UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q/A

 (Amendment No. 1)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the Quarter ended June 30, 2018

 

Commission File Number: 333-141929

 

GSRX INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

 

Nevada   14-1982491
(State of organization)   (I.R.S. Employer Identification No.)

 

Building No. 3, P.R. 696, int. Jose Efron Ave.

Dorado, Puerto Rico 00646

(Address of principal executive offices)

 

(214) 808-8649

Registrant’s telephone number, including area code

 

 

Former address if changed since last report

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [  ] No

 

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

 

Large accelerated filer [  ]

Non-accelerated filer [  ]

(Do not check if smaller reporting company)

Accelerated filer [  ]

Smaller reporting company [X]

Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ] Yes [X] No

 

As of October 25, 2018, the registrant had 45,211,044 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

   
 

 

EXPLANATORY NOTE

 

GSRX Industries Inc., formerly Green Spirit Industries Inc. (the “Company”), is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment No. 1”) amends and restated in its entirety the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2018 as originally filed with the Securities and Exchange Commission (the “Commission”) on July 12, 2018 (the “Original Filing”).

 

This Amendment No. 1 amends the Original Filing to reflect a restatement of the Company’s financial statements for the three and six months ended June 30, 2018, to correct various account balances as summarized below.

 

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   Net     
   Reported   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 shares 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.

 

For ease of reference, revisions to the Original Filing have been made to the following sections:

 

Part I, Item 1 – Financial Statements (and Notes to Unaudited Consolidated Financial Statements)
Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

In addition, the Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this filing in connection with this Amendment No. 1 (Exhibits 31.1, 31.2 and 32.1), and the Company has provided its revised audited consolidated financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101.

 

Except as provided in this explanatory note, or as indicated in the applicable disclosure, this Amendment No. 1 has not been updated to reflect other events occurring after the filing of the Original Filing and does not modify or update information and disclosures in the Original Filing affected by subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with our filings with the Commission subsequent to the date on which we filed the Original Filing, together with any amendments to those filings.

 

 
 

 

TABLE OF CONTENTS 

 

  PART I - FINANCIAL INFORMATION  
     
ITEM 1. INTERIM FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS 17
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
ITEM 4 CONTROLS AND PROCEDURES 24
     
  PART II - OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 1A. RISK FACTORS 25
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. MINE SAFETY DISCLOSURES 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS 25
   
SIGNATURES 26

 

3
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. INTERIM FINANCIAL STATEMENTS

 

GSRX Industries Inc.

Consolidated Balance Sheets

June 30, 2018 and December 31, 2017

 

   June 30, 2018   December 31, 2017 
    (Unaudited)    (Audited) 
    (Restated)      
Assets          
           
Current Assets          
Cash  $782,208   $4,645 
Cash, held in escrow   3,344,553    6,753,373 
Accounts Receivable   97,993    - 
Inventory   300,166    - 
Prepaid Expenses   93,297    20,650 
Total Current Assets   4,618,217    6,778,668 
           
Fixed Assets          
Furniture, fixtures and equipment   255,766    - 
Building and leasehold improvements   1,878,475    - 
Accumulated Depreciation   (22,961)   - 
Total Net Fixed Assets   2,111,280    - 
         - 
Other Assets          
Licenses (Note 6)   812,300    503,000 
Deposits   280,200    7,300 
Patent Application Costs   1,522,023    - 
Construction in progress (Note 7)   282,678    241,627 
Total Other Assets   2,897,201    751,927 
           
Total Assets  $9,626,698   $7,530,595 
           
Liabilities and Stockholders’ Equity          
           
Current Liabilities          
Accounts Payable  $216,689   $222,515 
Accrued Expenses   29,613    - 
Advances Payable   2,522    1,000 
Total Current Liabilities   248,824    223,515 
           
Total Liabilities   248,824    223,515 
           
Commitments and Contingencies (Note 10)          
           
Stockholders’ Equity (Note 4)          
           
