GB SCIENCES INC - Quarter Report: 2016 September (Form 10-Q)

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________________________

 

FORM 10-Q

__________________________

 

(Mark One)

 

For the transition period from __________ to ___________

GROWBLOX SCIENCES, INC.

(Exact name of registrant as specified in its charter)

3550 W. Teco Avenue

Las Vegas, Nevada 89118

Phone: (866) 721-0297

(Address and telephone number of

principal executive offices)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý  Yes     ☐  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ý  Yes     ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).  ☐  Yes     ý  No  

 

There were 89,137,778 shares of common stock, par value $0.0001 per share, outstanding as of November 14, 2016.

 

GROWBLOX SCIENCES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

 

INDEX

 

 

ITEM 1. Financial Statements

 

 

 

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of Growblox Sciences, Inc. (the "Company," "We" or "Us") have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulations S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending March 31, 2017. The balance sheet at March 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 2016.

Principles of Consolidation

The condensed consolidated financial statements include all operating divisions and majority owned subsidiaries, reported as a single operating segment, for which we maintain controlling interests. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the comparative period amounts in order to conform to the current period presentation.  These reclassifications had no effect on the reported financial position, results of operations or cash flows of the entity.

Significant Accounting Policies

A description of the Company's significant accounting policies is included in Note 3 of its Annual Report on Form 10–K for the fiscal year ended March 31, 2016.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued amended accounting guidance that changes the accounting for leases and requires expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The amended guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018, and early application is permitted. The Company is currently evaluating the impact this guidance will have on its financial position and results of operations.

 

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

Note 2 – Going Concern

The Company's condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained net losses since inception, which have caused an accumulated deficit of approximately $24.6 million at September 30, 2016. In addition, the Company has consumed cash in its operating activities of approximately $1.7 million for the six months ended September 30, 2016 compared to $1.6 million for the same period last year. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.

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

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

Note 3 – Convertible Notes

In February 2016, the Company issued a short-term Promissory Note ("Note") with a face value of $192,500 resulting in aggregate proceeds of $175,000 reflecting a 9.1% original discount and a nominal rate of 10%. The Note is payable within one year of issuance and is convertible into 962,500 shares of the Company's common stock and 962,500 common stock purchase warrants at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.50 per share for a period of three years.  The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $94,037 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $66,912 was recorded based on the fair value of the 962,500 warrants attached to the note. This value was derived using the Black-Scholes valuation model. At September 30, 2016, the Note had a balance of $0.1 million net of $0.06 million unamortized discount and beneficial conversion feature.

In March 2016, the Company issued a short-term Promissory Note ("Note") with a face value of $300,000 resulting in aggregate proceeds of $250,000 reflecting a 16.67% original discount and a nominal rate of 20%. The Note is payable within one year of issuance and is convertible into 1,500,000 shares of the Company's common stock and 1,500,000 common stock to purchase warrants at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.50 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $143,750 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $93,750 was recorded based on the fair value of the 1,500,000 warrants attached to the note. At September 30, 2016, the Note had a balance of $0.2 million net of $0.1 million unamortized discount and beneficial conversion feature.

In July 2016, the Company issued a short-term Promissory Note ("Note") resulting in aggregate proceeds of $500,000. The Note is payable within one year of issuance and is convertible into 2,500,000 shares of the Company's common stock at any time and from time to time before maturity at the option of the holder. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $350,000 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the note. At September 30, 2016, the Note had a balance of $0.2 million net of $0.3 million unamortized beneficial conversion feature.

The Notes and Warrants were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 (the "Securities Act") and/or Rule 506 of Regulation D under the Securities Act, as amended.

Note 4– Note Payable

The Company entered into a Note Purchase Agreement, dated May 12, 2015 and effective as of June 8, 2015, with Pacific Leaf Ventures, LP ("Pacific Leaf"), pursuant to which Pacific Leaf has made installment loans (the "Loans") to us in the aggregate amount of $1.75 million. The purpose of the financing is to provide for the acquisition and installation of an operating facility, equipment and other tangible assets by GBSN. Such facility and equipment will be dedicated to the cultivation of cannabis and the extraction of oils and other constituents present in cannabis, subject at all times to Nevada legal requirements. The note is convertible at the option of the holder into common shares at a conversion price of $0.50, subject to anti-dilution adjustments.

