Washington, D.C. 20549
3550 W. Teco Avenue
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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No
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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. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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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.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes
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No
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The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, that being September 30, 2015, was $14,769,754.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K of Growblox Sciences, Inc., a Delaware corporation and its subsidiaries (the "Company"), contains "forward-looking statements," as defined in the United States Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates:, believes", "estimates", "predicts" or "continue", which list is not meant to be all-inclusive and other such negative terms and comparable technology. These forward-looking statements, include, without limitation, statements about market opportunity, strategies, competition, expected activities and expenditures as we pursue business our plan, and the adequacy of available cash reserves. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements. The economic environment within which we operate could materially affect actual results. Additional factors that could materially affect these forward-looking statements and/or predictions include among other things: (i)product demand, market and customer acceptance of any or all of the Company's products, equipment and other goods, (ii) ability to obtain financing to expand its operations, (iii) ability to attract qualified personnel, (iv) competition pricing and development difficulties, (v) ability to increase cultivation production, (vi) the timing and extent of changes in prices for medical cannabis, (vii) agricultural risks of growing and harvesting medical cannabis, (viii) the availability of equipment, such as extraction equipment, (ix) the adequacy of capital reserves and liquidity including, but not limited to, access to additional borrowing capacity, (x) and general industry and market conditions and growth rates, unexpected natural disasters, and other factors, which we have little or no control: and any other factors discussed in the Company's filings with the Securities and Exchange Commission ("SEC").
Any forward-looking statements are based on information available to us today and we undertake no obligation to publicly update any forward-looking statements, whether as a result of future events, new information or otherwise.
ITEM 1. DESCRIPTION OF BUSINESS
Unless the context indicates otherwise, all references to "Growblox" refers solely to Growblox Sciences, Inc., a Delaware corporation, and all references to "the Company," "we", "us" or "our" in this Annual Report refers to Growblox and its consolidated subsidiaries.
Overview
The Company seeks to be an innovative technology and solution company that converts the cannabis plant into medicines, therapies and treatments for a variety of ailments. The Company is developing and utilizing state of the art technologies in plant biology, cultivation and extraction techniques, combined with biotechnology, and plans to produce consistent and measurable medical-grade cannabis, cannabis concentrates and cannabinoid therapies.
Although we believe that maximum shareholder value will ultimately be achieved through the development, production and marketing of certified cannabinoid medicines, therapies and treatments, in order to generate cash flow and near term profitability, we intend to cultivate and dispense cannabis for medical purposes in both Nevada and other states which permit such sales and in which we and our operating partners are able to obtain cultivation and dispensing licenses.
We seek to become a trusted producer of consistent and efficacious medicinal strains and products, combining both cannabinoids and terpenes, which we intend to market in those states within the United States and in other countries where the sale of medical cannabis products are permitted. In addition, subject to obtaining Food and Drug Administrative (FDA) certification, we intend to market our cannabinoid based drug discoveries on a world-wide basis.
We were incorporated in the State of Delaware on April 4, 2001, under the name "Flagstick Venture, Inc." On March 28, 2008, stockholders owning a majority of our outstanding common stock approved changing our then name "Signature Exploration and Production Corp." as our business model had changed.
On March 13, 2014, we entered into a definitive assets purchase agreement for the acquisition of assets, including the Growblox™ cultivation technology which resulted in a change in our corporate name on April 4, 2014, from Signature Exploration and Production Corporation to Growblox Sciences, Inc.
The Company will cultivate cannabis using innovative, but conventional methods in its wholly owned subsidiary, GB Sciences Nevada, LLC ("GBSN"). GBSN is in the final states of opening Phase 1 of an approximately 28,000 sq. ft. facility in Las Vegas, Nevada. When all phases of construction are completed, the facility is expected to produce 6,800 pounds of marijuana per year and generate revenues of $16.9 million, based on a projected wholesale price of $2,500 per pound. Completion of all Phases of this facility is dependent upon the availability of capital to complete construction. Phase 1, due to be completed in August 2016 is expected to produce revenues of $3.4 million per year. The Company has made completion of all Phases of this facility its number one priority.
Growblox intends to conduct its business operations, primarily through its subsidiaries in three distinct operating units which we designate as our "Solutions," "Sciences" and "Product" divisions. Our Solutions division involves the development and use of our proprietary suite of controlled-climate indoor agricultural technology growing and cultivation Suites, which we call "TissueBLOX", "GrowBLOX,"
TM
"CureBLOX"
and "ExtractionLAB"
(collectively, the "GrowBLOX Suites"). Our GrowBLOX Suites are engineered and designed to cultivate medical grade cannabis and create cGMP-certified plant extracts, and thereafter to enable us to process and manufacture a variety of pharmaceutical, nutraceutical and cosmeceutical formulations and products based on these certified raw ingredients. The GrowBlox Suite currently exists in prototype. A full production model of the GrowBLOX is scheduled for testing before August 2016.
We believe that the key advantage of our GrowBLOX Suites is that they are capable of producing certified raw materials with consistent and measurable profiles of active ingredients. We believe that producing cannabis-based materials with validated chemical compositions is ideal for scientifically rigorous testing of the safety and effectiveness of these materials as a therapy for patients. If these materials are approved by the FDA they can be marketed in patented pharmaceutical compositions. As such, we believe that the medical grade cannabis and other extracts produced in our GrowBLOX Suites can serve as the raw materials for our Science and Products divisions.
We will seek to obtain ISO and Current Good Manufacturing Practices (cGMP) certifications for the process of growing and processing botanical ingredients in our GrowBlox Suites. The manufacture, licensing, installation and support of such equipment will be the focus of our Growblox Sciences Puerto Rico, LLC subsidiary, which will operate our Solutions division.
Our Science division will seek to create and validate the effectiveness of proprietary formulations of active ingredients derived from the cannabis plant in combination with "big data" driven clinical research and development programs to bring pain relief and potential cures to patients suffering from a variety of neurological and other diseases. Our Science division is currently engaged in preclinical testing of its biopharmaceutical cannabinoid product prototypes to begin future human clinical trials. In addition, we are seeking co-development partners to assist us with growing a phytocannabinoid-based biopharmaceutical product pipeline.
We are currently developing and intend to file patent applications for specific, cannabis-based, pharmaceutical formulations that fit within seven broad therapeutic categories. Many of these disease categories are not currently being treated effectively by traditional pharmaceutical companies. Once our patent applications are filed with the U.S. Patent Office, we will submit IND-applications to the FDA and request "orphan drug" designation status for our formulations in some instances or "breakthrough drug" designations in others in order to fast track our clinical trials. In addition, we intend to implement adaptive design clinical trials based on recent FDA-guidance documents. Adaptive design clinical trials have the potential to reduce the total clinical trial time to as little as three to five years, as it has for other new FDA-approved treatments like Gilead's Hepatitis C treatment. Additionally, we believe that our time to market can be reduced because we expect to shortly be able to cultivate and dispense to human recipients consistent and measurable medical-grade cannabis in Nevada and thereafter in other states by licensed dispensaries and oncologists.
It should be emphasized that we face significant hurdles in obtaining FDA approval and certification for our therapies. Not only is the FDA certification process for any proposed pharmaceutical both extremely expensive and time consuming, but the current policy and regulations of the Federal government and some of its agencies are that cannabis has no medical benefit. Despite current Federal policy, there are more than 500 clinical trials currently in process in the United States testing cannabis or marijuana, and they are registered on the FDA-regulated website at
www.clinicaltrials.gov
. Of these trials, approximately 188 are testing potentially positive clinical effects of cannabis-based therapies.
Medical cannabis has been shown in numerous trials to be an effective source of pain therapy and has been indicated as being effective in treating some conditions such as glaucoma, AIDS, multiple sclerosis, chemotherapy-induced nausea and certain seizure disorders. While the therapeutic effects of medical cannabis on these conditions have been well documented in the medical literature, many patients and their physicians have well-founded concerns regarding the consistency, safety and efficacy of medical cannabis that is available any most standard dispensaries. We will seek to alleviate these concerns and increase safety and efficacy through cultivating harvest-to-harvest consistency in the levels of active cannabinoids in our proprietary stains; eliminate harmful pesticides and fungicides in our Growblox Suites growing and curing system.
We are also in the preliminary stages of developing, through a third party contactor, a mobile cannabis delivery application - GBLX-PRO. We hope to use GBLX-PRO in dispensary trials to establish correlations between the profiles of active ingredients in the cannabis-based extracts and symptom improvement as reported by patients and confirmed biometrically. GBLX-PRO would be downloaded into a smart phone. Once data on a user of medical cannabis is obtained and the precise formulation of medical grade cannabis is dispensed, the proposed application will permit a user to remotely order additional deliveries or obtain the identical product by using thumb print identification on his or her smart phone. In addition, by use of a "health" wrist watch, the user's blood pressure, pulse rate and potentially sleep patterns and genetic markers can be accessed; all of which, we believe, would be significant in providing "big data" capabilities for the clinical trials to be conducted by our Science division. We therefore believe that these human clinical trials will help establish the safety and efficacy of our raw cannabis-based formulations. However, at this time, the mobile cannabis delivery application exists only as an early prototype. Significant time, effort and expenditures will be required to develop fully operational production versions of this technology.
Our principal executive offices and Science and Product divisions operations are located at 3550 W. Teco Avenue, Las Vegas, Nevada.
Our Business Strategy
Growblox intends to operate as an intellectual property company that will conduct its business through its subsidiaries. Growblox intends to own all patents and related technologies developed by it and its subsidiaries. In addition, Growblox owns and will seek to own majority interests in each of its existing and future operating subsidiaries.
Although we believe that maximum shareholder value will ultimately be achieved through the development, production and marketing of certified cannabinoid medicines, therapies and treatments, in order to generate cash flow and near term profitability we intend to cultivate and dispense cannabis for medical purposes in both Nevada and other states which permit such sales and in which we and our operating partners are able to obtain cultivation and dispensing licenses.
The completion of pre-clinical and clinical trials and FDA-approvals for a pharmaceutical product is traditionally a long and expensive process. However, we believe that strategic partnering and aggressive licensing of these products at early clinical stages can mitigate some of the risks. If we are able to obtain "orphan drug" or "breakthrough drug" fast track status, this would be very helpful in shortening the process; as is the use of the new adaptive design clinical trial strategy. In order to achieve the strategic goals for our Science division, we intend to enter into partnerships or joint ventures with respected, independent contract research organizations, medical schools and other researchers. To this end, in December 2014, we signed a letter of intent with NRC Research Institute, a respected contract research organization in California. It is contemplated that NRC will focus on designing Phase I/II studies in parallel to simultaneously evaluate safety and efficacy of therapeutics.
If we achieve successful outcomes of product prototypes and meet all of our intermediate clinical trial goals, we will seek to proceed with testing using the adaptive design clinical trial strategy that allows us to proceed more quickly through all three human trial phases in a single series. We would then apply for FDA approval. If and when one or more of our drugs, therapies or treatments are approved by the FDA, we will seek to market them either through our Products division or under joint ventures or licensing arrangements with major pharmaceutical companies.
There can be no assurance that we will ever be able to enter into any joint ventures or other arrangements with third parties to finance our drug development program or that if we are able to do so, that any of our projected therapies will ever be approved by the FDA. Even if we obtain FDA approval for a therapy, there can be no assurance that it could be successfully marketed or would not be superseded by another cannabis based therapy produced by one or more of our competitors. It also may be anticipated that even if we enter into a joint venture development with a financially stable pharmaceutical or institutional partner, we will still be required to raise significant additional capital in the future to achieve the strategic goals of our Science Division. There can be no assurance that we will be able to obtain such additional capital on reasonable terms, if at all. If our Science Division fails to achieve its goal of producing one or more cannabis based pharmaceuticals or therapies, it would have a material adverse effect on our future financial condition and business prospects.