Preferred Stock, convertible, $.001 par value; 1,000 shares authorized; 1,000 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively   1    1 
Common Stock $.001 par value 100,000,000 authorized; 43,476,758 and 40,817,870 issued and outstanding and 190,000 and 77,167 held in escrow and not issued; 417,000 and 0 authorized and not issued as of June 30, 2018 and December 31, 2017, respectively   44,085    40,895 
Joint venture equity   -    - 
Additional paid-in capital   46,908,998    33,349,144 
Retained deficit   (38,074,851)   (26,082,960)
Equity attributable to Green Spirit Industries Inc.   8,878,233    7,307,080 
Non-controlling interest   499,641      
           
Total Stockholders’ Equity   9,377,874    7,307,080 
           
Total Liabilities and Stockholders’ Equity  $9,626,698   $7,530,595 

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

4
 

 

GSRX Industries Inc.

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2018   2017   2018   2017 
   (Restated)       (Restated)     
Revenues                
Revenues  $353,430   $-   $355,626   $- 
Cost of Goods Sold   200,357         201,178      
Gross Profit   153,073    -    154,448    - 
                     
Operating expenses                    
Consulting Fees   357,990    30,000    674,823    30,000 
General and administrative   1,138,396    20,965    1,544,233    20,965 
Professional Fees   134,464    56,250    326,877    56,250 
Depreciation Expense   22,961    -    22,961    - 
Stock based compensation (Note 4)                    
Consulting fees   2,155,500    1,069,600    9,450,500    1,069,600 
Investor relations   -    991,000    300,000    991,000 
Professional fees   -    1,129,400    -    1,129,400 
Total Stock based compensation   2,155,500    3,190,000    9,750,500    3,190,000 
Toal Operating Expenses   3,809,311    3,297,215    12,319,394    3,297,215 
Loss from operations   (3,656,238)   (3,297,215)   (12,164,946)   (3,297,215)
                     
Other Income (Expenses)                    
Rent Income   8,585    -    8,585    - 
                     
Total Other Income (Expenses)   8,585    -    8,585    - 
                     
Loss from operations before provision for income taxes   (3,647,653)   (3,297,215)   (12,156,361)   (3,297,215)
                     
Provision for income taxes (Note 5)   -    -    -    - 
                     
Net loss   (3,647,653)   (3,297,215)   (12,156,361)   (3,297,215)
Net loss attributable to non-controlling interest   (163,952)   -    (164,470)   - 
Net loss attributable to Green Spirit Industries Inc.  $(3,483,701)  $(3,297,215)  $(11,991,891)  $(3,297,215)
                     
Basic loss per share  $(0.08)  $(0.20)  $(0.28)  $(0.39)
                     
Weighted average number of common shares outstanding   43,150,486    16,595,057    42,246,571    8,466,462 

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

5
 

 

GSRX Industries Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2018

(Unaudited)

 

   Shares   Preferred   Common   Additional       Non -     
   Preferred   Common   Stock   Stock   Paid-in   Retained   Controlling     
   Stock   Stock   Amount   Amount   Capital   Deficit   Interest   Total 
                                 
Balance as of December 31, 2017   1,000    40,895,037   $      1   $40,895   $33,349,144   $(26,082,960)  $-   $7,307,080 
                                         
Issuance of shares and warrants for cash   -    155,167    -    155    465,345    -    -    465,500 
                                         
Issuance of shares for cash   -    738,504    -    739    2,584,026    -    -    2,584,765 
                                         
Issuance of shares for services   -    1,905,050    -    1,906    9,748,594    -    -    9,750,500 
                                         
Shares purchased, not issued as of statement date   -    190,000    -    190    474,810    -    -    475,000 
                                         
Shares issued for purchase of patents   -    200,000    -    200    949,800    -    -    950,000 
                                         
Purchase of Spirulinex, LLC joint venture interest   -    -    -    -    (662,721)        662,721    - 
                                         
Capital contributed by minority joint venturers                       -         1,390    1,390 
                                         
Net loss   -    -    -    -    -    (11,991,891)   (164,470)   (12,156,361)
                                         
Balance as of June 30, 2018   1,000    44,083,758   $1   $44,085   $46,908,998   $(38,074,851)  $499,641   $9,377,874 

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

6
 

 

