ITEM 1. Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 –
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements of Growblox Sciences, Inc. (the "Company," "We" or "Us") have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulations S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending March 31, 2017. The balance sheet at March 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 2016.
Principles of Consolidation
The condensed consolidated financial statements include all operating divisions and majority owned subsidiaries, reported as a single operating segment, for which we maintain controlling interests. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the comparative period amounts in order to conform to the current period presentation. These reclassifications had no effect on the reported financial position, results of operations or cash flows of the entity.
Significant Accounting Policies
A description of the Company's significant accounting policies is included in Note 3 of its Annual Report on Form 10–K for the fiscal year ended March 31, 2016.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued amended accounting guidance that changes the accounting for leases and requires expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Note 2 – Going Concern
The Company's condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained net losses since inception, which have caused an accumulated deficit of approximately $24.6 million at September 30, 2016. In addition, the Company has consumed cash in its operating activities of approximately $1.7 million for the six months ended September 30, 2016 compared to $1.6 million for the same period last year. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
Management has been able, thus far, to finance the losses through a public offering, private placements and obtaining operating funds from stockholders. The Company is continuing to seek sources of financing. There are no assurances that the Company will be successful in achieving its goals.
In view of these conditions, the Company's ability to continue as a going concern is dependent upon its ability to obtain additional financing or capital sources, to meet its financing requirements, and ultimately to achieve profitable operations. Management believes that its current and future plans provide an opportunity to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that may be necessary in the event the Company is unable to continue as a going concern.
Note 3 – Convertible Notes
In February 2016, the Company issued a short-term Promissory Note ("Note") with a face value of $192,500 resulting in aggregate proceeds of $175,000 reflecting a 9.1% original discount and a nominal rate of 10%. The Note is payable within one year of issuance and is convertible into 962,500 shares of the Company's common stock and 962,500 common stock purchase warrants at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.50 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $94,037 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $66,912 was recorded based on the fair value of the 962,500 warrants attached to the note. This value was derived using the Black-Scholes valuation model. At September 30, 2016, the Note had a balance of $0.1 million net of $0.06 million unamortized discount and beneficial conversion feature.
In March 2016, the Company issued a short-term Promissory Note ("Note") with a face value of $300,000 resulting in aggregate proceeds of $250,000 reflecting a 16.67% original discount and a nominal rate of 20%. The Note is payable within one year of issuance and is convertible into 1,500,000 shares of the Company's common stock and 1,500,000 common stock to purchase warrants at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.50 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $143,750 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $93,750 was recorded based on the fair value of the 1,500,000 warrants attached to the note. At September 30, 2016, the Note had a balance of $0.2 million net of $0.1 million unamortized discount and beneficial conversion feature.
In July 2016, the Company issued a short-term Promissory Note ("Note") resulting in aggregate proceeds of $500,000. The Note is payable within one year of issuance and is convertible into 2,500,000 shares of the Company's common stock at any time and from time to time before maturity at the option of the holder. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $350,000 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the note. At September 30, 2016, the Note had a balance of $0.2 million net of $0.3 million unamortized beneficial conversion feature.
The Notes and Warrants were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 (the "
Securities Act
") and/or Rule 506 of Regulation D under the Securities Act, as amended.
Note 4– Note Payable
The Company entered into a Note Purchase Agreement, dated May 12, 2015 and effective as of June 8, 2015, with Pacific Leaf Ventures, LP ("Pacific Leaf"), pursuant to which Pacific Leaf has made installment loans (the "Loans") to us in the aggregate amount of $1.75 million. The purpose of the financing is to provide for the acquisition and installation of an operating facility, equipment and other tangible assets by GBSN. 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. The note is convertible at the option of the holder into common shares at a conversion price of $0.50, subject to anti-dilution adjustments.
To evidence the Loans, the Company issued to Pacific Leaf a 6% senior secured convertible promissory note (the "Note"), bearing interest at the rate of 6% per annum, payable quarterly. All outstanding principal and interest due under the Note were due and payable on May 12, 2020. We were required to prepay the outstanding principal amount of the Note on a quarterly basis in an amount equal to 50% of the cash flow (accrued EBITDA) of GB Sciences Nevada, LLC ("GBSN") attributable to our percentage interest in GBSN no later than the earlier to occur of (a) the fifth (5th) business day following receipt of a distribution of the Company's Share of GBSN's EBITDA for the calendar quarter in question, or (b) thirty (30) days following the end of the calendar quarter in question, with the first such prepayment to be made not later than July 31, 2015 with respect to the quarter ending June 30, 2015. In order to induce the Pacific Leaf to extend the loan to the Company and to secure the payment and performance of all of the Secured Obligations, the Company agreed to grant Pacific Leaf a security interest in certain of its assets and enter into the lending agreement.
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 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%.
On June 13, 2016 the Company received notice from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory. Accordingly, the Company has issued 2,000,000 shares of its common stock ($500,000 converted at a price of $0.25 per share) to Pacific Leaf and the Company's indebtedness to Pacific Leaf pursuant to the Note has been reduced by $500,000. As of September 30, 2016, the total amount of installments received, net of conversion, is $2.1 million.
On August 4, 2016, the Company entered into the Second Omnibus Amendment ("Second Amendment") of its existing agreements with Pacific Leaf. The Second Amendment eliminates Pacific Leaf's option to purchase up to a 20% membership interest in GB Sciences Nevada LLC, a wholly owned subsidiary of the Company ("GBS") and reduces Pacific Leaf's existing royalty rate to 16.4% of the gross sales revenue of GBS. It also caps maximum aggregate royalty payments to be made to Pacific Leaf at $2,420,000 with respect to any calendar year. In consideration of the amended terms, Pacific Leaf and its designees received 1,000,000 shares of the Company's common stock and a five-year warrant to purchase 1,500,000 shares of the Company's common stock at $0.36 per share resulting in related expense of approximately $0.9 million.
Note 5 – Capital Lease
In July, 2016, an entity associated with Pacific Leaf Partners, LLC completed the purchase of the building housing the Company's cultivation facility at 3550 W. Teco Ave., Las Vegas, NV. In connection with the purchase, the Company entered into an amended lease agreement
for an initial term of 10.5 years with one option to extend the lease for five years, or until December 31, 2030. The monthly rent payments per the Amended Lease Agreement are $40,000 through December 31, 2017. Commencing January 1, 2018, the monthly rent payments will increase by 3% per annum
through the expiration of the lease. We analyzed the transaction in accordance with the applicable accounting guidance determining that aggregate amount of $3.9 million met the requirements for capitalization. The building has been capitalized and is included in September 20, 2016 property and equipment, net balance with related obligations included as part of current and non-current liabilities. The obligation recorded is based upon the present value of the future minimum lease payment discounted at 11.6% interest rate.
Note 6 – Capital Transactions
During the six months ended September 30, 2016, the Company issued an aggregate of 1,853,054 shares of common stock in settlement and release of certain obligations owed by the Company to various persons and recorded related expenses of $0.6 million, as follows:
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The Company issued 512,275 shares of its common stock in connection with the conversion of $0.2 million in indebtedness owed by us to various persons at a conversion price of approximately $0.38 per share.
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The Company issued 323,692 shares of common stock in connection with settlement of payroll liabilities owed by us to our executives at a conversion price of $0.19 per share. The Company recorded approximately $0.1 million of compensation expense.
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The Company issued 1,017,087 shares of its common stock in connection with the conversion of $0.3 million in indebtedness owed by us to various persons at a conversion price of approximately $0.33 per share.
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On April 8, 2016, the Company issued 200,000 of its common shares to its former Chief Financial Officer, in exchange for a full dismissal with prejudice of all causes of action pending in the complaint filed against the Company on August 19, 2015. The Company recorded approximately $0.04 million of legal settlement expense.
During the six months ended September 30, 2016, The Company issued 202,394 shares in exchange for consulting services and recorded a related expense of $0.07 million. The Company also issued 100,000 shares of common stock to employees and recorded an expense of $0.03 million.
On June 13, 2016 the Company received notice from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory. Accordingly, the Company has issued 2,000,000 shares of its common stock ($500,000 converted at a price of $0.25 per share) to Pacific Leaf.
On August 4, 2016, Company issued 1,000,000 shares to Pacific Leaf and its designees
and recorded a related expense of $0.4 million. The common shares were issued
to satisfy the conditions under the Second Omnibus Amendment described in detail in Note 4 to the financial statements for the six months ended September 30, 2016.
On August 9, 2016, the Company finalized a settlement agreement in final disposition of the lawsuit filed by the Company on April 2, 2014, in the United States District Court for the Southern District of New York. The suit is more particularly described in Part I, Item 3 of the Company's Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on July 14, 2016. The Company issued 1,400,000 shares of restricted common stock to certain non-affiliates of the Company and recorded a related expense of $0.4 million.
During six months ended September 30, 2016, the Company sold 14,847,500 units through a private placement at a price of $0.20 per unit. Each unit consisted of one share of common stock and one common stock purchase warrant, expiring in three years, with an exercise price of $0.50. The Company also sold 9,281,750 units through a private placement at a price of $0.20 per unit. Each unit consisted of one share of common stock and one common stock purchase warrant, expiring in five years, with an exercise price of $0.60. The Company recorded net proceeds of $4.1 million as a result of these issuances.
