GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
Long-Lived Assets
Property and equipment comprise a significant portion of our total assets. We evaluate the carrying value of property and equipment if impairment indicators are present or if other circumstances indicate that impairment may exist under authoritative guidance. The annual testing date is March 31. When management believes impairment indicators may exist, projections of the undiscounted future cash flows associated with the use of and eventual disposition of property and equipment are prepared. If the projections indicate that the carrying value of the property and equipment are not recoverable, we reduce the carrying values to fair value. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. No indicators of impairment were identified by the Company as of March 31, 2019.
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 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
15
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
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.
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 136,230,024 and 73,579,521 potentially dilutive common shares at September 30, 2019 and 2018, respectively. However, such common stock equivalents were not included in the computation of diluted net loss per share as their inclusion would have been anti-dilutive.
Recent Accounting Pronouncements
Recently Adopted Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), (the "New Lease Standard"). This standard requires leases, other than short-term, to be recognized on the balance sheet as a lease liability and a corresponding right-of-use asset.
Lease payments include fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, and others as required by the standard. Lease payments do not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components. This standard is effective for interim and annual reporting periods beginning after December 15, 2018 and the Company adopted the standard as of April 1, 2019. The Company also elected the package of practical expedients, which among other things, does not require reassessment of lease classification.
The Company adopted the New Lease Standard using the modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, "Targeted Improvements - Leases (Topic 842)." Under this method, the cumulative effect adjustment to the opening balance of retained earnings is recognized at the adoption date. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption on April 1, 2019.
The Company's consolidated balance sheet was affected by this standard, but the consolidated statement of operations and consolidated statement of cash flows were not significantly impacted. The most significant change to the consolidated balance sheet upon adoption on April 1, 2019 relates to the recognition of new right-of-use (ROU) assets of $182,624, net of accumulated amortizations, and operating liabilities of $190,173 at the date of adoption. The Company's accounting for finance leases remains substantially unchanged.
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU No 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The guidance also specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company as of April 1, 2019. The Company determined that all share-based payments were settled as of the date of the adoption, so there was no impact on the Company's consolidated financial statements.
All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.
16
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
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 $90,071,120 at September 30, 2019. The Company had a working capital deficit of $6,074,924 including a deficit of $48,828 from discontinued operations at September 30, 2019, compared to $3,245,409 including a deficit of $1,133,890 from discontinued operations at March 31, 2019. In addition, the Company has consumed cash in its operating activities of $3,546,457 including $1,253,851 from discontinued operations for the six months ended September 30, 2019, compared to $6,383,922 including $1,180,054 from discontinued operations 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 consolidated 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 – 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, extracts, and vapes in bulk and packaged forms.
|
|
|
September 30,
2019
|
|
March 31,
2019
|
|
|
|
|
|
|
|
Raw materials
|
|
$191,743
|
|
$440,414
|
|
Work in progress
|
|
566,686
|
|
676,341
|
|
Finished goods
|
|
783,247
|
|
417,037
|
|
|
|
|
|
|
|
Total inventory
|
|
$1,541,676
|
|
$1,533,792
|
Note 4 – 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 2021 to 2032.
As a result of the adoption of ASC 842, certain real estate and equipment operating leases have been recorded on the balance sheet with a lease liability and right-of-use asset ("ROU"). Application of this standard resulted in the recognition of ROU assets of $182,624, net of accumulated amortization, and a corresponding lease liability of $190,173 at the April 1, 2019, date of adoption. Accounting for finance leases is substantially unchanged.
Operating leases are included in operating lease ROU assets, operating lease obligations, current, and operating lease obligations, long term on the condensed consolidated balance sheets. Finance leases are included in property
17
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
and equipment, finance lease obligations, short term, and finance lease obligations, long term, on the 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.
During the six months ended September 30, 2019, finance lease costs recorded in the consolidated financial statements were $340,880, of which $214,394 represents interest expense and $126,486 represents amortization of the right-of-use assets. Operating lease costs were $41,174, of which $15,522 represents interest expense and $25,652 represents amortization of the right-of-use assets.
Discontinued operations includes $222,824 in finance lease costs, of which $123,382 represents interest expense and $84,167 represents amortization of right-of-use assets.
Amortization of lease assets is included in general and administrative expenses. The future minimum lease payments of lease liabilities as of September 30, 2019, from continuing operations are as follows:
|
|
Year Ending March 31,
|
|
Finance Leases
|
|
Operating
Leases
|
|
|
|
|
|
|
|
|
|
2020 (6 months)
|
|
$300,871
|
|
$35,093
|
|
|
2021
|
|
528,443
|
|
71,548
|
|
|
2022
|
|
544,296
|
|
73,939
|
|
|
2023
|
|
560,625
|
|
38,101
|
|
|
2024
|
|
577,444
|
|
3,927
|
|
|
Thereafter
|
|
4,375,869
|
|
-
|
|
Total undiscounted lease payments
|
|
|
6,887,548
|
|
222,608
|
|
Less: Amount representing interest
|
|
|
(3,187,688)
|
|
(51,070)
|
|
Present value of minimum lease payments
|
|
|
3,699,860
|
|
171,538
|
|
Less: Current maturities of lease obligations
|
|
(106,488)
|
|
(44,571)
|
|
Long-term lease obligations
|
|
|
$3,593,372
|
|
$126,967
|
18
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
Note 5 – Notes Payable
6% Note Payable due November 30, 2018
On July 28, 2018, the Company entered into the Amendment and Termination Agreement (“Amendment and Termination Agreement”) with Pacific Leaf Ventures, L.P (“Pacific Leaf”). Pursuant to that agreement, the Pacific Leaf Royalty Agreement and all other agreements with Pacific Leaf were terminated in their entirety, and the Company would make payments totaling $1 million of the $1.5 million balance due to Pacific Leaf by August 31, 2018. Contemporaneously with the Amendment and Termination Agreement, the Company issued a Promissory Note (“Promissory Note”) for the remaining $0.5 million due to Pacific Leaf. The Promissory Note accrued interest at a rate of 6% per annum and matured on November 30, 2018. The Company recorded interest expense of $5,425 related to the Promissory Note for the three months ended September 30, 2018.