To evidence the Loans, the Company issued to Pacific Leaf a 6% senior secured convertible promissory note (the "Note"), bearing interest at the rate of 6% per annum, payable quarterly. All outstanding principal and interest due under the Note were due and payable on May 12, 2020. We were required to prepay the outstanding principal amount of the Note on a quarterly basis in an amount equal to 50% of the cash flow (accrued EBITDA) of GB Sciences Nevada, LLC ("GBSN") attributable to our percentage interest in GBSN no later than the earlier to occur of (a) the fifth (5th) business day following receipt of a distribution of the Company's Share of GBSN's EBITDA for the calendar quarter in question, or (b) thirty (30) days following the end of the calendar quarter in question, with the first such prepayment to be made not later than July 31, 2015 with respect to the quarter ending June 30, 2015. In order to induce the Pacific Leaf to extend the loan to the Company and to secure the payment and performance of all of the Secured Obligations, the Company agreed to grant Pacific Leaf a security interest in certain of its assets and enter into the lending agreement.

On February 8, 2016, the Company entered into the Amended and Restated 6% Senior Convertible Promissory Note ("Amended Note") with Pacific Leaf Ventures, LP ("Pacific Leaf").  The amended agreement modifies the 6% Senior Secure Convertible Promissory Note dated May 12, 2015 and effective as of June 8, 2015, in the principal amount of $1.75 million.

Per the terms of the amended agreement, Pacific Leaf may make up to $1.0 million in additional advances to the Company under the Amended Note bringing the total in the aggregate to $2.75 million. The note is convertible at the option of the holder into common shares at a conversion price of $0.25, subject to anti-dilution adjustments. The Company has an option to prepay the Amended Note, without premium or penalty, in whole or in part, with accrued interest to the date of such prepayment.

Until the payment in full of the Amended Note, the Investor or its designee shall have the option (the "Option") to purchase up to a 20% membership interest in GBSN for a purchase price equal to $100,000 for each 2% of membership interest purchased (i.e., $1,000,000 if the Option is exercised in full), provided that the Option may not be exercised for less than a 1% membership interest in GBSN.

In connection with the Amended Note, the Company also entered into the Amended and Restated Royalty Agreement with Pacific Leaf dated and effective as of February 8, 2016.  Per the terms of the Amended Royalty Agreement, the royalty rate at any time shall equal to the sum of (i) 9.1%, and (ii) the percentage calculated by dividing the amount advanced in excess of $1.75 million by $1.0 million, multiplied by the gross revenues of GBSN.  On the earlier of (i) the seventh anniversary of the royalty payment date, or (ii) the date that all amounts outstanding under the Amended Note have been paid in full, the royalty rate shall be reduced by 50%.

On June 13, 2016 the Company received notice from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory.  Accordingly, the Company has issued 2,000,000 shares of its common stock ($500,000 converted at a price of $0.25 per share) to Pacific Leaf and the Company's indebtedness to Pacific Leaf pursuant to the Note has been reduced by $500,000. As of September 30, 2016, the total amount of installments received, net of conversion, is $2.1 million.

On August 4, 2016, the Company entered into the Second Omnibus Amendment ("Second Amendment") of its existing agreements with Pacific Leaf.  The Second Amendment eliminates Pacific Leaf's option to purchase up to a 20% membership interest in GB Sciences Nevada LLC, a wholly owned subsidiary of the Company ("GBS") and reduces Pacific Leaf's existing royalty rate to 16.4% of the gross sales revenue of GBS.  It also caps maximum aggregate royalty payments to be made to Pacific Leaf at $2,420,000 with respect to any calendar year. In consideration of the amended terms, Pacific Leaf and its designees received 1,000,000 shares of the Company's common stock and a five-year warrant to purchase 1,500,000 shares of the Company's common stock at $0.36 per share resulting in related expense of approximately $0.9 million.

