Note 1 - Background and Basis of Presentation
Background
GB Sciences, Inc. (“We,” or “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.
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.
Effective December 12, 2016, the Company amended its Certificate of Corporation pursuant to shareholder approval as reported in the Form 8-K filed on October 14, 2016. Pursuant to the amendment the Company’s name was changed from Growblox Sciences, Inc. to GB Sciences, Inc.
Effective April 8, 2018, Shareholders of the Company approved the change in corporate domicile from the State of Delaware to the State of Nevada and increase in the number of authorized capital shares from 250,000,000 to 400,000,000.
Recent Developments
On October 4, 2016, we acquired a 60% interest in a Nevada Medical Marijuana Production License with an option to own 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. On October 23, 2017, the Company amended the existing Nevada Medical Marijuana Production License Agreement (“Amended Production License Agreement”). Per the terms of the Amended Production License Agreement, GB Sciences purchased the remaining percentage of the production license resulting in the 100% ownership of the license. GB Sciences also received 100% ownership of the cultivation license included in the original Nevada Medical Marijuana Production License Agreement. In exchange, GB Sciences made one-time payment of $500,000 and issued a Promissory Note in the amount of $700,000 payable in equal monthly payments over a three-year period commencing on January 1, 2018. On February 21, 2018, the Company received its recreational production license and began full production operations in its Las Vegas facility.
On November 1, 2017, the Company entered into an Edibles Production Agreement (the “EPA”) with The Happy Confections, L.L.C. (“THCLLC”) through the Company’s wholly owned subsidiary, GB Sciences Las Vegas, LLC (“GBSLV”). Dr. Andrea Small-Howard, a member of GB Science’s Board of Directors, is a Co-Managing Member of THCLLC. Under the EPA, THCLLC is to produce cannabis-infused baked goods and other edibles in GBSLV’s production facility upon approval of GBSLV’s Nevada Medical Marijuana Production License. The Company will receive a royalty of between 20% and 25% on all sales of edibles produced by THCLLC.
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Contemporaneously with the EPA, the Company entered into a Non-Revolving Credit Line Agreement and Non-Revolving Credit Line Promissory Note (together, the “THC Note” or “Note”) to advance up to $300,000 to THCLLC for the purpose of expanding THCLLC’s operations. The Note bears interest at a rate of 1.29% per annum. Beginning 90 days after the sale of its first product, THCLLC is to make repayment of its advances under the Note in an amount equal to 25% of its gross sales revenue. Such repayment is due within 10 days of the sale of any product.
As of March 31, 2019, the Company has advanced $253,034 under the THC Note. On October 15, 2018, the Company gave notice to The Happy Confections, LLC (“THC LLC”) that Company would not provide any additional financing beyond the $300,000 Credit Line granted under the Non-Revolving Credit Line Agreement dated November 1, 2017. In this notice, the Company requested that THC LLC seek to find additional sources of financing to be able to fund the manufacture of edibles. The Company further notified THC LLC that the Company would terminate the Edibles Production Agreement and all other related agreements with THC LLC if it was unable to acquire additional funding by October 22, 2018. On October 19, 2018, the Company received a response from THC LLC that it was unable to acquire additional funding. Accordingly, the Company has terminated all of its agreements with THCLLC effective October 19, 2018 and took possession of all tangible assets owned by THCLLC on October 22, 2018, as collateral for the balance owed under the Note. These assets include kitchen and production machinery and equipment, leasehold improvements, and inventory that is used in the Company’s production operations at the Teco Facility.
The historical cost of the machinery and equipment received was $139,411 and the Company has capitalized that amount in fixed assets as of March 31, 2019. All of the machinery and equipment received from THC LLC was placed in service for use in the Company’s production facility in December 2018. The Company also recorded $113,623 as other expense in its Consolidated Statement of Operations for the year ended March 31, 2019, which represents the remaining balance of the outstanding note receivable from THC LLC.
On September 18, 2017 GB Sciences finalized its agreement with Louisiana State University (“LSU”) AgCenter to be the sole operator of the LSU’s medical marijuana program. The LSU Board of Supervisors entered into a five-year agreement—that has an option to renew for two additional five-year terms—with GB Sciences.
The contract includes the Company’s commitment to make a minimum financial contribution to the LSU AgCenter in the amount of $3.4 million, or a 10% commission of gross receipts, in addition to annual research investments of $500,000 to the LSU AgCenter.
The monetary contributions would be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, which AgCenter would retain 50% of those rights. As of March 31, 2019, GB Sciences has made payments totaling $1,500,000 toward its obligations under the agreement.
On September 21, 2018, the Company formed a wholly owned subsidiary, GBS Global Biopharma, Inc., in the province of Ontario, Canada with plans to license and/or transfer some of Growblox Life Sciences LLC’s intellectual property to the newly formed entity. On March 15, 2019, the Company entered into the Asset Purchase Agreement with GBS Global Biopharma, Inc., whereby all of the assets and certain liabilities held by Growblox Life Sciences, LLC, a wholly-owned subsidiary of GB Sciences, Inc., were transferred to GBS Global Biopharma, Inc. in exchange for a promissory note in the amount of $1,435,700. The assets transferred include all intellectual property and intangible assets owned by the Company, consisting primarily of patents in process and research contracts with universities and researchers. It is anticipated that GBS Global Biopharma Inc. will pursue clinical development of the intellectual property, including clinical trials.
On January 31, 2018 the Company entered into a Contract Farming Agreement with Colorado Hemp Project Limited (“CHP”) for the development and cultivation of boutique help genetics and new strains of hemp which will provide the key ingredient in proprietary CBD formulations. Per the terms of the agreement, the Company leased 8 acres of land on which CHP planted 2000 seeds per acre. CHP is responsible for providing genetics, land, water, planting, cultivation, any soil amendments needed, harvest, drying and stripping into whole plant composite for extraction, if desired. In return, GB Sciences is obligated to pay for all production expenses and delivery or shipping
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for the total of $16,750 per acre of land farmed. On March 15, 2018, the Company leased additional 5 acres of land from CHP under the same terms as those included in the original agreement.
Intellectual Property
Our intellectual property includes:
Four USPTO & WIPO Patent Applications
Title:
CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF NEURODEGENERATIVE DISEASES
U.S. Patent Application No. 15/729,565;
WIPO Application number: PCT/US17/SS989
Filed:
October 10, 2017;
Inventors:
Andrea Small-Howard et al.
Claims benefit of U.S. Patent Application No. 62/406,764 filed October 11, 2016
Title:
CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF MAST CELL-ASSOCIATED OR BASOPHIL-MEDIATED INFLAMMATORY DISORDERS
U.S. Patent Application No.15/885,620;
WIPO Application number: PCT/US18/016296
Filed:
January 31, 2018;
Inventors:
Andrea Small-Howard, et al.
Claims benefit of U.S. Patent Application No. 62/453,161 filed February 1, 2017
Title:
MYRCENE-CONTAINING COMPLEX MIXTURES TARGETING TRPV1
U.S. Patent Application No. 15/986,316;
WIPO Patent Application No. PCT/US2018/033956
Filed:
May 22, 2018;
Inventors:
Andrea Small-Howard, et al.
Claims benefit of U.S. Patent Application No. 62/509,546 filed May 22, 2017
Title:
TRPV1 ACTIVATION-MODULATING COMPLEX MIXTURES OF CANNABINOIDS AND/OR TERPENES
U.S. Patent Application No.: 16/420,004;
WIPO Patent Application No.: PCT/US2019/033618
Filed:
May 22, 2019;
Inventors:
Andrea Small-Howard, et al.
Claims benefit of U.S. Patent Application No. 62/674,843 filed May 22, 2018
Two Provisional USPTO Patent Applications
Title: DIVERSE TRPV1 RESPONSES TO CANNABINOIDS
U.S. Patent Application No.: 62/849,719
Filed:
May 17, 2019;
Inventors:
Andrea Small-Howard, et al.
Title:
THERAPEUTIC NANOPARTICLES ENCAPSULATING MYRCENE
U.S. Patent Application No.: 62/757,660
Filed:
November 8, 2018;
Inventors:
Andrea Small-Howard, et al.
Three Licensed Patents for Intellectual Property Portfolio
Title:
METHODS AND COMPOSITIONS FOR PREVENTION AND TREATMENT OF CARDIAC HYPERTROPHY.
Inventor:
Alexander Stokes;
Assignee:
University of Hawai’i
Commercialization rights licensed to Makai Biotech, LLC
Sublicensed by Makai Biotech, LLC to GBS Global Biosciences, Inc.
