GB SCIENCES INC - Quarter Report: 2017 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-Q

__________________________

(Mark One)

ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission file number: 000-55462

GB SCIENCES, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other Jurisdiction of Incorporation or organization)

59-3733133

(IRS Employer I.D. No.)

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.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller Reporting Company)

Smaller reporting company ý

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 155,931,576 shares of common stock, par value $0.0001 per share, outstanding as of February 14, 2018.

GB SCIENCES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017

INDEX

PART I – FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets at December 31, 2017 (unaudited) and March 31, 2017	3

	Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended December 31, 2017 and 2016	4

	Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended December 31, 2017 and 2016	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	20
Item 1A	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	22

SIGNATURES		24

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

GB SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

	31-Dec-17	31-Mar-17


CURRENT ASSETS:
Cash and cash equivalents	$ 1,487,407	$ 2,692,953
Accounts Receivable	552,501	-
Inventory	607,408	89,037
Prepaid expenses	467,256	166,378
TOTAL CURRENT ASSETS	3,114,572	2,948,368
Property and Equipment, Net	11,732,041	8,642,677
Deposits	1,085,505	1,203,305
Other Assets	464,628	212,529
TOTAL ASSETS	$ 16,396,746	$ 13,006,879
CURRENT LIABILITIES:
Accounts Payable	$ 92,685	$ 157,152
Accrued Interest	178,995	48,969
Accrued Liabilities	408,695	468,710
Convertible Notes Payable, net of unamortized discount of $7.7 million and $1 million at December 31, 2017 and March 31, 2017, respectively	1,052,653	2,734
TOTAL CURRENT LIABILITIES	1,733,028	677,565
Convertible Notes Payable	507	155,312
Capital Lease Obligations	6,187,219	3,771,321
TOTAL LIABILITIES	7,920,754	4,604,198
STOCKHOLDERS' (DEFICIT)/ EQUITY:
Common Stock, $0.0001 par value, 200,000,000 shares authorized, 131,254,104 and 124,406,818 shares issued and outstanding at December 31, 2017 and March 31, 2017	13,126	12,441
Additional Paid In Capital	56,915,330	43,569,864
Accumulated Deficit	(48,452,464)	(35,257,045)
TOTAL GB SCIENCES, INC. STOCKHOLDERS' EQUITY	8,475,992	8,325,260
Non-controlling interest	-	77,421
TOTAL EQUITY	8,475,992	8,402,681
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 16,396,746	$ 13,006,879

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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GB SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	For the Three Months Ended December 31,		For the Nine Months Ended December 31,
	2017	2016	2017	2016

REVENUE	$ 1,275,000	$ -	$ 1,635,136	$ -
COST OF GOODS SOLD	(388,259)	-	(557,649)	-
GROSS PROFIT	886,741	-	1,077,487	-
GENERAL AND ADMINISTRATIVE EXPENSES	7,106,605	3,215,104	12,776,975	6,637,764
LOSS FROM OPERATIONS	(6,219,864)	(3,215,104)	(11,699,488)	(6,637,764)
OTHER INCOME (EXPENSE)
Interest Expense	(1,131,466)	(290,153)	(1,918,264)	(746,614)
Other Income/(Expense)	389,151	(75,781)	354,308	(81,534)
Total other expense	(742,315)	(365,934)	(1,563,956)	(828,148)
NET LOSS	(6,962,179)	(3,581,038)	(13,263,444)	(7,465,912)
Net income/(loss) attributable to non-controlling interest	-	(56,658)	(68,025)	(133,520)
NET LOSS ATTRIBUTABLE TO GB SCIENCES, INC.	$ (6,962,179)	$ (3,524,380)	$ (13,195,419)	$ (7,332,392)
Net loss per share - basic and diluted	$ (0.05)	$ (0.04)	$ (0.10)	$ (0.11)
Weighted average common shares outstanding - basic and diluted	128,301,565	88,836,452	127,389,398	68,954,306

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

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GB SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


