GB SCIENCES INC - Quarter Report: 2020 December (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

________________________

 

FORM 10-Q

__________________________

 

(Mark One)

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

 

For the quarterly period ended December 31, 2020

 

☐	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)

 

Nevada (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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class	Trading Symbol(s)	Name of exchange on which registered
None	N/A	N/A

 

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.  ☒  Yes     ☐  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   ☒  Yes     ☐  No

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company  ☒

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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     ☒  No  

 

There were 293,521,444 shares of common stock, par value $0.0001 per share, outstanding as of February 13, 2021. 

 

 

GB SCIENCES, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED December 31, 2020

 

 

INDEX

	Page
PART I. FINANCIAL INFORMATION	3
ITEM 1. Financial Statements (Unaudited)	3
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk	46
ITEM 4.  Controls and Procedures	46
PART II – OTHER INFORMATION	47
ITEM 1.  Legal Proceedings	47
ITEM 1A.  Risk Factors	47
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds	47
ITEM 3.  Defaults Upon Senior Securities	48
ITEM 4.  Mine Safety Disclosures	48
ITEM 5.  Other Information	48
ITEM 6.  Exhibits	48

 

 

 

		As of December 31,				As of March 31,
		2020				2020
CURRENT ASSETS:			(unaudited)
Cash and cash equivalents		$	771,064			$	2,406
Prepaid expenses and other current assets			40,225				18,776
Note receivable			-				5,224,423
Current assets from discontinued operations			2,084,877				1,755,275
TOTAL CURRENT ASSETS			2,896,166				7,000,880
Property and equipment, net			28,150				37,821
Intangible assets, net of accumulated amortization of $28,968 and $12,287 at December 31, 2020 and March 31, 2020, respectively			1,647,376				1,128,702
Long term assets from discontinued operations			5,677,156				6,185,465
TOTAL ASSETS		$	10,248,848			$	14,352,868
CURRENT LIABILITIES:
Accounts payable		$	1,456,695			$	1,913,049
Accrued interest			462,930				366,865
Accrued liabilities			1,110,525				813,618
Notes and convertible notes payable and line of credit, net of unamortized discount of $0 and $608,580 at December 31, 2020 and March 31, 2020, respectively			3,726,308				5,054,728
Indebtedness to related parties			331,895				586,512
Note payable to related party			-				151,923
Income tax payable			827,546				592,982
Current liabilities from discontinued operations			1,115,379				1,406,080
TOTAL CURRENT LIABILITIES			9,031,278				10,885,757
Convertible notes payable, net of unamortized discount of $63,058 and $0 at December 31, 2020 and March 31, 2020, respectively			283,942				-
Long term liabilities from discontinued operations			3,429,704				3,555,605
TOTAL LIABILITIES			12,744,924				14,441,362
Commitments and contingencies (Note 8)
STOCKHOLDERS' DEFICIT:
Common Stock, $0.0001 par value, 600,000,000 shares authorized, 283,819,453 and 275,541,602 outstanding at December 31, 2020 and March 31, 2020, respectively			28,382				27,554
Additional paid-in capital			98,126,152				97,271,157
Accumulated deficit			(100,650,610	)			(97,387,205	)
TOTAL STOCKHOLDERS' DEFICIT			(2,496,076	)			(88,494	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	10,248,848			$	14,352,868

 