Status: Granted in the following territories on the corresponding dates
U.S. Patent Number: 9,084,786;
Issued: July 21, 2015
European Union Patent Number: 2,635,281;
Granted: March 14, 2018
Hong Kong Patent Application Number: 14102182.8; Granted: March 14, 2018
IN Patent Application Number: 1404/KOLNP/2013; Continuation Application Serial No.: 16/181204
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Title
METHOD FOR PRODUCING A PHARMACEUTICAL COMPOSITION OF POLYMERIC NANOPARTICLES FOR TREATING NEUROPATHIC PAIN CAUSED BY PERIPHERAL NERVE COMPRESSION
Inventors:
Martin Banderas, Lucia; Fernandez Arevala, Mercedes; Berrocoso, Dominguez, Esther; and Mico Segura, Juan Antonio
Assignees:
Universidad de Sevilla, Universidad de Cadiz, and Centro de Investigacion Biomedica En Red (CIBER)
Exclusive worldwide license held by GBS Global Biopharma, Inc.
WIPO/PCT Application: WO 2016/128591
Filed: August 18, 2016
Claims benefit of Spanish Patent Application no. ES 2582287
Filed: September 2, 2015
U.S. Patent Application 15/549,653
Europe Patent Application EP3257503
Canada Patent Application CA2976040
INGESTIBLE FILMS HAVING SUBSTANCES FROM HEMP OR CANNABIS
USPTO Patent Number: 10, 265,362;
Issued: April 23, 2019;
Inventor:
Scott Schaneville
Non-exclusive worldwide license held by GBS Global Biopharma, Inc. through GB Sciences, Inc.
Three Additional Near-Term Patent Applications:
GBS Global has data sets for three new provisional patent applications to be filed in Q3 and Q4 of 2019, as follows:
Title:
POLY-PHARMACEUTICAL MIXTURES FOR CHRONIC PAIN BASED ON CLASSIFICATIONS OF CANNABINOIDS AND TERPENOIDS INTO COMPLEMENTS OR COMPETITORS BASED ON THEIR BINDING-SITES ON PAIN-SENSING RECEPTORS
Filing Date:
July 1, 2019 (anticipated);
Inventors:
Andrea Small-Howard, et al.
Title:
METHOD FOR PRODUCING A PHARMACEUTICAL COMPOSITION OF POLYMERIC NANOPARTICLES CONTAINING COMPLEX MIXTURES OF CANNABINOIDS AND TERPENOIDS FOR TREATING NEUROPATHIC PAIN CAUSED BY PERIPHERAL NERVE COMPRESSION
Filing Date: August 1, 2019 (anticipated);
Inventors:
Andrea Small-Howard, et al.
Title:
CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF HIV-ASSOCIATED NEURODEGENERATIVE DISORDERS (HAND)
Filing Date:
December 1, 2019 (anticipated);
Inventors:
Andrea Small-Howard, et al.
Note 2 - Going Concern
The Company’s financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained net losses since inception. For the years ended March 31, 2019 and 2018, the Company sustained net losses of approximately $23.7 million and $23.0 million respectively and had an accumulated deficit of approximately $84.7 million and $58.2 million respectively. As of March 31, 2019, the Company had a working capital deficit of $3.2 million. 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
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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 - Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
We prepare our consolidated financial statements in accordance with generally accepted accounting principles (GAAP) for the United States of America. Our consolidated financial statements include all operating divisions and majority-owned subsidiaries, reported as a single operating segment, for which we maintain controlling interests. Intercompany accounts and transactions have been eliminated in consolidation. In our opinion, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation of the financial statements, have been included.
Certain reclassifications have been made to the comparative year 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.
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.
Fair Value of Financial Instruments
The Company adopted ASC 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:
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Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
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Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
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The carrying value of cash, accounts receivable, accounts payables and accrued expenses are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability.
Inventory
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We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out method, or its current estimated market value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete inventory is based on expected future use.
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets primarily represent the value of our patents pending. Upon issuance of the patents, the indefinite-lived intangible assets will have finite lives. We amortize our finite-lived intangible assets over their estimated useful lives using the straight-line method, and we periodically evaluate the remaining useful lives of our finite-lived intangible assets to determine whether events or circumstances warrant a revision to the remaining period of amortization.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets: 3-8 years for machinery and equipment, leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.
Long-Lived Assets
Property and equipment comprise a significant portion of our total assets. We evaluate the carrying value of property and equipment if impairment indicators are present or if other circumstances indicate that impairment may exist under authoritative guidance. The annual testing date is March 31. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of property and equipment are prepared. If the projections indicate that the carrying value of the property and equipment are not recoverable, we reduce the carrying values to fair value. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. No indicators of impairment were identified by the Company as of March 31, 2019.
Beneficial Conversion Feature of Convertible Notes Payable
The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20,
Debt with Conversion and Other Options
and Emerging Issues Task Force (“EITF”) 00-27,
“Application of Issue No. 98-5 to Certain Convertible Instruments”
. A beneficial conversion feature (“BCF”) exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments were granted with the debt. In accordance with this guidance, the BCF of a convertible note is measured by allocating a portion of the note's proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The Company calculates the fair value of warrants issued with the convertible notes using the Black-Scholes valuation model and uses the same assumptions for valuing any employee options in accordance with ASC Topic 718
Compensation – Stock Compensation
. The only difference is that the contractual life of the warrants is used.
The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on a relative fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
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Other Assets
Other assets primarily include employee advances.
Revenue Recognition
The FASB issued Accounting Standards Codification (“ASC”) 606 as guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company adopted the guidance on April 1, 2018 and applied the cumulative catch-up transition method.
The Company’s only current revenue source is from sales of cannabis, a distinct physical good. Under ASC 606, the Company is required to separately identify each performance obligation resulting from its contracts from customers, which may be a good or a service. A contract may contain one or more performance obligations. All of the Company’s contracts with customers, past and present, contain only a single performance obligation, the delivery of distinct physical goods. Because fulfillment of the company’s performance obligation to the customer under ASC 606 results in the same timing of revenue recognition as under the previous guidance (i.e. revenue is recognized upon delivery of physical goods), the Company did not record any material adjustment to report the cumulative effect of initial application of the guidance.
Research and Development Costs
Research and development costs are expensed as incurred.
Equity-Based Compensation
The Company accounts for equity instruments issued to employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718) and Equity-Based Payments to Non-employees pursuant to ASC 505-50 (ASC 505-50). The computation of the expense associated with stock-based compensation requires the use of a valuation model. The FASB-issued accounting guidance requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. This accounting guidance requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in financial statements or tax returns. Deferred tax items are reflected at the enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Due to the uncertainty regarding the success of future operations, management has valued the deferred tax asset allowance at 100% of the related deferred tax assets.
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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 128,608,852 and 104,207,396 potentially dilutive common shares at March 31, 2019 and 2018, 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
.
Net loss attributable to common stockholders for the year ended March 31, 2019 includes and adjustment for a deemed dividend from induced warrant exercises. The following table sets forth the computation of basic and diluted EPS:
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For the Year Ended March 31, 2019
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Income
(Numerator)
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Shares
(Denominator)
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Per-Share
Amount
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Net loss attributable to GB Sciences, Inc.
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$ (23,653,165)
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Less: Inducement dividend from warrant exercises
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(2,861,436)
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Basic and Diluted EPS
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Net loss attributable to common stockholders
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$ (26,514,601)
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209,537,769
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$ (0.13)
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Recent Accounting Pronouncements
Standards Effective in Future Years
In February 2016, the FASB issued ASU 2016-02,
Leases
, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company as of April 1, 2019.
The Company reviewed the terms of its existing lease and has recorded a right of asset and related lease liability of approximately $213,000 upon adoption.
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company as of April 1, 2019. The Company determined that all share-based payments were settled as of the date of the adoption, so there was no impact on the Company's financial statements.
All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
Recently Adopted Standards
The FASB issued Accounting Standards Codification (“ASC”) 606 as guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to
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each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company adopted the guidance on April 1, 2018 and applied the cumulative catch-up transition method.
The Company’s only current revenue source is from sales of cannabis, a distinct physical good. Under ASC 606, the Company is required to separately identify each performance obligation resulting from its contracts from customers, which may be a good or a service. A contract may contain one or more performance obligations. All of the Company’s contracts with customers, past and present, contain only a single performance obligation, the delivery of distinct physical goods. Because fulfillment of the company’s performance obligation to the customer under ASC 606 results in the same timing of revenue recognition as under the previous guidance (i.e. revenue is recognized upon delivery of physical goods), the Company did not record any material adjustment to report the cumulative effect of initial application of the guidance.