In consideration for deferring the payment of the amounts due to Pacific Leaf, the Company issued 100,000 shares of its common stock to Pacific Leaf on July 31, 2018 having a fair market value of $36,000. The Company made cash payments totaling $1.0 million to Pacific Leaf in August 2018 related to the Amendment and Termination Agreement. Both the $36,000 fair value of shares issued to Pacific Leaf and the $1,000,000 in cash payments made to Pacific Leaf in August 2018 are recorded in the Company’s Condensed Consolidated Statement of Operations for the Three and Six Months Ended September 31, 2018, under the other expense caption.
On December 21, 2018, the company made a $100,000 payment on the promissory note. The payment was applied to interest accrued to date of $12,164 and the remaining $87,836 was applied to the principal balance of the Note.
On December 21, 2018, the Company also issued 500,000 shares of its common stock to Pacific Leaf in consideration for further deferral of repayment of the Note. The Company recognized $95,000 in expense related to the shares issued, which is recorded in the Company’s Consolidated Statement of Operations for the year ended March 31, 2019, under the other expense caption.
The Company made additional payments on the promissory note of $100,000 on January 16, 2019, $100,000 on February 6, 2019, and a final payment of $210,000 on March 4, 2019 which paid the note off in full.
Because the Amendment and Termination Agreement irrevocably terminated the Pacific Leaf Royalty Agreement Royalty Agreement, the Company recorded an expense of $1,530,000 in the quarter ended September 30, 2018 related to the prepaid royalties previously recorded on the Condensed Consolidated Balance Sheet in connection with the February 2018 Agreement. The expense is included in the Other Expense caption of the Company’s Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2018. In total, the Company recorded $3.0 million in Other Expense in its Condensed Consolidated Statement of Operations for the three and six months ended September 30, 2018, as summarized in the table below:
|
Amounts Recorded in Other Expense
|
|
For the Three and Six Months Ended
September 30, 2018
|
|
|
|
|
|
Prepaid royalties expensed during the quarter
|
|
$ 1,530,000
|
|
Promissory note issued to Pacific Leaf, due on or before November 30, 2018
|
|
500,000
|
|
100,000 shares common stock issued to Pacific Leaf
|
|
36,000
|
|
Long-term note payable and accrued interest terminated
|
|
(20,075)
|
|
Total non-cash expense
|
|
2,045,925
|
|
Cash payments made in August 2018
|
|
1,000,000
|
|
Total
|
|
$ 2,045,925
|
19
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
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 a one-time payment of $500,000 and issued a 0% Promissory Note in the amount of $700,000 payable in equal monthly payments over a three-year period commencing on January 1, 2018.
The present value of the note was $521,067 on the date of its issuance based on an imputed interest rate of 20.3% and the Company recorded a discount on notes payable of $178,933. During the six months ended September 30, 2019, the Company recorded $31,092 in interest expense related to amortization of the note discount.
As of the date of this report, five monthly payments on the note totaling $97,222 are unpaid. The terms of the note provide the Company ten days to cure any breach upon written notification of default received from the lender. To date, 483 Management has not provided the Company with written notification of default and we are in the process of negotiating a forbearance agreement. If the Company is unable to cure the default within ten days of receiving a written notice, 483 Management will have the option to accelerate the remaining balance owed of $369,444 and impose a penalty interest rate of 10%, but must notify the Company in writing should it choose to do so.
Note payable to BCM MED, LLC
On December 20, 2018, GB Sciences Louisiana, LLC (“GBSLA") entered into a $300,000 Loan Agreement with BCM MED, LLC (“BCM MED”). BCM MED is a related party to Wellcana Group, LLC, the minority member in GBSLA. The purpose of the financing is to fund operating expenses incurred by or on behalf of medical marijuana operations of GBSLA.
Pursuant to the Loan Agreement, GBSLA will began making eight (8) monthly installment payments in the amount of $33,333 on or before the 10th business day of each month commencing in April 2019. GBSLA will make the 9th and final installment payment in the amount of $33,333 on or before the 10th business day of December 2019. The aggregate amount of the installment payments from GBSLA to BCM MED are equal to the loan amount. During the six months ended September 30, 2019, GBSLA made $100,000 in payments towards the loan and reduced the loan balance to $100,000. The balance is included in current liabilities from discontinued operations on the Company’s September 30, 2019 unaudited condensed consolidated balance sheet.
20
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
Summary of Notes Payable
As of September 30, 2019, the following notes payable were recorded in the Company’s consolidated balance sheet:
|
|
As of September 30, 2019
|
|
Short-Term Notes Payable
|
Face Value
|
|
Discount
|
|
Carrying Value
|
|
6% Convertible promissory notes payable (Note 6)
|
$1,257,000
|
|
$(360,134)
|
|
$896,866
|
|
8% Convertible Secured Promissory Note dated February 28, 2019, as amended (Note 6)
|
$1,361,863
|
|
$(101,611)
|
|
$1,260,252
|
|
8% Convertible Promissory Note dated April 23, 2019
|
$2,765,000
|
|
$(261,760)
|
|
$2,503,240
|
|
0% Note Payable dated October 23, 2017, current portion
|
$311,111
|
|
$(53,816)
|
|
$257,295
|
|
Total Short-Term Notes Payable
|
$5,694,974
|
|
$(777,321)
|
|
$4,917,653
|
|
|
|
|
|
|
|
|
Long-Term Notes Payable
|
|
|
|
|
|
|
0% Note Payable dated October 23, 2017
|
$58,333
|
|
$(1,919)
|
|
$56,414
|
|
Total Long-Term Notes Payable
|
$58,333
|
|
$(1,919)
|
|
$56,414
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
0% Note Payable dated December 20, 2018
|
$100,000
|
|
$-
|
|
$100,000
|
Note 6 – Convertible Notes
March 2017 Convertible Note Offering
In March 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $965,500. The Notes are payable within three years of issuance and are convertible into 3,862,000 shares of the Company’s common stock. 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.
21
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
July 2017 Convertible Note Offering
In July 2017, the Company entered into a Placement Agent’s Agreement with a third-party brokerage firm to offer units consisting of a $1,000 6% promissory note convertible into 4,000 shares of the Company’s common stock at $0.25 per share and 4,000 warrants to purchase shares of the Company’s’ common stock at an exercise price of $0.65 per share for the period of three years.