		For the Three Months Ended December 31,								For the Nine Months Ended December 31,
		2020				2019				2020				2019
Sales revenue		$	-			$	-			$	-			$	-
Cost of goods sold			-				-				-				-
Gross profit			-				-				-				-
General and administrative expenses			670,311				1,472,937				1,677,482				4,555,633
LOSS FROM OPERATIONS			(670,311	)			(1,472,937	)			(1,677,482	)			(4,555,633	)
OTHER INCOME/(EXPENSE)
Interest expense			(167,120	)			(277,813	)			(1,249,994	)			(942,750	)
Loss on amendment to line of credit			(650,000	)			-				(650,000	)			-
Gain/(loss) on extinguishment			467,872				(92,796	)			467,872				(216,954	)
Gain on settlement of accounts payable			372,415				-				372,415				-
Gain on deconsolidation			-				4,502,058				-				4,502,058
Debt default penalty			-				-				(286,059	)			-
Other income/(expense)			17,523				(127,059	)			14,149				89,806
Total other income/(expense)			40,690				4,004,390				(1,331,617	)			3,432,160
INCOME/(LOSS) BEFORE INCOME TAXES			(629,621	)			2,531,453				(3,009,099	)			(1,123,473	)
Income tax expense			(206,690	)			-				(234,564	)			-
INCOME/(LOSS) FROM CONTINUING OPERATIONS			(836,311	)			2,531,453				(3,243,663	)			(1,123,473	)
Gain/(loss) from discontinued operations			242,327				(1,547,306	)			(2,479	)			(3,359,868	)
NET INCOME/(LOSS)			(593,984	)			984,147				(3,246,142	)			(4,483,341	)
Net loss attributable to non-controlling interest			-				(360,327	)			-				(738,107	)
NET INCOME/(LOSS) ATTRIBUTABLE TO GB SCIENCES, INC.		$	(593,984	)		$	1,344,474			$	(3,246,142	)		$	(3,745,234	)
Net income/(loss) attributable to common stockholders of GB Sciences, Inc. - basic
Continuing operations		$	(836,311	)		$	2,531,453			$	(3,243,663	)		$	(1,123,473	)
Discontinued operations, net of non-controlling interest			242,327				(1,186,979	)			(2,479	)			(2,621,761	)
Net income/(loss)		$	(593,984	)		$	1,344,474			$	(3,246,142	)		$	(3,745,234	)
Net income/(loss) attributable to common stockholders of GB Sciences, Inc. - diluted
Continuing operations		$	(836,311	)		$	2,583,061			$	(3,243,663	)		$	(1,123,473	)
Discontinued operations, net of non-controlling interest			242,327				(1,186,979	)			(2,479	)			(2,621,761	)
Net income/(loss)		$	(593,984	)		$	1,396,082			$	(3,246,142	)		$	(3,745,234	)
Net income/(loss) per common share – basic
Continuing operations		$	(0.00	)		$	0.01			$	(0.01	)		$	(0.00	)
Discontinued operations, net of non-controlling interest			0.00				(0.00	)			(0.00	)			(0.01	)
Net income/(loss)		$	(0.00	)		$	0.01			$	(0.01	)		$	(0.01	)
Net income/(loss) per common share – diluted
Continuing operations		$	(0.00	)		$	0.00			$	(0.01	)		$	(0.00	)
Discontinued operations, net of non-controlling interest			0.00				(0.00	)			(0.00	)			(0.01	)
Net income/(loss)		$	(0.00	)		$	0.00			$	(0.01	)		$	(0.01	)
Weighted average common shares outstanding - basic			280,967,623				263,055,254				280,119,116				253,297,660
Weighted average common shares outstanding - diluted			280,967,623				325,790,554				280,119,116				253,297,660

 

