The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
Note 1 - Background and Basis of Presentation
Background
GB Sciences, Inc. (“the Company”, “GB Sciences”, “we”, “us”, or “our”) seeks to be a biopharmaceutical research and cannabinoid-based drug development company whose goal is to create patented formulations for safe, standardized, cannabinoid therapies that target a variety of medical conditions in both the pharmaceutical and wellness markets. The Company is is engaged in the research and development of cannabinoid medicines and plans to produce cannabinoid therapies for the wellness markets based on its portfolio of intellectual property.
Through its wholly owned Canadian subsidiary, GBS Global Biopharma, Inc. (“GBSGB”), the Company is engaged in the research and development of cannabinoid medicines with virtual operations in North America and Europe. GBSGB assets include cannabinoid medicine intellectual property, research contracts and key supplier arrangements. GBSGB’s intellectual property covers a range of conditions and several programs are in pre-clinical animal stage of development; including Parkinson’s disease, neuropathic pain, and cardiovascular therapeutic programs. GBSGB runs a lean drug development program and takes effort to minimize expenses, including personnel, overhead, and fixed capital expenses through strategic partnerships with Universities and Contract Research Organizations (“CROs”). GBSGB’s intellectual property portfolio includes two issued USPTO Patents, five USPTO patent applications, four provisional USPTO patent applications, and one USPTO application that we anticipate filing by the end of calendar year 2020, as well as licenses for three additional patents covering novel cannabinoid delivery systems. In addition to the USPTO patents and patent applications, the company has filed 28 patent applications internationally.
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 Articles of Incorporation 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. Effective August 15, 2019, Shareholders of the Company approved an additional increase in authorized capital shares from 400,000,000 to 600,000,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Developments
On April 7th, 2020, GB Sciences received a Notice of Allowance from the United States Patent and Trademark Office (USPTO) for claims protecting Cannabinoid Containing Complex Mixtures ("CCCMs") for the Treatment of Parkinson’s disease (PD), which is owned by the Company’s Canadian entity, GBS Global Biopharma, Inc. (GBS). The Notice of Allowance is a significant milestone in the process of patenting intellectual property in that it is the final step before the patent is issued. It signifies that the claims from the patent application have been reviewed successfully and that these claims are considered meritorious. On May 19, 2020, the patent was issued as United States Patent 10,653,640.
On May 12th, 2020, GB Sciences received a Notice of Allowance from the United States Patent and Trademark Office (USPTO) for claims protecting Myrcene Containing Complex Mixtures ("MCCMs") for the Treatment of Neuropathic Pain. Intellectual property rights to this application and the MCCM contained within it are owned by the Company’s Canadian entity, GBS Global Biopharma, Inc. (GBS). The Company's MCCMs are protected for use in the treatment of pain related to arthritis, shingles, irritable bowel syndrome, sickle cell disease, and endometriosis. The patent was issued on July 14, 2020 as United States Patent 10,709,670.
On November 15, 2019, the Company entered into the Membership Interest Purchase Agreement ("MIPA") with the noncontrolling interest in GB Sciences Louisiana, LLC ("GBSLA"). In consideration for the sale of its 50.01% membership interest in GBSLA, the Company received the $8,000,000 Promissory Note ("Wellcana Note") and may receive up to an additional $8,000,000 in earn-out payments. On August 24, 2020, the Company entered into a letter of intent with the purchaser to discount the note receivable in exchange for accelerated payment. Pursuant to the letter of intent, the Company will receive payments totaling $5,224,423, including the forgiveness by purchaser of $324,423 in liabilities and the payment of $4,900,000 in cash, on or before October 15, 2020, less any cash payments made by the purchaser up to the date of the final payment. Upon receipt of the payment, all liabilities owed to the Company by the purchaser, including the $8,000,000 note receivable and any potential earn-out payments will be considered satisfied in full.
On November 15, 2019, we entered into a Binding Letter of Intent (the "LOI") to sell 75% of the Company's membership interest interests in GBSN and GBLV (together, the "Teco Subsidiaries") for $3.0 million cash upon close and up to an additional $3.0 million in earn-out payments after close. In connection with the LOI, we entered into a Management Agreement with the purchaser whereby the facilities will be managed by an affiliate of the purchaser until the close of the sale. On March 24, 2020, we entered into the Membership Interest Purchase Agreement ("Teco MIPA") which formalized the sale of the Teco Subsidiaries and modified the terms of the sale. Pursuant to the Teco MIPA, the Company will sell 100% of its membership interests in GBSN and GBLV for $4.0 million cash upon close and will receive a $4.0 million 8% promissory note to be paid in monthly installments over 36 months (see Note 16).
The Company also holds a Nevada license for cultivation of medical marijuana located in Sandy Valley, Nevada (the “Nopah License”). The license is owned by the Company’s wholly owned subsidiary, GB Sciences Nopah, LLC ("Nopah"). Operations have not begun under the Nopah License. On November 27, 2019, the Company entered into a Binding Letter of Intent to sell its 100% interest in GB Sciences Nopah, LLC (the “Nopah LOI”), with the transaction closing upon transfer of the Nopah License. As consideration for the transfer of the license, the Company will receive $300,000 and the purchaser will pay all expenses related to the upkeep and maintenence of the Nopah License. The transfer of the Nopah License is subject to the same restrictions on license transfers currently in effect in the State of Nevada (see Note 16).
The sales are expected to close upon the successful transfer of the Nevada cultivation and production licenses. The transfer of cannabis licenses in the State of Nevada has been subject to an indefinite moratorium since October 2019. In a meeting held on July 21, 2020, the Nevada Cannabis Compliance Board lifted the moratorium, however, the board has indicated that there are over 90 requests pending and it will take up to several months to process the entire backlog of pending license transfers. Based on this information, we cannot provide any assurances as to the timing of the close of the sale. The lifting of the moratorium and processing of cannabis license transfers have been delayed by the COVID-19 pandemic and could be further delayed if the pandemic continues.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intellectual Property
Our intellectual property portfolio includes:
Two USPTO Patents Issued/Allowed for Cannabinoid- and Myrcene-Containing Complex Mixtures
Title: CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF NEURODEGENERATIVE DISEASES
U.S. Patent Number 10,653,640; Inventors: Andrea Small-Howard et al.
Issued: May 19, 2020; Expiration: October 23, 2038
Patent protection was granted for GBSGB’s Cannabinoid-Containing Complex Mixtures for the treatment of Parkinson’s disease.
Title: MYRCENE-CONTAINING COMPLEX MIXTURES TARGETING TRPV1
U.S. Patent Number 10,709,670; Inventors: Andrea Small-Howard, et al.
Issued: July 14, 2020; Expiration: May 22, 2038
Five USPTO & Twenty-Three International Patent Applications Pending
Title: CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF NEURODEGENERATIVE DISEASES
U.S. Patent Application No. 15/729,565; WIPO Application number: PCT/US2017/055989
Filed: October 10, 2017; Inventors: Andrea Small-Howard et al.
National stage applications entered in AU, CA, CN, EP, HK, IL, and JP on October 10, 2017.
On April 3, 2020, GBSGB Received a Notice of Allowance on our Cannabinoid-Containing Complex Mixtures for Parkinson’s Disease. On the same day as we paid the fee for the allowed patent claims, we filed a Continuation for Review of the non-Parkinson’s formulas within this application, which includes Alzheimer’s disease, Huntington’s disease, Lewy body dementia, and dementia. U.S. Continuation Application No. 16/844,713, filed on Apr 9, 2020, is pending. This application 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/US2018/016296
Filed: January 31, 2018; Inventors: Andrea Small-Howard, et al.
National stage applications entered in AU, CA, CN, EP, HK, IL, and JP on January 31, 2018.
Claims benefit of U.S. Patent Application No. 62/453,161 filed February 1, 2017.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
National stage applications entered in AU, CA, CN, EP, HK, IL, and JP on May 22, 2018.
On May 12, 2020, GBSGB received a Notice of Allowance for its Myrcene-Containing Complex Mixtures. On the same day as we paid the fee for the allowed claims, we filed a Continuation for the review of the other formulations including those for heart disease and other TRPV1-related pathologies. U.S. Continuation Application No. 16/878,295, filed on May 19, 2020, is pending. 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 Nos. 62/674,843 filed May 22, 2018; 62/769,743 filed November 20, 2018; and 62/849,719 filed May 17, 2019.
Title: THERAPEUTIC NANOPARTICLES ENCAPSULATING TERPENOIDS AND/OR CANNABINOIDS
U.S. Patent Application No.:16/686,069 WIPO Patent Application No.: PCT/ES2019/070765
Filed: November 8, 2019; Inventors: Andrea Small-Howard, et al.
Claims benefit of U.S. Patent Application Nos. 62/757,660 filed November 8, 2018
Two Provisional USPTO Patent Applications Pending
Title: TREATMENT OF PAIN USING ALLOSTERIC MODULATOR OF TRPV1
U.S. Patent Application No.: 62/868,794; Inventors: Andrea Small-Howard, et al.
Filed: June 28, 2019
Title: THERAPEUTIC NANOPARTICLES ENCAPSULATING TERPENOIDS AND/OR CANNABINOIDS
U.S. Patent Application No.: 62/897,235 Inventors: Andrea Small-Howard, et al.
Filed: September 6, 2019
Two Additional Provisional Patent Applications Filed on August 18, 2020
GBSGB has data sets for two new provisional patent applications filed on August 18, 2020, as follows:
Title: CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF CHRONIC INFLAMMATORY DISORDERS
Filing Date: August 18, 2020; Inventor: Andrea Small-Howard
Title: CANNABINOID-CONTAINING COMPLEX MIXTURES FOR THE TREATMENT OF CYTOKINE RELEASE SYNDROME WHILE PRESERVING KEY ANTI-VIRAL IMMUNE REACTIONS
Filing Date: August 18, 2020; Inventor: Andrea Small-Howard
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiple Licensed Patents for GBSGB’s 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 Biopharma, Inc.