GB Sciences Nevada, LLC and GB Nevada Partners, LLC Separation Agreement
In March 2015, we and GB Sciences Nevada, LLC ("GBSN") entered into a binding memorandum (the "Memorandum") with GBS Nevada Partners, LLC ("GBS Partners"), the minority member of GBSN. Under the terms of such agreement, our equity in GBSN was to increase from 55% to 65%, and GBSN was to retain its existing certification to cultivate and grow cannabis and, if and when issued by Clark County and/or Las Vegas, Nevada, the delivery certification. It was further agreed that, if and when issued, the dispensary certification would be assigned to an entity to be wholly-owned by GBS Partners. In consideration for such assignment, the entity operating the dispensaries was to agree to purchase a minimum of 20% of its inventory of cannabis from GBSN and pay to us 10% of all profits derived from its dispensary business. In addition, GBSN was to retain the delivery certificate and the exclusive right to provide all delivery services on behalf of the dispensaries that are permitted by applicable state and local Nevada law. The actions contemplated by the Memorandum were never taken because the delivery and dispensary certifications have yet to be issued and our ownership of GBSN remains at 55%.
On August 17, 2015, however, we entered into a letter agreement with GB Partners to expand on the actions contemplated by the Memorandum and to effect an ownership separation. The transfer of the license and 100% of ownership to us was approved by Division of Public & Behavioral Health of the Nevada Department of Health and Human Services on November 24, 2015. Pursuant thereto, we became the sole shareholder of GBSN and retain the Clark County cultivation license and state certificates together with all related SUPs and state certificates.
GBS Partners will receive the Clark County and City of Las Vegas dispensary location licenses, together with related SUPs and state certificates. In connection with the foregoing, the parties agreed to enter into a Consignment and Delivery Agreement ("CDA") with a term of ten years subject to optional extensions for additional five year periods. The initial extension is automatic assuming neither party is in breach of the CDA. Further extensions thereafter, will require mutual agreement of the parties.
Pursuant to the CDA, GBS Partners will provide GBSN with 20% of its most prominent in-store retail merchandising shelf space for consignment sales. All after-tax consignment sale proceeds resulting therefrom will be split equally between GBS Partners and GBSN. The CDA will further provide that GBSN will establish and bear all expenses of operating and administrating a local delivery service from the dispensary locations. All product sold through such services will be treated as a consignment sale and as such, all after-tax delivery consignment sale proceeds will be split between GBSN and GBS Partners on an 80/20 basis. The service may also include non-GBSN product to be sold through the service from GBS Partners' county dispensary and in such event, GBSN will retain 20% of the initial sales price thereof.
The CDA will also provide for GBSN to receive a non-dilutable 10% interest in the distributions, profits and equity of all entities that own or have the right to 100% of all dispensary operations. GBSN will also have the right to tag along with any sale or transfer of any direct or derivative interest in the dispensary operation on a pari passu basis.
GBS Partners is required to reimburse GBSN approximately $307,000 for expenses incurred in connection with the application and issuance of an approved provisional state certificate from both the Las Vegas and Clark County dispensaries. Approximately $61,000 of such amount is payable upon the governmental approval of the license transfers. The balance of such amount is payable from the first sale proceeds from dispensary operations and in all events no later than 2 years from the date the county dispensary receives its final certificate of occupancy (the "County Certificate") and opens for business. In the event that the County Certificate is not issued, GBS Partners can defer payment of approximately $153,000 for a maximum of two additional years. Notwithstanding the foregoing, if GBS Partners finances the dispensary operations with a third party resulting in the receipt of net proceeds by GBS Partners, then all expense amounts shall become immediately due and payable.
Agreement with Growblox Sciences Puerto Rico
On May 7, 2015, the Company entered into certain agreements with Growblox Sciences, Puerto Rico, LLC, a limited liability company organized under the laws of the Commonwealth of Puerto Rico ("GBSPR"). GBSPR was formed and is being capitalized primarily by Cesar Cordero-Kruger, a prominent business executive and resident of Puerto Rico.
Under the terms of a commercialization agreement between the Company and GBSPR, the Company has granted to GBSPR the exclusive world-wide rights to all of our technology and intellectual property to:
(a)
manufacture, produce, lease and license our indoor series of controlled-climate indoor agricultural technology growing and cultivation chambers engineered and designed to produce medical grade cannabis and other plant extracts (the "Growblox Chambers") and provide remote diagnostic monitoring and servicing of the Growing Chambers to third party growers and processors of hemp, cannabis and other plant extracts;
(b)
sell to the Company, for resale and distribution throughout the world, in all territories and jurisdictions (including states in the United States) where the sale and use of such products are permitted, any and all pharmaceutical raw materials and products as well as neutraceuticals and cosmeceutical skin care products derived from medical-grade cannabis and hemp raw materials that were cultivated and grown in Growblox Chambers;
(c)
use the trademarks and packaging developed by the Company to be used to identify all cannabis products grown in Growblox Chambers;
(d)
provide technical support for the licensing, permitting and other requisite applications for the cannabis business in Puerto Rico and related markets;
(e)
access all research supporting the Growblox Chambers and educational materials previously developed or collected in the future by the Company to the extent associated or used with GBSPR Business; and
(f)
access all of the dispensary related technology, proprietary information and contacts including, without limitation, technology, proprietary information, and contacts.
All rights not granted to GBSPR under the commercialization agreement are retained by the Company and include the (i) right to conduct pre-clinical and clinical trials and ongoing research and development to create cannabis-based therapies for specific clinical conditions based on an understanding of how cannabinoids interact with the natural receptors in the human body; (ii) formulation of targeted combinations of active ingredients to combat specific conditions and diseases; (iii) use of proprietary cannabinoid formulations, to develop palliative and curative pharmaceutical treatment options and products for patients with certain critical diseases; (iv) exclusive right to sell, dispense and market cannabinoid and hemp based pharmaceutical raw materials and products as well as neutraceuticals and cosmeceutical skin care products throughout the world, either directly, through distributors or under other agreements with third parties; and (iv) right, directly, or through one or more of our subsidiaries (other than GBSPR), to cultivate, grow, dispense and sell medical-grade cannabis or marijuana in Nevada and Colorado.
To the extent that GBSPR produces and sells to the Company for resale or distribution pharmaceutical raw materials and products, neutraceuticals and/or cosmeceutical skin care products derived from plants cultivated and grown in Growblox Chambers (collectively, the "Finished Products"), the Company has agreed to establish mutually acceptable transfer pricing between GBSPR and the Company for such Finished Products; failing which agreement, an independent third party will arbitrate such pricing and pricing policies. In the event that GBSPR is unable to fulfill 100% of the requirements of the customers for Growblox Chambers or Finished Products, GBSPR will subcontract such production to third parties that are reasonably acceptable to the Company. Neither the Company nor GBSPR may commercially sell (as opposed to leasing or licensing) Growblox Chambers without the consent of both parties.
The grant of rights under the commercialization agreement was subject to the condition that GBSPR obtain not less than $1.25 million of equity financing by no later than September 30, 2015, failing which we could unilaterally terminate the agreement. GBSPR failed to obtain the funds by September 30, 2015 required pursuant to the commercialization agreement. Furthermore, the delivery of the approved production version of the Growblox cultivation unit has not yet been completed and the unit has not been delivered for testing. The Company continues to work with GBSPR to finalize the production version of the GrowBLOX and develop an alternative plan for funding. As of this date, the Company has not cancelled the commercialization agreement and technology license with GBSPR, and would prefer to continue the relationship but, in the absence of a viable funding plan, the Company may cancel the agreements and seek alternative partners for the development and commercialization of the GrowBLOX Suite technology.
Upon consummation of the contemplated $1.25 million capitalization of GBSPR, the Company will be the majority owner of its equity, owning approximately 66% of the GBSPR membership interests; Mr. Cordero-Kruger will own approximately 15.9% of such membership interests, Dr. Andrea Small-Howard, a Director and Chief Technology Officer will own approximately 2.1% of such membership interests and Joseph J. Bianco, a GBSPR Board member will own approximately 8.3% of such membership interests. The remaining percentage of ownership of such membership interests will be owned by other non-related party investors.
Under the terms of the GBSPR operating agreement, Mr. Cordero-Kruger is the managing member of GBSPR, entitled to designate a majority of the five member board of managers of GBSPR, and is delegated with the authority to manage the business of GBSPR, subject only to certain major decisions defined in the operating agreement (dealing primarily with matters of finance, related party transactions and amending agreements among the parties) which require unanimous approval of the Board or approval by the Company. The Company has designated Craig Ellins, President and CEO, and Joseph J. Bianco as members of the GBSPR Board.
The operating agreement also provides that the investors (including Mr. Cordero-Kruger) who have provided the maximum $1.25 million of capital to GBSPR will hold Class A membership interests that entitle them to exclusive rights to certain research and development tax credits available to residents of the Commonwealth of Puerto Rico. The Company and its affiliates and associates hold Class B membership interests, which are identical to the Class A membership interest, other than the right to the research and development tax credits.
Assuming it completes its initial $1.25 million capitalization, GBSPR may seek to raise an additional $4.75 million of capital in 2016 or thereafter to enable it to expand its business activities. The operating agreement provides that the terms of such additional financing, if undertaken, have to be unanimously approved by all members of the GBSPR board, including the Company's designees. Under certain conditions, after three years, the operating agreement provides that Mr. Cordero-Kruger or his designated members of the GBSPR board may require the Company to acquire the remaining equity of GBSPR under a formula or consummate another liquidity event for the members of GBSPR.
There can be no assurance that the proposed initial $1.25 million capitalization of GBSPR will be consummated, or that the contemplated $4.75 million of additional financing will be undertaken or completed upon terms and conditions that are acceptable to GBSPR, if at all. There can also be no assurance that the proposed business activities of GBSPR will be successful, the ongoing research and development will result in pre-clinical trials or clinical trials that will result in the production of any pharmaceutical or related products that will either be commercially accepted or permitted to be sold by the FDA or any other state or federal regulatory authority, or the Company will ever be able to purchase or be permitted to resell medical grade cannabis or other finished products.
Installment Loan Financing – Convertible Debenture
On May 12, 2015, we entered into a note purchase agreement, (the "NPA") effective as of June 9, 2015, with Pacific Leaf Ventures, LP ( "Pacific Leaf"), pursuant to which Pacific Leaf agreed to make installment loans to us in the aggregate amount of $1.75 million (the "Loans"). The note is convertible at the option of the holder into common shares of the Company at a conversion price of $0.50, subject to anti-dilution adjustments. The purpose of the financing is to provide for the acquisition and installation of an operating facility, equipment and other tangible assets by GB Sciences Nevada. Such facility and equipment will be dedicated to the cultivation of cannabis and the extraction of oils and other constituents present in cannabis, subject at all times to Nevada legal requirements. Currently, the Company expects to achieve operating revenues in October 2016.
On February 8, 2016, the Company entered into the Amended and Restated 6% Senior Convertible Promissory Note ("Amended Note") with Pacific Leaf Ventures, LP ("Pacific Leaf"). The amended agreement modifies the 6% Senior Secure Convertible Promissory Note dated May 12, 2015 and effective as of June 8, 2015, in the principal amount of $1.75 million.
Per the terms of the amended agreement, Pacific Leaf may make up to $1.0 million in additional advances to the Company under the Amended Note bringing the total in the aggregate to $2.75 million. The note is convertible at the option of the holder into common shares at a conversion price of $0.25, subject to anti-dilution adjustments. The Company has an option to prepay the Amended Note, without premium or penalty, in whole or in part, with accrued interest to the date of such prepayment.
Until the payment in full of the Amended Note, the Investor or its designee shall have the option (the "
Option
") to purchase up to a 20% membership interest in GB Sciences Nevada LLC ("GBSN") from GBSN for a purchase price equal to $100,000 for each 2% of membership interest purchased (
i.e.
, $1,000,000 if the Option is exercised in full), provided that the Option may not be exercised for less than a 1% membership interest in GBSN.
In connection with the Amended Note, the Company also entered into the Amended and Restated Royalty Agreement with Pacific Leaf dated and effective as of February 8, 2016. Per the terms of the Amended Royalty Agreement, the royalty rate at any time shall equal to the sum of (i) 9.1%, and (ii) the percentage calculated by dividing the amount advanced in excess of $1.75 million by $1.0 million, multiplied by the gross revenues of GBSN. On the earlier of (i) the seventh anniversary of the royalty payment date, or (ii) the date that all amounts outstanding under the Amended Note have been paid in full, the royalty rate shall be reduced by 50%.
Under the NPA, Pacific Leaf made advances resulting in total Loans of $2.1 million at March 31, 2016.
There can be no assurance that:
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the Company will be able to comply with the covenants under the Pacific Leaf Note Purchase Agreement so as to enable the Company to receive all of the anticipated funding thereunder;
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there will not be cost over-runs in connection with the purchase and/or lease of the cultivation facility and related equipment resulting in the proceeds of the Loan being insufficient to enable GBSN to complete the installation and commence production of cannabis for medical purposes;
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a state business license to operate the medical cannabis facility will be issued, or that the Company or GBSN will not violate existing or newly imposed state, county and city regulations in Nevada that would significant restrict or prohibit its proposed business activities; or
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the proposed business to be conducted by GBSN with the proceeds of the Loan will prove profitable to the Company or its subsidiaries.
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A default by the Company under the Note Purchase Agreement could have a material adverse effect on the business.
Although the proposed and actual business activities of GBSN are not illegal within the State of Nevada, the production and sale of cannabis products violate federal laws as presently constituted.
Teco Cultivation Facility
Our wholly-owned subsidiary GB Sciences Nevada, LLC ("GBSN") leases a warehouse facility at 3550 W. Teco Avenue, Las Vegas Nevada. GBSN holds a provisional certificate from the Division of Public & Behavioral Health of the Nevada Department of Health and Human Services to operate an establishment to cultivate medical cannabis at its Las Vegas location. The certificate was granted in November 2014 and is considered provisional until the establishment is in compliance with applicable local government requirements and has received a state business operating license.
As of March 31, 2016, Pacific Leaf has advanced approximately $2.1 million toward the completion of the build-out of the Company's 28,000 sq. ft. cultivation facility in Las Vegas, Nevada. The money has been used to significantly advance construction. The Company is confident that the facility will be completed and operational by August, 2016. Based on this completion schedule, the Company expects to introduce 800 small cannabis plants to the facility in early August which will lead a revenue generating harvest no later than October 2016.
Additionally, GB Sciences Nevada LLC, the holder of the cannabis cultivation license located in the Teco facility, received notice from its landlord that the lease was in default for technical reasons not related to monthly lease payments. The Company promptly responded and provided evidence that none of the alleged defaults were valid. If, for some reason, the landlord were able to prove a default in the lease and evict the Company from the Teco property, the financial damage to the Company could be material.
Subsequently, an affiliate of Pacific Leaf, W-Net, Inc., entered into an agreement to purchase the building housing our cultivation facility at 3550 West Teco Ave., Clark County, Nevada for a purchase price of $3.9 million. In conjunction with the purchase agreement, the Company agreed to vacate the premises if the purchase did not close pursuant to the purchase agreement. W-Net has informed the Company that it is confident that the purchase will close pursuant to the agreement. Failure of W-Net or its assignees to close the purchase of the facility will have a material adverse effect on the Company's ability to generate revenues from conventional cannabis cultivation.
Management Agreement between Growblox Sciences, Inc. and Compassionate Team of Las Vegas LLC
On August 17, 2015, the Company entered into a Medical Marijuana Establishment Management Agreement with Compassionate Team of Las Vegas LLC ("Compassionate Team") pursuant to the term of which the Company agreed to manage the operation of the Medical Marijuana Establishment for cultivation, located at 2601 Highland Drive, Las Vegas, Clark County, Nevada ("Real Property"). The responsibility and control of all operations shall reside with Compassionate Team as licensee. Growblox Sciences agreed to provide all capital funding to the Medical Marijuana Establishment for cultivation to become fully operational in return for a) 70% of EBITDA and b) assignment of 50% membership interest in Compassionate Team after the facility had reached an EBITDA run rate of $1,000,000 per annum. The effectiveness of the management agreement is depended upon Compassionate Team providing Growblox Sciences with written proof of Provisional Medical Marijuana Establishment Registration Certificate for cultivation and evidence of approved Special Use Permit and a Compliance Permit at the Real Property.
In February 2016, Compassionate Team informed the Company that it planned to purchase an alternative building more suitable for development as a cultivation facility than the existing location. The Agreement was amended to accommodate the new location as well as add a potential dispensary license to be developed and operated by the Company under terms similar to the original Agreement.
Issuance and Transfer of Provisional Cultivation and Production Certificates
On August 14, 2015, Sandra Tiffany, the managing member of GWGA, LLC ("GWGA"), LVIG Holdings LLC ("LVIG") and LVOP Holdings LLC ("LVOP") agreed to transfer the State of Nevada, Division of Public and Behavioral Health (the "Division") provisional Cultivation Establishment Registration Certificates to be issued to GWGA and LVIG and the Division's provisional Production Establishment Registration Certificate to be issued to LVOP to us at such time that the Division allows for the transfer of such certificates.
The Company was to pay consideration to Tiffany of $180,000 to reimburse Tiffany for the cost of buying out her former partners, $50,000 in prior legal fees related to buying out her former partners, and 250,000 shares of Growblox Common Stock. The Company also was to employ Tiffany as General Manager of GB Sciences Nevada LLC. Additionally, the Company was required to finance approximately $1.0 million to build-out the subject cultivation and production facilities.
In January 2016 the Company made the assessment that it did not have sufficient financial resources to meet the commitments under this agreement and would instead focus all its resources on completing its Teco facility. Consequently, Tiffany and the Company sought out third parties with the objective of finding potential venture partners that would assume the original costs of the Tiffany agreement.
In April 2016, after exhausting all opportunities, the Tiffany agreement was cancelled. Sandra Tiffany resigned from the Company and will pursue the development of the provisional Cultivation Establishment Registration Certificates issued to GWGA and LVIG and provisional Production Establishment Registration Certificate issued to LVOP on her own. As a result of cancellation of the Tiffany agreement, we no longer have any interest in GWGA and LVIG certificates.
Cost Saving Measures
The Company is "pre-revenue" until its first cannabis harvest occurs in October 2016. Consequently, its only sources of funds for operations are loans and sales of Common Stock. In order to conserve cash resources and maximize utilization of cash toward completing the Teco cultivation facility, the Company adopted several cost saving measures.
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In January, the Company vacated its offices at 6450 Cameron in Las Vegas, saving $7,000 per month in rent. In May 2016, The Company moved its corporate offices to the Teco facility upon receiving a Certificate of Occupancy for the facility.
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In March 2016 the Company implemented a furlough of all science-related officers and employees. These employees are expected to return to work the earlier of a) the receipt of revenues from sales of cannabis grown at the Teco facility; or b) identification of critical time-sensitive tasks or projects combined with sufficient resources to pay for the performance of these tasks or projects. As a result of these measures, and other layoffs the Company reduced its expenditures by approximately $45,000 per month.
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Management Changes and
Board of Directors Expansion
Effective July 27, 2015, the Board of Directors hired John Poss as our Chief Financial Officer. Effective December 31, 2015 the Company's Board of Directors also hired John Poss as the Company's President and Chief Operating Officer.
Effective April 29, 2016 the Company's Board of Directors was expanded to five members. As a result of the expansion, the Board of Directors elected Leslie Bocskor, Shane Terry and John Poss to serve as Members of the Board of Directors for a term of three years to fill the three existing vacancies.
The
Board of Directors also accepted the resignation of Craig Ellins as Chief Executive Officer of the corporation and immediately appointed Craig Ellins to serve as Chief Innovation Officer of the corporation with no changes in his current employment contract.
The Board of Directors elected John Poss to serve as Interim Chief Executive Officer until such time as the Board of Directors can identify and hire a suitable replacement.
Mr. Poss has been serving as the CFO of the Company since August, 2015 and its COO since December 31, 2015. He will continue serving as CFO and COO until suitable replacements can be recruited.
Competition
The medical cannabis industry is subject to intense and increasing competition. Some of our competitors may have substantially greater capital resources, facilities and infrastructure then we have, which may enable them to compete more effectively in this market. These competitors include MedBox, Inc., TerraTech Corp., Cannabis Science, Inc., Peak Pharmaceuticals, Inc., Cannabis-Rx, Inc. and Nemus Biosciences, Inc. In addition, the development of therapies and pharmaceutical products based on extracts from the cannabis plant is being undertaken by a number of medical and educational institutions, including the University of Mississippi, which is the only U.S. based entity authorized by the Federal government to cultivate cannabis for research. Such institutions have significantly greater financial resources and facilities than we have
Intellectual Property
We believe that we have the opportunity to file applications for several potential patents relating to our cultivation and growing technologies. We filed a provisional patent application in 2014 which has expired. We intend to expand our prior claims and refile on or more new patent applications in the near future.
Our key technology is the indoor agricultural growing Suite known as the Growblox™. The Growblox™ is a controlled-climate indoor agricultural growing Suite designed and engineered to cultivate medical-grade cannabis plants. We believe that our Growblox™ Suites create the ideal growing environment for each plant while economically monitoring and adjusting the light, humidity, nutrition, temperature and aeration, The Growblox™ Suites also excludes outside stresses like, toxins, pathogens and pests. We believe that this customized environment ensures maximum harvest of the finest grade products and will consistently deliver the quality and efficacy expected from a medical-grade cannabis product.
We believe that the Growblox™ system is economical, environmental and user friendly as it utilizes the following technologies:
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Growblox's™ AeroVAPOR™ misting system delivers all of the moisture, nutrients and oxygen the cannabis plants need to grow through a misting system that recycles the water used. Absolutely, no gray water remains that would traditionally be released back into the environment.
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Energy-efficient LED lighting system.
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Integrated, intelligent control system that continuously monitors, manages, records, and analyzes the cultivation methodology for optimal growth.
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Remote monitoring system sends alerts via text, email and telephone to scientists, botanists and cultivators, recommending adjustments to the Suites cultivation levels.
The Growblox Suite currently exists in prototype. A full production model of the GrowBLOX is scheduled for testing before August 2016.
We
anticipate filing a number of patent applications for specific, cannabis-based, pharmaceutical formulations that fit within seven broad therapeutic categories using phytocannabinoid ingredients extracted from the cannabis plant. Canabinoids, we believe, either in isolated form or in varying combinations within various prototypes of cannabis plants, are either proven, or have the potential, for treatment of numerous conditions including pain, nausea, seizure and inflammation reduction, tumor inhibition, psychotic and anxiety issue, and muscle spasms. There is no assurance that any or all of these patent applications will be filed in the near future or if filed that letters patent will be issued in the near future, if at all. Even if issued, there is no assurance that our patents will afford us with adequate protection for the intellectual property that we may develop.
Government Regulation and Federal Policy
Under the Controlled Substances Act ("CSA"), the policies and regulations of the Federal government and its agencies are that cannabis (marijuana) is a stage 1 narcotic that is addictive and has no medical benefit. Accordingly, and a range of activities including cultivation and the personal use of cannabis is prohibited and subject to prosecution and criminal penalties. Unless and until Congress amends the CSA with respect to medical cannabis, there is a risk that the federal authorities may enforce current federal law, and we may be deemed to be engaged in producing, cultivating, or dispensing cannabis in violation of federal law, or we may be deemed to be facilitating the sale or distribution of drug paraphernalia in violation of federal law with respect to our Company's business operations. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our strategic goals, revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain. See "
Risk Factors
" below.
The U.S. Supreme Court declined to hear a case brought by San Diego County, California that sought to establish federal preemption over state medical cannabis laws. The preemption claim was rejected by every court that reviewed the case. The California 4th District Court of Appeals wrote in its unanimous ruling, "Congress does not have the authority to compel the states to direct their law enforcement personnel to enforce federal laws." However, in another case, the U.S. Supreme Court held that, as long as the CSA contains prohibitions against cannabis, under the Commerce Clause of the United States Constitution, the United States may criminalize the production and use of cannabis even where states approve its use for medical purposes.