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Note 4 – 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 the Amended Lease Agreement for an initial term of ten and a half 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 were $40,000 through December 31, 2017. Commencing January 1, 2018, the monthly rent payments increased by 3% and will increase by 3% per annum through the expiration of the lease. The Company analyzed the transaction in accordance with the applicable accounting guidance determining that the aggregate amount of $3.9 million met the requirements for capitalization. The building has been capitalized and is included in 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.
On August 4, 2017, the Company entered into a Lease Agreement for the building located at 18350 Petroleum Drive in Baton Rouge, Louisiana, which will be used for the Company’s medical marijuana operations in the State of Louisiana. The Lease is for an initial term of five years beginning on July 1, 2018, with two options to extend the lease for five years, or until June 30, 2032. The monthly rent payments per the Lease Agreement are $25,588 through June 30, 2022. If the Company chooses to exercise its first option to extend the Lease term, the monthly rent payments will increase to $28,147 per month for the period from July 1, 2022 through June 30, 2027. If the Company chooses to exercise its second option to extend the Lease term, the monthly rent payments will increase to $30,966 per month for the period from July 1, 2027 through June 30, 2032.The Company analyzed the transaction in accordance with the applicable accounting guidance determining that the aggregate amount of $2.5 million met the requirements for capitalization. The building has been capitalized and is included in 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 a 10.3% interest rate.
Amortization of assets under capital leases is included in depreciation expense. The future minimum lease payments required under the capital leases and the net present value of the minimum lease payments as of March 31, 2019, are as follows:
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Year Ending March 31,
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Total
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2020
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777,671
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2021
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835,499
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2022
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851,352
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2023
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890,712
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2024
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915,208
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Thereafter
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7,331,562
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Total minimum lease payments
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11,602,004
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Less: Amount representing interest
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(5,465,943)
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Present value of minimum lease payments
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6,136,061
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Less: Current maturities of capital lease obligations
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(142,010)
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Long-term capital lease obligations
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5,994,051
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Note 5 – Notes Payable
February 2018 Agreement
On February 23, 2018, the Company entered into the Agreement with Pacific Leaf (“February 2018 Agreement”) whereby all rights and obligations between the parties pursuant to all prior agreements would terminate. Under the
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terms of the February 2018 Agreement, the Company paid Pacific Leaf $1,269,818 upon the signing of the agreement and was to pay Pacific Leaf an additional $1,500,000 on or before July 31, 2018. The Company would also issue Pacific Leaf 1,600,000 shares of restricted common stock on or before July 31, 2018. Thereafter, no business relationship would exist between the parties and no royalties would be owed.
If the Company were unable to make the $1.5 million payment to Pacific Leaf on or before July 31, 2018, the Royalty Agreement and all other agreements that would have been terminated under the terms of the February 2018 Agreement would have continued in full force and effect, and 75% of all payments made under the February 2018 Agreement would have been credited toward royalties owed under the Royalty Agreement.
In connection with the February 2018 Agreement, the Company recorded royalty expense of $269,818 in fiscal year 2018 for accrued royalties paid, $250,000 in other expense which represents 25% of the $1 million payment made on February 26, 2018, and $750,000 in prepaid expenses which represents the 75% portion of the $1 million payment which would have been credited toward future royalties in the event the $1.5 million payment were not made on or before July 31, 2018.
The market value of the 1.6 million shares issued relating to the February 2018 Agreement was $1,040,000, valued as of the date of the agreement. The Company recorded $260,000 in other expense related to the issuance of those shares, which represents 25% of the market value of those shares. The Company recorded $780,000 in prepaid expenses, representing the 75% portion of the fair market value of those shares which would have been credited toward future royalties in the event that the final $1.5 million payment were not made on or before July 31, 2018.
All amounts related to the February 2018 Agreement recorded in the Company’s Consolidated Balance Sheet and Statement of Operations for the year ended March 31, 2018, are summarized below:
|
Year Ended
March 31, 2018
|
|
As of March 31, 2018
|
|
|
Pacific Leaf Ventures LP
February 2018 Agreement
|
Royalty
Expense
|
Other
Expense
|
|
Prepaid
Expense
|
|
Total
|
Payment made on February 26, 2018
|
$
269,818
|
$
250,000
|
|
$
750,000
|
|
$
1,269,818
|
1,600,000 shares common stock issued in connection with the February 2018 Agreement
|
-
|
260,000
|
|
780,000
|
|
1,040,000
|
Total recorded in Fiscal Year 2018 related to the February 2018 Agreement
|
$
269,818
|
$
510,000
|
|
$
1,530,000
|
|
$
2,309,818
|
July 2018 Amendment and Termination Agreement
On July 28, 2018, the Company entered into the Amendment and Termination Agreement (“Amendment and Termination Agreement”) with Pacific Leaf. Pursuant to that agreement, the Pacific Leaf Royalty Agreement and all other agreements with Pacific Leaf were terminated in their entirety, and the Company would make payments totaling $1 million of the $1.5 million balance due to Pacific Leaf by August 31, 2018.
Because the Amendment and Termination Agreement irrevocably terminated the Pacific Leaf Royalty Agreement, the Company recorded an expense of $1,530,000 in the quarter ended September 30, 2018 related to the prepaid royalties previously recorded on the Consolidated Balance Sheet in connection with the February 2018 Agreement. The expense is included in the Other Expense caption of the Company’s Consolidated Statement of Operations for the year ended March 31, 2019.
Contemporaneously with the Amendment and Termination Agreement, the Company issued a Promissory Note (“Promissory Note”) for the remaining $0.5 million due to Pacific Leaf. The Promissory Note accrued interest at a rate of 6% per annum and matured on November 30, 2018.
In consideration for deferring the payment of the amounts due to Pacific Leaf, the Company issued 100,000 shares of its common stock to Pacific Leaf on July 31, 2018 having a fair market value of $36,000. The Company made
53
cash payments totaling $1.0 million to Pacific Leaf in August 2018 related to the Amendment and Termination Agreement. Both the $36,000 fair value of shares issued to Pacific Leaf and the $1,000,000 in cash payments made to Pacific Leaf in August 2018 are recorded in the Company’s Consolidated Statement of Operations for the year March 31, 2019, under the other expense caption.
On December 21, 2018, the company made a $100,000 payment on the promissory note. The payment was applied to interest accrued to date of $12,164 and the remaining $87,836 was applied to the principal balance of the Note.
On December 21, 2018, the Company also issued 500,000 shares of its common stock to Pacific Leaf in consideration for further deferral of repayment of the Note. The Company recognized $95,000 in expense related to the shares issued, which is recorded in the Company’s Consolidated Statement of Operations for the year ended March 31, 2019, under the other expense caption.
In total, the Company recorded $3.1 million related to the Amendment and Termination Agreement in Other Expense in its Consolidated Statement of Operations for the year ended March 31, 2019, as summarized in the table below:
Amendment and Termination Agreement -
|
|
|
Year Ended
|
Amounts Recorded in Other Expense
|
|
|
March 31, 2019
|
|
|
|
|
Prepaid royalties recorded in February 2018
|
|
$
1,530,000
|
Cash payments made in August 2018
|
|
1,000,000
|
Promissory note issued to Pacific Leaf, due on or before November 30, 2018
|
|
500,000
|
100,000 shares common stock issued to Pacific Leaf
|
|
36,000
|
Settlement of convertible note payable and related accrued interest
|
|
(20,075)
|
500,000 shares common stock issued to Pacific Leaf on December 21, 2018
|
|
95,000
|
Total
|
|
$
3,140,925
|
The Company made additional payments on the promissory note of $100,000 on January 16, 2019, $100,000 on February 6, 2019, and a final payment of $210,000 on March 4, 2019. The company recorded and paid a total of $15,929 in interest expense related to the promissory note during the year ended March 31, 2019.
Note payable to BCM MED, LLC
On December 20, 2018, GB Sciences Louisiana, LLC (“GBSLA") entered into a $300,000 Loan Agreement with BCM MED, LLC (“BCM MED”). BCM MED is a related party to Wellcana Group, LLC, the minority member in GBSLA. The purpose of the financing is to fund operating expenses incurred by or on behalf of medical marijuana operations of GBSLA.
Pursuant to the Loan Agreement, GBSLA will make eight (8) monthly installment payments in the amount of $33,333 on or before the 10
th
business day of each month and began making payments in April 2019. GBSLA will make the 9
th
and final installment payment in the amount of $33,333 on or before the 10
th
business day of December 2019. The aggregate amount of the installment payments from GBSLA to BCM MED shall be equal to the loan amount. GBSLA has the option to defer one monthly installment payment to the first day of the following calendar month.