	Nine Months Ended December 31,
	2017	2016
OPERATING ACTIVITIES:
Net loss	`$(13,263,444)`	`$(7,465,912)`
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	`600,725`	`251,599`
Stock-based compensation	`4,623,657`	`3,695,521`
Amortization of debt discount and beneficial conversion feature	`1,328,908`	`486,762`
Loss on debt conversion	`-`	`75,781`
Loss/(gain) on sale of assets	`(357,968)`	`5,572`
Changes in operating assets and liabilities:
Accounts receivable	`(552,501)`	`-`
Prepaid expenses and other assets	`(300,878)`	`70,764`
Inventory	`(518,371)`	`-`
Accounts payable	`(64,467)`	`12,186`
Accrued expenses	`481,830`	`26,433`
Net cash used in operating activities	`(8,022,509)`	`(2,841,294)`
INVESTING ACTIVITIES:
Sale of membership interest in GB Sciences Puerto Rico, LLC	`(19,417)`	`-`
Purchase of property and equipment	`(1,210,481)`	`(1,929,375)`
Change in deposits and other assets	`(246,793)`	`(74,227)`
Net cash used in investing activities	`(1,476,691)`	`(2,003,602)`
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and warrants	`-`	`5,140,179`
Proceeds from non-controlling interest	`120,000`	`269,296`
Proceeds from convertible notes payable	`8,235,500`	`654,805`
Payments under long-term obligations	`(66,465)`	`(261,854)`
Other financing activities	`4,619`	`(1,029)`
Net cash provided by financing activities	`8,293,654`	`5,801,397`
Net change in cash and cash equivalent	`(1,205,546)`	`956,501`
CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD	`2,692,953`	`34,824`
CASH AND CASH EQUIVALENT AT END OF PERIOD	`$1,487,407`	`$991,325`
Non-cash transactions:
Stock issued to settle payables	`$-`	`$590,777`
Stock issued upon partial conversion of long-term note payable	`$656,886`	`$2,576,750`
Stock issued to settle legal obligations	`$-`	`$460,840`
Capital lease obligation	`$2,525,000`	`$3,900,000`
Stock and warrants issued upon amendment of long-term note	`$-`	`$875,663`

The accompanying notes are an integral part of these unaudited condensed consolidated 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 GB 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, 2018. The balance sheet at March 31, 2017 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, 2017.

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 Company.

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, 2017.

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

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permitted. The Company expects that adoption of this guidance will result in the recognition of right-of-use assets and related obligations.

The FASB issued ASC 606 as guidance on the recognition of revenue from contracts with customers in May 2014 with amendments in 2015 and 2016. Revenue recognition will depict 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 is required to adopt the guidance on January 1, 2018 and will apply the cumulative catch-up transition method.

The Company’s only current revenue source is from sales of cannabis, a distinct physical good. Under current accounting guidance, the Company recognizes revenue upon delivery of distinct physical goods to the customer. 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 (ie. revenue is recognized upon delivery of physical goods), the Company does not anticipate recording any material adjustment to report the cumulative effect of initial application of the guidance.

In August 2016, the FASB issued ASU 2016-15, which amends the guidance in Accounting Standards Codification ("ASC") 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistency on this topic. The standard is effective for annual and interim periods beginning after December 15, 2017, and the Company will adopt it effective January 1, 2018. Significant classification modifications are not expected as a result of adoption

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 $48.5 million at December 31, 2017. In addition, the Company has consumed cash in its operating activities of approximately $8.0 million for the nine months ended December 31, 2017 compared to $2.8 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 securing capital necessary to achieve 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 March 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $965,500. The Notes are payable within three years of issuance and are convertible into 3,862,000 shares of

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the Company’s common stock. The Company also issued 3,862,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.60 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $416,733 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $548,767 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

During the three months ended June 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $1,034,500. The Notes are payable within three years of issuance and are convertible into 4,138,000 shares of the Company’s common stock. The Company also issued 4,138,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.60 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $487,957 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $480,236 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

In July, 2017, the Company entered into a Placement Agent’s Agreement with a third-party brokerage firm to offer units consisting of a $1,000 6% promissory note convertible into 4,000 shares of the Company’s common stock at $0.25 per share and 4,000 warrants to purchase shares of the Company’s’ common stock at an exercise price of $0.65 per share for the period of three years.

