Notes
to Consolidated Financial Statements
June
30, 2019
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.
The
Company is in the business of acquiring, developing and operating medical cannabis dispensaries throughout Puerto Rico; cannabis
related businesses in California and real estate leasing in Puerto Rico and California.
The
Company entered into the Final Purchasing Agreements (“FPA”) 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
Company operates six dispensaries as follows:
Location
|
|
State/Territory
|
|
Date Opened
|
|
Purchase
Price
|
|
Dorado
|
|
Puerto Rico
|
|
March 28, 2018
|
|
$
|
100,000
|
|
Fajardo
|
|
Puerto Rico
|
|
December 28, 2018
|
|
$
|
100,000
|
|
Carolina
|
|
Puerto Rico
|
|
June 1, 2018
|
|
$
|
100,000
|
|
Hato Rey
|
|
Puerto Rico
|
|
June 1, 2018
|
|
$
|
128,000
|
|
San Juan
|
|
Puerto Rico
|
|
October 2, 2018
|
|
$
|
75,000
|
|
Point Arena
|
|
California
|
|
April 2, 2018
|
|
$
|
350,000
|
|
The
FPA’s have an indefinite life and are not being amortized.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
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,
2018 (including the notes thereto) set forth in Form 10-K filed with the Securities and Exchange Commission on April 16, 2019.
Principles
of Consolidation
The
consolidated financial statements through June 30, 2019 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
|
●
|
100%
owned subsidiary, Ukiah Supply Company, LLC
|
●
|
100%
owned subsidiary, Pure and Natural, LLC
|
●
|
96%%
owned subsidiary, Point Arena Manufacturing, LLC
|
●
|
99%
owned subsidiary, Point Arena Distribution, LLC
|
●
|
51%
majority owned subsidiary, Pure and Natural-Lakeway, LLC
|
●
|
51%
majority owned subsidiary, Pure and Natural One-TN, LLC
|
●
|
96%
owned subsidiary, Green Room Palm Springs, LLC
|
All intercompany transactions have been eliminated
in the consolidated financial statements.
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 June 30, 2019 the Company had $0 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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Cash
held in escrow, in the name of the Company, is held by Gunnison Bank (“Gunnison”). The escrow account was established
to hold the deposits from the sale of equity in subsidiaries and hold funds for businesses under subscription agreements. There
are no restrictions on the funds held by Gunnison on the Company’s behalf.
Investments,
fair value
On
March 30, 2019 the Company entered into a Share Exchange Agreement (the “Share Agreement”) and an Ancillary Rights
Agreement (the “Ancillary Agreement”) with Chemesis International Inc., a British Columbian Corporation (“CADMF”).
In the Share Agreement, the Company received 7,291,874 restricted shares of common stock of CADMF. Fair value of the investment
as of June 30, 2019 was $10,864,892. CADMF is quoted on the OTC market and closed on Friday, June 28, 2019 at $1.49
per share.
Investments,
cost method
Pure
and Natural, LLC made a $50,000 investment on January 4, 2019 for a 10% equity and profits interest in The Zen Stop, LLC. The
Zen Stop is a mobile wellness business called “Zen Stop.”
The investment is carried at the cost basis as it is a private company and fair value cannot be determined.
Pure
and Natural, LLC purchased 25,167 membership units in Buzznog, LLC for $20,000 on March 6, 2019. The investment is carried at
the cost basis as it is a private company and fair value cannot be determined.
Revenue
Recognition
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
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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
The
following table presents the Company’s revenues disaggregated by type and by state/territory:
|
|
For
the Three Months Ended
June
30,
|
|
|
For
the Six Months Ended
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues by Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
11,955
|
|
|
$
|
-
|
|
|
$
|
17,753
|
|
|
$
|
-
|
|
Retail
|
|
|
3,427,270
|
|
|
|
353,430
|
|
|
|
6,287,551
|
|
|
|
355,626
|
|
Total
|
|
$
|
3,439,225
|
|
|
$
|
353,430
|
|
|
$
|
6,305,304
|
|
|
$
|
355,626
|
|
|
|
For
the Three Months Ended
June 30,
|
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues by State/Territory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
157,684
|
|
|
$
|
-
|
|
|
$
|
279,580
|
|
|
$
|
-
|
|
Tennessee
|
|
|
15,353
|
|
|
$
|
-
|
|
|
|
25,665
|
|
|
|
-
|
|
Texas
|
|
|
15,656
|
|
|
|
-
|
|
|
|
44,846
|
|
|
|
-
|
|
Puerto Rico
|
|
|
3,250,532
|
|
|
|
353,430
|
|
|
|
5,955,213
|
|
|
|
355,626
|
|
Total
|
|
$
|
3,439,225
|
|
|
$
|
353,430
|
|
|
$
|
6,305,304
|
|
|
$
|
355,626
|
|
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 June 30, 2019, 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; and CBD products, such as soft gels, tinctures, balms, pain
cream and vape pens.