During the three months ended September 30, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $3,085,000. The Notes are payable within three years of issuance and are convertible into 12,340,000 shares of the Company’s common stock. The Company also issued 12,340,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,541,797 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $1,532,335 recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.
During the three months ended December 31, 2017, the Company issued short-term Promissory Notes (“Notes”) to various holders with combined face value of $4,116,000. The Notes are payable within three years of issuance and are convertible into 16,464,000 shares of the Company’s common stock. The Company also issued 16,464,000 common stock warrants to the Note holders. The warrants are exercisable at any time and from time to time before maturity at the option of the holder. Each warrant gives the Noteholder the right to purchase one share of common stock of the Company at an exercise price of $0.65 per share for a period of three years. The beneficial conversion feature resulting from the discounted conversion price compared to the market price was calculated based on the date of issuance to be $1,600,808 after adjusting the effective conversion price for the relative fair value of the note proceeds compared to the fair value of the attached warrants and note. In addition to this discount related to the beneficial conversion feature, an additional discount of $2,417,856 was recorded based on the fair value of the warrants attached to the note. This value was derived using the Black-Scholes valuation model.
As of September 30, 2019, convertible notes having a carrying value of $896,866, net of unamortized discount of $360,134 remained outstanding from the March 2017 and July 2017 note offerings, and accrued interest on the notes was $159,371. Interest expense for the six months ended September 30, 2019, was $242,608, of which $204,795 was amortization of the note discount.
8% Senior Secured Convertible Promissory Note dated February 28, 2019
On February 28, 2019, the Company issued a $1,500,000 8% Senior Secured Convertible Promissory Note and entered into the Note Purchase Agreement and Security Agreement with CSW Ventures, LP (together, “CSW Note”). The note matures on August 28, 2020 and is convertible at any time until maturity into 8,823,529 shares of the Company’s common stock at $0.17 per share. Collateral pledged as security for the note includes all of the Company’s 100% membership interests in GB Sciences, Nevada, LLC and GB Sciences Las Vegas, LLC, which together represent substantially all of the Company’s cannabis cultivation and production operations and assets located at its Teco facility in Las Vegas, Nevada.
The intrinsic value of the beneficial conversion feature resulting from the market price of the Company’s common stock in excess of the conversion price was $176,471 on the date of issuance, and the Company recorded a discount on the CSW Note in that amount. During the six months ended September 30, 2019, the Company recorded accrued interest on the CSW Note of $32,186 and recorded an additional $61,286 in interest expense as the result of amortization of the note discount.
On May 28, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $170,000 of the principal balance of the 8% Senior Secured Promissory Note dated February 28, 2019. Accordingly, the
22
GB SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
Table of Contents
Company issued 1,000,000 shares of its common stock based on a $0.17 per share conversion price. In connection with the conversions, $17,225 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $152,775. After conversion, the remaining balance outstanding was $1,330,000 at September 30, 2019.
On July 12, 2019, the Company entered into the Amendment to Note Documents and the Amended and Restated 8% Senior Secured Promissory Note (together, “CSW Amendment”). The CSW Amendment increased the balance of the CSW Note by $100,000 to reflect an additional $100,000 advanced to the Company on July 12, 2019, and by $41,863 to add accrued interest to date to the principal balance. The CSW Amendment also decreased the conversion price to $0.11 per share, with the remaining terms unchanged from the original CSW Note.
We evaluated the modification under the guidance in ASC 470-50 and determined that the amendment represents an extinguishment because the change in the fair value of the conversion feature exceeded 10% of the carrying value of the CSW Note on the amendment date. The carrying value of the amended note on the date of extinguishment was $1,338,057, net of a beneficial conversion feature discount of $133,806, and we recorded a loss on extinguishment of $124,158.
During the six months ended September 30, 2019, we recorded interest expense of $46,953 related to the amended CSW Note consisting of $24,338 in accrued interest and $22,615 related to amortization of the note discount.
On August 1, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $110,000 of the principal balance of the Amended CSW Note at $0.11 per share. Accordingly, the Company issued 1,000,000 shares of its common stock. In connection with the conversions, $9,579 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $100,421. After conversion, the remaining balance outstanding was $1,361,863.
As of the date of this report, the Company is in default on the amended CSW Note due to non-payment of the quarterly interest payment that was due on October 1, 2019 and nonpayment of an income tax liability related to the March 31, 2018 tax year. The terms of the note provide that the Company has 5 days to cure a default caused by nonpayment of interest and ten days to cure a default caused by noncompliance with affirmative or negative debt covenants. As of the date of this report, the lender has not provided formal notice of the default and the Company is negotiating a forbearance agreement with the lender. Upon written notice of default to the Company, the lender may accelerate the payment of principal and interest and enforce its remedies under the Security Agreement.
On October 23, 2019, as an inducement to entering into a forbearance agreement, the Company entered into an additional Amendment to Promissory Note with CSW Ventures, L.P., which reduced the conversion price of the CSW Note from $0.11 to $0.08. The final terms of the forbearance agreement have not been negotiated and executed as of the date of this report (see Note 11 Subsequent Events).
8% Convertible Promissory Note dated April 23, 2019
On April 23, 2019, the Company entered into the Note Purchase Agreement with Iliad Research and Trading, L.P. and issued an 8% Convertible Promissory Note with a face value of $2,765,000. The Note was issued with original issue discount of $265,000 and is convertible into shares of the Company’s common stock at a price of $0.17 per share at the option of the note holder at any time until the Note is repaid. The Note matures on April 22, 2020.
A total discount of $440,000 was recorded on the note, which includes $265,000 of original issue discount and $175,000 in fees paid to brokers. During the six months ended September 30, 2019, interest expense related to the note was $274,599, of which $178,240 was amortization of the note discount.
The note includes cross-default and cross-acceleration clauses that may be triggered by the defaults on the Company’s other debts described above in Note 5 and Note 6.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
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Note 7 – Capital Transactions
Increase in Authorized Capital
Effective April 8, 2018, Shareholders of the Company approved the change in corporate domicile from the State of Delaware to the State of Nevada and an increase in the number of authorized capital shares from 250,000,000 to 400,000,000. On August 15, 2019, Shareholders of the Company approved an increase in authorized capital shares from 400,000,000 to 600,000,000.