		Nine Months Ended December 31,
		2020				2019
OPERATING ACTIVITIES:
Net loss		$	(3,246,142	)		$	(4,483,341	)
Loss from discontinued operations			(2,479	)			(3,359,868	)
Net loss from continuing operations			(3,243,663	)			(1,123,473	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			30,097				100,877
Stock-based compensation and modification expense			248,850				455,242
Compensation warrants issued			-				132,914
Amortization of debt discount and beneficial conversion feature			776,908				698,615
Interest expense on conversion of notes payable			-				93,931
Loss on induced conversion			-				127,059
Amortization of discount on note receivable			-				(120,583	)
Accrued interest income			-				(50,411	)
ASC 842 Adjustment			-				(1,227	)
Loss on amendment to line of credit			650,000				-
Loss/(gain) on extinguishment			(467,872	)			216,954
Gain on settlement of accounts payable			(372,415	)			-
Gain on deconsolidation			-				(4,502,058	)
Debt default penalty			286,059				-
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			(21,449	)			204,699
Accounts payable			20,961				485,774
Accrued expenses			319,407				169,096
Accrued interest			518,892				291,256
Deposits and other noncurrent assets			-				106,385
Income tax payable			234,564				-
Indebtedness to related parties			(254,617	)			-
Net cash used in operating activities of continuing operations			(1,274,278	)			(2,714,950	)
Net cash provided by/(used in) operating activities of discontinued operations			21,098				(1,533,341	)
Net cash used in operating activities			(1,253,180	)			(4,248,291	)
INVESTING ACTIVITIES:
Proceeds from note receivable			5,051,923				-
Acquisition of intangible assets			(326,000	)			(91,862	)
Net cash provided by/(used in) investing activities of continuing operations			4,725,923				(91,862	)
Net cash used in investing activities of discontinued operations			(131,302	)			(446,922	)
Net cash provided by/(used in) investing activities			4,594,621				(538,784	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock			-				790,225
Gross proceeds from warrant exercises			249,807				1,069,975
Gross proceeds from convertible notes payable			300,000				2,630,000
Proceeds from Line of Credit			375,000				-
Principal payment of notes and convertible notes payable			(3,156,014	)			(26,664	)
Principal payment of note payable to related party			(151,923	)			-
Fees for issuance of note payable and convertible note payable			(34,500	)			(175,000	)
Brokerage fees for issuance of common stock and warrants			(24,983	)			(175,628	)
Net cash provided by/(used in) financing activities of continuing operations			(2,442,613	)			4,112,908
Net cash provided by/(used in) financing activities of discontinued operations			(129,237	)			529,412
Net cash provided by/(used in) financing activities			(2,571,850	)			4,642,320
Net change in cash and cash equivalents			769,591				(144,755	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			151,766				182,055
CASH AND CASH EQUIVALENTS AT END OF PERIOD			921,357				37,300
Less: cash and cash equivalents classified as discontinued operations			(150,293	)			(17,782	)
CASH AND CASH EQUIVALENTS AT END OF PERIOD FROM CONTINUING OPERATIONS		$	771,064			$	19,518

		Nine Months Ended December 31,
		2020				2019
Cash paid for interest		$	241,014			$	451,040
Cash paid for income tax		$	-			$	-
Non-cash transactions:
Accrued liabilities forgiven in connection with Wellcana Note settlement		$	172,500			$	-
Depreciation capitalized in inventory (discontinued operations)		$	417,616			$	370,167
Accrued interest capitalized in convertible note principal		$	223,094			$	-
Property capitalized under operating leases		$	-			$	182,624
Patent acquisition costs capitalized in intangible assets		$	45,100			$	163,174
Stock options issued for services		$	168,000			$	-
Stock issued upon conversion of notes payable		$	-			$	525,000
Induced dividend from warrant exercises		$	17,263			$	267,525
Beneficial conversion feature on notes payable		$	196,886			$	829,736
Cumulative effect of the new lease standard		$	-			$	7,550

 

		Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Non-Controlling Interest				Total
Balance at September 30, 2020			280,532,686			$	28,054			$	97,679,001			$	(100,056,626	)		$	-			$	(2,349,571	)
Exercise of warrants for stock			3,286,767				328				88,415				-				-				88,743
Share based compensation expense			-				-				191,500				-				-				191,500
Modification of employee options and warrants			-				-				57,350				-				-				57,350
Beneficial conversion feature on notes payable											46,886				-				-				46,886
Stock options issued for services											63,000				-				-				63,000
Net loss			-				-				-				(593,984	)			-				(593,984	)
Balance at December 31, 2020			283,819,453			$	28,382			$	98,126,152			$	(100,650,610	)		$	-			$	(2,496,076	)

		Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Non-Controlling Interest				Total
Balance at September 30, 2019			255,345,019			$	25,535			$	95,333,271			$	(90,071,120	)		$	9,027,977			$	14,315,663
Issuance of stock for debt conversion			5,583,333				558				244,442				-				-				245,000
Exercise of warrants for stock			3,125,000				313				115,088				-				-				115,401
Issuance of stock for services			2,500,000				250				213,750				-				-				214,000
Share based compensation expense			-				-				32,431				-				-				32,431
Issuance of stock for cash, net of issuance costs			4,000,000				400				239,600				-				-				240,000
Beneficial conversion feature on notes payable			-				-				695,932				-				-				695,932
Contributions from non-controlling interest			-				-				-				-				40,000				40,000
Inducement dividend from warrant exercises			-				-				37,499				(37,499	)			-				-
Induced note conversions			-				-				127,059				-				-				127,059
Deconsolidation of subsidiary			-				-				-				-				(8,707,650	)			(8,707,650	)
Net loss			-				-				-				1,344,474				(360,327	)			984,147
Balance at December 31, 2019			270,553,352			$	27,056			$	97,039,072			$	(88,764,145	)		$	-			$	8,301,983

		Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Non-Controlling Interest				Total
Balance at March 31, 2020			275,541,602			$	27,554			$	97,271,157			$	(97,387,205	)		$	-			$	(88,494	)
Exercise of warrants for stock, net of issuance costs			8,277,851				828				223,996				-				-				224,824
Share based compensation expense			-				-				191,500												191,500
Modification of employee options and warrants			-				-				57,350				-				-				57,350
Beneficial conversion feature on notes payable			-				-				196,886				-				-				196,886
Stock options issued for services			-				-				168,000				-				-				168,000
Inducement dividend from warrant exercises			-				-				17,263				(17,263	)			-				-
Net loss			-				-				-				(3,246,142	)			-				(3,246,142	)
Balance at December 31, 2020			283,819,453			$	28,382			$	98,126,152			$	(100,650,610	)		$	-			$	(2,496,076	)

		Shares				Amount				Additional Paid-In Capital				Accumulated Deficit				Non-Controlling Interest				Total
Balance at March 31, 2019			240,627,102			$	24,063			$	93,020,015			$	(84,743,836	)		$	8,855,757			$	17,155,999
Issuance of stock for debt conversion			7,583,333				758				524,242				-				-				525,000
Exercise of warrants for stock			12,574,750				1,257				964,620				-				-				965,877
Issuance of stock for services			2,500,000				250				213,750				-				-				214,000
Share based compensation expense			-				-				241,242				-				-				241,242
Issuance of stock for cash, net of issuance costs			7,668,167				768				717,929				-				-				718,697
Beneficial conversion feature on notes payable			-				-				829,736				-				-				829,736
Contributions from non-controlling interest			-				-				-				-				590,000				590,000
Compensation warrants			-				-				132,914				-				-				132,914
Cancelled shares issued to consultant			(400,000	)			(40	)			40				-				-				-
Inducement dividend from warrant exercises			-				-				267,525				(267,525	)			-				-
Induced note conversions			-				-				127,059				-				-				127,059
Cumulative effect of the new lease standard			-				-				-				(7,550	)			-				(7,550	)
Deconsolidation of subsidiary			-				-				-				-				(8,707,650	)			(8,707,650	)
Net loss			-				-				-				(3,745,234	)			(738,107	)			(4,483,341	)
Balance at December 31, 2019			270,553,352			$	27,056			$	97,039,072			$	(88,764,145	)		$	-			$	8,301,983

 

Note 1 – Background and Significant Accounting Policies 

 

GB Sciences, Inc. (“the Company”, “GB Sciences”, “we”, “us”, or “our”) seeks to be a biopharmaceutical research and cannabinoid-based drug development company whose goal is to create patented formulations for safe, standardized, cannabinoid therapies that target a variety of medical conditions in both the pharmaceutical and wellness markets. The Company is engaged in the research and development of cannabinoid medicines and plans to produce cannabinoid therapies for the wellness markets based on its portfolio of intellectual property.

 

Through its wholly owned Canadian subsidiary, GBS Global Biopharma, Inc. (“GBSGB”), the Company is engaged in the research and development of plant-based medicines, primarily cannabinoid medicines, with virtual operations in North America and Europe. GBSGB’s assets include a portfolio of cannabinoid medicine intellectual property, critical research contracts, and key supplier arrangements. GBSGB’s intellectual property covers a range of conditions and several programs are in the pre-clinical animal stage of development including Parkinson’s disease, neuropathic pain, and cardiovascular therapeutic programs. GBSGB runs a lean drug development program and takes effort to minimize expenses, including personnel, overhead, and fixed capital expenses through strategic partnerships with Universities and Contract Research Organizations (“CROs”). GBSGB’s intellectual property portfolio includes five USPTO issued patents, seven USPTO nonprovisional patent applications pending in the US, and three provisional patent applications in the US. In addition to the USPTO patents and patent applications, the company has filed 29 patent applications internationally to protect its proprietary technology.