Note Payable to 483 Management, LLC
On October 23, 2017, the Company amended the existing Nevada Medical Marijuana Production License Agreement (“Amended Production License Agreement”). Per the terms of the Amended Production License Agreement, GB Sciences purchased the remaining percentage of the production license resulting in the 100% ownership of the license. GB Sciences also received 100% ownership of the cultivation license included in the original Nevada Medical Marijuana Production License Agreement. In exchange, GB Sciences made one-time
54
payment of $500,000 and issued a 0% unsecured Promissory Note in the amount of $700,000 payable in equal monthly payments over a three-year period commencing on January 1, 2018.
The present value of the note was $521,067 on the date of its issuance based on an imputed interest rate of 20.3% and the Company recorded a discount on notes payable of $178,933. During the year ended March 31, 2019, the Company recorded $85,981 in interest expense related to amortization of the note discount.
Summary of Notes Payable
As of March 31, 2019, the following notes payable were recorded in the Company’s Consolidated Balance Sheet:
|
As of March 31, 2019
|
Short-Term Notes Payable
|
Face Value
|
|
Discount
|
|
Carrying Value
|
Convertible Notes Payable to various investors
|
$
1,257,000
|
|
$
(564,929)
|
|
$
692,071
|
Convertible Promissory Note due to CSW Ventures
|
1,500,000
|
|
(169,134)
|
|
1,330,866
|
Note Payable to 483 Management, LLC, current portion
|
272,221
|
|
(65,347)
|
|
206,874
|
Note Payable - BCM Med
|
300,000
|
|
-
|
|
300,000
|
Total Short-Term Notes Payable
|
$
3,329,221
|
|
$
(799,410)
|
|
$
2,529,811
|
|
|
|
|
|
|
Long-Term Notes Payable
|
|
|
|
|
|
Note Payable to 483 Management, LLC, long-term
|
$
175,000
|
|
$
(13,928)
|
|
$
161,072
|
Total Long-Term Notes Payable
|
$
175,000
|
|
$
(13,928)
|
|
$
161,072
|
Note 6 – Convertible Notes
March 2017 Convertible Note Offering
In March 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $965,500. The Notes are payable within three years of issuance and are convertible into 3,862,000 shares of the Company’s common stock and 3,862,000 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 $0.60 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $416,733 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $548,767 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.
During the three months ended June 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $1,034,500. The Notes are payable within three years of issuance and are convertible into 4,138,000 shares of the Company’s common stock. The Company also issued 4,138,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.60 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $487,957 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the
55
beneficial conversion feature, an additional discount of $480,236 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.
July 2017 Convertible Note Offering
In July, 2017, the Company entered into a Placement Agent’s Agreement with a third-party brokerage firm to offer units consisting of a $1,000 6% promissory note convertible into 4,000 shares of the Company’s common stock at $0.25 per share and 4,000 warrants to purchase shares of the Company’s’ common stock at an exercise price of $0.65 per share for the period of three years.
During the three months ended September 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $3,085,000. The Notes are payable within three years of issuance and are convertible into 12,340,000 shares of the Company’s common stock. The Company also issued 12,340,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,541,797 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $1,532,335 recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.
During the three months ended December 31, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $4,116,000. The Notes are payable within three years of issuance and are convertible into 16,464,000 shares of the Company’s common stock. The Company also issued 16,464,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,600,808 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $2,417,856 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.
As of March 31, 2019, convertible notes having a carrying value of $692,071, net of unamortized discount of $564,929 remained outstanding from the March 2017 and July 2017 note offerings, and accrued interest on the notes is $121,558. Discount amortization was $786,484 for the year ended March 31, 2019.
Convertible Note Payable to CSW Ventures, LP
On February 28, 2019, the Company issued a $1,500,000 8% Senior Secured Convertible Promissory Note and entered into the Note Purchase Agreement and Security Agreement with CSW Ventures, LP (together, “CSW Note”). The note matures on August 28, 2020 and is convertible at any time until maturity into 8,823,529 shares of the Company’s common stock at $0.17 per share. Collateral pledged as security for the note includes all of the Company’s 100% membership interests in GB Sciences, Nevada, LLC and GB Sciences Las Vegas, LLC, which together represent substantially all of the Company’s cannabis cultivation and production operations and assets located at its Teco facility in Las Vegas, Nevada.
The intrinsic value of the beneficial conversion feature resulting from the market price of the Company’s common stock in excess of the conversion price was $176,471 on the date of issuance, and the Company recorded a discount on the CSW Note in that amount. During the year ended March 31, 2019, the company recorded accrued interest on the CSW Note of $8,329 and recorded an additional $7,336 in interest expense as the result of amortization of the note discount.
56
Note 7 - Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful life of the asset or, in the case of leasehold improvements amortized over the lesser of the useful life of the asset or the underlying lease term. We recorded depreciation expense of $0.6 million and $0.8 million for the fiscal years ended March 31, 2019 and March 31, 2018, respectively. Property and equipment is comprised of the following:
|
|
March 31,
|
|
|
2019
|
|
2018
|
Furniture and fixtures
|
|
$
|
20,883
|
|
$
|
-
|
Computer and software
|
|
|
201,304
|
|
|
151,748
|
Machinery and equipment
|
|
|
1,633,004
|
|
|
1,094,472
|
Leaseholds
|
|
|
15,734,980
|
|
|
4,357,779
|
Construction in progress
|
|
|
1,852,839
|
|
|
3,193,767
|
Capital lease - building
|
|
|
6,425,000
|
|
|
6,425,000
|
|
|
|
25,868,010
|
|
|
15,222,766
|
Less accumulated depreciation and amortization
|
|
|
(2,363,308)
|
|
|
(1,463,609)
|
Property and Equipment, Net
|
|
$
|
23,504,702
|
|
$
|
13,759,157
|
Note 8 – Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction. The Company operates in the state of Nevada which does not levy an income tax. The Company has analyzed filing positions for all open tax years in the federal jurisdiction where it is required to file income tax returns. The Company identified its federal tax return as its “major” tax jurisdiction, as defined under generally accepted accounting principles.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into United States tax law. The Company has adjusted its deferred tax assets and liabilities at December 31, 2017 to reflect the Act’s reduction of corporate income tax rates.
The Company’s effective tax rate was -2.4% and 0% for the years ended March 31, 2019 and 2018, respectively.
Income tax expense was $526,145 for the year ended March 31, 2019. This amount includes a $510,647 tax liability and tax penalties of $15,498 attributable to the tax year ended March 31, 2018. Income tax expense was $0 for the year ended March 31, 2018.
The Company’s income tax payable was $506,145 as of March 31, 2019, and $0 as of March 31, 2018. The increase in income taxes payable is based on a tax liability attributable to the March 31, 2018 tax year, less $20,000 in tax payments made during the current year.
At March 31, 2019 and 2018 respectively, the Company had net operating loss carryforwards (“NOLs”) for income tax purposes of $47,430,184 and $34,481,122. The net operating loss carryforwards are expected to expire at various times from 2025 through 2039.
These NOLs have the potential to be used to offset future ordinary taxable income and reduce future cash tax liabilities.
Utilization of the Company’s net operating losses may be subject to substantial annual limitation if the Company experiences a 50% change in ownership, as provided by the Internal Revenue Code and similar state provisions. Such an ownership change would substantially increase the possibility of net operating losses expiring before complete utilization.
Because the Company operates in the legal cannabis industry, it is subject to the limitations of Internal Revenue Code Section 280E (“280E”) for U.S. income tax purposes. Under 280E, the Company is allowed to deduct expenses that are directly related to the production of its products, i.e. cost of goods sold, but is allowed no further
57
deductions for ordinary and necessary business expenses from its gross profit. The Company believes that the deductions disallowed include the deduction of NOLs. The unused NOLs will continue to carry forward and may be used by the Company to offset future taxable income that is not subject to the limitations of 280E.