In an effort to provide guidance to federal law enforcement, the Department of Justice ("DOJ") has issued Guidance Regarding Cannabis Enforcement to all United States attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the CSA, but, the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent and rational way.
The August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning cannabis enforcement in light of state laws legalizing medical and recreational cannabis possession in small amounts.
The memorandum sets forth certain enforcement priorities that are important to the federal government:
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Distribution of cannabis to children;
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Revenue from the sale of cannabis going to criminals;
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Diversion of medical cannabis from states where it is legal to states where it is not;
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Using state authorized cannabis activity as a pretext of other illegal drug activity;
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Preventing violence in the cultivation and distribution of cannabis;
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Preventing drugged driving;
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Growing cannabis on federal property; and
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Preventing possession or use of cannabis on federal property.
The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of cannabis for use on private property but has relied on state and local law enforcement to address cannabis activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical cannabis and recreational cannabis in small amounts, there may be a direct and adverse impact to our business and our revenue and profits. Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including Nevada and California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical cannabis.
In contrast to federal policy, there are currently 25 states and the District of Columbia that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation.
Employees
As of March 31, 2016, we employed seven employees consisting of management and support staff.
You should carefully consider the risks, uncertainties and other factors described below, in addition to the other information set forth in this Annual Report on Form 10-K, including our financial statements and the related notes thereto. Any of these risks, uncertainties and other factors could materially and adversely affect our business, financial condition, results of operation and cash flows. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. An investment in our securities is speculative and involves a high degree of risk. You should not invest in our securities if you cannot bear the economic risk of your investment for an indefinite period of time and cannot afford to lose your entire investment. There may be additional risks that we do not presently know of or that we currently believe are immaterial which could also impair our business and financial position. See also "Cautionary Note Regarding Forward-Looking Statements."
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
We have a limited operating history, which may make it difficult for investors to predict future performance based on current operations.
We have a limited operating history upon which investors may base an evaluation of our potential future performance. In particular, we have not proven that we can supply growing equipment in a manner that enables us to be profitable and meet customer requirements, develop intellectual property to enhance our product lines, obtain the necessary permits to develop medical grade cannabis, develop and maintain relationships with key manufacturers and strategic partners to extract value from our intellectual property, raise sufficient capital in the public and/or private markets, or respond effectively to competitive pressures. As a result, there can be no assurance that we will be able to develop or maintain consistent revenue sources, or that our operations will be profitable and/or generate positive cash flows.
Any forecasts we make about our operations may prove to be inaccurate. We must, among other things, determine appropriate risks, rewards, and level of investment in our product lines, respond to economic and market variables outside of our control, respond to competitive developments and continue to attract, retain and motivate qualified employees. There can be no assurance that we will be successful in meeting these challenges and addressing such risks and the failure to do so could have a materially adverse effect on our business, results of operations and financial condition. Our prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by companies in the early stage of development. As a result of these risks, challenges and uncertainties, the value of your investment could be significantly reduced or completely lost.
Our independent auditors' report for the fiscal years ended March 31, 2016 and 2015 have expressed doubts about our ability to continue as a going concern;
Due to the uncertainty of our ability to meet our current operating and capital expenses, in our audited annual financial statements as of and for the year ended March 31, 2016 and 2015 our independent auditors included a note to our financial statements regarding concerns about our ability to continue as a going concern. The Company has incurred recurring losses, has not generated revenue and has had negative operating cash flows since inception of the exploration activities. These factors and the need for additional financing in order for the Company to meet its business plan, raise substantial doubt about the ability to continue as a going concern. The presence of the going concern note to our financial statements may have an adverse impact on the relationships we are developing and plan to develop with third parties as we continue the commercialization of our products and could make it challenging and difficult for us to raise additional financing, all of which could have a material adverse impact on our business and prospects and result in a significant or complete loss of your investment.
We have incurred significant losses in prior periods, and losses in the future could cause the quoted price of our Common Stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flows.
We have incurred significant losses in prior periods. For the years ended March 31, 2016 and 2015, we incurred net losses of $6.8 million and $7.7 million respectively, and we had an accumulated deficit of $20.8 million and $14 million respectively. Any losses in the future could cause the quoted price of our common stock to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flows.
We will need additional capital to sustain our operations and will need to seek further financing, which we may not be able to obtain on acceptable terms or at all. If we fail to raise additional capital, as needed, our ability to implement our business plan could be compromised.
We have limited capital resources and operations. To date, our operations have been funded entirely from the proceeds of debt and equity financings. We expect to require substantial additional capital in the near future to implement our strategies, develop our intellectual property base, and establish our targeted levels of commercial production. There is no assurance that it will be able to raise the amount of capital needed for future growth plans.
Even if financing is available, it may not be on terms that are acceptable. If unable to raise the necessary capital at the times required, the Company may have to materially change the business plan, including delaying implementation of aspects of the business plan or curtailing or abandoning the business plan. Even if we obtain financing for our near-term operations, we expect that we will require additional capital thereafter, especially if we are to develop our Science division and start to conduct, individually or with joint venture partners, pre-clinical and clinical trials for potential pharmaceutical, nutraceutical or cosmeceutical products derived from cannabis. Our capital needs will depend on numerous factors including: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment requirements for research and development; and (iv) the amount of our capital expenditures, including acquisitions. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our existing stockholders will be reduced and our stockholders may experience significant dilution. In addition, new securities may contain rights, preferences or privileges that are senior to those of our common stock. If we raise additional capital by incurring debt, this will result in increased interest expense. If we raise additional funds through the issuance of securities, market fluctuations in the price of our shares of common stock could limit our ability to obtain equity financing.
We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially adversely affected, and we could be forced to reduce or discontinue our operations.
The establishment of our Solutions division operation in Puerto Rico will require additional financing.
In order for GB Sciences Puerto Rico to finalize the production version, commence the manufacture, licensing, installation and servicing of our proprietary GrowBLOX Suites, it will need to raise up to $5 million of financing. There is no assurance that he will be able to do so or that even if such financing is obtained that it will be sufficient to enable our Puerto Rico subsidiary to effectively commence operations. There is also no assurance that there will be any significant third demand to license or lease our GrowBLOX Suites or that, even if successfully established, our Solutions division will ever be able to operate profitably.
The inability of our Solutions division to raise sufficient funds to complete commercialization of the Growblox Technology Suite and to establish its business would materially and adversely affect our proposed Science and Products division and our business prospects taken as a whole.
We must establish a cannabis cultivation facility in Nevada by August 2016
Our GB Sciences Nevada, LLC ("GBSN") subsidiary holds a provisional cultivation certificate for a cannabis cultivation facility which must be operational by August 2016. Although we have obtained a maximum $2.75 million line of credit to construct such facility to be funded in installments, there can be no assurance that:
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we will be able to comply with our loan covenants to enable it to receive all of the anticipated funding thereunder;
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there will not be cost over-runs in connection with the purchase and/or lease of the cultivation facility and related equipment resulting in the proceeds of the loan being insufficient to enable us to timely complete the facility and commence production of cannabis for medical purpose;
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a final certificate to cultivate medical cannabis at the Las Vegas facility will be issued, or we or GBSN will not violate existing or newly imposed state, county and city regulations in Nevada that would significant restrict or prohibit proposed business activities; or
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the proposed business to be conducted by GBSN will prove profitable.
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The occurrence of any of the above events could have a material adverse effect on our business and prospective cash flow.
Drug research and development programs typically involves huge expenditures, long periods to obtain FDA approvals and the potential that such prospective pharmaceutical products will not prove to be safe and effective.
The production of FDA-approved pharmaceutical products and related drug is typically a highly expensive a long and drawn out process, typically involving hundreds of millions of dollars and a decade or more to achieve. Although we believe that some, if not all, of our planned cannabinoid based pharmaceutical protocols can qualify for "orphan drug" status and be accelerated through the FDA approval process, there can be no assurance that this will be the case.
In addition, we do not now have, and do not expect in the foreseeable future to have, the capital resources to fund our drug discovery programs, nor do we have the infrastructure to conduct such program alone. For that reason, we intend to engage in joint ventures with third parties, including hospitals, clinics, foundations and other qualified sources. Although we are in preliminary discussions with various potential partners, to date, we have not entered into any definitive drug development joint venture or partnership agreement. Our failure or inability to enter into one or more drug development agreements will materially and adversely affect our ability to develop our Science division. Even if we are able to obtain such joint drug development agreements there can be no assurance that it will be on terms and conditions that will be favorable to us.
Although we believe that we can significantly reduce the costs of engaging in FDA certified pre-clinical and clinical trials, including traditional Phase IV human trials, by obtaining data from existing users of our medical cannabis protocols, there can be no assurance that such data will be available, or if it is, that the FDA will accept our data. There is the further risk that the anticipated costs of producing an FDA approved drug will not escalate to the point that will cause us and any of our prospective development partners to abandon such efforts.
Even if we do develop an FDA-approved pharmaceutical product, there is the risk that it will not be saleable to a major pharmaceutical company (either before or after completion of the FDA approval process), or that other competing drugs will not be produced providing the same medical benefits.
Accordingly, there is a significant risk that we will never be able to generate a return on our investment, and we could lose our entire investment in our Science division. Either of such events, would have a material adverse effect on our business prospects and equity value.
Federal law prohibits the use of cannabis for the purposes in which the Company expects to engage.
Under the federal Controlled Substances Act ("CSA"), cannabis is deemed to be a Stage One narcotic that has no medical benefit. Therefore a range of activities including cultivation and the personal use of cannabis is prohibited and is a criminal offense. Unless and until Congress amends the CSA with respect to medical cannabis, as to the timing or scope of any which amendments there can be no assurance, there is a risk that federal authorities may enforce current federal law. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings, and stated federal policy remains uncertain.
The current policy and regulations of the Federal government and its agencies, including the U.S. Drug Enforcement Agency and the FDA, are that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of Federal law. Although 24 states and District of Columbia have passed legislation permitting the cultivation and dispensing of medical cannabis, these laws are, in many jurisdictions, subject to strict regulation and limitations and are still being developed. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the ability of the Company to develop its business plan even though it is allowed by state regulation in the various states in which the Company intends to operate. Although research and development in the growing and processing of cannabis products for medicinal purposes and in seeking to obtain state permits for the cultivation and sale of cannabis products are not in violation of Federal law, our business plan to conduct our Solutions and Products divisions, even if conducted within the parameters of any state licenses or permits we are able to obtain, will violate federal laws, as currently in effect. Accordingly, even if the Company is successful in obtaining a cultivation and dispensing license or permit in Nevada or other states and operates pursuant to such licenses, if federal law does not change, we believe the Company will at that time be in violation of federal law. If existing federal laws are enforced by the United States Department of Justice or the FDA, it is likely that our proposed business will be significantly and materially adversely affected.
FDA regulation of marijuana and the possible registration of facilities where medical marijuana is grown could negatively affect the cannabis industry which would directly affect our financial condition.
Should the federal government legalize marijuana for medical use, it is possible that the U.S. Food and Drug Administration (FDA) would seek to regulate it under the Food, Drug and Cosmetics Act of 1938. Additionally, the FDA may issue rules and regulations including cGMPs (current good manufacturing practices) related to the growth, cultivation, harvesting and processing of medical marijuana. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where medical marijuana is grown be registered with the FDA and comply with certain federally prescribed regulations. In the event that some or all of these regulations are imposed, we do not know what the impact would be on the medical marijuana industry, what costs, requirements and possible prohibitions may be enforced.
If no additional states allow the medicinal use of cannabis, or if one or more states that currently allow it reverse their position, we may not be able to continue our growth, or the market for our products and services may decline.
Currently, twenty five states and the District of Columbia allow the use of medicinal cannabis. While we believe that the number of states that allow the use of medicinal cannabis will grow, there can be no assurance that it will, and if it does not, there can be no assurance that the twenty five existing states and/or the District of Columbia won't reverse their position and disallow it. If either of these things happens, then not only will the growth of our business be materially impacted, we may experience declining revenue as the market for our products and services declines.
Because the business activities of some of our customers are illegal under Federal law, we may be deemed to be aiding and abetting illegal activities through the services that we provide to those customers. As a result, we may be subject to actions by law enforcement authorities which would materially and adversely affect our business.
We provide services to customers that are engaged in businesses involving the possession, use, cultivation, and transfer of cannabis. As a result, law enforcement authorities may seek to bring an action or actions against us, including, but not limited, to a claim of aiding and abetting another's criminal activities. Such an action would have a material effect on our business and operations.
In the states where medicinal cannabis is permitted, local laws and regulations could adversely affect our clients, including causing some of them to close, which would materially and adversely affect our business.
Even in areas where the medicinal use of cannabis is legal under state law, there are also local laws and regulations that affect our clients. These local laws and regulations may cause some of our customers to close and having a material effect on our business and operations. In addition, the enforcement of identical rules or regulations as it pertains to medicinal cannabis may vary from municipality to municipality, or city to city.
Variations in state and local regulation and enforcement in states that have legalized medical cannabis that may restrict cannabis-related activities, including activities related to medical cannabis may negatively impact our revenues and profits.
Individual state laws do not always conform to the federal standard or to other states laws. A number of states have decriminalized cannabis to varying degrees, other states have created exemptions specifically for medical cannabis, and several have both decriminalization and medical laws. Four states, Colorado, Oregon, Alaska, and Washington, have legalized the recreational use of cannabis. Variations exist among states that have legalized, decriminalized, or created medical cannabis exemptions. For example, Colorado has limits on the number of cannabis plants that can be homegrown. In most states, the cultivation of cannabis for personal use continues to be prohibited except for those states that allow small-scale cultivation by the individual in possession of medical cannabis needing care or that person's caregiver. Active enforcement of state laws that prohibit personal cultivation of cannabis may indirectly and adversely affect our business and our revenue and profits.
It is possible that federal or state legislation could be enacted in the future that would prohibit us from selling our products or any resulting cannabis products, and if such legislation were enacted, it could prevent us from generating revenue, leading to a loss in your investment.
We are not aware of any federal or state regulation that regulates the sale of indoor cultivation equipment to medical or recreational cannabis growers. The extent to which the regulation of drug paraphernalia under the CSA is applicable to our business and the sale of our products is found in the definition of "drug paraphernalia." Drug paraphernalia means any equipment, product, or material of any kind that is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful.
If federal and/or state legislation is enacted which prohibits the sale of our growing equipment to medical cannabis growers, our revenues would decline, leading to a loss of a material portion of your investment.
Prospective customers may be deterred from doing business with a company with a significant nationwide online presence because of fears of federal or state enforcement of laws prohibiting possession and sale of medical or recreational cannabis.
Internet websites are visible by people everywhere, not just in jurisdictions where the medical or recreational use of cannabis is considered legal. Our website is visible in jurisdictions where medicinal and/or recreational use of cannabis is not permitted and, as a result, we may be found to be violating the laws of those jurisdictions. We could lose potential customers as they could fear federal prosecution for growing cannabis with our Growblox Suites, reducing our revenue. In most states in which the production and sale of cannabis have been legalized, there are additional laws or licenses required and some states altogether prohibit home cultivation, all of which could make the loss of potential customers more likely.
We may not obtain the necessary permits and authorizations to operate the medical cannabis business.
We may not be able to obtain or maintain the necessary licenses, permits, authorizations, or accreditations, or may only be able to do so at great cost, to operate its medical cannabis business. In addition, we may not be able to comply fully with the wide variety of laws and regulations applicable to the medical cannabis industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations, or accreditations could result in restrictions on our ability to operate the medical cannabis business, which could have a material adverse effect on our business.
If we incur substantial liability from litigation, complaints, or enforcement actions, our financial condition could suffer.
Our participation in the medical cannabis industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities against these subsidiaries. Litigation, complaints, and enforcement actions involving these subsidiaries could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our sales, revenue, profitability, and growth prospects.
We have difficulty accessing the service of banks, which may make it difficult for us to operate.
Since the use of cannabis is illegal under Federal law, there is an argument that banks should not accept for deposit funds from businesses involved with the cannabis industry. Consequently, such businesses often have difficulty finding a bank willing to accept their business.
On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state licensed marijuana businesses. A memorandum issued by the Justice Department to federal prosecutors re-iterated guidance previously given, this time to the financial industry that banks can do business with legal marijuana businesses and "may not" be prosecuted. The Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued guidelines to banks that "it is possible to provide financial services" to state-licensed marijuana businesses and still be in compliance with federal anti-money laundering laws. To date we are unaware if any banks have relied on the guidance and taken on legal marijuana companies as clients.
Notwithstanding the above federal guidelines and in addition to potential federal sanctions, regulators in the states in which we are able to conduct business may make it difficult for local banks to do business with companies considered to be engaged in cultivating and dispensing cannabis. Failure to establish a permanent banking relationship could have a material and adverse effect on our future business operations.
We face intense competition and many of our competitors have greater resources that may enable them to compete more effectively.
The industry in which we operate is subject to intense and increasing competition. Some of our competitors have greater capital resources, facilities and diversity of product lines, which may enable them to compete more effectively in this market. Our competitors may devote their resources to developing and marketing products that will directly compete with our product lines. Due to this competition, there is no assurance that we will not encounter difficulties in obtaining revenues and market share or in the positioning of our products. There are no assurances that competition in our respective industries will not lead to reduced prices for our products. If we are unable to successfully compete with existing companies and new entrants to the market this will have a negative impact on our business and financial condition.
If we fail to protect or develop our intellectual property, our business could be adversely affected.
Our viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our technology to distinguish our products from our competitors' products. We will rely on patents, copyrights, trademarks, trade secrets, and confidentiality provisions to establish and protect our intellectual property.
Any infringement or misappropriation of our intellectual property could damage its value and limit our ability to compete. We may have to engage in litigation to protect the rights to our intellectual property, which could result in significant litigation costs and require a significant amount of our time. In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside the United States, which could make it easier for competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by us.
Competitors may also harm our sales by designing products that mirror the capabilities of our products or technology without infringing on our intellectual property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue.
We may also find it necessary to bring infringement or other actions against third parties to seek to protect our intellectual property rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute and there can be no assurance that we will have the financial or other resources to enforce our rights or be able to enforce our rights or prevent other parties from developing similar technology or designing around our intellectual property.
Although we believe that our intellectual property does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on our business.
We are not aware of any infringement by us of any person's or entity's intellectual property rights. In the event that products we sell are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify our products or obtain a license for the manufacture and/or sale of such products or cease selling such products. In such event, there can be no assurance that we would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business.
There can be no assurance that we will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. If our products or proposed products are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, we could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business and our financial condition.
Our trade secrets may be difficult to protect.
Our success depends upon the skills, knowledge, and experience of our scientific and technical personnel, our consultants and advisors, as well as our licensors and contractors. Because we operate in several highly competitive industries, we rely in part on trade secrets to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We enter into confidentiality or non-disclosure agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third parties confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party's relationship with us. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property, and we enter into assignment agreements to perfect our rights.
These confidentiality, inventions and assignment agreements may be breached and may not effectively assign intellectual property rights to us. Our trade secrets also could be independently discovered by competitors, in which case we would not be able to prevent the use of such trade secrets by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our trade secrets could be difficult, expensive and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain meaningful trade secret protection could adversely affect our competitive position.
Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our future success largely depends upon the continued services of our executive officers and management team. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company, we may lose some of our potential customers. Finally, we do not maintain "key person" life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations, and thereby an investment in our stock.
Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. We face significant competition for skilled personnel in our industry. This competition may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely affect our financial condition or business. As a result, the value of your investment could be significantly reduced or completely lost.
We may not be able to effectively manage our growth or improve our operational, financial, and management information systems, which would impair our results of operations.
In the near term, we intend to expand the scope of our operations activities significantly. If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, finances, management and other resources. The factors that may place strain on our resources include, but are not limited to, the following:
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The need for continued development of our financial and information management systems;
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The need to manage strategic relationships and agreements with manufacturers, customers and partners; and
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Difficulties in hiring and retaining skilled management, technical, and other personnel necessary to support and manage our business.
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Additionally, our strategy could produce a period of rapid growth that may impose a significant burden on our administrative and operational resources. Our ability to effectively manage growth will require us to substantially expand the capabilities of our administrative and operational resources and to attract, train, manage, and retain qualified management and other personnel. There can be no assurance that we will be successful in recruiting and retaining new employees, or retaining existing employees.
We cannot provide assurances that our management will be able to manage this growth effectively. Our failure to successfully manage growth could result in our sales not increasing commensurately with capital investments or otherwise materially adversely affecting our business, financial condition, or results of operations.
If we are unable to continually innovate and increase efficiencies, our ability to attract new customers may be adversely affected.
In the area of innovation, we must be able to develop new technologies and products that appeal to our customers. This depends, in part, on the technological and creative skills of our personnel and on our ability to protect our intellectual property rights. We may not be successful in the development, introduction, marketing, and sourcing of new technologies or innovations, that satisfy customer needs, achieve market acceptance, or generate satisfactory financial returns.
If we are unable to adopt or incorporate technological advances into Growblox™'s equipment products, our business could become less competitive, uncompetitive, or obsolete and we may not be able to compete effectively with competitors' products.
We expect that technological advances in the processes and procedures for growing equipment will continue to occur. As a result, there are risks that products that compete with our products could be improved or developed. If we are unable to adopt or incorporate technological advances, our products could be less efficient or cost-effective than methods developed and sold by our competitors, which could cause our products to become less competitive, uncompetitive or obsolete, which would have a material adverse effect on our
financial condition, and to a much lesser extent, on our financial condition.
Competing forms of specialized agricultural equipment may be more desirable to consumers or make our products obsolete.
There are currently several different specialized agricultural equipment technologies being deployed in urban vertical farming operations other than hydroponics, such as aquaponics and terraponics. Further development of any of these competitive technologies may lead to advancements in vertical farming techniques that will make our products obsolete. Consumers may prefer alternative technologies and products. Any developments that contribute to the obsolescence of our products may substantially impact our business, reducing our ability to generate revenues.
Litigation may adversely affect our business, financial condition, and results of operations.
From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results of our operations.
Our officers and directors have significant control over stockholder matters and the minority stockholders will have little or no control over our affairs.
Our officers and directors currently own approximately 30% of our outstanding common stock, and have approximately 30% of stockholder voting power, and thus significant control over stockholder matters, such as election of directors, amendments to the Articles of Incorporation, and approval of significant corporate transactions. As a result, the Company's minority stockholders will have little or no control over its affairs.
If we fail to implement and maintain proper and effective internal controls and disclosure controls and procedures pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our ability to produce accurate and
timely financial statements and public reports could be impaired, which could adversely affect our operating results, our ability to operate our business, and investors' views of us.
As of March 31, 2016, management assessed the effectiveness of our internal controls over financial reporting. Management concluded, as of the fiscal year ended March 31, 2016, that our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP rules. Management concluded that our internal controls were adversely affected by deficiencies in the design or operation of our internal controls, which management considered to be material weaknesses. These material weaknesses include the following:
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Lack of a functioning audit committee consisting of independent Board members as well as a lack of expertise with respect to the application of US GAAP and SEC rules and regulations and;
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Inadequate segregation of duties consistent with control objectives; and
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Lack of audit committee members with prior experience in financial accounting and the application of US GAAP.
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The failure to implement and maintain proper and effective internal controls and disclosure controls could result in material weaknesses in our financial reporting such as errors in our financial statements and in the accompanying footnote disclosures that could require restatements. Investors may lose confidence in our reported financial information and disclosure, which could negatively impact our stock price.
We do not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our insurance coverage may be inadequate to cover all significant risk exposures; because we are in the cannabis industry, we have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liabilities.
We will be exposed to liabilities that are unique to the products we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition and results of operations. We do not have any business interruption insurance. Any business disruption or natural disaster could result in substantial costs and diversion of resources.
Currently we have insurance coverage in place for business personal property located at 3550 W. Teco Avenue, Las Vegas, Nevada 89118, as well as workers' compensation insurance, directors and officers' liability insurance, and general liability insurance.
Insurance that is otherwise readily available is more difficult for us to find, and more expensive, because we engaged in the medicinal cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
Because we do not have an audit or compensation committee, stockholders will have to rely on our officers and directors, most of whom are not independent, to perform these functions.
Because we do not have a compensation committee, stockholders will have to rely on our officers and directors, most of whom are not independent, to perform these functions. Thus, there is a potential conflict of interest in that our officers and directors have the authority to determine issues concerning management compensation, nominations, and audit issues that may affect management decisions.
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
We expect to experience volatility in the price of our common stock, which could negatively affect stockholders' investments.
The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with securities traded in those markets. Broad market and industry factors may seriously affect the market price of companies' stock, including ours, regardless of actual operating performance. All of these factors could adversely affect your ability to sell your shares of common stock or, if you are able to sell your shares, to sell your shares at a price that you determine to be fair or favorable.
The relative lack of public company experience of our management team could adversely impact our ability to comply with the reporting requirements of U.S. securities laws.
Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by the Sarbanes-Oxley Act of 2002. Our senior management has little experience in managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such increased legal, regulatory compliance, and reporting requirements, including the establishing and maintaining of internal controls over financial reporting. Any such deficiencies, weaknesses, or lack of compliance could have a materially adverse effect on our ability to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which is necessary to maintain our public company status. If we were to fail to fulfill those obligations, our ability to continue as a U.S. public company would be in jeopardy, we could be subject to the imposition of fines and penalties and our management would have to divert resources from attending to our business plan.
Our common stock is categorized as "penny stock," which may make it more difficult for investors to sell their shares of common stock due to suitability requirements.
Our common stock is categorized as "penny stock". The Securities and Exchange Commission (the "SEC") has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our common stock is significantly less than $5.00 per share, and is therefore considered "penny stock." This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer buying our securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may restrict the ability and/or willingness of brokers or dealers to buy or sell our common stock, either directly or on behalf of their clients, may discourage potential stockholders from purchasing our common stock, or may adversely affect the ability of stockholders to sell their shares.
Financial Industry Regulatory Authority ("FINRA") sales practice requirements may also limit a stockholder's ability to buy and sell our common stock, which could depress the price of our common stock.
In addition to the "penny stock" rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our shares of common stock, have an adverse effect on the market for our shares of common stock, and thereby depress our price per share of common stock.
The elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification rights for or obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees.
Our Articles of Incorporation contain a provision permitting us to eliminate the personal liability of our directors to us and our stockholders for damages for the breach of a fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification obligations under any future employment agreements with our officers. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us and our stockholders.
We may issue additional shares of common stock in the future, which could cause significant dilution to all stockholders.
Our Certificate of Incorporation authorizes the issuance of up to 250,000,000 shares of common stock with a par value of $0.001 per share. As of June 29, 2016, we had 57,297,185 shares of common stock outstanding. However, we require additional capital and will likely issue additional shares of Common Stock in the future in connection with one or more financings or an acquisition. Such issuances may not require the approval of our stockholders. In addition, certain of our outstanding rights to purchase additional shares of common stock or securities convertible into our common stock are subject to full-ratchet anti-dilution protection, which could result in the right to purchase significantly more shares of common stock being issued or a reduction in the purchase price for any such shares or both. Any issuance of additional shares of our common stock, or equity securities convertible into our common stock, including but not limited to, warrants, and options, will dilute the percentage ownership interest of all stockholders, may dilute the book value per share of our common stock, and may negatively impact the market price of our common stock.
Anti-takeover effects of certain provisions of Delaware state law hinder a potential takeover of us.
Nevada has a business combination law which prohibits certain business combinations between Nevada corporations and "interested stockholders" for three years after an "interested stockholder" first becomes an "interested stockholder," unless the corporation's board of directors approves the combination in advance. For purposes of Delaware law, an "interested stockholder" is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation, or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term "business combination" is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation's assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The effect of Delaware's business combination law is to potentially discourage parties interested in taking control of us from doing so if it cannot obtain the approval of our Board. Both of these provisions could limit the price investors would be willing to pay in the future for shares of our common stock.
Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Declaring and paying future dividends, if any, will be determined by our Board, based upon earnings, financial condition, capital resources, capital requirements, restrictions in our Articles of Incorporation, contractual restrictions, and such other factors as our Board deems relevant. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
Our executive offices and our Science and Product divisions are located at 3550 W. Teco Avenue, Las Vegas, NV 89118 under a five year lease expiring December 31, 2020 at a monthly base rental of $28,432. Our Growblox Sciences Puerto Rico, LLC subsidiary lease offices in San Juan, Puerto Rico under a one year lease expiring January 31, 2017 at a monthly rental of $1,500.
ITEM 3. LEGAL PROCEEDINGS
On April 2, 2014, we commenced an action in the United States District Court for the Southern District of New York captioned Signature Exploration and Production Corporation v. GCM Administrative Services, LLC, Strategic Turnaround Equity Partners, L.P. (Cayman), Seth M. Lukash, and Gary Herman, 14 Civ. 02280 (ER) (the "Action"). After the change of name of Signature Exploration and Production Corporation, the caption was amended to substitute GrowBlox Sciences, Inc. as the plaintiff. The complaint in the Action sought a declaratory judgment that neither Lukash nor Herman was entitled to receive any interest in, including any shares of stock of, Growblox pursuant to certain share conversion rights held under promissory notes in the aggregate amount of $75,000, given by a related party of ours to the entity defendants GCM and Strategic.
On May 9, 2014, defendants filed an answer denying the complaint's material allegations, and asserted a counterclaim against us, against persons identified as certain of our officers or directors, and against GrowOpp, LLC and Tumbleweed Holdings, Inc. On November 19, 2014, defendants filed an amended counterclaim, including a prayer for monetary relief or damages in the sum of $9 million. We moved to dismiss the counterclaim and by opinion dated June 2, 2015, the Court granted the motion in part and dismissed counts one and two (for declaratory judgment as to an alleged partnership or joint venture, and for breach of fiduciary duty predicated upon those allegations), and denied the motion in part, leaving counts three and four of the counterclaim standing. The Court viewed the third and fourth claims as a single claim for unjust enrichment, in which recovery would be based on quantum meruit, that is, upon the alleged value of any benefit conferred by defendants to us through alleged work and services rendered. In view of the fact that the pleading did not assign a particular value to that claim we are unable at present to advise what specific sum of money damages is sought. We did not challenge the fifth count of the counterclaim at this stage that seeks damages of $75,000 for alleged non-payment of the above-referenced promissory notes.
The Company and its adversaries entered an agreement in principle, subject to the execution of formal documents and dated as of June 20, 3016, to settle and dismiss the action. The Company's board approved the settlement on July 6, 2016. The parties are in the process of executing a formal, written settlement agreement. Under the settlement, the Company will deliver 1.4 million shares of its common stock to its adversaries. Craig Ellins, formerly CEO of the Company and now its chief scientific officer, will deliver 3 million shares that he owns personally. Based on our estimate of potential outcomes, we have accrued $0.5 million with respect to this matter as of March 31, 2016.
On August 19, 2015, Cathryn Kennedy, our former Chief Financial Officer, filed a Complaint against us in the District Court in Clark County, Nevada alleging that she was assigned new duties by us which constituted a termination without cause effective July 24, 2015, and that as a consequence thereof she is entitled to severance, vacation pay and stock compensation from us pursuant to her Employment Agreement dated November 18, 2014. On April 8, 2016, the Company entered into a mutual agreement with Cathryn Kennedy per terms of which the Company issued 200,000 of its unrestricted common shares in exchange for a full dismissal with prejudice of all causes of action pending in the above-referenced Complaint.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The names of the executive officers and directors of Growblox, their ages as of June 27, 2016, and the positions currently held by each are as follows:
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Name
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Age
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Position
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John Poss
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68
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Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Director
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Craig Ellins
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63
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Chief Innovation Officer and Chairman of the Board
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Dr. Andrea Small-Howard
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47
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Chief Science Officer and Director
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Leslie Bocskor
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51
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Director
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Shane Terry
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37
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Director
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Biographies
Set forth below are brief accounts of the business experience of each director an executive officer of the Company.
John Poss, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Director
Effective April 29, 2016, The Board of Directors elected John Poss to serve as Chief Executive Officer.
Mr. Poss has been serving as the CFO of the Company since August, 2015 and its COO since December 31, 2015. He will continue serving as CFO and COO until suitable replacements can be recruited.
Mr. Poss has over 30 years of experience working as a consultant to companies facing major transitions and transformations. Mr. Poss began his career in the Washington, D.C. office of Arthur Andersen & Co. and has served as Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Chief Technology Officer of both public and private companies in such diverse industries as homebuilding, mining, telecommunications, manufacturing, logistics, construction lending and mortgage banking. For the past twenty months prior to joining Growblox, Mr. Poss served as Chief Executive Officer of Experiential Teaching Online Corp., an educational content developer and for four years prior thereto owned and operated his own consulting firm. Mr. Poss has also has worked extensively internationally, successfully negotiating agreements in countries throughout Asia, Europe and the Americas. Mr. Poss graduated from the University of Texas in 1974 with a degree in accounting.
Craig Ellins, Chairman and Chief Innovation Officer
Mr. Ellins was appointed as Chief Executive Officer and as chairman of our board of directors on March 13, 2014. Effective April 29, 2016,
the
Board of Directors accepted the resignation of Craig Ellins as Chief Executive Officer of the Company and immediately appointed Craig Ellins to serve as Chief Innovation Officer of the Company.
Mr. Ellins has spent over 30 years discovering emerging trends and developing start-ups for various industries. He has served as Chief Executive Officer and on the Board of Directors of numerous organizations, both in the private and public sectors and has worked with a multitude of Fortune 500 organizations. Mr. Ellins has a proven and successful background in international and domestic product and business development, technological innovation, trade secrets, strategic planning, critical infrastructure and sustainable growth. Mr. Ellins continuously sets new standards for innovation and most recently set his sights on the cannabis industry. His work in medical marijuana has produced significant advancements in indoor growing technology, all of which have pending patents. Mr. Ellins has worked diligently over the years to produce state-of-the-art technology that has a substantial impact on cultivation and ingenuity. Finding treatments to serious medical conditions has become the benchmark to Mr. Ellins technological innovation, out of which has come the Growblox™. Mr. Ellins' rich history of new technology and financial expertise has created a framework for change in technological enterprises, especially in cultivation.
From 2013 to 2014, Mr. Ellins served as the Chairman and CEO of Cognitiv, Inc. Cognitiv, Inc., together with its subsidiaries, engages in the creation, development, and maintenance of Websites and mobile applications. It also provides Website search engine optimization services; email marketing services; pay per click consultation services; social media consultation, creation, and marketing services; domaining services; and mobile marketing services. The company was formerly known as University Health Industries, Inc. and changed its name to Cognitiv, Inc. in March 2012. Cognitiv, Inc. is based in Heathrow, Florida. As Chairman and CEO, Mr. Ellins was responsible for all aspects of the company.
From 2009 to 2013, Mr. Ellins served as CEO and Chairman of Phototron Holdings, Inc., now known as GrowLife, Inc. GrowLife, Inc. manufactures and supplies branded equipment and expendables for urban gardening in the United States. The company offers equipment and expendables, such as nutrients and soils for the growing of medical marijuana. As Chairman and CEO, Mr. Ellins was responsible for all aspects of the company.
Dr. Andrea Small-Howard, PhD, MBA, Chief Science Officer and Director
Dr. Small-Howard was appointed as our Chief Science Officer and as a member of our board of directors on June 10, 2014 and has served continuously in both positions since that time. As the Chief Science Officer, her goal is to create and maintain a novel cannabinoid therapy pipeline based on the Company's proprietary technology suite, direct research & development efforts, facilitate clinical research partnerships, guide product commercialization strategies, develop corporate cannabis education programming, and create corporate messaging around our novel drug discovery process.
From January, 2012 to present, she has served as a Director on the Board of Directors at The Center for Healthcare Innovation, "CHI". CHI is a non-profit, non-partisan, and independent organization committed to serving as a catalyst for stimulating ideas, people, companies, and institutions to collaborate and achieve excellence in healthcare innovation, particularly in the biotechnology, medical device, nanotechnology, and pharmaceutical sectors. Her board level responsibilities at CHI have included shaping and supporting the evolving mission of this dynamic group. She has also been on the planning committee for their annual "Emerging Markets in the Life Sciences" seminar series, which is now in its 5th consecutive year.
From July 2011 to June 2014, Dr. Small-Howard was the Founder and President of International Biotechnology Solutions, a management consulting firm that created customized, cost-effective commercialization solutions for viable yet abandoned biopharmaceutical products. International Biotechnology Solutions provided management consulting with a focus on assisting US biotech companies with products that could be commercialized within the Asia-Pacific region. Dr. Small-Howard she successfully completed projects within the areas of business development, corporate alliance building, product commercialization, due diligence reporting on medical marijuana companies, corporate restructuring, and management of successful fund raising campaigns.
From June 2011 to March 2013, she served as a Director on the Board of Directors (President for part of that time), for the Ceremax Investment Corporation. The Ceremax Investment Group was established by members of the USC EMBA Class XXV to pool its financial and intellectual resources to identify investment opportunities. During her tenure at Ceremax, Dr. Small Howard reviewed and approved capital and resource investments in promising start-up or scale-up phase private companies.
From November, 2008 to July, 2011, she served as the Vice President of Scientific Oversight for the Radient Pharmaceutical Corporation, a vertically-integrated biopharmaceutical research, development and manufacturing corporation with operations in both the US and China. Dr. Small-Howard provided oversight for global product development in multiple international business divisions. She authored and/or attained 12 patents & 3 trademarks on proprietary cancer tests, cancer (gene) therapies, cosmeceuticals, and animal models. She achieved numerous regulatory approvals for cancer tests, cancer therapies, pharmaceuticals, and cosmeceutical products with the United States FDA, Health Canada and other foreign ministries of health. She initiated and/or nurtured five international, collaborative, cancer research trial programs with universities and that yielded 7 publications supporting cancer products, and supervised the Quality Management Systems for an ISO 13485/cGMP compliant medical device manufacturing facility in the US; as well as the regulated manufacturing facilities in China. She also led and participated in internal and US FDA, CDPH, CE Mark/ISO 13485, and CMDR audits of Radient's Quality Management System.
Leslie Bocskor, Director
In the burgeoning cannabis economy, Leslie Bocskor has emerged as one of the most influential and respected global advisors for business, policy and social reform, using his unique lens and understanding of what is, what will be, and what is needed -- based on decades of success in the trenches of investment banking and entrepreneurship in disruptive industries. With his rare combination of financial market experience and business sensibilities, he is beloved by policy makers and growers, technologists and scientists, doctors and patients alike, curating the unrivaled network necessary to shepherd them all into achieving goals and prosperity.
The advisory firm he founded, Electrum Partners, works with leading companies around the globe in the hemp, legal medical cannabis, recreational cannabis, cannabis based pharmaceuticals, cannabis based nutraceuticals and supplements, technology, retails sales, processing, cultivation, ecommerce, unique brands, edibles manufacturing, intellectual property, finance and banking. The firm is sought after to deliver high-level strategies for profitability and shareholder value, and to bring together critical partnerships and solutions that contribute positively to further develop the cannabis business ecosystem. The company maintains relationships with key industry groups including MPP, DPA, NCIA, The ArcView Group, Red Estatal de Mujeres Antiprohibicionistas and Women Grow.
In position to provide perspective and guidance as to how the dots will be connected as the industry takes shape, Mr. Bocskor's contributions have already had substantial impact. He was bestowed with the 2015 ArcView Group Outstanding Member Award, and was named 2015 CEO of the Year by The Weed Blog, one of the industry's most-trafficked media sites. Bocskor is the founding chairman of the Nevada Cannabis Industry Association and in November 2014, Mr. Bocskor was ranked 58th of 100 Most Influential People in the Cannabis industry by Cannabis Business Executive Magazine and was soon after the subject of a Newsweek's Special Edition Weed 2.0.Magazine feature article, "A Future Gold Mine," and featured on CNBC's special coverage of the Marijuana business economy among hundreds of news features and commentaries.
Share Terry, Director
Mr. Terry
is an independent consultant provides advisory services to Medical Marijuana Establishments (MME's) in Nevada and other states. He served as a CEO of NuVeda NMS, LLC, a company that operates marijuana dispensaries in Nevada, from 2013 until 2016. He is also a former President of the Nevada Dispensary Association Mr. Terry is a decorated veteran of the United States Air Force, whose 15 year career as an Officer and F-16 fighter pilot included earning two Air Medals for combat action over Iraq and Afghanistan while leading his team to three Air Force Outstanding Unit awards from 2006-2009.
During the past five years none of our directors, executive officers, promoters or control persons was:
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the subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
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convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
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subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
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4)
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found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law.
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Family Relationships
None.
Audit Committee
On July 6, 2016, the Board established the Audit Committee and approved and adopted a charter (the "Audit Committee Charter") to govern the Audit Committee. The audit committee is comprised of Leslie Bocskor and Shane Terry, each of whom is independent under the rules of the Securities and Exchange Commission and the Nasdaq Stock Market listing standards. Leslie Bocskor is designated the chairperson of the committee. In addition to the enumerated responsibilities of the Audit Committee in the Audit Committee Charter, the primary function of the Audit Committee is to assist the Board in its general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. The Audit Committee Charter is
filed herewith as Exhibit 10.25.
Audit Committee Financial Expert
As of the date of filling of this Form 10-K, no member of our board of directors qualifies as an "audit committee financial expert" as defined in Item 407(d)(5) of Regulation S-K promulgated under the Securities Act.
Compensation Committee
On July 6, 2016, the Board established the Compensation Committee and approved and adopted a charter (the "Compensation Committee Charter"). The compensation committee is comprised of Leslie Bocskor and Shane Terry, each of whom is independent under the rules of the Securities and Exchange Commission and the Nasdaq Stock Market listing standards. Leslie Bocskor is designated the chairperson of the committee. In addition to the enumerated responsibilities of the Compensation Committee in the Compensation Committee Charter, the primary function of the Compensation Committee is to oversee the compensation of our executives, produce an annual report on executive compensation for inclusion in our proxy statement, if and when required by applicable laws or regulations, and advise the Board on the adoption of policies that govern our compensation programs. The Compensation Committee Charter is
filed herewith as Exhibit 10.26.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act requires our executive officers and directors and persons who directly or indirectly beneficially own more than 10% of our equity securities to file reports of ownerships on Forms 3, 4 and 5 with the SEC. Executive officers, directors and 10% stockholders are required by the SEC to furnish us with copies of all Forms 3, 4 and 5 they file. Based solely on our review of the copies of such forms we have received, we believe that each of our officers and directors is under a current obligation to file a Form 3.
Code of Ethics
We adopted the Growblox Sciences, Inc. Code of Ethics for the CEO and Senior Financial Officers (the "finance code of ethics"), a code of ethics that applies to Chief Executive Officer, Chief Financial Officer, Chief Science Officer and other finance organization employees. A copy of the finance code of ethics may be obtained from the Company, free of charge, upon written request delivered to Growblox Sciences, Inc. 3550 W. Teco Avenue, Las Vegas, NV 89118. If we make any substantive amendments to the finance code of ethics or grant any waiver, including any implicit waiver, from a provision of the code to the Chief Executive Officer or Chief Financial Officer, we will disclose the nature of such amendment or waiver in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table reflects all compensation awarded to, earned by, or paid to the Chief Executive Officer, Chief Innovation Officer and Chief Science Officer for all services rendered to us in all capacities during each of the years ended March 31, 2016 and 2015.
Summary Compensation Table
|
Name and Position
|
Year
|
|
Salary
|
|
|
Stock Awards
(1)
|
|
|
Option Awards
(2)
|
|
|
Total
|
|
|
John Poss, CEO, CFO, COO, and Director
|
2016
|
|
$
|
55,055
|
|
|
$
|
-
|
|
|
|
|
|
$
|
179,585
|
|
|
$
|
234,640
|
|
|
2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig Ellins, CIO and Chairman of the Board
|
2016
|
|
$
|
137,192
|
|
|
$
|
-
|
|
|
|
|
|
$
|
860,000
|
|
|
$
|
997,192
|
|
|
2015
|
|
$
|
168,617
|
|
|
$
|
-
|
|
|
|
(3
|
)
|
|
$
|
-
|
|
|
$
|
168,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Andrea Small-Howard, Chief Science Officer and Director
|
2016
|
|
$
|
63,000
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
63,000
|
|
|
2015
|
|
$
|
62,700
|
|
|
$
|
756,000
|
|
|
|
|
|
|
$
|
84,413
|
|
|
$
|
903,113
|
|
(1) Represents the grant date fair value of restricted stock awards granted, as calculated in accordance with stock-based compensation accounting standards. The fair value of each of these awards is based on the closing share price of our stock on the grant date. Although the table above indicates the full grant date value of the awards in the year which the compensation is considered, the restricted stock granted vests over a three-year period.
(2) Represents the grant date fair value of option awards granted, as calculated in accordance with stock-based compensation accounting standards. The fair value of these awards is determined under the Black-Scholes option pricing model. For the assumptions used for purposes of determining the value of the awards included in each year's compensation, please refer to Note 10. Although the table above indicates the full grant date value of the awards in the year which the compensation is considered, the options granted vest over a three-year period.
(3) Per terms of the Amended Employment Agreement dated June 22, 2015, the executive waived and relinquished all rights to the grant of 3,000,000 shares of the common stock of the Company that was awarded under the Prior Agreement dated June 19, 2014. In lieu of the stock grant the Company issued to the executive a three year warrant to purchase 5,000,000 shares of the common stock of the Company at an exercise price of $0.45 per share. Thus, 3,000,000 shares of the common stock of the Company award under June 19, 2014 Agreement were cancelled.
Employment Agreements
John Poss, Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Director
On August 10, 2015, Mr. Poss, entered into an employment agreement with the Company. The term of employment is one year subject to automatic extensions for additional one year periods unless either party chooses to terminate such employment. The Company may terminate the Employment Agreement at any time with or without cause. If the Company terminates the Employment Agreement without cause, Mr. Poss is entitled to three months' severance if the termination takes place during the first year of employment, four months' severance if the termination takes place during the second year of employment and six months' severance if the termination takes place during the third year or a subsequent year of employment. No severance payments are due in the case of a termination for cause. Similar severance provisions apply to a termination by Mr. Poss for good reason but not to a termination by Mr. Poss without good reason. Mr. Poss receives a monthly salary of $10,000 per month. In addition, in August 2015, the Company issued 600,000 options to Mr. Poss under our 2014 Equity Incentive Plan. The options are exercisable upon vesting for a period of 10 years from issuance for the purchase of shares of our common stock at a price of $0.30 per share. The options vest ratably on a monthly basis in equal installments over the course of 30 months commencing on the seventh month of the employment period. In the event that Mr. Poss' employment is terminated for cause or by Mr. Poss without good reason, all unvested options at the time of termination will be cancelled. In the event of a Change of Control, as such term is defined in the 2014 Equity Incentive Plan, all of the options issued to Mr. Poss shall vest immediately. The number of options issuable to Mr. Poss is subject to increase within 6 months of the commencement of Mr. Poss' employment at the discretion of our Board of Directors. At the end of the third year of employment, the compensation payable to Mr. Poss shall be renegotiated in good faith by the parties.