 

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, 2021. The balance sheet at March 31, 2020 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. The unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended March 31, 2020.

 

 

Principles of Consolidation

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles (GAAP) for the United States of America. Our consolidated financial statements include all operating divisions and majority-owned subsidiaries, reported as a single operating segment, for which we maintain controlling interests. Intercompany accounts and transactions have been eliminated in consolidation. The ownership interest of non-controlling participants in subsidiaries that are not wholly owned is included as a separate component of equity. The non-controlling participants’ share of the net loss is included as “Net loss attributable to non-controlling interest” on the unaudited consolidated statements of operations.

 

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, inventory valuation and standard cost allocations, valuation of initial right-of-use assets and corresponding lease liabilities, valuation of beneficial conversion features in convertible debt, valuation of the assets and liabilities of discontinued operations, stock-based compensation expense, purchased intangible asset valuations, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies.  These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates.

 

Reclassifications

 

Certain reclassifications have been made to the comparative period amounts to conform to the current period presentation. Certain items on the unaudited balance sheets and statements of operations and cash flows have been reclassified to conform with current period presentation. The assets, liabilities, income/(loss), and cash flows of GB Sciences Louisiana, LLC, GB Sciences Nevada, LLC, GB Sciences Las Vegas, LLC, and GB Sciences Nopah, LLC have been reclassified to discontinued operations due to the sale of the Company's Louisiana cultivation and extraction facility (Note 10) and the pending sale of the Company's Nevada cultivation and extraction facilities (Note 11).

 

Discontinued Operations

 

Refer to Note 3.

 

 

Long-Lived Assets

 

We evaluate the carrying value of property and equipment if impairment indicators are present or if other circumstances indicate that impairment may exist under authoritative guidance. The annual testing date is March 31. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of property and equipment are prepared. If the projections indicate that the carrying value of the property and equipment are not recoverable, we reduce the carrying values to fair value. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. No indicators of impairment were identified by the Company as of December 31, 2020.

 

Inventory

 

We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out method, or its current estimated net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete inventory is based on expected future use.

 

Beneficial Conversion Feature of Convertible Notes Payable

 

The Company accounts for convertible notes payable in accordance with the guidelines established by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 470-20, Debt with Conversion and Other Options and Emerging Issues Task Force (“EITF”) 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”.  A beneficial conversion feature (“BCF”) exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of any attached equity instruments, if any related equity instruments were granted with the debt. In accordance with this guidance, the BCF of a convertible note is measured by allocating a portion of the note's proceeds to the warrants, if applicable, and as a reduction of the carrying amount of the convertible note equal to the intrinsic value of the conversion feature, both of which are credited to additional paid-in-capital. The Company calculates the fair value of warrants issued with the convertible notes using the Black-Scholes valuation model and uses the same assumptions for valuing any employee options in accordance with ASC Topic 718 Compensation – Stock Compensation. The only difference is that the contractual life of the warrants is used.

 

The value of the proceeds received from a convertible note is then allocated between the conversion features and warrants on a relative fair value basis. The allocated fair value is recorded in the financial statements as a debt discount (premium) from the face amount of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of the note, if sooner) and is charged to interest expense.

 

Revenue Recognition

 

The FASB issued Accounting Standards Codification (“ASC”) 606 as guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The Company adopted the guidance on April 1, 2018 and applied the cumulative catch-up transition method.

 

The Company’s only current revenue source (classified as discontinued operations) is from sales of cannabis, a distinct physical good. Under ASC 606, the Company is required to separately identify each performance obligation resulting from its contracts from customers, which may be a good or a service. A contract may contain one or more performance obligations. All of the Company’s contracts with customers, past and present, contain only a single performance obligation, the delivery of distinct physical goods. Because fulfillment of the company’s performance obligation to the customer under ASC 606 results in the same timing of revenue recognition as under the previous guidance (i.e. revenue is recognized upon delivery of physical goods), the Company did not record any material adjustment to report the cumulative effect of initial application of the guidance.

