GSRX INDUSTRIES INC. - Annual Report: 2019 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 333-141929

GSRX INDUSTRIES INC.

(Exact name of registrant as specified in charter)

Building No. 3, P.R. 606, int. Jose Efron Ave.

Dorado, Puerto Rico 00646

(Address of principal executive offices) (Zip Code)

Registrant’s telephone Number: (214) 808-8649

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[  ] Yes [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

[X] Yes [  ] No

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) [X] Yes [  ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

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 (Check one):

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 Exchange Act). [  ] Yes [X] No

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed fiscal year, December 31, 2019, was $1,635,986.

As of June 11, 2020 there are 81,799,286 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

TABLE OF CONTENTS

PART I

This Form 10-K contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Properties,” as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

ITEM 1. BUSINESS.

Unless the context indicates or suggests otherwise, references to “we,” “our,” “us,” the “Company,” or “GSRX” refer to GSRX Industries Inc., a Nevada corporation, individually, or as the context requires, collectively with its consolidated subsidiaries.

Organizational History

GSRX Industries Inc. was incorporated in Nevada under the name “Cyberspace Vita, Inc.” on November 7, 2006. The Company’s original business plan was to create and conduct an online business for the sale of vitamins and supplements; however, Cyberspace never generated any meaningful revenues. On May 5, 2008, Cyberspace discontinued its prior business and changed its business plan.

Following discontinuation of its initial business plan, the Company’s business plan was to seek, investigate, and, if warranted, acquire one or more properties or businesses, and to pursue other related activities intended to enhance stockholder value. The acquisition of a business opportunity may be made by purchase, merger, exchange of stock, or otherwise, and may encompass assets or a business entity, such as a corporation, joint venture, or partnership.

On May 11, 2017, the Company entered into an Exchange Agreement with Project 1493, and the sole member of 1493, pursuant to which the member transferred all of the outstanding membership interests of 1493 to the Company in exchange for 16,690,912 of its restricted shares of common stock and warrants to purchase up to 3,000,000 shares of common stock at an exercise price of $0.50 per share.

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. The Company, together with its wholly-owned subsidiary, is in the business of acquiring, developing and operating medical cannabis dispensaries in Puerto Rico.

On May 12, 2017, the Company changed its name from “Cyberspace Vita, Inc.” to “Green Spirit Industries Inc.” On June 22, 2018, the Company changed its name from “Green Spirit Industries Inc.” to “GSRX Industries Inc.”

On March 30, 2019 the Company entered into a Share Exchange Agreement (the “Share Agreement”) and an Ancillary Rights Agreement (the “Ancillary Agreement”) with Chemesis International Inc., a British Columbian Corporation (“CADMF”). In the Share Agreement, the Company received 7,291,874 restricted shares of common stock of CADMF.

Effective August 28, 2019, eight shareholders of the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with CADMF, pursuant to which the shareholders exchanged 42,534,454 common shares and 1,000 shares of preferred stock of the Company for 14,880,705 shares of CADMF. As a result and as of the date hereof, Chemesis owns 54,151,035 common shares or 66.20% of the Company.

On May 7, 2020 the Company entered into an option agreement (the “Option Agreement”) with a royalty right with Natural Ventures PR, LLC (“NVPR”), 80% owned NVPR to acquire 100% of the issued and outstanding membership interest of its wholly-owned subsidiary, Project 1493, LLC (the “1493 Membership Interest”). Project 1493, LLC holds all of operating and issued Puerto Rican dispensaries and cannabis licenses.

The right of NVPR to exercise the option and acquire the 1493 Membership Interest is conditional upon NVPR performing, or causing to be performed by its parent company Chemesis, the following milestones (the “Milestones”) within the applicable timelines set forth below:

Immediately upon NVPR completing, or causing Chemesis to complete, as the case may be, each of the aforementioned Milestones within the respective timelines set out above, NVPR will be deemed to have acquired all of the 1493 Membership Interest (“Exercise of the Option”).

Upon Exercise of the Option, NVPR and the Company shall enter into a royalty agreement (the “Royalty Agreement”), the form of which was negotiated concurrent with the Option Agreement, pursuant to which NVPR shall grant to the Company a revenues interest royalty and the right to receive payments in respect thereof equal to five percent (5%) of the revenues realized by NVPR from the operations of Project 1493, LLC in Puerto Rico for a period of five years.

Prior to the Exercise of the Option, either NVPR or the Company may terminate the Option Agreement upon delivering notice to the other of its intention to terminate. If GSRX elects to terminate, then NVPR will not acquire the 1493 Membership Interest and the Company must, as a condition precedent to such election: (i) return all cash payments it received under the terms of the Option Agreement; (ii) return the Chemesis Shares (if any) it received under the terms of the Option Agreement; and (iii) pay to Chemesis a break fee of US$100,000. If NVPR elects to terminate, then NVPR will not acquire the 1493 Membership Interest and GSRX will be entitled to keep the Initial Cash Payment. Subject to termination of the Option Agreement as described above, the term of the Option is 15 months after the Effective Date.

In conjunction with the Option Agreement, on May 7, 2020, the Company entered into a security, pledge and assignment agreement (the “Security Agreement”) with NVPR which assigns and pledges to NVPR a security interest in all of the Company’s right, title and interest in and to 100% of the issued and outstanding membership interest of Project 1493, LLC. 

Corporate Structure

GSRX is a holding company with the following subsidiaries:

Effective June 22, 2018, we changed our name to GSRX Industries Inc. Our corporate headquarters is located at Building No. 3, P.R. 606, int. Jose Efron Ave. Dorado, Puerto Rico 00646 and our telephone number is (214) 808-8649. Our website addresses are as follows: www.greenspiritrx.com, www.spirulinex.com, getpureandnatural.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. On October 1, 2019, our common stock, par value $0.001 per share (the “Common Stock”), was moved from the OTCQB to 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 will exceed $30 billion in revenue by the year 2025 as estimated by New Frontier Data, a cannabis researcher.

We are in the business of operating retail dispensaries 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.”

Puerto Rico Operations

We are in the business of operating retail dispensaries related to the medical cannabis industry in Puerto Rico and California. As of the date of this Form 10-K, we have acquired all of the legal rights, permits, pre-qualified licenses, leasing contracts and assets pertaining to eight medical cannabis dispensaries in Puerto Rico, five of which are in operation.

As of the date of this report, the Isla Verde location has passed the final inspection but we are waiting for the Cannabis Board to grant the license to open; construction has been completed on the Bayamón and Guaynabo locations and we are waiting for the permits of use to apply for final inspection from the Cannabis Board.

On October 11, 2019 the Company sold real estate in Puerto Rico, resulting in net proceeds of $920,402. The proceeds were sent directly to its parent, Chemesis in exchange for a note due January 31, 2020, bearing an interest of at Prime plus 1.0% per month. As of December 31, 2019 Chemesis repaid $300,000 of the advance. Through May 6, 2020 Chemesis repaid an additional $350,000 on the loan. On May 6, 2020 the Company amended the loan agreement with Chemesis to repay $100,000 of the loan by May 31, 2020 and the balance paid in full by November 6, 2020.

As of the date of this report, Chemesis did not make the loan payment of $100,000 due on May 30, 2020.

On May 7, 2020 the Company entered into an option agreement (the “Option Agreement”) with a royalty right with Natural Ventures PR, LLC (“NVPR”), 80% owned NVPR to acquire 100% of the issued and outstanding membership interest of its wholly-owned subsidiary, Project 1493, LLC (the “1493 Membership Interest”). Project 1493, LLC holds all of operating and issued Puerto Rican dispensaries and cannabis licenses.

The right of NVPR to exercise the option and acquire the 1493 Membership Interest is conditional upon NVPR performing, or causing to be performed by its parent company Chemesis, the following milestones (the “Milestones”) within the applicable timelines set forth below:

Immediately upon NVPR completing, or causing Chemesis to complete, as the case may be, each of the aforementioned Milestones within the respective timelines set out above, NVPR will be deemed to have acquired all of the 1493 Membership Interest (“Exercise of the Option”).

Upon Exercise of the Option, NVPR and the Company shall enter into a royalty agreement (the “Royalty Agreement”), the form of which was negotiated concurrent with the Option Agreement, pursuant to which NVPR shall grant to the Company a revenues interest royalty and the right to receive payments in respect thereof equal to five percent (5%) of the revenues realized by NVPR from the operations of Project 1493, LLC in Puerto Rico for a period of five years.

Prior to the Exercise of the Option, either NVPR or the Company may terminate the Option Agreement upon delivering notice to the other of its intention to terminate. If GSRX elects to terminate, then NVPR will not acquire the 1493 Membership Interest and the Company must, as a condition precedent to such election: (i) return all cash payments it received under the terms of the Option Agreement; (ii) return the Chemesis Shares (if any) it received under the terms of the Option Agreement; and (iii) pay to Chemesis a break fee of US$100,000. If NVPR elects to terminate, then NVPR will not acquire the 1493 Membership Interest and GSRX will be entitled to keep the Initial Cash Payment. Subject to termination of the Option Agreement as described above, the term of the Option is 15 months after the Effective Date.

In conjunction with the Option Agreement, on May 7, 2020, the Company entered into a security, pledge and assignment agreement (the “Security Agreement”) with NVPR which assigns and pledges to NVPR a security interest in all of the Company’s right, title and interest in and to 100% of the issued and outstanding membership interest of Project 1493, LLC. 

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.

On March 26, 2018, Mendocino was granted the local permit to operate by the City of Point Arena. On May 15, 2020, Mendocino received its State of California permit to operate its adult use and recreational cannabis dispensary.

As of the date hereof, the retail dispensary was available for adult use sales in addition to medical cannabis. 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.

We also assumed the prior owner’s delivery license, which allows delivery of The Green Room product through telephone or on-line orders to any county in California that allows such product delivery. The delivery car is allowed to carry $3,000 of product at retail price, but may make as many daily deliveries as necessary. Once the product is delivered, the driver must reload to continue deliveries. 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.

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 limited liability company between GSRX and Solunas (the “Spirulinex”) for the purpose of carrying out the manufacturing of cannabis and cannabinoid products for distribution in the State of California. As of the date of this report, Spirulinex had not received the requisite license to operate.

On April 13, 2018, Spirulinex entered into a lease agreement for a 4,500 square foot facility located in San Francisco, California (the “Spirulinex Facility”). The Company abandoned the lease, and was assumed by the minority partner.

As of March 7, 2019, the Company terminated funding the operations of Spirulinex. As of the date of this report, the Company is in process of dissolving the LLC.

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 limited liability company between GSRX and Happy for the purpose of carrying out the growing of cannabis for distribution in the State of California.

As of April 16, 2019, the Company terminated funding the operations of Sunset. As of the date of this report, the Company is in process of dissolving the LLC.

GS Essentials

On March 26, 2019, 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 limited liability company between GSRX and Happy for the purpose of carrying out the extraction of cannabis oils for distribution in the State of California.

As of April 16, 2019, the Company terminated funding the operations of GS Essentials. As of the date of this report, the Company is in process of dissolving the LLC.

Point Arena Distribution and Manufacturing

On February 27, 2019, Point Arena Manufacturing, LLC (“PAM”) and Point Arena Distribution, LLC (“PAD”) entered into an operating lease for a 600 square foot building at 165 Main Street, Point Arena, California for five years beginning March 1, 2019 and ending February 28, 2024, for the purpose of manufacturing and distributing cannabis products. The lease has one (1) five-year option. As of the date of this report, the building is still under construction.

PAM is expected to manufacturing cannabis oil through the Type-6, non-volatile manufacturing process. The oil will then be self-distributed, via PAD, to licensees to sell as-is, or infused with other approved products, such as food and ointments.

PAD is expected to able to purchase and sell the cannabis products manufactured by PAM, arrange for testing of the products and conduct quality assurance review of packaging and labeling. PAD may also arrange for transportation of the products between licensees. PAD will be the sole distributor for PAM.

CBD Operation

Pure and Natural LLC

On October 8, 2018, the Company formed Pure and Natural LLC (“PaN”) as a wholly-owned subsidiary of the Company, for the purpose of selling its CBD products on line through its website “getpureandnatural.com.”

PaN has entered into four strategic agreements to assist in promoting and bringing brand awareness to the Pure and Natural name. PaN has entered into the following agreements: (i) on February 20, 2019 PaN and BYB Extreme Fighting Series, LLC (“BYB”) entered into a sponsorship agreement (“Agreement”) to sponsor three events of the BYB EXTREME Series. PaN will be the “Title Sponsor” and the events will be promoted as the exclusive sponsor for “BYB Brawl For It All Presented by GetPureAndNatural.com”, which includes having “GetPureAndNatural.com” on events and broadcasts, the triangle cage and mat, ring cards, advertisements, BYB website, social media posts and will be the official CBD Products of DADA 5000 and BYB Fighting Series; (ii) on March 5, 2019 PaN and JCD3 Enterprises, Inc. (“JCD3”) entered into a sponsorship agreement to sponsor a Musical Artist’s (“Artist”) 2019 musical tour. The sponsorship terminated December 31, 2019. For consideration given, the Artist will make social media posts, mention PaN in official “YouTube” videos, displays at concerts, make three (3) appearances at the PaN store in Nashville and PaN will have exclusive sponsorship rights for Artist and Artist’s tour dates with respect to its category of products and services; (iii) on March 4, 2019, PaN and Buzznog, LLC entered into a Preferred Partner and Advertising Agreement allowing PaN to sell cannibidiol products on Buzznog’s website, mobile applications and platforms. PaN will pay Buzznog 20% of the gross profit margin on all products sold using Buzznog’s sites. The agreement has a term of three years from the moment of its coming into effect; and (iv) on February 27, 2019 PaN and Matt Sorum (“Sorum”) entered into an Endorsement Licensing and Co-Branding Agreement, to develop, market, promote and sell a unique Matt Sorum Product Line for dietary supplements derived from hemp containing 0% THC. The Agreement is for an initial three year term, beginning February 27, 2019 and ending February 26, 2022. The Agreement was terminated by Sorum on January 24, 2020.

Business Model

Medical Cannabis Products:

We 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 licensed dispensaries.

In Puerto Rico, we had 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, currently has multiple strands of cannabis flower available and is able to produce up to 200 pounds a month. Pursuant to the terms of the Supply Agreement, the supplier agreed 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 up to a 20% discount to current wholesale market prices.

In California, we are currently operating one (1) dispensary in Point Arena. On March 6, 2019 we signed a lease to operate a dispensary in Palm Springs, which is in the planning and permit phase; we received local permits for a manufacturing facility and distribution business (from growers and manufacturers to retailers) in Point Arena and currently in the planning and state permit phases of such businesses. Mendocino also holds a delivery license, which enables the dispensary to pick up and deliver products in any county in California which allows a delivery service. Similar to platforms such as “Uber Eats” or “Grub Hub”, a customer may place an order by telephone or the internet, and a driver will deliver the requested product to the customer’s doorstep. The driver may carry a maximum of $3,000 of product (retail value).

1493 holds five licenses and (3) pre-qualified locations in Puerto Rico, three of which are in various phases of development and construction. Currently, we have one (1) dispensary in operation in California and five (5) in Puerto Rico.

Our current fixed overhead, which includes our ongoing leasing obligations, is approximately $85,000 per month. We anticipate that fixed overhead will increase at such time as more 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 anticipated revenue once the dispensaries and other operations 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 median annual revenue is $1,200,000.

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.

CBD Products:

The Company’s CBD products are made from “hemp,” which is defined as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

The Company intends to produce and distribute its CBD products in various delivery forms including gels, tinctures, balms, pain creams, face masks, vape pens and energy packs. The Company’s CBD operations will be completed through Pure and Natural, LLC (“PaN”) via wholesale and online sales via its website “getpureandnatural.com.”

On December 17, 2018, PaN entered into an operating lease for a 1,725 square foot CBD retail store at 3100 RR 620 South, Suite 200, Lakeway, Texas for eighty six (86) months beginning May 18, 2019 and ending July 18, 2026. The lease has one five-year option.

On December 19, 2018, Pure and Natural, LLC entered into an operating lease for a kiosk in Governor’s Square Mall, in Clarksville, Tennessee for fifteen (15) months beginning February 1, 2019 and ending April 30, 2020. Currently, the kiosk is on a month to month lease. We began operations at the kiosk on February 9, 2019.

On February 8, 2018, PaN entered into an operating lease for a 2,525 square foot CBD retail store at 2306 West End Avenue, Nashville, Tennessee for five (5) years beginning February 1, 2019 and ending January 31, 2024. The lease has one five-year option.

Revenue Streams:

We anticipate that revenues will be generated from the following:

We expect to realize, although no assurance can be given, approximately 42-58% gross margins on THC edibles, approximately 40-45% gross margins on CBD edibles, 40-51% gross margins on cannabis flower and paraphernalia and a range of approximately 20% to 60% net margins on CBD products depending on the particular product sold and the distribution method in which it is sold.

Cost Structure:

We price our cannabis and CBD products at competitive market rates.

Marketing

Our marketing and sales strategy will be aimed at generating long-term, repeat customers, as well as attracting tourists who visit the dispensaries who wish to purchase cannabis and cannabis products. In order to generate repeat customers, we intend to provide the highest quality medical cannabis, at the lowest possible cost to ensure we build a loyal customer base. Further, we have built what we believe are aesthetically pleasing dispensaries and have hired and trained all of our employees to provide excellent customer service.

We intend to leverage the Internet and social media platforms, including, Instagram, Facebook, Twitter, YouTube, Google+, LinkedIn, the Yellow Pages online, texts (currently we send 175,000 texts per month), Weedmaps and over 50 cannabis websites we have identified. Our marketing will focus on the wide variety of our cannabis products and their high quality.

We also intend to utilize blogs, micro-ads, testimonial interviews, articles and deploy this media across all social media channels and websites accessed by our customer targets.

The Cannabis Industry

Market Opportunity

The legal cannabis markets in the United States are expanding rapidly. As of the date of this filing, thirty-three (33) states, Washington D.C. and the territories of Guam and Puerto Rico have legalized the use of cannabis for medicinal purposes. Additionally, ten (10) states, Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington and Washington D.C. have legalized cannabis for adult recreational use.

We believe the cannabis market will continue to rapidly expand as existing states broaden the definition of the approved uses for cannabis (i.e. from medicinal to recreational use) and additional states legalize cannabis for at least some other purposes. Despite the fact that the Federal Controlled Substances Act makes the use and possession of marijuana illegal on a national level, recent guidance from the previous administration under President Obama suggested that it will continue to tolerate legalization at the state level, especially when backed by strong and effective regulation. On August 29, 2013, United States Deputy Attorney General James Cole issued the “Cole Memo” to United States Attorneys guiding them to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under state law, so long as certain requirements are met. On December 11, 2014, the DOJ issued another memorandum about its position and enforcement protocol with regard to Indian Country, stating that the Eight Priorities in the Cole Memo would guide the United States Attorneys’ cannabis enforcement efforts in Indian Country. On December 16, 2014, as a component of the federal spending bill, the Obama administration enacted regulations that prohibit the DOJ from using funds to prosecute state-based legal medical cannabis programs. We believe it is significant that in 2016, the Congressional Spending Bill specifically prevented the Justice Department from spending money to enforce the federal ban on growing or selling cannabis in states where cannabis has been approved.

More recently under the Trump administration, on January 4, 2019, the DOJ suspended the Cole Memo and replaced it with a new Memorandum titled with the subject “Marijuana Enforcement” from then Attorney General Jeff Sessions (the “Sessions Memo”) which provides that each U.S. Attorney has the discretion to determine which types of cannabis-related cases should be federally prosecuted, thus ending the broad safe harbor provided under the Cole Memo.

We continue to follow and monitor the actions and statements of the Trump administration, the DOJ and Congress’ positions on federal law and cannabis policy. As the possession and use of cannabis is illegal under the CSA, we could be deemed to be aiding and abetting illegal activities through the equipment we intend to sell in the U.S. and directly violating federal law by producing Cannabis under State law. Under federal law, and more specifically the CSA, the possession, use, cultivation, and transfer of cannabis is illegal. Our equipment could be used by persons or entities engaged in the business of possession, use, cultivation, and/or transfer of cannabis.

As a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, could seek to bring an action or actions against us, including, but not limited to, a claim of aiding and abetting another’s criminal activities or directly violating the CSA. The federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal” (18 U.S.C. §2(a).) Enforcement of federal law regarding cannabis would likely result in the Company being unable to proceed with our business plans, could expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes in banking, insurance or other business services may also affect our ability to operate our business.

Target Markets

We believe that not since the repeal of Prohibition in 1933, has a consumer product business opportunity of this magnitude been created simply by changes in the law. According to an IBISWorld report, the cannabis industry is expected to achieve rapid growth over the next five years. We believe the industry will continue to benefit from increasingly favorable attitudes towards medical cannabis-based treatments and applications as acceptance and legitimacy of cannabis continues to grow.

Our target markets are those where states or U.S. territories have legalized the production and use of cannabis, such as Puerto Rico and California, and to add new markets in states that have recently legalized cannabis use.

Most recently, Vermont legislatively legalized and voters in Michigan approved a ballot to legalize cannabis for adult recreational use, bringing the total number of states with legalized recreational cannabis use to ten, in addition to the District of Columbia.

As of the date of this filing, thirty-three (33) states, Washington D.C. and the territories of Guam and Puerto Rico have legalized the use of cannabis for medicinal purposes. Additionally, ten (10) states, Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington and Washington D.C. have legalized cannabis for adult recreational use. While it is difficult to estimate the amount of time it would take for a state to establish regulations relating to the sale of cannabis, or for those businesses engaged in this activity to begin generating revenue from operations, we anticipate, but no assurance can be given, that for new states legalizing the medical use of cannabis, revenues will begin to be realized beginning in 2019.

Continued development of the regulated cannabis industry depends on continued legislative authorization at the state level. Progress, while encouraging, is not assured and any number of factors could slow or halt progress in the cannabis industry.

Puerto Rico – Market Opportunity

Puerto Rico benefits from a large and growing tourism industry. Puerto Rico was recently chosen by The New York Times as its number one place to visit in 2019. Importantly, patients who hold a license to buy medical marijuana in the 33 states where it is now legal may use their patient license to purchase marijuana at Puerto Rico’s dispensaries.

The Academic Sciences of Puerto Rico (ASPR), in collaboration with the Cannabis Doctors of Puerto Rico, conducted a certification program for doctors to obtain the Health Department (HD) license and recommended medicinal cannabis to nearly 200,000 patients. Accordingly, and considering that Puerto Rico is an island with a population of 3.5 million, the Company believes that there is a potential market of 200,000 patients, or 6% of Puerto Rico’s current population. In addition, there is a potentially very large market opportunity presented by the burgeoning tourist industry. If only 2% of the tourists visiting Puerto Rico purchase medical marijuana, that would add another 200,000 patients on an annual basis or an average of approximately 18,000 patients per month.

We believe our initial locations present significant revenue potential and growth opportunity. We have strategically picked our initial locations based on the following factors: population density, disposable income, and proximity to commercial and districts tourist destinations.

California – Market Opportunity

California is the most populous state in the United States with a population of 39.3 million residents. California’s $2.67 trillion economy is larger than any other state. If it were a country, it would be the fifth largest economy in the world. In 2016, Proposition 64 was passed allowing the use of medicinal cannabis, and effective January 1, 2019, it became legal for adult recreational use. Proposition 64 legalized commercial cultivation and sale of cannabis in California for medical use as of the date of passage. All cannabis activity is exclusively controlled through registration and permitting by local governments, and then the State issues the final operating license.

According to visitcalifornia.com, in 2018, California’s tourism experienced an eighth straight year of growth, setting a new record for visitor spending at $132.4 billion. According to BDS Analytics, 2019 sales of cannabis products in California were approximately $2.5 billion, making California the leading state in cannabis sales.

Medical Cannabis Market

The last five years have seen a dramatic shift in public opinion on medical marijuana, which is reflected in the direction of individual states toward legalization. A Quinnipiac University Poll published on March 6, 2019 showed 93% of registered voters in the United States support the use of medically prescribed cannabis. Thirty-three states and Washington, D.C., have enacted medical cannabis laws. According to marijuanapolicyproject.com, as of December 3, 2019, there are approximately 2.6 million registered medical marijuana patients within these states. The five states with the largest known current medical marijuana patient populations are: Arizona, California, Colorado, Florida, Michigan and New York.

Cannabis is used for medicinal purposes and has proven to be an effective treatment for pain relief, inflammation and a number of other medical disorders. According to an IBISWorld report, new medical research and changing public opinion have boosted industry growth.

Doctors may prescribe ‘legalized’ medical cannabis in approved states where patients can receive a “recommendation” from a state-approved and licensed physician for the treatment of certain conditions specified by the state. Medical cannabis is being used to treat severe or chronic pain, inflammation, nausea and vomiting, neurologic symptoms (including muscle spasticity), glaucoma, cancer, multiple sclerosis, post-traumatic stress disorder, anorexia, arthritis, Alzheimer’s, Crohn’s disease, fibromyalgia, ADD, ADHD, Tourette’s syndrome, spinal cord injury and numerous other conditions. Cannabis oil has also been proven effective in treating epileptic seizures in children.

Recreational Cannabis Market

Ten states have legalized recreational cannabis – Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington, plus Washington, D.C. In November 2012, Colorado voters legalized recreational marijuana use. This history-changing legislation created a window of opportunity for the commercialization and state taxation of a plant group that has, until recently, been virtually untouchable and set the wheels in motion for other states to follow. In July of 2014, Washington State launched its recreational program, while Oregon and Alaska and the District of Columbia voted to introduce recreational programs commencing in 2015. In November 2016, California, Maine, Massachusetts, and Nevada all passed ballot initiatives for the legalization of recreational cannabis. In January 2019, Vermont passed a bill legalizing recreational marijuana use, becoming the first state to legalize marijuana legislatively. In November 2019, Michigan passed a ballot initiative for the legalization of recreational cannabis, which took effect in December 2019. A Quinnipiac University Poll published on March 6, 2019 showed that 60% of registered voters in the United States support the legalization of marijuana.

Competition

We face significant competition in all aspects of our business. Specifically, we face competition from a number of companies that operate dispensaries, growing facilities and extraction facilities in the legal cannabis market within the United States and U.S. territories.

While such competition exists within the industry as a whole, there is limited competition in Puerto Rico. Currently, there are fifty-four dispensaries with approved licenses in Puerto Rico.

We also anticipate additional competition from the unauthorized sale and purchase of cannabis through the “black market” in Puerto Rico and California. Black market competition in Puerto Rico is estimated by the government at $200 million annually. While we deem the “black market” to be a major competitor, we believe, although no assurance can be given, that we can increase our market share by offering a greater variety of product at competitive prices and reduce risks for consumers.

Competitive Strengths

We believe that consumers generally choose their dispensary based on several factors, including proximity to where they live and work, price, quality, variety and the overall service experience. We believe that our advantage stems from our relationships with our supplier. Our supplier, who operates a state-of-the art facility, has over 36 strands available and can produce up to 200 pounds a month. Our supplier, the largest in Puerto Rico in total production capacity, has agreed to sell products to us at reduced prices which we believe will allow us to achieve 75% gross margins, all while maintaining a major price advantage over competitors.

We also believe that we possess certain other competitive strengths and advantages in the industries in which we intend to operate:

Range of Services. We intend to leverage our breadth of services and resources to deliver comprehensive, integrated solutions to companies in the cannabis industry—from operational, compliance and marketing consulting to products, security and financing services.

Strategic Alliances. We are dedicated to growing our business through strategic acquisitions, partnerships and agreements that will enable us to enter and expand into new markets. Our strategy is to pursue alliances with potential targets that have the ability to generate positive cash flow, effectively meet customer needs and supply desirable products, services or technologies, among other considerations. We anticipate that strategic alliances will play a significant role as more states pass legislation permitting the cultivation and sale of hemp and cannabis.

Regulatory Compliance. The state laws regulating the cannabis industry are changing at a rapid pace. Currently, there are 33 U.S. states, the District of Columbia and the territories of Guam and Puerto Rico that have created a legislative body to manage the medical cannabis industry. Ten of those states also allow recreational use. We intend to take such steps necessary to ensure that all aspects of our operations are in compliance with all laws, policies, guidance and regulations to which we are subject and providing an opportunity to our customers and allies to use our services in order to ensure that they, too, are in full compliance are both critical components of our business plan.