The provision for income taxes is different than would result from applying the U.S. statutory rate to profit before taxes for the reasons set forth in the following reconciliation:
|
|
2019
|
|
2018
|
Tax benefit computed at U.S. statutory rates
|
|
$
(4,424,959)
|
|
$
(4,824,580)
|
Increases (decreases) in taxes resulting from:
|
|
|
|
|
IRC Section 280E
|
|
968,870
|
|
159,188
|
Other permanent items
|
|
35,590
|
|
5,604
|
Change in valuation allowance
|
|
3,420,499
|
|
4,659,788
|
Prior year tax expense
|
|
510,647
|
|
-
|
Total provision for income taxes
|
|
$
510,647
|
|
$
-
|
The tax effects of the primary temporary differences giving rise to the Company’s deferred tax assets and liabilities are as follows for the year ended March 31, 2019 and 2018:
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Stock based compensation
|
|
$
2,883,491
|
|
$
752,617
|
Net operating loss carryforward
|
|
9,960,339
|
|
9,190,629
|
Depreciation and Amortization expense
|
|
(416,944)
|
|
(286,240)
|
Other temporary items
|
|
68,520
|
|
-
|
Total deferred tax assets
|
|
12,495,406
|
|
9,657,006
|
Less valuation allowance
|
|
(12,495,406)
|
|
(9,657,006)
|
Net deferred tax asset
|
|
$
-
|
|
$
-
|
Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies. The Company continues to evaluate its deferred tax asset valuation allowance on a quarterly basis. The Company concluded that, as of March 31, 2019, it is more likely than not that the Company will not have sufficient taxable income within the applicable net operating loss carry-forward period to realize any portion of its deferred tax assets.
The Company believes that the tax positions taken in its tax returns would be sustained upon examination by taxing authorities. The Company files income tax returns in the U.S. federal jurisdiction and other required state jurisdictions. The Company's periodic tax returns filed in 2016 and, thereafter, are subject to examination by taxing authorities under the normal statutes of limitations in the applicable jurisdictions.
Note 9 – Capital Transactions
Sale of Common Stock and Warrants
Debt Conversions
During the year ended March 31, 2019, the Company received notice from convertible note holders of the conversion of a total of $4,470,000 in face value and $170,971 in accrued interest on the related convertible notes.
58
Accordingly, the Company has issued 18,563,885 shares of its common stock based on a $0.25 per share conversion price. In connection with the conversions, $3,464,187 in unamortized discount on the related notes was recognized as interest expense and the Company has reduced the carrying amount of convertible notes payable by $1,005,813.
Exercise of Warrants for Stock
During the year ended March 31, 2019, the Company issued 12,657,875 shares of its common stock for the exercise of warrants as follows:
In order to encourage the exercise of the 8,000,000 warrants issued to investors in the private offering of convertible notes dated March 2017 and the 28,804,000 warrants issued to investors in the private offering of convertible notes dated July 2017, the Company effected a temporary decrease in the exercise price of the warrants from $0.60 and $0.65, respectively, to $0.30 and $0.325 per share. As a result of the price reduction, the Company issued 12,332,750 shares of its common stock and received net proceeds of approximately $3.9 million. In connection with the induced exercise of the warrants, the Company recorded an inducement dividend of approximately $2.9 million.
The Company issued 325,125 shares of its common stock in connection with the exercise of compensation warrants at $0.01 per share.
Issuance of Stock for Services
The Company issued 4,032,407 shares in exchange for past and future consulting services and recorded a related expense of $0.9 million and prepaid expense of $0.3 million. The shares and services were valued at the closing price of the Company’s common stock on the dates granted under the related consulting agreements.
Issuance of Stock for Cash
During the year ended March 31, 2019, the Company issued 277,778 shares of its common stock to an investor for the cash purchase of shares at $0.36 per share.
Stock Issued in Private Placement
The Company issued 35,878,302 shares of its common stock in private placements:
On August 10, 2018, the Company entered into a Placement Agent’s Agreement to offer a total of 10,000,000 units at the price of $0.25 per unit. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at the price of $0.60 for a period of three years. On August 23, 2018, the Placement Agent’s Agreement was amended to increase the number of units offered by 10,000,000 to 20,000,000 in total, with no other changes to the agreement. Between August 10, 2018 and September 25, 2018, the Company received a total of $4.4 million in proceeds from the private placement, net of $0.6 million in brokerage fees and issued 20 million shares of its common stock and 20 million warrants to purchase one share of its common stock for a period of three years to the investors who participated in the private placement.
On December 4, 2018, the Company entered into a Placement Agent’s Agreement to offer a total of 15,000,000 units at the price of $0.20 per unit up to a total of $3 million. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at the price of $0.60 for a period of five years. On January 15, 2019, the Placement Agent’s Agreement was amended to decrease the unit price from $0.20 per unit to $0.15 per unit for a total of 20,000,000 units and decrease the exercise price of the warrants included in each unit from $0.60 to $0.30, applied retroactively to funds raised prior to the date of the amendment, with no other changes to the agreement. Between December 4, 2018 and March 31, 2019, the Company received a total of $2,072,125 in proceeds from the
59
private placement, net of $309,620 in brokerage fees and issued 15,878,302 shares of its common stock and 15,878,302 warrants to purchase one share of its common stock at $0.30 per share.
Issuance of Stock to Settle Pacific Leaf Royalty Agreement
In connection with the Pacific Leaf Amendment and Termination Agreement, the Company issued 600,000 shares of its common stock and recorded $131,000 in other expense related to those shares.
Options and Warrants
On December 1, 2018, the Company entered into an agreement with EMLL Group, LLC for business advisory and consulting services. In consideration for the services, the Company issued warrants to purchase 8 million shares of the Company’s common stock at $0.1125 per share. The Company valued the warrants at $969,197 using the Black-Scholes valuation model. All services owed to the Company under the agreement were provided as of March 31, 2019, and the company recorded $969,197 in expense related to the warrants in its Consolidated Statement of Operations for the year ended March 31, 2019.
On December 6, 2018, the Company entered into an agreement with SylvaCap Media for business advisory and consulting services. In consideration for the services, the Company issued warrants to purchase 2 million shares of the Company’s common stock at $0.1125 per share. The Company valued the warrants at $244,000 using the Black-Scholes valuation model. The fair value of the warrants will be recognized as consulting expense over the twelve-month term of the agreement. The company recorded $81,333 in expense related to the warrants in its Consolidated Statement of Operations for the year ended March 31, 2019.
In connection with the agreement with SylvaCap Media, the Company also agreed to pay a $10,000 monthly fee for 12 months and to issue 4 million restricted shares of the Company’s common stock, of which 2 million shares were due on the date of the contract and have been issued to the consultant. On June 6, 2019, the Company entered into a Cancellation and Settlement with SylvaCap Media and terminated the December 6, 2018 agreement. In consideration for termination of the agreement, the Company will pay $135,000 as a one-time cancellation fee and will not issue the remaining 2 million shares due under the agreement.
In connection with the Placement Agent’s Agreement dated August 10, 2018 and as amended August 23, 2018, the Company issued 2,000,000 compensation warrants to the brokers who participated in the offering and recorded a related expense of $0.6 million. Each compensation warrant is for the purchase of one share of the Company’s common stock at a price of $0.60 per share and expires on October 1, 2023.
During the year ended March 31, 2019, the Company issued 400,000 stock options under the 2014 Equity Incentive Plan to its employees. The options are exercisable upon vesting for a period of 10 years from issuance at an exercise price ranging from $0.37 to $0.60 per share. The Company has recognized total of $0.8 million in share-based compensation expense related to all outstanding options during the year ended March 31, 2019.
Warrants Outstanding
Presented below is a summary of the Company’s warrant activity for the years ended March 31, 2019 and 2018:
60
|
Warrants Outstanding
|
|
Number of Shares
|
|
Exercise Price
|
|
|
|
|
Outstanding at March 31, 2017
|
32,932,413
|
|
|
Warrants issued
|
51,284,000
|
|
$
0.60-$1.00
|
Warrants exercised
|
(9,838,375)
|
|
$
0.01-$0.20
|
Warrants expired/cancelled
|
(8,494,976)
|
|
$
1.00
|
Outstanding at March 31, 2018
|
65,883,062
|
|
|
Warrants issued
|
47,878,302
|
|
$
0.30-$0.60
|
Warrants exercised
|
(12,657,875)
|
|
$
0.30-$0.325
|
Warrants expired/cancelled
|
(1,312,500)
|
|
$
0.50-$2.00
|
Outstanding at March 31, 2019
|
99,790,989
|
|
|
Note 10 – Employee Benefit Plan
Share-Based Employee Compensation
On February 6, 2008, the Board of Directors adopted the GB Sciences, Inc. 2007 Amended Stock Option Plan (“2007 Plan”). Under the 2007 Plan, 8,000,000 shares of the Company’s restricted common stock may be issuable upon the exercise of options issued to employees, advisors and consultants. The Company revised the plan and the Board of Directors adopted the new 2014 Equity Compensation Plan. On June 30, 2015, GB Sciences filed a Form S-8 Registration Statement with the SEC to register 8,500,000 shares of common stock issuable under stock options to grant to employees and consultants. At the Company’s special meeting of the shareholders held on April 6, 2018, the adoption by the Board of Directors of the 2014 Equity Compensation Plan was ratified by a majority of shareholders present at the meeting, either in person or by proxy.