 

 

Earnings/(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 131,886,787 and 158,728,095 potentially dilutive common shares at December 31, 2020 and March 31, 2020, respectively. However, such common stock equivalents were not included in the computation of diluted net loss per share for the three and nine months ended December 31, 2020, and the nine months ended December 31, 2019, as their inclusion would have been anti-dilutive. The computation of diluted earnings per share for the three months ended December 31, 2019, is as follows:

 

 

 

 

 

Recent Accounting Pronouncements

 

Recently Adopted Standards

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13").  Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities.  For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.  For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down.  ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income.  The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash.  The amendments in this ASU are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on its financial statements.

 

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted the standard on April 1, 2020. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

All other newly issued but not yet effective accounting pronouncements have been deemed either immaterial or not applicable.

 

 

 

Note 2 – Going Concern

 

The Company’s financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained net losses since inception, which have caused an accumulated deficit of $(100,650,610) at December 31, 2020. The Company had a working capital deficit of $(6,135,112) at December 31, 2020, net of working capital of $969,498 classified as discontinued operations, compared to $(3,884,877) at March 31, 2020, net of working capital of $349,195 classified as discontinued operations. In addition, the Company has consumed cash in its operating activities of $(1,253,180) for the nine months ended December 31, 2020, including $21,098 provided by discontinued operations, compared to $(4,248,291) including $(1,533,341) used in discontinued operations for the nine months ended December 31, 2019. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

Furthermore, Management believes the COVID-19 pandemic may have a significant impact on the Company's business. The pandemic presents a risk to the global economy, and it is possible that it could have an impact on the operations of the Company in the near term that could materially impact the Company’s financials and ability to continue as a going concern. Management has not been able to measure the potential financial impact on the Company and continues to monitor the impact of the pandemic closely, although the extent to which the COVID-19 outbreak will impact our operations, financing ability or future financial results is uncertain.

 

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 – Discontinued Operations

 

Discontinued operations comprise those activities that were disposed of during the period or which were classified as held for sale at the end of the period and represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes. The Company has included its subsidiaries GB Sciences Louisiana, LLC, GB Sciences Nevada, LLC, GB Sciences Las Vegas, LLC, and GB Sciences Nopah, LLC in discontinued operations due to the sale of the Company's Louisiana cultivation and extraction facility (Note 10) and the pending sale of the Company's Nevada cultivation and extraction facilities (Note 11).

 

There were no assets and liabilities from discontinued operations attributable to GB Sciences Louisiana, LLC at December 31, 2020 and March 31, 2020. The assets and liabilities associated with discontinued operations included in our condensed consolidated balance sheets as of December 31, 2020 and March 31, 2020 were as follows:

 

 

 

 

Discontinued Operations - Revenues and Expenses

 

The revenues and expenses associated with discontinued operations included in our condensed consolidated statements of operations for the three and nine months ended December 31, 2020 and 2019 were as follows:

 

 

 

 

 

Discontinued Operations - Revenues and Expenses (continued)

 

The components of revenues and expenses associated with discontinued operations included in our condensed consolidated statements of operations for the three and nine months ended December 31, 2020 and 2019 were as follows:

 

 

 

 

 

Discontinued Operations - Inventory

 

Raw materials consist of supplies, materials, and consumables used in the cultivation and extraction processes. Work-in-progress includes live plants and cannabis in the drying, curing, and trimming processes. Finished goods includes completed cannabis flower, trim, and extracts in bulk and packaged forms. Inventory is included in current assets from discontinued operations in the Company's unaudited condensed consolidated balance sheets at December 31, 2020 and March 31, 2020.

 

 

 

Discontinued Operations - Leases

 

The Company determines if an arrangement is a lease at inception and has lease agreements for warehouses, office facilities, and equipment. These commitments have remaining non-cancelable lease terms, with lease expirations which range from 2024 to 2025.