Status: Granted in the following territories on the corresponding dates
U.S. Patent Number: 9,084,786; Issued: July 21, 2015
U.S. Patent Number: 10,137,123; Issued: November 27, 2018
U.S. Continuation Application: 16/181,204
European Union Patent Number: 2,635,281; Granted: March 14, 2018
Europe Patent Application: 3,348,267
Hong Kong Patent Number: 14102182.8; Granted: March 14, 2018
India Patent Application: 1404/KOLNP/2013
China Patent Application: 201180063998.4
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: PCT/ES2016/000016 (Pub. No. WO 2016/128591)
Filed: August 18, 2016
Claims benefit of Spanish Patent Application no. P201500129 (Pub. No. ES 2582287)
Filed: February 9, 2015
U.S. Patent Application: 15/549,653
Spain Patent ES2582287; Granted: September 29, 2017
Europe Patent Application: EP3257503
Canada Patent Application CA2976040
Note 2 - Going Concern
The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained net losses since inception, which have caused an accumulated deficit of $(97,387,205) at March 31, 2020. The Company had a working capital deficit of $(3,884,877) at March 31, 2020, compared to $(3,245,409) including $(1,133,890) from discontinued operations at March 31, 2019. In addition, the Company has consumed cash in its operating activities of $(4,479,713) including $(1,244,720) from discontinued operations for the year ended March 31, 2020, compared to $(9,855,895) including $(1,271,177) from discontinued operations for the year ended March 31, 2019. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Management has been able, thus far, to finance the losses through a public offering, private placements and obtaining operating funds from stockholders. The Company is continuing to seek sources of financing. There are no assurances that the Company will be successful in achieving its goals.
In view of these conditions, the Company’s ability to continue as a going concern is dependent upon its ability to obtain additional financing or capital sources, to meet its financing requirements, and ultimately to achieve profitable operations. Management believes that its current and future plans provide an opportunity to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that may be necessary in the event the Company is unable to continue as a going concern.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The subsidiaries of the Company are:
GB Sciences Nevada, LLC
GB Sciences Las Vegas, LLC
ECRX, Inc.
GB Sciences Texas, LLC
GB Sciences Nopah, LLC
GBS Global Biopharma, Inc.
Intercompany accounts and transactions have been eliminated in consolidation. The ownership interest of non-controlling participants in subsidiaries that are not wholly owned is included as a separate component of equity. The non-controlling participants’ share of the net loss is included as “Net loss attributable to non-controlling interest” on the consolidated statements of operations.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, inventory valuation and standard cost allocations, valuation of initial right-of-use assets and corresponding lease liabilities, valuation of beneficial conversion features in convertible debt, valuation of the assets and liabilities of discontinued operations, stock-based compensation expense, purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, litigation, other loss contingencies, and impairment of long lived assets. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates.
Reclassifications
Certain reclassifications have been made to the comparative period amounts in order to conform to the current period presentation. The current and long-term capital lease obligations recorded in the consolidated balance sheet as of March 31, 2019 have been reclassified to conform to the current period presentation as finance lease obligations, current, and finance lease obligations, long term. Certain items on the statements of cash flows have been reclassified to confirm with current period presentation. In addition, the assets, liabilities, income, and cash flows of GB Sciences Louisiana, LLC have been separated from the comparative period amounts to confirm to the current period presentation as discontinued operations as the result of the sale of the Company’s interest in GB Sciences Louisiana, LLC (Note 15). The reclassifications had no effect on the reported financial position, results of operations or cash flows of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
Discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period and represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes.
The assets and liabilities associated with discontinued operations included in our consolidated balance sheets are as follows:
Discontinued Operations – (continued)
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
Total
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
151,766
|
|
|
$
|
-
|
|
|
$
|
151,766
|
|
|
$
|
182,055
|
|
|
$
|
45,703
|
|
|
$
|
227,758
|
|
Accounts receivable, net
|
|
|
117,967
|
|
|
|
-
|
|
|
|
117,967
|
|
|
|
488,329
|
|
|
|
-
|
|
|
|
488,329
|
|
Inventory, net
|
|
|
1,445,839
|
|
|
|
-
|
|
|
|
1,445,839
|
|
|
|
1,533,792
|
|
|
|
602,714
|
|
|
|
2,136,506
|
|
Prepaid and other current assets
|
|
|
60,885
|
|
|
|
-
|
|
|
|
60,885
|
|
|
|
262,208
|
|
|
|
351,970
|
|
|
|
614,178
|
|
Note receivable
|
|
|
5,224,423
|
|
|
|
-
|
|
|
|
5,224,423
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL CURRENT ASSETS
|
|
|
7,000,880
|
|
|
|
-
|
|
|
|
7,000,880
|
|
|
|
2,466,384
|
|
|
|
1,000,387
|
|
|
|
3,466,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
5,533,833
|
|
|
|
-
|
|
|
|
5,533,833
|
|
|
|
10,481,706
|
|
|
|
13,022,996
|
|
|
|
23,504,702
|
|
Intangible assets, net
|
|
|
1,699,966
|
|
|
|
-
|
|
|
|
1,699,966
|
|
|
|
1,818,802
|
|
|
|
-
|
|
|
|
1,818,802
|
|
Deposits and other noncurrent assets
|
|
|
91,504
|
|
|
|
-
|
|
|
|
91,504
|
|
|
|
230,651
|
|
|
|
1,002,376
|
|
|
|
1,233,027
|
|
Operating lease right-of-use assets, net
|
|
|
26,685
|
|
|
|
-
|
|
|
|
26,685
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
14,352,868
|
|
|
$
|
-
|
|
|
$
|
14,352,868
|
|
|
$
|
14,997,543
|
|
|
$
|
15,025,759
|
|
|
$
|
30,023,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,559,914
|
|
|
$
|
-
|
|
|
$
|
2,559,914
|
|
|
$
|
1,374,771
|
|
|
$
|
1,695,985
|
|
|
$
|
3,070,756
|
|
Accrued interest
|
|
|
397,652
|
|
|
|
-
|
|
|
|
397,652
|
|
|
|
142,112
|
|
|
|
-
|
|
|
|
142,112
|
|
Accrued expenses
|
|
|
888,012
|
|
|
|
-
|
|
|
|
888,012
|
|
|
|
244,931
|
|
|
|
76,415
|
|
|
|
321,346
|
|
Notes payable, net
|
|
|
5,534,728
|
|
|
|
-
|
|
|
|
5,534,728
|
|
|
|
2,229,812
|
|
|
|
300,000
|
|
|
|
2,529,812
|
|
Indebtedness to related parties
|
|
|
586,512
|
|
|
|
-
|
|
|
|
586,512
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Note payable to related party
|
|
|
151,923
|
|
|
|
-
|
|
|
|
151,923
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income tax payable
|
|
|
592,982
|
|
|
|
-
|
|
|
|
592,982
|
|
|
|
506,145
|
|
|
|
-
|
|
|
|
506,145
|
|
Operating lease obligations, current
|
|
|
7,265
|
|
|
|
-
|
|
|
|
7,265
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Finance lease obligations, current
|
|
|
166,769
|
|
|
|
-
|
|
|
|
166,769
|
|
|
|
80,132
|
|
|
|
61,877
|
|
|
|
142,009
|
|
TOTAL CURRENT LIABILITIES
|
|
|
10,885,757
|
|
|
|
-
|
|
|
|
10,885,757
|
|
|
|
4,577,903
|
|
|
|
2,134,277
|
|
|
|
6,712,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
161,072
|
|
|
|
-
|
|
|
|
161,072
|
|
Operating lease obligations, long term
|
|
|
22,515
|
|
|
|
-
|
|
|
|
22,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Finance lease obligations, long term
|
|
|
3,533,090
|
|
|
|
-
|
|
|
|
3,533,090
|
|
|
|
3,646,540
|
|
|
|
2,347,511
|
|
|
|
5,994,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
$
|
14,441,362
|
|
|
$
|
-
|
|
|
$
|
14,441,362
|
|
|
$
|
8,385,515
|
|
|
$
|
4,481,788
|
|
|
$
|
12,867,303
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations - (continued)
The revenues and expenses associated with discontinued operations included in our consolidated statements of operations were as follows:
|
|
For the Year Ended March 31,
|
|
|
For the Year Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
Total
|
|
|
Continuing
|
|
|
Discontinued
|
|
|
Total
|
|
Sales revenue
|
|
$
|
3,120,620
|
|
|
$
|
569,077
|
|
|
$
|
3,689,697
|
|
|
$
|
3,454,552
|
|
|
$
|
-
|
|
|
$
|
3,454,552
|
|
Cost of goods sold
|
|
|
(4,002,083
|
)
|
|
|
(574,544
|
)
|
|
|
(4,576,627
|
)
|
|
|
(3,246,097
|
)
|
|
|
-
|
|
|
|
(3,246,097
|
)
|
Gross profit (loss)
|
|
|
(881,463
|
)
|
|
|
(5,467
|
)
|
|
|
(886,930
|
)
|
|
|
208,455
|
|
|
|
-
|
|
|
|
208,455
|
|
General and administrative expenses
|
|
|
6,483,513
|
|
|
|
1,292,613
|
|
|
|
7,776,126
|
|
|
|
13,399,524
|
|
|
|
2,403,259
|
|
|
|
15,802,783
|
|
Loss on impairment of long-lived assets
|
|
|
4,645,054
|
|
|
|
-
|
|
|
|
4,645,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
LOSS FROM OPERATIONS
|
|
|
(12,010,030
|
)
|
|
|
(1,298,080
|
)
|
|
|
(13,308,110
|
)
|
|
|
(13,191,069
|
)
|
|
|
(2,403,259
|
)
|
|
|
(15,594,328
|
)
|
OTHER INCOME/(EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,625,204
|
)
|
|
|
(178,140
|
)
|
|
|
(1,803,344
|
)
|
|
|
(4,940,090
|
)
|
|
|
(251,168
|
)
|
|
|
(5,191,258
|
)
|
Other expense
|
|
|
(194,248
|
)
|
|
|
-
|
|
|
|
(194,248
|
)
|
|
|
(3,368,556
|
)
|
|
|
-
|
|
|
|
(3,368,556
|
)
|
Loss on extinguishment
|
|
|
(216,954
|
)
|
|
|
-
|
|
|
|
(216,954
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss on modification of note receivable
|
|
|
(1,895,434
|
)
|
|
|
-
|
|
|
|
(1,895,434
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gain on deconsolidation of subsidiary
|
|
|
4,393,242
|
|
|
|
-
|
|
|
|
4,393,242
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
TOTAL OTHER INCOME/(EXPENSE)
|
|
|
461,402
|
|
|
|
(178,140
|
)
|
|
|
283,262
|
|
|
|
(8,308,646
|
)
|
|
|
(251,168
|
)
|
|
|
(8,559,814
|
)
|
NET LOSS BEFORE INCOME TAXES
|
|
|
(11,548,628
|
)
|
|
|
(1,476,220
|
)
|
|
|
(13,024,848
|
)
|
|
|
(21,499,715
|
)
|
|
|
(2,654,427
|
)
|
|
|
(24,154,142
|
)
|
Income tax expense
|
|
|
(86,837
|
)
|
|
|
-
|
|
|
|
(86,837
|
)
|
|
|
(526,145
|
)
|
|
|
-
|
|
|
|
(526,145
|
)
|
NET LOSS
|
|
$
|
(11,635,465
|
)
|
|
$
|
(1,476,220
|
)
|
|
$
|
(13,111,685
|
)
|
|
$
|
(22,025,860
|
)
|
|
$
|
(2,654,427
|
)
|
|
$
|
(24,680,287
|
)
|
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:
-
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
-
|
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.