GSRX Industries Inc.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

   For the Six Months Ended June 30, 
   2018   2017 
   (Restated)     
Cash Flow from Operating Activities          
Net loss  $(12,156,361)  $(3,297,215)
Adjustments to Reconcile Net Loss to Net Cash used in Operating Activities          
Issuance of common stock for services   9,750,500    3,190,000 
Depreciation Expense   22,961      
           
Changes in operating assets and liabilities:          
Accounts Receivable   (97,993)   - 
Inventory   (300,166)   - 
Prepaid Expenses   (72,647)   (17,500)
Accounts Payable   (5,826)   4,750 
Accrued Expenses   29,613    - 
Advances Payable   1,522    1,000 
Net cash (used in) provided by operating activities   (2,828,397)   (118,965)
           
Cash Flow from Investing Activities          
Deposit   (272,900)   (150,000)
Fixed Assets   (2,134,241)   - 
Licenses   (309,300)   - 
Patent Application Costs   (572,023)   - 
Construction in Progress   (41,051)   (63,747)
Net cash used in investing activities   (3,329,515)   (213,747)
           
Cash Flow from Financing Activities          
Issuance of common stock   3,525,265    3,300,000 
Cash contributed by minority joint venturers   1,390      
Capitalization of subsidiary for prepaid expenses   -    1,000 
Advances payable, related party   -    150,000 
Advances Payable, related party   -    (150,000)
Net cash provided by financing activities   3,526,655    3,301,000 
Net increase (decrease) in cash   (2,631,257)   2,968,288 
Cash at beginning of period   6,758,018    - 
Cash at end of period  $4,126,761   $2,968,288 
           
Supplemental Disclosures of Cash Flow Information          
Cash paid during the period for:          
Interest  $-   $- 
Income Taxes  $-   $- 
Non-cash: Shares issued for patent application costs  $

950,000

   $- 

 

The accompanying footnotes are an integral part of these consolidated financial statements.

 

7
 

 

GSRX Industries Inc.

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.

 

8
 

 

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 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 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.

 

9
 

 

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.

 

10
 

 

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.

 

11
 

 

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.

 

12
 

 

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.

 

13
 

 

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.

 

14
 

 

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.

 

15
 

 

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.

 

16
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our unaudited financial statements and the notes thereto.

 

Forward-Looking Statements

 

This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Unless the context indicates or suggests otherwise, references to “we,” “our,” “us,” the “Company,” or “Green Spirit” refer to Green Spirit Industries Inc., a Nevada corporation, individually, or as the context requires, collectively with its consolidated subsidiaries. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Available Information

 

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at https://ir.greenspiritrx.com/sec-filings when such reports are available on the SEC’s website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.

 

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Corporate Structure

 

Green Spirit Industries Inc., organized on November 7, 2006 in Nevada, is a holding company with the following subsidiaries:

 

  Project 1493, LLC, a Puerto Rico limited liability company (“1493”);
  Green Spirit Mendocino, LLC, a California limited liability company (“Mendocino”);
  Sunset Connect Oakland, LLC, a California limited liability company (“Sunset”);
  Green Spirit Essentials, LLC, a California limited liability company (“GS Essentials”);
  Spirulinex, LLC, a California limited liability company (“Spirulinex”);
  Point Arena Supply Co., LLC, a California limited liability company (“PA Supply”);
  GSRX SUSPES, LLC., a California limited liability company (“SUSPES”);
  138 Main Street PA, LLC, a California limited liability company (“138 Main”); and
  511 Andalucia, LLC, a Puerto Rico limited liability company (“511”).

 

Our corporate headquarters is located at Building No. 3, P.R. 696, int. Jose Efron Avenue, Dorado, Puerto Rico, 00646 and our telephone number is (214) 808-8649. Our website addresses are as follows: www.greenspiritrx.com, www.spirulinex.com and www.thegreenroomcollective.org. No information on or through websites shall be deemed to be incorporated into this Annual Report on Form 10-K. Our common stock, par value $0.001 per share, is quoted on the OTC Pink Tier of the OTC Markets, Inc. under the symbol “GSRX.”