Sale of Common Stock and Exercise of Warrants
Debt Conversions
On May 28, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $170,000 of the principal balance of the 8% Senior Secured Promissory Note dated February 28, 2019 (See Note 6). Accordingly, the Company issued 1,000,000 shares of its common stock based on a $0.17 per share conversion price. In connection with the conversions, $17,225 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $152,775.
On August 1, 2019, the Company received notice from CSW Ventures, L.P. of the conversion of a total of $110,000 of the principal balance of the Amended CSW Note at $0.11 per share. Accordingly, the Company issued 1,000,000 shares of its common stock. In connection with the conversions, $9,579 in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by $100,421. After conversion, the remaining balance outstanding was $1,361,863.
Exercise of Warrants for Stock
In order to encourage the exercise of approximately 70.5 million warrants issued to investors in private placements of convertible notes and common stock having exercise prices ranging between $0.65 and $0.30, the Company effected a temporary decrease in the exercise price of the warrants to $0.10 per share until July 11, 2019. On July 12, 2019, the Company extended the repricing of the warrants through August 30, 2019, and on July 31, 2019, the Company extended the repricing of the warrants to September 30, 2019. As a result of the price reduction, the Company received notice of the exercise of 9,449,750 warrants and received proceeds of $850,478, net of brokerage fees of $94,498. In connection with the induced exercise of the warrants, the Company recorded an inducement dividend of $230,025.
Stock Issued in Private Placement
On December 4, 2018, the Company entered into a Placement Agent’s Agreement to offer a total of 15,000,000 units at the price of $0.20 per unit up to a total of $3 million. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at the price of $0.60 for a period of five years. On January 15, 2019, the Placement Agent’s Agreement was amended to decrease the unit price from $0.20 per unit to $0.15 per unit for a total of 20,000,000 units and decrease the exercise price of the warrants included in each unit from $0.60 to $0.30, applied retroactively to funds raised prior to the date of the amendment, with no other changes to the agreement. During the six months ended September 30, 2019, the Company received a total of $478,696 in proceeds from the private placement, net of $71,529 in brokerage fees and issued 3,668,167 shares of its common stock and 3,668,167 warrants to purchase one share of its common stock at $0.30 per share.
Cancellation of Shares Issued to Consultant
During the six months ended September 30, 2019, the Company cancelled 400,000 shares of common stock issued to a consultant as compensation for services rendered during the year ended March 31, 2019, that were initially issued
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
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as part of the consulting agreement. During the quarter ended June 30, 2019, the Company agreed to amend the consulting agreement to issue options instead of the shares. The amendment has not yet been executed nor has the option agreement as of September 30, 2019.
Options and Warrants
At the conclusion of the December 2018 private placement on September 30, 2019, the Company issued 1,954,613 compensation warrants to the broker participating in the private placement. The warrants are exercisable at $0.30 per share until expiration on June 15, 2024 and are eligible for cashless exercise. The Company recorded a $132,914 expense related to the issuance of the warrants.
For the six months ended September 30, 2019, the Company recorded $208,809 in share-based compensation expense relating to options granted to employees and consultants in prior periods.
Note 8 – 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 $500,000 annual research investment is prepaid annually in September and amortized over a one-year period. The 10% commission on gross receipts is accrued and paid as the sales are made. The Company’s first sales in Louisiana were made on August 6, 2019 and total expense related to the 10% commission was $37,701 for the three months ended September 30, 2019 and that amount is accrued in current liabilities from discontinued operations.
The monetary contributions will be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, which AgCenter would retain 50% of those rights with the other 50% retained by the Company. As of September 30, 2019, GB Sciences has made payments totaling $1,600,000 toward its obligations under the agreement. For the six months ended September 30, 2019, the Company recorded $250,000 in expense related to the agreement.
On December 6, 2018, the Company entered into an agreement with SylvaCap Media for business advisory and consulting services. In consideration for the services, the Company issued warrants to purchase 2 million shares of the Company’s common stock at $0.1125 per share. The Company valued the warrants at $244,000 using the Black-Scholes valuation model. The fair value of the warrants was recognized as consulting expense over the term of the agreement. The company recorded $162,667 in expense related to the warrants for the six months ended September 30, 2019. The Company also agreed to pay the consultant a $10,000 monthly fee for 12 months and to issue 4 million restricted shares of the Company’s common stock. The Company issued 2 million shares on the date of the contract, with the remaining 2 million due six months after the date of the agreement.
On June 6, 2019, the Company entered into a Cancellation and Settlement with SylvaCap Media and terminated the December 6, 2018 agreement. In consideration for terminating the agreement, the Company will pay $135,000 as a one-time cancellation fee and will not issue the remaining two million shares due under the agreement. This amount is accrued in accounts payable as of September 30, 2019.
During the year ended March 31, 2019, the Company recorded a $200,000 charge related to seizure of cash by local law enforcement during a routine traffic stop while transporting the cash to one of our subsidiaries. The charge was recorded in other expense as the Company believed it was more likely than not that the cash would not be returned. After appealing the seizure of the cash through the proper channels, the cash was returned to the Company on September 6, 2019, and the Company recorded other income on that date.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
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From time to time, the Company may become involved in certain legal proceedings and claims which arise in the ordinary course of business. In management’s opinion, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, the Company would record a reserve for the claim in question. If and when the Company records such a reserve, it could be material and could adversely impact its results of operations, financial condition, and cash flows.
Note 9 – Related Party Transactions
During the six months ended September 30, 2019, the Company made payments totaling $200,000 on the 0% Note Payable to BCM MED, LLC. BCM MED, LLC shares common ownership with Wellcana Group, LLC, who hold the noncontrolling interest in GB Sciences Louisiana, LLC.
Note 10 – Non-Controlling Interest
On February 12, 2018, the Company’s wholly-owned subsidiary, GB Sciences Louisiana, LLC (“GBLA"), issued members’ equity interests equal to 15% in GBLA to Wellcana Group, LLC (“Wellcana”) for $3 million. Under the GBLA operating agreement, Wellcana had an option to make additional capital contributions for the purchase of up to an additional 35% membership interest in GBLA, at the rate of 5% membership interest per $1 million contributed. To date, Wellcana has made additional cash contributions of $7.0 million and its non-controlling interest in GBLA increased to 49.99%. The capital contributions have been used to fund the buildout of the Petroleum Drive facility and to pay for the operating costs of GBLA.