During the three months ended September 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $3,085,000. The Notes are payable within three years of issuance and are convertible into 12,340,000 shares of the Company’s common stock. The Company also issued 12,340,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,541,797 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $1,532,335 recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

During the three months ended December 31, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $4,116,000. The Notes are payable within three years of issuance and are convertible into 16,464,000 shares of the Company’s common stock. The Company also issued 16,464,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,600,808 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $2,417,856 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.

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 the Company 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 GB Sciences Nevada,

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LLC (“GBSN”). Such facility and equipment was 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. The Company was 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 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. 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, Pacific Leaf or its designee 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 the Pacific Leaf that it had elected to convert $500,000 of the 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 pursuant to the Note was reduced by $500,000.

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 GBSN and reduces Pacific Leaf's existing royalty rate to 16.4% of the gross sales revenue of GBSN. 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.

On October 4, October 20, November 1, and November 10, 2016, the Company received notices from Pacific Leaf that it had elected to convert total of $1,776,750 of the 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 7,107,000 shares of its common stock ($1,776,750 converted at a price of $0.25 per share) to Pacific Leaf and the Company’s indebtedness pursuant to the Note was reduced by $1,776,750.

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On January 24, and February 22, 2017, the Company received additional notices from Pacific Leaf Ventures, LP (“Pacific Leaf”) that it had elected to convert $413,085 ($317,938 in principal and $95,145 in accrued interest) of the 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 1,652,332 shares of its common stock ($413,083 converted at a price of $0.25 per share) to Pacific Leaf and the Company’s indebtedness pursuant to the Note was reduced to $0.2 million.

On May 12, 2017, the Company received notice from Pacific Leaf Ventures, LP (“Pacific Leaf”) that it had elected to convert $184,805 ($154,805 principal and $30,000 accrued interest) 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 Note was reduced by $184,805.

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 the Amended Lease Agreement for an initial term of ten and a half years with one option to extend the lease for five years, or until December 31, 2030. The monthly rent payments per the Amended Lease Agreement 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. The Company analyzed the transaction in accordance with the applicable accounting guidance determining that the aggregate amount of $3.9 million met the requirements for capitalization. The building has been capitalized and is included in property and equipment, net balance with related obligations included as part of current and non-current liabilities. The obligation recorded is based upon the present value of the future minimum lease payments discounted at an 11.6% interest rate.

In August 2017, GB Sciences Louisiana, LLC entered into the Lease Agreement with Petroleum Drive Investment, LLC for 36,125 square feet of interior space on approximately 5.38 acres of land located at 18350 Petroleum Drive, Baton Rouge, LA 70809. The Lease Agreement is for an initial term of five years with two options to extend the lease for five years, or until June 30, 2032. The monthly rent payments per the Lease Agreement are $25,588 through June 30, 2022. If the Company exercises its first and second options to extend, monthly rent payments will increase to $28,147 beginning August 1, 2022, and to $30,966 beginning August 1, 2027. The Company analyzed the transaction in accordance with the applicable accounting guidance determining that the aggregate amount of $2.5 million met the requirements for capitalization. The building has been capitalized and is included in property and equipment, net balance with related obligations included as part of current and non-current liabilities. The obligation recorded is based upon the present value of the future minimum lease payments discounted at a 10.2% interest rate.

Note 6 – Capital Transactions

During the nine months ended December 31, 2017, the Company issued an aggregate of 6,847,286 shares of common stock, as follows:

The Company issued 2,191,994 shares of its common stock to a third-party brokerage firm as a result of a cashless exercise of 2,281,000 compensation warrants at the exercise price of $0.01 per share and recorded a related expense of $0.6 million

On May 12, 2017, the Company received notice from Pacific Leaf Ventures, LP (“Pacific Leaf”) that it had elected to convert $184,805 ($154,805 principal and $30,000 accrued interest) 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 739,220 shares of its common stock ($184,805 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 $184,805.

The Company issued 1,617,857 shares in exchange for consulting services and recorded a related expense of $0.5 million. The Company also issued 388,167 shares of common stock to employees and recorded an expense of $0.1 million.

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The Company issued 21,000 shares of its common stock in connection with the exercise of warrants at $0.20 per share.

During the three months ended December 31, 2017, the Company received notice from convertible note holders of the conversion of a total of $453,500 face value and $18,581 in interest accrued on the related convertible notes. Accordingly, the Company has issued 1,889,048 shares of its common stock based on a $0.25 per share conversion price. In connection with the conversions, $349,956 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 $103,544.