Note 5 – Capital Lease

In July, 2016, an entity associated with Pacific Leaf Partners, LLC completed the purchase of the building housing the Company's cultivation facility at 3550 W. Teco Ave., Las Vegas, NV. In connection with the purchase, the Company entered into an amended lease agreementfor an initial term of 10.5 years with one option to extend the lease for five years, or until December 31, 2030. The monthly rent payments per the Amended Lease Agreement are $40,000 through December 31, 2017. Commencing January 1, 2018, the monthly rent payments will increase by 3% per annum through the expiration of the lease. We analyzed the transaction in accordance with the applicable accounting guidance determining that aggregate amount of $3.9 million met the requirements for capitalization. The building has been capitalized and is included in September 20, 2016 property and equipment, net balance with related obligations included as part of current and non-current liabilities. The obligation recorded is based upon the present value of the future minimum lease payment discounted at 11.6% interest rate. 

Note 6 – Capital Transactions

During the six months ended September 30, 2016, the Company issued an aggregate of 1,853,054 shares of common stock in settlement and release of certain obligations owed by the Company to various persons and recorded related expenses of $0.6 million, as follows:

·	The Company issued 512,275 shares of its common stock in connection with the conversion of $0.2 million in indebtedness owed by us to various persons at a conversion price of approximately $0.38 per share.

·	The Company issued 323,692 shares of common stock in connection with settlement of payroll liabilities owed by us to our executives at a conversion price of $0.19 per share. The Company recorded approximately $0.1 million of compensation expense.

·	The Company issued 1,017,087 shares of its common stock in connection with the conversion of $0.3 million in indebtedness owed by us to various persons at a conversion price of approximately $0.33 per share.

On April 8, 2016, the Company issued 200,000 of its common shares to its former Chief Financial Officer, in exchange for a full dismissal with prejudice of all causes of action pending in the complaint filed against the Company on August 19, 2015. The Company recorded approximately $0.04 million of legal settlement expense.

During the six months ended September 30, 2016, The Company issued 202,394 shares in exchange for consulting services and recorded a related expense of $0.07 million. The Company also issued 100,000 shares of common stock to employees and recorded an expense of $0.03 million.

On June 13, 2016 the Company received notice from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory.  Accordingly, the Company has issued 2,000,000 shares of its common stock ($500,000 converted at a price of $0.25 per share) to Pacific Leaf.

On August 4, 2016, Company issued 1,000,000 shares to Pacific Leaf and its designees and recorded a related expense of $0.4 million. The common shares were issued to satisfy the conditions under the Second Omnibus Amendment described in detail in Note 4 to the financial statements for the six months ended September 30, 2016.

On August 9, 2016, the Company finalized a settlement agreement in final disposition of the lawsuit filed by the Company on April 2, 2014, in the United States District Court for the Southern District of New York.  The suit is more particularly described in Part I, Item 3 of the Company's Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on July 14, 2016.  The Company issued 1,400,000 shares of restricted common stock to certain non-affiliates of the Company and recorded a related expense of $0.4 million.

During six months ended September 30, 2016, the Company sold 14,847,500 units through a private placement at a price of $0.20 per unit.  Each unit consisted of one share of common stock and one common stock purchase warrant, expiring in three years, with an exercise price of $0.50. The Company also sold 9,281,750 units through a private placement at a price of $0.20 per unit.  Each unit consisted of one share of common stock and one common stock purchase warrant, expiring in five years, with an exercise price of $0.60. The Company recorded net proceeds of $4.1 million as a result of these issuances.

Options and Warrants

On June 1, 2016, we issued 900,000 stock options under our 2014 Equity Incentive Plan to the independent members of the Company's Board of Directors. The options are exercisable upon vesting for a period of 7 years from issuance at an exercise price of $0.16 per share. As of September 30, 2015, the Company recognized total of $0.1 million in share-based compensation expense related to options vested to date.

On June 1, 2016, we issued 1,400,000 stock options under our 2014 Equity Incentive plan to our Chief Executive Officer. The options are exercisable upon vesting for a period of 7 years from issuance at an exercise price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.2 million in share-based compensation expense related to options vested to date.

Effective on June 1, 2016, the Company amended its employment agreement with its Chief Science Officer, Andrea Small-Howard.  Pursuant to the amendment, Dr. Small-Howard surrendered a stock award for 450,000 shares of common stock in exchange for warrants to purchase 1,200,000 common shares at the strike price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.1 million in share-based compensation expense related to warrants vested to date.

On June 30, 2016, we issued 200,000 stock options under our 2014 Equity Incentive Plan to various employees. The options are exercisable upon vesting for a period of 10 years from issuance at an exercise price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.01 million in share-based compensation expense related to options vested to date.