|
-
|
Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.
|
The carrying value of cash, accounts receivable, accounts payable 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. The Company had no short-term investments classified as cash equivalents at March 31, 2020.
Accounts Receivable
Accounts receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability based on aging and subsequent collections. During the year ended March 31, 2020, the Company recorded $108,001 in bad debt expense as the result of a $63,630 increase in the allowance for doubtful accounts and $44,371 in direct write-off of uncollectible accounts.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory
We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out method, or its current estimated 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. Indirect costs, which primarily relate to the lease and operation costs of the Teco Facility, are allocated based on square footage of the facility used in the production of inventory.
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets primarily represent the value of our patents pending and includes the costs paid to draft and file patent applications. Upon issuance of the patents, the indefinite-lived intangible assets will have finite lives. Intangible assets also include the acquisition cost of a cannabis production license with an indefinite life. 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. During the year ended March 31, 2020, the Company entered into the Membership Interest Purchase Agreement ("Teco MIPA") to sell 100% of the membership interests in the Teco Facility (Note 16). As a result of this agreement, the Company determined that the long-lived assets of the Teco Facility including a production license acquired through purchase might be impaired due to the current expectation that the asset group will more likely than not be disposed of by sale significantly before the end of its previously estimated useful life. The Company allocated an impairment loss of $449,801 to the license and reduced its carrying value from $1,021,067 to $571,266.
Operating Lease Right-of-Use Asset and Liability
The Company determines if an arrangement is a lease at inception and has lease agreements for office facilities, equipment, and other space and assets with non-cancelable lease terms. Certain real estate and property leases, and various other operating leases are measured on the balance sheet with a lease liability and right-of-use asset ("ROU").
ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available.
Lease payments include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the New Lease Standard. Lease payments do not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components.
Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of twelve months or less are not recorded on the balance sheet. Additionally, lease and non-lease components are accounted for as a single lease component for real estate agreements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. Property under finance leases and related obligations are initially recorded at an amount equal to the present value of future minimum lease payments computed on the basis of the Company’s incremental borrowing rate, and depreciation is recorded on a straight-line basis and is included within depreciation and amortization expense. 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.
During the year ended March 31, 2020, the Company entered into the Membership Interest Purchase Agreement ("Teco MIPA") to sell 100% of the membership interests in the Teco Facility (Note 16). As a result of this agreement, the Company determined that the long-lived assets of the Teco Facility might be impaired due to the current expectation that the asset group will more likely than not be disposed of by sale significantly before the end of its previously estimated useful life. The Company estimated future undiscounted cash flows related to the Teco Facility to be $8.0 million, which was less than the carrying amount of the Teco Facility asset group of $11.9 million. Using a discounted cash flow approach, the Company estimated the fair value of the asset group to be approximately $7.3 million, resulting in a write-down of $4,645,054 related to the Teco Facility asset group. Fair value was based on expected future cash flows using level 3 inputs under ASC 820. The cash flows are the proceeds expected to be generated from the sale of the assets under the Teco MIPA, discounted to present value at a rate of 17%. The cash flow projection includes the $4.0 million in cash flows that the Company anticipates receiving from the Note Receivable that it will receive from the sale of the Teco facility and the $4.0M payment that will be received at the close of the sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beneficial Conversion Feature of Convertible Notes Payable
The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options and Emerging Issues Task Force (“EITF”) 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”. A beneficial conversion feature (“BCF”) exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments were granted with the debt. In accordance with this guidance, the BCF of a convertible note is measured by allocating a portion of the note's proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The Company calculates the fair value of warrants issued with the convertible notes using the Black-Scholes valuation model and uses the same assumptions for valuing any employee options in accordance with ASC Topic 718 Compensation – Stock Compensation. The only difference is that the contractual life of the warrants is used.
The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on a relative fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.
Revenue Recognition
The FASB issued Accounting Standards Codification (“ASC”) 606 as guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company adopted the guidance on April 1, 2018 and applied the cumulative catch-up transition method.
The Company’s only current revenue source is from sales of cannabis, a distinct physical good. Under ASC 606, the Company is required to separately identify each performance obligation resulting from its contracts from customers, which may be a good or a service. A contract may contain one or more performance obligations. All of the Company’s contracts with customers, past and present, contain only a single performance obligation, the delivery of distinct physical goods. Because fulfillment of the company’s performance obligation to the customer under ASC 606 results in the same timing of revenue recognition as under the previous guidance (i.e. revenue is recognized upon delivery of physical goods), the Company did not record any material adjustment to report the cumulative effect of initial application of the guidance.
Research and Development Costs
Research and development costs are expensed as incurred. During the years ended March 31, 2020 and 2019, the Company recorded $1,543,397 and $458,790, respectively, in research and development expense.
Equity-Based Compensation
The Company accounts for equity instruments issued to employees and non-employees in accordance with the provisions of ASC 718 Stock Compensation (ASC 718). 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Loss per Share
The Company’s basic loss per share has been calculated using the weighted average number of common shares outstanding during the period. The Company had 158,404,020 and 128,608,852 potentially dilutive common shares at March 31, 2020 and 2019, 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.
Recent Accounting Pronouncements
Recently Adopted Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted the standard on April 1, 2019. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted the standard on April 1, 2019. The adoption of this guidance is not expected to have a material 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Inventory
Raw materials consist of supplies, materials, and consumables used in the cultivation and extraction processes. Work-in-progress includes live plants and cannabis in the drying, curing, and trimming processes and extracts in process. Finished goods includes completed cannabis flower, trim, and extracts that are ready to be sold in bulk and packaged forms.
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
91,465
|
|
|
$
|
440,414
|
|
Work in progress
|
|
|
1,166,511
|
|
|
|
676,341
|
|
Finished goods
|
|
|
466,319
|
|
|
|
579,604
|
|
Subtotal
|
|
|
1,724,295
|
|
|
|
1,696,359
|
|
Allowance to reduce inventory to NRV
|
|
|
(278,456
|
)
|
|
|
(162,567
|
)
|
Total inventory, net
|
|
$
|
1,445,839
|
|
|
$
|
1,533,792
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Leases
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), (the "New Lease Standard"). This standard requires leases, other than short-term, to be recognized on the balance sheet as a lease liability and a corresponding right-of-use asset.
Lease payments include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the standard. Lease payments do not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components. This standard is effective for interim and annual reporting periods beginning after December 15, 2018 and the Company adopted the standard as of April 1, 2019. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.
The Company adopted the New Lease Standard using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on April 1, 2019.
The Company determines if an arrangement is a lease at inception and has lease agreements for warehouses and equipment. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2024 to 2025 with an optional extension of 5 years.
As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right-of-use asset ("ROU"). Application of this standard resulted in the recognition of ROU assets of $182,624, net of accumulated amortization, and a corresponding lease liability of $190,173 at the April 1, 2019, date of adoption. Accounting for finance leases is substantially unchanged.
Operating leases are presented in operating lease right-of-use assets, operating lease obligations, current, and operating lease obligations, long term on the consolidated balance sheets. Finance leases are included in property and equipment, finance lease obligations, current, and finance lease obligations, long term. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available. The rates used to discount finance leases previously recorded as capital leases range from 10.2% to 11.5%. Operating leases were discounted at a rate of 17.0%.
Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the consolidated balance sheets.
During the year ended March 31, 2020, finance lease costs recorded in the consolidated financial statements were $679,347, of which $426,374 represents interest expense and $252,973 represents amortization of the right-of-use assets. Operating lease costs were $75,306, of which $27,611 represents interest expense and $47,695 represents amortization of the right-of-use assets.
Discontinued operations includes $280,227 in finance lease costs, of which $153,977 represents interest expense and $126,250 represents amortization of right-of-use assets.