Options and Warrants

During the nine months ended December 31, 2017, the Company issued 1,275,000 stock options under the 2014 Equity Incentive Plan to various consultants. The options are exercisable upon vesting for a period of 10 years from issuance at an exercise price ranging from $0.22 to $0.27 per share. The Company has recognized total of $0.1 million in share-based compensation expense related to options vested to date.

During the nine months ended December 31, 2017, the Company issued 5,300,000 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 $0.24 to $0.34 per share. The Company has recognized total of $0.4 million in share-based compensation expense related to options vested to date.

During the nine months ended December 31, 2017, the Company issued warrants to purchase 32,942,000 shares of its common stock at the price of $0.60 to $0.65 per share for the period of three years to various holders of its convertible notes. Convertible notes issued during the nine months ended December 31, 2017, have a combined face value of $8,235,500. During the nine months ended December 31, 2017, the Company recorded a discount of $4,430,427 based on the fair value of the warrants attached to the notes. This value was derived using the Black-Scholes valuation model.

Note 7 – Commitments and Contingencies

On September 18, 2017 GB Sciences finalized its agreement with Louisiana State University (“LSU”) AgCenter to be the sole operator of the LSU’s medical marijuana program. The LSU Board of Supervisors entered into a five-year agreement—that has an option to renew for two additional five-year terms—with GB Sciences.

The contract includes the Company’s commitment to make a minimum financial contribution to the LSU AgCenter in the amount of $3.4 million, or a 10% commission of gross receipts, in addition to annual research investments of $500,000 to the LSU AgCenter.

The monetary contributions would be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, which AgCenter would retain 50% of those rights. As of December 2017, GB Sciences made payments totaling $500,000 toward its obligations under the agreement.

From time to time, the Company may become involved in certain legal proceedings and claims which arise in the ordinary course of business. In 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.

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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 84,116,413 and 39,882,413 of potentially dilutive common shares at December 31, 2017 and March 31, 2017, 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 – Related Party Transactions

During the fiscal year ended March 31, 2017, the Company entered into a consulting contract with Quantum Shop, a Company owned by a relative of one of the Company’s executives. Per the terms of the agreement, Quantum Shop is to provide GB Sciences with research, design, development, fabrication, and production services. During the year ended March 31, 2017, the Company made a payment of $50,000 to the Quantum Shop in relation to the services provided. During the nine months ended December 31, 2017, additional payments of $435,070 were made to Quantum Shop in relation to the services provided.

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 is renewable for a successive one-year period. During the nine months ended December 31, 2017, the Company made payments totaling $75,562 to Electrum Partners, LLC and issued 443,667 shares of its restricted stock.

During the nine months ended December 31, 2017, the Company entered into a consulting contract with Monica Poss, a relative of one of the Company’s executives. Per the terms of the agreement, Ms. Poss is to provide GB Sciences with advisory services. The Company made payments of $32,626 and issued 46,706 shares of our common stock at an expense of $11,473 relating to services provided during the nine months ended December 31, 2017.

During the nine months ended December 31, 2017, the Company entered into an Edibles Production Agreement (the “EPA”) with The Happy Confections, L.L.C. (“THCLLC”) through the Company’s wholly-owned subsidiary, GB Sciences Las Vegas, LLC (“GBSLV”). Dr. Andrea Small-Howard, a member of GB Science’s Board of Directors, is a Co-Managing Member of THCLLC. Under the EPA, THCLLC is to produce cannabis-infused baked goods and other edibles in GBSLV’s production facility upon approval of GBSLV’s Nevada Medical Marijuana Production License. The Company will receive a royalty of between 20% and 25% on all sales of edibles produced by THCLLC.

Contemporaneously with the EPA, the Company entered into a Non-Revolving Credit Line Agreement and Non-Revolving Credit Line Promissory Note (together, the “THC Note” or “Note”) to advance up to $300,000 to THCLLC for the purpose of expanding THCLLC’s operations. The Note bears interest at a rate of 1.29% per annum. Beginning 90 days after the sale of its first product, THCLLC is to make repayment of its advances under the Note in an amount equal to 25% of its gross sales revenue. Such repayment is due within 10 days of the sale of any product.