Options and Warrants
On June 1, 2016, we issued 900,000 stock options under our 2014 Equity Incentive Plan to the independent members of the Company's Board of Directors. The options are exercisable upon vesting for a period of 7 years from issuance at an exercise price of $0.16 per share. As of September 30, 2015, the Company recognized total of $0.1 million in share-based compensation expense related to options vested to date.
On June 1, 2016, we issued 1,400,000 stock options under our 2014 Equity Incentive plan to our Chief Executive Officer. The options are exercisable upon vesting for a period of 7 years from issuance at an exercise price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.2 million in share-based compensation expense related to options vested to date.
Effective on June 1, 2016, the Company amended its employment agreement with its Chief Science Officer, Andrea Small-Howard. Pursuant to the amendment, Dr. Small-Howard surrendered a stock award for 450,000 shares of common stock in exchange for warrants to purchase 1,200,000 common shares at the strike price of $0.30 per share.
As of September 30, 2015, the Company recognized total of $0.1 million in share-based compensation expense related to warrants vested to date.
On June 30, 2016, we issued 200,000 stock options under our 2014 Equity Incentive Plan to various employees. The options are exercisable upon vesting for a period of 10 years from issuance at an exercise price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.01 million in share-based compensation expense related to options vested to date.
On August 4, 2016, Company issued a warrant to purchase 1,500,000 shares of the Company's common stock at the price of $0.36 per share to Pacific Leaf and its designees
and recorded a related expense of $0.5 million. The warrant to purchase common shares was issued
to satisfy the conditions under the Second Omnibus Amendment described in detail in Note 4 to the financial statements for the six months ended September 30, 2016.
All of the foregoing securities were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 (the "
Securities Act
") and/or Rule 506 of Regulation D under the Securities Act, as amended.
Note 7 – Commitments and Contingencies
Growblox Sciences, Inc. v. GCM Administrative Services, LLC
On August 9, 2016, the Company finalized a settlement agreement in final disposition of the lawsuit filed by the Company on April 2, 2014, in the United States District Court for the Southern District of New York. The suit is more particularly described in Part I, Item 3 of the Company's Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on July 14, 2016. The Company issued 1,400,000 shares of restricted common stock to certain non-affiliates of the Company and recorded a related expense of $0.4 million
Cathryn Kennedy Complaint Settlement
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 valued at $40,000 in exchange for a full dismissal with prejudice of all causes of action pending in the above-referenced Complaint.
From time to time, the Company also becomes involved in certain legal proceedings and claims which arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, we will record a reserve for the claim in question. If and when we record such a reserve is recorded, it could be material and could adversely impact our results of operations, financial condition, and cash flows.
Note 8 – Loss per Share
The Company's basic loss per share has been calculated using the weighted average number of common shares outstanding during the period. The Company had 56,613,414 and 27,558,334 of potentially dilutive common shares at September 30, 2016 and March 31, 2016, respectively. However, such common stock equivalents were not included in the computation of diluted net loss per share as their inclusion would have been anti-dilutive.
Note 9 – Subsequent Events
Pacific Leaf Note Conversion Notice
On October 4 and October 20, 2016 the Company received notices from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory. Accordingly, the Company has issued 4,000,000 shares of its common stock ($1,000,000 converted at a price of $0.25 per share) to Pacific Leaf and the Company's indebtedness to Pacific Leaf pursuant to the Note has been reduced by $1,000,000.
Acquisition of Production License
On October 4, 2016, we acquired a 60% interest in a Nevada Medical Marijuana Production License with an option of up to 80%. A production license enables us to convert cannabis plants into to oils and extracts that are suitable for creating medical compounds as well as consumer products. This license is critical and essential to our plan of producing cannabis-based medicines, and must be integrated into our cultivation facility to ensure quality control standards and efficiency in our production of cannabis medicines.
Short-Term Note Conversion
On November 8, 2016 the Company received a notice from the Holder of the Short-Term Promissory Note ("Note") issued in March 2016 with face value of $300,000. The Holder had elected to convert $300,000 of the Company's indebtedness into warrants and common stock of the Company pursuant to the Convertible Note Agreement. Accordingly, the Company had issued 1,500,000 shares of its common stock ($300,000 converted at a price of $0.20 per share) and 1,500,000 warrants to purchase shares of Common Stock of the Company at an exercise price of $0.50 per share for the period of three years.