On August 4, 2016, Company issued a warrant to purchase 1,500,000 shares of the Company's common stock at the price of $0.36 per share to Pacific Leaf and its designees and recorded a related expense of $0.5 million. The warrant to purchase common shares was issued to satisfy the conditions under the Second Omnibus Amendment described in detail in Note 4 to the financial statements for the six months ended September 30, 2016.

All of the foregoing securities were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 (the "Securities Act") and/or Rule 506 of Regulation D under the Securities Act, as amended.

Note 7 – Commitments and Contingencies

Growblox Sciences, Inc.  v. GCM Administrative Services, LLC

On August 9, 2016, the Company finalized a settlement agreement in final disposition of the lawsuit filed by the Company on April 2, 2014, in the United States District Court for the Southern District of New York.  The suit is more particularly described in Part I, Item 3 of the Company's Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on July 14, 2016.  The Company issued 1,400,000 shares of restricted common stock to certain non-affiliates of the Company and recorded a related expense of $0.4 million

Cathryn Kennedy Complaint Settlement

On August 19, 2015, Cathryn Kennedy, our former Chief Financial Officer, filed a Complaint against us in the District Court in Clark County, Nevada alleging that she was assigned new duties by us which constituted a termination without cause effective July 24, 2015, and that as a consequence thereof she is entitled to severance, vacation pay and stock compensation from us pursuant to her Employment Agreement dated November 18, 2014.  On April 8, 2016, the Company entered into a mutual agreement with Cathryn Kennedy per terms of which the Company issued 200,000 of its unrestricted common shares valued at $40,000 in exchange for a full dismissal with prejudice of all causes of action pending in the above-referenced Complaint.

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

Note 8 – Loss per Share

The Company's basic loss per share has been calculated using the weighted average number of common shares outstanding during the period. The Company had 56,613,414 and 27,558,334 of potentially dilutive common shares at September 30, 2016 and March 31, 2016, respectively.  However, such common stock equivalents were not included in the computation of diluted net loss per share as their inclusion would have been anti-dilutive.

Note 9 – Subsequent Events

Pacific Leaf Note Conversion Notice

On October 4 and October 20, 2016 the Company received notices from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory.  Accordingly, the Company has issued 4,000,000 shares of its common stock ($1,000,000 converted at a price of $0.25 per share) to Pacific Leaf and the Company's indebtedness to Pacific Leaf pursuant to the Note has been reduced by $1,000,000.

The following discussion and analysis contains "forward-looking statements," as defined in the United States Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts" or "continue" , which list is not meant to be all-inclusive and other such negative terms and comparable technology.  These forward-looking statements, include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Actual results may differ materially from the predictions discussed in these forward-looking statements.  The economic environment within which we operate could materially affect our actual results. Additional factors that could materially affect these forward-looking statements and/or predictions include among other things: (1)product demand, market and customer acceptance of Growblox Sciences products, equipment and other goods, (ii) ability to obtain financing to expand its operations, (iii) ability to attract qualified personnel, (iv)competition pricing and development difficulties, (v) general industry and market conditions and growth rates, unexpected natural disasters, and other factors, which we have little or no control: and other factors discussed in the Company's filings with the Securities and Exchange Commission ("SEC"). The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

The following discussion highlights the Company's results of operations and the principal factors that have affected our financial condition, as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis is based on the Company's unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.

Overview

The Company seeks to be an innovative technology and solution company that converts the cannabis plant into medicines, therapies and treatments for a variety of ailments. The Company is developing and utilizing state of the art technologies in plant biology, cultivation and extraction techniques, combined with biotechnology, and plans to produce consistent and measurable medical-grade cannabis, cannabis concentrates and cannabinoid therapies.

Although we believe that maximum shareholder value will ultimately be achieved through the development, production and marketing of certified cannabinoid medicines, therapies and treatments, in order to generate cash flow and near term profitability, we intend to cultivate and dispense cannabis for medical purposes in both Nevada and other states which permit such sales and in which we and our operating partners are able to obtain cultivation and dispensing licenses.