Compensation Expense
For the years ended March 31, 2019 and 2018, the Company recorded compensation expense of $0.8 million and $1.8 mi
llion respectively, related to employee stock options and restricted stock.
The unrecognized compensation cost, and weighted-average period over which the cost is expected to be recognized for non-vested awards as of March 31, 2019, are presented below:
|
Unrecognized Compensation Cost ($)
|
|
Weighted Average Period (years)
|
Stock Options
|
$193,559
|
|
0.40
|
Total
|
$193,559
|
|
0.40
|
61
Fair Value
The closing price of the Company's stock on the date of grant is used as the fair value for the issuances of restricted stock. The fair value of stock options granted is estimated as of the grant date using the Black-Scholes option pricing model.
The following range of assumptions in the Black-Scholes option pricing model was used to determine fair value at the years ended below:
|
Twelve months ended
|
|
March 31, 2019
|
|
March 31, 2018
|
Weighted-average volatility
|
181.00%
|
|
183.55%
|
Expected term (in years)
|
10
|
|
10
|
Risk-free interest rate
|
2.74%
|
|
2.02%
|
Expected volatilities used for award valuation in 2019 and 2018 are based on the peer group volatility.
The risk-free interest rate for periods equal to the expected term of an award is based on a blended historical rate using Federal Reserve
rates for U.S. Treasury securities.
Stock
Options
A summary of option activity as of March 31, 2019 and 2018, and changes during the years then ended, is presented below:
|
Options
|
Weighted Average Exercise Price $
|
Weighted Average Remaining Contractual Life (years)
|
Aggregate Intrinsic Value ($)
|
Outstanding at April 1, 2017
|
6,950,000
|
$
0.26
|
8.05
|
$
627,890
|
Granted
|
6,400,000
|
$
0.28
|
|
|
Exercised
|
(83,333)
|
$
0.32
|
|
|
Forfeited
|
(233,333)
|
$
0.28
|
|
|
Outstanding at March 31, 2018
|
13,033,334
|
$
0.28
|
8.21
|
$
2,646,723
|
Granted
|
400,000
|
$
0.41
|
|
|
Exercised
|
-
|
$
-
|
|
|
Forfeited
|
(850,000)
|
$
0.24
|
|
|
OutstandingatMarch31,2019
|
12,583,334
|
$
0.28
|
7.18
|
$
43,000
|
FullyvestedandexpectedtovestatMarch31,2019
|
10,500,006
|
$
0.28
|
|
$
43,000
|
ExercisableatMarch31,2019
|
10,500,006
|
$
0.28
|
|
$
43,000
|
|
|
|
|
|
Restricted stock awards
No restricted stock awards were granted or outstanding during the years ended March 31, 2019 and 2018.
62
Note 11 – Commitments and Contingencies
On September 18, 2017 GB Sciences finalized its agreement with Louisiana State University (“LSU”) AgCenter to be the sole operator of the LSU’s medical marijuana program. The LSU Board of Supervisors entered into a five-year agreement—that has an option to renew for two additional five-year terms—with GB Sciences.
The contract includes the Company’s commitment to make a minimum financial contribution to the LSU AgCenter in the amount of $3.4 million, or a 10% commission of gross receipts, in addition to annual research investments of $500,000 to the LSU AgCenter.
The monetary contributions would be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, which AgCenter would retain 50% of those rights. As of March 31, 2019, GB Sciences has made payments totaling $1,500,000 toward its obligations under the agreement.
From time to time, the Company may become involved in certain legal proceedings and claims which arise in the ordinary course of business. In management’s opinion, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, the Company would record a reserve for the claim in question. If and when the Company records such a reserve, it could be material and could adversely impact its results of operations, financial condition, and cash flows.
Note 12 – Deposits and Prepayments
Deposits and prepayments were $1.2 million and $1.5 million at March 31, 2019 and March 31, 2018, respectively. The decrease in deposits and prepayments is primarily due to a $0.3 million escrow deposit related to our Letter of Intent regarding potential acquisition of 100% interest in NevadaPURE, LLC (“NVPURE LOI”) entered into on March 22, 2018. On May 9, 2019, the NVPURE LOI was terminated and the Company received a refund of its $0.3 million deposit.
Note 13 - Related Party Transactions
During the fiscal year ended March 31, 2017, the Company entered into a consulting contract with Quantum Shop, a Company owned by a relative of one of the Company’s executives. Per the terms of the agreement, Quantum Shop is to provide GB Sciences with research, design, development, fabrication, and production services. During the years ended March 31, 2019, and March 31, 2018, the Company made payments totaling $1.1 million and $1.3 million, respectively, to Quantum Shop primarily related to the build-out of the Company’s cultivation and production facility in Baton Rouge, Louisiana.
During the year ended March 31, 2017, the Company entered into an advisory agreement with Electrum Partners, LLC, (“Electrum Partners”) a company whose President resides on GB Sciences’ Board of Directors and serves as a Chair of the Audit Committee. Per the terms of the agreement, Electrum Partners shall be compensated $5,000 monthly with the initial payment due upon the execution of the consulting agreement. Electrum Partners is also to receive an additional $10,000 each month in restricted stock. The agreement has a term of one year and is renewable for a successive one-year period. The agreement was renewed for its second one-year period in March 2018.
During the year ended March 31, 2018, the Company made payments totaling $75,562 to Electrum Partners and issued 499,102 shares of its restricted stock.
During the year ended March 31, 2019, the Company made payments totaling $153,329 to Electrum Partners, LLC and issued 432,407 shares of its restricted stock at an expense of $122,363. On January 29, 2019, the Company provided Electrum Partners with notice of the agreement’s termination effective February 28, 2019.
63
On November 1, 2017, the Company entered into an Edibles Production Agreement (the “EPA”) with The Happy Confections, L.L.C. (“THCLLC”) through the Company’s wholly-owned subsidiary, GB Sciences Las Vegas, LLC (“GBSLV”). Dr. Andrea Small-Howard, a member of GB Science’s Board of Directors, is a Co-Managing Member of THCLLC. Under the EPA, THCLLC was to produce cannabis-infused baked goods and other edibles in GBSLV’s production facility upon approval of GBSLV’s Nevada Medical Marijuana Production License. The Company would receive a royalty of between 20% and 25% on all sales of edibles produced by THCLLC.
Contemporaneously with the EPA, the Company entered into a Non-Revolving Credit Line Agreement and Non-Revolving Credit Line Promissory Note (together, the “THC Note” or “Note”) to advance up to $300,000 to THCLLC for the purpose of expanding THCLLC’s operations. The Note bears interest at a rate of 1.29% per annum. Beginning 90 days after the sale of its first product, THCLLC was to make repayment of its advances under the Note in an amount equal to 25% of its gross sales revenue. Such repayment was due within 10 days of the sale of any product.
As of March 31, 2019, the Company advanced $253,034 under the THC Note. On October 15, 2018, the Company gave notice to THC LLC that Company would not provide any additional financing beyond the $300,000 Credit Line granted under the Non-Revolving Credit Line Agreement dated November 1, 2017. In this notice, the Company requested that THC LLC seek to find additional sources of financing to be able to fund the manufacture of edibles. The Company further notified THC LLC that the Company would terminate the Edibles Production Agreement and all other related agreements with THC LLC if it was unable to acquire additional funding by October 22, 2018. On October 19, 2018, the Company received a response from THC LLC that it was unable to acquire additional funding. Accordingly, the Company has terminated all of its agreements with THC LLC effective October 19, 2018 and has taken possession of all tangible assets owned by THC LLC on October 22, 2018, as collateral for the balance owed under the Note. These assets include kitchen and production machinery and equipment, leasehold improvements, and inventory that will be used in the Company’s production operations at the Teco Facility.
The Company assessed the Fair Value of the machinery and equipment received at $139,411 and has capitalized that amount in fixed assets during the year ended March 31, 2019. All of the machinery and equipment received from THC LLC was placed in service for use in the Company’s production facility during December 2018. The Company also recorded $113,623 as other expense in its Consolidated Statement of Operations for the year ended March 31, 2019, which represents the remaining balance of the outstanding note receivable from THC LLC.
Note 14 – Concentrations
For the year ended March 31, 2019, there were two customers that accounted for 10.1% each of total revenue. Two customers accounted for 21.4% and 11.1% of total accounts receivable.