Amortization of lease assets is included in general and administrative expenses. The future minimum lease payments of lease liabilities as of March 31, 2020, from continuing operations are as follows:
|
Year Ending
|
|
|
|
|
|
Operating
|
|
|
March 31,
|
|
Finance Leases
|
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
581,763
|
|
|
$
|
11,779
|
|
|
2022
|
|
|
544,296
|
|
|
|
11,779
|
|
|
2023
|
|
|
560,625
|
|
|
|
11,779
|
|
|
2024
|
|
|
577,444
|
|
|
|
3,927
|
|
|
2025
|
|
|
594,767
|
|
|
|
-
|
|
|
Thereafter
|
|
|
3,781,101
|
|
|
|
-
|
|
Total minimum lease payments
|
|
|
6,639,996
|
|
|
|
39,264
|
|
Less: Amount representing interest
|
|
|
(2,940,137
|
)
|
|
|
(9,484
|
)
|
Present value of minimum lease payments
|
|
|
3,699,859
|
|
|
|
29,780
|
|
Less: Current maturities of capital lease obligations
|
|
|
(166,769
|
)
|
|
|
(7,265
|
)
|
Long-term capital lease obligations
|
|
$
|
3,533,090
|
|
|
$
|
22,515
|
|
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Notes Payable and Line of Credit
6% Note Payable due November 30, 2018
On July 28, 2018, the Company entered into the Amendment and Termination Agreement (“Amendment and Termination Agreement”) with Pacific Leaf. 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 December 31, 2018 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 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 recorded $95,000 in expense related to the shares issued, which is included 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:
Amounts Recorded in Other Expense
|
|
Year Ended
|
|
Related to the Amendment and Termination Agreement
|
|
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
0% Note Payable dated October 23, 2017
On October 23, 2017, the Company amended the existing Nevada Medical Marijuana Production License Agreement (“Amended Production License Agreement”). Per the terms of the Amended Production License Agreement, GB Sciences purchased the remaining percentage of the production license resulting in the 100% ownership of the license. GB Sciences also received 100% ownership of the cultivation license included in the original Nevada Medical Marijuana Production License Agreement. In exchange, GB Sciences made one-time payment of $500,000 and issued a 0% Promissory Note in the amount of $700,000 payable in equal monthly payments over a three-year period commencing on January 1, 2018.
The present value of the note was $521,067 on the date of its issuance based on an imputed interest rate of 20.3% and the Company recorded a discount on notes payable of $178,933. During the year ended March 31, 2020, the Company recorded $53,122 in interest expense related to amortization of the note discount.
The Company has been in default on this note since June of 2019, and as of the date of this report, fifteen monthly payments on the note totaling $291,660 are unpaid. As the result of the default, the Company has accrued penalty interest at the rate of 10% according to the terms of the Promissory Note. Total penalty interest accrued was $30,787 as of and for the year ended March 31, 2020. If the Company is unable to cure the default within ten days of receiving a written notice, the lender will have the option to accelerate the remaining balance owed of $369,444, but must notify the Company in writing should it choose to do so. The Company is currently in the process of negotiating a settlement and/or forbearance agreement with the lender and anticipates curing its default upon receiving proceeds from the sale of the Company's Teco facility (Note 16).
0% Note Payable dated December 20, 2018
On December 20, 2018, GB Sciences Louisiana, LLC (“GBSLA") entered into a $300,000 Loan Agreement with BCM MED, LLC (“BCM MED”). BCM MED is a related party to Wellcana Group, LLC, the minority member in GBSLA. The purpose of the financing is to fund operating expenses incurred by or on behalf of medical marijuana operations of GBSLA.
Pursuant to the Loan Agreement, GBSLA began making eight (8) monthly installment payments in the amount of $33,333 on or before the 10th business day of each month commencing in April 2019. The aggregate amount of the installment payments from GBSLA to BCM MED are equal to the loan amount. Through November 15, 2019, GBSLA made $266,667 in payments towards the loan and reduced the loan balance to $33,333. The remaining balance was assumed by the purchaser and deconsolidated upon close of the sale of the Company's controlling membership interest (Note 15).
8% Line of Credit dated November 27, 2019
In connection with the Binding Letter of Intent dated November 27, 2019 (Note 16), the Company entered into a promissory note and received a line of credit for up to $470,000 from the purchaser of the Company's membership interest in its Nevada facilities. The purpose of the line of credit is to supply working capital for the Nevada operations. The note matures upon the close of the sale of membership interests. During the year ended March 31, 2020, the Company received $480,000 in advances under the line of credit, reflecting an informal agreement with the lender to increase the Line of Credit limit by $10,000. The Company accrued interest of $10,444 on the line of credit for the year ended March 31, 2020 and the balance of the line of credit was $480,000 at March 31, 2020. Upon the close of the sale of the Teco Facility all principal and interest due under the line of credit will be considered satisfied in full.
Summary of Notes Payable
As of March 31, 2020, the following notes payable were recorded in the Company’s consolidated balance sheet:
|
|
As of March 31, 2020
|
|
Short-Term Notes Payable
|
|
Face Value
|
|
|
Discount
|
|
|
Carrying Value
|
|
6% Convertible promissory notes payable (Note 7)
|
|
$
|
1,257,000
|
|
|
$
|
(155,340
|
)
|
|
$
|
1,101,660
|
|
8% Convertible Secured Promissory Note dated February 28, 2019, as amended (Note 7)
|
|
|
1,271,863
|
|
|
|
(409,481
|
)
|
|
|
862,382
|
|
8% Convertible Promissory Note dated April 23, 2019 (Note 7)
|
|
|
2,765,000
|
|
|
|
(29,830
|
)
|
|
|
2,735,170
|
|
0% Note Payable dated October 23, 2017 (Note 6)
|
|
|
369,445
|
|
|
|
(13,929
|
)
|
|
|
355,516
|
|
8% Line of Credit dated November 27, 2019 (Note 6)
|
|
|
480,000
|
|
|
|
-
|
|
|
|
480,000
|
|
Total Short-Term Notes Payable
|
|
$
|
6,143,308
|
|
|
$
|
(608,580
|
)
|
|
$
|
5,534,728
|
|
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
|
6% Convertible promissory notes payable (Note 7)
|
|
$
|
1,257,000
|
|
|
$
|
(564,929
|
)
|
|
$
|
692,071
|
|
8% Convertible Secured Promissory Note dated February 28, 2019, as amended (Note 7)
|
|
|
1,500,000
|
|
|
|
(169,134
|
)
|
|
|
1,330,866
|
|
0% Note Payable dated October 23, 2017 (Note 6)
|
|
|
272,222
|
|
|
|
(65,347
|
)
|
|
|
206,875
|
|
Total Short-Term Notes Payable
|
|
$
|
3,029,222
|
|
|
$
|
(799,410
|
)
|
|
$
|
2,229,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0% Note Payable dated December 20, 2018 (discontinued operations)
|
|
$
|
300,000
|
|
|
$
|
-
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
0% Note Payable dated October 23, 2017 (Note 6)
|
|
$
|
175,000
|
|
|
$
|
(13,928
|
)
|
|
$
|
161,072
|
|
Total Long-Term Notes Payable
|
|
$
|
175,000
|
|
|
$
|
(13,928
|
)
|
|
$
|
161,072
|
|
Note 7 – Convertible Notes
March 2017 $2M Convertible Note Offering
In March 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 $0.60 per share for the period of three years. Between March 2017 and May 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $2,000,000. The Notes are payable within three years of issuance and are convertible into 8,000,000 shares of the Company’s common stock. The Company also issued 8,000,000 common stock warrants to the Noteholders. 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 Company recorded an aggregate discount on convertible notes of $1,933,693, which included $904,690 related to the relative fair value of beneficial conversion features and $1,029,003 for the relative fair value of the warrants issued with each note. The fair value of warrants was derived using the Black-Scholes valuation model.
July 2017 $7.2M 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. Between July 2017 and December 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $7,201,000. The Notes are payable within three years of issuance and are convertible into 28,804,000 shares of the Company’s common stock. The Company also issued 28,804,000 common stock warrants to the Noteholders. 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 Company recorded an aggregate discount on convertible notes of $7,092,796, which included $3,142,605 related to the relative fair value of beneficial conversion features and 3,950,191 for the relative fair value of the warrants issued with each note. The fair value of warrants was derived using the Black-Scholes valuation model.
As of March 31, 2020, convertible notes having a carrying value of $1,101,660, net of unamortized discount of $155,340 remained outstanding from the March 2017 and July 2017 note offerings, and accrued interest on the notes is $197,185. Discount amortization was $409,589 for the year ended March 31, 2020.
8% Senior Secured Convertible Promissory Note dated February 28, 2019
On February 28, 2019, the Company issued a $1,500,000 8% Senior Secured Convertible Promissory Note and entered into the Note Purchase Agreement and Security Agreement with CSW Ventures, LP (together, “CSW Note”). The note matures on August 28, 2020 and is convertible at any time until maturity into 8,823,529 shares of the Company’s common stock at $0.17 per share. Collateral pledged as security for the note includes all of the Company’s 100% membership interests in GB Sciences, Nevada, LLC and GB Sciences Las Vegas, LLC, which together represent substantially all of the Company’s cannabis cultivation and production operations and assets located at the 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 28, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $170,000 of the principal balance of the 8% Senior Secured Promissory Note dated February 28, 2019. Accordingly, the Company issued 1,000,000 shares of its common stock based on a $0.17 per share conversion price. In connection with the conversions, $ 17,225 in unamortized discount was recorded as interest expense and the Company reduced the carrying amount of convertible notes payable by $152,775. After conversion, the remaining balance outstanding was $1,330,000.
On July 12, 2019, the Company entered into the Amendment to Note Documents and the Amended and Restated 8% Senior Secured Promissory Note (together, “Amended CSW Note”). The Amended CSW Note increased the note balance by $100,000 to reflect an additional $100,000 advanced to the Company on July 12, 2019, by $41,863 to add accrued interest to date to the principal balance, and decreased the conversion price to $0.11 per share, with the remaining terms substantially unchanged from the original CSW Note.
We evaluated the modification under the guidance in ASC 470-50 and determined that the amendment represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the CSW Note on the amendment date. The carrying value of the amended note on the date of extinguishment was $1,338,057, net of a beneficial conversion feature discount of $133,806, and we recorded a loss on extinguishment of $124,158.
On August 1, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $ 110,000 of the principal balance of the Amended CSW Note at $0.11 per share. Accordingly, the Company issued 1,000,000 shares of its common stock. In connection with the conversions, $9,579 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $100,421. After conversion, the remaining balance outstanding was $ 1,361,863.
On October 23, 2019, the Company entered into the Amendment to Promissory Note. The October 23, 2019 amendment decreased the conversion price to $0.08 per share, with the remaining terms substantially unchanged from the Amended CSW Note.
We evaluated the modification under the guidance in ASC 470-50 and determined that the amendment represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the Amended CSW Note immediately prior to the 2nd Amended CSW Note. The carrying value of the Amended CSW Note on the date of extinguishment was $1,269,067, net of a beneficial conversion feature discount of $92,796, and we recorded a loss on extinguishment of $92,796.
On November 27, 2019, the Company entered into the Second Amendment to Note Documents and the Second Amended and Restated 8% Senior Secured Promissory Note (together, “2nd Amended CSW Note”). The 2nd Amended CSW Note decreased the conversion price to $0.04 per share and increased the note balance by $30,000 to reflect an advance received on that date, with the remaining terms substantially unchanged from the Amended CSW Note.
We evaluated the modification under the guidance in ASC 470-50 and determined that the 2nd Amended CSW Note represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the Amended CSW Note immediately prior to the 2nd Amended CSW Note; however, no loss on extinguishment was recorded because the net consideration paid for the 2nd Amended CSW Note was equal to the extinguished carrying value of the Amended CSW Note. The carrying value of the Amended CSW Note on the date of extinguishment was $1,361,863.
On December 16, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $120,000 of the principal balance of the Amended CSW Note at $0.04 per share and we issued 3,000,000 shares of common stock. In connection with the conversions, $57,551 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $62,449. After conversion, the remaining balance outstanding was $1,271,863 and the carrrying amount of the note was $687,021, net of $584,842 in unamortized discount from the beneficial conversion feature.
During the year ended March 31, 2020, we recorded interest expense of $398,591 related to the CSW Note and its amendments consisting of $109,161 in accrued interest and $289,430 related to amortization of the note discount. As of March 31, 2020, the carrying amount of the CSW Note was $862,382, net of unamortized discount of $409,481.
The Company is in default on the amended CSW Note due to non-payment of the quarterly interest payments due on October 1, 2019, January 1, 2020, and March 1, 2020, and nonpayment of an income tax liability related to the March 31, 2018 tax year. The terms of the note provide that the Company has 5 days to cure a default caused by nonpayment of interest and ten days to cure a default caused by noncompliance with affirmative or negative debt covenants. The lender has agreed to provide forbearance of the defaults in connection with the sale of the Teco facilities, and the Company anticipates that the CSW Note will be settled in full upon close of the sale of the Company's interests in its Nevada operations to an entity affiliated with CSW Ventures, LP (Note 16).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8% Convertible Promissory Note dated April 23, 2019
On April 23, 2019, the Company entered into the Note Purchase Agreement with Iliad Research and Trading, L.P. ("Iliad") and issued an 8% Convertible Promissory Note with a face value of $2,765,000. The Note was issued with original issue discount of $265,000 and is convertible into shares of the Company’s common stock at a price of $0.17 per share at the option of the note holder at any time until the Note is repaid. The Note matures on April 22, 2020.
A total discount of $440,000 was recorded on the note, which includes $265,000 of original issue discount and $175,000 in fees paid to brokers. During the year ended March 31, 2020, interest expense related to the note was $617,430, of which $410,169 was amortization of the note discount.
During the year ended March 31, 2020, the Company honored the conversion of a total of a total of $125,000 of accrued interest on the Iliad Note at reduced conversion rates. On October 30, 2019, the Company received notice of the conversion of $75,000 at $0.06 per share and issued 1,250,000 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $64,706, and the Company recorded an induced conversion expense. On November 18, 2019, the Company received notice of the conversion of $50,000 of the note balance at $0.0375 per share and issued 1,333,333 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $62,353, and the Company recorded an expense in that amount. In total, the Company recorded $127,059 in non-cash expense for the two conversions of the Iliad note at below contractual conversion rates for the year ended March 31, 2020, which is included in other expense on the Company's consolidated statement of operations.
On April 22, 2020, the Company failed to make payment of the principal and accrued interest due under the Iliad Note, resulting in a default. Pursuant to the terms of the Promissory Note, upon the default, the principal and accrued interest balances outstanding increased by 10% and the Company recorded an expense of $286,059 related to the default. As of June 30, 2020, the total balance due under the note was $3,234,149.
On May 20, 2020, Iliad filed a lawsuit against the Company in the Third Judicial District Court of Salt Lake County in the State of Utah demanding repayment of the note. The lawsuit further seeks to compel the Company to participate in arbitration pursuant to the arbitration provisions contained within the Note Purchase Agreement and to prohibit the Company to raise funds through the issuance of its common stock unless the note is paid in full simultaneously with such issuance. The Company filed a confession of judgment in response to the complaint and does not intend to defend the lawsuit. On July 14, 2020, the Court entered judgment in favor of Iliad in the amount of $3,264,594 and the judgment accrues interest at the default rate of 15% per annum. The Company will also be responsible for reasonable attorney's fees amd costs incurred by Iliad for obtaining and collecting on the judgment. The amount of such fees has not been established as of the date of this report. The Company believes it will have sufficient resources to repay the Iliad Note from the proceeds of the sale of the Teco Facility and the note receivable therefrom, along with the proceeds of the note receivable from Wellcana Group from the sale of the Company's membership interest in GB Sciences Louisiana, LLC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - 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 $541,462 and $338,190 for the year ended March 31, 2020 and 2019, respectively, net of depreciation capitalized in inventory of $811,508 and $584,017. Discontinued operations included $291,274 and $126,447 for the year ended March 31, 2020 and 2019, respectively. Property and equipment is comprised of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Furniture and fixtures
|
|
$
|
-
|
|
|
$
|
20,883
|
|
Computer and software
|
|
|
151,748
|
|
|
|
151,748
|
|
Machinery and equipment
|
|
|
911,343
|
|
|
|
1,415,494
|
|
Leaseholds
|
|
|
3,367,591
|
|
|
|
5,120,758
|
|
Construction in progress
|
|
|
173,695
|
|
|
|
1,852,838
|
|
Capital lease - building
|
|
|
1,663,013
|
|
|
|
3,900,000
|
|
|
|
|
6,267,390
|
|
|
|
12,461,721
|
|
Less accumulated depreciation and amortization
|
|
|
(733,557
|
)
|
|
|
(1,980,015
|
)
|
Property and Equipment, Net
|
|
$
|
5,533,833
|
|
|
$
|
10,481,706
|
|
During the year ended March 31, 2020, the Company entered into the Membership Interest Purchase Agreement ("Teco MIPA") to sell 100% of the membership interests in the Teco Facility (Note 16). As a result of this agreement, the Company determined that the long-lived assets of the Teco Facility might be impaired due to the current expectation that the asset group will more likely than not be disposed of by sale significantly before the end of its previously estimated useful life. The Company estimated future undiscounted cash flows related to the Teco Facility to be $8.0 million, which was less than the carrying amount of the Teco Facility asset group of $11.9 million. Using a discounted cash flow approach, the Company estimated the fair value of the asset group to be approximately $7.3 million, resulting in a write-down of $4,645,054 related to the Teco Facility asset group. Fair value was based on expected future cash flows using level 3 inputs under ASC 820. The cash flows are the proceeds expected to be generated from the sale of the assets under the Teco MIPA, discounted to present value at a rate of 17%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 – 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.
The Company’s effective tax rate was 0.0% and -2.4% for the years ended March 31, 2020 and 2019, respectively.
Income tax expense was $86,837 for the year ended March 31, 2020, which includes $38,913 in penalties and $47,924 in accrued interest related to a $506,145 tax liability from the March 31, 2018 tax year. Income tax payable at March 31, 2020 was $592,982 including a $506,145 income tax liability related to the March 31, 2018 tax year, net of a $20,000 tax payment made during the year ended March 31, 2019, and $86,837 in accrued penalties and interest. 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 payable was $506,145 as of March 31, 2019.
At March 31, 2020 and 2019 respectively, the Company had net operating loss carryforwards (“NOLs”) for income tax purposes of $50,596,940 and $47,430,184. $34,481,122 of the Company's net operating loss carryforwards are expected to expire at various times from 2025 through 2039. $16,115,818 of the NOL carryforwards generated in tax years ending March 31, 2019 to present have no expiration date. 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. 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 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.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
|
|
2020
|
|
|
2019
|
|
Tax benefit computed at U.S. statutory rates
|
|
$
|
(2,178,478
|
)
|
|
$
|
(4,424,959
|
)
|
Increases (decreases) in taxes resulting from:
|
|
|
|
|
|
|
|
|
IRC Section 280E
|
|
|
202,877
|
|
|
|
968,870
|
|
Other permanent items
|
|
|
22,948
|
|
|
|
35,590
|
|
Change in valuation allowance
|
|
|
1,952,653
|
|
|
|
3,420,499
|
|
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, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
$
|
2,943,816
|
|
|
$
|
2,883,491
|
|
Net operating loss carryforward
|
|
|
10,625,357
|
|
|
|
9,960,339
|
|
Impairment of long-lived assets
|
|
|
975,461
|
|
|
|
-
|
|
Depreciation and Amortization expense
|
|
|
(324,707
|
)
|
|
|
(416,944
|
)
|
Other temporary items
|
|
|
136,243
|
|
|
|
68,520
|
|
Total deferred tax assets
|
|
|
14,356,170
|
|
|
|
12,495,406
|
|
Less valuation allowance
|
|
|
(14,356,170
|
)
|
|
|
(12,495,406
|
)
|
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, 2020, 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 2017 and thereafter are subject to examination by taxing authorities under the normal statutes of limitations in the applicable jurisdictions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Capital Transactions
Increase in Authorized Capital
Effective April 8, 2018, Shareholders of the Company approved the change in corporate domicile from the State of Delaware to the State of Nevada and an increase in the number of authorized capital shares from 250,000,000 to 400,000,000. On August 15, 2019, Shareholders of the Company approved an increase in authorized capital shares from 400,000,000 to 600,000,000.
Year Ended March 31, 2020
Stock Issued for Debt Conversions
During the year ended March 31, 2020, the Company issued a total of 7,583,333 shares of common stock for the conversion of notes payable:
On May 28, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $170,000 of the principal balance of the 8% Senior Secured Promissory Note dated February 28, 2019 (See Note 6). Accordingly, the Company issued 1,000,000 shares of its common stock based on a $0.17 per share conversion price. In connection with the conversions, $17,225 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $152,775.
On August 1, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $110,000 of the principal balance of the Amended CSW Note at $0.11 per share. Accordingly, the Company issued 1,000,000 shares of its common stock. In connection with the conversions, $9,579 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $100,421. After conversion, the remaining balance outstanding was $1,361,863.
On December 16, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $120,000 of the principal balance of the Amended CSW Note at $0.04 per share and we issued 3,000,000 shares of common stock. In connection with the conversions, $57,551 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $62,449. After conversion, the remaining balance outstanding was $1,271,863 and the carrrying amount of the note was $687,021, net of $584,842 in unamortized discount from the beneficial conversion feature.
During the year ended March 31, 2020, the Company has honored the conversion of a total of a total of $125,000 of debt owed under the Iliad Note at reduced conversion rates. On October 30, 2019, the Company received notice of the conversion of $75,000 at $0.06 per share and issued 1,250,000 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $64,706, and the Company recorded an expense in that amount. On November 18, 2019, the Company received notice of the conversion of $50,000 of the note balance at $0.0375 per share and issued 1,333,333 shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by $62,353, and the Company recorded an expense in that amount. In total, the Company recorded $127,059 in noncash expense for the two conversions of the Iliad note at below contractual conversion rates for the year ended March 31, 2020.
Exercise of Warrants for Stock
During the year ended March 31, 2020, the Company issued 17,563,000 shares of common stock for exercises of warrants:
In order to encourage the exercise of approximately 70.5 million warrants issued to investors in private placements of convertible notes and common stock having exercise prices ranging between $0.65 and $0.30, the Company effected a temporary decrease in the exercise price of the warrants to $0.10 per share until July 11, 2019. On July 12, 2019, the Company extended the repricing of the warrants through August 30, 2019, and on July 31, 2019, the Company extended the repricing of the warrants to December 31, 2019. As a result of the price reduction, the Company received notice of the exercise of 9,449,750 warrants and received proceeds of $850,478, net of brokerage fees of $94,498. In connection with the induced exercise of the warrants, the Company recorded an inducement dividend of $230,025.
In order to encourage the further exercise of the warrants, the Company effected a temporary decrease in the exercise price of the warrants to $0.03-$.05 per share beginning in December 2019. As a result of the price reduction, the Company received notice of the exercise of an additional 8,113,250 warrants and received proceeds of $307,249, net of brokerage fees of $22,566. In connection with the induced exercise of the warrants, the Company recorded an inducement dividend of $32,215.
Issuance of Stock for Services
During the year ended March 31, 2020, the Company issued 2,100,000 shares of common stock for consulting services and recorded related expense of $214,000 based on the fair value of the stock on the date of the related consulting agreements.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Issuance of Stock and warrants for Cash
During the year ended March 31, 2020, the company issued 7,668,167 shares of common stock for cash as follows:
On December 4, 2018, the Company entered into a Placement Agent’s Agreement to offer a total of 15,000,000 units at the price of $0.20 per unit up to a total of $3 million. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at the price of $0.60 for a period of five years. On January 15, 2019, the Placement Agent’s Agreement was amended to decrease the unit price from $0.20 per unit to $0.15 per unit for a total of 20,000,000 units and decrease the exercise price of the warrants included in each unit from $0.60 to $0.30, applied retroactively to funds raised prior to the date of the amendment, with no other changes to the agreement. During the year ended March 31, 2020, the Company received a total of $478,696 in proceeds from the private placement, net of $71,529 in brokerage fees and issued 3,668,167 shares of its common stock and 3,668,167 warrants to purchase one share of its common stock at $0.30 per share.
During the year ended March 31, 2020, the Company issued 1,954,613 compensation warrants to its brokers in connection with the December 4, 2018 private placement. The warrants are exercisable at $0.30 for a period of five years. The warrants were valued at $132,914 at the grant date using the Black-Scholes Model, and the expense is recorded in general and administrative expenses for the year ended March 31, 2020.
On October 10, 2019, the Company issued 4,000,000 shares of common stock and 2,000,000 warrants to purchase one share of common stock at $0.08 per share for a period of three years to an investor for $240,000 cash. The warrants were valued at $110,000 on the date of issuance using the Black-Scholes model.
Year Ended March 31, 2019
Stock Issued for 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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 $592,638. 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 recognized a total of $806,282 in share-based compensation expense related to all outstanding options during the year ended March 31, 2019.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants Outstanding
Presented below is a summary of the Company’s warrant activity for the years ended March 31, 2020 and 2019:
|
|
Warrants Outstanding
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
Warrants issued
|
|
|
7,622,780
|
|
|
$0.30
|
|
Warrants exercised
|
|
|
(17,563,000)
|
|
|
$0.035-$0.10
|
|
Warrants expired/cancelled
|
|
|
(5,312,608)
|
|
|
$0.50-$2.00
|
|
Outstanding at March 31, 2020
|
|
|
84,538,161
|
|
|
|
|
Note 11 – Employee Benefit Plan
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company as of April 1, 2019. The Company determined that all share-based payments were settled as of the date of the adoption, so there was no impact on the Company's consolidated financial statements.
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, 4,500,000 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 and the Company adopted the GB Sciences, Inc 2018 Stock Plan. On October 25, 2018, GB Sciences filed a Form S-8 Registration Statement with the SEC to register 10,000,000 shares of common stock issuable under the 2018 Plan. There were 9,450,333 shares available for issuance under the stock plans at March 31, 2020.
Compensation Expense
For the years ended March 31, 2020 and 2019, the Company recorded share-based compensation expense of $103,472 and $806,282, respectively, related to employee stock options. There was no expense for restricted stock. All awards were vested and the Company had no unrecognized compensation cost for non-vested awards as of March 31, 2020.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
The closing price of the Company's stock on the date of grant is used as the fair value for 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.
No new option awards were granted during the year ended March 31, 2020. The following range of assumptions in the Black-Scholes option pricing model was used to determine fair value at the years ended below:
|
|
Year Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Weighted-average volatility
|
|
|
N/A
|
|
|
|
181.00
|
%
|
Expected term (in years)
|
|
|
N/A
|
|
|
|
10
|
|
Risk-free interest rate
|
|
|
N/A
|
|
|
|
2.74
|
%
|
Expected volatilities used for award valuation in 2019 are based on 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, 2020 and 2019, and changes during the years then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price $
|
|
|
Life (years)
|
|
|
Value ($)
|
|
Outstanding at April 1, 2018
|
|
|
13,033,334
|
|
|
$
|
0.28
|
|
|
|
8.21
|
|
|
$
|
2,646,723
|
|
Granted (Note 10)
|
|
|
400,000
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(850,000
|
)
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
12,583,334
|
|
|
$
|
0.28
|
|
|
|
7.18
|
|
|
$
|
43,000
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,600,000
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
10,983,334
|
|
|
$
|
0.28
|
|
|
|
6.02
|
|
|
$
|
-
|
|
Fully vested and expected to vest at March 31, 2020
|
|
|
10,983,334
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
10,983,334
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
No restricted stock awards were granted during the years ended March 31, 2020 and 2019.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Commitments and Contingencies
On September 18, 2017 GB Sciences finalized its agreement with Louisiana State University (“LSU”) AgCenter to be the sole operator of the LSU’s medical marijuana program. The LSU Board of Supervisors entered into a five-year agreement that has an option to renew for two additional five-year terms with GB Sciences.
The contract includes the Company’s commitment to make an annual research investments of $500,000 to the LSU AgCenter. The Company retained its 50% interest in the research relationship with LSU after the sale of its membership interest in GB Sciences Louisiana, LLC (Note 15), and accordingly remains obligated for $250,000 of the $500,000 annual research investment for three years, or a total commitment of $750,000. The research investment is paid annually in September and amortized over a one-year period.
The monetary contributions will be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, of which AgCenter would retain 50% of those rights with the other 50% retained 25% each by the Company and by GB Sciences Louisiana, LLC.
Tara “Dee” Russell filed a Charge of Discrimination with the Nevada Equal Rights Commission ("NERC") against the Company on April 2, 2019, alleging that she was subjected to sexual harassment and retaliatory discharge. The Company received the Notice of Charge of Discrimination on or about May 15, 2019. The Company submitted its response to the Notice of Discrimination Charge on July 26, 2019. It is the Company's position that Ms. Russel was not an employee of the Company, but rather was an independent contractor. The Company intends to aggressively respond to the charge. To date, the NERC has not issued a ruling regarding the charge.
On April 22, 2020, the Company failed to repay any of the outstanding balance of the Convertible Promissory Note Payable to Iliad Research and Trading, L.P. (Note 7), resulting in a default. Pursuant to the terms of the Promissory Note, upon the default, the principal and accrued interest balances outstanding increased by 10% and the Company anticipates recording expense of $286,059 related to the default. As of June 30, 2020, the total balance due under the note was $3,234,149.
On May 20, 2020, Iliad filed a lawsuit against the Company in the Third Judicial District Court of Salt Lake County in the State of Utah demanding repayment of the note. The lawsuit further seeks to compel the Company to participate in arbitration pursuant to the arbitration provisions contained within the Note Purchase Agreement and to prohibit the Company to raise funds through the issuance of its common stock unless the note is paid in full simultaneously with such issuance. The Company filed a confession of judgment in response to the complaint and does not intend to defend the lawsuit. On July 14, 2020, the Court entered judgment in favor of Iliad in the amount of $3,264,594 and the judgment accrues interest at the default rate of 15% per annum. The Company will also be responsible for reasonable attorney's fees amd costs incurred by Iliad for obtaining and collecting on the judgment. The amount of such fees has not been established as of the date of this report. The Company believes it will have sufficient resources to repay the Iliad Note from the proceeds of the sale of the Teco Facility and the note receivable therefrom, along with the proceeds of the note receivable from Wellcana Group from the sale of the Company's membership interest in GB Sciences Louisiana, LLC.
On April 22, 2020, the Company was served notice of a lawsuit filed in the Eighth Judicial District Court in Clark County, Nevada, filed by a contractor who had been hired to perform architectural and design services. The lawsuit demands payment of $73,050 for the services provided. The Company intends to negotiate a settlement and the full amount demanded in the lawsuit of $73,050 is accrued in accounts payable as of March 31, 2020.