On September 12, 2019, we signed a term sheet under which an entity affiliated with Wellcana will pursue the purchase of the Company’s controlling interest in GBLA in exchange for $8 million cash with the potential for up to an additional $8 million over time through earn out provisions. The parties would negotiate and draft a Purchase and Sale Agreement with the intent to close the transaction by October 31, 2019. On October 31, 2019, we signed an agreement extending the date of closing to November 30, 2019. Because of the plan to sell the Company’s interest in GBLA, we determined that GB Sciences Louisiana, LLC qualifies as a discontinued operation under the relevant accounting guidance, and accordingly the assets, liabilities, income, and cash flows of GB Sciences Louisiana, LLC are separated from continuing operations for all periods presented.
The net loss attributable to the non-controlling interest in GBLA was $377,781 for the six months ended September 30, 2019.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
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Note 11 – Subsequent Events
Capital Transactions
Subsequent to September 30, 2019, the Company issued 7,450,000 shares of its common stock as the result of the following transactions:
On October 9, 2019, the Company issued 2,000,000 shares to a consultant as prepayment for consulting services.
On October 10, 2019, the Company issued 200,000 shares of its common stock to the landlord of its Teco facility in Nevada in as consideration for deferment of lease payments until November 15, 2019.
On October 16, 2019, the Company issued 4,000,000 shares of its common stock and 2,000,000 warrants to purchase one share of common stock at $0.08 per share for three years to an investor in exchange for $240,000 cash.
On October 30, 2019, the Company agreed to a limited one-time reduction to the conversion price of the $2,765,000 8% Convertible Promissory Note dated April 23, 2019 and received notice of the conversion of $75,000 principal balance at $0.06 per share. As the result of that conversion, we issued 1,250,000 shares of common stock and reduced the principal balance of the note by $75,000.
Amendment to 8% Senior Secured Convertible Promissory Note dated February 12, 2019
On October 23, 2019, as an inducement to entering into a forbearance agreement, the Company entered into an additional Amendment to Promissory Note with CSW Ventures, L.P., which reduced the conversion price of the CSW Note from $0.11 to $0.08. The Company evaluated the modification under the guidance in ASC 470-50 and determined that the price reduction may represent terms that are substantially different from the pre-modification note and we anticipate recording a loss on extinguishment of $92,796.
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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.
We seek to become a trusted producer of consistent and efficacious medicinal strains and products, combining both cannabinoids and terpenes, which we intend to market in those states within the United States and in other countries where the sale of medical cannabis products are permitted. In addition, subject to obtaining Food and Drug Administrative (FDA) certification, we intend to market our cannabinoid-based drug discoveries on a world-wide basis.
We were incorporated in the State of Delaware on April 4, 2001, under the name “Flagstick Venture, Inc.” On March 28, 2008, stockholders owning a majority of our outstanding common stock approved changing our then name “Signature Exploration and Production Corp.” as our business model had changed.
On March 13, 2014, we entered into a definitive assets purchase agreement for the acquisition of assets, including the Growblox™ cultivation technology which resulted in a change in our corporate name on April 4, 2014, from Signature Exploration and Production Corporation to Growblox Sciences, Inc.
Effective December 12, 2016, the Company amended its Certificate of Corporation pursuant to shareholder approval as reported in the Form 8-K filed on October 14, 2016. Pursuant to the amendment the Company’s name was changed from Growblox Sciences, Inc. to GB Sciences, Inc.
Effective April 8, 2018, Shareholders of the Company approved the change in corporate domicile from the State of Delaware to the State of Nevada and increase in the number of authorized capital shares from 250,000,000 to
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400,000,000. Effective August 15, 2019, Shareholders of the Company approved an increase in authorized capital shares from 400,000,000 to 600,000,000.
Our wholly owned subsidiary GB Sciences Nevada, LLC (“GBSN”) leases a warehouse facility at 3550 W. Teco Avenue, Las Vegas Nevada. 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 $10 million. Completion of all Phases of this facility is dependent upon the availability of capital to complete construction.
We also hold a Nevada Medical and Recreational Marijuana Production License through the Company’s wholly owned subsidiary, GB Sciences Las Vegas, LLC. 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. We began full production operations in our Teco facility in December 2018.
On September 18, 2017 GB Sciences finalized its agreement with Louisiana State University (“LSU”) AgCenter to be the sole operator of the LSU’s medical marijuana program. The LSU Board of Supervisors entered into a five-year agreement that has an option to renew for two additional five-year terms with GB Sciences.
The contract includes the Company’s commitment to make a minimum financial contribution to the LSU AgCenter in the amount of $3.4 million, or a 10% commission of gross receipts, in addition to annual research investments of $500,000 to the LSU AgCenter.
The monetary contributions would be used to conduct research on plant varieties, compounds, extraction techniques and delivery methods that could generate additional revenue through discoveries that are subject to intellectual property rights, which AgCenter would retain 50% of those rights. As of March 31, 2019, GB Sciences has made payments totaling $1,600,000 toward its obligations under the agreement.
On September 12, 2019, we signed a term sheet under which an entity affiliated with Wellcana will pursue the purchase of the Company’s controlling interest in GB Sciences Louisiana, LLC in exchange for $8 million cash with the potential for up to an additional $8 million over time through earn out provisions. On October 31, 2019, we signed an agreement extending the date of closing to November 30, 2019.
On September 21, 2018, the Company formed a wholly owned subsidiary, GBS Global Biopharma, Inc., in the province of Ontario, Canada with plans to license and/or transfer some of Growblox Life Sciences LLC’s intellectual property to the newly formed entity. On March 15, 2019, the Company entered into the Asset Purchase Agreement with GBS Global Biopharma, Inc., whereby all of the assets and certain liabilities held by Growblox Life Sciences, LLC, a wholly-owned subsidiary of GB Sciences, Inc., were transferred to GBS Global Biopharma, Inc. in exchange for a promissory note in the amount of $1,435,700. The assets transferred include all intellectual property and intangible assets owned by the Company, consisting primarily of patents in process and research contracts with universities and researchers. GBS Global Biopharma Inc. is currently pursuing clinical development of the intellectual property, including clinical trials.
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Plan of Operation
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 cultivate and dispense cannabis for medical and recreational purposes in Nevada and Louisiana. Additionally, we intend to cultivate and dispense cannabis in other states which permit such sales and in which we and our operating partners are able to obtain cultivation and dispensing licenses.
Drug Discovery and Development of Novel Cannabis-Based Therapies
Through its wholly-owned, Canadian subsidiary, GBS Global Biopharma, Inc. (GBSGB), the Company has conducted ground-breaking research embracing the complexity of the whole plant led by Dr. Andrea Small-Howard, the Company’s Chief Science Officer, and Dr. Helen Turner, Vice President of Innovation and Dean of the Science and Technology Department at Chaminade University. Small-Howard and Turner posited that complex mixtures of cannabinoids and terpenes that are derived from native mixtures in the cannabis plant, but with precise optimizations, would provide more targeted and effective treatments for specific disease conditions than either single cannabinoids or whole plant formulations. They developed a rapid screening and assaying system which tested thousands of combinations of cannabinoids and terpenes in vitro against cell-based models of disease. This process identified precise mixtures of cannabinoids and terpenes, many of which contained no THC, to treat categories of disease conditions, including neurological disorders, inflammation, heart disease, metabolic syndrome, chronic and neuropathic pain.
GBSGB’s drug discovery process combines: 1) HTS: high throughput screening of tens of thousands of combinations of compounds derived from specific chemovars of the cannabis plant in well-established cellular models of diseases, and 2) NPP: a proprietary Network Pharmacology Platform algorithm for the prediction of complex therapeutic mixtures that the Company spent two-and-a-half-years training and testing against cell assay data. This combined approach to drug discovery increases research efficiency and accuracy reducing the time from ideation to patenting from 7 years to 1.5 years. Screening of cannabis-based mixtures for drug discovery involves the testing of specific combinations of plant chemicals from many naturally occurring cannabis chemovars and the use of live models for these diseases that have been well established by other researchers. First, the Company finds chemovars that show some therapeutic activity, and then refines these natural mixtures to optimize their effectiveness in cellular assays by removing compounds that do not act synergistically with the others in the mixtures. The Company also use its internally-validated Network Pharmacology Platform to prioritize and eliminate some potential combinations, which reduces the time in the discovery period.
The U.S. Patent and Trademark Office allows complex mixtures to be claimed as Active Pharmaceutical Ingredients, and GBSGB has a series of patents containing cannabis-derived complex mixtures that act as therapeutic agents for specific disease categories, as described below. GBSGB’s patents are protected whether the individual compounds are derived from the cannabis plant, another plant, synthetically produced, or derived from a combination of sources for the individual chemical compounds in these mixtures.
GBS Global Biopharma, Inc. has made significant strides in the past year with respect to both discovery research and product development programs. Both lead Rx programs in Parkinson’s disease and chronic neuropathic pain are now in preclinical animal studies with Dr. Lee Ellis of the NRC in Halifax. For chronic neuropathic pain, GBSGB is testing its Myrcene-Containing Complex Mixtures (MCCM) both as encapsulated, time-released nanoparticles, as well as in non-encapsulated forms of these therapeutic mixtures. For Parkinson’s disease, the initial clinical prototypes of GBSGB Cannabinoid-Containing Complex Mixtures (CCCM) are being formulated by Catalent Pharma using Catalent’s Zydis® Orally Disintegrating Tablet technology. Catalent has reported that the prototypes passed the initial Feasibility Testing Phase, and Catalent is now working on the Proof of Concept Study with our GBS101.PD, GBS102.PD, and GBS103.PD formulations. Three new patent applications were filed, two new patent applications are being prepared for filings, and we have licensed another patented delivery method, oral thin films. We are also raising awareness of our work through six peer-reviewed journal articles and a dozen presentations at national and international meetings. Favorable Research Updates from our university collaborators reveal the promise in our discovery programs with Michigan State University (HIV-Associated Neurodegenerative Disorder), Chaminade University (Neuropathic Pain, Metabolic Syndrome), the University of Athens, Greece (Cannabis Metabolomics), and the University of Seville, Spain (Time-Released Nanoparticles). The University of Seville has
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completed functional testing on nanoparticles containing myrcene, nerolidol, and beta-caryophyllene. In these cell-based assays, the effectiveness and kinetics of the nanoparticle-forms of these terpenes were compared with the “naked” terpenes both individually and in mixtures. In all cases, the effectiveness of the nanoparticles were superior to the naked terpenes, however, the mixtures were dramatically more effective than the individuals. These results from Seville are very promising as these nanoparticles are now entering the animal testing phase at the NRC in Halifax.
Intellectual Property Portfolio
The Company has filed four USPTO & WIPO patent applications, four provisional USPTO patent applications, and anticipates filing two additional patent applications during the fiscal year ended March 31, 2020. We have licensed three more patents for our intellectual property portfolio. Refer to the Company’s 10-K for the year ended March 31, 2019, for a complete list of patent filings and licensed patents in our intellectual property portfolio.
Partnering Strategy
GBSGB runs a lean drug development program and minimizes expenses, including personnel, overhead, and fixed capital expenses (such as lab and diagnostic equipment), through strategic partnerships with Universities and Contract Research Organizations (“CROs”). Through these research and development agreements, GBSGB has created a virtual pipeline for the further development of novel medicines extracted from the cannabis plant. The partners bring both expertise and infrastructure at a reasonable cost to the life sciences program. GBSGB has also negotiated with these partners to keep 100% of the ownership of the IP within GBSGB for original patent filings.
GBSGB currently has active and on-going research agreements with the following institutions covering the indicated areas of research:
· Chaminade University: Broad-based research program to support the drug discovery platform that has yielded most of GBSGB’s original patents to date in the areas of neurodegenerative diseases, heart disease, inflammatory diseases, neuropathic pain and chronic pain.