Under the EPA, the Company is to provide accounting and bookkeeping services to THCLLC. In connection with the EPA and THC note, the Company entered into a Reimbursement Agreement for facility expenses and accounting services. Under the Reimbursement Agreement, the Company will be reimbursed $4,500 per month for facility expenses and $2,000 per month for accounting and bookkeeping services. In light of the fact that The Company will be providing the accounting and bookkeeping services to THCLLC, the Company may deduct royalties, facility expenses, and accounting expenses directly from the accounts of THCLLC.

As of December 31, 2017, the Company has advanced $105,350 to THCLLC under the THC Note. This amount is reported under the other assets caption on the Company’s December 31, 2017 balance sheet.

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Note 10 – Subsequent Events

Subsequent to December 31, 2017, the Company issued 24,677,472 shares of its common stock as the result of the following transactions:

Private Placement Agreement

In January 2018, the Company entered into a new Placement Agent’s Agreement with a third-party brokerage firm to offer for sale a maximum of up to $7,250,000 in units at the price of $0.40 per unit. Each unit consists of a single share of the Company’s common stock plus warrants to purchase one share of the Company’s common stock at $0.90 per share per two units purchased for a term of three years. The company raised $7,200,000 under the Agreement in January 2018. In connection with the funds raised, the Company issued 18,000,000 shares of its common stock and warrants to purchase 9,000,000 shares of common stock.

Warrant Exercises

In January 2018, the Company received notice from Pacific Leaf Ventures, LP (“Pacific Leaf”) that it had elected to purchase 1,500,000 shares of Company’s common stock at $0.36 per share in a cashless exercise of warrants issued pursuant to our Second Omnibus Agreement. As a result, the Company issued 833,333 shares of common stock in a cashless transaction.

We issued 893,290 shares of common stock in a cashless exercise of 1,036,374 compensation warrants at an exercise price of between $0.01 and $0.60. The warrants were previously issued to a third-party brokerage firm in connection with our Placement Agent’s Agreements.

In January, 2018, the Company received notice from Craig Ellins, our former CEO, of the cashless exercise of warrants to purchase 5,000,000 shares at $0.30 per share. We issued 3,314,607 shares of our common stock to Mr. Ellins as the result of his exercise.

Employee Incentives

The Company issued 54,589 shares of its common stock to current and former employees in connection with the cashless exercise of employee stock options. The options exercised were for 83,334 shares at a purchase price between $0.32 and $0.34.

Convertible Notes

The Company issued 1,560,000 shares of its common stock during January 2018 after receiving conversion notices from three convertible noteholders. $375,000 in face value of convertible debt plus accrued interest was converted to common stock at the conversion price of $0.25 per share.

Consultants

We issued 21,653 shares of common stock to Electrum Partners pursuant to our related-party consulting agreement.

Note 11 – Deconsolidation of GB Sciences Puerto Rico, LLC

During the quarter, the Company agreed to transfer approximately 17% of its membership interest in GB Sciences Puerto Rico, LLC (GBSPR) to Cesar Cordero-Kruger, who at the time of the agreement owned approximately 34% of GBSPR. The Company did not receive any consideration in the transaction but was relieved of any obligation to fund the losses of GBSPR going forward.

As the result of the transaction, the Company deconsolidated the assets, liabilities and noncontrolling interests of GBSPR since its ownership interest was reduced to a non-controlling level.

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Total net liabilities deconsolidated were $228,572, which consisted of the following:


	October 1, 2017
Cash and cash equivalents	$ 19,417
Long term deposits	112,134
Property and equipment	45,752
Less:
Accrued liabilities	405,000
Other liabilities	875
Net liabilities deconsolidated	$ (228,572)

GBSPR has a history of recorded losses and no revenue or sales contracts to date. Its liabilities exceed its assets and management does not have any reason to believe that GBSPR will ever generate positive cash flows to the Company. The Company is not obligated to fund GBSPR’s future losses. Based on these facts, the Company determined that the fair value of its remaining interest in GBSPR is zero and recorded a gain on the deconsolidation of GBSPR, calculated as follows:

	October 1, 2017
Consideration received	$ -
Fair value of retained noncontrolling interest	-
Carrying value of noncontrolling interest	129,396
Net liabilities deconsolidated	228,572
Gain on sale of membership interest in GB Sciences Puerto Rico, LLC	$ 357,968

The gain on deconsolidation of GBSPRLLC is classified under the other income/(expense) caption in the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended December 31, 2017.

The investment in GBSPR will be accounted for under the equity method as the Company maintains significant influence but lacks control over GBSPR. Because the Company is not obligated to and does not intend to fund future losses, the Company’s share of GBSPR’s net losses will be suspended until GBSPR achieves cumulative net profitability.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 GB 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.

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Effective December 12, 2016, the Company amended its Certificate of Corporation pursuant to shareholder approval as reported in the Form 8-K filed on October 14, 2016. Pursuant to the amendment the Company’s name was changed from Growblox Sciences, Inc. to GB Sciences, Inc.

Plan of Operation

The Company is cultivating cannabis using innovative, but conventional methods in its wholly owned subsidiary, GB Sciences Nevada, LLC (“GBSN”). On January 4, 2017, GBSN received a State Registration Certificate (“Certificate”) for its 28,000-sq. ft. cannabis cultivation facility located in Las Vegas, NV. The receipt of the Certificate allows the Company to cultivate medical cannabis. Phase 1 of the GBSN cultivation facility opened with 200 grow lights. When all phases of construction are completed, the facility is expected to generate revenues of approximately $10 million per year. 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. In May 2017, the cultivation facility harvested its first cannabis. As a result of the harvest and subsequent harvests, the Company recorded sales revenue of approximately $1.6 million for the nine months ended December 31, 2017.

On October 4, 2016, we acquired a 60% interest in a Nevada Medical Marijuana Production License with an option of up to 80%. On October 23, 2017, we entered into a Master Membership Purchase Agreement to acquire the remaining 40% interest in the License. A production license enables us to convert cannabis plants into to oils and extracts that are suitable for creating medical compounds as well as consumer products. This license is critical and essential to our plan of producing cannabis-based medicines, and must be integrated into our cultivation facility to ensure quality control standards and efficiency in our production of cannabis medicines.

On March 31, 2017, we entered into an agreement with Arizona-based company, Kush Cups, to produce cannabis-infused products in the state of Nevada. Cannabis for production will be grown in our Cultivation Labs facility in Las Vegas, NV. We will distribute cannabis-infused Keurig-compatible K-Cups, hot and cold brew coffees as well as infused teas.

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. We are also the exclusive Nevada grower of Kyle Kushman's proprietary marijuana strains, which have been highly rated top sellers in California.

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 our 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.

On December 13, 2016, Growblox Life Sciences, LLC licensed intellectual property from Makai Biotechnology, LLC. The patent underlying the license was issued by the USPTO in July of 2015, and claims therapeutic methods for the treatment of cardiac hypertrophy and associated pathologies through regulation of the cannabinoid receptor, TRPV1. TRPV1 can be regulated therapeutically by plant-based cannabinoids, which creates a plethora of potentially new therapeutic agents for the treatment of cardiac hypertrophy and heart failure. Licensing this TRPV1 patent underscores the Company’s drug discovery commitment to targeting the non-classical cannabinoid receptors, beyond the usual CB1 and CB2 receptors

On February 1, 2017, we filed our second patent application for the Treatment of Chronic Arthritis, Crohn's Disease, Inflammatory Bowel Disease, and Asthma; Proprietary Cannabinoid-Containing Complex Mixtures for the Treatment of Inflammatory Disorders. The current provisional patent application covers cannabinoid-containing complex mixtures ("CCCM") capable of preventing and treating a spectrum of inflammatory disorders. The application focuses on the use of CCCM to disrupt the signaling pathways in certain immune cells that lead to the

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initiation and maintenance of inflammatory responses. Both common and uncommon inflammatory disorders, ranging from chronic arthritis to acute responses to insect stings, are likely to be effectively targeted by this therapeutic approach.

On May 23, 2017, we filed our third patent application for the treatment of chronic pain and heart therapies based on myrcene-containing complex mixtures ("MCCM"). The current provisional patent application covers myrcene-containing complex mixtures capable of targeting the non-traditional cannabinoid receptor, TRPV1. Our latest patent application complements the issued TRPV1 patent that GB Sciences licensed from Makai Biotechnology in December of 2016.

On July 1, 2017, GBSN received a provisional Nevada recreational cannabis license for branded recreational products. The decision to sell to the recreational market through the addition of GB Sciences’ own trusted-ingredient retail brands, strengthens the Company’s vertically-integrated strategy of controlling product quality and purity from seed-to-sale. Premium flower and medical-grade oils for use in vape pens and tinctures will be sold under the Cultivation Labs banner.

RESULTS OF OPERATIONS

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

	For the Three Months Ended December 31,		For the Nine Months Ended December 31,
	2017	2016	2017	2016

Revenue	$ 1,275,000	$ -	$ 1,635,136	$ -
Cost of goods sold	(388,259)	-	(557,649)	-
Gross profit	886,741	-	1,077,487	-
General and administrative expenses	7,106,605	3,215,104	12,776,975	6,637,764
Other Income/(Expense)	(742,315)	(365,934)	(1,563,956)	(828,148)
Net loss attributable to non-controlling interest	-	(56,658)	(68,025)	(133,520)
Net Loss	$ (6,962,179)	$ (3,524,380)	$ (13,195,419)	$ (7,332,392)

Comparison of the Three Months Ended December 31, 2017 and 2016

Gross profit

The Company recorded gross profit of approximately $0.9 million for the three months ended December 31, 2017 as compared to no gross profit for the same period in prior year. The increase in gross profit is due to the Company’s cultivation facility located in Las Vegas, NV harvesting its first cannabis in May 2017 and subsequent harvests.

General and administrative expenses

General and administrative expenses increased $3.9 million to $7.1 million for the three months ended December 31, 2017 compared to $3.2 million for the three months ended December 31, 2016. The increase is attributable in part to a $0.9 million increase in consulting and advisory expense related primarily to issuance of compensation warrants pursuant to the terms of a private placement agreement and other consulting fees related to investor relations expenses. Payroll and related expenses increased by $1.0 million due to growth in the number of employees. Share-based compensation to consultants increased by $0.5 million and expenses for options granted to employees and consultants increased $0.1 million. Cultivation taxes increased by $0.3 million compared to no taxes in the prior year.

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Other expense

Total other expense increased by $0.4 million compared to the same period in prior year. The increase is primarily due to interest expense related to the beneficial conversion features discount recorded on the convertible debt.

Comparison of the Nine Months Ended December 31, 2017 and 2016

Gross Profit

The Company recorded gross profit of approximately $1.1 million for the nine months ended December 31, 2017 as compared to no gross profit for the same period in prior year. The increase in gross profit is due the Company’s cultivation facility located in Las Vegas, NV harvesting its first cannabis in May 2017 and subsequent harvests.

General and administrative expenses

General and administrative expenses increased $6.1 million to $12.8 million for the nine months ended December 31, 2017 compared to $6.6 million for the nine months ended December 31, 2016. The increase is attributable in part to the issuance of $2.1 million in compensation warrants pursuant to the terms of a private placement agreement and an exercise of compensation warrants that resulted in a $0.6 million expense, compared to no expense in the prior year. Expenses for stock issued to consultants increased by $0.2 million to $0.6 million compared to $0.4 million in the prior year. Commissions paid pursuant to our private placement agreements increased by $1.0 million to $1.1 million, compared to $0.1 million in the prior year. Payroll and related expenses increased by $1.4 million due to growth in the number of employees. Licenses, taxes, and permits expenses increased by $0.5 million to $0.6 million, compared to $0.1 million in the prior year. The increase in these expenses is largely due to an increase of approximately $0.3 million in state and local taxes on cultivation and $0.1 million of expense resulting from the amortization of prepaid license fees related to the LSU Agreement.

Other expense

Total other expense increased by $0.7 million compared to the same period in prior year. The increase is primarily due to 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 its 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 additional capital. 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.

