GSRX INDUSTRIES INC. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

EXCHANGE ACT OF 1934

For the Quarter ended March 31, 2018

Commission File Number: 333-141929

GREEN SPIRIT INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

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.

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 May 21, 2018, the registrant had 41,460,204 shares of common stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

Green Spirit Industries Inc.

Consolidated Balance Sheets

March 31, 2018 and December 31, 2017

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

Green Spirit Industries Inc.

Consolidated Statements of Operations

For the Three Months Ended March 31, 2018 and 2017

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

Green Spirit Industries Inc.

Consolidated Statement of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 2018

(Unaudited)

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

Green Spirit Industries Inc.

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2018 and 2017

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

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

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.

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, 2017 and had no operations since 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.

Sunset Connect Oakland, LLC (“Sunset”) was organized under the laws of the State of California on December 13, 2017 and had no operations since 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 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 Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

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. Mendocino had no operations during the quarter ended March 31, 2018. 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.

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. Upon the closing of the purchase, 138 Main will lease the building to Green Spirit Mendocino.

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”). (Note 6). The Company began operations in one dispensary in Puerto Rico on March 28, 2018 and on April 2, 2018 in Point Arena, California.

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 March 31, 2018 include the accounts of the Company and the following entities, all of which have fiscal year ends of December 31(Note 1):

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 March 31, 2018 the Company had $3,049,000 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.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

Cash held in escrow, in the name of the Company, is held by Sichenzia Ross Ference Kesner (“Sichenzia”). The escrow account was established to hold the deposits from the sale of common stock and hold funds for businesses under letters of intents to purchase. There are no restrictions on the funds held by Sichenzia on the Company’s behalf.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. The new standard did not have a material impact on our consolidated financial position and consolidated results of operations, as this guideline does not change the manner or timing of recognizing revenue on a majority of our revenue transactions.

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 customer.

Other revenues, primarily rents, do not compromise a material amount of the Company’s net sales.

Share based Compensation

Compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the consolidated financial statements and covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. See Note 3.

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 the State of Nevada, and therefore will be taxed at statutory U.S. federal corporate income tax rates.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 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 3).

Recent Accounting Pronouncements

As of March 31, 2018 and through May 21, 2018, there were several new accounting pronouncements issued by the Financial Accounting Standards Board. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or future operating results. The Company will monitor these emerging issues to assess any potential future impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. This standard will be effective for our interim and annual periods beginning January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We are currently evaluating the timing of adoption and the potential impact of this standard on our consolidated financial position, but we do not expect it to have a material impact on our results of operations.

3. Equity

Authorized and Outstanding Capital Stock

The Company has authorized 100,000,000 shares of common stock, par value $0.001, of which 41,460,204 are currently issued and outstanding; an additional 1,277,500 shares were approved 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.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

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 three months ended March 31, 2018:

On January 22, 2018, the Company authorized the issuance of 200,000 shares of common stock at $5.75 to Thomas Gingerich, Chief Financial Officer, for services rendered to the Company.

On January 22, 2018, the Company authorized the issuance of 10,000 shares of common stock at $5.75 to John Grainer for services rendered to the Company.

On March 3, 2018, the Company authorized the issuance of 200,000 shares of common stock at $5.70 to Spirulinex, LLC for the purchase of patents and patent rights.

On March 12, 2018, the Company authorized the issuance of 600,000 shares of common stock at $5.00 to Peach Management, LLC for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 300,000 shares of common stock at $5.00 to Les Ball for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 300,000 shares of common stock at $5.00 to Tom Gingerich for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 30,000 shares of common stock at $5.00 to Harlan Ribnik for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 30,000 shares of common stock at $5.00 to Steve Farkas for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 10,000 shares of common stock at $5.00 to GP Consulting, LLC for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 1,000 shares of common stock at $5.00 to Josh Gottsegan for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 1,000 shares of common stock at $5.00 to Patrick Kliesch for services rendered to the Company.

On March 12, 2018, the Company authorized the issuance of 5,500 shares of common stock at $5.00 to Alexis Colon for services rendered to the Company.

Series A Preferred Stock 

The holder of Series A Preferred Stock shall have full voting rights and shall vote together as a single class with the holders of the Company’s common stock. The holder of Series A Preferred Stock is entitled to fifty-one percent (51%) of the total votes on all matters brought before shareholders of the Company, regardless of the actual number of shares of Series A Preferred Stock then outstanding. In addition, the Company is prohibited from issuing any other class of preferred stock without first obtaining the prior approval of the holders of Series A Preferred Stock. 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 March 31, 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.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

Board of Directors

On February 12, 2018, the Board increased the size of the Board by two (2) members and to appoint the following individuals to serve as directors of the Corporation, Harlan R. Ribnik, MD and Steven Farkas.

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.

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.

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.

4. Income Taxes

Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

5. 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 March 31, 2018, the Company has paid $455,800 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 May 31, 2018.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

6. 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 quarter ended March 31, 2018, the CEO and CFO were paid $65,000 and $47,500, respectively.

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 quarter ended March 31, 2018, Peach was paid $65,000.

7. 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, par value $0.001 per share; 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.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

8. Commitments and Contingencies

Term Sheet – Mythic Cuts, Inc.

On October 27, 2017, the Company entered into a Term Sheet with Mythic Cuts, Inc. (“Mythic”) to form a limited liability company (“LLC”) for the purpose of operating within the cannabis industry. The LLC will be named Mythic Cuts Oakland, LLC (“Mythic Oakland”), which the Company and Mythic intend to operate as a cannabis cloning company. It is contemplated that Mythic Oakland will enter into a lease or sub-lease agreement with the Company in Oakland, California. The Company will own 51% of the Membership Interests for a purchase price of $1,600,000. Closing was be subject to satisfactory completion by GSRX of due diligence and upon the delivery of certain corporate and financial information reasonably requested by GSRX from Mythic.

As of February 3, 2018, the Company determined not to proceed with the Mythic transaction.

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 February 27, 2018, Project 1493, LLC remitted $50,000 in the form of an option to purchase a building located at 51 McLeary Street in San Juan, 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 cost of the building was placed in escrow as of March 31, 2018 in anticipation of the purchase, which closed on May 2, 2018. The Company will continue to lease the property to the current tenant, a medical cannabis dispensary under the current lease which expires January 31, 2021.

Bayamon Lease

On March 14, 2018, Project 1493, LLC entered into an operating lease for the building located at A-15 Acacia Street, Avenida Lomas Verdes, Bayomon, Puerto Rico for five years beginning March 12, 2018 and ending March 11, 2023; with an initial term of ninety days to obtain all of the permits required to operate a medical cannabis dispensary. The initial three months lease obligation will be $2,099 per month and $3,000 for the next nine months. Subsequently, the monthly lease obligation will increase $100 per month for the remaining four years. The lease is triple net, as all utilities, insurance and taxes will be paid by Project 1493.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

138 Main Street PA, LLC and lease

On March 19, 2018, the Company organized 138 Main Street PA, LLC (“138”) to hold certain real property, located at 138 Main Street, Point Arena, California. On March 7, 2018 the Company entered into an agreement to purchase the building at 138 Main Street, Point Arena, California. On March 28, 2018 the Company deposited $19,500 into escrow per the requirements of the contract to purchase the building. The Company entered into a sixty day lease until the purchase transaction can be completed.

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 March 31, 2018 and May 21, 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.

9. Subsequent Events

Purchase of The Green Room

On March 7, 2018, the Company, through its wholly-owned subsidiary, GS Mendocino, entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Coastal Patient Network d/b/a The Green Room Wellness Center (the “Seller”), pursuant to which GS Mendocino will acquire all of the assets relating to a retail cannabis business in Point Arena, Mendocino County, California (the “Retail Business”) for total cash consideration of $350,000 (the “Purchase Price”), subject to certain closing conditions. Pursuant to the Asset Purchase Agreement, GS Mendocino will purchase certain assets from the Seller, effective upon satisfaction of certain closing conditions, cash and cash equivalents, equipment, inventory, supplies, receivables, trade names, and certain intangible assets of the business. GS Mendocino will not acquire certain intangible assets nor will it assume any of the Seller’s liabilities. The Asset Purchase Agreement contains customary representations and considerations of each of the parties. The final installment payment for the purchase was paid on April 26, 2018.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

The dispensary became fully operational on April 2, 2018.

In connection with the Asset Purchase Agreement, on March 7, 2018, GS Mendocino entered into a short-term lease with the landlord of the building where the Retail Business operates. The lease agreement provides for a term of sixty (60) days, which may be extended for up to an additional thirty (30) days, during which time GS Mendocino and the landlord will negotiate more definitive terms of the arrangement. In addition, GS Mendocino will make lease payments in the amount of $1,200 per month.

Coinciding with the lease, the Company through its wholly-owned subsidiary 138 Main Street PA, LLC, entered into a contract on March 1, 2018 to purchase the building for $195,000. The Green Room currently occupies the building. The Company transferred $19,500 into an escrow account on execution of the contract, and will pay the remaining $175,500 at the closing date, which is to be determined. (Note 7).

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.

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”) at a purchase price of $3.50 per share. The Offering will terminate on May 21, 2018.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

570 Bryant Street, San Francisco, CA lease

On April 13, 2018, Spirulinex, LLC entered into an operating lease for the 4,500 square foot building located at 570 Bryant Street, San Francisco, CA for five years beginning May 1, 2018 and ending April 30, 2023. Upon execution of the lease, Spirulinex will pay $110,000 for May, 2018 rent and $95,000 security deposit. During the 2-4^th years of the lease, a monthly rent amount of the security deposit will be applied against the first month of rent for that year. The initial 12 months lease obligation will be $15,000 per month and increasing $1,000 per month for the subsequent four years. Spirulinex has an option to renew the lease for an additional five years at fair market value. The lease is triple net, as all utilities, insurance and taxes will be paid by Spirulinex.

Non – Executive Board Advisory Consultant Appointments

On April 17, 2018, the Board of Directors (the “Board”) of the Company appointed Luis F. Toledo-Bayouth and Juan Bauzá Salas as non-executive board advisory consultants. In this capacity, Messrs. Toledo-Bayouth and Salas will each provide support and strategic advice to the Company in identifying new business opportunities and expanding its operations in Puerto Rico.

As consideration for Mr. Toledo-Bayouth’s services, the Company has agreed to issue him 5,000 restricted shares of common stock, par value $0.001 per share, payable quarterly, subject to his continuous service as a board advisory consultant. In consideration for Mr. Salas’ services, the Company has agreed to pay him (i) $3,000 cash fee payable monthly, commencing immediately; and (ii) 5,000 restricted shares of common stock, par value $0.001 per share, of the Corporation, payable quarterly, subject to his continuous service as a board advisory consultant.

685 85^th Street, Oakland, California Lease

On May 3, 2018, The Company’s majority-owned subsidiary, Sunset Connect Oakland, LLC (“Sunset Connect”) entered into a sublease agreement (the “Sublease”), effective May 1, 2018, with CPlex, LLC, a California limited liability company (“CPLEX), pursuant to which Sunset Connect will sublease from CPLEX approximately 25,000 usable square feet of space in the building located at 685 85^th Avenue, Oakland, California (the “Sublease Premises”). Sunset intends to occupy the Sublease Premises for the purpose of cultivating and manufacturing cannabis and cannabis-related products.

The Sublease provides for a term of five (5) years (the “Term”), commencing on May 1, 2018 (the “Commencement Date”) and ending on the fifth anniversary of the Commencement Date (the “Expiration Date”), unless sooner terminated in accordance with the terms of the Sublease. On the Expiration Date, Sunset Connect shall have the option to renew the Sublease for an additional term of two (2) years and eleven (11) months, with such additional term expiring on March 30, 2026.

Green Spirit Industries Inc.

