Note 1 – Background and Significant Accounting Policies 

 

GB Sciences, Inc. (“the Company”, “GB Sciences”, “we”, “us”, or “our”) seeks to be a biopharmaceutical research and cannabinoid-based drug development company whose goal is to create patented formulations for safe, standardized, cannabinoid therapies that target a variety of medical conditions in both the pharmaceutical and wellness markets. The Company is is engaged in the research and development of cannabinoid medicines and plans to produce cannabinoid therapies for the wellness markets based on its portfolio of intellectual property.

 

Through its wholly owned Canadian subsidiary, GBS Global Biopharma, Inc. (“GBSGB”), the Company is engaged in the research and development of cannabinoid medicines with virtual operations in North America and Europe. GBSGB assets include cannabinoid medicine intellectual property, research contracts and key supplier arrangements. GBSGB’s intellectual property covers a range of conditions and several programs are in pre-clinical animal stage of development; including Parkinson’s disease, neuropathic pain, and cardiovascular therapeutic programs. GBSGB runs a lean drug development program and takes effort to minimize expenses, including personnel, overhead, and fixed capital expenses  through strategic partnerships with Universities and Contract Research Organizations (“CROs”). GBSGB’s intellectual property portfolio includes four USPTO & WIPO patent applications, four provisional USPTO patent applications, and three patent applications that we anticipate filing by June 30, 2020, as well as licenses for three additional patents covering novel cannabinoid delivery systems.

 

We currently hold 100% membership interests in cultivation and extraction facilities in Nevada under our subsidiaries GB Sciences Nevada, LLC ("GBSN") and GB Sciences Las Vegas, LLC ("GBLV"). On November 15, 2019, we entered into a Binding Letter of Intent (the "LOI") to sell 75% of the Company's membership interest interests in GBSN and GBLV for $3 million cash upon close and up to an additional $3 million in earn-out payments after close. In connection with the LOI, we entered into a Management Agreement with the purchaser whereby the facilities will be managed by an affiliate of the purchaser until the close of the sale. The sale is expected to close upon the successful transfer of the Nevada cultivation and production licenses. The transfer of cannabis licenses in the State of Nevada is presently subject to an indefinite moratorium, and while the moratorium is expected to be lifted shortly, we cannot provide any assurances as to the timing of the close of the sale.

 

We recently completed the sale of the Company's controlling interest in GB Sciences Louisiana, LLC, which has partnered with Louisiana State University to operate a cultivation and extraction facility to produce products for the medical cannabis market. As consideration for the sale of our controlling membership interest in GB Sciences Louisiana, LLC, we received an $8 million promissory note and may receive up to an additional $8 million in earn out payments. The Company retained its 50% interest in the research relationship with Louisiana State University ("LSU") and will retain an interest in rights to the intellectual property developed through the relationship with LSU.

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements of GB Sciences, Inc. (the “Company,” “We” or “Us”) have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulations S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending March 31, 2020. The balance sheet at March 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended March 31, 2019.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Principles of Consolidation

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles (GAAP) for the United States of America. Our consolidated financial statements include all operating divisions and majority-owned subsidiaries, reported as a single operating segment, for which we maintain controlling interests. Intercompany accounts and transactions have been eliminated in consolidation. The ownership interest of non-controlling participants in subsidiaries that are not wholly owned is included as a separate component of equity. The non-controlling participants’ share of the net loss is included as “Net loss attributable to non-controlling interest” on the unaudited consolidated statements of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, inventory valuation, valuation of initial right-of-use assets and corresponding lease liabilities, valuation of beneficial conversion features in convertible debt, valuation of the assets and liabilities of discontinued operations, stock-based compensation expense, purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies.  These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates.

 

Reclassifications

 

Certain reclassifications have been made to the comparative period amounts in order to conform to the current period presentation. The current and long-term capital lease obligations recorded in the consolidated balance sheet as of March 31, 2019 have been reclassified to conform to the current period presentation as finance lease obligations, current, and finance lease obligations, long term. Certain items on the unaudited statements of cash flows have been reclassified to confirm with current period presentation. In addition, the assets, liabilities, income, and cash flows of GB Sciences Louisiana, LLC have been separated from the comparative period amounts to confirm to the current period presentation as discontinued operations as the result of the sale of the Company’s interest in GB Sciences Louisiana, LLC (Note 10). The reclassifications had no effect on the reported financial position, results of operations or cash flows of the Company.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Discontinued Operations

 

Discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period and represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes.

 

The assets and liabilities associated with discontinued operations included in our condensed consolidated balance sheets are as follows:

 

Discontinued Operations – (continued)		December 31, 2019												March 31, 2019
		Continuing				Discontinued				Total				Continuing				Discontinued				Total
ASSETS
CURRENT ASSETS
Cash		$	37,300			$	-			$	37,300			$	182,055			$	45,703			$	227,758
Accounts receivable, net			80,436				-				80,436				488,329				-				488,329
Inventory, net			1,560,048				-				1,560,048				1,533,792				602,714				2,136,506
Prepaid and other current assets			83,240				-				83,240				262,208				351,970				614,178
Note receivable			1,365,042				-				1,365,042				-				-				-
TOTAL CURRENT ASSETS			3,126,066				-				3,126,066				2,466,384				1,000,387				3,466,771
Property and equipment, net			10,097,430				-				10,097,430				10,481,706				13,022,996				23,504,702
Intangible assets, net			2,073,839				-				2,073,839				1,818,802				-				1,818,802
Note receivable			5,366,133				-				5,366,133				-				-				-
Deposits and other noncurrent assets			95,504				-				95,504				230,651				1,002,376				1,233,027
Operating lease right-of-use assets, net			144,146				-				144,146				-				-				-
TOTAL ASSETS		$	20,903,118			$	-			$	20,903,118			$	14,997,543			$	15,025,759			$	30,023,302
LIABILITIES
CURRENT LIABILITIES
Accounts payable		$	1,998,994			$	-			$	1,998,994			$	1,374,771			$	1,695,985			$	3,070,756
Accrued interest			429,064				-				429,064				142,112				-				142,112
Accrued expenses			469,053				-				469,053				244,931				76,415				321,346
Notes payable, net			4,860,221				-				4,860,221				2,229,812				300,000				2,529,812
Indebtedness to related parties			476,661				-				476,661				-				-				-
Income tax payable			506,145				-				506,145				506,145				-				506,145
Operating lease obligations, current			47,084				-				47,084				-				-				-
Finance lease obligations, current			134,239				-				134,239				80,132				61,877				142,009
TOTAL CURRENT LIABILITIES			8,921,461				-				8,921,461				4,577,903				2,134,277				6,712,180
Note payable, net			-				-				-				161,072								161,072
Operating lease obligations, long term			114,052				-				114,052				-								-
Finance lease obligations, long term			3,565,622				-				3,565,622				3,646,540				2,347,511				5,994,051
TOTAL LIABILITIES		$	12,601,135			$	-			$	12,601,135			$	8,385,515			$	4,481,788			$	12,867,303

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Discontinued Operations – (continued)

 

The revenues and expenses associated with discontinued operations included in our condensed consolidated statements of operations were as follows:

 

		For the Three Months Ended December 31,
		2019												2018
		Continuing				Discontinued				Total				Continuing				Discontinued				Total
Sales revenue		$	254,131			$	192,070			$	446,201			$	695,764			$	-			$	695,764
Cost of goods sold			(675,933	)			(193,915	)			(869,848	)			(302,569	)			-				(302,569	)
Gross profit (loss)			(421,802	)			(1,845	)			(423,647	)			393,195				-				393,195
General and administrative expenses			1,744,699				666,042				2,410,741				2,456,411				526,210				2,982,621
LOSS FROM OPERATIONS			(2,166,501	)			(667,887	)			(2,834,388	)			(2,063,216	)			(526,210	)			(2,589,426	)
OTHER INCOME/(EXPENSE)
Interest expense			(419,264	)			(52,769	)			(472,033	)			(258,522	)			(62,627	)			(321,149	)
Other income/(expense)			(118,695	)			-				(118,695	)			(402,504	)							(402,504	)
Loss on extinguishment			(92,795	)			-				(92,795	)			-				-				-
Gain on deconsolidation of subsidiary			4,502,058				-				4,502,058				-				-				-
Total other expense			3,871,304				(52,769	)			3,818,535				(661,026	)			(62,627	)			(723,653	)
NET LOSS BEFORE INCOME TAXES			1,704,803				(720,656	)			984,147				(2,724,242	)			(588,837	)			(3,313,079	)
Income tax expense			-				-				-				(737,568	)			-				(737,568	)
NET INCOME/(LOSS)		$	1,704,803			$	(720,656	)		$	984,147			$	(3,461,810	)		$	(588,837	)		$	(4,050,647	)

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Discontinued Operations – (continued)

 

		For the Nine Months Ended December 31,
		2019												2018
		Continuing				Discontinued				Total				Continuing				Discontinued				Total
Sales revenue		$	2,336,505			$	569,077			$	2,905,582			$	2,728,277			$	-			$	2,728,277
Cost of goods sold			(3,157,452	)			(574,544	)			(3,731,996	)			(1,185,878	)			-				(1,185,878	)
Gross profit (loss)			(820,947	)			(5,467	)			(826,414	)			1,542,399				-				1,542,399
General and administrative expenses			5,213,561				1,292,613				6,506,174				10,079,767				1,935,766				12,015,533
LOSS FROM OPERATIONS			(6,034,508	)			(1,298,080	)			(7,332,588	)			(8,537,368	)			(1,935,766	)			(10,473,134	)
OTHER INCOME/(EXPENSE)
Interest expense			(1,332,637	)			(178,140	)			(1,510,777	)			(4,681,235	)			(188,947	)			(4,870,182	)
Other income/(expense)			74,920				-				74,920				(3,352,311	)			-				(3,352,311	)
Loss on extinguishment			(216,954	)			-				(216,954	)			-				-				-
Gain on deconsolidation of subsidiary			4,502,058				-				4,502,058				-				-				-
Total other expense			3,027,387				(178,140	)			2,849,247				(8,033,546	)			(188,947	)			(8,222,493	)
NET LOSS BEFORE INCOME TAXES			(3,007,121	)			(1,476,220	)			(4,483,341	)			(16,570,914	)			(2,124,713	)			(18,695,627	)
Income tax expense			-				-				-				(737,568	)			-				(737,568	)
NET LOSS		$	(3,007,121	)		$	(1,476,220	)		$	(4,483,341	)		$	(17,308,482	)		$	(2,124,713	)		$	(19,433,195	)

 

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Long-Lived Assets

 

Property and equipment comprise a significant portion of our total assets. We evaluate the carrying value of property and equipment if impairment indicators are present or if other circumstances indicate that impairment may exist under authoritative guidance. The annual testing date is March 31. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of property and equipment are prepared. If the projections indicate that the carrying value of the property and equipment are not recoverable, we reduce the carrying values to fair value. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. No indicators of impairment were identified by the Company as of March 31, 2019.

 

Inventory

 

We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out method, or its current estimated net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete inventory is based on expected future use.

 

Beneficial Conversion Feature of Convertible Notes Payable

 

The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options and Emerging Issues Task Force (“EITF”) 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”.  A beneficial conversion feature (“BCF”) exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments were granted with the debt. In accordance with this guidance, the BCF of a convertible note is measured by allocating a portion of the note's proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The Company calculates the fair value of warrants issued with the convertible notes using the Black-Scholes valuation model and uses the same assumptions for valuing any employee options in accordance with ASC Topic 718 Compensation – Stock Compensation. The only difference is that the contractual life of the warrants is used.

 

The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on a relative fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.

 

Revenue Recognition

 

The FASB issued Accounting Standards Codification (“ASC”) 606 as guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company adopted the guidance on April 1, 2018 and applied the cumulative catch-up transition method.

 

The Company’s only current revenue source is from sales of cannabis, a distinct physical good. Under ASC 606, the Company is required to separately identify each performance obligation resulting from its contracts from customers, which may be a good or a service. A contract may contain one or more performance obligations. All of the Company’s contracts with customers, past and present, contain only a single performance obligation, the delivery of distinct physical goods. Because fulfillment of the company’s performance obligation to the customer under ASC 606 results in the same timing of revenue recognition as under the previous guidance (i.e. revenue is recognized upon delivery of physical goods), the Company did not record any material adjustment to report the cumulative effect of initial application of the guidance.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Earnings/(loss) per Share 

 

The Company’s basic loss per share has been calculated using the weighted average number of common shares outstanding during the period. The Company had 158,728,095 and 108,999,521 potentially dilutive common shares at December 31, 2019 and 2018, respectively. However, for the nine months ended December 31, 2019 and the three and nine months ended December 31, 2018, such common stock equivalents were not included in the computation of diluted net loss per share as their inclusion would have been anti-dilutive. The computation of diluted earnings per share for the three months ended December 31, 2019, is presented in the following table:

 

 

		For the Three Months Ended December 31, 2019
Diluted EPS Computation		Income (Numerator)				Shares (Denominator)				Per-Share Amount
Net income from continuing operations available to common stockholders		$	1,704,803
Plus: Income impact of assumed conversions
Interest expense on convertible notes payable			51,608
Effect of assumed conversions			51,608
Income from continuing operations plus assumed conversions			1,756,411
Net loss from discontinued operations available to common stockholders			(360,329	)
Net income available to common stockholders		$	1,396,082
Weighted-average common shares outstanding							263,055,254
Plus: incremental shares from assumed conversions
Warrants							26,648,530
Convertible notes payable							36,086,770
Dilutive potential common shares							62,735,300
Adjusted weighted-average shares							325,790,554
Diluted EPS
Net income from continuing operations		$	1,756,411				325,790,554			$	0.01
Net loss from discontinued operations		$	(360,329	)			325,790,554			$	(0.00	)
Net loss		$	1,396,082				325,790,554			$	0.00

 

 

 

 

Recent Accounting Pronouncements

 

Recently Adopted Standards

 

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), (the "New Lease Standard"). This standard requires leases, other than short-term, to be recognized on the balance sheet as a lease liability and a corresponding right-of-use asset.

 

Lease payments include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the standard. Lease payments do not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components. This standard is effective for interim and annual reporting periods beginning after December 15, 2018 and the Company adopted the standard as of April 1, 2019. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.

 

The Company adopted the New Lease Standard using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on April 1, 2019.

 

The Company's consolidated balance sheet was affected by this standard, but the consolidated statement of operations and consolidated statement of cash flows were not significantly impacted. The most significant change to the consolidated balance sheet upon adoption on April 1, 2019 relates to the recognition of new right-of-use (ROU) assets of $182,624, net of accumulated amortizations, and operating liabilities of $190,173 at the date of adoption. The Company's accounting for finance leases remains substantially unchanged.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company as of April 1, 2019. The Company determined that all share-based payments were settled as of the date of the adoption, so there was no impact on the Company's consolidated financial statements.

 

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Note 2 – Going Concern

 

The Company’s condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained net losses since inception, which have caused an accumulated deficit of $ (88,764,145) at December 31, 2019. The Company had a working capital deficit of  $ (5,795,395) at December 31, 2019, compared to $ (3,245,409) including a deficit of  $ (1,133,890) from discontinued operations at March 31, 2019. In addition, the Company has consumed cash in its operating activities of $ (4,248,291) including $ (1,244,721) from discontinued operations for the nine months ended December 31, 2019, compared to $ (7,847,751) including $ (447,852) from discontinued operations for the same period last year. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

Management has been able, thus far, to finance the losses through a public offering, private placements and obtaining operating funds from stockholders. The Company is continuing to seek sources of financing.  There are no assurances that the Company will be successful in securing capital necessary to achieve its goals.

 

In view of these conditions, the Company’s ability to continue as a going concern is dependent upon its ability to obtain additional financing or capital sources, to meet its financing requirements, and ultimately to achieve profitable operations. Management believes that its current and future plans provide an opportunity to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that may be necessary in the event the Company is unable to continue as a going concern.

 

Note 3 – Inventory

 

Raw materials consist of supplies, materials, and consumables used in the cultivation and extraction processes. Work-in-progress includes live plants and cannabis in the drying, curing, and trimming processes. Finished goods includes completed cannabis flower, trim, extracts, and vapes in bulk and packaged forms.

 

		December 31, 2019				March 31, 2019
Raw materials		$	299,740			$	440,414
Work in progress			1,495,301				676,341
Finished goods			257,995				579,604
Allowance to reduce inventory to NRV			(492,988	)			(162,567	)
Total inventory		$	1,560,048			$	1,533,792

 

 

Note 4 – Leases

 

The Company determines if an arrangement is a lease at inception and has lease agreements for warehouses, office facilities, and equipment. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2021 to 2032.

 

As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right-of-use asset ("ROU"). Application of this standard resulted in the recognition of ROU assets of $182,624, net of accumulated amortization, and a corresponding lease liability of $190,173 at the April 1, 2019, date of adoption. Accounting for finance leases is substantially unchanged.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

 

Operating leases are included in other current assets , accrued liabilities, and operating lease obligations, long term on the unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment, finance lease obligations, short term, and finance lease obligations, long term, on the unaudited condensed consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available. The rates used to discount finance leases previously recorded as capital leases range from 10.2% to 11.5%. Operating leases were discounted at a rate of 17.0%.

 

Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the consolidated balance sheet.

 

During the nine months ended December 31, 2019, finance lease costs recorded in the consolidated financial statements were $ 790,666, of which $ 474,686 represents interest expense and $ 315,980 represents amortization of the right-of-use assets. Operating lease costs were $ 61,144, of which $ 22,667 represents interest expense and $ 38,477 represents amortization of the right-of-use assets.

 

Discontinued operations includes $ 280,227 in finance lease costs, of which $ 153,977 represents interest expense and $ 126,250 represents amortization of right-of-use assets.

 

Amortization of lease assets is included in general and administrative expenses. The future minimum lease payments of lease liabilities as of December 31, 2019, from continuing operations are as follows:

 

		Year Ending						Operating
		March 31,		Finance Leases				Leases
		2020 (3 months)		$	185,871			$	17,547
		2021			528,443				71,548
		2022			544,296				73,939
		2023			560,625				38,101
		2024			577,444				3,926
		Thereafter			4,375,869				-
Total undiscounted lease payments					6,772,548				205,061
Less: Amount representing interest					(3,072,687	)			(43,925	)
Present value of minimum lease payments					3,699,861				161,136
Less: Current maturities of lease obligations					(134,239	)			(47,084	)
Long-term lease obligations				$	3,565,622			$	114,052

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Note 5 – Notes Payable and Line of Credit

 

6% Note Payable due November 30, 2018

 

On July 28, 2018, the Company entered into the Amendment and Termination Agreement (“Amendment and Termination Agreement”) with Pacific Leaf Ventures, L.P (“Pacific Leaf”). Pursuant to that agreement, the Pacific Leaf Royalty Agreement and all other agreements with Pacific Leaf were terminated in their entirety, and the Company would make payments totaling $1 million of the $1.5 million balance due to Pacific Leaf by August 31, 2018. Contemporaneously with the Amendment and Termination Agreement, the Company issued a Promissory Note (“Promissory Note”) for the remaining $0.5 million due to Pacific Leaf. The Promissory Note accrued interest at a rate of 6% per annum and matured on November 30, 2018. The Company recorded interest expense of $5,425 related to the Promissory Note for the three months ended December 31, 2018.

 

In consideration for deferring the payment of the amounts due to Pacific Leaf, the Company issued 100,000 shares of its common stock to Pacific Leaf on July 31, 2018 having a fair market value of $36,000. The Company made cash payments totaling $1.0 million to Pacific Leaf in August 2018 related to the Amendment and Termination Agreement. Both the $36,000 fair value of shares issued to Pacific Leaf and the $1,000,000 in cash payments made to Pacific Leaf in August 2018 are recorded in the Company’s Condensed Consolidated Statement of Operations for the Three and Six Months Ended September 31, 2018, under the other expense caption.

 

On December 21, 2018, the Company made a $100,000 payment on the promissory note. The payment was applied to interest accrued to date of $12,164 and the remaining $87,836 was applied to the principal balance of the Note.

 

On December 21, 2018, the Company also issued 500,000 shares of its common stock to Pacific Leaf in consideration for further deferral of repayment of the Note. The Company recorded $ 95,000 in expense related to the shares issued, which is recorded in the Company’s Consolidated Statement of Operations for the year ended March 31, 2019, under the other expense caption.

 

The Company made additional payments on the promissory note of $100,000 on January 16, 2019, $100,000 on February 6, 2019, and a final payment of $210,000 on March 4, 2019 which paid the note off in full.

 

Because the Amendment and Termination Agreement irrevocably terminated the Pacific Leaf Royalty Agreement Royalty Agreement, the Company recorded an expense of $1,530,000 in the quarter ended December 31, 2018 related to the prepaid royalties previously recorded on the Condensed Consolidated Balance Sheet in connection with the February 2018 Agreement. The expense is included in the Other Expense caption of the Company’s Condensed Consolidated Statement of Operations for the nine months ended December 31, 2018. In total, the Company recorded $3.1 million in Other Expense in its Condensed Consolidated Statement of Operations for the nine months ended December 31, 2018, as summarized in the table below:

 

Amounts Recorded in Other Expense Related to Royalty Settlement		For the Nine Months Ended December 31, 2018
Prepaid royalties expensed during the quarter		$	1,530,000
Promissory note issued to Pacific Leaf, due on or before November 30, 2018			500,000
600,000 shares common stock issued to Pacific Leaf			131,000
Long-term note payable and accrued interest terminated			(20,075	)
Total non-cash expense			2,140,925
Cash payments made in August 2018			1,000,000
Total		$	3,140,925

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

---

 

0% Note Payable dated October 23, 2017

 

On October 23, 2017, the Company amended the existing Nevada Medical Marijuana Production License Agreement (“Amended Production License Agreement”). Per the terms of the Amended Production License Agreement, GB Sciences purchased the remaining percentage of the production license resulting in the 100% ownership of the license. GB Sciences also received 100% ownership of the cultivation license included in the original Nevada Medical Marijuana Production License Agreement. In exchange, GB Sciences made a one-time payment of $500,000 and issued a 0% Promissory Note in the amount of $700,000 payable in equal monthly payments over a three-year period commencing on January 1, 2018.

 

The present value of the note was $521,067 on the date of its issuance based on an imputed interest rate of 20.3% and the Company recorded a discount on notes payable of $178,933. During the nine months ended December 31, 2019, the Company recorded $31,092 in interest expense related to amortization of the note discount.

 

The Company has been in default on this note since June of 2019, and as of the date of this report, eight monthly payments on the note totaling $155,555 are unpaid. If the Company is unable to cure the default within ten days of receiving a written notice, 483 Management will have the option to accelerate the remaining balance owed of $369,444 and impose a penalty interest rate of 10%, but must notify the Company in writing should it choose to do so. The Company is currently in the process of negotiating a settlement and/or forbearance agreement with the lender.

 

Line of Credit dated November 27, 2019

 

In connection with the Binding Letter of Intent dated November 27, 2019, the Company entered into a promissory note and received a line of credit for up to $470,000 from the purchaser of 75% interest in its Nevada facilities. The note matures upon the close of the sale of membership interests. During the nine months ended December 31, 2019, the Company received $330,000 in advances under the line of credit. Subsequent to December 31, 2019, the Company received an additional $150,000 in advances under the line of credit, bringing total proceeds to $480,000 as of the date of this report and reflecting an informal agreement with the lender to increase the Line of Credit limit by $10,000. The balance at December 31, 2019 was $330,000.

 

Note payable to BCM MED, LLC

 

On December 20, 2018, GB Sciences Louisiana, LLC (“GBSLA") entered into a $300,000 Loan Agreement with BCM MED, LLC (“BCM MED”). BCM MED is a related party to Wellcana Group, LLC, the minority member in GBSLA. The purpose of the financing is to fund operating expenses incurred by or on behalf of medical marijuana operations of GBSLA.

 

Pursuant to the Loan Agreement, GBSLA began making eight (8) monthly installment payments in the amount of $33,333 on or before the 10^th business day of each month commencing in April 2019. The aggregate amount of the installment payments from GBSLA to BCM MED are equal to the loan amount. Through November 15, 2019, GBSLA made $266,667 in payments towards the loan and reduced the loan balance to $33,333. The remaining balance was deconsolidated upon close of the sale of the Company's controlling membership interest (Note 10).

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

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Summary of Notes Payable and Convertible Notes

 

As of December 31, 2019, the following notes payable were recorded in the Company’s consolidated balance sheet:

 

		As of December 31, 2019
Short-Term Notes Payable		Face Value				Discount				Carrying Value
6% Convertible promissory notes payable (Note 6)		$	1,257,000			$	(257,177	)		$	999,823
8% Convertible Secured Promissory Note dated February 28, 2019, as amended (Note 6)			1,271,863				(584,842	)			687,021
8% Convertible Promissory Note dated April 23, 2019 (Note 6)			2,640,000				(142,314	)			2,497,686
0% Note Payable dated October 23, 2017, current portion			369,444				(23,753	)			345,691
Line of Credit dated November 27, 2019			330,000				-				330,000
Note Payable to John Davis (Note 9)			151,923				-				151,923
Total Short-Term Notes Payable		$	6,020,230			$	(1,008,086	)		$	5,012,144

 

Note 6 – Convertible Notes

 

March 2017 Convertible Note Offering

 

In March 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $965,500. The Notes are payable within three years of issuance and are convertible into 3,862,000 shares of the Company’s common stock. The Company also issued 3,862,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.60 per share for a period of three years.  The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $416,733 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $548,767 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

 

During the three months ended June 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $1,034,500. The Notes are payable within three years of issuance and are convertible into 4,138,000 shares of the Company’s common stock. The Company also issued 4,138,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.60 per share for a period of three years.  The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $487,957 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $480,236 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

July 2017 Convertible Note Offering

 

In July 2017, the Company entered into a Placement Agent’s Agreement with a third-party brokerage firm to offer units consisting of a $1,000 6% promissory note convertible into 4,000 shares of the Company’s common stock at $0.25 per share and 4,000 warrants to purchase shares of the Company’s’ common stock at an exercise price of $0.65 per share for the period of three years.

 

During the three months ended September 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $3,085,000. The Notes are payable within three years of issuance and are convertible into 12,340,000 shares of the Company’s common stock. The Company also issued 12,340,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years.  The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,541,797 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $1,532,335 recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

 

During the three months ended December 31, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $4,116,000. The Notes are payable within three years of issuance and are convertible into 16,464,000 shares of the Company’s common stock. The Company also issued 16,464,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years.  The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,600,808 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $2,417,856 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

 

As of December 31, 2019, convertible notes having a carrying value of $ 999,823, net of unamortized discount of $ (257,177) remained outstanding from the March 2017 and July 2017 note offerings, and accrued interest on the notes was $ 178,381. Interest expense for the nine months ended December 31, 2019, was $ 364,575, of which $ 307,752 was amortization of the note discount.

 

8% Senior Secured Convertible Promissory Note dated February 28, 2019

 

On February 28, 2019, the Company issued a $1,500,000 8% Senior Secured Convertible Promissory Note and entered into the Note Purchase Agreement and Security Agreement with CSW Ventures, LP (together, “CSW Note”). The note matures on August 28, 2020 and is convertible at any time until maturity into 8,823,529 shares of the Company’s common stock at $0.17 per share. Collateral pledged as security for the note includes all of the Company’s 100% membership interests in GB Sciences, Nevada, LLC and GB Sciences Las Vegas, LLC, which together represent substantially all of the Company’s cannabis cultivation and production operations and assets located at its Teco facility in Las Vegas, Nevada.

 

The intrinsic value of the beneficial conversion feature resulting from the market price of the Company’s common stock in excess of the conversion price was $176,471 on the date of issuance, and the Company recorded a discount on the CSW Note in that amount. During the nine months ended December 31, 2019, the Company recorded accrued interest on the CSW Note of $32,186 and recorded an additional $61,286 in interest expense as the result of amortization of the note discount.

 

On May 28, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $170,000 of the principal balance of the 8% Senior Secured Promissory Note dated February 28, 2019. Accordingly, the Company issued 1,000,000 shares of its common stock based on a $0.17 per share conversion price. In connection with the conversions, $ 17,225 in unamortized discount was recorded as interest expense and the Company reduced the carrying amount of convertible notes payable by $152,775. After conversion, the remaining balance outstanding was $1,330,000.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

On July 12, 2019, the Company entered into the Amendment to Note Documents and the Amended and Restated 8% Senior Secured Promissory Note (together, “Amended CSW Note”). The Amended CSW Note increased the note balance by $100,000 to reflect an additional $100,000 advanced to the Company on July 12, 2019, by $41,863 to add accrued interest to date to the principal balance, and decreased the conversion price to $0.11 per share, with the remaining terms substantially unchanged from the original CSW Note.

 

We evaluated the modification under the guidance in ASC 470-50 and determined that the amendment represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the CSW Note on the amendment date. The carrying value of the amended note on the date of extinguishment was $1,338,057, net of a beneficial conversion feature discount of $133,806, and we recorded a loss on extinguishment of $124,158.

 

On August 1, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $ 110,000 of the principal balance of the Amended CSW Note at $0.11 per share. Accordingly, the Company issued 1,000,000 shares of its common stock. In connection with the conversions, $9,579 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $100,421. After conversion, the remaining balance outstanding was $ 1,361,863.

 

On October 23, 2019, the Company entered into the Amendment to Promissory Note. The October 23, 2019 amendment decreased the conversion price to $0.08 per share, with the remaining terms substantially unchanged from the Amended CSW Note.

 

We evaluated the modification under the guidance in ASC 470-50 and determined that the amendment represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the Amended CSW Note immediately prior to the 2nd Amended CSW Note. The carrying value of the Amended CSW Note on the date of extinguishment was $1,269,067, net of a beneficial conversion feature discount of $92,796, and we recorded a loss on extinguishment of $92,796.

 

On November 27, 2019, the Company entered into the Second Amendment to Note Documents and the Second Amended and Restated 8% Senior Secured Promissory Note (together, “2nd Amended CSW Note”). The 2nd Amended CSW Note decreased the conversion price to $0.04 per share and increased the note balance by $30,000 to reflect an advance received on that date, with the remaining terms substantially unchanged from the Amended CSW Note.

 

We evaluated the modification under the guidance in ASC 470-50 and determined that the 2nd Amended CSW Note represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the Amended CSW Note immediately prior to the 2nd Amended CSW Note; however, no loss on extinguishment was recorded because the net consideration paid for the 2nd Amended CSW Note was equal to the extinguished carrying value of the Amended CSW Note. The carrying value of the Amended CSW Note on the date of extinguishment was $1,361,863.

 

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

On December 16, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $120,000 of the principal balance of the Amended CSW Note at $0.04 per share and we issued 3,000,000 shares of common stock. In connection with the conversions, $57,551 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $62,449. After conversion, the remaining balance outstanding was $1,271,863 and the carrrying amount of the note was $687,021, net of $584,842 in unamortized discount from the beneficial conversion feature.

 

During the nine months ended December 31, 2019, we recorded interest expense of $ 89,624 related to the CSW Note and its amendments consisting of $ 27,270 in accrued interest and $ 62,354 related to amortization of the note discount.

 

The Company is in default on the amended CSW Note due to non-payment of the quarterly interest payments due on October 1, 2019, and January 1, 2020, and nonpayment of an income tax liability related to the March 31, 2018 tax year. The terms of the note provide that the Company has 5 days to cure a default caused by nonpayment of interest and ten days to cure a default caused by noncompliance with affirmative or negative debt covenants. As of the date of this report, the lender has not provided formal notice of the default and the Company anticipates that the CSW Note will be settled in full upon close of the sale of 75% of the Company's interests in its Nevada operations to an entity affiliated with CSW Ventures, LP (Note 10). Upon written notice of default to the Company, the lender may accelerate the payment of principal and interest, impose a penalty interest rate of 10%, and enforce its remedies under the Security Agreement.

 

 

8% Convertible Promissory Note dated April 23, 2019

 

On April 23, 2019, the Company entered into the Note Purchase Agreement with Iliad Research and Trading, L.P. and issued an 8% Convertible Promissory Note with a face value of $2,765,000. The Note was issued with original issue discount of $265,000 and is convertible into shares of the Company’s common stock at a price of $0.17 per share at the option of the note holder at any time until the Note is repaid. The Note matures on April 22, 2020.

 

A total discount of $440,000 was recorded on the note, which includes $265,000 of original issue discount and $175,000 in fees paid to brokers. During the nine months ended December 31, 2019, interest expense related to the note was $ 164,150, of which $ 109,870 was amortization of the note discount.

 

The Company may be in default on the Iliad Note due to nonpayment of an income tax liability related to the March 31, 2018 tax year. In addition, the note includes cross-default and cross-acceleration clauses that may be triggered by the defaults on the Company’s other debts described above in Note 5 and Note 6. The Company has not received formal notice of default from the lender and intends to work with the lender to negotiate terms of a forbearance arrangement. In the event of default, the lender's rights under the promissory note include enforcing a penalty interest rate of 15% and increasing the balance outstanding under the note by 10%.

 

As inducement for the temporary forbearance of formal default proceedings, the Company has honored the conversion of a total of a total of $125,000 of debt owed under the Iliad Note at reduced conversion rates. On October 30, 2019, the Company received notice of the conversion of $75,000 at $0.06 per share and issued 1,250,000 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $64,706, and the Company recorded an expense in that amount. On November 18, 2019, the Company received notice of the conversion of $50,000 of the note balance at $0.0375 per share and issued 1,333,333 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $62,353, and the Company recorded an expense in that amount. In total, the Company recorded $127,059 in noncash expense for the two conversions of the Iliad note at below contractual conversion rates for the three and nine months ended December 31, 2019.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Note 7 – Capital Transactions

 

Increase in Authorized Capital

 

Effective April 8, 2018, Shareholders of the Company approved the change in corporate domicile from the State of Delaware to the State of Nevada and an increase in the number of authorized capital shares from 250,000,000 to 400,000,000. On August 15, 2019, Shareholders of the Company approved an increase in authorized capital shares from 400,000,000 to 600,000,000.

 

Sale of Common Stock and Exercise of Warrants

 

Stock Issued for Debt Conversions

 

During the nine months ended December 31, 2019,the Company issued a total of 7,583,333 shares of common stock for the conversion of notes payable:

 

On May 28, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $170,000 of the principal balance of the 8% Senior Secured Promissory Note dated February 28, 2019 (See Note 6). Accordingly, the Company issued 1,000,000 shares of its common stock based on a $0.17 per share conversion price. In connection with the conversions, $17,225 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $152,775.

 

On August 1, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $110,000 of the principal balance of the Amended CSW Note at $0.11 per share. Accordingly, the Company issued 1,000,000 shares of its common stock. In connection with the conversions, $9,579 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $100,421. After conversion, the remaining balance outstanding was $1,361,863.

 

On December 16, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $120,000 of the principal balance of the Amended CSW Note at $0.04 per share and we issued 3,000,000 shares of common stock. In connection with the conversions, $57,551 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $62,449. After conversion, the remaining balance outstanding was $1,271,863 and the carrrying amount of the note was $687,021, net of $584,842 in unamortized discount from the beneficial conversion feature.

 

As inducement for the temporary forbearance of formal default proceedings, the Company has honored the conversion of a total of a total of $125,000 of debt owed under the Iliad Note at reduced conversion rates. On October 30, 2019, the Company received notice of the conversion of $75,000 at $0.06 per share and issued 1,250,000 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $64,706, and the Company recorded an expense in that amount. On November 18, 2019, the Company received notice of the conversion of $50,000 of the note balance at $0.0375 per share and issued 1,333,333 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $62,353, and the Company recorded an expense in that amount. In total, the Company recorded $127,059 in noncash expense for the two conversions of the Iliad note at below contractual conversion rates for the three and nine months ended December 31, 2019.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Exercise of Warrants for Stock

 

During the nine months ended December 31, 2019, the Company issued 12,574,750 shares of common stock for exercises of warrants:

 

In order to encourage the exercise of approximately 70.5 million warrants issued to investors in private placements of convertible notes and common stock having exercise prices ranging between $0.65 and $0.30, the Company effected a temporary decrease in the exercise price of the warrants to $0.10 per share until July 11, 2019. On July 12, 2019, the Company extended the repricing of the warrants through August 30, 2019, and on July 31, 2019, the Company extended the repricing of the warrants to December 31, 2019. As a result of the price reduction, the Company received notice of the exercise of 9,449,750 warrants and received proceeds of $850,478, net of brokerage fees of $94,498. In connection with the induced exercise of the warrants, the Company recorded an inducement dividend of $230,025.

 

In order to encourage the further exercise of the same warrants, the Company effected a temporary decrease in the exercise price of the warrants to $0.04 per share beginning in December 2019. As a result of the price reduction, the Company received notice of the exercise of an additional 3,125,000 warrants and received proceeds of $112,500, net of brokerage fees of $12,500. In connection with the induced exercise of the warrants, the Company recorded an inducement dividend of $37,499.

 

Issuance of Stock for Services

 

During the nine months ended December 31, 2019, the Company issued 2,500,000 shares of common stock for consulting services and recorded related expense of $214,000 based on the fair value of the stock on the date of the related consulting agreements.

 

Issuance of Stock for Cash

 

During the nine months ended December 31, 2019, the company issued 7,668,167 shares of common stock for cash as follows:

 

On December 4, 2018, the Company entered into a Placement Agent’s Agreement to offer a total of 15,000,000 units at the price of $0.20 per unit up to a total of $3 million. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at the price of $0.60 for a period of five years. On January 15, 2019, the Placement Agent’s Agreement was amended to decrease the unit price from $0.20 per unit to $0.15 per unit for a total of 20,000,000 units and decrease the exercise price of the warrants included in each unit from $0.60 to $0.30, applied retroactively to funds raised prior to the date of the amendment, with no other changes to the agreement. During the nine months ended December 31, 2019, the Company received a total of $478,696 in proceeds from the private placement, net of $71,529 in brokerage fees and issued 3,668,167 shares of its common stock and 3,668,167 warrants to purchase one share of its common stock at $0.30 per share.

 

On October 10, 2019, the Company issued 4,000,000 shares of common stock and 2,000,000 warrants to purchase one share of common stock at $0.08 per share for a period of three years to an investor for $240,000 cash. The warrants were valued at $110,000 on the date of issuance using the Black-Scholes model.

 

Cancellation of Shares Issued to Consultant

 

During the nine months ended December 31, 2019, the Company cancelled 400,000 shares of common stock issued to a consultant as compensation for services rendered during the year ended March 31, 2019, that were initially issued as part of the consulting agreement. During the quarter ended June 30, 2019, the Company agreed to amend the consulting agreement to issue options instead of shares of common stock. The amendment has not yet been executed nor has the option agreement as of December 31, 2019.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Options and Warrants

 

At the conclusion of the December 2018 private placement on December 31, 2019, the Company issued 1,954,613 compensation warrants to the broker participating in the private placement. The warrants are exercisable at $0.30 per share until expiration on June 15, 2024 and are eligible for cashless exercise. The Company recorded a $132,914 expense related to the issuance of the warrants.

 

As of December 31, 2019, there were 87,526,411 warrants outstanding at exercise prices ranging from $0.30 to $1.00 per share.

 

For the nine months ended December 31, 2019, the Company recorded $241,242 in share-based compensation expense relating to options granted to employees and consultants in prior periods. As of December 31, 2019, the Company had $15,131 of remaining unrecognized option expense related to options vesting at a future date. As of December 31, 2019, there were 10,383,334 options outstanding from grants to employees and 2,383,000 options outstanding from grants to consultants.

 

Note 8 – Commitments and Contingencies

 

On September 18, 2017 GB Sciences finalized its agreement with Louisiana State University (“LSU”) AgCenter to be the sole operator of the LSU’s medical marijuana program. The LSU Board of Supervisors entered into a five-year agreement that has an option to renew for two additional five-year terms with GB Sciences.

 

The contract includes the Company’s commitment to make an annual research investments of $500,000 to the LSU AgCenter. The Company retained its 50% interest in the research relationship with LSU after the sale of its membership interest in GB Sciences Louisiana, LLC (Note 10), and accordingly remains obligated for $250,000 of the $500,000 annual research investment for three years, or a total commitment of $750,000. The research investment is paid annually in September and amortized over a one-year period.

 

The monetary contributions will be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, of which AgCenter would retain 50% of those rights with the other 50% retained 25% each by the Company and by GB Sciences Louisiana, LLC.

 

On December 6, 2018, the Company entered into an agreement for business advisory and consulting services. In consideration for the services, the Company issued warrants to purchase 2 million shares of the Company’s common stock at $0.1125 per share. The Company valued the warrants at $244,000 using the Black-Scholes valuation model. The fair value of the warrants was recognized as consulting expense over the term of the agreement. The company recorded $162,667 in expense related to the warrants for the nine months ended December 31, 2019. The Company also agreed to pay the consultant a $10,000 monthly fee for 12 months and to issue 4 million restricted shares of the Company’s common stock. The Company issued 2 million shares on the date of the contract, with the remaining 2 million due nine months after the date of the agreement.

 

On June 6, 2019, the Company entered into a Cancellation and Settlement with the consultant and terminated the December 6, 2018 agreement. In consideration for terminating the agreement, the Company will pay $135,000 as a one-time cancellation fee and will not issue the remaining two million shares due under the agreement. This amount is accrued in accounts payable as of December 31, 2019.

 

On October 1, 2019, the Company entered into a new agreement for business advisory and consulting services. In connection with the agreement, the Company issued 2 million shares of its common stock and agreed to pay a monthly service fee of $50,000 beginning December 1, 2019, plus a quarterly stock fee of 2 million shares 90, 180, and 270 days after the agreement. The company recorded $180,000 expense related to the common stock payments and $50,000 expense related to the cash payments, which is accrued in accounts payable at December 31, 2019.

 

During the year ended March 31, 2019, the Company recorded a $200,000 charge related to seizure of cash by local law enforcement during a routine traffic stop while transporting the cash to one of our subsidiaries. The charge was recorded in other expense as the Company believed it was more likely than not that the cash would not be returned. After appealing the seizure of the cash through appropriate channels, the cash was returned to the Company on September 6, 2019, and the Company recorded other income on that date.

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

From time to time, the Company may become involved in certain legal proceedings and claims which arise in the ordinary course of business. In management’s opinion, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, the Company would record a reserve for the claim in question. If and when the Company records such a reserve, it could be material and could adversely impact its results of operations, financial condition, and cash flows.

 

Note 9 – Related Party Transactions

 

As of December 31, 2019, the Company is indebted to its officers for a total of $324,738, consisting of $142,637 in unpaid wages, $75,747 in unpaid bonuses, and $106,354 of reimbursements for business expenses.

 

In connection with the sale of membership interest in GB Sciences Louisiana, LLC, the Company issued a note payable in the amount of $151,923 to John Davis, the Company's former General Counsel and President of GB Sciences Louisiana, LLC, for unpaid fees and bonuses. The note matures upon receipt of the first payment from the Wellcana Note Receivable (Note 10).

 

During the fiscal year ended March 31, 2017, the Company entered into a consulting contract with Quantum Shop, a Company owned by a relative of one of the Company’s executives. Quantum Shop provided GB Sciences with research, design, development, fabrication, and production services. During the nine months ended December 31, 2018, the Company made payments totaling $1.1 million to Quantum Shop primarily related to the build-out of the cultivation and production facility in Baton Rouge, Louisiana owned by GB Sciences Louisiana, LLC.

 

During the year ended March 31, 2017, the Company entered into an advisory agreement with Electrum Partners, LLC, a company whose President resides on GB Sciences’ Board of Directors and serves as a Chair of the Audit Committee. The agreement has a term of one year and was renewed for a successive one-year period on March 31, 2018.  During the nine months ended December 31, 2018, the Company made payments totaling $73,904 to Electrum Partners, LLC and issued 285,412 shares of its restricted stock at an expense of $99,596. Subsequent to December 31, 2018, the Company terminated the advisory agreement.

 

On November 1, 2017, the Company entered into an Edibles Production Agreement (the “EPA”) with The Happy Confections, L.L.C. (“THCLLC”) through the Company’s wholly-owned subsidiary, GB Sciences Las Vegas, LLC (“GBLV”). A member of GB Science’s Board of Directors is a Co-Managing Member of THCLLC. Under the EPA, THCLLC was to produce cannabis-infused baked goods and other edibles in GBLV’s production facility. The Company will receive a royalty of between 20% and 25% on all sales of edibles produced by THCLLC.

 

Contemporaneously with the EPA, the Company entered into a Non-Revolving Credit Line Agreement and Non-Revolving Credit Line Promissory Note (together, the “THC Note” or “Note”) to advance up to $300,000 to THCLLC for the purpose of expanding THCLLC’s operations. Beginning 90 days after the sale of its first product, THCLLC was to make repayment of its advances under the Note in an amount equal to 25% of its gross sales revenue.

 

As of December 31, 2018, the Company had advanced $253,034 under the THC Note. The Company terminated the Edibles Production Agreement and all other related agreements with THC LLC effective October 19, 2018 and took possession of all tangible assets owned by THCLLC on October 22, 2018, as collateral for the balance owed under the Note. These assets included kitchen and production equipment, leasehold improvements, and inventory used in Company’s production operations at the Teco Facility.