On December 6, 2018, the Company entered into an agreement for business advisory and consulting services. In consideration for the services, the Company issued warrants to purchase 2 million shares of the Company’s common stock at $0.1125 per share. The Company valued the warrants at $244,000 using the Black-Scholes valuation model. The fair value of the warrants was recognized as consulting expense over the term of the agreement. The Company recorded $162,667 in expense related to the warrants for the nine months ended December 31, 2019. The Company also agreed to pay the consultant a $10,000 monthly fee for 12 months and to issue 4 million restricted shares of the Company’s common stock. The Company issued 2 million shares on the date of the contract, with the remaining 2 million due nine months after the date of the agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 6, 2019, the Company entered into a Cancellation and Settlement with the consultant and terminated the December 6, 2018 agreement. In consideration for terminating the agreement, the Company will pay $135,000 as a one-time cancellation fee and will not issue the remaining two million shares due under the agreement. This amount is accrued in accounts payable as of March 31, 2020.
On October 1, 2019, the Company entered into a new agreement for business advisory and consulting services. In connection with the agreement, the Company issued 2 million shares of its common stock and agreed to pay a monthly service fee of $50,000 beginning December 1, 2019, plus a quarterly stock fee of 2 million shares 90, 180, and 270 days after the agreement. The Company recorded $180,000 expense related to the common stock payments. The agreement was mutually terminated during the year ended March 31, 2020. No cash payments were made and no services were provided.
During the year ended March 31, 2019, the Company recorded a $200,000 charge related to seizure of cash by local law enforcement during a routine traffic stop while transporting the cash to one of our subsidiaries. The charge was recorded in other expense as the Company believed it was more likely than not that the cash would not be returned. After appealing the seizure of the cash through appropriate channels, the cash was returned to the Company on September 6, 2019, and the Company recorded other income on that date.
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 13 – Deposits and Noncurrent Assets
Deposits and noncurrent assets were $91,504 and $230,651 at March 31, 2020 and 2019, respectively. The decrease in deposits and prepayments is primarily due to the Company recording expense related to a $91,600 deposit for the manufacture of research chemicals. The chemicals were delivered and used in the Company's research and development programs during the year ended March 31, 2020, and the Company recorded the amount in research and development expense. Deposits and prepayments at March 31, 2020 consist of rent and utility deposits related to the Teco facilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Related Party Transactions
As of March 31, 2020, the Company is indebted to its officers and directors for a total of $586,512 consisting of $298,450 in deferred officer compensation, $76,183 in deferred director compensation, $80,747 in accrued bonuses, and $131,132 of unreimbursed business expenses.
In connection with the sale of membership interest in GB Sciences Louisiana, LLC, the Company issued a note payable in the amount of $151,923 to John Davis, the Company's former General Counsel and President of GB Sciences Louisiana, LLC, for unpaid fees and bonuses. The note matures upon receipt of the first payment from the Wellcana Note Receivable (Note 15). The note is recorded on the March 31, 2020 consolidated balance sheet under note payable to related party.
During the year ended March 31, 2017, the Company entered into a consulting contract with Quantum Shop, a Company owned by a relative of one of the Company’s executives. Quantum Shop provided GB Sciences with research, design, development, fabrication, and production services. During the year ended March 31, 2019, the Company made payments totaling $1.1 million to Quantum Shop primarily related to the build-out of the cultivation and production facility in Baton Rouge, Louisiana owned by GB Sciences Louisiana, LLC.
During the year ended March 31, 2017, the Company entered into an advisory agreement with Electrum Partners, LLC, a company whose President resides on GB Sciences’ Board of Directors and serves as a Chair of the Audit Committee. The agreement has a term of one year and was renewed for a successive one-year period on March 31, 2018. During the 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.
On November 1, 2017, the Company entered into an Edibles Production Agreement (the “EPA”) with The Happy Confections, L.L.C. (“THCLLC”) through the Company’s wholly-owned subsidiary, GB Sciences Las Vegas, LLC (“GBLV”). A member of GB Science’s Board of Directors is a Co-Managing Member of THCLLC. Under the EPA, THCLLC was to produce cannabis-infused baked goods and other edibles in GBLV’s production facility. The Company would receive a royalty of between 20% and 25% on all sales of edibles produced by THCLLC. THCLLC never made sales under the agreement and no royalties were accrued.
Contemporaneously with the EPA, the Company entered into a Non-Revolving Credit Line Agreement and Non-Revolving Credit Line Promissory Note (together, the “THC Note” or “Note”) to advance up to $300,000 to THCLLC for the purpose of expanding THCLLC’s operations. Beginning 90 days after the sale of its first product, THCLLC was to make repayment of its advances under the Note in an amount equal to 25% of its gross sales revenue.
As of October 19, 2018, the Company had advanced $253,034 under the THC Note. The Company terminated the Edibles Production Agreement and all other related agreements with THC LLC effective October 19, 2018 and took possession of all tangible assets owned by THCLLC on October 22, 2018, as collateral for the balance owed under the Note. These assets included kitchen and production equipment, leasehold improvements, and inventory used in Company’s production operations at the Teco Facility.
The Company assessed the fair value of the machinery and equipment received at $139,411 and capitalized that amount in fixed assets during the 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. The Company 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Sale of 50% Membership Interest in GB Sciences Louisiana, LLC
On February 12, 2018, the Company’s wholly-owned subsidiary, GB Sciences Louisiana, LLC (“GBSLA"), issued members’ equity interests equal to 15% in GBSLA to Wellcana Group, LLC (“Wellcana”) for $3 million. Under the GBSLA operating agreement, Wellcana had an option to make additional capital contributions for the purchase of up to an additional 35% membership interest in GBSLA, at the rate of 5% membership interest per $1 million contributed. To date, Wellcana has made additional cash contributions of $7.0 million and its non-controlling interest in GBSLA increased to 49.99%. The capital contributions have been used to fund the buildout of the Petroleum Drive facility and to pay for the operating costs of GBSLA.
On November 15, 2019, the Company entered into the Membership Interest Purchase Agreement ("MIPA") with Wellcana Plus, LLC ("Purchaser"), an affiliate of Wellcana Group, LLC. In consideration for the sale of its 50.01% membership interest in GBSLA, the Company received the $8,000,000 Promissory Note ("Wellcana Note") and may receive up to an additional $8,000,000 in earn-out payments.
The Wellcana note bears interest at a rate of 5% per annum and payments are due beginning June 1, 2020, and ending December 1, 2021. The Company recorded a $1,389,408 discount on the note receivable based on an imputed interest rate of 17.0%, and the carrying amount of the note was $6,610,592 as of November 15, 2019:
November 15, 2019 Note Receivable
|
|
Note Payments
|
|
June 1, 2020
|
|
$
|
500,000
|
|
September 1, 2020
|
|
|
750,000
|
|
December 1, 2020
|
|
|
1,000,000
|
|
March 1, 2020
|
|
|
1,250,000
|
|
June 1, 2021
|
|
|
1,500,000
|
|
September 1, 2021
|
|
|
1,500,000
|
|
December 1, 2021
|
|
|
1,500,000
|
|
TOTAL PAYMENTS
|
|
|
8,000,000
|
|
DISCOUNT ON NOTE RECEIVABLE
|
|
|
(1,389,408
|
)
|
NET PRESENT VALUE
|
|
$
|
6,610,592
|
|
Upon close of the sale on November 15, 2019, the Company recorded a gain on deconsolidation of $4,393,242 related to the sale of its membership interest in GBSLA, calculated as follows:
|
|
As of
|
|
Gain on Deconsolidation
|
|
November 15, 2019
|
|
Present value of promissory note
|
|
$
|
6,610,592
|
|
Carrying amount of non-controlling interest
|
|
|
8,707,651
|
|
TOTAL
|
|
|
15,318,243
|
|
|
|
|
|
|
Carrying amount of assets
|
|
|
14,715,798
|
|
Carrying amount of liabilities
|
|
|
(3,790,797
|
)
|
Net assets deconsolidated
|
|
|
10,925,001
|
|
GAIN ON DECONSOLIDATION
|
|
$
|
4,393,242
|
|
On August 24, 2020, the Company entered into a letter of intent with Wellcana to discount the note receivable in exchange for accelerated payment. Pursuant to the letter of intent, the Company will receive payments totaling $5,224,423, including the forgiveness by Wellcana of $324,423 in liabilities and the payment of $4,900,000 in cash, on or before October 15, 2020, less any cash payments made by Wellcana up to the date of the final payment. Upon receipt of the payment, all liabilities owed to the Company by Wellcana, including the $8,000,000 note receivable and any potential earn-out payments will be considered satisfied in full. Wellcana will assume the annual $250,000 research contribution commitment to LSU (Note 12) and the Company will retain no rights in the intellectual property developed under the research relationship. In addition, the Company agreed to reduce the $750,000 note payment due on September 1, 2020 to $500,000. Should Wellcana fail to make the $4,900,000 payment, less any offsets from payments made to date on the note receivable, the term sheet will be void and the original terms of the Membership Interest Purchase Agreement and $8,000,000 note receivable will prevail.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the August 24, 2020 letter of intent, the Company determined that the amount of the note that was collectible as of March 31, 2020 was $5,224,423 and recorded a loss on modification of note receivable calculated as follows:
August 24, 2020 Modification
|
|
March 31, 2020
|
|
Total cash payments to be made by October 15, 2020
|
|
$
|
4,900,000
|
|
Liabilities to be forgiven upon receipt of October 15, 2020 payment
|
|
|
324,423
|
|
Total receivable (as modified)
|
|
|
5,224,423
|
|
|
|
|
|
|
Carrying value of note receivable as of March 31, 2020
|
|
|
6,969,720
|
|
Accrued interest as of March 31, 2020
|
|
|
150,137
|
|
Total amount receivable as of March 31, 2020
|
|
|
7,119,857
|
|
|
|
|
|
|
LOSS ON MODIFICATION OF NOTE RECEIVABLE
|
|
$
|
(1,895,434
|
)
|
The Company granted forbearance of the $500,000 payment originally scheduled for June 1, 2020 in light of the circumstances created by the COVID-19 pandemic. The payment was received by the Company on August 4, 2020, net of the Company's annual $250,000 research contribution commitment to LSU (Note 12) and the principal and accrued interest payable to John Davis (Note 14), totaling $189,423 as of the date of payment.
The Company may also receive up to $8,000,000 in earn-out payments under the MIPA. Earn-out payments are calculated as 25% of the distributions made by GBSLA to Purchaser through September 30, 2022, and 10% of distributions made thereafter under any extension or renewal of the relationship with LSU. The Company accounts for contingent consideration under a loss recovery approach. Under a loss recovery approach, the Company records a contingent consideration asset only to the extent of the lesser of, 1) the amount that the non-contingent consideration received is exceeded by the net assets deconsolidated, or 2) the amount of contingent consideration that it is probable will be received. As of the transaction date, the Company was unable to determine that it was probable that any of the contingent consideration would be received, and accordingly no asset was recorded for contingent consideration. Subsequent measurement of contingent consideration will be based on the guidance for gain contingencies, and any gain from contingent consideration will be recorded at the time the consideration is received. If the October 15, 2020 payment of $4,900,000, net of offsets for any prior payments, is received pursuant to the August 24, 2020 letter of intent, no future earn-out payments will be due to the Company.
For all periods presented in the consolidated financial statements, the assets, liabilities, income, and cash flows of GBSLA have been reclassified to discontinued operations. The losses and cash flows from discontinued operations for the year ended March 31, 2020 represent activity through the close of the sale on November 15, 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16 - Sale of 100% Membership Interest in Teco Facility and Nopah License
On November 15, 2019, we entered into a Binding Letter of Intent ("Teco LOI") to sell 75% of the Company's membership interest interests in GB Sciences Nevada, LLC, and GB Sciences Las Vegas, LLC, for $3.0 million cash upon close and up to an additional $3.0 million in earn-out payments after close. In connection with the Teco LOI, we entered into a Management Agreement with the purchaser whereby the facilities will be managed by an affiliate of the purchaser until the close of the sale. As part of the transaction, the Company also entered into a Line of Credit of up to $470,000 with the purchaser (Note 6) to fund the operations of Teco. The line of credit accrues interest at a rate of 8% and the Company pledged its interest in the Teco facilities as collateral for the note, subject to the preexisting lien for collateralization of the CSW Ventures Note (Note 7). The Line of Credit will be considered satisfied in full upon close of the sale of the Teco Facility.
On March 24, 2020, we entered into the Membership Interest Purchase Agreement ("Teco MIPA") which formalized the sale of the Teco Subsidiaries and modified the terms of the sale. Pursuant to the Teco MIPA, the Company will sell 100% of its membership interests in GBSN and GBLV for $4.0 million cash upon close and will receive a $4.0 million 8% promissory note to be paid in monthly installments over 36 months.
The sale is expected to close upon the successful transfer of the Nevada cultivation and production licenses. The transfer of cannabis licenses in the State of Nevada has been subject to an indefinite moratorium since October 2019. In a meeting held on July 21, 2020, the Nevada Cannabis Compliance Board lifted the moratorium, however, the board has indicated that there are over 90 requests pending and it will take up to several months to process the entire backlog of pending license transfers. Based on this information, we cannot provide any assurances as to the timing of the close of the sale. The lifting of the moratorium and processing of cannabis license transfers have been delayed by the COVID-19 pandemic and could be further delayed if the pandemic continues.
The Company also holds a Nevada license for cultivation of medical marijuana located in Sandy Valley, Nevada (the “Nopah License”). The license is owned by the Company’s wholly owned subsidiary, GB Sciences Nopah, LLC ("Nopah"). Operations have not begun under the Nopah License. On November 27, 2019, the Company entered into a Binding Letter of Intent to sell its 100% interest in GB Sciences Nopah, LLC (the “Nopah LOI”), with the transaction closing upon transfer of the Nopah License. As consideration for the transfer of the license, the Company will receive $300,000 and the purchaser will pay all expenses related to the upkeep and maintenence of the Nopah License. The transfer of the Nopah License is subject to the same restrictions on license transfers discussed above.
Note 17 – Concentrations
For the year ended March 31, 2020, there were two customers that accounted for 12.2% and 13.8% of total revenue. Three customers accounted for 29.6%, 28.5%, and 16.9% of accounts receivable. We held no cash in excess of FDIC limits as of March 31, 2020. Of the Company's total sales of $3,689,697 during the year ended March 31, 2020, $3,120,620 or 85% were in the State of Nevada and $569,077 or 15% were part of discontinued operations in the State of Louisiana.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 – Subsequent Events
Capital Transactions
Subsequent to March 31, 2020, the Company issued 4,991,084 of common stock for exercises of outstanding warrants at discounted prices from $0.03 to $0.035 (Note 10), and received $136,082 cash proceeds net of $15,120 in brokerage fees.
On May 7, 2020, the Company received $135,000 cash from an investor, net of $15,000 in brokerage fees, and issued a $150,000 convertible promissory note. The note bears interest at a rate of 8.0% per annum. The note is to be repaid upon the first proceeds received from the $8 million promissory note related to the sale of the Company's membership interest in GB Sciences Louisiana, LLC (Note 15), or from the proceeds of the sale of the Teco Facility (Note 16). As inducement to enter into the note transaction, the Company repriced 8,002,500 preexisting warrants held by the investor to an exercise price of $0.04. The repriced warrants were valued at $272,085 on the date of the transaction using the Black-Scholes Model, which exceeded the value of the warrants prior to the price reduction of $49,525 by $222,560. As the result of the increase in the estimated fair value of the warrants, the Company recorded a full discount on notes payable of $150,000.
On July 24, 2020, the Company entered into the Loan Agreement, 8% Secured Promissory Note, and Security Agreement (together, the "July 24 Note") with AJE Management, LLC, which established a revolving loan of up to $500,000 that the Company may draw on from time to time. The loan is collateralized by the Teco Facility, subject to the pre-existing lien held by CSW Ventures, Inc. (Note 7). Any advances will be made at the sole discretion of the lender following a written request made by the Company. Contemporaneously with the Loan Agreement, the Company and AJE Management entered into the Amendment to the Membership Interest Purchase Agreement with AJE Management. The amendment provides that any balances outstanding under the July 24 Note at the time of the close of the sale of the Teco Facility will be forgiven in exchange for a reduction to the $4.0 million note receivable that the Company will receive as consideration for the sale of the Teco Facility (Note 16). The reduction to the note receivable will be equal to 3 times the balance outstanding under the July 24 Note on the date of the close of the sale of the Teco Facility. As of the date of this report, the Company has not received any advances under the July 24 Note.
Litigation
On April 22, 2020, the Company failed to repay any of the outstanding balance of the Convertible Promissory Note Payable to Iliad Research and Trading, L.P. (Note 7), resulting in a default. Pursuant to the terms of the Promissory Note, upon the default, the principal and accrued interest balances outstanding increased by 10% and the Company recorded expense of $286,059 related to the default. As of June 30, 2020, the total balance due under the note was $3,234,149.
On May 20, 2020, Iliad filed a lawsuit against the Company in the Third Judicial District Court of Salt Lake County in the State of Utah demanding repayment of the note. The lawsuit further seeks to compel the Company to participate in arbitration pursuant to the arbitration provisions contained within the Note Purchase Agreement and to prohibit the Company to raise funds through the issuance of its common stock unless the note is paid in full simultaneously with such issuance. The Company filed a confession of judgment in response to the complaint and does not intend to defend the lawsuit. On July 14, 2020, the Court entered judgment in favor of Iliad in the amount of $3,264,594 and the judgment accrues interest at the default rate of 15% per annum. The Company will also be responsible for reasonable attorney's fees and costs incurred by Iliad for obtaining and collecting on the judgment. The amount of such fees has not been established as of the date of this report. The Company believes it will have sufficient resources to repay the Iliad Note from the proceeds of the sale of the Teco Facility and the note receivable therefrom, along with the proceeds of the note receivable from Wellcana Group from the sale of the Company's membership interest in GB Sciences Louisiana, LLC.
On April 22, 2020, the Company was served notice of a lawsuit filed in the Eighth Judicial District Court in Clark County, Nevada, filed by a contractor who had been hired to perform architectural and design services. The lawsuit demands payment of $73,050 for the services provided. The Company is in the process of negotiating a settlement and the full amount demanded in the lawsuit of $73,050 is accrued in accounts payable as of March 31, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Wellcana Note Receivable
The Company granted forbearance of the June 1, 2020 payment under the Wellcana Note (Note 15) in light of the circumstances created by the COVID-19 pandemic. The payment was received by the Company on August 4, 2020, net of the Company's annual $250,000 research contribution commitment to LSU (Note 12) and the principal and accrued interest payable to John Davis (Note 5) totaling $189,423 as of the date of payment.
On August 24, 2020, the Company entered into a letter of intent with Wellcana to discount the note receivable in exchange for accelerated payment. Pursuant to the letter of intent, the Company will receive payments totaling $5,224,423, including the forgiveness by Wellcana of $324,423 in liabilities and the payment of $4,900,000 in cash, on or before October 15, 2020, less any cash payments made by Wellcana up to the date of the final payment. Upon receipt of the payment, all liabilities owed to the Company by Wellcana, including the $8,000,000 note receivable and any potential earn-out payments will be considered satisfied in full. Wellcana will assume the annual $250,000 research contribution commitment to LSU (Note 12) and the Company will retain no rights in the intellectual property developed under the research relationship. In addition, the Company agreed to reduce the $750,000 note payment due on September 1, 2020 to $500,000. Should Wellcana fail to make the $4,900,000 payment, less any offsets from payments made to date on the note receivable, the term sheet will be void and the original terms of the Membership Interest Purchase Agreement and $8,000,000 note receivable will prevail.
As a result of the August 24, 2020 letter of intent, the Company determined that the amount of the note that was collectible as of March 31, 2020 was $5,224,423 and recorded a loss on modification of note receivable of $(1,895,434) for the year ended March 31, 2020.
Note 19 – 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. 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 years ended March 31, 2020 and 2019.