 

Overview of Business

 

We operate in a rapidly evolving and highly regulated industry that, as has been estimated by some , will exceed $30 billion in revenue by the year 2020. We have been and will continue to be aggressive in executing acquisitions and pursuing other opportunities that we believe will benefit us in the long-term.

 

Through our operating subsidiaries, we operate as a vertically integrated retail, production and cultivation company, with an emphasis on providing the highest quality and unique medical and adult use cannabis products to the regulated cannabis industry.

 

We are in the business of acquiring, developing and operating retail dispensaries, growing facilities, extraction and manufacturing related to the cannabis industry in Puerto Rico and California. In Puerto Rico, all of our medicinal cannabis dispensaries operate under the name “Green Spirit RX” and our dispensary in California, located in Point Arena, Mendocino County, operates under the name “The Green Room”. As of the date of this quarterly report, we have secured leases to commence operations of our new ventures in San Francisco and Oakland. Once we commence operations, we plan to offer a broad selection of medical and adult use products including flowers, concentrates and edibles.

 

Puerto Rico Operations

 

We are currently in various stages of construction of our dispensaries in Puerto Rico. Three dispensaries have been completed and operating; one location will be completed in July 2018 the remaining dispensaries to be completed by the end of 2018. We currently hold pre-qualifications for a dispensary license for these locations, and they will not be fully licensed until construction is completed, and the Department of Health of Puerto Rico (“DHPR”) issues the requisite operating permit for each of the dispensaries.

 

As of the date of this Form 10-Q, we have acquired all of the legal rights, permits, pre-qualified licenses, leasing contracts and assets pertaining to six medical cannabis dispensaries in Puerto Rico. The dispensaries are located in the following locations: (1) Fajardo; (2) Carolina; (3) Dorado; (4) San Juan; (5) Hato Rey; (6) Bayamon; and (7) Isla Verde.

 

During the first quarter of 2018, we completed construction at our first medical cannabis dispensary in Dorado, Puerto Rico and were issued the requisite operating license by the DHPR. On March 28, 2018, we commenced operations under the name “Green Spirit RX.” We completed construction at our dispensaries located in Carolina and Hato Rey and began operations on June 1, 2018 at both dispensaries, after receiving the requisite operating licenses by the DHPR prior to beginning operations. We expect construction to be completed at one of our locations during the third quarter of 2018 and that construction at the remaining locations will be completed during the fourth quarter of 2018. These medical cannabis dispensaries will not be fully licensed until construction is completed, and the DHPR issues the requisite operating permit for each of the dispensaries.

 

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California Operations

 

The Green Room

 

On March 7, 2018, Mendocino entered into an asset purchase agreement (the “Asset Purchase Agreement”) with a third-party seller, pursuant to which Mendocino acquired all of the assets relating to a retail cannabis operation in Point Arena, Mendocino County, California for total cash consideration of $350,000. The purchase closed on April 26, 2018.

 

On March 26, 2018, Mendocino was granted the local permit to operate by the City of Point Arena. On April 2, 2018, Mendocino received its State of California permit to operate its adult use and recreational cannabis dispensary.

 

We also assumed the prior owner’s delivery license, which allows delivery of The Green Room product through both telephone or on-line orders to any county in California that allows such product delivery. The delivery car is permitted to transport up to $3,000 of product at retail price at a time, but may make as many daily deliveries as necessary to fulfill all delivery orders. The car contains GPS and a built in safe for security, and the sales proceeds are returned to the store’s safe after each delivery to avoid having cash in the car.

 

Featuring more than 15 strains grown locally and products only found in this location, many customers have made The Green Room a destination place. Coupled with our current plans in establishing new cultivation and manufacturing operations through our other subsidiaries, we intend to increase product offerings by producing unique product lines and branded items solely for purchase at The Green Room. We believe that this will result in return-customers.

 

Spirulinex

 

On March 3, 2018, we entered into an operating agreement with Solunas Aqua Corp., a California corporation (“Solunas”), relating to the formation of Spirulinex, LLC, a California limited liability company. Spirulinex was formed as a joint venture between Green Spirit and Solunas (the “Joint Venture”) for the purpose of carrying out the manufacturing cannabis and cannabinoid products for distribution in the State of California.