Industry Knowledge. We continue to create, share and leverage information and experiences with the purpose of creating awareness and identifying opportunities to increase stockholder value. Our management team has business expertise, extensive knowledge of the cannabis industry and closely monitors changes in legislation. We intend to work with partners who will enhance the breadth of our industry knowledge.

Lending Capabilities. In February 2014, the Treasury Department issued guidelines for financial institutions dealing with cannabis-related businesses. Nevertheless, many banks and traditional financial institutions refuse to provide financial services to cannabis-related businesses. We plan to provide finance and leasing solutions to market participants using the FinCEN guidelines as a primary guide for compliance with federal law.

Government and Industry Regulation

Cannabis is currently a Schedule I controlled substance under the CSA and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state law, its use, possession or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “DOJ”) defines Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.” If the federal government decides to enforce the CSA in states or territories that allow cannabis use recreationally and medicinally, persons that are charged with distributing, possessing with intent to distribute or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million fine.

Notwithstanding the CSA, as of the date of this filing, 33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow their residents to use medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level.

In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. The Cole Memo ultimately emphasizes the need for robust state regulation of marijuana. The memorandum “rests on its expectation that state and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.” In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines (the “FinCEN Guidelines”) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations.

Additional existing and pending legislation provides, or seeks to provide, protection to persons acting in violation of federal law but in compliance with state laws regarding cannabis. The Rohrabacher-Farr Amendment to the Commerce, Justice, Science and Related Agencies Appropriations Bill, which funds the DOJ, prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. The Rohrabacher-Farr Amendment is effective through April 28, 2018, but as an amendment to an appropriations bill, it must be renewed annually. As of the date of this Form 10-K, it has been renewed through September 30, 2020. The Compassionate Access Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) has been introduced in the U.S. Senate, which proposes to reclassify cannabis under the CSA to Schedule II, thereby changing the plant from a federally criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2018 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.

As of the date of this filing, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2018 has been enacted. However, the Rohrabacher-Farr Amendment has been renewed as part of an omnibus spending bill, in effect through September 30, 2020.

Furthermore, on January 4, 2018, the now former U.S. Attorney General, Jeff Sessions, issued the Sessions Memo, stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” Mr. Sessions went on to state in the memorandum that given the Justice Department’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”

In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”

The current U.S. Attorney General, William Barr, has signaled that he might be taking a different approach towards interfering with state medical marijuana laws than his predecessor Jeff Sessions. Mr. Barr was confirmed as the U.S. Attorney General on February 14, 2019. During his confirmation hearing on February 15, 2019, Mr. Barr addressed the conflict between federal and state cannabis policies, stating that his approach would be “not to upset settled expectations and the reliant interests that have arisen as a result of the Cole memorandum.” Mr. Barr went even further, stating that “to the extent that people are complying with the state laws—distribution and production and so forth—[the DOJ is] not going to go after that.” Despite the possibilities of a more relaxed approach, Mr. Barr voiced his desire for clarity and uniformity on the issue and preference that the United States has a federal law that prohibits marijuana everywhere.

It is unclear at this time whether the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of this Form 10-K, we have provided products and services to state-approved cannabis cultivators and dispensary facilities, as well as operating our own dispensary, manufacturing and extraction facilities. As a result, we could be deemed to be aiding and abetting or directly engaging in illegal activities, a violation of federal law. We may be irreparably harmed by a change in enforcement policies of the federal government.

The Cole Memo

Because of the discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis, from federal law that prohibits any such activities, DOJ Deputy Attorney General James M. Cole issued the Cole Memo concerning cannabis enforcement under the CSA. The Cole Memo guidance applies to all of the DOJ’s federal enforcement activity, including civil enforcement and criminal investigations and prosecutions, concerning cannabis in all states.

The Cole Memo reiterates Congress’s determination that cannabis is a dangerous drug and that the illegal distribution and sale of cannabis is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that the DOJ is committed to enforcement of the CSA consistent with those determinations. It also notes that the DOJ is committed to using its investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provides guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities (the “Enforcement Priorities”) in preventing:

Although the Sessions Memo has rescinded the Cole Memo and it is unclear at this time what the ultimate impact of that rescission will have on our business, if any, we intend to continue to conduct rigorous due diligence to verify the legality of all activities that we engage in and ensure that our activities do not interfere with any of the Enforcement Priorities set forth in the Cole Memo.

FinCEN

FinCEN provided guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their BSA obligations. For purposes of the FinCEN guidelines, a “financial institution” includes any person doing business in one or more of the following capacities:

In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough customer due diligence is a critical aspect of making this assessment.

In assessing the risk of providing services to a cannabis-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.

As part of its customer due diligence, a financial institution should consider whether a cannabis-related business implicates one of the Cole Memo Enforcement Priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a cannabis-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial institution that decides to provide financial services to a cannabis-related business would be required to file suspicious activity reports. It is unclear at this time what impact the Sessions Memo will have on customer due diligence by a financial institution.

While we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships with potential tenants, clients and customers. As such, as we engage in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain and is expected to evolve rapidly, we believe that FinCEN’s guidelines will help us best operate in a prudent, reasonable and acceptable manner. There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.

Moreover, since the use of cannabis is illegal under federal law, we may have difficulty acquiring or maintaining bank accounts and insurance, and our stockholders may find it difficult to deposit their stock with brokerage firms.

Licensing and Local Regulations

Where applicable, we will apply for additional state licenses that are necessary to conduct our business in compliance with local laws. Local laws at the city, county and municipal levels add a layer of complexity to legalized cannabis. Despite a state’s adoption of legislation legalizing cannabis, cities, counties and municipalities within the state may have the ability to otherwise restrict cannabis activities, including but not limited to cultivation, retail or consumption.

Zoning sets forth the approved use of land in any given city, county or municipality. Zoning is set by local governments or local voter referendum, and may otherwise be restricted by state laws. For example, under certain state laws a seller of liquor may not be allowed to operate within 1,000 feet of a school. There may be similar restrictions imposed on cannabis operators, which will restrict where cannabis operations may be located and the manner and size to which they can grow and operate. Zoning can be subject to change or withdrawal, and properties can be re-zoned. The zoning of our properties will have a direct impact on our business operations.

Regulatory Environment

The regulatory status of the cannabis industry is shifting rapidly at the state level, with momentum toward a change at the federal level through pressure on the U.S. Congress and the White House. Current federal regulations classify cannabis as a Schedule 1 substance, defined as “drugs with no currently accepted medical use and a high potential for abuse.” This drug classification also includes heroin, LSD and ecstasy.

The legal cannabis industry has evolved considerably over the past 3-5 years. We believe the industry has reached the tipping point for legalization through pressure from citizens’ groups in individual states for the legalization of medical and/or recreational marijuana. As reported by Pew Research Center in April 2015, nearly half (49%) of Americans say they have tried marijuana.

A Quinnipiac University Poll published on March 6, 2019 showed 93% of registered voters in the United States support the use of medically prescribed cannabis and that 60% support the legalization of marijuana use.

Millennials (currently 18-34) have been in the forefront of legalization support: 85% favor legalizing marijuana use, by far the highest percentage of any age group. 63% of voters ages 35-49 and 59% of voters ages 50-64 support the legalization of marijuana use. Voters over 65 years old are more divided on the topic, with 44% in support of the legalization of marijuana use.

Public support has given rise to the passage of new marijuana laws and regulations in a number of states, as well as multiple legal reforms on legislative dockets. Each state’s legal environment is unique, making it critical for businesses to know and understand the regulatory landscape on a state-by-state basis.

Another regulatory variable adding to the complexity of the legal cannabis market are the local laws at the municipality and county levels. Even when a state enacts legislation legalizing cannabis, each level of local government has the right to exercise restrictions on cannabis activities, such as retail, consumption, transportation and cultivation. Zoning is an area of particular concern, which is set forth at the local level. This can restrict where businesses can be located and the manner and size in which they operate. Understanding individual state’s laws and local regulations requires business operators and investors to account for multiple levels of regulatory compliance, such as how marijuana may be sourced, processed, distributed, and to whom, where and how it may be sold.

State Legal Status

While new state-level legalization efforts continue to expand the number of states involved in the cannabis industry, only a handful of existing states have any meaningful full-scale operations for the cultivation and distribution of cannabis. This presents a significant growth opportunity for investment over the next several years as the existing legalized states and new states’ markets come online.

California State Regulatory Overview: Cannabis

In 1996, California voters passed Proposition 215, also known as the Compassionate Use Act, allowing physicians to recommend cannabis for an inclusive set of qualifying medical conditions, but it did not establish a state licensing authority or comprehensive regulations to oversee cannabis collectives. In 2015, the California legislature passed three bills, collectively known as the “Medical Cannabis Regulation and Safety Act” (“MCRSA”), which established a framework for licensing and regulating medical cannabis businesses. In 2016, California voters passed “The Adult Use of Marijuana Act” (“AUMA”), which legalized adult-use cannabis for adults 21 years and older and created a licensing system for commercial cannabis businesses. On June 27, 2017, Governor Brown signed SB-94 into law which combined elements of MCRSA and AUMA into one state licensing structure under the “Medicinal and Adult-Use of Cannabis Regulation and Safety Act” (“MAUCRSA”).

Pursuant to MAUCRSA: (i) CalCannabis, a division of the California Department of Food and Agriculture, issues licenses to cannabis cultivators: (ii) the Manufactured Cannabis Safety Branch (the “MCSB”), a division of the California Department of Public Health, issues licenses to cannabis manufacturers; and (iii) the California Department of Consumer Affairs, via its agency the Bureau of Cannabis Control (the “BCC”), issues licenses to cannabis distributors, testing laboratories, retailers, and micro-businesses. These agencies also oversee the various aspects of implementing and maintaining California’s cannabis landscape, including the statewide track and trace system. All three agencies released their initial emergency rulemakings at the end of 2017 and updated them with minor revisions in June 2018. The three agencies adopted their permanent rulemakings on January 16, 2019, which are now in effect. All three agencies began issuing temporary licenses in January 2018 and stopped doing so on December 31, 2018, pursuant to MAUCRSA.

Local authorization is a prerequisite to obtaining a state license, and local governments are permitted to prohibit or otherwise regulate the types and number of cannabis businesses allowed in their locality. All three state regulatory agencies require confirmation from the applicable locality that the operator is operating in compliance with local requirements and was granted authorization to continue or commence commercial cannabis operations within the locality’s jurisdiction. Applicants are required to comply with all local zoning and land use requirements and provide written authorization from the property owner where the commercial cannabis operations are proposed to take place, which must dictate that the applicant has the property owner’s authorization to engage in the specific state-sanctioned commercial cannabis activities proposed to occur on the premises. The State has not set a limit on the number of state licenses an entity may hold, unlike other states that have restricted how many cannabis licenses an entity may hold in total or for various types of cannabis activity. Although vertical integration across multiple license types is allowed under MAUCRSA, testing laboratory licensees may not hold any other licenses aside from a laboratory license. There are also no residency requirements for ownership of a state license under MAUCRSA.

Unlike other states, California has not set a limit on the number of state licenses that a single entity may hold, with certain limited exceptions. Similarly, vertical integration across multiple license types is allowed under MAUCRSA, with the exception of testing laboratory licensees, which entities may not hold any other license type. The laws and regulations of the State of California related to the cultivation, manufacturing and dispensing of cannabis, including, but not limited to, Cal. Bus. & Prof. Code § 26000 et seq., and the rules and regulations promulgated pursuant thereto.

Puerto Rico Regulatory Overview: Cannabis

On December 28, 2015, the Puerto Rico Health Department issued Regulation No. 8686 to regulate medical cannabis, which was later repealed by Regulation No. 8766, and amended by Regulation No. 8847, known as the Regulation for the Use, Possession, Cultivation, Manufacture, Production, Dispensation and Research of Medical Cannabis.

On July 9, 2017, the MEDICINAL Act, Act No. 42-2017, was enacted to reaffirm the legal framework for the medical cannabis industry and create the Medical Cannabis Regulatory Board (the “Regulatory Board”), ascribed to the Puerto Rico Department of Health. On July 2, 2018, the Puerto Rico Health Department and the Regulatory Board issued Regulation No. 9038 which repeals all prior regulations (“Reg. No. 9038”). Therefore, the current legal framework surrounding Medical Cannabis consists of the MEDICINAL Act, Reg. No. 9038 and the administrative orders, bulletins and forms issued thereunder.

The MEDICINAL Act prohibits the recreational use of cannabis and only allows the use of medical cannabis by licensed patients who have obtained a recommendation from an authorized physician due to a debilitating medical condition. There are 27 debilitating medical conditions identified in Reg. No. 9038, and the Board’s Medical Advisory Council is authorized to recommend and the Board may approve additional conditions.

Medical cannabis may be provided to patients as oral drops, oral inhalers, suppositories, transdermal patch, edible products, concentrates, pill, topical (lotions, balms and patches) or through the vaporized delivery method (under certain exceptions). Smoking is specifically prohibited and medical cannabis products may not be used in public places.

The six types of licenses that medical cannabis establishments may obtain are: cultivation, dispensary, laboratory, manufacturing, research, and transportation. These licenses are valid for a one-year term. An entity may obtain multiple licenses. In order to obtain any of these licenses 51% of the ownership of the entity must come from Puerto Rico capital, as the term is defined in the Reg. No. 9038. As part of the license application process the Board reviews, among other things, fee payment, background check results, financial stability and capitalization, security and safety procedures, generally accepted agriculture, manufacturing, laboratory, and clinical best practices reports, and adequate insurance policies.

The MEDICINAL Act authorizes licensed medical establishments to make deposits in savings and loan institutions duly authorized to do business in Puerto Rico.

Importing cannabis or cannabis seeds to Puerto Rico is prohibited by the MEDICINAL Act.

The Regulatory Board uses BioTrackTHC as its inventory system to track commercial cannabis activity and seed-to-sale. Individual licensees are required to provide data to the Regulatory Board to meet all reporting requirements.

Federal Legal Status: Banking

Cannabis is still classified as an illegal substance in the U.S. The Drug Enforcement Agency (“DEA”) and the Food and Drug Administration (“FDA”) currently classify cannabis as a Schedule 1 drug under the Controlled Substances Act. The classification makes cannabis illegal under federal law to cultivate, manufacture, distribute or possess cannabis, and has created a discrepancy between state’s rights and federal law.

This discrepancy has created a complicated environment for cannabis businesses in regards to restrictive banking regulations, interstate trade, IRS tax code and federal bankruptcy laws, especially for companies that directly “touch the plant” such as growers and distributors. For example, FinCEN provided guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their BSA obligations. While we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships with potential tenants, clients and customers. As such, as we engage in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain but expected to evolve rapidly, we believe that FinCEN’s guidelines will help us best operate in a prudent, reasonable and acceptable manner. There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.

Additionally, because the possession or distribution of cannabis violates federal law, banks that provide services may face the threat of prosecution or sanctions and thus we may have difficulty acquiring or maintaining bank accounts and insurance, and our stockholders may find it difficult to deposit their stock with brokerage firms.

The banking issues created by the federal laws have required the cannabis industry to focus on viable alternatives and have created opportunities for new providers, from finance companies to security and software firms. The issue of interstate trade requires companies that grow or distribute cannabis to duplicate efforts within each state they wish to legally operate and has limited the development of ‘national’ brands. These laws do not directly affect companies operating in ancillary businesses.

In February 2014, the White House and the Department of the Treasury gave a roadmap for conducting transactions with cannabis companies operating within state regulations. The most sweeping federal reforms to date, however, have come from Congress in the federal spending bill that passed both Houses in June 2015 and continued in June 2016. Congress voted to protect state medical marijuana and hemp laws from federal interference and cut the DEA’s budget. As an example of increased support for the removal of federal laws banning medical marijuana, the medical marijuana-protecting amendment passed the House 219-189 and became law last year and was accepted by a larger 242-186 majority this year, with even more Republican members’ support.

Ancillary Cannabis-Related Businesses

As more states enact cannabis legislation, the demand for cannabis-related products and services grows. The rapid expansion of the cannabis market combined with more sophisticated management teams and business models entering the market has spurred the development of numerous cannabis-related niche markets. These ancillary markets that do not physically “touch the plant” include infrastructure and support for the cannabis industry in such areas as social media, security, consulting, delivery systems, financial services, software & high-tech, electronic hardware, infused products, extracts & oils, hemp production, ancillary cultivation solutions, and retail.

As mentioned, the federal government still classifies cannabis as a Schedule 1 substance, which leaves many traditional businesses fearing reputational and legal risks of serving the cannabis industry. However, ancillary businesses that do cater to the legal cannabis industry are well positioned to benefit from the growth in the industry.

The CBD Industry

Market Opportunity

According to the Brightfield Group (“Brightfield”), the hemp-derived CBD market will reach sales of $22 billion by 2022, as compared to $591 million in 2018. According to Brightfield, the main drivers of growth would be:

According to Brightfield, 55% of CBD users purchase their CBD products at storefront dispensaries, 31% through local delivery services, and 17% online. Most of the remainder of CBD products are sourced from friends, dealers and cooperatives (8-9% each). Among CBD users, 80% use CBD products at least once a week, and about 41% use them every day. Approximately 4% of CBD consumers are occasional users, turning to CBD products less than once a month. Over half of CBD users have bought 1-2 CBD products over the last two weeks, and roughly 17% have bought 3 or more over the same time period. CBD users tend to enjoy having low or micro-doses of CBD (10 mg or less), once or twice per day.

According to Brightfield, the demographic age of CBD users are as follows: the largest group (nearly one third) between ages 35 and 49, and the 26-34 and 50-64 age, ranges each making up 20-25% of the market. Among CBD users, hemp-derived CBD users lean slightly older, more likely to fall into the 50-64 age range, and less likely to fall into the 26-34 age range. In general, significantly more CBD users are female (55%) than male (44%), with that figure being driven up by hemp-derived CBD users, 59% of whom were female. CBD users reflect the general population in terms of income, but within their ranks, slightly more hemp-derived CBD users fall into the lower-income groups (employed but making less than $40K). CBD users are generally well-educated - only 1.3% have not (yet) received their high school diplomas, whereas 15.4% have a graduate or post-grad degree completed. Nearly half of CBD users have a Bachelor’s Degree or beyond. CBD users are the most likely to be married – with 43% having spouses. At least 37% are married among all respondents, and this is the most common status. Just over 30% of CBD users are single.

Distribution of Products

Our CBD products are currently available for sale on our website GetPureandNatural.com.

Competitive Overview

Given the rapid growth of the U.S. CBD oil industry, hundreds of companies have entered the market. Consequently, the market is becoming highly competitive and we believe to compete in the market requires ensuring the quality and integrity of product offerings. Certain of our competitors have substantially greater financial, distribution, and marketing resources, as well as greater brand awareness than us, and there can be no assurance we will be able to successfully compete.

The Difference Between Hemp and Marijuana

Both marijuana and hemp come from the same species of plant called “Cannabis Sativa L.” However, cultivators of the cannabis plant have manipulated it over the years to encourage specific traits to become dominant. Cannabis plants contain unique compounds called cannabinoids. Current research has revealed over 80 different cannabinoids thus far, but management believes THC is the most well-known and is credited with causing the marijuana high. While marijuana plants contain high levels of THC, hemp contains very little of the psychoactive chemical. The foregoing is one of the differences which distinguishes hemp from marijuana.

Hemp was originally cultivated nearly 10,000 years ago in what is modern day Taiwan. Ancient cultivators of the cannabis plant recognized that it was dioecious, meaning that it had dual characteristics. Cultivators grew one variety of the cannabis plant to be tall and durable. This became what we now call industrial hemp. Upon discovering that the flower buds of the cannabis plant had psychoactive effects, cultivators began separating the hemp plants from the flowering plants in order to isolate their “medicinal” characteristics.

Scientifically, we now know that industrial hemp plants tend to produce high levels of the cannabinoid CBD, while producing low amounts of THC. Conversely, the marijuana plant produces high THC levels and low CBD levels. This chemical difference dictates the way we use the cannabis plant for medicinal and dietary supplemental purposes.

Federal Legislative Overview

Cannabidiol, or CBD, that is derived from industrial hemp plants — like the CBD used in all products currently being produced or to be produced by Bespoke Extracts — is deemed by the FDA to be a dietary supplement, not a medication or food product. Consequently, in the U.S., no prescription is required to obtain CBD and it can be legally purchased and consumed in all 50 states (and in 40 countries around the world) unless a state adopts a specific law against its use.

In December 2016, the Department of U.S. Drug Enforcement Administration (“DEA”) implemented a new rule that declared CBD as a Schedule I drug, meaning it has “no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision and a high potential for abuse.” While numerous industry insiders expressed concerns about the DEA’s ruling, it is widely believed that the agency would struggle to make CBD illegal under current laws, thanks to multiple protections put in place by Congress as part of the 2014 Farm Bill. Moreover, subsequent additions to the 2015 and 2016 Congressional Appropriations Act prohibit the DEA from going after the products produced under these programs. Moreover, the most recent version of the legislation to legalize growing hemp was introduced in April 2019, with Senate Majority Speaker Mitch McConnell as the primary sponsor, which quickly evolved into the Senate’s Agriculture Improvement Act of 2019 (2019 Farm Bill). On December 3, 2018, House and Senate leaders announced that they had come to an agreement on the reconciled version of the 2019 Farm Bill, which – for the first time ever – includes a provision to lift the federal government’s longstanding ban on the commercial production of industrial hemp. It also amends the Federal Controlled Substance Act of 1970 so that industrial hemp containing no more than 0.3% delta-9 tetrahydrocannabinol (“THC”) is no longer classified as a Schedule I prohibited substance. The 2018 Farm Bill was approved on December 12, 2018.

The Company’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products. Section 12619 of the 2018 Farm Bill removed “hemp,” as defined in the Agricultural Marketing Act of 1946 (the “1946 Agricultural Act”), from the classification of “marijuana,” which is generally prohibited as a Schedule I drug under the Controlled Substances Act of 1970 (“CSA”). Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), the term “hemp” means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” As a result of the passage of the 2019 Farm Bill, and since the Company believes that its CBD products contain parts of the cannabis plant with a THC concentration of not more than 0.3 percent on a dry weight basis, the Company believes that its CBD products are not governed by the CSA and, ergo, would not be subject to prosecution thereunder because the Company believes that its CBD products contain “hemp” within the meaning of the 1946 Agricultural Act (as amended by the 2019 Farm Bill) and do not contain any “marijuana” as prohibited under the CSA (as amended by the 2018 Farm Bill); provided, however, there is a lack of legal protection for hemp-based products that contain more than 0.3 percent THC and there is a risk that the Company would be subject to prosecution under the CSA in the event that its CBD products are found to contain more than 0.3 percent THC. The Company’s CBD products contain no trace of THC at all.

Furthermore, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) provides additional regulations regarding the production of hemp-based products and there is the risk that the Company’s CBD products may be found to be in violation of these regulations. Specifically, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) contains provisions relating to the shared state-federal jurisdiction over hemp cultivation and production, whereby states and Indian tribes have been delegated the broad authority to regulate and limit the production and sale of hemp and hemp products within their borders. Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), a plan under which a State or Indian tribe monitors and regulates the production of hemp shall only be required to include “(i) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (ii) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (iii) a procedure for the effective disposal of—(I) plants, whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants; (iv) a procedure to comply with enforcement procedures ; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of applicable law; (vi) a procedure for submitting the information , as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out the practices and procedures described in clauses (i) through (vi).” Further, a hemp producer in a State or the territory of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or (iii) producing Cannabis sativa L. with a delta-9 tetrahydrocannabinol concentration of more than 0.3 percent on a dry weight basis.” A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe, as applicable.” In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor and regulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced in violation of applicable law; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; and (F) such other practices or procedures as the Secretary considers to be appropriate. The Secretary shall also establish a procedure to issue licenses to hemp producers. In the case of a State or Indian tribe for which a State or Tribal plan is not approved under applicable law, it shall be unlawful to produce hemp in that State or the territory of that Indian tribe without a license issued by the Secretary. A violation of a plan established by the Secretary shall be subject to enforcement and the Secretary shall report the production of hemp without a license issued by the Secretary to the Attorney General. In the event that the Company’s CBD products are found to be in violation of these regulations, the Company may become subject to enforcement action as provided for in the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and may become subject to prosecution thereunder.

Furthermore, the Company’s CBD products are subject to the application of laws relating to health and safety of our products. Specifically, the Company’s CBD products may be governed by the Federal Food Drug and Cosmetic Act (FD&C Act) as a drug. The FD&C Act is intended to assure the consumer, in part, that drugs and devices are safe and effective for their intended uses and that all labeling and packaging is truthful, informative, and not deceptive. The FD&C Act and FDA regulations define the term drug, in part, by reference to its intended use, as “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the body of man or other animals.” Therefore, almost any ingested or topical or injectable product that, through its label or labeling (including internet websites, promotional pamphlets, and other marketing material), that is claimed to be beneficial for such uses will be regulated by FDA as a drug. The definition also includes components of drugs, such as active pharmaceutical ingredients. The FD&C Act defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body...for cleansing, beautifying, promoting attractiveness, or altering the appearance.” See FD&C Act, sec. 201(i). Among the products included in this definition are skin moisturizers, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, cleansing shampoos, permanent waves, hair colors, and deodorants, as well as any substance intended for use as a component of a cosmetic product. Under the FD&C Act, cosmetic products and ingredients, with the exception of color additives, do not require FDA approval before they go on the market. Drugs, however, must generally either receive premarket approval by FDA through the New Drug Application (NDA) process or conform to a “monograph” for a particular drug category, as established by FDA’s Over-the-Counter (OTC) Drug Review. These monographs specify conditions whereby OTC drug ingredients are generally recognized as safe and effective, and not misbranded. Certain OTC drugs may remain on the market without an NDA approval until a monograph for its class of drugs is finalized as a regulation. However, once FDA has made a final determination on the status of an OTC drug category, such products must either be the subject of an approved NDA (see FD&C Act, sec. 505(a) and (b), or comply with the appropriate monograph for an OTC drug.

Additionally, it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. In January of 2019, the New York City Department of Health banned the sale of CBD-infused food products. As of the date hereof, legislators are calling on the FDA to provide guidance on legal pathways for food products infused with CBD to be sold.

California State Regulatory Overview: Hemp

The commercial cultivation of industrial hemp in California is permitted under state law. The California Department of Food and Agriculture (“CDFA”) issues hemp cultivation licenses through a county’s agricultural commissioner. There is no state registration to grow industrial hemp in California; only county registration is required. All California growers and breeders of industrial hemp are required to register with the county agricultural commissioner prior to cultivation, and registrations are valid for one year from the date of issuance.

Additionally, pursuant to an FAQ published by the California Department of Public Health in July 2018, hemp-derived CBD cannot be used as a food ingredient, food additive, or dietary supplement. State law also expressly prohibits bars, liquor stores, and dispensaries from selling alcoholic drinks infused with any cannabinoids, including cannabinoids derived from industrial hemp. California law does not impose any requirements (and licenses are not currently available) for the manufacturing, processing, or sale of non-food industrial hemp or industrial hemp products.

As of February 26, 2020, California was in the process of drafting a hemp production plan pursuant to the 2018 Farm Bill to be submitted for USDA review.

Puerto Rico Regulatory Overview: Hemp

The sale of CBD is allowed under local law and it is governed mainly by FDA regulations that prohibit the sale of CBD as food, dietary supplement or as having therapeutic value. The sale of CBD in Puerto Rico is outside the jurisdiction of the Medical Cannabis Regulatory Board and Medical Cannabis laws and regulations. CBD products are not considered nutritional supplements and cannot be marketed as medicine.

As of February, 2020, the Health Department issued an administrative guideline requiring all establishments that sale CBD products to have the corresponding warnings in a visible place and make the corresponding disclosures to the consumers.

As of the date of this report, the cultivation and manufacture licenses for hemp are issued by the Department of Agriculture and there is a limit of 10 acres of cultivation area. After the approbation of the State Plan, the Department of Agriculture of Puerto Rico has a conservative projection of 10,000 acres of hemp cultivation

Employees

As of June 11, 2020, we have four full-time employees, sixty-seven employees leased from an employment agency and three full-time consultants/independent contractors. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

ITEM 1A. RISK FACTORS

Risks Relating to Our Business

We have a limited operating history and face many of the risks and difficulties frequently encountered by an early stage company.

Although our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation, we also operate in an evolving industry that may not develop as expected. Furthermore, our operations will likely continue to evolve under our business plan as we continually assess new strategic opportunities for our business within our industry. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in our industry can be affected by a wide variety of factors including:

We may not be able to successfully address these factors, which could negatively impact our growth, harm our business and cause our operating results to be worse than expected.

We may need to secure additional financing.

While we have raised funds that we believe will be sufficient to fund our operations for the next twelve months, we anticipate that we may require additional funds for our operations in the future. If we are not successful in securing additional financing when needed, we may be unable to execute our business strategy, which could result in curtailment of our operations.

Our ability to raise additional capital is uncertain and dependent on numerous factors beyond our control including, but not limited to, economic conditions and availability or lack of availability of credit. We currently do not have any committed external source of funds.

If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

To the extent that we raise additional capital through the sale of equity or convertible debt securities, then-existing stockholders’ interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect their rights as common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Cannabis remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable or even prohibit such operations.

We operate in the cannabis industry, which is dependent on state laws and regulations pertaining to such industry; however, under federal law, cannabis remains illegal.

The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.

Currently, 33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow the use of medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.

In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “Cole Memo”) to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. The Cole Memo ultimately emphasizes the need for robust state regulation of marijuana. The memorandum “rests on its expectation that state and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.” In addition, the Financial Crimes Enforcement Network (“FinCEN”) provided guidelines (the “FinCEN Guidelines”) on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations.

In 2014, the United States House of Representatives passed an amendment (the “Rohrabacher-Farr Amendment”) to the Commerce, Justice, Science, and Related Agencies Appropriations Bill, which funds the United States Department of Justice (the “DOJ”). The Rohrabacher-Farr Amendment prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. In August 2016, a 9th Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Farr Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act (the “CARERS Act”) was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2018 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.

Although these developments have been met with a certain amount of optimism in the cannabis industry, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 have yet been adopted. In addition, the Rohrabacher-Farr Amendment, being an amendment to an appropriations bill that must be renewed annually, has been renewed as part of an omnibus spending bill, in effect through September 30, 2020.

Furthermore, on January 4, 2018, the now former U.S. Attorney General, Jeff Sessions, issued a written memorandum (the “Sessions Memo”) to all U.S. Attorneys stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” Mr. Sessions went on to state in the memorandum that given the Justice Department’s well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”

In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”

The current U.S. Attorney General, William Barr, has signaled that he will be taking a different approach towards interfering with state medical marijuana laws than his predecessor Jeff Sessions. Mr. Barr was confirmed as the U.S. Attorney General on February 14, 2019. During his confirmation hearing on February 15, 2019, Mr. Barr addressed the conflict between federal and state cannabis policies, stating that his approach would be “not to upset settled expectations and the reliant interests that have arisen as a result of the Cole memorandum.” Mr. Barr went even further, stating that “to the extent that people are complying with the state laws—distribution and production and so forth—[the DOJ is] not going to go after that.” Despite the more relaxed approach, Mr. Barr voiced his desire for clarity and uniformity on the issue and preference that the United States have a federal law that prohibits marijuana everywhere.

It is unclear at this time whether the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. While we do not currently harvest, distribute or sell cannabis, we intend to do so in the future, and thus we may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. At such time, we could be deemed to be aiding and abetting illegal activities, a violation of federal law.

Additionally, as we are always assessing potential strategic acquisitions of new businesses, we may in the future also pursue opportunities that include growing and distributing medical or recreational cannabis, should we determine that such activities are in the best interest of the Company and our stockholders. Any such pursuit would involve additional risks with respect to the regulation of cannabis.

Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.

Continued development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could slow or halt progress in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation legalizing cannabis use, or its sale and distribution, or the re-criminalization or restriction of cannabis at the state level could negatively impact our business. Additionally, changes in applicable state and local laws or regulations could restrict the products and services we offer or impose additional compliance costs on us or our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be materially adverse to our business.

The cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.

We are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in a growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.

Large, well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market for the current “cannabis pill” sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical or any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business.

We operate in a highly competitive industry.

The markets for ancillary businesses in the medical cannabis and recreational cannabis industries are competitive and evolving. There is no material aspect of our business that is protected by patents, copyrights, trademarks, or trade names, and we face strong competition from larger companies that may offer similar products and services to ours. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger client bases than us, and there can be no assurance that we will be able to successfully compete against these or other competitors.

Given the rapid changes affecting the global, national, and regional economies generally and the medical cannabis and recreational cannabis industries, in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to keep pace with any changes in our markets, particularly, legal and regulatory changes. Our success will also depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition and results of operations.

Conditions in the economy, the markets we serve and the financial markets generally may adversely affect our business and results of operations.

Our business is sensitive to general economic conditions. Slower economic growth, volatility in the credit markets, high levels of unemployment, and other challenges that affect the economy adversely could affect us and our customers and suppliers. If growth in the economy or in any of the markets we serve slows for a significant period, if there is a significant deterioration in the economy or such markets or if improvements in the economy do not benefit the markets we serve, our business and results of operations could be adversely affected.

We depend on our management, certain key personnel and board of directors, as well as our ability to attract, retain and motivate qualified personnel.

Our future success depends largely upon the experience, skill, and contacts of our officers and directors, and the loss of the services of these officers or directors may have a material adverse effect upon our business. Additionally, shortages in qualified personnel could also limit our ability to successfully implement our growth plan. The U.S. hemp and cannabis industries may have more stringent requirements for personnel, including but not limited to, requirements that they complete criminal background checks, submit financial information, and demonstrate proof of residency, which may make it more challenging for the us to hire and retain employees. As we grow, we will need to attract and retain highly skilled experts in the cannabis industry, as well as managerial, sales and marketing, security and finance personnel. There can be no assurance, however, that we will be able to attract and retain such personnel.

Our reputation and ability to do business may be negatively impacted by the improper conduct by our business partners, employees or agents.

We depend on third party suppliers to produce and timely deliver our inventory. Products purchased from our suppliers are resold to our customers. These suppliers could fail to produce products to our specifications or quality standards and may not deliver units on a timely basis. Any changes in our suppliers to resolve production issues could disrupt our ability to fulfill orders. Any changes in our suppliers to resolve production issues could also disrupt our business due to delays in finding new suppliers.

Furthermore, we cannot provide assurance that our internal controls and compliance systems will always protects us from acts committed by our employees, agents or business partners in violation of U.S. federal or state laws. Any improper acts or allegations could damage our reputation and subject us to civil or criminal investigations and related stockholder lawsuits, could lead to substantial civil and criminal monetary and non-monetary penalties, and could cause us to incur significant legal and investigatory fees.

If we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.

Our ability to grow successfully requires that we have an effective planning and management process. The expansion and growth of our business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls, systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects.

Catastrophic events may disrupt our business.

Our inventory, dispensaries and overall operations are vulnerable to damage or interruption from fires, floods, power losses, telecommunications failures, cyber-attacks, terrorist attacks, acts of war, human errors, break-ins and similar events. Additionally, we rely on our third-party suppliers for our inventory. In the event of a catastrophic event, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our product development, and lengthy interruptions in our services, breaches of data security and loss of critical data, all of which could have an adverse effect on our future operating results.

Puerto Rico is susceptible to hurricanes and major storms, which could further deteriorate Puerto Rico’s economy and infrastructure.

Recent hurricanes in Puerto Rico have significantly impacted government operations and infrastructure, causing a disruption in economic activity. These adverse effects could delay completing construction of our Old San Juan location, as well as the issuance of the requisite operating license from the Department of Health of Puerto Rico in order to commence operations. Our construction site did not suffer any substantial damage. As of the date of this Form 10-K, we have completed construction on all of our dispensary locations in Puerto Rico except for our Old San Juan and Condado locations and we anticipate commencing construction on both location during the third quarter of 2019.

Any new or changes made to laws, regulations, rules or other industry standards affecting our business may have an adverse impact on our financial results.

We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business within the cannabis industry, many of which are still evolving and could be interpreted in ways that could harm our business. In the United States, cannabis is currently classified as a Schedule I controlled substance under the CSA and is, therefore, illegal under federal law. Even in those states in which the use of cannabis has been legalized pursuant to state laws, its use, possession or cultivation remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “DOJ”) defines Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence.”

Notwithstanding the CSA, as of the date of this filing, 33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow their residents to use medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level.

Such conflict between federal laws and state laws regarding cannabis has created a complicated environment for cannabis businesses in regards to restrictive banking regulations, interstate trade, IRS tax code and federal bankruptcy laws, especially for companies that directly “touch the plant” such as growers and distributors. For example, since the possession or distribution of cannabis violates federal law, banks that provide services may face the threat of prosecution or sanctions. As a result of being denied banking services or direct access to conventional loans, many of the companies that grow or distribute cannabis directly are forced to transact business on a cash-only basis.

The banking issues created by the federal laws have required the cannabis industry to focus on viable alternatives and have created opportunities for new providers, from finance companies to security and software firms. The issue of interstate trade requires companies that grow or distribute cannabis to duplicate efforts within each state they wish to legally operate and has limited the development of ‘national’ brands. If we are unable to raise capital or conduct operations as a result of various laws and regulations, we may be unable to finance our activities which would have an adverse impact on our operations and financial results.

Laws and regulations affecting the cannabis industry are constantly changing, and this may affect our consumer base in ways that we are unable to predict.

Local, state and federal medical cannabis laws and regulations are broad in scope and subject to evolving interpretations. We cannot predict the nature of any future laws, regulations, interpretations or applications that may affect us, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on the vitality of the cannabis legalization movement or the unification or popularity of the community in favor of legalization, the members of which community form our anticipated consumer base and underpin our business model.

The Company’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products.

The Company’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products. Section 12619 of the Agriculture Improvement Act of 2018 (“2018 Farm Bill”) removed “hemp,” as defined in the Agricultural Marketing Act of 1946 (the “1946 Agricultural Act”), from the classification of “marijuana,” which is generally prohibited as a Schedule I drug under the Controlled Substances Act of 1970 (“CSA”). Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), the term “hemp” means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” As a result of the passage of the 2018 Farm Bill, and since the Company believes that its CBD products contain parts of the cannabis plant with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3 percent on a dry weight basis, the Company believes that its CBD products are not governed by the CSA and, ergo, would not be subject to prosecution thereunder because the Company believes that its CBD products contain “hemp” within the meaning of the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and do not contain any “marijuana” as prohibited under the CSA (as amended by the 2018 Farm Bill); provided, however, there is a lack of legal protection for hemp-based products that contain more than 0.3 percent THC and there is a risk that the Company would be subject to prosecution under the CSA in the event that its CBD products are found to contain more than 0.3 percent THC.

Furthermore, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) provides additional regulations regarding the production of hemp-based products and there is the risk that the Company’s CBD products may be found to be in violation of these regulations. Specifically, the 1946 Agricultural Act (as amended by the 2018 Farm Bill) contains provisions relating to the shared state-federal jurisdiction over hemp cultivation and production, whereby states and Indian tribes have been delegated the broad authority to regulate and limit the production and sale of hemp and hemp products within their borders. Under the 1946 Agricultural Act (as amended by the 2018 Farm Bill), a plan under which a State or Indian tribe monitors and regulates the production of hemp shall only be required to include “(i) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (ii) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (iii) a procedure for the effective disposal of—(I) plants, whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants; (iv) a procedure to comply with enforcement procedures ; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of applicable law; (vi) a procedure for submitting the information , as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out the practices and procedures described in clauses (i) through (vi).” Further, a hemp producer in a State or the territory of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government, as applicable; or (iii) producing Cannabis sativa L. with a delta-9 tetrahydrocannabinol concentration of more than 0.3 percent on a dry weight basis.” A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable, determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe, as applicable.” In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor and regulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced in violation of [applicable law]; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not produced in violation of this subtitle; and (F) such other practices or procedures as the Secretary considers to be appropriate. The Secretary shall also establish a procedure to issue licenses to hemp producers. In the case of a State or Indian tribe for which a State or Tribal plan is not approved under applicable law, it shall be unlawful to produce hemp in that State or the territory of that Indian tribe without a license issued by the Secretary. A violation of a plan established by the Secretary shall be subject to enforcement and the Secretary shall report the production of hemp without a license issued by the Secretary to the Attorney General. In the event that the Company’s CBD products are found to be in violation of these regulations, the Company may become subject to enforcement action as provided for in the 1946 Agricultural Act (as amended by the 2019 Farm Bill) and may become subject to prosecution thereunder.

Laws and regulations affecting the hemp industry are constantly changing, which could detrimentally affect our proposed operations in the event that the Company’s CBD products become subject to such regulation.

Local, state and federal laws and regulations relating to hemp-based products are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan in the event that the Company’s CBD products become subject to such regulation. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects of our planned operations in the event that the Company’s CBD products become subject to such regulation. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business in the event that the Company’s CBD products become subject to such regulation.

The Company’s CBD products may become subject to the application of laws relating to health and safety of our products.

The Company’s CBD products are subject to the application of laws relating to health and safety of our products. Specifically, the Company’s CBD products may be governed by the Federal Food Drug and Cosmetic Act (FD&C Act) as a drug. The FD&C Act is intended to assure the consumer, in part, that drugs and devices are safe and effective for their intended uses and that all labeling and packaging is truthful, informative, and not deceptive. The FD&C Act and FDA regulations define the term drug, in part, by reference to its intended use, as “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the body of man or other animals.” Therefore, almost any ingested or topical or injectable product that, through its label or labeling (including internet websites, promotional pamphlets, and other marketing material), that is claimed to be beneficial for such uses will be regulated by FDA as a drug. The definition also includes components of drugs, such as active pharmaceutical ingredients. The FD&C Act defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled, or sprayed on, introduced into, or otherwise applied to the human body...for cleansing, beautifying, promoting attractiveness, or altering the appearance.” See FD&C Act, sec. 201(i). Among the products included in this definition are skin moisturizers, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, cleansing shampoos, permanent waves, hair colors, and deodorants, as well as any substance intended for use as a component of a cosmetic product. Under the FD&C Act, cosmetic products and ingredients, with the exception of color additives, do not require FDA approval before they go on the market. Drugs, however, must generally either receive premarket approval by FDA through the New Drug Application (NDA) process or conform to a “monograph” for a particular drug category, as established by FDA’s Over-the-Counter (OTC) Drug Review. These monographs specify conditions whereby OTC drug ingredients are generally recognized as safe and effective, and not misbranded. Certain OTC drugs may remain on the market without an NDA approval until a monograph for its class of drugs is finalized as a regulation. However, once FDA has made a final determination on the status of an OTC drug category, such products must either be the subject of an approved NDA (see FD&C Act, sec. 505(a) and (b), or comply with the appropriate monograph for an OTC drug.

Additionally, it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. In January of 2018, the New York City Department of Health banned the sale of CBD-infused food products. As of the date hereof, legislators are calling on the FDA to provide guidance on legal pathways for food products infused with CBD to be sold. Therefore, until the FDA provides guidance, restaurants may become hesitant to purchase CBD additives and CBD-infused food products.

The Company may face significant competition from companies that serve its industries.

The CBD products industry is subject to intense competition. The Company will be competing for customers with competitors who have greater financial and marketing resources, which would allow them to expand and improve their marketing efforts in ways that could affect the Company’s ability to effectively compete in this market. If the Company is unable to compete successfully, its financial performance may be adversely affected.

The Company is subject to the potential factors of market changes.

The business of the Company will be significantly impacted by the performance of the CBD products industry and may experience more volatility and be exposed to greater risk than a more diversified business.

Negative press from having a hemp or cannabis-related line of business could have a material adverse effect on our business, financial condition, and results of operations.

There is a misconception that hemp and marijuana, which both belong to the cannabis family, are the same thing, but industrial hemp is roughly defined as a cannabis plant with not more than 0.3 percent THC content on a dry-weight basis. Any hemp oil or hemp derivative we use will comport with this definition of less than 0.3% THC. Despite this, we may still receive negative attention from the press, business clients, or partners, grounded in these broad misconceptions, and this in turn can materially adversely affect our business.

If we fail to comply with any of the various government regulations we are subject to, our ability to maintain operations and execute our business strategy as planned could be negatively impacted.

We are subject to various federal, state, provincial and local laws affecting the possession, consumption, production, supply and sale of products that contain cannabis and hemp-derived CBD. Certain U.S. federal government agencies, including but not limited to, the USDA, U.S. Food and Drug Administration (“FDA”), U.S. Drug Enforcement Administration (“DEA”), and Federal Trade Commission (“FTC”), as well as Health Canada, state, local, and provincial agencies, and various European agencies specific to each country, have jurisdiction over and regulate all aspects of cannabis and hemp-derived CBD, including the advertising and representations made by businesses in the sale of such products, which will apply to us. Our inability to remain in compliance with all of the regulations applicable to our operations and the products we intend to produce could negatively impact our business and our ability to execute our business strategy.

The illegal status of cannabis under U.S. federal law could subject us to criminal prosecution and civil liability, which would have an adverse impact on the Company and potentially those affiliated with us.

Cannabis is classified as a Schedule I controlled substance in the U.S. Controlled Substances Act (“CSA”) and is therefore illegal under U.S. federal law. As a result, it remains illegal under U.S. federal law to grow, cultivate, sell or possess cannabis for any purpose or to assist or conspire with those who do so. Additionally, 21 U.S.C. 856 makes it illegal to “knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance.” Even in those U.S. states in which the use of cannabis has been authorized, its use remains a violation of federal law, and any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture. Any person that is connected to the U.S. cannabis industry, including, but not limited to, an investor in the Company, may be at risk of federal criminal prosecution and civil liability. Any investments could also be subject to civil or criminal forfeiture and a total loss.

Our involvement in the U.S. cannabis industry could subject us to the Racketeer Influenced Corrupt Organizations Act (“RICO”), a U.S. federal law that criminalizes the use of any profits from certain defined “racketeering” activities in interstate commerce, which could result in the Company or individuals affiliated with the Company being subject to criminal prosecution or civil liability.

While intended to provide an additional cause of action against organized crime, due to the fact that cannabis is illegal under U.S. federal law, the production and sale of cannabis qualifies cannabis-related businesses as “racketeering” as defined by RICO. As such, all officers, directors and owners in a cannabis-related business could be subject to criminal prosecution under RICO, which carries substantial criminal penalties. RICO can create civil liability as well: persons harmed in their business or property by actions which would constitute racketeering under RICO often have a civil cause of action against such “racketeers,” and can claim triple their amount of estimated damages in attendant court proceedings. The Company as well as its officers, directors and owners could all be subject to civil claims under RICO. Since U.S. federal law criminalizing the use of cannabis is not preempted by state laws that legalize its use, strict enforcement of federal law regarding cannabis would likely result in the Company’s inability to proceed with certain aspects of our business plan, and a possible total loss of our investment.

A U.S. court may decide not to enforce a contract related to cannabis, which could negatively impact our rights and ability to defend claims involving the Company.

Some U.S. courts have determined that contracts relating to state legal cultivation and sale of cannabis are unenforceable on the grounds that they are illegal under federal law and therefore void as a matter of public policy. This could substantially impact the rights of parties making or defending claims involving the Company and any lender of or interest holder in the Company.

The U.S. Department of Justice’s (“DOJ”) rescission of the “Cole Memorandum” created increased uncertainty around the DOJ’s current enforcement priorities in relation to state law-compliant cannabis operations, which may negatively impact the Company’s ability to determine how to operate in the U.S. cannabis industry in a manner that minimizes the risk of federal enforcement.

The Company’s business plan involves certain U.S. cannabis activities. Notably, on January 4, 2018, then-U.S. Attorney General Sessions (“Sessions”), an appointee of President Donald J. Trump, rescinded the previously issued guidance (the “Cole Memorandum”) from the DOJ which de-prioritized the enforcement of federal law against cannabis users and businesses who comply with state cannabis laws, adding uncertainty to the question of how the U.S. federal government would choose to enforce federal laws regarding cannabis. At that time, Sessions issued a memorandum to all U.S. Attorneys in which he affirmatively rescinded the previous guidance as to cannabis enforcement, calling such guidance “unnecessary.” Sessions’ one-page memorandum was vague in nature, stating that federal prosecutors should use established principles in setting their law enforcement priorities. Under previous administrations, the DOJ indicated that those users and suppliers of cannabis who complied with state laws, which required compliance with certain criteria, would not be prosecuted. As a result, there is now more uncertainty regarding whether the DOJ will seek to enforce the CSA against those users and suppliers who comply with state cannabis laws. If such enforcement occurs, the U.S. federal government could potentially choose to seize property and proceeds, and arrest individuals affiliated with the Company. However, current Attorney General William Barr (“Barr”) indicated he would not promote prosecution against companies that have relied on the Cole Memorandum, nor would he upset expectations or reliant interests related to it.

If the U.S. Department of the Treasury decides to rescind the “FinCen Memo,” it could have an adverse impact on the Company’s business, results of operations, and financial condition.

Despite Sessions’ rescission of the Cole Memorandum, the U.S. Department of the Treasury, Financial Crimes Enforcement Network (“FinCEN”) has not rescinded the “FinCEN Memo” dated February 14, 2014, which de-prioritizes enforcement of the Bank Secrecy Act (as amended, the “BSA”) against financial institutions and cannabis-related businesses that utilize them. This FinCEN Memo appears to be a standalone document and is presumptively still in effect. At any time, however, FinCEN could elect to rescind the FinCEN Memo. This would make it more difficult for the Company to access the U.S. banking system and conduct financial transactions. Enforcement of the BSA against the Company would also be made more likely by the rescission of the FinCEN Memo. This could subject the Company’s officers, directors and investors to potential criminal prosecution and have a material adverse effect on the Company’s business, results of operations, and financial condition. Even with the FinCEN Memo in place, prosecution of the Company for violations of the BSA remains possible, as the FinCEN Memo is only prosecutorial guidance and does not have the force of law.

FinCEN also issued a memo attempting to clarify how financial institutions can provide services to businesses in the cannabis industry consistent with their BSA obligations. In addition to performing thorough customer due diligence, including ongoing monitoring, FinCEN also advises institutions to consider whether customer activities involve any of the eight enforcement priorities identified by the DOJ, or violate any state law. Banks must file suspicious activity reports and comply with other reporting requirements. Since the issuance of these two memos, the banking industry has continued to exercise caution and hesitation with respect to offering even basic banking services to cannabis-related businesses. Some banks have ceased offering these services altogether in light of the FinCEN memo for concern about the policing requirements imposed. Therefore, even if a cannabis-related business is operating in compliance with state law, federally insured banks could face serious consequences from the DOJ for violating federal drug trafficking and money laundering statutes. The Company may also be subject to increased scrutiny and risk of federal investigation into our investment and transactions under anti-money laundering laws. While elected officials have sought amendments to banking regulations and laws in order to allow banks to transact business with state-authorized medical cannabis businesses, there can be no assurance such legislation will be successful, that banks will decide to do business with medical cannabis retailers, or that in the absence of legislation, state and federal banking regulators will not strictly enforce current prohibitions on banks handling funds generated from an activity that is illegal under federal law. These policies have an impact on the Company’s ability to access traditional banking services and credits from banks.

The U.S. Congress could fail to renew the “Appropriations Rider” that protects state law-compliant medical cannabis businesses, which would increase the risk of federal prosecution in connection with certain aspects of the Company’s business plan.

In 2014, Congress passed a spending bill (the “2015 Appropriations Bill”) containing a provision (the “Appropriations Rider” or as it is sometimes known, the “Rohrbacher-Farr Amendment”) blocking federal funds and resources allocated under the 2015 Appropriations Bill from being used to “prevent such States from implementing their own State [medical marijuana] law[.]” The Appropriations Rider seemed to have prohibited the federal government from interfering with the ability of states to administer their medical cannabis laws, although it did not codify federal protections for medical cannabis patients and producers. Moreover, despite the Appropriations Rider, the DOJ maintains that it can still prosecute violations of the federal cannabis ban and continue cases already in the courts. Additionally, the Appropriations Rider must be renewed every year. It was most recently renewed on December 20, 2019, and is effective through September 30, 2020. There is no guarantee that the Appropriations Rider will continue to be renewed, and if it is not, this could have an adverse impact on the Company’s business.

Further legislative development related to laws pertaining to the cannabis industry is not guaranteed, and if that development slows, halts, or regresses, the Company’s business plan would be negatively impacted.

To date, a total of 33 U.S. states, plus the District of Columbia, have legalized cannabis in some form. The recreational use of cannabis has been legalized in 11 U.S. states, including Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington. We may be required to obtain permits from various states in order to produce, supply and sell cannabis and certain of our other products in those states. We currently have no government permits to sell cannabis in any jurisdiction. Continued development of the cannabis industry in the U.S. is dependent upon continued legislative and regulatory authorization of cannabis at the state level. Any number of factors could slow or halt progress in this area, as the cannabis industry still faces opposition. Further progress is not assured, and the legality of cannabis could be reversed in one or more U.S. states in which the Company intends to operate. While there may be ample public support for legislative action, numerous factors impact the legislative and regulatory process. Any one of these factors could slow or halt business operations relating to cannabis or the current tolerance for the use of cannabis by consumers, which would negatively impact the Company’s business plan.

Even if cannabis is generally legalized in the U.S. at the federal and state government levels, commerce in cannabis is still expected to be heavily regulated and taxed, which will have a material effect on our operating results, financial condition and business performance. Although the Company believes its business activities and those of its subsidiaries are compliant with the laws and regulations of the jurisdictions in which the Company and its subsidiaries operate or plan to operate, strict compliance with state and local laws with respect to cannabis and hemp-derived CBD in the U.S. neither absolves the Company of liability under U.S. federal law, nor provide a defense to any proceeding that may be brought against the Company under federal law. Any proceeding that may be brought against the Company could have a material adverse effect on the Company’s business, financial condition and results of operations.

We may face tax issues specific to cannabis companies operating in the U.S.

The U.S. federal tax code, specifically 26 U.S. Code § 280E, bars companies engaged in the distribution of substances identified in the CSA from taking tax credits and standard deductions. Therefore, in the U.S., state law-compliant cannabis operators that cultivate, manufacture, or distribute cannabis products are prohibited from deducting business-related expenses, including rent, health coverage, and labor costs in order to lower their federal tax liability. While some have proceeded with classifying certain expenses as cost of goods sold (“COGS”), a specific categorization for qualifying costs, a recent Internal Revenue Service (“IRS”) memo narrowed the definition of COGS. High tax liability for state law-compliant cannabis operations may impair their ability to operate at a profit or continue operation at all. Efforts to revise the tax code have not gained support throughout Congress. In addition, states and localities may levy various taxes on cannabis operators. Tax rates specific to cannabis operators are likely to continue to change in the coming years, and these changes could have a negative impact on our ability to execute our business plan.

The recent coronavirus outbreak may adversely affect our business.

In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has reached multiple other countries, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in China, the U.S., Italy, Israel and other affected countries. The continued outbreak and spreading of the coronavirus has and may continue to adversely impact our business, as our operations are based in the United States which has been severely affected by the outbreak. The various precautionary measures taken by many governmental authorities around the world in order to limit the spread of the coronavirus has had and may continue to have an adverse effect on the global markets and global economy, including on the availability and pricing of employees, resources, materials, manufacturing and delivery efforts and other aspects of the global economy. The financial downturn has compelled us to furlough or reduce working hours for much of our operating staff, as well as third-party contractors, and our clients may encounter cash-flow issues that will delay their payments to us. We also rely on third-party professionals to provide services such as the preparation of our financial statements and to conduct audits, and many of these parties have been affected by government-imposed precautionary measures, thereby delaying our receipt of these services. Therefore, the coronavirus has and could continue to disrupt production and cause delays in the supply and delivery of our products, may continue to affect our operation and disrupt the marketplace in which we operate and may have a material adverse effect on our operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. The development of the coronavirus outbreak could materially disrupt our business and operations, hamper our ability to raise additional funds or sell our securities, continue to slow down the overall economy, curtail consumer spending, interrupt our sources of supply, and make it hard to adequately staff our operations.

Risks Related to Our Common Stock

There is not an active liquid trading market for the Company’s common stock.

As of October 1, 2019, the Company’s common stock was moved from the OTCQB listing and is currently quoted on the OTC Pink Market under the symbol “GSRX”. There is a significant risk that if an active trading market develops for the Company’s stock, the Company’s stock price may fluctuate dramatically in response to any of the following factors, some of which are beyond our control:

Our common stock may be subject to the “penny stock” rules of the Securities and Exchange Commission, which may make it more difficult for stockholders to sell our common stock.

The SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company’s common stock if and when such shares are eligible for sale and may cause a decline in the market value of its stock.

Because we became a public by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.

Because we became public through a “reverse acquisition”, securities analysts of brokerage firms may not provide coverage of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.

Applicable regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for the Company to retain or attract qualified officers and directors, which could adversely affect the management of its business and its ability to obtain or retain listing of its common stock.

We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for effective management because of the rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series of related rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of new and more stringent rules by the stock exchanges. The perceived increased personal risk associated with these changes may deter qualified individuals from accepting roles as directors and executive officers.

Further, some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of its business and its ability to obtain or retain listing of our shares of common stock on any stock exchange (assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.

Voting power is highly concentrated in one stockholder.

Chemesis International, Inc. currently owns one thousand (1,000) shares of Series A Preferred Stock which entitles it to 51% of the voting power. In addition, pursuant to the Certificate of Designation for of the Series A Preferred Stock, the Company is prohibited from designating any other class or series of preferred stock without first obtaining prior approval from the holder of the Series A Preferred Stock. Such concentrated control of the Company may adversely affect the price of our common stock. A stockholder that acquires common stock will not have an effective voice in the management of the Company.

We do not intend to pay dividends for the foreseeable future.

We have paid no dividends on our common stock to date and we do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of the business, we currently anticipate that we will retain any earnings to finance our future expansion and for the implementation of our business plan. A lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in our Company.

Our stockholders may experience significant dilution.

We have a significant number of warrants to purchase our common stock outstanding, the exercise of which would be dilutive to stockholders. In certain instances, the exercise prices are subject to adjustment if we issue or sell shares of our common stock or equity-based instruments at a price per share less than the exercise price then in effect. In such case, both the issuance and the adjustment would be dilutive to stockholders.

We may from time to time finance our future operations or acquisitions through the issuance of equity securities, which securities may also have rights and preferences senior to the rights and preferences of our common stock. We may also grant options to purchase shares of our common stock to our directors, employees and consultants, the exercise of which would also result in dilution to our stockholders.

Our articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors has the authority to issue, upon obtaining prior consent from the holder of Series A Preferred Stock, up to 9,999,000 shares of our preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.

As an issuer of “penny stock”, the protection provided by the federal securities laws relating to forward looking statements does not apply to us.

Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2. PROPERTIES.

Our principal offices are located at Building No. 3, P.R. 696, int. Jose Efron Ave., Dorado, PR 00646. We have leases at the following locations:

ITEM 3. LEGAL PROCEEDINGS.

From time to time we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business. Other than discussed below, Part III, Item 10, no director, executive officer or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

Other than discussed below, Part III, Item 10, to our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years:

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is quoted on the OTC Pink of the OTC Markets, Inc. under the symbol “GSRX”. The following table sets forth the high and low closing quotations for our common stock for each quarterly period within the two most recent fiscal years. There has been minimal reported trading to date in the Company’s common stock.

The following table sets forth the high and low closing quotations for our common stock on the OTC markets. Beginning October 1, 2019, the Company stock was moved from OTCQB to OTC Pink for the periods shown. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

As of June 10, 2020, our common stock had a closing price of $0.04 per share.

Holders

As of June 11, 2020, there were 81,799,286 shares of our Common Stock issued and outstanding. There were 117 stockholders of record at this time.

Dividend Policy

We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant.

Recent Sales of Unregistered Securities

June 2018 Offering

On June 7, 2018, the Company entered into a subscription agreement (the “June Agreement”) with selected accredited investors (the “Investors”). Pursuant to the terms of the June Agreement, the Company offered in a private placement (the “June Offering”) common stock, par value $0.001 per share (the “Shares”) at a purchase price of $3.50 per share.

In the June 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 of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.

July 2018 Offering

On July 18, 2018, the Company entered into a subscription agreement (the “July Agreement”) with selected accredited investors (the “Investors”). Pursuant to the terms of the July Agreement, the Company offered in a private placement (the “July Offering”) common stock, par value $0.001 per share (the “Shares”) at a purchase price of $2.50 per share.

In the July Offering, the Company issued a total of 190,000 Shares for total gross proceeds of $475,000.

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 of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.

October 2018 Offering

On October 5, 2018, the Company entered into a subscription agreement (the “October Agreement”) with selected accredited investors (the “Investors”). Pursuant to the terms of the October Agreement, the Company agreed to issue and sell in a private placement (the “October Offering”) units (each, a “Unit” and collectively, the “Units”) at a purchase price of $1.25 per Unit, each consisting of: (i) one (1) share of the Company’s common stock, par value $0.001 per share (the “Shares”); and (ii) a warrant to purchase such number of shares of common stock equal to 50% of the number of Shares to be issued to each Investor under the Subscription Agreement (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 $2.50 per share, subject to adjustment as provided in the Warrant agreement (the “Warrant Agreement”).

In the October Offering, the Company sold a total of 1,035,600 Units for total gross proceeds of $1,294,500. As a result, the Company issued to the investors a total of 1,035,600 Shares and 517,800 Warrants.

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 of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.

March 2019 Offering

On March 6, 2019, the Company entered into a subscription agreement (the “March Agreement”) with selected accredited investors (the “Investors”). Pursuant to the terms of the March Agreement, the Company agreed to issue and sell in a private placement (the “March Offering”) units (each, a “Unit” and collectively, the “Units”) at a purchase price of $1.25 per Unit, each consisting of: (i) one (1) share of the Company’s common stock, par value $0.001 per share (the “Shares”); and (ii) a warrant to purchase such number of shares of common stock equal to 33% of the number of Shares to be issued to each Investor under the Subscription Agreement (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 two (2) years at an exercise price per share equal to $1.75 per share, subject to adjustment as provided in the Warrant agreement (the “Warrant Agreement”).

In the March Offering, the Company sold a total of 621,600 Units for total gross proceeds of $777,000. As a result, the Company issued to the investors a total of 621,600 Shares and 207,200 Warrants.

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 of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.

2019 Private Placements

On June 25, 2019, the Company entered into a subscription agreement (the “June Agreement”) with selected accredited investors (the “Investors”). Pursuant to the terms of the June Agreement, the Company offered in a private placement (the “July Offering”) common stock, par value $0.001 per share (the “Shares”) at a purchase price of $0.50 per share.

In the June Offering, the Company sold a total of 400,000 common shares for total gross proceeds of $200,000.

On July 18, 2019, the Company entered into a subscription agreement (the “July Agreement”) with selected accredited investors (the “Investors”). Pursuant to the terms of the July Agreement, the Company offered in a private placement (the “July Offering”) common stock, par value $0.001 per share (the “Shares”) at a purchase price of $0.50 per share.

In the July Offering, the Company sold a total of 412,000 common shares for total gross proceeds of $206,000.

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 of 1933, as amended (the “Securities Act”) for transactions not involving a public offering.

Consultant Issuances

During the year ended December 31, 2019, the Company issued an aggregate of 22,663,385 shares of common stock, par value $0.001 per share, to consultants for services rendered.

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 6. SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

This Management’s Discussion and Analysis or Plan of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for our products, and competition.

Unless the context indicates or suggests otherwise, references to “we,” “our,” “us,” the “Company,” or “GSRX” refer to GSRX Industries Inc., a Nevada corporation, individually, or as the context requires, collectively with its consolidated subsidiaries.

GSRX Industries Inc. was incorporated in Nevada under the name “Cyberspace Vita, Inc.” on November 7, 2006. The Company’s original business plan was to create and conduct an online business for the sale of vitamins and supplements; however, Cyberspace never generated any meaningful revenues. On May 5, 2008, Cyberspace discontinued its prior business and changed its business plan.

Following discontinuation of its initial business plan, the Company’s business plan was to seek, investigate, and, if warranted, acquire one or more properties or businesses, and to pursue other related activities intended to enhance stockholder value. The acquisition of a business opportunity may be made by purchase, merger, exchange of stock, or otherwise, and may encompass assets or a business entity, such as a corporation, joint venture, or partnership.

On May 11, 2017, the Company entered into an Exchange Agreement with Project 1493, and the sole member of 1493, pursuant to which the member transferred all of the outstanding membership interests of 1493 to the Company in exchange for 16,690,912 of its restricted shares of common stock and warrants to purchase up to 3,000,000 shares of common stock at an exercise price of $0.50 per share.

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. The Company, together with its wholly-owned subsidiary, is in the business of acquiring, developing and operating medical cannabis dispensaries in Puerto Rico.

On May 12, 2017, the Company changed its name from “Cyberspace Vita, Inc.” to “Green Spirit Industries Inc.” On June 22, 2018, the Company changed its name from “Green Spirit Industries Inc.” to “GSRX Industries Inc.”

As of the date of this Report, we have financed operations through a combination of equity financings including net proceeds from the private placements of stock. Although it is difficult to predict our liquidity requirements, based upon our current operating plan, as of the date of this Report, we believe we will have sufficient cash to meet our projected operating requirements until the end of 2020, at which point we anticipate nearing or reaching cash-flow breakeven. See “Liquidity and Capital Resources.”

RESULTS OF OPERATIONS

Twelve Months Ended December 31, 2019 Compared to December 31, 2018

The following table summarizes the results of our operations during the fiscal years ended December 31, 2019 and 2018, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the current 12-month period to the prior 12-month period:

We incurred a net loss of $36,257,003 for the fiscal year ended December 31, 2019 as compared with a net loss of $16,239,276 for the fiscal year ended December 31, 2018. The loss is primarily due to expenses incurred as operations of dispensaries began in 2019, unrealized loss of investments and stock based compensation. The loss was also decreased by the increase in revenues.

Net Cash Used in Operating Activities

We used $709,371 in operating activities during the year ended December 31, 2019. The use of cash was primarily a result of the use of cash in operations of $5,686,635, which is derived from net loss of $36,257,003 less non-cash shared based compensation of $19,135,617 and non-cash unrealized loss of investments of $11,434,751. In addition, we used for inventory of $81,856. The use of cash was offset by the increase in prepaid inventory of $143,252, prepaid expenses of $23,800, accounts payable of $154,288 and accrued expenses of $369,926.

Net Cash Used in Investing Activities

We had a decrease of $1,195,666 in investing activities during the year ended December 31, 2019. We used $549,982 in advance to parent and affiliate, $309,613 for deposits, $215,101 for fixed assets, $70,000 to invest in closely held companies, $135,546 for Patent Application Costs and $215,424 for construction in progress. We received $300,000 repayment of advance to parent.

Net Cash From Financing Activities

We received $2,696,897 from financing activities. We received $1,183,000 from proceeds for the issuance of common stock and warrants. In addition, we received proceeds of $1,514,997 from capital contributed by non-controlling interests.

Contractual Obligations and Commitments

Information regarding our Contractual Obligations and Commitments is contained in Note 8 to the Financial Statements.

Liquidity and Capital Resources

As of December 31, 2019, we had $604,274 cash on hand compared to $1,313,645 as of December 31, 2018. 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.

During 2019, we have financed our operations during the year through proceeds from offerings conducted by the Company in the amount of $1,183,000 and from operations.

As of December 31, 2019, GSRX had $8,046,604 of total assets, a working capital surplus of $775,319 and an accumulated equity of $4,461,301. The Company’s operating activities used $709,371 in cash for the fiscal year ended December 31, 2019. GSRX earned $11,004,406 of revenues during the fiscal year ended December 31, 2019.

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 or capital expenditures or capital resources that are material to an investor in our securities.

Seasonality

Our operating results were not affected by seasonality.

Inflation

Our business and operating results are not affected in any material way by inflation.

Critical Accounting Policies

The Securities and Exchange Commission issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” suggesting that companies provide additional disclosure and commentary on their most critical accounting policies. In Financial Reporting Release No. 60, the Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The nature of our business generally does not call for the preparation or use of estimates except for accrued expenses, right of use, stock based compensation and realization on investments.

Limited Operating History

There is limited historical financial information about us which to base an evaluation of our performance. 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.

Plan of Operations

We will continue to generate revenues from our current business operations of selling medical cannabis and cannabis products and limited revenues from our sale of CBD products. We currently operate five (5) dispensaries in Puerto Rico and one (1) in California, one (1) CBD kiosk and we have wholesale revenues and online sales. We expect to complete construction at and receive the necessary licensing to begin operations for three Puerto Rico dispensaries in 2020, the manufacturing and distribution businesses in Point Arena are expected to begin operations in the third quarter of 2020.

Over the next 12 months, we plan to continue operating medical cannabis dispensaries. We currently operate 6 locations. Our current fixed overhead is approximately $85,000 per month. We anticipate fixed overhead increasing when the dispensaries begin operations.

Our primary source of revenue is expected to be derived from selling medical cannabis and cannabis related products in the dispensaries. In order to acquire a significant market share, we will have to advertise and market our products. 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. 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.

ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

All financial information required by this Item is attached hereto at the end of this report beginning on page F-1 and is hereby incorporated by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management has concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report to provide the reasonable assurance discussed above.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Our management has concluded that, as of December 31, 2019, our internal control over financial reporting is not effective based on these criteria.

Turner Stone & Company, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, was not required to issue an attestation report on our internal control over financial reporting.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth the names and ages of all of our directors and executive officers as of June 11, 2020. Our Board of Directors is currently comprised of three members, who are elected annually to serve for one year or until their successor is duly elected and qualified, or until their earlier resignation or removal. Executive officers serve at the discretion of the Board of Directors and are appointed by the Board of Directors.

Mr. Nihart brings an extensive background in business operations that have included a focus on profit and loss optimization, strategic planning, finance and financial reporting. Prior to joining the Corporation, he served as a Strategic Advisor of Iso International, LLC from July 2018 through January 2020. He also served as COO of Iso International, LLC DBA Isodiol from January 2016 through June 2017 and as President of Iso International, LLC from June 2017 through June 2018. Additionally, he served as President for HempMeds from 2013 through 2016 and was a Co-Founder of Kannaway in 2014.

Mr. Parmar has served as a director of Chemesis since July 2018. Previously, Mr. Parmar was a director of Isodiol International Inc. From May 2017 through November 2018 and a director of Vanc Pharmaceutical Inc. From December 2014 through December 2015. Additionally, Mr. Parmar has served as the General Manager of Haraman Development Inc. since February 2011.

Mr. Rogers has been in the direct sales industry 32 years. In 1995 he co-founded his first direct sales company launching him into a career of helping people reach their financial goals. His experience includes every facet of the industry, from company owner to field leader to expert consultant. Mr. Rogers has owned or been on the executive team of five direct sales companies.

Mr. Dale brings 25 years of operational management experience to the Company. Shaun’s proven track of success brings stability and growth to GSRX’s operations and his experience will help guide GSRX as it looks to further expand into other industries.

Mr. Dooly has over 37 years’ experience in operations and business development in various industries. He has held many positions including COO, CCO, and has founded multiple marketing and distribution companies. In addition to his professional experience, Mr. Dooly is a public speaker and radio host.

Mr. Gingerich serves as our Chief Financial Officer and Secretary. He has 35 years of accounting experience in public and private practice, specializing in tax compliance, structures and tax planning. He is a former Partner at Lain, Faulkner & Co, PC specializing in forensic accounting. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.

Family Relationships

No family relationships exist between any of our current or former directors or executive officers.

Involvement is Certain Legal Proceedings

Other than as described below, no director, executive officer or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

From April 2012 until August 2012, Mr. Dooly was a paid consultant providing public relations and media services for Rex Venture Group, LLC (“Rex Ventures”), the parent company of ZeekRewards.com (“ZeekRewards”). During the tenure of Mr. Dooly’s consultancy and the discharge of his obligations thereunder with Rex Ventures he did not disclose to his readers and listeners the compensation arrangement with Rex Ventures. Mr. Dooly believed that under a non-disclosure agreement with Rex Ventures that Rex Ventures maintained the exclusive right to determine whether or not to disclose the consulting arrangement and the amount of compensation.

In August 2012 ZeekRewards was shut down by the SEC for operating an illegal pyramid and ponzi scheme and as a result the SEC brought an administrative action against Mr. Dooly for violation of Section 17(b) of the Securities Act. On September 30, 2013, Troy Dooly entered into an agreement to settle the matter in connection the asserted violation of Section 17(b) of the Securities Act and paid $6098.81 in disgorgement, interest and civil penalties to the court appointed receiver.

Board Leadership Structure and Role in Risk Oversight

Due to the small size and early stage of the Company, we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined.

Our Board of Directors is primarily responsible for overseeing our risk management processes on behalf of the Company. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.

Board Committees

There are currently no committees of the Board of Directors, and the Company does not presently have a director who meets the definition of an “audit committee financial expert”.

Code of Ethics

Our board of directors intends to adopt a code of ethics that our officers, directors and any person who may perform similar functions will be subject to.

ITEM 11. EXECUTIVE COMPENSATION.

No past officer or director of the Company has received any compensation and none is due or payable prior to the reverse merger. Our former sole officer and director, Alexander Diener, did not receive any compensation for the services he rendered to the Company, has not received compensation in the past, and is not accruing any compensation pursuant to any agreement with the Company. No retirement, pension, profit sharing, stock option or insurance programs or other similar programs have been adopted by the Company for the benefit of the Company’s employees prior to the reverse merger. In addition, no compensation has been paid or due to our current officers and director as of December 31, 2019.

The table below shows the compensation for services in all capacities we paid during the years ended December 31, 2019 and 2018 to the individuals serving as our principal executive officers during the last completed fiscal year and our other two most highly paid executive officers at the end of the last completed fiscal year (whom we refer to collectively as our “named executive officers”);

Employment Agreements with Named Officers

Leslie Ball. On March 27, 2019, the Company entered into an Executive Consulting Agreement with Leslie A. Ball, the Company’s Chief Executive Officer and member of its Board (the “Ball Consulting Agreement”). Pursuant to the Ball Consulting Agreement, the Company engaged Mr. Ball to provide such services and to perform such duties and functions customarily performed by, and to have all the responsibilities customary to, the role of Chief Executive Officer of the Company and any of its subsidiaries, as more fully described in the Ball Consulting Agreement. The Ball Consulting Agreement shall be effective as of January 1, 2019, in accordance with the terms therein. As compensation under the Ball Consulting Agreement, Mr. Ball shall be entitled to receive a monthly cash fee of $20,000 per month, payable in accordance with the Company’s standard practices. The Ball Consulting Agreement further provides that Mr. Ball shall be entitled to receive bonus compensation from time to time as shall be determined in the sole discretion of the Board. Mr. Ball was terminated as CEO on March 10, 2020.

Thomas Gingerich. On March 27, 2019, the Company entered into an Executive Consulting Agreement with Thomas Gingerich, the Company’s Chief Financial Officer and Secretary (the “Gingerich Consulting Agreement”). Pursuant to the Gingerich Consulting Agreement, the Company engaged Mr. Gingerich to provide such services and to perform such duties and functions customarily performed by, and to have all the responsibilities customary to, the role of Chief Financial Officer and Secretary of the Company and any of its subsidiaries, as more fully described in the Gingerich Consulting Agreement. The Gingerich Consulting Agreement shall be effective as of January 1, 2019, in accordance with the terms therein. Pursuant to the Gingerich Consulting Agreement, Mr. Gingerich received a monthly cash fee of $17,500 payable in accordance with the Company’s standard practices. On July 24, 2019, the Company and Mr. Gingerich amended the Gingerich Consulting Agreement (the “A&R Gingerich Consulting Agreement”), pursuant to which Mr. Gingerich’s compensation was amended to a monthly cash fee of $10,000 per month, payable in accordance with the Company’s standard practices, as well as 15,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly. The A&R Gingerich Consulting Agreement further provides that Mr. Gingerich shall be entitled to receive bonus compensation from time to time as shall be determined in the sole discretion of the Board

Each of Mr. Ball and Mr. Gingerich performed their executive and financial duties for the Company since March 17, 2017. During the year ended December 31, 2019, the CEO and CFO were paid $240,000 and $185,000, respectively.

Consulting Agreement with Dorado Consulting LLC

On January 1, 2019, we entered into a consulting agreement with Peach Management LLC (“Peach”), an entity controlled by Christian Briggs, pursuant to which Peach shall provide certain consulting services relating to the execution of the Company’s business plan (the “Peach Agreement”). In consideration of Peach’s services, the Company agreed to pay to Peach an amount of $10,000 per month, payable in accordance with the Company’s standard practices. On March 12, 2019, the Board of Directors increased the amount payable monthly to $25,000 to Peach. On July 24, 2019, the Company and Peach amended the Peach Agreement to provide for compensation in consideration of the Consulting Services as follows: (i) a monthly cash fee of $10,000, payable in accordance with the Company’s standard payroll practices; and (ii) 15,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly, effective immediately. Peach was paid $212,500 in 2019.

On, November 28, 2019, we executed a Consent to Assignment with Peach and Dorado Consulting LLC (“Dorado”), pursuant to which Peach assigned its rights under the Peach Agreement to Dorado. Dorado is an entity controlled by Christian Briggs. Dorado was paid $10,000 in 2019. The agreement was terminated March 10, 2020.

Outstanding Equity Awards at Fiscal Year-End

None

Director Compensation

2019 Director Compensation Table

Below is a table disclosing the compensation paid to our Directors for the year ended December 31, 2019

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information with respect to the beneficial ownership of our voting securities following the completion of the Exchange Agreement of this report by (i) any person or group owning more than 5% of any class of voting securities; (ii) our director and chief executive officer; (iii) our chief financial officer; and (iv) all executive officers and directors as a group as of June 11, 2020. Unless otherwise indicated, the address of all listed stockholders is c/o GSRX Industries Inc., Building No. 3, P.R. 696, int. Jose Efron Ave. Dorado, PR 00646.

* Based on 81,799,286 shares of Common Stock issued and outstanding as of June 11, 2020.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Other than compensation arrangements for our named executive officers and directors, we describe below each transaction or series of similar transactions, since January 1, 2019, to which we were a party or will be a party, in which:

Compensation arrangements for our named executive officers and directors are described in Item 11, Executive Compensation.

2018

On May 12, 2018 Peach Management LLC, former sole member of Project 1493, LLC and then majority shareholder of the Company, advanced $40,734 to 1493 for various prepaid expenses for professional fees and restoration fees for 1493 to be in compliance with Puerto Rico laws. The Company repaid this amount on May 11, 2018 in connection with the Exchange Agreement.

On April 18, 2018 Peach Management LLC made a short term advance of $150,000 to 1493. The proceeds of the loan were used as a 50% deposit for the purchase of the first three dispensaries, according to the Memorandum of Understanding with Puerto Rico Industrial Commercial Holdings Biotech Corporation.

On May 11, 2018, the Company entered into a debt exchange agreement (the “Debt Exchange”) with Fountainhead Capital Management Limited (“Fountainhead”), whereby Fountainhead agreed to cancel a promissory note in the aggregate amount of $510,652 plus accrued interest of $129,265, which represented all amounts owed to Fountainhead as of the date of the Debt Exchange. As consideration, Fountainhead received an aggregate of 1,800,000 shares of the Company’s common stock, of which 200,000 shares of common stock had been previously issued.

Also on May 11, 2018, immediately prior to closing of the Exchange Agreement, Fountainhead entered into a private share exchange agreement with Peter Zachariou, a certain creditor of Fountainhead, whereby Zachariou agreed to extinguish the debt owed to him by Fountainhead in exchange for an aggregate of 1,800,000 shares of the Company’s common stock, of which 200,000 shares of common stock has been previously issued to Fountainhead. As a result, Zachariou acquired all of the common stock issued to Fountain head under the Debt Exchange and consequently became the majority stockholder of the Company immediately prior to the closing of the Exchange Agreement.

2019

Consulting Agreement

On January 1, 2019, the Company entered into a consulting agreement with Peach Management LLC (“Peach”), then a majority shareholder of the Company, 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, 2019, the Company entered into an amended and restated consulting agreement with Peach, pursuant to which the Company agreed to increase Peach’s monthly payment to $25,000 in connection with his appointment as Chairman of the Board of Directors. On July 24, 2019, the Company and Peach amended the consulting agreement to provide for compensation in consideration of the Consulting Services as follows: (i) a monthly cash fee of $10,000, payable in accordance with the Company’s standard payroll practices; and (ii) 15,000 restricted shares of the Company’s common stock, par value $0.001 per share, payable quarterly, effective immediately.

On, November 28, 2019, we executed the Consent to Assignment with Peach and Dorado Consulting LLC (“Dorado”), pursuant to which Peach assigned its rights under the Peach Agreement to Dorado. Dorado is an entity controlled by Christian Briggs. The consulting agreement was terminated March 10, 2020.

Director Independence

Our common stock is listed on the OTC Pink; therefore, we are not subject to independent director requirements. For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship which, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. According to the NASDAQ definition,

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed by our auditors, Turner, Stone & Company LLP, for professional services rendered for the audit of our annual financial statements for the fiscal year ended December 31, 2019 and for the review of our interim financial statements for the first, second and third quarters of 2019 are estimated to be $58,000.

Audit-Related Fees

During the last two fiscal years, no fees were billed or incurred for assurance or related services by our auditors that were reasonably related to the audit or review of financial statements reported above.

Tax Fees

There were no tax preparation fees billed for the fiscal years ended December 31, 2019 or 2018.

All Other Fees

During the last two fiscal years, no other fees were billed or incurred for services by our auditors other than the fees noted above. Our board, acting as an audit committee, deemed the fees charged to be compatible with maintenance of the independence of our auditors.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

We currently do not have a separate audit committee. Our full board of directors performs the functions of an audit committee. Before an independent auditor is engaged by us to render audit or non-audit services, our board of directors pre-approves the engagement. Board of directors pre-approval of audit and non-audit services will not be required if the engagement for the services is entered into pursuant to pre-approval policies and procedures established by our board of directors regarding our engagement of the independent auditor, provided the policies and procedures are detailed as to the particular service, our board of directors is informed of each service provided, and such policies and procedures do not include delegation of our board of directors’ responsibilities under the Exchange Act to our management. Our board of directors may delegate to one or more designated members of our board of directors the authority to grant pre-approvals, provided such approvals are presented to the board of directors at a subsequent meeting. If our board of directors elects to establish pre-approval policies and procedures regarding non-audit services, the board of directors must be informed of each non-audit service provided by the independent auditor. Board of directors pre-approval of non-audit services, other than review and attest services, also will not be required if such services fall within available exceptions established by the SEC. For the fiscal year ended December 31, 2019, 100% of audit-related services, tax services and other services performed by our independent auditors were pre-approved by our board of directors.

Our board has considered whether the services described above under the caption “All Other Fees”, which are currently none, is compatible with maintaining the auditor’s independence.

The board approved all fees described above.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

* Filed herewith

ITEM 16. FORM 10-K SUMMARY.

Not applicable.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dorado, Commonwealth of Puerto Rico, on June 11, 2020.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

GSRX INDUSTRIES INC.

Audited Financial Statements

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of GSRX Industries Inc.,

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of GSRX Industries Inc. (the “Company”), as of December 31, 2019 and 2018 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company lacks sufficient liquidity to meet its obligations as they come due. This condition raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Turner, Stone & Company, L.L.P.

We have served as the Company’s auditor since 2017.

Dallas, Texas

June 11, 2020

GSRX Industries Inc.

Consolidated Balance Sheets

December 31, 2019 and December 31, 2018