Note 15 – Subsequent Events
Capital Transactions
On June 5, 2019, the Company entered into an amendment to the December 4, 2018 Placement Agent’s Agreement. The amendment extends the offering period to July 31, 2019 and increases the maximum offering to $3.5 million from $3 million. All other terms of the December 4, 2018 Placement Agent’s Agreement remained the same. Subsequent to March 31, 2019, the Company received an additional $621,754 in proceeds from investors in the private placement, net of brokerage fees, and issued 3,668,167 shares of its common stock and 3,668,167 warrants to purchase one share of common stock at $0.30 for a period of five years.
In order to encourage the exercise of 70.5 million warrants issued to investors in private placements of convertible notes and common stock having exercise prices ranging between $0.65 and $0.30, the Company effected a temporary decrease in the exercise price of the warrants to $0.10 per share until July 11, 2019. As a result of the price reduction, the Company has received notice of the exercise of 1,957,500 warrants and received proceeds of $195,750.
64
On July 12, 2019, The Company entered into an amendment to the 8% Senior Secured Convertible Promissory Note payable to CSW Ventures, L.P. The amendment increases the balance owed under the note by $141,863 to reflect an additional $100,000 loan made to the Company and $41,863 of interest accrued on the note through July 12, 2019, which was added to the principal balance of the note.
Convertible Promissory Note Payable to Iliad Research and Trading, L.P.
On April 23, 2019, the Company entered into the Note Purchase Agreement with Iliad Research and Trading, L.P. and issued an 8% Convertible Promissory Note with a face value of $2,765,000. The Note was issued with an original issue discount of $265,000 and is convertible into shares of the Company’s common stock at a price of $0.17 per share at the option of the note holder at any time until the Note is repaid. The Note matures on April 22, 2020.
Cancellation of Agreement with SylvaCap Media
On June 6, 2019, the Company entered into a Cancellation and Settlement with SylvaCap Media and terminated the December 6, 2018 agreement. In consideration for termination of the agreement, the Company will pay $135,000 as a one-time cancellation fee and will not issue the remaining 2 million shares due under the agreement.
Note 16 – Non-Controlling Interest
On February 12, 2018, the Company entered into the Operating Agreement for its wholly-owned subsidiary, GB Sciences Louisiana, LLC (“GBSLA"). Pursuant to the Operating Agreement, Wellcana Group, LLC (“Wellcana”) purchased 15% of the membership interest in GBSLA for the price of $3 million. Under the operating agreement, Wellcana has the option to make additional capital contributions for the purchase of up to an additional 35% membership interest in GBSLA, at the rate of 5% membership interest per $1 million contributed.
During the year ended March 31, 2019, Wellcana made additional cash contributions of $7.0 million and its non-controlling interest in GBSLA increased to 49.99%. The capital contributions have been used to fund the buildout of the Petroleum Drive facility and to pay for the operating costs of GBSLA.
The Company maintains a majority interest in GBSLA and continues to exercise control over the management and operations of GBSLA. Accordingly, the Company has consolidated GBSLA in its consolidated financial statements for the year ended March 31, 2019.
Note 17 – Formation of GBS Global Biopharma, Inc.
On September 21, 2018, the Company formed a wholly-owned subsidiary, GBS Global Biopharma, Inc., in the province of Ontario, Canada with plans to license and/or transfer some of Growblox Life Sciences LLC’s intellectual property to the newly formed entity. On March 15, 2019, the Company entered into the Asset Purchase Agreement with GBS Global Biopharma, Inc., whereby all of the assets and certain liabilities held by Growblox Life Sciences, LLC, a wholly-owned subsidiary of GB Sciences, Inc., were transferred to GBS Global Biopharma, Inc. in exchange for a promissory note in the amount of $1,435,700. It is anticipated that GBS Global Biopharma Inc. will pursue clinical development of the intellectual property, including clinical trials.
The assets transferred include all intellectual property and intangible assets owned by the Company, consisting primarily of patents in process and research contracts with universities and researchers. GBS Global Biopharma, Inc. also assumed $475,586 of liabilities associated with the development of the transferred intellectual property. With the assistance of a third-party valuation specialist, The Company valued the assets transferred, net of liabilities assumed, at $1,435,700.
Because the transaction consisted of an intercompany transfer of assets between wholly owned subsidiaries of GB Sciences, Inc., the promissory note and any gain or loss resulting from the Asset Purchase Agreement have been eliminated from the Company’s Consolidated Financial Statements for the year ended March 31, 2019.
65
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The names of the executive officers and directors of GB Sciences, their ages as of July 15, 2019, and the positions currently held by each are as follows:
Name
|
|
Age
|
|
Position
|
John Poss
|
|
71
|
|
Chief Executive Officer and Chairman of the Board of Directors
|
Dr. Andrea Small-Howard
|
|
50
|
|
Chief Science Officer and Director
|
Ksenia Griswold
|
|
36
|
|
Chief Financial Officer and Chief Operations Officer
|
Leslie Bocskor
|
|
54
|
|
Chairman of the Audit and Compensation Committees and Vice Chairman of the Board of Directors
|
Shane Terry
|
|
40
|
|
Member of the Audit and Compensation Committees and Director
|
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 and Chairman of the Board
Effective April 29, 2016, The Board of Directors elected John Poss to serve as Chief Executive Officer. Mr. Poss served as the CFO of the Company beginning in August 2015, and its COO since December 31, 2015. He resigned his position as CFO on August 4, 2016 and his position as COO on November 10, 2017.
Effective May 8, 2017, following the retirement of Craig Ellins, our Chief Innovation Officer and Chairman of the Board, Mr. Poss, replaced Mr. Ellins as Chairman of the Board.
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 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.
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
68
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.
Ksenia Griswold, Vice President, Chief Financial Officer and Chief Operations Officer
Ms. Griswold has been serving as the controller of the Company since November 2015 and was appointed Chief Financial Officer on August 4, 2016. For the five years prior to November 2015, beginning in October 2010, she worked in the Las Vegas, Nevada office of Ernst & Young, LLP. At the time of her departure from Ernst & Young, she was audit manager.
Leslie Bocskor, Vice Chairman of the Board and Chairman of the Audit and Compensation Committees
Effective May 8, 2017, Mr. Bocskor was appointed as Vice Chairman of the Board.
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
69
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 and Member of Audit and Compensation Committees
Mr. Terry is an independent consultant providing 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:
|
1)
|
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;
|
|
2)
|
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
3)
|
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
|
|
4)
|
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.
|
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 governing OTC Market. 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.
70
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 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 GB 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 GB 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 Science Officer, Chief Financial Officer, and Chief Operating Officer for all services rendered to us in all capacities during each of the years ended March 31, 2019 and 2018.
71
Summary Compensation Table
Name and Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock Awards (1)
|
|
Option Awards (2)
|
|
Total
|
John Poss, CEO and Chairman of the Board
|
|
2019
|
|
$
120,000
|
|
$
137,375
|
|
$
-
|
|
$
-
|
|
$
257,375
|
|
|
2018
|
|
120,000
|
|
221,028
|
|
-
|
|
351,217
|
|
692,245
|
Dr. Andrea Small-Howard, CSO and Director
|
|
2019
|
|
160,000
|
|
-
|
|
-
|
|
-
|
|
160,000
|
|
|
2018
|
|
125,385
|
|
10,000
|
|
-
|
|
117,072
|
|
252,457
|
Ksenia Griswold, CFO and COO
|
|
2019
|
|
206,154
|
|
30,000
|
|
-
|
|
-
|
|
236,154
|
|
|
2018
|
|
156,154
|
|
70,000
|
|
-
|
|
105,365
|
|
331,519
|
(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.
Employment Agreements
John Poss, Chief Executive Officer and Chairman of the Board of Directors
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
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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 the Company’s 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.
Effective May 8, 2017, following the retirement of Craig Ellins, our Chief Innovation Officer and Chairman of the Board, Mr. Poss, replaced Mr. Ellins as Chairman of the Board.
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 the Company. 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.
Ksenia Griswold, Chief Financial Officer
On August 5, 2016, the Company's Board of Directors accepted the resignation of John Poss as Chief Financial Officer of the Company and appointed Ksenia Griswold as the Company's Vice President and Chief Financial Officer. Pursuant to the appointment of Ms. Griswold
as the Company's Vice President and Chief Financial Officer, the Company entered into an Amended and Restated Employment Agreement, effective October 7, 2016. The agreement will end on November 1, 2017, which end date can be extended upon the mutual agreement of the parties. Under the agreement Ms. Griswold will receive an annual salary of not less than $110,000 and options to acquire 350,000 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.
Effective April 24, 2017, the Company amended its employment agreement with Ms. Griswold. Pursuant to the amendment, Ms. Griswold will receive a base salary at the annual rate no less than $160,000 and a quarterly bonus equivalent to $15,000.
