Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
1.
Nature of Operations
GSRX
Industries Inc., formerly
Green Spirit 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 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 to “GSRX Industries Inc.”
in order to reflect the nature of the corporation. The name change became effective on 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
(Restated)
June
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 retail cannabis business 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 Green Spirit 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 businesses in California. To date, the Company has acquired a
ll of the legal rights,
permits, licenses, leasing contracts and assets of pre-qualified medical cannabis dispensaries pursuant to three Final Purchasing
Agreements (“FPA”).
The FPA’s purchased pre-qualified cannabis licenses in Puerto Rico. The Company
acquired all of the legal rights, permits, pre-qualified licenses and leases for five medical cannabis dispensaries. The pre-qualification
license does not allow the holder to operate a dispensary, only the opportunity to go through the qualifying steps to obtain an
operating permit and open the dispensary. Additional steps include proving financial viability, background checks, application
of final permit, certificate of occupancy, employment of a security firm, installation of security cameras and smaller compliance
matters.
The
cities and purchase price of FPA for the dispensaries are as follows:
Fajardo
|
|
$
|
100,000
|
|
Carolina
|
|
|
100,000
|
|
Dorado
|
|
|
100,000
|
|
San
Juan
|
|
|
75,000
|
|
Hato
Rey
|
|
|
128,000
|
|
Total
|
|
$
|
503,000
|
|
The
FPA’s have an indefinite life, therefore are not being amortized.
(Note
7). The Company began operations of one dispensary in Puerto Rico on March 28, 2018, two dispensaries on June 1, 2018 and one
dispensary in Point Arena, California on April 2, 2018.
2.
Restatement of the Consolidated Financial Statements
The
restatements are being made in accordance with ASC 250, “Accounting Changes and Error Corrections.” The disclosure
provision of ASC 250 requires a company that corrects an error to disclose that its previously issued financial statements have
been restated, a description of the nature of the error, the effect of the correction on each financial statement line item and
any per share amount affected for each prior period presented, and the cumulative effect on retained (deficit) in the consolidated
balance sheets as of the beginning of each period presented.
The
effects of the adjustments on the Company’s previously issued unaudited financial statements are summarized as follows:
Selected
Unaudited Consolidated Balance Sheets Information as of June 30, 2018
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Net
Change
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
43,668
|
|
|
|
417
|
|
|
|
44,085
|
|
Additional
paid-in capital
|
|
|
44,756,665
|
|
|
|
2,152,333
|
|
|
|
46,908,998
|
|
Retained
deficit
|
|
|
(35,922,101
|
)
|
|
|
(2,152,750
|
)
|
|
|
(38,074,851
|
)
|
Selected
Unaudited Consolidated Statements of Operations for the three months ended June 30, 2018
|
|
Three
months ended June 30, 2018
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Net
Change
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation-consulting
fee
|
|
|
2,750
|
|
|
|
2,152,750
|
|
|
|
2,155,500
|
|
Loss from operations
|
|
|
(1,503,488
|
)
|
|
|
(2,152,750
|
)
|
|
|
(3,656,238
|
)
|
Loss from operations before provision
for income taxes
|
|
|
(1,494,903
|
)
|
|
|
(2,152,750
|
)
|
|
|
(3,647,653
|
)
|
Net loss
|
|
|
(1,494,903
|
)
|
|
|
(2,152,750
|
)
|
|
|
(3,647,653
|
)
|
Net loss attributable to GSRX
Industries Inc.
|
|
|
(1,330,951
|
)
|
|
|
(2,152,750
|
)
|
|
|
(3,483,701
|
)
|
Basic loss per share
|
|
|
(.03
|
)
|
|
|
(.05
|
)
|
|
|
(.08
|
)
|
Weighted average number of common
shares outstanding
|
|
|
42,946,004
|
|
|
|
204,482
|
|
|
|
43,150,486
|
|
Selected
Unaudited Consolidated Statements of Operations for the six months ended June 30, 2018
|
|
Six
months ended June 30, 2018
|
|
|
|
Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Net
Change
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation-consulting
fee
|
|
|
7,297,750
|
|
|
|
2,152,750
|
|
|
|
9,450,500
|
|
Loss from operations
|
|
|
(10,012,196
|
)
|
|
|
(2,152,750
|
)
|
|
|
(12,164,946
|
)
|
Loss from operations before provision
for income taxes
|
|
|
(10,003,611
|
)
|
|
|
(2,152,750
|
)
|
|
|
(12,156,361
|
)
|
Net loss
|
|
|
(10,003,611
|
)
|
|
|
(2,152,750
|
)
|
|
|
(12,156,361
|
)
|
Net loss attributable to GSRX Industries
Inc.
|
|
|
(9,839,141
|
)
|
|
|
(2,152,750
|
)
|
|
|
(11,991,891
|
)
|
Basic loss per share
|
|
|
(.23
|
)
|
|
|
(.05
|
)
|
|
|
(.28
|
)
|
Weighted average number of common
shares outstanding
|
|
|
42,143,764
|
|
|
|
102,807
|
|
|
|
42,246,571
|
|
The
Company’s Board of Directors authorized the issuance of common shares as compensation to consultants, related parties and
members of the board for services rendered during the second quarter ended June 30, 2018 which were not reflected in the financial
statements for the period ended June 30, 2018. The authorized shares were not issued until September 4, 2018.