 

On April 13, 2018, Spirulinex entered into a lease agreement for a 4,500 square foot facility located in San Francisco, California. We believe that such facility would provide ample space to manufacture quality products for sale to distributors and retailers throughout California, including to our dispensary in Point Arena

 

At the end of the second quarter, the leased space is currently under construction and will become fully operational in the third quarter of 2018.

 

Sunset

 

On March 26, 2018, we entered into an operating agreement with Sunset Connect SF, Inc. (formerly Happy VA Corp.), a California corporation (“Happy”), relating to the formation of Sunset Connect Oakland, LLC, a California limited liability company (“Sunset”). Sunset was formed as a joint venture between Green Spirit and Happy for the purpose of carrying out the cultivation of cannabis for distribution in the State of California.

 

On May 3, 2018, Sunset entered into a sublease for a 25,000 square foot facility located in Oakland, California. We believe that such facility would provide ample space to grow and cultivate quality product for sale to distributors and retailers in California, including our dispensary in Point Arena.

 

At the end of the second quarter, the leased space is currently under construction and will become fully operational in the third quarter of 2018.

 

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GS Essentials

 

On March 26, 2018, we entered into an operating agreement with Sunset Connect SF, Inc. (formerly Happy VA Corp.), a California corporation (“Happy”), relating to the formation of Green Spirit Essentials, LLC, a California limited liability company (“GS Essentials”). GS Essentials was formed as a joint venture between Green Spirit and Happy for the purpose of carrying out the extraction of cannabis oils for distribution in the State of California. We plan to have GS Essentials sublease space from Spirulinex. As noted above, Spirulinex leased a 4,500 square foot facility in San Francisco, California. We expect that approximately 1,000 square feet will be allocated to GS Essentials’ extraction business.

 

Through GS Essentials, we plan to run a mix of volatile and non-volatile closed loop extractions as well as an ethanol distillation process to allow us to manufacture a broad spectrum of products, including topical applications, cartridges, oils, wax, shatter, crumble and oral for sale in California.

 

Business Model

 

We plan to operate as a service business specializing in the sale of medical cannabis, edibles and paraphernalia, including, oils, lotions, THC pills, vaporizers, rigs, grinders, t-shirts, hats, logo items, and bongs and pipes with vaporizer attachments through our strategically located dispensaries; and operating several cultivation, extraction and manufacturing facilities.

 

In Puerto Rico, we have entered into a long-term supply agreement (the “Supply Agreement”) to purchase our products from one of the largest growers on the island, who operates a state-of-the art facility and currently has over 36 strands available and is able to produce up to 2,000 pounds a week. Pursuant to the terms of the Supply Agreement, the supplier agrees to sell products to us, upon the issuance by the Department of Health of Puerto Rico of the requisite operating permit for each of the dispensaries, at a 20% discount to current wholesale market prices. We anticipate that based on such prices, we will realize gross margins of approximately 75%. However, there can be no assurance that we will realize such margins. The Company has also begun researching available locations to open its own flower growing facility in Puerto Rico in order to develop its new strains not currently found in Puerto Rico. In addition, the Company will continue the vertical chain with its own extraction and manufacturing units.

 

In California, we are currently evaluating three retail dispensaries to purchase and operate. If purchased, we plan to use our cultivation, extraction and manufacturing subsidiaries to furnish the majority of product once we commence operations while also purchasing certain strains of flowers, edibles oils and lotions from local suppliers.

 

Plan of Operations

 

We also intend to continue evaluating retail, extraction and manufacturing opportunities in multiple states and Puerto Rico. During the past nine months, we have performed due diligence on nine facilities, but rejected them due to their business plan or questionable records. In addition to the three dispensaries noted above, we currently have one dispensary in the due diligence phase located in Portland, Oregon and we are reviewing one dispensary in Puerto Rico to determine whether to continue pursuing those opportunities and commence due diligence.

 

We intend to sell and keep inventory of the top 5 selling brands, which will be determined by sales velocity. We intend to use a state-of-art CRM to track our customers, their buying habits and monthly spend. Customer Segments will be categorized by age, occupation and medical condition.