We seek to become a trusted producer of consistent and efficacious medicinal strains and products, combining both cannabinoids and terpenes, which we intend to market in those states within the United States and in other countries where the sale of medical cannabis products are permitted. In addition, subject to obtaining Food and Drug Administrative (FDA) certification, we intend to market our cannabinoid-based drug discoveries on a world-wide basis.

We were incorporated in the State of Delaware on April 4, 2001, under the name "Flagstick Venture, Inc." On March 28, 2008, stockholders owning a majority of our outstanding common stock approved changing our then name "Signature Exploration and Production Corp." as our business model had changed.

On March 13, 2014, we entered into a definitive assets purchase agreement for the acquisition of assets, including the Growblox™ cultivation technology which resulted in a change in our corporate name on April 4, 2014, from Signature Exploration and Production Corporation to Growblox Sciences, Inc.

Plan of Operation

The Company will cultivate cannabis using innovative, but conventional methods in its wholly owned subsidiary, GB Sciences Nevada, LLC ("GBSN").  GBSN is in the final stages of opening Phase 1 of an approximately 28,000 sq. ft. facility in Las Vegas, Nevada.  When all phases of construction are completed, the facility is expected to produce 6,800 pounds of marijuana per year and generate revenues of $16.9 million, based on a projected wholesale price of $2,500 per pound.  Completion of all Phases of this facility is dependent upon the availability of capital to complete construction. The Company has made completion of all Phases of this facility its number one priority.

On October 4, 2016, we acquired a 60% interest in a Nevada Medical Marijuana Production License with an option of up to 80%.  A production license enables us to convert cannabis plants into to oils and extracts that are suitable for creating medical compounds as well as consumer products. This license is critical and essential to our plan of producing cannabis-based medicines, and must be integrated into our cultivation facility to ensure quality control standards and efficiency in our production of cannabis medicines. The Company's plan commence operations on or about October 1, 2016 has been pushed back to no later than January 2017. These discussed strategic modifications in our plan along with the acquisition of this production license contributed to the January 2017 date.

The Company still expects to meet its revenue projections for the fiscal year ended March 31, 2017 of approximately $700,000 as it can still achieve the same revenue because the production facility will open concurrently with the cultivation facility.  Thus, the Company will be able to acquire cannabis from other producers and process and sell products such as vape pens and edibles immediately.

We expect our products to compete well in the marketplace because of the considerable efforts we have made in the plant genetics and tissue culturing of our proprietary strains of cannabis.  And, we are the exclusive Nevada grower of Kyle Kushman's proprietary marijuana strains which have been highly rated top sellers in California. Furthermore our ownership interest in the Showgrow dispensary on Fort Apache Boulevard in Las Vegas guarantees retail distribution of our products from that facility.  Our products will have enough exposure to ensure that consumers can appreciate its quality and superiority compared to other brands.

The current emphasis on near-term cash flow allows us to plan for exploiting the potential of our science assets.  We recently formed Growblox Life Sciences, LLC and have retained Fenwick & West, a Silicon Valley based law firm focusing on life sciences and high technology companies with a nationally top-ranked intellectual property practice, to development strategies for the protection of the Company's intellectual property. On October 11, 2016 we filed the first of several planned patent applications for life science inventions by its wholly-owned subsidiary, Growblox Life Sciences, LLC.  The current provisional patent application covers complex-cannabinoid-containing mixtures capable of enhancing dopamine secretion and protecting neurons from the mitochondria-induced free radical damage that occurs during disease progression in the brains of patients with Parkinson's disease, Alzheimer's disease, Lewy Body Dementia, and Huntington's disease, among others. At this time, the Company plans to seek partners in the pharmaceutical industry or alternatively venture funding to advance these cannabis-based formulations to clinical testing and commercialization.

Our proprietary Growblox chambers, anticipated to be commercially ready during the third quarter of fiscal 2017 will enable us to grow a consistent, pharmaceutical grade cannabis which is important irrespective of its ultimate consumers; a consistent recreational brand will be as important to consumers as a consistent medicine will be to its patients.

 

RESULTS OF OPERATIONS

The following table sets forth certain of our Statements of Operations data:

		For the Three Months Ended September 30,								For the Six Months Ended September 30,
		2016				2015				2016				2015
Revenue		$	-			$	-			$	-			$	-
General and administrative expenses			2,197,557				2,693,145				3,405,338				4,215,910
Other Income/(Expense)			(308,408	)			(11,556	)			(479,535	)			(10,996	)
Net loss attributable to non-controlling interest			(38,661	)			(23,704	)			(76,862	)			(204,160	)
Net Loss		$	(2,467,304	)		$	(2,680,997	)		$	(3,808,011	)		$	(4,022,746	)

Comparison of the Three Months Ended September 30, 2016 and 2015

Revenues

The Company has not achieved any operating revenues to date.

General and administrative expenses

General and administrative expenses decreased $0.5 million to $2.2 million for the three months ended September 30, 2016 compared to $2.7 million for the three months ended September 30, 2015. The decrease in primarily attributable to $0.8 million decrease in consulting and advisory services related to development of our proprietary GrowBLOX Suites combined with a $0.3 million decrease in legal expenses offset by $0.9 million increase in expense related to amendment of long-term debt.

Other expense

Total other expense increased by $0.3 million compared to the same period in prior year. The increase in primarily due to the recognition of $0.03 million in accrued interest related to the Pacific Leaf Loan and $0.2 million amortization of the debt discount related to the beneficial conversion features discount recorded on the convertible debt.

Comparison of the Six Months Ended September 30, 2016 and 2015

Revenues

The Company has not achieved any operating revenues to date.

General and administrative expenses

General and administrative expenses decreased $0.8 million to $3.4 million for the six months ended September 30, 2016 compared to $4.2 million for the six months ended September 30, 2015. The decrease in primarily attributable to a $0.9 million decrease in consulting and advisory services related to development of our proprietary GrowBLOX chambers combined with a $0.9 million decrease in professional service expense offset by $0.6 million increase in stock-based compensation expense $0.9 million increase in expense related to amendment of long-term debt.

Other expense

Total other expense increased by $0.5 million compared to the same period in prior year. The increase in primarily due to the recognition of $0.1 million in accrued interest related to the Pacific Leaf Loan and $0.3 million amortization of the debt discount related to the beneficial conversion features discount recorded on the convertible debt.

LIQUIDITY AND CAPITAL RESOURCES

Current Liquidity

The Company will need additional capital to implement our strategies. There is no assurance that it will be able to raise the amount of capital needed for future growth plans. Even if financing is available, it may not be on terms that are acceptable. If unable to raise the necessary capital at the times required, the Company may have to materially change the business plan, including delaying implementation of aspects of the business plan or curtailing or abandoning the business plan. The Company represents a speculative investment and investors may lose all of their investment. In order to be able to achieve the strategic goals, the Company needs to further expand its business and financing activities. Based upon the cash position, it is necessary to raise additional capital by the end of the next quarter in order to continue to fund current operations. These factors raise substantial doubt about the ability to continue as a going concern.  The Company is pursuing several alternatives to address this situation, including the raising of additional funding through equity or debt financings. In order to finance existing operations and pay current liabilities over the next twelve months, the Company will need to raise approximately $4-5 million of capital depending upon license status. No assurance can be given that the Company will be able to operate profitably on a consistent basis, or at all, in the future.

The principal sources of liquidity to date have been cash generated from sales of debt and equity securities and loans.

At September 30, 2016, cash was $2.1 million, other current assets excluding cash were $0.12 million and our working capital was $0.9 million. At the same time, current liabilities were approximately $1.3 million, which consisted principally of $0.8 million in notes payable, $0.3 million in accrued liabilities, and $0.1 million in accounts payable. At March 31, 2016, the Company had cash balance $0.03 million, other current assets excluding cash were $0.2 million and our working capital deficit was $2.1 million. Current liabilities were approximately $2.3 million, which consisted principally of $0.9 million in accounts payable, $0.8 million in accrued liabilities, and $0.5 million in notes payable. An improvement in our liquidity position at September 30, 2016 compared to March 31, 2016 is primarily attributable to the capital raised through private offerings.

Sources and Uses of Cash

Net cash used in operating activities was $1.7 million for the six months ended September 30, 2016, as compared to net cash used of $1.6 million for the six months ended September 30, 2015. We anticipate that cash flows from operations may be insufficient to fund business operations for the next twelve-month period. Accordingly, we will have to generate additional liquidity or cash flow to fund our current and anticipated operations. This will likely require the sale of additional common stock or other securities. There is no assurance that we will be able to realize any significant proceeds from such sales, if at all.

During the six months ended September 30, 2016 and 2015, the Company used $1 million and $0.7 million, respectively, of cash in investing activities. The cash used in investing activities during the six months ended September 30, 2016 and 2015 was primarily for the purchase of property and equipment.

During the six months ended September 30, 2016 and 2015, cash flows from financing activities totaled $4.7 million and $2.6 million, respectively. Cash flows from financing activities for the six months ended September 30, 2016 related primarily to $4.1 million in proceeds from the issuance of common stock and warrants, $0.5 million in proceeds from convertible notes, and $0.2 million in proceeds from non-controlling interests. Cash flows from financing activities for the six months ended September 30, 2015 related primarily to $1.2 million in proceeds from the issuance of common stock and warrants, $1.2 million in proceeds from notes payable, and $0.3 million in proceeds from non-controlling interests.

GOING CONCERN

The unaudited interim financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of approximately $24.6 million as of September 30, 2016, and further losses are anticipated in the development of the business raising substantial doubt about the ability to continue as a going concern. The ability to continue as a going concern is dependent upon generating profitable operations in the future and/or obtaining the necessary financing to meet obligations and repay liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and/or private placements of debt and equity securities. The financials do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts, or amounts and classifications of liabilities that might result from this uncertainty.

VARIABLES AND TRENDS

In the event the Company is able to obtain the necessary financing to progress with its business plan, the Company expects expenses to increase significantly to grow the business. Accordingly, the comparison of the financial data for the periods presented may not be a meaningful indicator of future performance and must be considered in light of these circumstances.

CRITICAL ACCOUNTING POLICIES

A description of the Company's significant accounting policies is included in Note 3 of its Annual Report on Form 10–K for the fiscal year ended March 31, 2016.

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

Evaluation of Disclosure Controls and Procedures

The Company  maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and to ensure that such information is accumulated and communicated to management, including the chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. At the end of the quarter ended September 30, 2016, the Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of disclosure controls and procedures, as defined in Rule 13(a)-15(e) and Rule 15d-15(e) under the 1934 Act. Based on this evaluation, management concluded that as of September 30, 2016 the disclosure controls and procedures were not effective due to material weaknesses as no member of our board of directors qualifies as an "audit committee financial expert" as defined in Item 407(d)(5) of Regulation S-K promulgated under the Securities Act.

Limitations on Effectiveness of Controls and Procedures

Management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls

During the fiscal quarter ended September 30, 2016, there have been no changes in the internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the internal controls over financial reporting. 

PART II – OTHER INFORMATION

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

There are no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2016, as filed with the SEC.

Common Stock

On June 13, 2016 the Company received notice from Pacific Leaf Ventures, LP ("Pacific Leaf") that it had elected to convert $500,000 of the Company's indebtedness to Pacific Leaf Note into common stock of the Company pursuant to the Amended and Restated 6% Senior Secured Convertible Promissory.  Accordingly, the Company has issued 2,000,000 shares of its common stock ($500,000 converted at a price of $0.25 per share) to Pacific Leaf.

On August 4, 2016, Company issued 1,000,000 shares to Pacific Leaf and its designees and recorded a related expense of $0.4 million. The common shares were issued to partially satisfy the conditions under the Second Omnibus Amendment described in detail in Note 4 to the financial statements for the six months ended September 30, 2016.

On August 9, 2016, the Company finalized a settlement agreement in final disposition of the lawsuit filed by the Company on April 2, 2014, in the United States District Court for the Southern District of New York.  The suit is more particularly described in Part I, Item 3 of the Company's Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on July 14, 2016.  The Company issued 1,400,000 shares of restricted common stock to certain non-affiliates of the Company and recorded a related expense of $0.4 million.

During six months ended September 30, 2016, the Company sold 14,847,500 units through a private placement at a price of $0.20 per unit.  Each unit consisted of one share of common stock and one common stock purchase warrant, expiring in three years, with an exercise price of $0.50. The Company also sold 9,281,750 units through a private placement at a price of $0.20 per unit.  Each unit consisted of one share of common stock and one common stock purchase warrant, expiring in five years, with an exercise price of $0.60. The Company recorded net proceeds of $4.1 million as a result of these issuances.

Options and Warrants

On June 1, 2016, we issued 900,000 stock options under our 2014 Equity Incentive Plan to the independent members of the Company's Board of Directors. The options are exercisable upon vesting for a period of 7 years from issuance at an exercise price of $0.16 per share. As of September 30, 2015, the Company recognized total of $0.1 million in share-based compensation expense related to options vested to date.

On June 1, 2016, we issued 1,400,000 stock options under our 2014 Equity Incentive plan to our Chief Executive Officer. The options are exercisable upon vesting for a period of 7 years from issuance at an exercise price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.2 million in share-based compensation expense related to options vested to date.

Effective on June 1, 2016, the Company amended its employment agreement with its Chief Science Officer, Andrea Small-Howard.  Pursuant to the amendment, Dr. Small-Howard surrendered a stock award for 450,000 shares of common stock in exchange for warrants to purchase 1,200,000 common shares at the strike price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.1 million in share-based compensation expense related to warrants vested to date.

On June 30, 2016, we issued 200,000 stock options under our 2014 Equity Incentive Plan to various employees. The options are exercisable upon vesting for a period of 10 years from issuance at an exercise price of $0.30 per share. As of September 30, 2015, the Company recognized total of $0.01 million in share-based compensation expense related to options vested to date.

On August 4, 2016, Company issued a warrant to purchase 1,500,000 shares of the Company's common stock at the price of $0.36 per share to Pacific Leaf and its designees and recorded a related expense of $0.5 million. The warrant to purchase common shares was issued to satisfy the conditions under the Second Omnibus Amendment described in detail in Note 4 to the financial statements for the six months ended September 30, 2016.

All of the foregoing securities were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 (the "Securities Act") and/or Rule 506 of Regulation D under the Securities Act, as amended.

None.

Not Applicable.

The Board of Directors also accepted the resignation of Craig Ellins as Chief Executive Officer of the Company and immediately appointed Craig Ellins to serve as Chief Innovation Officer of the Company.

Executive Appointments

Effective on June 1, 2016, the Company amended its employment agreement with its Chief Science Officer, Andrea Small-Howard.  Pursuant to the amendment, Dr. Small-Howard surrendered a stock award for 450,000 shares of common stock in exchange for warrants to purchase 1.2 million common shares at the strike price of $0.30 per share.

Also on June 1, 2016, the Board amended compensation arrangements with Mr. Craig Ellins, the Chairman and Chief Innovation Officer of the Company.  Pursuant to the amendment, warrants issued on June 22, 2015, for the purchase of 5,000,000 shares of common stock of the Company at the exercise price of $0.45 per share were cancelled and warrants for the purchase of 5,000,000 shares of common stock of the Company at the exercise price of $0.30 were issued to Mr. Ellins.

Establishment of Audit and Compensation Committees

Audit Committee

 

On July 6, 2016, the Board established the Audit Committee and approved and adopted a charter (the "Audit Committee Charter") to govern the Audit Committee. The audit committee is comprised of Leslie Bocskor and Shane Terry, each of whom is independent under the rules of the Securities and Exchange Commission and the Nasdaq Stock Market listing standards. Leslie Bocskor is designated the chairperson of the committee. In addition to the enumerated responsibilities of the Audit Committee in the Audit Committee Charter, the primary function of the Audit Committee is to assist the Board in its general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions.

Compensation Committee

 

On July 6, 2016, the Board established the Compensation Committee and approved and adopted a charter (the "Compensation Committee Charter"). The compensation committee is comprised of Leslie Bocskor and Shane Terry, each of whom is independent under the rules of the Securities and Exchange Commission and the Nasdaq Stock Market listing standards. Leslie Bocskor is designated the chairperson of the committee. In addition to the enumerated responsibilities of the Compensation Committee in the Compensation Committee Charter, the primary function of the Compensation Committee is to oversee the compensation of our executives, produce an annual report on executive compensation for inclusion in our proxy statement, if and when required by applicable laws or regulations, and advise the Board on the adoption of policies that govern our compensation programs.

In reviewing the agreements included as exhibits to this Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:

·	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

·	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

·	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

·	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Form 10-Q and the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov.

The following exhibits are included as part of this report:

* This certification is being furnished and shall not be deemed "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.