The
Board authorized 215,000 of common shares which had a fair value of $1,193,250 on April 27, 2018. The Board authorized 202,000
of common shares which had a fair value of $959,500 on June 6, 2018. The total value of the shares authorized, but not issued
is $2,152,750. The shares issued increase the net loss for the three and six months ended June 30, 2018 by $2,152,750. The financial
statements are being restated to reflect this change.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
3
.
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 June 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 June 30, 2018 the Company had $3,268,709 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 (“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.
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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
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.
Other
revenues, primarily rents, do not comprise a material amount of the Company’s net sales.
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, 2018, the Company
had not identified any uncollectible accounts.
Inventory
The
Company’s inventory is stated at the lower of cost or market.
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 quarter ended June 30, 2018, consisting of legal costs.
The patent applications will be filed over the next several quarters. As the patents have not been issued as of June 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 9).
The
licenses have indefinite useful lives. The licenses are tested annually for impairment, or when events or changes in circumstances
indicate the potential for impairment. If the carrying amount of an indefinite lived intangible asset exceeds its fair value,
the intangible asset is written down to its fair value. Fair value is calculated using comparative license costs or cash flow
method.
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 will
be measured based on the estimated fair value of the equity or liability instruments issued. See Note 4.
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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
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 6,038,462. (Note 4).
Recent
Accounting Pronouncements
As
of June 30, 2018 and through October 26, 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.
4
.
Equity
Authorized
and Outstanding Capital Stock
The
Company has authorized 100,000,000 shares of common stock, par value $0.001, of which 43,476,758 are currently issued and outstanding;
190,000 shares were purchased but not issued; and 417,000 were authorized but not issued. 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.
The
following table illustrates the common stock transactions for the six months ended June 30, 2018:
|
|
Preferred
|
|
|
Common
|
|
Category
|
|
Shares
|
|
|
Shares
|
|
Cash,
common shares
|
|
|
0
|
|
|
|
893,671
|
|
Services
|
|
|
0
|
|
|
|
1,487,500
|
|
Services,
approved but not issued
|
|
|
0
|
|
|
|
417,
550
|
|
Patents
|
|
|
0
|
|
|
|
200,000
|
|
Cash,
common shares purchased but not issued as of the statement date
|
|
|
0
|
|
|
|
190,000
|
|
Total
|
|
|
0
|
|
|
|
2,771,721
|
|
On
April 27, 2018, the Company authorized the issuance of 100,000 shares of common stock at $5.55 to Peach Management, LLC for services
rendered to the Company.
On
April 27, 2018, the Company authorized the issuance of 25,000 shares of common stock at $5.55 to Les Ball for services rendered
to the Company.
On
April 27, 2018, the Company authorized the issuance of 25,000 shares of common stock at $5.55 to Tom Gingerich for services rendered
to the Company.
On
April 27, 2018, the Company authorized the issuance of 65,000 shares of common stock at $5.55 to Princesa Investments, LLC for
services rendered to the Company.
On
June 6, 2018, the Company authorized the issuance of 100,000 shares of common stock at $4.75 to Peach Management, LLC for services
rendered to the Company.
On
June 6, 2018, the Company authorized the issuance of 50,000 shares of common stock at $4.75 to Les Ball for services rendered
to the Company.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
On
June 6, 2018, the Company authorized the issuance of 25,000 shares of common stock at $4.75 to Tom Gingerich for services rendered
to the Company.
On
June 6, 2018, the Company authorized the issuance of 25,000 shares of common stock at $4.75 to David Scott for services rendered
to the Company.
On
June 6, 2018, the Company authorized the issuance of 2,000 shares of common stock at $4.75 to Gregory Jump for services rendered
to the Company.
On
June 12, 2018 the Company issued 275 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
June 12, 2018 the Company issued 275 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.
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.
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, 2018, the Company had outstanding warrants to purchase 6,038,462 shares of common stock (the “
Warrants
”).
Each Warrant represents the right to purchase one share 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
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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
2018
Stock Offering
On
February 23, 2018, the Company entered into a subscription agreement (the “February Agreement”) with selected accredited
investors (each, an “Investor” and collectively, the “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 (each, a “Warrant”
and together with the Units, Shares and the common stock issuable upon exercise of the Warrants (the “Warrant Shares”),
collectively, the “Securities”). 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
On
April 11, 2018, the Company entered into a subscription agreement (the “April Agreement”) with selected accredited
investors (each, an “Investor” and collectively, the “Investors”). Pursuant to the terms of the April
Agreement, the Company sold in a private placement (the “April Offering”) 738,504 common shares at a purchase price
of $3.50 per share. The Offering resulted in $2,584,765 total gross proceeds. The Offering was terminated on May 21, 2018.
June
2018 Stock Offering
On
June 11, 2018, the Company entered into a subscription agreement (the “April Agreement”) with selected accredited
investors (each, an “Investor” and collectively, the “Investors”). Pursuant to the terms of the April
Agreement, the Company sold in a private placement (the “June Offering”) 190,000 common shares at a purchase price
of $2.50 per share. The Offering resulted in $475,000 total gross proceeds. The Offering was terminated on June 22, 2018.
Non-Controlling
Interests
Three
subsidiaries of the Company began operations during the quarter ended June 30, 2018; Spirulinex, LLC (51% ownership), Sunset Connect
Oakland, LLC (55% ownership) and Green Spirit Mendocino LLC (100% ownership). The non-controlling interests in Spirulinex, LLC
and Sunset Connect Oakland, LLC during the quarter were accounted for on an equity basis in the consolidated financial statements.
5
.
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.
6
.
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 retail cannabis business 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.
7
.
Construction in progress
On
June 8, 2017, the Company entered into construction contracts for the construction and build-out of two dispensaries for the Carolina
and Dorado locations for $123,700 and $100,075, respectively. On August 14, 2017 the Company entered into a construction contract
for the construction and build-out of a dispensary for the Andalucia location for $117,200. On October 4, 2017 the Company entered
into a construction contract for the construction and build-out of a dispensary for the Fajardo location for $127,600. As of June
30, 2018, the Company has paid $587,237 on interim payment applications to the contractor. The construction at the Dorado location
was completed March 24, 2018; and the construction was completed at Carolina and Andalucia on May 14, 2018. The construction on
the Fajardo location began on March 15, 2018 and is anticipated to be completed by July 31, 2018. The estimated cost to
complete the projects is approximately $150,000.
8
.
Related Party Transactions
The
Company entered into Consulting Agreements with the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
effective as of January 1, 2018. The CEO will be paid $20,000 per month plus expenses and the CFO will be paid $17,500 per month
plus expenses.
The
two officers performed their executive and financial duties for the Company since March 17, 2017. During the six months ended
June 30, 2018, the CEO and CFO were paid $125,000 and $100,500, respectively.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
On
March 9, 2018, the Company entered into a consulting agreement effective January 1, 2018 with Peach Management LLC (“Peach”),
pursuant to which Peach shall provide certain consulting services relating to the execution of the Company’s business plan.
In consideration of Peach’s services, the Company agrees to pay to Peach an amount of $10,000 per month, payable in accordance
with the Company’s standard practices. On March 12, 2018 the Board of Directors increased the amount payable monthly to
$25,000 to Peach.
During
the six months ended June 30, 2018, Peach was paid $127,500.
9
.
Patents
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 shares of common stock valued at $4.75 per share, par value $0.001 per share, valued at
$950,000; the Company contribute to Spirulinex a total of $350,000 to fund the Business; 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 six months ended June 30, 2018, the Company has paid $222,023 in legal and associated costs for the multiple patent applications.
10
.
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 Puerto Rico Department of Health. 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.
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, 2018 and July 11, 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.
Letter
of Intent – Progressive Collectives, LLC
On
January 26, 2018, the Company entered into a 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.
GSRX
Industries Inc.
Notes
to Consolidated Financial Statements
(Restated)
June
30, 2018
11
.
Revenue Classes
Selected
financial information for the Company’s operating revenue for disaggregated revenue purposes are as follows:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
by Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
98,252
|
|
|
$
|
-
|
|
|
$
|
98,252
|
|
|
$
|
-
|
|
Retail
|
|
|
255,178
|
|
|
|
|
|
|
|
257,374
|
|
|
|
|
|
Total
|
|
$
|
353,430
|
|
|
|
-
|
|
|
$
|
355,626
|
|
|
|
-
|
|
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
by State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
220,461
|
|
|
$
|
-
|
|
|
$
|
220,461
|
|
|
$
|
-
|
|
Puerto
Rico
|
|
|
132,969
|
|
|
|
|
|
|
|
135,165
|
|
|
|
|
|
Total
|
|
$
|
353,430
|
|
|
|
-
|
|
|
$
|
355,626
|
|
|
|
-
|
|
12
.
Subsequent Events
Isla
Verde Construction
On
July 2, 2018 the Company entered into a construction contract for the construction and build-out of a dispensary for the Isla
Verde location for $180,150. Estimated completion date is October, 2018.
Letter
of Intent – Progressive Collectives, LLC
On
January 26, 2018, the Company entered into a 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. On October 12, 2018 the Company terminated the LOI with Progressive.