· Michigan State University: Discovery work using a cutting-edge, multi-cellular model of the human immune system and a multi-cell model of the brain to explore CCCM™s for use as an adjunctive therapy to anti-retroviral cocktails for HIV/AIDS patients and to define CCCM™s for use in the prevention of HIV-Associated Neurocognitive Disorders (HAND). The initial screens are producing positive results.
· University of Athens: Broad-based metabolomics analysis of over 100 cannabis genotypes including both hemp and THC-producing cannabis varieties, in combination with GBSGB’s bioassay data linking genotypes and potential disease-remediations. This project has the potential to define active ingredients from plant-derived mixtures beyond the standard cannabinoids and terpenoids. The discovery potential is huge.
· The National Research Center (NRC) of Canada, Halifax, Nova Scotia: Two animal-phase studies are being performed by Dr. Lee Ellis’ group at the NRC. An animal safety and efficacy study was initiated in Q4 of 2018 for GBSGB’s Parkinson’s disease therapies, and a safety and efficacy study in animals for GBSGB’s Chronic Neuropathic Pain (NP) formulas was initiated in Q1 of 2019.
· The University of Seville: Development and functional testing of time-released and disease-targeted nanoparticles of cannabis-based complex mixtures for oral administration.
· The University of Cadiz: Testing the safety and efficacy of the above-mentioned polymeric nanoparticles in rodent models.
· University of Hawaii: Validating the efficacy of a complex cannabis-based mixture for the treatment of cardiac hypertrophy and cardiac disease in a rodent model.
The Company also has consulting agreements with the following subject matter experts:
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· Dr. Zoltan Mari, Section Head, Nevada Movement Disorders Program & Lee Pascal Parkinson's Disease Scholar at Cleveland Clinic, who will oversee the phase 0 human Parkinson’s disease trial and protocols.
· Dr. Ziva Cooper, UCLA, Research Director, UCLA Cannabis Research Initiative, will design GBSGB’s human neuropathic and chronic pain trials and provide strategic guidance on clinical development of these products. For nearly a decade, Dr. Cooper has been building on her training in preclinical models of drug dependence and developing an expertise in human laboratory studies on cannabis, cannabinoids, opioids, and cocaine while maintaining research projects in animal models of substance use. Her current research investigates the direct neurobiological effects of emerging drugs of abuse, including synthetic cannabinoids in laboratory animals and the direct physiological and behavioral effects of cannabinoids as they pertain to both their abuse potential and potential therapeutic effects in double-blind, placebo controlled human laboratory studies. Dr. Cooper’s research is funded by the National Institute on Drug Abuse.
Path to Market: Drug Development Stages and Proposed Clinical Trials
GBSGB has cannabis-based therapeutic products in the following stages of drug development: Discovery, Pre-Clinical, and entering the Clinical Phase. It has also licensed therapeutic products that the Company intends to develop through partners, labeled Partner Programs.
The completion of pre-clinical studies, clinical trials, and obtaining FDA-approvals for pharmaceutical products is traditionally a long and expensive process. However, GBSGB asserts that its drug development program, novel regulatory strategy, experienced development partners, and aggressive licensing of these products at early clinical stages can mitigate some of the risks. The Company uses a combination of in silico discovery methods and automated screening of cellular models of disease to decrease the time in Discovery prior to filing novel patent applications for disease-specific therapeutics. GBSGB’s original patent applications cover new chemical entities (“NCE”) based on complex combinations of plant-derived compounds. Its Exploratory IND/Phase 0 Program gets the Company to First-in-Man sooner than traditional programs, which reduces translational risks, and includes preliminary efficacy measures for responsible development decisions. In contrast, a traditional phased-development path would not provide any efficacy measures until Phase II. After the completion of our Phase 0 study, which compares the efficacies of multiple related cannabis-based formulations, the Company plans to advance the lead drug candidate using an adaptive trial design that is more efficient than the traditional phased-development pathway. GBSGB has entered into research contracts, partnerships, and/or joint ventures with several respected, independent contract research organizations, medical schools, universities, and other scientific researchers to increase developmental efficiencies. If and when one or more of GBSGB’s drugs, therapies or treatments are approved by the FDA, GBSGB will seek to market them under licensing arrangements with major biotechnology or pharmaceutical companies.
GBSGB plans to use a combination of FDA-registered human clinical trials, as described in detail above, and pilot human studies in the development of its therapeutic product portfolio. Early in product development, human pilot studies that are fully-compliant with state medical cannabis programs will be used to gather early data on safety and efficacy that can later be referenced in the next phase of product development. GBSGB may be able to produce and sell the early products that prove efficacious, through licensing agreements with cannabis companies in other US states and countries that have legalized cannabis programs. GBSGB believes that these pilot studies will provide significant value by reducing the cost of commercialization, more rapidly putting effective drugs in the hands of patients, and accelerating by years the monetization of research. GBSGB’s goal is to be the perfect partner to those companies with greater resources and experience in the marketing and distribution of medications worldwide.
There can be no assurance that we will ever be able to enter into any joint ventures or other arrangements with third parties to finance our drug development program or that if we are able to do so, that any of our projected therapies will ever be approved by the FDA. Even if we obtain FDA approval for a therapy, there can be no assurance that it could be successfully marketed or would not be superseded by another cannabis-based therapy produced by one or more of our competitors. It also may be anticipated that even if we enter into a joint venture development with a financially stable pharmaceutical or institutional partner, we will still be required to raise significant additional capital in the future to achieve the strategic goals of GBSGB. There can be no assurance that we will be able to obtain such additional capital on reasonable terms, if at all. If GBSGB fails to achieve its goal of producing one or more cannabis-based pharmaceuticals or therapies, it would have a material adverse effect on our future financial condition and business prospects.