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.
Effective May 8, 2017, Mr. Bocskor was appointed as Vice Chairman of the Board.
Effective on December 1, 2017, the Company amended Mr. Bocskor’s compensation. Pursuant to the amendment, Ms. Bocskor will receive $75,000 annually with an additional $1,000 for each meeting attended. Mr. Bocskor also
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received additional options to purchase 450,000 shares of stock which vest over 24 months. The strike price of the options is $0.24 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 $0.16 per share, the market value of the Company's common stock on the date the Mr. Terry was elected to the Board.
Outstanding Equity Awards
The following table summarizes the number of shares underlying outstanding equity incentive plan awards for each named executive officer as of March 31, 2019:
Name
|
|
Number of shares underlying exercisable options/warrants (2)
|
|
Number of shares underlying unexercisable options/warrants
|
|
Option exercise price ($)
|
|
Option expiration date
|
|
Market value of shares not vested ($) (1)
|
Andrea Small-Howard
|
|
500,000
|
|
-
|
|
$
0.17
|
|
3/27/2025
|
|
$
-
|
|
|
1,200,000
|
(3)
|
-
|
|
0.30
|
|
6/1/2026
|
|
-
|
|
|
333,334
|
|
166,666
|
|
0.24
|
|
11/26/2027
|
|
31,667
|
John Poss
|
|
600,000
|
|
-
|
|
0.30
|
|
8/10/2025
|
|
-
|
|
|
1,400,000
|
|
-
|
|
0.30
|
|
6/1/2023
|
|
-
|
|
|
1,000,000
|
|
500,000
|
|
0.24
|
|
11/26/2027
|
|
95,000
|
Ksenia Griswold
|
|
100,000
|
|
-
|
|
0.29
|
|
11/4/2025
|
|
-
|
|
|
-
|
|
100,000
|
|
0.30
|
|
6/1/2023
|
|
19,000
|
|
|
350,000
|
|
-
|
|
0.32
|
|
10/7/2026
|
|
-
|
|
|
300,000
|
|
150,000
|
|
0.24
|
|
11/26/2027
|
|
28,500
|
Leslie Bocskor
|
|
450,000
|
|
-
|
|
0.16
|
|
6/1/2023
|
|
-
|
|
|
300,000
|
|
150,000
|
|
0.24
|
|
11/26/2027
|
|
28,500
|
Shane Terry
|
|
450,000
|
|
-
|
|
0.16
|
|
6/1/2023
|
|
-
|
(1) Based on our closing stock price of $0.19 on March 31, 2019.
(2) These options were vested at March 31, 2019.
(3) Represents a warrant to purchase 1,200,000 shares of common stock at an exercise price of $0.30 per share.
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 compensation fee annually with an additional $1,000 for each meeting attended. The compensation is payable in cash or stock at the election of the Company.
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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 19, 2019, 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 246,252,769 shares of common stock outstanding as of July 15, 2019. 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)
|
|
No. of Shares Owned
|
|
Percentage of Total Shares Owned
|
Officers and Directors
|
|
|
|
|
John Poss
|
|
3,022,500
|
(2)
|
1.23%
|
Dr. Andrea Small-Howard
|
|
2,109,750
|
(3)
|
*(11)
|
Ksenia Griswold
|
|
767,361
|
(4)
|
*(11)
|
Leslie Bocskor
|
|
731,250
|
(5)
|
*(11)
|
Shane Terry
|
|
450,000
|
(6)
|
*(11)
|
Directors and officers as a group (five) persons
|
|
7,080,861
|
|
2.88%
|
5% Holders:
|
|
|
|
|
Lawrence D. Ordower
|
|
20,501,560
|
(7)
|
8.33%
|
Dave Ruggieri
|
|
16,001,500
|
(8)
|
6.50%
|
Robert Moody, Jr.
|
|
20,005,000
|
(9)
|
8.12%
|
Edward Pershing
|
|
13,010,961
|
(10)
|
5.28%
|
(1) Unless otherwise noted, the address of each person listed is GB Sciences, Inc. 3550 W. Teco Avenue, Las Vegas, NV 89118.
(2) Includes (a) 125,000 shares of common stock currently owned of record by Mr. Poss, (b) options to purchase 1,960,000 shares of common stock at $0.30 per share exercisable as of the Record Date or within 60 days thereafter, and (c) options to purchase 937,500 shares of common stock at $0.24 per share exercisable as of the Record Date or within 60 days thereafter.
(3) Includes (a) 116,000 shares of common stock currently owned of record by Dr. Small-Howard, (b) options to purchase 481,250 shares of common stock at $0.17 per share exercisable as of the Record Date or within 60 days thereafter, (c) 1,200,000 additional shares of common stock issuable upon exercise of stock warrant at an exercise price of $0.30 per share, and (d) 312,500 shares of common stock issuable upon exercise of stock options at an exercise price of $0.24 per share exercisable as of the Record Date or within 60 days thereafter.
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(4) Includes (a) 25,000 shares of common stock currently owned of record by Ms. Griswold, (b) options to purchase 83,333 shares of common stock at $0.29 per share exercisable as of the Record Date or within 60 days thereafter, (c) options to purchase 66,667 shares of common stock at $0.30 per share exercisable as of the Record Date or within 60 days thereafter, (d) options to purchase 311,111 shares of common stock at $0.32 per share exercisable as of the Record Date or within 60 days thereafter, and (e) options to purchase 281,250 shares of common stock at $0.24 per share exercisable as of the Record Date or within 60 days thereafter.
(5) Includes 450,000 options to purchase shares of common stock at $0.16 per share exercisable as of the Record Date or within 60 days thereafter and options to purchase 281,250 shares of common at $0.24 per share exercisable as of the Record Date or within 60 days thereafter.
(6) Includes 450,000 options to purchase shares of common stock at $0.16 per share exercisable as of the Record Date or within 60 days thereafter.
(7) Address is Lawrence B. Ordower, 25 East Washington Street, Suite 1400, Chicago, IL 60602. Of the total amount of 20,501,560, 6,858,000 of the shares may be acquired by Mr. Ordower upon the exercise of warrants, 3,570,000 are common shares held by Mr. Ordower, 2,375,560 are common shares held by ELGJO LLC, a limited liability company controlled by Mr. Ordower, 1,662,000 of the shares may be acquired by ELGJO LLC upon the exercise of warrants, 1,818,000 are common shares held by a trust over which Mr. Ordower has depository control, and 4,218,000 are common shares that may be acquired by a trust over which Mr. Ordower has depository control upon the exercise of warrants.
(8) Address is David Ruggieri 1107 West Marion Ave, Unit 116, Punta Gorda, FL 33950. The total consists of 5,576,000 common shares held by Mr. Ruggieri and 5,847,500 shares of common stock issuable upon exercise of warrants and conversion of Notes, and 10,425,500 that may be acquired by Mr. Ruggieri upon the conversion of notes.
(9) Address is Robert Moody Jr, 2302 Post Office Street, Suite 601, Galveston, TX 77550. The total consists of 7,762,500 common shares held by Mr. Moody, 8,002,500 shares that may be acquired upon the exercise of warrants, and 4,240,000 may be acquired upon the conversion of notes.
(10) Address is Edward Pershing, 2220 Southerland Ave, Knoxville, TN 37919. The total consists of 5,250,661 common shares held by Mr. Pershing and 7,760,300 shares that may be acquired upon the exercise of warrants.
(11) Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
At March 31, 2019, the Company had two independent directors serving on the Board of Directors. The definition the Company uses to determine whether a director is independent are the rules governing OTC market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
|
Fiscal 2019
|
|
Fiscal 2018
|
Audit Fees
(1)
|
|
$
70,617
|
|
$
42,483
|
Audit-Related Fees
(2)
|
|
-
|
|
-
|
Tax Fees
(3)
|
|
46,710
|
|
10,350
|
Subtotal
|
|
$
117,327
|
|
$
52,833
|
All other Fees
(4)
|
|
-
|
|
-
|
Total
|
|
$
117,327
|
|
$
52,833
|
(1) Audit Fees – Audit fees billed to the Company in FY 2019 and 2018 include fees billed by Soles, Heyn & Company, LLP for auditing the Company's annual financial statements and reviewing the financial statements included in the Company's Quarterly Reports on Form 10-Q.
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(2) Audit-Related Fees – There were no other fees billed by Soles, Heyn & Company, LLP 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 and Milleret & Biordi, CPAs PLLC during the past fiscal year for professional services.
(4) All Other Fees – There were no other fees billed in FY 2019 and 2018 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.