Inventory
is comprised of the following items:
|
|
As of
|
|
|
As of
|
|
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Finished goods – flower
|
|
$
|
36,515
|
|
|
$
|
137,592
|
|
Finished goods – cannabis products
|
|
|
244,402
|
|
|
|
191,468
|
|
Finished goods
– CBD products
|
|
|
122,693
|
|
|
|
31,400
|
|
Total
|
|
$
|
403,610
|
|
|
$
|
360,460
|
|
As
of June 30, 2019, the Company had paid for inventory which had not been delivered in the amount of $179,971.
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
|
Furniture, Fixtures and Equipment
|
|
5 – 10 years
|
Building and Leasehold improvements
|
|
5 - 25 years
|
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Intangible
Costs
The
Company has incurred costs related to Patent Application Costs during the year ended December 31, 2018 and quarter ended June
30, 2019, consisting of $1,943,934 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 June 30, 2019, 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 to operations. (Note 7).
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 6,995,796. (Note 3).
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Recent
Accounting Pronouncements
As
of June 30, 2019 and through September 20, 2019, 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. On January 1,
2019 we adopted this standard on our consolidated financial statements.
3.
Equity
The
following table illustrates the common stock transactions for the six months ended June 30, 2019:
Category
|
|
Common
Shares
|
|
Cash, common shares
|
|
|
621,600
|
|
Services, common shares
|
|
|
762,335
|
|
Cash, common shares,
not issued
|
|
|
400,000
|
|
Shares issued in
Share Exchange and Ancillary Agreement
|
|
|
11,666,998
|
|
Services,
authorized but not issued
|
|
|
104,906
|
|
Total
|
|
|
13,555,839
|
|
During
the six months ended June 30, 2019, issued 621,600 shares of the Company’s .001 par value common stock, resulting in net
proceeds of $777,000.
During
the six months ended June 30, 2019, consultants received 762,335 shares of common stock for legal, professional, consulting and
advisory services provided for the Company with a fair market value of $969,032.
During
the six months ended June 30, 2019, issued 400,000 shares of the Company’s .001 par value common stock, resulting in net
proceeds of $200,000. The shares were issued subsequent to June 30, 2019.
During
the six months, the Company entered into a Share Exchange Agreement and an Ancillary Rights Agreement with Chemesis International
Inc. In the Share Agreement, the Company issued 11,666,998 restricted shares of the Company’s common stock.
During
the six months ended June 30, 2019, consultants received 104,906 shares of common stock for legal, professional, consulting
and advisory services provided for the Company with a fair market value of $104,161.
During
the six months ended June 30, 2019, the Company authorized the issuance of 15,000 shares of common stock to Dorado Consulting,
LLC (Note 6) for services rendered to the Company with a fair market value of $16,500.
During
the six months ended June 30, 2019, the Company authorized the issuance of 315,000 shares of common stock to Thomas Gingerich,
Chief Financial Officer (Note 6), for services rendered to the Company with a fair market value of $394,500.
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, a related party.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
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 June 30, 2019, the Company had outstanding warrants to purchase 6,995,796 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 two
(2) or three (3) years from the date of issuance.
|
|
Warrants
Issued
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
May 11,
2017
|
|
|
6,038,462
|
|
|
$
|
.50
|
|
|
May 11, 2020
|
February 23, 2018
|
|
|
232,334
|
|
|
$
|
6.00
|
|
|
February 23, 2021
|
October 5, 2018
|
|
|
517,800
|
|
|
$
|
2.50
|
|
|
October 5, 2020
|
March
8, 2019
|
|
|
207,200
|
|
|
$
|
1.75
|
|
|
March 7, 2021
|
Total
|
|
|
6,995,796
|
|
|
|
|
|
|
|
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. No warrants were issued
for compensation during the period ended June 30, 2019.
All
of the outstanding warrants granted were fully vested on the grant date.
January
2019 Stock Offering
In
January and February 2019, the Company entered into a subscription agreement (the “January Agreement”) with selected
accredited investors. Pursuant to the terms of the January 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 “January 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 33% 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 $1.75. In the January Offering, the Company sold an aggregate of 621,600 Units, resulting in total gross proceeds of $777,000.
As a result, the Company issued to the investors a total of 621,600 Shares and 207,200 Warrants. The January Offering closed on
March 6, 2019.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Sale
of Equity in Subsidiaries
On
March 29, 2019 the Company sold partial interests in its wholly owned subsidiaries to an investor as follows:
Subsidiary
|
|
%
Sold
|
|
|
Amount
Received
|
|
Point
Arena Manufacturing, LLC
|
|
|
1.5
|
%
|
|
$
|
125,001
|
|
Point Arena Distribution,
LLC
|
|
|
1.0
|
%
|
|
|
50,000
|
|
Green Room Palm
Springs, LLC
|
|
|
1.5
|
%
|
|
|
158,571
|
|
Total
|
|
|
|
|
|
$
|
333,572
|
|
As
a result of the transaction, the Company reported $328,819 as additional paid in capital and $4,753 as included in non-controlling
interest.
On
April 29, 2019, the investor transferred his partial interest from Point Arena Distribution, LLC to Green Room Palm Springs, LLC.
The investor also contributed the unit price difference of $2,857.
On
June 10, 2019 the Company sold partial interests in its wholly owned subsidiaries to an investor as follows:
Subsidiary
|
|
%
Sold
|
|
|
Amount
Received
|
|
Point Arena Manufacturing,
LLC
|
|
|
2.5
|
%
|
|
$
|
208,435
|
|
Green Room Palm
Springs, LLC
|
|
|
2.0
|
%
|
|
|
211,428
|
|
Total
|
|
|
|
|
|
$
|
419,863
|
|
As
a result of the transaction, the Company reported $411,465 as additional paid in capital and $8,398 as included in non-controlling
interest.
Share
Exchange and Ancillary Rights Agreements – Chemesis International Inc.
On
March 30, 2019 the Company entered into a Share Exchange Agreement (the “Share Agreement”) and an Ancillary Rights
Agreement (the “Ancillary Agreement”) with Chemesis International Inc., a British Columbian Corporation (“CADMF”).
In the Share Agreement, the Company receives 7,291,874 restricted shares of common stock of CADMF and CADMF receives 11,666,998
restricted shares of the Company’s common stock. Closing date of the transaction was March 30, 2019. The exchange allows
a mutual leak out. Beginning six months after the closing date, the Company shall be able to sell up to 1,215,313 of the CADMF
shares and CADMF shall be able to sell 1,944,500 of the Company’s shares every six months, subject to compliance with any
applicable securities laws and stock exchange rules.
The
Ancillary Rights Agreement (“Agreement”) contains the following representations:
|
1)
|
CADMF will be
entitled to nominate and have one member to the Company’s Board of Directors, as long as CADMF holds 10% or more of
the Company’s issued and outstanding common shares. Likewise, the Company will be entitled to nominate and have one
member on the CADMF Board of Directors, as long as the Company holds 5% or more of the issued and outstanding common shares.
|
|
|
|
|
2)
|
If the Company
proposes to issue shares to raise capital, CADMF has a participation right to subscribe for and purchase such number of shares
to maintain its equity ownership percentage of the Company.
|
|
|
|
|
3)
|
The Company will
provide CADMF with the first right of refusal to produce any requested cannabis or hemp-based CBD products if CADMF has production
facilities in the jurisdiction the Company has the request (i.e. California or Puerto Rico). CADMF has ten days to respond
to the request of product. After that, the Company can request product from a third party.
|
|
|
|
|
4)
|
The Agreement
may be terminated by written agreement of the Company and CADMF or if CADMF ownership percentage decreases below 5% of the
issued and outstanding shares of the Company.
|
The Company recognized no compensation
attributable to the Ancillary Rights Agreement during the period ended June 30, 2019.
Non-Controlling
Interest
The
following schedule discloses the effects of changes in the Company’s ownership interest in its subsidiaries on the Company’s
equity:
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2019
|
|
Net loss
attributable to GSRX Industries Inc.
|
|
$
|
(5,761,624
|
)
|
Net Loss Attributable
to Non-Controlling Interests
|
|
|
(478,818
|
)
|
Change from net loss attributable to GSRX Industries Inc. and transfers to Non-Controlling Interest
|
|
$
|
(5,282,806
|
)
|
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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
5.
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.
6.
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 April 1, 2019, 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) 75,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly,
effective immediately.
Effective
July 1, 2019, the Company entered into an amended and restated executive consulting agreement with the CEO. Pursuant to the agreement,
the Company agreed to pay the Executive Chairman compensation as follows: (i) a monthly cash fee of $0 – $15,000,
based on the Company’s monthly revenues, payable in accordance with the Company’s standard payroll practices; and
(ii) 200,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly, effective immediately,
and (iii) an acceleration of 14 quarters of the quarterly shares upon a change of control in the Company.
Effective
July 1, 2019, the Company entered into an amended and restated executive consulting agreement with the CFO. Pursuant to the agreement,
the Company agreed to pay the Executive Chairman compensation as follows: (i) a monthly cash fee of $0 – $15,000, based
on the Company’s monthly revenues, payable in accordance with the Company’s standard payroll practices; and (ii) 200,000
restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly, effective immediately and
(iii) an acceleration of 14 quarters of the quarterly shares upon a change of control in the Company.
During
the six months ended June 30, 2019, the CEO and CFO were paid $130,000 and $91,250, 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 the 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”). On November 28, 2018, the agreement was assigned to Dorado Consulting,
LLC, an entity controlled by Mr. Christian Briggs. On April 1, 2019, the Company entered into an amended and restated executive
consulting agreement with the Dorado Consulting, LLC. 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) 150,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable
quarterly, effective immediately.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Effective
July 1, 2019, the Company entered into an amended and restated executive consulting agreement with the Executive Chairman. Pursuant
to the agreement, the Company agreed to pay the Executive Chairman compensation as follows: (i) a monthly cash fee of $0 –
$15,000, based on the Company’s monthly revenues, payable in accordance with the Company’s standard payroll
practices; and (ii) 700,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly,
effective immediately and (iii) an acceleration of 14 quarters of the quarterly shares upon a change of control in the Company.
During
the six months ended June 30, 2019, Dorado was paid $46,000.
On
April 9, 2018 the Company entered into a consulting agreement with GP Consulting, LLC, an entity owned by Gabrielle Pinto, daughter
of Christian Briggs. GP Consulting, LLC, through its employee Gustavo Pinto, serves as the VP of Operations – Puerto Rico
(“VP Ops”). Pursuant to the agreement, Gustavo Pinto, , the Company agreed to pay to the VP Ops a monthly fee of $15,000,
plus expenses for services and duties customarily performed by and customary to the role of VP Ops.
Effective
July 1, 2019, the Company entered into an amended and restated executive consulting agreement with the GP Consulting. Pursuant
to the agreement, the Company agreed to pay the Executive Chairman compensation as follows: (i) a monthly cash fee of $15,000,
payable in accordance with the Company’s standard payroll practices; and (ii) 50,000 restricted shares of the Company’s
common stock, par value $0.001 per share, payable quarterly, effective immediately.
During
the quarter ended June 30, 2019, Dorado was paid $71,196.
7.
Patent Application Costs and Intangible Assets
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 six months ended June 30, 2019, the Company did not incur any legal and associated costs for the multiple patent applications.
As
the patents have not been issued as of June 30, 2019, 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
June
30, 2019
8.
Commitments and Contingencies
Lease
Commitments
The
Company leases various facilities under operating leases which expire at various dates through June 2028. Under the terms of the
operating lease agreements, the Company is responsible for certain insurance, taxes and common area maintenance expenses. As of
January 1, 2019 the Company adopted ASC 842 requiring lessees to record assets and liabilities on the balance sheet. The Company
records rent expense on a straight-line basis over the terms of the underlying leases. Lease expense for the quarters ended June
30, 2019 and 2018 was $437,973 and $51,860, respectively.
Aggregate
future lease liability payments under ASC 842 are as follows:
2019
|
|
$
|
750,390
|
|
2020
|
|
|
670,116
|
|
2021
|
|
|
658,028
|
|
2022
|
|
|
615,313
|
|
2023
|
|
|
444,917
|
|
Thereafter
|
|
|
516,436
|
|
Total
|
|
$
|
3,655,200
|
|
Option
to Purchase Building
On
May 14, 2018 and November 20, 2018, Andalucia 511, LLC, through its parent company, Project 1493, LLC remitted $50,000 payments
for the purpose of extending the 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 $6,000 rent for the duration of the option agreement. On March 27, 2019
a $100,000 payment was made to extend the option to May 31, 2019. On May 21, 2019 the Company elected to forego the purchase of
the building. The Company notified the Option holder of the decision, and released the $200,000 funds held in escrow to the Option
holder and terminated the agreement to purchase the building.