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At December 31, 2017, cash was $1.5 million, other current assets excluding cash were $1.6 million, and our working capital was $1.3 million. At the same time, current liabilities were approximately $1.7 million and consisted principally of $0.4 million in accrued liabilities and $1.1 million in notes payable, net of $7 million in discounts. At March 31, 2017, the Company had a cash balance of $2.7 million, other current assets excluding cash were $0.3 million and our working capital was $2.3 million. Current liabilities were approximately $0.7 million, which consisted principally of $0.5 million in accrued liabilities and $0.2 million in accounts payable.

Sources and Uses of Cash

Operating Activities

Net cash used in operating activities was $8.0 million for the nine months ended December 31, 2017, as compared to net cash used of $2.8 million for the nine months ended December 31, 2016. 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.

Investing Activities

During the nine months ended December 31, 2017 and 2016, the Company used $1.5 million and $2.0 million, respectively, of cash in investing activities. The cash used in investing activities during the nine months ended December 31, 2017 and 2016 was primarily for the purchase of property and equipment.

Financing Activities

During the nine months ended December 31, 2017 and 2016, cash flows from financing activities totaled $8.3 million and $5.8 million, respectively. Cash flows from financing activities for the nine months ended December 31, 2017 related primarily to $8.2 million in proceeds from the issuance of convertible notes and $0.1 million in proceeds from non-controlling interests. Cash flows from financing activities for the nine months ended December 31, 2016 related primarily to $5.1 million in proceeds from the issuance of common stock and warrants, $0.7 million in proceeds from the issuance of convertible notes, 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 $48.5 million as of December 31, 2017, 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, 2017.

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ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

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.

ITEM 4.Controls and Procedures

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 December 31, 2017, 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 December 31, 2017 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 December 31, 2017, 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

ITEM 1.Legal Proceedings

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

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record such a reserve is recorded, it could be material and could adversely impact our results of operations, financial condition, and cash flows.

ITEM 1A.Risk Factors

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, 2017, as filed with the SEC.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

During the nine months ended December 31, 2017, the Company issued an aggregate of 6,847,286 shares of common stock, as follows:

The Company issued 21,000 shares of its common stock in connection with the exercise of warrants at $0.20 per share.

The Company issued 1,889,048 shares of its common stock in connection with the conversion of $453,500 in convertible notes.

Options and Warrants

During the nine months ended December 31, 2017, the Company issued 1,275,000 stock options under the 2014 Equity Incentive Plan to various consultants. The options are exercisable upon vesting for a period of 10 years from issuance at an exercise price ranging from $0.22 to $0.28 per share. The Company has recognized total of $0.1 million in share-based compensation expense related to options vested to date.

During the nine months ended December 31, 2017, the Company issued 5,300,000 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 $0.24 to $0.35 per share. The Company has recognized total of $0.4 million in share-based compensation expense related to options vested to date.

During the nine months ended December 31, 2017, the Company issued warrants to purchase 4,138,000 shares of its common stock at the price of $0.60 per share and warrants to purchase 28,804,000 shares of its common stock at the price of $0.65 per share for the period of three years to various holders of its convertible notes. Convertible notes issued during the period have a combined face value of $8,235,500. During the nine months ended December 31, 2017, Company recorded a discount of $4,430,427 based on the fair value of the warrants attached to the notes. This value was derived using the Black-Scholes valuation model.

ITEM 3. Defaults Upon Senior Securities

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None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

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:

Exhibit Number		Description of Exhibit
3.1		Articles of Incorporation (Incorporated by reference to an exhibit to Form SB-2 No. 333-82580 filed with the Commission on February 12, 2002)
3.2		Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.2 to Form S-1/A No. 333-82580 filed with the Commission on October 6, 2014 and Exhibit 3.2 to Form 10-K No. 333-82580 filed with the Commission on June 27, 2014)
3.3		Bylaws (Incorporated by reference to an exhibit to Form SB-2 No. 333-82580 filed with the Commission on February 12, 2002)
31.1		Certification of Principal Executive Officer and Pursuant to Rule 13a-14
31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14
32.1*		CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2*		CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

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* 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.

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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.

	GB SCIENCES, INC.

February 14, 2018	By:	/s/ John Poss
	John Poss, Chief Executive Officer (Principal Executive Officer)

	GB SCIENCES, INC.

February 14, 2018	By:	/s/ Ksenia Griswold
	Ksenia Griswold, Chief Financial Officer (Principal Financial Officer)