Notes to Consolidated Financial Statements

March 31, 2018

Pursuant to the Sublease, Sunset Connect will pay CPLEX an initial monthly base rent of approximately $56,250, or an annual base rent of approximately $675,000, which will increase annually by approximately four percent (4.0%), plus additional monthly fees to cover Sunset Connect’s share of certain operating expenses relating to the Sublease Premises, including utilities, property taxes, insurance, maintenance and security.

In connection with the execution of the Sublease, Sunset Connect delivered to CPLEX a cash security deposit in the amount of $112,500 to be held as security for the full and faithful performance by Sunset Connect of the terms, covenants and conditions of the Sublease. In addition, Sunset Connect paid an advance of the first three (3) months of rent in the amount of $168,750.

The Sublease contains customary default provisions. If Sunset Connect fails to cure a breach of any of its obligations within specified time periods, the Sublease can be terminated. Sunset Connect may not assign or further sublease all or any part of the Sublease Premises.

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.

Corporate Structure

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

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. We anticipate that construction at five of our medicinal cannabis dispensaries in Puerto Rico will be complete by the second quarter of 2018, with 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.” As of the date of this filing, we completed construction at our dispensaries located in Carolina and Hato Rey. We expect construction to be completed at three of our locations during the second quarter of 2018 and that construction at the last location will be completed during the fourth quarter of 2018. These six 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.

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 business in Point Arena, Mendocino County, California for total cash consideration of $350,000. The acquisition 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

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.

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 two 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 six months, we have performed due diligence on eight facilities, but rejected them due to their business plan or questionable records. In addition to the two dispensaries noted above, we currently have one dispensary in the due diligence phase located in Oregon, and we are reviewing four dispensaries 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.

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:

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.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2018 and March 31, 2017

The following table summarizes the results of our operations during the three months ended March 31, 2018 and 2017, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the current 3-month period to the prior 3-month period:

We recorded a net loss of $98,508,708 for the three months ended March 31, 2018.

Revenue. Total revenue for the three months ended March 31, 2018 and 2017 was $2,196 and $0, respectively. The increase of $2,196, or 100%, was primarily due to operations from the opening of the dispensary in Dorado, Puerto Rico.

Cost of Goods Sold. Total cost of revenue for the three months ended March 31, 2018 and 2017 was $821 and $0, respectively. The increase of $821, or 100%, was due to expenses relating to commencing operations of the dispensary in Dorado, Puerto Rico.

General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 2018 and 2017 was $8,510,083 and $0, respectively. The increase of $8,510,083, or 100%, was primarily due to overhead expenses of the Company and stock-based compensation paid to officers, directors and consultants for services rendered.

Net Loss. Loss from operations for the three months ended March 31, 2018 and 2017 was $8,508,708 and $0, respectively. The increase of $8,508,708, or 100%, was primarily due to stock-based compensation paid to officers, directors and consultants for services rendered.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

As of March 31, 2018, the Company had $3,825,395 cash on hand as compared to $6,758,018 as of December 31, 2017. For the three months ended March 31, 2018, the Company reported loss from operations of $8,508,708 and net cash used in operating activities of $1,136,994. The Company continues to experience liquidity constraints due to the continuing losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

We have financed our operations during the quarter through the remaining proceeds from the Company’s July 2017 offering, which resulted in total gross proceeds of $3,300,000. In addition, we financed our operations during the quarter through 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.

We will continue to need additional cash during the following twelve months and these needs will coincide with the cash demands resulting from implementing 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 three months ended March 31, 2018 was $1,136,994, which was due to the net loss from operations, less stock-based compensation, purchase of inventory, advances to our subsidiaries and reduction in accounts payable.

Investing Cash Flows. Net cash used in investing activities for the three months ended March 31, 2018 was $2,262,519, which was due to the purchase of our dispensary located in Point Arena, California, escrow payment relating to our 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 three months ended March 31, 2018 was $466,890, which was due to our February 2018 capital raise.

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.

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 March 31, 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.

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

February 2018 Private Placement

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 232,334 units (each, a “Unit” and collectively, the “Units”) at a purchase price of $3.00 per Unit. The Offering resulted in $697,001 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.

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

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.