Risk
of Prosecution for Cannabis-Related Companies
A
company that is connected to the marijuana 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 June 30, 2019 and September 18, 2019 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 allowed for adult use cannabis sales. California’s cannabis licensing system is
being implemented in two phases. First, beginning on January 1, 2018, the State began issuing temporary licenses. On January 1,
2019 the State ceased issuing temporary licenses and began transitioning 2018 qualifying temporary licenses to provisional and
annual license status.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Green
Spirit Mendocino, LLC holds a provisional license which expires April 4, 2020. The provisional license was issued by the
Bureau of Cannabis Control (“BCC”) while the annual application is pending final approval. Point Arena
Manufacturing, LLC (“PAM”) holds a Non-Volatile Type 6 Manufacturing license was issued a provisional license on
April 24, 2019 and expires on May 15, 2020. Point Arena Distribution, LLC holds a Distribution Type 11 license issued by the
BCC which expires on June 27, 2020.
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.
Nashville
Lease – Pure and Natural, LLC
On
February 8, 2019, Pure and Natural, LLC entered into an operating lease for a 2,525 square foot CBD retail store at 2306 West
End Avenue, Nashville, Tennessee for five years beginning February 1, 2019 and ending January 31, 2024. The initial lease obligation
will be $7,364 per month with an escalation of $1/per square foot for the remaining four years. The lease also states a security
deposit of $7,364 and for additional rent of $1,403 per month for common area maintenance expenses. The lease has one five-year
renewal option.
Sponsorship
Agreement – BYB Extreme Fighting Series LLC
On
February 20, 2019 Pure and Natural, LLC (“Pure”) and BYB Extreme Fighting Series, LLC (“BYB”) entered
into a Sponsorship Agreement (“Agreement”) to sponsor three events of the BYB EXTREME Series.
In
consideration of the sponsorship, Pure paid $30,000 on February 20, 2019. The Company will also issue $25,000 of its restricted
common stock per event. BYB commits to purchase $25,000 worth of Pure products no less than 45 days before each sponsored event.
Endorsement
Licensing and Co-Branding Agreement – Matt Sorum
On
February 27, 2019 Pure and Natural, LLC (“Pure”) and Matt Sorum (“Sorum”) entered into an Endorsement
Licensing and Co-Branding Agreement (“Agreement”), to develop, market, promote and sell a unique Matt Sorum Product
Line (“Licensed Products”) for dietary supplements derived from hemp containing 0% THC. The Agreement is for an initial
three year term, beginning February 27, 2019 and ending February 26, 2022. The Agreement may be extended with the same terms unless
either party provides a 60 day notice prior to the initial term.
Sorum
will be compensated (i) a royalty of 20% of Net Gross Margin of the Licensed Products; (ii) 20% of the Net Gross Margin of any
Products sold in connection with any commercial made by Sorum; and (iii) 30% of Net Gross Margin of Licensed Products. The Company
further agrees to issue Matt Sorum certain shares of common stock as further consideration under this Agreement. The Company agrees
to issue Matt Sorum 2,000 shares of its restricted common stock for each $1,000,000 in gross revenue derived directly from the
sale of Licensed Products up to a maximum of 100,000 shares during the Term of this Agreement (the “Compensation Shares”).
The Compensation Shares shall be issued at the end of each year of this Agreement.
Point
Arena Manufacturing and Distribution Lease
On
February 27, 2019, Point Arena Manufacturing, LLC and Point Arena Distribution, LLC (“Lessees”) entered into an operating
lease for a 600 square foot building at 165 Main Street, Point Arena, California for five years beginning March 1, 2019 and ending
February 28, 2024, for the purpose of manufacturing and distribution of cannabis products. The initial lease obligation will be
$3,000 per month, the first year rent of $36,000 due within 10 days of signing the lease. This payment has not been made as the
building has not been made ready. The rent will escalate 2.5% for the remaining four years of the base term. The lease has one
five-year renewal option.
Preferred
Partner and Advertising Agreement – Buzznog, LLC
On
March 4, 2019 Pure and Natural, LLC (“Pure”) and Buzznog, LLC entered into a Preferred Partner and Advertising Agreement
(“Agreement”) allowing Pure to sell cannibidiol products on Buzznog’s website, mobile applications and platforms.
Pure will pay Buzznog 20% of the gross profit margin on all products sold using Buzznog’s sites. The Agreement has a term
of three years from the moment of its coming into effect. If neither party announces termination of the Agreement at least thirty
(90) days before its stated expiration, the 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 Agreement.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
June
30, 2019
Palm
Springs Lease – Green Room Palm Springs, LLC
On
March 6, 2019, the Company entered into an operating lease for a 4,500 square foot cannabis retail store at 2155 N. Palm Canyon
Drive, Palm Springs, California for five years and six months beginning March 1, 2019 and ending August 31, 2024. The initial
lease obligation will be $6,000 per month for nine months; $10,000 for months ten through fifteen; and a 3% escalation of the
monthly lease for the remainder of the base lease. The Company paid a security deposit of $20,000 upon signing the lease.
Consulting
agreements
On
March 3, 2019 the Company entered into an engagement letter agreement with MH Legal Services, LLC (“MH”). In connection
with the engagement, the Company will pay MH compensation for in-house legal services as follows: (i) a monthly fee of Twelve
thousand five hundred dollars ($12,500); and (ii) and a one-time issuance of 150,000 shares of the Company’s restricted
common stock, par value $0.001 per share, due within thirty days of signing the engagement letter.
On
March 29, 2019 the Company entered into a consulting agreement with John Grainer (“Grainer”). In connection with the
agreement, the Company will pay Grainer compensation for management, development and operation services as follows: (i) a monthly
fee of Fifteen thousand dollars ($15,000); and (ii) the Company will issue to Grainer two hundred thousand (200,000) restricted
common shares, par value $0.001 per share. One hundred thousand shares (100,000) will be issued promptly upon execution of the
consulting agreement. The remaining 100,000 shares shall accrue on a quarterly basis over a two (2) year period (12,500 per quarter),
commencing on the effective date of this Agreement and except for a change in control of GSRX, subsequent share distribution is
subject to your continued engagement. If this engagement is terminated prior to the accrual of any quarterly basis share accrual,
you shall not be entitled to receive the unaccrued shares.
Effective
July 1, 2019, the Company entered into an amended and restated executive consulting agreement with the Grainer. Pursuant to the
agreement, the Company agreed to pay the Executive Chairman compensation as follows: (i) a monthly cash fee of $10,000, payable
in accordance with the Company’s standard payroll practices; and (ii) 50,000 restricted shares of the Company’s common
stock, par value $0.001 per share, payable quarterly, effective immediately.
9.
Subsequent Events
Share
Exchange Agreement
Effective
August 28, 2019, eight shareholders of the Company into a Share Exchange Agreement with Chemesis International, Inc. (“Chemesis”),
pursuant to which the shareholders exchanged 42,534,454 common shares and 1,000 preferred shares of GSRX for 14,880,705 shares
of Chemesis. As a result of the exchange and as of September 19, 2019 Chemesis owned 54,201,452 shares or 67.20% of the
Company.
Private
Placement
On
July 18, 2019, the Company conducted a private placement, pursuant to which it sold 412,000 shares of Common Stock, at
a purchase price of $0.50 per share, to an investor, resulting in net proceeds to the Company of $206,000. The shares were issued
pursuant to Regulation D under the Securities Act of 1933, as amended (the “Act”).
Bonus
of Common Shares
On
July 4, 2019, the Board of Directors approved the following bonus shares for consultants and officers:
GP Consulting, LLC
|
|
|
100,000
|
|
ACB Management, Inc.
|
|
|
50,000
|
|
MH Legal Services, LLC
|
|
|
250,000
|
|
Tom Gingerich
|
|
|
100,000
|
|
Les Ball
|
|
|
100,000
|
|
Dorado Consulting, LLC
|
|
|
100,000
|
|
Steve Farkas
|
|
|
25,000
|
|
Harlan Ribnik
|
|
|
25,000
|
|
Warrant
Modification
On
July 31, 2019 the Board of Directors approved the reduction of exercise price of certain warrants from $.50 to $.005 in order
to maintain certain officers and directors.
Acceleration
of Shares due to Change of Control
On
July 31, 2019, the Board of Directors elected to effectuate Section 9 of Consulting Agreements to accelerate 14 quarters of bonus
shares due to change of control. Shares issued are as follow:
Dorado Consulting, LLC
|
|
|
12,800,000
|
|
Les Ball
|
|
|
2,900,000
|
|
Tom Gingerich
|
|
|
2,900,000
|
|
GP Consulting, LLC
|
|
|
600,000
|
|
John Grainer
|
|
|
700,000
|
|