Pursuant to the appointment of Mr. Poss
as the Company's President, Chief Executive Officer and Board Member, the Company entered into an Amended and Restated Employment Agreement, effective June 1, 2016. The agreement will end on May 1, 2017, which end date can be extended upon the mutual agreement of the parties. Under the agreement Mr. Poss will receive an annual salary of not less than $120,000 and quarterly bonuses equal to the value of 125,000 shares of Growblox common stock. Bonuses are payable in S-8 stock or cash in the discretion of the Company. Under the agreement, Mr. Poss will also receive options to acquire 1.4 million shares of the Company's common stock subject to certain vesting requirements. The option strike price is the market value of the stock on the date the options were granted.
Craig Ellins, Chairman and Chief Innovation Officer
On June 19, 2014 Craig Ellins entered into an amended employment agreement having a three year term. Mr. Ellins received a salary of $140,000 per annum, year one, $180,000 per annum year two and $240,000 per annum year three. Additionally he received 3,000,000 shares of the common stock of Growblox which vest over three years in equal 1,000,000 amounts. Effective as of June 19, 2015, Growblox and Mr. Ellins amended and restated the employment agreement with the same compensation terms and cancelling the 3,000,000 share stock grant. In consideration for such forfeiture, Mr. Ellins received a three year warrant to purchase 5,000,000 shares of Growblox common stock at an exercise price of $0.45 per share, the closing price of Growblox common stock on the date of the restated employment agreement. The warrant contains customary anti-dilution provisions and cashless exercise provisions. The warrant and underlying shares of common stock issuable upon exercise of the warrant are restricted securities as defined by the Rules and Regulations promulgated under the Securities Act of 1933, as amended. The Company may terminate the Employment Agreement at any time with or without cause. If the Company terminates the Employment Agreement without cause, Mr. Ellins is entitled any unpaid base salary accrued through the effective date of termination notice and pay in a lump sum of an amount equal to the product of the sum of the executive's based salary plus the amount of the highest annual bonus or other incentive compensation payment therefore made by the Company to the executive, multiplied by one. In the event of a Change of Control, as such term is defined in the 2014 Equity Incentive Plan, all equity compensation grants not yet vested shall vest immediately.
Effective June 1, 2016, the Board amended compensation arrangements with Mr. Ellins. Pursuant to the amendment, warrants issued on June 22, 2015, for the purchase of 5,000,000 shares of common stock of the Company at the exercise price of $0.45 per share were cancelled and warrants for the purchase of 5,000,000 shares of common stock of the Company at the exercise price of $0.30 were issued to Mr. Ellins.
Dr. Andrea Small-Howard, PhD, MBA, Chief Science Officer and Director
On June 19, 2014, Dr. Andrea Small-Howard, Chief Science Officer, entered into a three year employment agreement with Growblox. Dr. Small-Howard received a salary at the annual rate of $78,000 and 450,000 shares of restricted common stock that vests over the three year term of employment. The stock is restricted as defined by the Rules and Regulations promulgated under the Securities Act of 1933, as amended. The Company may terminate the Employment Agreement at any time with or without cause. If the Company terminates the Employment Agreement without cause, Dr. Small-Howard is entitled any unpaid base salary accrued through the effective date of termination notice and pay in a lump sum of an amount equal to the product of the sum of the executive's based salary plus the amount of the highest annual bonus or other incentive compensation payment therefore made by the Company to the executive, multiplied by one. In the event of a Change of Control, as such term is defined in the 2014 Equity Incentive Plan, all of the restricted stock granted to Dr. Small-Howard shall vest immediately. Dr. Small-Howard also received 500,000 of stock options not in connection with her employment agreement, of which 100,000 vested immediately and the remainder vest over three years.
Effective on June 1, 2016, the Company amended its employment agreement with Dr. Small-Howard. Pursuant to the amendment, Ms. Small-Howard surrendered a stock award for 450,000 shares of common stock in exchange for warrants to purchase 1.2 million common shares at the strike price of $0.30 per share.
Leslie Bocskor, Director
Effective June 1, 2016, the Board of Directors established compensation for Mr. Bocskor to be $25,000 annually with an additional $1,000 for each meeting attended. The compensation is payable in cash or stock at the election of the Company. Mr. Bocskor also received options to purchase 450,000 shares of stock which vest over 24 months. The strike price of the options is $0.16 per share, the market value of the Company's common stock on the date the Mr. Bocskor was elected to the Board.
Share Terry, Director
Effective June 1, 2016, the Board of Directors established compensation for Mr. Terry to be $25,000 annually with an additional $1,000 for each meeting attended. The compensation is payable in cash or stock at the election of the Company. Mr. Terry also received options to purchase 450,000 shares of stock which vest over 24 months. The strike price of the options is $0.16 per share, the market value of the Company's common stock on the date the Mr. Terry was elected to the Board.
Outstanding Equity Awards
The following table summarizes the number of shares underlying outstanding equity incentive plan awards for each named executive officer as of
March 31, 2016:
|
Name
|
|
Number of shares underlying exercisable options/warrants
|
Number of shares underlying unexercised options/warrants
|
Option exercise price ($)
|
Option expiration date
|
|
Number of shares that have not vested
|
Market value of shares that have not vested ($)
|
|
Craig Ellins
|
|
5,000,000
|
(2)
|
-
|
|
0.45
|
|
6/22/2018
|
|
-
|
|
-
|
|
|
Andrea Small-Howard
|
|
200,000
|
(3)
|
300,000
|
(4)
|
0.17
|
|
3/27/2025
|
|
300,000
|
(6)
|
60,000
|
(1)
|
|
John Poss
|
|
20,000
|
(3)
|
580,000
|
(5)
|
0.30
|
|
8/10/2025
|
|
-
|
|
|
|
(1) Based on our closing stock price of $0.20 on March 31, 2016.
(2) Represents three year warrant to purchase 5,000,000 shares of common stock at an exercise price of $0.45 per share.
(3) These options were vested at March 31, 2016.
(4) These options vest one-third on each of March 27, 2017, 2018, and 2019.
(4) These options vest ratably on a monthly basis in equal installments over the course of 29 months commencing on the April 10, 2016,
(6) These shares vest one-half on each of June 19, 2016 and 2017.
Directors' Compensation
All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. There are no agreements with respect to the election of directors. Officers are appointed annually by the Board of Directors and each executive officer serves at the discretion of the Board of Directors. Directors are entitled to be reimbursed for reasonable and necessary expenses incurred on behalf of the Company. Outside directors are paid $25,000 annually with an additional $1,000 for each meeting attended. The compensation is payable in cash or stock at the election of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents information known to us, as of June 29, 2016, relating to the beneficial ownership of common stock by:
|
|
·
|
each person who is known by us to be the beneficial holder of more than 5% of outstanding common stock;
|
|
|
·
|
each of named executive officers and directors; and
|
|
|
·
|
directors and executive officers as a group.
|
We believe that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them, except as noted.
Percentage ownership in the following table is based on 57,297,185 shares of common stock outstanding as of June 26, 2016. A person is deemed to be the beneficial owner of securities that can be acquired by that person within 60 days from the date of this Annual Report upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by dividing the number of shares beneficially owned by that person by the base number of outstanding shares, increased to reflect the shares underlying options, warrants or other convertible securities included in that person's holdings, but not those underlying shares held by any other person.
|
Name of Beneficial Owner
(1)
|
|
Number of Shares of Common Stock Beneficialy Owned
|
|
|
Percentage of Shares Beneficially Owned
|
|
|
Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
Craig Ellins
|
|
|
15,127,692
|
|
|
|
(2
|
)
|
|
|
26
|
%
|
|
Dr. Andrea Small-Howard
|
|
|
1,516,000
|
|
|
|
(3
|
)
|
|
|
3
|
%
|
|
John Poss
|
|
|
586,667
|
|
|
|
(4
|
)
|
|
|
1
|
%
|
|
Leslie Bosckor
|
|
|
150,000
|
|
|
|
(7
|
)
|
|
|
0
|
%
|
|
Shane Terry
|
|
|
150,000
|
|
|
|
(7
|
)
|
|
|
0
|
%
|
|
Directors and officers as a group (5) persons
|
|
|
17,530,359
|
|
|
|
|
|
|
|
30
|
%
|
|
5% Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cesar Cordero-Kruger
|
|
|
2,820,000
|
|
|
|
(5
|
)
|
|
|
5
|
%
|
|
Lazarus Investment Partners, LLLP
(6)
|
|
|
3,000,000
|
|
|
|
|
|
|
|
5
|
%
|
(1) Unless otherwise noted, the address of each person listed is Growblox Sciences, Inc. 3550 W. Teco Avenue, Las Vegas, NV 89118.
(2) Includes (a) 10,127,692 shares of common stock currently owned of record by Mr. Ellins, and (b) 5,000,000 additional shares of common stock issuable upon exercise of warrant at an exercise price of $0.30 per share.
(3) Includes (a) 116,000 shares of common stock currently owned of record by Dr. Small-Howard, (b) options to purchase 200,000 shares of common stock at $0.17 per share exercisable as of June 29, 2016 or within 60 days thereafter, and (c) 1,200,000 additional shares of common stock issuable upon exercise of warrant at an exercise price of $0.30 per share.
(4) Includes options to purchase 586,667 shares of common stock at $0.30 per share exercisable as of June 29, 2016 or within 60 days thereafter.
(5) Does not include a minimum of 16.2% and a maximum of 20.6% of the equity of GBSPR, our Puerto Rico subsidiary which operates the Solutions division.
(6) Address is Lazarus Management Company LLC, 3200 Cherry Creek South Drive, Suite 670, Denver, CO 80209.
(7) Includes options to purchase shares of common stock at $0.16 per share exercisable as of June 29, 2016 or within 60 days thereafter.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
At March 31, 2016, we did not have any independent directors serving on the Board of Directors. The definition the Company uses to determine whether a director is independent is NASDAQ Rule 4200(a)(15).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
|
|
Fiscal 2016
|
|
|
Fiscal 2015
|
|
|
Audit Fees
(1)
|
|
$
|
17,050
|
|
|
$
|
91,113
|
|
|
Audit-Related Fees
(2)
|
|
|
-
|
|
|
|
-
|
|
|
Tax Fees
(3)
|
|
|
6,950
|
|
|
|
3,035
|
|
|
Subtotal
|
|
|
24,000
|
|
|
|
94,148
|
|
|
All other Fees
(4)
|
|
|
33,600
|
|
|
|
-
|
|
|
Total
|
|
$
|
57,600
|
|
|
$
|
94,148
|
|
(1) Audit Fees – Audit fees billed to the Company in FY 2016 include fees billed by Patrick Heyn, CPA for auditing the Company's annual financial statements and reviewing the financial statements included in the Company's Quarterly Reports on Form 10-Q. Audit fees billed to the Company in FY 2015 relate to fees billed by auditor, LJ Sullivan Certified Public Accountant, LLC for auditing the Company's annual financial statements and reviewing the financial statements included in the Company's Quarterly Reports on Form 10-Q.
(2)Audit-Related Fees – There were no other fees billed by Patrick Heyn, CPA or LJ Sullivan Certified Public Accountant, LLC for the last two fiscal years for assurance and related services that were reasonably related to the performance of the audit or review of the Company's financial statements and not reported under "Audit Fees" above.
(3)Tax Fees –Tax fees billed by Lavelle & Associates, CPAs during the last past fiscal year for professional services.
(4) All Other Fees – Other fees billed in FY 2016 include $33,600 billed by LJ Sullivan Certified Public Accountant, LLC for consulting services related to the Company's Quarterly Reports on Form 10-Q. There were no other fees billed in FY2015 for products and services provided.
Pre-approval of Audit and Non-Audit Services
The Board of Director's policy is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to 12 months from the date of pre-approval and any pre-approval is detailed as to the particular service or category of services. The Board of Directors may delegate pre-approval authority to one or more of its members when expedition of services is necessary.