 

Over the next 12 months, we plan to continue identifying, purchasing and operating medical cannabis dispensaries in various states. We expect to operate 5 locations in the next 12 months and 10 locations by the end of 2019. It is anticipated that costs associated with purchasing or constructing the dispensary, licensing, stocking inventory and operating these dispensaries will be approximately $2.5 million. Our current fixed overhead, which includes our ongoing leasing obligations, is approximately $140,000 per month. We anticipate that fixed overhead will increase at such time as the dispensaries begin operations. In addition, we expect that our fixed costs will continue to increase so long as we are successful in our plan of expansion. We anticipate supporting our operations through the proceeds from our prior and future offerings of our securities, from anticipated revenue once the dispensaries become fully operational and, if necessary, through the sale of our securities in order to complete the development of our dispensaries. However, there can be no assurance that we will be successful in raising sufficient revenues necessary to support our operations, or that we will be successful in selling our securities.

 

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We anticipate earning revenue by selling medical cannabis, edibles, pills, creams, patches and oral drops, and paraphernalia such as vaporizers. The average net profit for medical marijuana dispensaries is 20% in the U.S., according to a study conducted by Marijuana Business Daily and the media annual revenue is $1,200,000. We aim to undercut our competition by acquiring our goods at a lower than average cost which we anticipate will allow us to achieve 30% net margins, 50% higher than the industry average.

 

In addition, we will focus on providing the best and most friendly customer service, and provide the highest quality brands and widest variety possible in order to attract repeat business. We expect to realize, although no assurance can be given, approximately 30% net margins on edibles, with 50% net margins on edibles and paraphernalia.

 

Revenue Streams:

 

We expect our primary source of revenue to be from the sale of cannabis and cannabis-related products in our dispensaries. We believe that in order to acquire a significant market share, we will need to increase our advertising and marketing efforts of our products and services. We plan to advertise online and use traditional advertising outlets. We have no specific budget set forth at this time for either form of advertising. Further, we believe that in order to maximize our product sales, we will require additional market research and testing to enable us to be efficient with purchasing and inventory management to determine which products our customers will purchase. We may need to raise additional equity for research and development of our inventory plan. However, there can be no assurance that we will be successful in our advertising and marketing plans, or that we will raise the capital necessary to support the research and development of our inventory plan.

 

We anticipate that revenues from our retail dispensaries will be generated from the following:

 

  medical cannabis, up to 10 strains in each dispensary;
  derivatives (oils, lotions, edibles, THC pills);
  paraphernalia (vaporizers, grinders, rigs, bongs and pipes with vaporizer attachments); and
  clothing (hats, t-shirts, logos).

 

As for our planned extraction, cultivation, and manufacturing operations, we intend to derive revenues from the distribution and sale of our product to dispensaries and other distributors throughout California.

 

Cost Structure:

 

We intend to price our product at below market rates, however we intend to market certain items as “boutique” items, such as gourmet style edibles or exotic strains and clothing and paraphernalia.

 

Limited Operating History

 

There is no historical financial information about us which to base an evaluation of our performance. As of the date of this filing, we have generated minimal revenues from our current operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise in a complicated regulatory environment.

 

CRITICAL ACCOUNTING POLICIES

 

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations.” Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Due to the life cycle stage of our Company every balance sheet account has inherent estimates.

 

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RESULTS OF OPERATIONS

  

The following table summarizes the results of our operations during the three months ended June 30, 2018 and 2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the current 3-month period to the prior six-month period:

 

Line Item  6/30/2018 (unaudited)   6/302017 (unaudited)   Increase (Decrease)  

Percentage

Increase

(Decrease)

 
Revenues   353,430    -    353,430    100%
Cost of Goods Sold   200,357    -    200,357    100%
Operating expenses   3,809,311    3,297,215    512,096   15%
Net loss   (3,647,653)   (3,297,215)   (350,438)   11%
Loss per share of common stock  $(0.08)  $(0.20)  $0.12    40%

 

Three Months Ended June 30, 2018 and June 30, 2017

 

We recorded a net loss of $3,647,653 for the three months ended June 30, 2018.

 

Revenue. Total revenue for the three months ended June 30, 2018 and 2017 was $353,430 and $0, respectively. The increase of $353,430, or 100%, was due to operations of four dispensaries opening in Puerto Rico and Point Arena, California; and revenues from the grow and manufacturing facilities in Oakland and San Francisco, respectively.

 

Cost of Goods Sold. Total cost of revenue for the three months ended June 30, 2018 and 2017 was $200,357 and $0, respectively. The increase of $200,357, or 100%, was due to four dispensaries opening in Puerto Rico and Point Arena, California; and revenues from the grow and manufacturing facilities in Oakland and San Francisco, respectively.

 

Total Operating Expenses Selling, general, administrative and operating expenses for the three months ended June 30, 2018 and 2017 was $3,809,311 and $3,297,215, respectively. The increase of $512,096, or 15%, was primarily due to decrease of stock based compensation paid to officers, directors and consultants for services rendered and an increase to general and administrative expenses.

 

Net Loss. Net Loss for the three months ended June 30, 2018 and 2017 was $3,647,653 and $3,297,215, respectively. The increase of $350,438, or 11%, was primarily due to operations beginning in four retail dispensaries, grow and manufacturing facilities, and the decrease of stock based compensation paid to officers, directors and consultants for services rendered.

 

Six Months Ended June 30, 2018 and June 30, 2017

 

We recorded a net loss of $12,156,361 for the six months ended June 30, 2018.

 

Revenue. Total revenue for the six months ended June 30, 2018 and 2017 was $355,626 and $0, respectively. The increase of $355,626, or 100%, was primarily due to operations beginning in four retail dispensaries, grow and manufacturing facilities.

 

Cost of Goods Sold. Total cost of revenue for the six months ended June 30, 2018 and 2017 was $201,178 and $0, respectively. The increase of $201,178, or 100%, was due to operations beginning in four retail dispensaries, grow and manufacturing facilities.

 

Total Operating Costs. Selling, general, administrative and operating expenses for the six months ended June 30, 2018 and 2017 was $12,319,394 and $3,297,215, respectively. The increase of $9,022,179, or 373%, was primarily due to stock based compensation paid to officers, directors and consultants for services rendered and overhead expenses incurred to operate the business.

 

Net Loss. Net Loss for the six months ended June 30, 2018 and 2017 was $12,156,361 and $3,297,215, respectively. The increase of $8,859,146, or 268%, was primarily due to stock based compensation paid to officers, directors and consultants for services rendered and overhead expenses incurred to operate the business.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Sources of Liquidity

 

As of June 30, 2018, the Company had $4,126,761 cash on hand as compared to $6,758,018 as of December 31, 2017. For the six months ended June 30, 2018, the Company reported loss from operations of $10,033,611 and net cash used in operating activities of $2,828,397.

 

We have financed our operations during the six months through the remaining proceeds from the Company’s July 2017 offering, which resulted in total gross proceeds of $3,300,000. During the first quarter, the Company operated with the proceeds from the Company’s December 2017 offering and February 2018 offering, which resulted in total gross proceeds of $5,000,000 and $697,001, respectively. 

 

In addition, we financed our operations during the six months of 2018 through the proceeds from the Company’s April offering and June 2018 offering, which resulted in total gross proceeds of $2,584,765 and $475,000, respectively.

 

We will continue to raise additional cash during the following twelve months and these needs will coincide with the cash demands anticipated for the implementation of our business plan and remaining current with our Securities and Exchange Commission filings. There is no assurance that we will be able to obtain additional capital as required, or obtain the capital on acceptable terms and conditions.

 

Operating Cash Flows. Net cash used in operating activities for the six months ended June 30, 2018 was $2,828,397, which was due to the net loss from operations, less stock-based compensation, purchase of inventory, payment of prepaid expenses and increases of accounts payable and accrued expenses.