 

As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right-of-use asset ("ROU"). Application of this standard resulted in the recognition of ROU assets of $182,624, net of accumulated amortization, and a corresponding lease liability of $190,173 at the April 1, 2019, the date of adoption. Accounting for finance leases is substantially unchanged.

 

Operating leases are included in other current assets , accrued liabilities, and operating lease obligations, long term on the unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment, finance lease obligations, short term, and finance lease obligations, long term, on the unaudited condensed consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make scheduled lease payments. ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is calculated using the incremental borrowing rate at lease commencement, which takes into consideration recent debt issuances as well as other applicable market data available. The rates used to discount finance leases previously recorded as capital leases range from 10.2% to 11.5%. Operating leases were discounted at a rate of 17.0%.

 

Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the consolidated balance sheet.

 

All finance lease costs recorded in the Company's unaudited condensed consolidated financial statements for the three and nine months ended December 31, 2020 and 2019 relate to discontinued operations. During the nine months ended December 31, 2020, finance lease costs included in discontinued operations were $428,487, of which $312,463 represents interest expense and $116,024 represents amortization of the right-of-use assets.

  

Amortization of lease assets is included in income/(loss) from discontinued operations. As of December 31, 2020, there are no operating or finance lease obligations included in continuing operations. The future minimum lease payments of lease liabilities as of December 31, 2020, from discontinued operations are as follows:

 

 

 

 

 

Note 4 – Leases (Continuing Operations)

 

As a result of the adoption of ASC 842, certain real estate and equipment operating leases were recorded on the balance sheet with a lease liability and right-of-use asset ("ROU"). Application of this standard resulted in the recognition of ROU assets of $182,624, net of accumulated amortization, and a corresponding lease liability of $190,173 at the April 1, 2019, the date of adoption. Accounting for finance leases is substantially unchanged.

 

Operating leases are included in discontinued operations under operating right-of-use assets, net and operating lease obligations, short and long term on the unaudited condensed consolidated balance sheets. Lease terms include options to extend when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the consolidated balance sheet.

 

There are no finance leases included in continuing operations. Operating lease costs included in continuing operations were $3,243, of which $1,242 represents interest expense and $2,001 represents amortization of the right-of-use assets. As of December 31, 2020, all of the Company's operating leases have terminated, and there are no right-of-use assets or operating or finance lease obligations included in continuing operations.

 

 

 

Note 5 – Notes Payable and Line of Credit

 

0% Note Payable dated October 23, 2017

 

On October 23, 2017, the Company amended the existing Nevada Medical Marijuana Production License Agreement (“Amended Production License Agreement”). Per the terms of the Amended Production License Agreement, GB Sciences purchased the remaining percentage of the production license resulting in the 100% ownership of the license. GB Sciences also received 100% ownership of the cultivation license included in the original Nevada Medical Marijuana Production License Agreement. In exchange, GB Sciences made one-time payment of $500,000 and issued a 0% Promissory Note in the amount of $700,000 payable in equal monthly payments over a three-year period commencing on January 1, 2018. The present value of the note was $521,067 on the date of its issuance based on an imputed interest rate of 20.3% and the Company recorded a discount on notes payable of $178,933 related to the difference between the face value and present value of the note.

 

To date, the company has made principal payments totaling $330,555 and the principal balance of the note was $369,445 at December 31, 2020. During the nine months ended December 31, 2020, the Company recorded interest expense of $13,929 related to amortization of the note discount. The remaining unamortized discount as of December 31, 2020 was $0.

 

On August 10, 2020, the Company entered into the Membership Interest Purchase Agreement ("Nopah MIPA") for the sale of its interest in  GB Sciences Nopah, LLC (Note 11). The Nopah MIPA will close upon successful transfer of the Nevada Medical Marijuana Cultivation Facility Registration Certificate. Upon close, the principal balance of the note will be reduced to $190,272 and the maturity date of the note will be extended to July 31, 2021, with no payments of principal or interest due until maturity. In addition, the note will no longer bear interest at the penalty rate of 15% unless there is a new event of default.