 

The Company assessed the fair value of the machinery and equipment received at $139,411 and capitalized that amount in fixed assets during the quarter ended December 31, 2018. All of the machinery and equipment received from THC LLC was placed in service for use in the Company’s production facility. The Company recorded $113,623 as other expense in its Condensed Consolidated Statement of Operations for the three and nine months ended December 31, 2018, which represents the remaining balance of the outstanding note receivable from THC LLC.

 

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

 

Note 10 – Sale of 50% Membership Interest in GB Sciences Louisiana, LLC

 

On February 12, 2018, the Company’s wholly-owned subsidiary, GB Sciences Louisiana, LLC (“GBSLA"), issued members’ equity interests equal to 15% in GBSLA to Wellcana Group, LLC (“Wellcana”) for $3 million. Under the GBSLA operating agreement, Wellcana had an option to make additional capital contributions for the purchase of up to an additional 35% membership interest in GBSLA, at the rate of 5% membership interest per $1 million contributed. To date, Wellcana has made additional cash contributions of $7.0 million and its non-controlling interest in GBSLA increased to 49.99%. The capital contributions have been used to fund the buildout of the Petroleum Drive facility and to pay for the operating costs of GBSLA.

 

On November 15, 2019, the Company entered into the Membership Interest Purchase Agreement ("MIPA") with Wellcana Plus, LLC ("Purchaser"), an affiliate of Wellcana Group, LLC. In consideration for the sale of its 50.01% membership interest in GBSLA, the Company received the $8,000,000 Promissory Note  ("Wellcana Note") and may receive up to an additional $8,000,000 in earn-out payments.

 

The Wellcana note bears interest at a rate of 5% per annum and payments are due beginning June 1, 2020, and ending December 1, 2021. The Company recorded a $1,389,408 discount on the note receivable based on an imputed interest rate of 17.0%, and the carrying amount of the note was $6,610,592 as of November 15, 2019:

 

Wellcana Note Receivable		Note Payments
June 1, 2020		$	500,000
September 1, 2020			750,000
December 1, 2020			1,000,000
March 1, 2020			1,250,000
June 1, 2021			1,500,000
September 1, 2021			1,500,000
December 1, 2021			1,500,000
TOTAL PAYMENTS			8,000,000
DISCOUNT ON NOTE RECEIVABLE			(1,389,408	)
NET PRESENT VALUE		$	6,610,592

 

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

The Company may also receive up to $8,000,000 in earn-out payments under the MIPA. Earn-out payments are calculated as 25% of the distributions made by GBSLA to Purchaser through September 30, 2022, and 10% of distributions made thereafter under any extension or renewal of the relationship with LSU. The Company accounts for contingent consideration under a loss recovery approach. Under a loss recovery approach, the Company records a contingent consideration asset only to the extent of the lesser of, 1) the amount that the non-contingent consideration received is exceeded by the net assets deconsolidated, or 2) the amount of contingent consideration that it is probable will be received. As of the transaction date, the Company was unable to determine that it was probable that any of the contingent consideration would be received, and accordingly no asset was recorded for contingent consideration. Subsequent measurement of contingent consideration will be based on the guidance for gain contingencies, and any gain from contingent consideration will be recorded at the time the consideration is received.

 

Based on the foregoing assessment of the consideration received, the Company recorded a gain on deconsolidation of $4,502,058 related to the sale of its membership interest in GBSLA, calculated as follows:

 

		As of
		November 15, 2019
Present value of promissory note		$	6,610,592
Carrying amount of non-controlling interest			8,707,651
TOTAL			15,318,243
Carrying amount of assets			14,715,798
Carrying amount of liabilities			(3,899,613	)
Net assets deconsolidated			10,816,185
GAIN ON DECONSOLIDATION		$	4,502,058

 

For all periods presented in the unaudited financial statements, the assets, liabilities, income, and cash flows of GBSLA have been reclassified to discontinued operations. The losses and cash flows from discontinued operations for the three and nine months ended December 31, 2019 represent activity through the close of the sale on November 15, 2019.

 

 

 

GB SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

(unaudited)

 

Note 11 – Sale of Membership Interests in Nevada Subsidiaries

 

The Company operates cannabis cultivation and extraction facilities located at 3550 W. Teco Ave., Las Vegas, NV 89118. The facilities operate under two wholly-owned subsidiaries, GB Sciences, Nevada, LLC and GB Sciences Las Vegas, LLC (together, "Teco"), which hold the Company’s Nevada Licenses for the State-regulated cultivation and production of cannabis and cannabis products, respectively (the "Teco Licenses").

 

On November 27, 2019, the Company entered into a Binding Letter of Intent (the “Teco LOI”) to sell 75% of its interests in Teco to AJE Management, LLC, with the transaction closing upon transfer of the Licenses. As consideration for the transfer of membership interests, the Company will receive $3,000,000 upon closing and up to an additional $3,000,000 in earn-out payments. The transaction closes upon the approval of the transfer of the Teco Licenses by Nevada regulatory authorities. As of the date of this report, the State of Nevada has imposed a temporary moratorium on cannabis license transfers. The Company anticipates that the moratorium will be lifted in the near future but we are unable to say when the timing of the close may be.

 

In connection with the Teco LOI, on December 6, 2019, the Company entered into a Management Agreement with AJE Management whereby AJE Management will manage the operations of Teco until the closing of the sale of membership interests. Under the management agreement, AJE Management is entitled to receive a $75,000 monthly management fee for the duration of the management contract, to be paid out of available cash flow from Teco or no later than the close of the sale of membership interests. The management fee is accrued in the unaudited consolidated balance sheets under accrued liabilities.

 

In connection with the Teco LOI, the Company also entered into a Line of Credit of up to $470,000 with AJE Management (Note 5) to fund the operations of Teco. The line of credit accrues interest at a rate of 8% and the Company pledged its interest in the Teco facilites as collateral for the note, subject to the preexisting lien for collateralization of the CSW Ventures Note (Note 6). 

 

The Company also holds a Nevada license for cultivation of medical marijuana located in Sandy Valley, Nevada (the “Nopah License”). The license is owned by the Company’s wholly owned subsidiary, GB Sciences Nopah, LLC ("Nopah"). Operations have not begun under the Nopah License. On November 27, 2019, the Company entered into a Binding Letter of Intent to sell its 100% interest in GB Sciences Nopah, LLC to The Moore Group, Inc. (the “Nopah LOI”), with the transaction closing upon transfer of the Nopah License. As consideration for the transfer of the license, the Company will receive $300,000. The transfer of the Nopah License is subject to the same restrictions on license transfers currently in effect in the State of Nevada.