 

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Investing Cash Flows. Net cash used in investing activities for the six months ended June 30, 2018 was $3,329,515, which was due to the purchase of our dispensary located in Point Arena, California, purchase of certain real estate property in San Juan, Puerto Rico, purchase of patents, and construction costs of our dispensaries in Puerto Rico.

  

Financing Cash Flows. Net cash provided by financing activities for the six months ended June 30, 2018 was $3,526,655, which was due to our February, April and June 2018 capital raises.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Material Capital Expenditure Commitments

 

The Company has upcoming capital commitments:

 

Remaining construction of five remaining dispensaries in Puerto Rico  $400,000 
Investment commitment in Spirulinex (joint venture)  $350,000 
Purchase of building in Puerto Rico  $1,000,000 

 

The capital committed is for construction of existing leased units in Puerto Rico, which are currently in different phases of construction. The Company estimates construction be completed by December 31, 2018. However, no assurance can be given. The Company estimates it will require an additional $350,000 in fixed assets and operating capital for Spirulinex. The Company has committed to fund this amount to become 100% operational. In May, 2018 the Company signed an option purchase agreement to acquire a building for a potential dispensary location in Condado, San Juan, Puerto Rico. The Company anticipates to execute the option and subsequently close on the purchase of the building during quarter ended December 31, 2018. However, no assurance can be given that the Company will exercise its option, or that the purchase of the building will be completed. The Company plans to use current funds to complete construction of its dispensary locations in Puerto Rico and for the completing the build-out of Spirulinex. With respect to its option purchase, the Company is currently in discussions with an investor, whereby the investor would purchase the Condado building and the Company would enter into a lease agreement with the investor for use of the building. However, no assurance can be given that this will be consummated. The Company does not expect any material changes in the mix and relative cost of such relative resources.

 

Capital Expenditures Put into Service during the Three Months Ended June 30, 2018

 

During the six month period ended June 30, 2018, the Company began having significant activity and operations in Puerto Rico and California. During the period, the following fixed assets were added to our balance sheet:

 

Real Property Purchase in Puerto Rico*  $1,200,000 
      
Construction costs, equipment and inventory for three dispensaries in Puerto Rico  $478,000 
      
Purchase of Real Property in Point Arena, CA, which is where the Company operates its dispensary  $196,000 
      
Purchase of equipment for corporate office and Point Arena  $67,000 
      
Costs associated with build-out and equipment for Spirulinex  $157,000 

 

*Estimated

 

(1)On May 2, 2018, through its wholly-owned subsidiary, the Company purchased real estate property in San Juan, Puerto Rico consisting of approximately 423 square meters of land with a parking lot for total cash consideration of $350,000, plus closing costs. In addition, the Company purchased real estate property in San Juan Puerto Rico consisting of approximately 525 square meters of land with a building located thereon for total cash consideration of $800,000, plus closing costs. The building is occupied by a tenant operating one of the largest cannabis dispensaries in Puerto Rico.

 

Fixed assets will continue to be purchased and constructed during the third and fourth quarters of 2018 for the existing and new facilities. In that regard, the Company will furnish disclosure of the proper accounting policies in the September 30, 2018 financial statements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures 

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2018. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that our disclosure and controls are not designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; and (3) ineffective controls over period end financial disclosure and reporting processes.

 

Management believes that the material weaknesses set forth in items (2) and (3) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no legal proceedings which are pending or have been threatened against us or any of our officers, directors or control persons of which management is aware.

 

ITEM 1A. RISK FACTORS.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES 

 

June 2018 Private Placement

 

On June 7, 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 Subscription Agreement, the Company offered in a private placement (the “Offering”) common stock, par value $0.001 per share (the “Shares”) at a purchase price of $3.50 per share. In the Offering, the Company issued a total of 738,504 Shares for total gross proceeds of $2,584,764.

 

In connection with the foregoing issuances, the Company relied upon the exemption from securities registration provided by Section 4(a)(2) under the Securities Act for transactions not involving a public offering.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description
     
31.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
101 SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101 LAB   XBRL Extension Labels Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

 

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

  GSRX INDUSTRIES INC.
     

Date: October 25, 2018

By: /s/ Leslie Ball
    Leslie Ball
    Chief Executive Officer

 

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