 

8% Line of Credit dated November 27, 2019

 

In connection with the Binding Letter of Intent dated November 27, 2019 (Note 11), the Company entered into a promissory note and received a line of credit for up to $470,000 from the purchaser of the Company's membership interest in its Nevada facilities. The purpose of the line of credit is to supply working capital for the Nevada operations. The note matures upon the close of the sale of membership interests. As of December 31, 2020, the Company has received $485,000 in advances under the line of credit, reflecting an informal agreement with the lender to increase the Line of Credit limit by $15,000. The Company accrued interest of $29,200 on the line of credit for the nine months ended December 31, 2020, and the balance of the line of credit was $485,000 at December 31, 2020. The note and related interest expense are included in discontinued operations. Upon the close of the sale of the Teco Facility all principal and interest due under the line of credit will be considered satisfied in full.

 

8% Note Payable dated May 7, 2020

 

On May 7, 2020, the Company received $135,000 cash from an investor, net of $15,000 in brokerage fees, and issued a $150,000 promissory note. The note bears interest at a rate of 8.0% per annum. The note was to be repaid upon the first proceeds received from the $8,000,000 promissory note related to the sale of the Company's membership interest in GB Sciences Louisiana, LLC (Note 10), or from the proceeds of the sale of the Teco Facility (Note 11). As inducement to enter into the note transaction, the Company repriced 8,002,500 preexisting warrants held by the investor to an exercise price of $0.04. The repriced warrants were valued at $272,085 on the date of the transaction using the Black-Scholes Model, which exceeded the value of the warrants prior to the price reduction of $49,525 by $222,560. As the result of the increase in the estimated fair value of the warrants, the Company recorded a full discount on notes payable of $150,000. During the nine months ended December 31, 2020, the Company recorded interest expense of $154,964 related to the note consisting of accrued interest of $4,964 and $150,000 related to amortization of the note discount. The Company paid $154,964 on October 5, 2020 in full satisfaction of the note.

 

 

 

 

8% Line of Credit dated July 24, 2020

 

On July 24, 2020, the Company entered into the Loan Agreement, 8% Secured Promissory Note, and Security Agreement (together, the "July 24 Note") with AJE Management, LLC, which established a revolving loan of up to $500,000 that the Company may draw on from time to time. The loan is collateralized by the Teco Facility, subject to the pre-existing lien held by CSW Ventures, L.P. in connection with the 8% Senior Secured Convertible Promissory Note dated February 28, 2019 (Note 6). Any advances will be made at the sole discretion of the lender following a written request made by the Company. Contemporaneously with the Loan Agreement, the Company and AJE Management entered into the Amendment to the Membership Interest Purchase Agreement with AJE Management. The amendment provides that any balances outstanding under the July 24 Note at the time of the close of the sale of the Teco Facility will be forgiven in exchange for a reduction to the $4,000,000 note receivable that the Company will receive as consideration for the sale of the Teco Facility (Note 11). The reduction to the note receivable will be equal to 3 times the balance outstanding under the July 24 Note on the date of the close of the sale of the Teco Facility. The balance outstanding under the note plus accrued interest may be repaid at any time prior to the close of the sale of the Teco facility.

 

On December 29, 2020, the Company entered into the Omnibus Amendment with the purchaser of the Teco Facility (Note 11). The Omnibus Amendment reduces the amount of the note receivable that the Company will receive from the sale of the Teco Facility by $975,000 (three times $325,000 in advances made under the July 24 Note) to $3,025,000. Any advances made to the Company under the July 24 Note in excess of $325,000 will reduce the amount of cash received upon close of the sale of Teco one-for-one, i.e. such advances will be considered advance payments of the $4,000,000 cash purchase price. The Company also agreed that it will not repay the balances outstanding under the July 24 Note prior to the closing of the Teco sale. As a result of the Omnibus Amendment, the Company accrued a modification expense of $650,000 (two times $325,000 in addition to $325,000 in advances already recorded under the July 24 Note). The Company has received $50,000 in additional advances above $325,000 bringing the total balance to $1,025,000 at December 31, 2020. Interest expense was $5,112 for the nine months ended December 31, 2020.

 

 

Summary of Notes and Convertible Notes Payable

 

As of December 31, 2020, the following notes payable were recorded in the Company’s consolidated balance sheet: