaining to a medical cannabis dispensary, including but not limited to all of the legal rights, permits,
licenses, leasing contracts and other assets (the “420 Dispensary”), in exchange for $156,000 cash consideration (the
“Cash Payment”) and 46,000 shares of restricted common stock, par value $0.001 per share, of the Company (the “Shares”
and, together with the Cash Payment, the “Purchase Price”). The Agreement provides that the Cash Payment shall be
deposited into an escrow account until all transactions contemplated by the Agreement are finalized, and all corresponding permits
to operate the medical dispensary are approved and issued by the Department of Health of Puerto Rico; provided, however, that
the Cash Payment shall be disbursed to the Seller no later than 45 days from the date on which the DHPR authorizes the transfer
of the 420 Dispensary and all assignments contemplated by the Agreement is completed. The Agreement contains customary representations
and considerations of each of the parties. The acquisition of the 420 Dispensary is expected to close during the third quarter
of 2018; however, there can be no assurance that the Company will complete the transaction during this time, if at all.
The
Company terminated the Agreement relating to 420 Dispensary on October 22, 2018.
Letter
of Intent – So-Cal MM Patients Association, LLC
On
September 19, 2018, the Company entered into a binding letter of intent (the “LOI”) with So-Cal MM Patients Association,
LLC, a California limited liability company, dba The Coughy Shop (the “Seller”), pursuant to which the Company and
the Seller have agreed to execute a purchase agreement in which the Company would acquire all of the assets relating to a licensed
retail cannabis dispensary currently operating in Desert Hot Springs, California (the “Business”). The LOI provides
that the Company shall purchase from the Seller all assets used in the Business, both tangible and intangible, including licenses
and permits covering medical and adult-use cannabis sales, leases, equipment, inventory, and other assets (the “Proposed
Transaction”) in exchange for total cash consideration of $1,500,000 (the “Purchase Price”). In consideration
of the LOI, on September 24, 2018, the Company deposited into escrow a one-time, refundable security deposit of $100,000 (the
“Deposit”), to secure the Company’s exclusivity over the Proposed Transaction during the due diligence period
as set forth in the LOI. The Company has thirty (30) days to conduct its due diligence investigation, which shall begin upon receipt
of all requested information from the Seller, and which shall be extended as required to allow the Company to complete its due
diligence investigation. In the event the Proposed Transaction closes, the Deposit shall be applied to the Purchase Price. However,
in the event that the Company elects not to proceed with the Proposed Transaction as a result of its due diligence investigation,
the Deposit shall be returned to the Company as soon as reasonably practicable.
The
Proposed Transaction is subject to customary closing conditions more fully described in the LOI, including: the Company’s
satisfactory due diligence investigation by the Company; the Company’s receipt of all necessary regulatory approvals from
the relevant city and/or state authority of the Proposed Transaction, specifically approval by the City of Desert Hot Springs
and State Bureau of Cannabis Control to conduct retail cannabis operations at the location in which the Business operations; and
the negotiation, execution, and delivery of the Definitive Agreement.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
September
30, 2018
Risk
of Prosecution for Cannabis-Related Companies
A
company that is connected to the cannabis industry must be aware that cannabis-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 cannabis. Many states
impose and enforce similar prohibitions. As of September 30, 2018 and October 30, 2018, 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.
California
Operating Licenses
Effective January
1, 2018 the State of California commenced licensing for both medical and adult use commercial cannabis activity under the Medicinal
and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”). Beginning on January 1, 2018, the State began issuing
temporary licenses for medical and adult use cannabis activity. Temporary licenses were initially issued for 120 days, but can
be extended for additional 90 day periods if the applicant submits an annual license application during the initial 120 day window.
The temporary licensing program expires on December 31, 2018, after which time applicants must apply for annual licenses only.
The key requirement for temporary and annual state license approval is confirmation of local authorization to operate from the
operator’s local jurisdiction. The Company’s current local San Francisco temporary permit to operate a manufacturing
business was issued on April 27, 2018 and allowed Spirulinex to conduct manufacturing operations at its prior facility and subsequently
at its new facility in San Francisco. The permit expired on August 25, 2018 due to the need to move the facility to the current
San Francisco location and recognize the Company’s investment in Spirulinex, both issues that complicated the San Francisco
permitting process. The Company has actively engaged with San Francisco’s Office of Cannabis Control and Board of Supervisors
to resolve these issues by ordinance amendment, a process that is currently pending and may, if successful, result in the reinstatement
of Spirulinex’s local authorization. The Company’s current state temporary licenses issued by the California Department
of Public Health’s Manufactured Cannabis Safety Branch (MCSB) expired on September 28, 2018. Additionally, the Company submitted
a new cannabis manufacturing application under San Francisco’s social equity program on September 5, 2018, which application
is under review. Although the Company believes it will receive the necessary licenses from the City of San Francisco and the State
to conduct its business in a timely fashion, there is no guarantee the Company will be able to do so and any failure to do so
may have a negative effect on its business and results of operations.
Although
the possession, cultivation and distribution of cannabis for medical and adult use is permitted in California, cannabis is a Schedule-I
controlled substance and its use remains a violation of federal law. Since federal law criminalizing the use of cannabis preempts
state laws that legalize its use, strict enforcement of federal law regarding cannabis would likely result in our inability to
proceed with our business plan, especially in respect of our cannabis cultivation, production and dispensaries. In addition, our
assets, including real property, cash, equipment and other goods, could be subject to asset forfeiture because cannabis is still
federally illegal.
10.
Subsequent Events
On
October 1, 2018, the Company received the requisite operating permit, issued by the Department of Health of Puerto for its Andalucia,
San Juan, Puerto Rico medical cannabis dispensary, allowing the Company to commence operations at this location. The Company opened
its new Green Spirit RX dispensary on October 2, 2018.