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RESULTS OF OPERATIONS
The following table sets forth certain of our Statements of Operations data:
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For the Three Months Ended
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For the Six Months Ended
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September 30,
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September 30,
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2019
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2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
SALES REVENUE
|
|
$1,171,698
|
|
$717,229
|
|
$2,082,374
|
|
$2,032,513
|
|
COST OF GOODS SOLD
|
|
(1,857,150)
|
|
(302,744)
|
|
(2,481,519)
|
|
(883,309)
|
|
GROSS PROFIT
|
|
(685,452)
|
|
414,485
|
|
(399,145)
|
|
1,149,204
|
|
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
1,403,314
|
|
3,806,320
|
|
3,468,863
|
|
7,623,356
|
|
LOSS FROM OPERATIONS
|
|
(2,088,766)
|
|
(3,391,835)
|
|
(3,868,008)
|
|
(6,474,152)
|
|
OTHER EXPENSE
|
|
(406,101)
|
|
(5,813,533)
|
|
(843,917)
|
|
(7,372,520)
|
|
NET LOSS BEFORE INCOME TAX EXPENSE
|
|
(2,494,867)
|
|
(9,205,368)
|
|
(4,711,925)
|
|
(13,846,672)
|
|
INCOME TAX EXPENSE
|
|
57,392
|
|
-
|
|
-
|
|
-
|
|
NET LOSS FROM CONTINUING OPERATIONS
|
|
(2,437,475)
|
|
(9,205,368)
|
|
(4,711,925)
|
|
(13,846,672)
|
|
DISCONTINUED OPERATIONS
|
|
(491,131)
|
|
(825,697)
|
|
(755,565)
|
|
(1,535,876)
|
|
NET LOSS
|
|
(2,928,606)
|
|
(10,031,065)
|
|
(5,467,490)
|
|
(15,382,548)
|
|
NET LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
|
(245,565)
|
|
(291,416)
|
|
(377,781)
|
|
(475,559)
|
|
NET LOSS ATTRIBUTABLE TO GB SCIENCES, INC.
|
|
$(2,683,041)
|
|
$(9,739,649)
|
|
$(5,089,709)
|
|
$(14,906,989)
|
Comparison of the Three and Six Months Ended September 30, 2019 and 2018
Sales revenue
The Company recorded sales revenue of approximately $1.2 million for the three months ended September 30, 2019, as compared to $0.7 million for the same period in the prior year. The increase in sales is due to the production facility beginning operations in December 2018 and the resulting sales of production products in the current year quarter.
Sales revenue was approximately $2.1 million for the six months ended September 30, 2019, as compared to sales revenue of $2.0 million for the same period in the prior year.
Cost of goods sold
Cost of goods sold increased $1.5 million to $1.9 million for the three months ended September 30, 2019, compared to $0.3 million for the six months ended September 30, 2018. Cost of goods sold increased by $1.6 million to $2.5 million for the six months ended September 30, 2019, compared to $0.9 million for the six months ended September 30, 2018. The increase is attributable to an increase in the costs to cultivate cannabis from approximately $1.98 and $2.24 per gram for the three six months ended September 30, 2018, respectively, compared to approximately $3.64 and $5.60 per gram for the three and six months ended September 30, 2019, respectively. The increase in the cost of cultivation for the three and six months is largely attributable to an adjustment of $0.5 million to record inventory at its estimated net realizable value, which was lower than historical cost at September 30, 2019. Another factor affecting the increase in costs of cultivation was a decrease in yield per plant from 153 grams per plant in in the quarter ended June 30, 2018 to 105 grams per plant in the quarter ended June 30, 2019, and from 114 grams per
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plant in the quarter ended September 30, 2018, compared to 108 grams per plant in the quarter ended September 30, 2019.
General and administrative expenses
General and administrative expenses decreased $2.4 million to $1.4 million for the three months ended September 30, 2019, compared to $3.8 million for the three months ended September 30, 2018. The decrease in general and administrative expense is primarily the result of a Company-wide effort to cut administrative costs.
General and administrative expenses decreased $4.1 million for the six months ended September 30, 2019, compared to the six months ended September 30, 2018. The decrease in general and administrative expense is primarily related to Company-wide efforts to cut administrative costs along with a reduction in noncash charges of $0.5 million for share-based compensation expense, $0.5 million for compensation warrant expense, and $0.7 million of expense recognized upon the issuance of stock for services.
Interest expense
Total interest expense decreased by $2.3 million to $0.5 million for the three months ended September 30, 2019, compared to $2.8 million in the prior year quarter. The decrease is primarily due to $2.5 million of unamortized discount recorded as interest expense upon the conversion of convertible notes in the prior year quarter, offset by an increase in accrued interest and interest expense from amortization of discount on convertible notes outstanding.
Total interest expense decreased by $3.5 million to $0.9 million for the six months ended September 30, 2019, compared to $4.4 million for the six months ended September 30, 2018. The decrease is primarily due to $3.4 million of unamortized discount recorded as interest expense upon the conversion of convertible notes in the prior year quarter, offset by an increase in accrued interest and interest expense from amortization of discount on convertible notes outstanding.
Other income
Total other income was $69,457 for the three and six months ended September 30, 2019, compared to other expense of $3.0 million for the three months ended September 30, 2018, and $2.9 million for the six months ended September 30, 2018. The decrease is primarily driven by a $1.0 million payment to settle the Pacific Leaf Royalty Agreement and an additional noncash expense of $2.0 million related to that agreement, both recorded during the three months ended September 30, 2018.
Current year other income relates to $0.2 million recorded upon the return of cash to the company which previously had been recorded as other expense (Note 8), offset by a loss on extinguishment of debt of $0.1 million (Note 5).
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.
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The principal sources of liquidity to date have been cash generated from sales of debt and equity securities and loans.
At September 30, 2019, cash was $84,799, other current assets excluding cash were $3,265,599 including $1,476,678 from discontinued operations, and our working capital deficit was $6,074,924. At the same time, current liabilities were $9,425,322 million and consisted principally of $1,621,424 in accounts payable, $703,535 in accrued liabilities, $4,917,653 in notes payable, net of $777,321 in discounts, $151,059 of current lease obligations, $506,145 in income tax payable, and $1,525,506 of current liabilities from discontinued operations. At March 31, 2019, the Company had a cash balance of $182,055, other current assets excluding cash were $3,284,716 including $1,000,387 from discontinued operations, and our working capital deficit was $3,245,409. Current liabilities were $6,712,180, which consisted principally of $1,374,771 in accounts payable, $387,043 in accrued liabilities, $2,229,812 in notes payable, $506,145 in income taxes payable, and $2,134,277 of current liabilities from discontinued operations.
Sources and Uses of Cash
Operating Activities
Net cash used in operating activities was $3,546,457 for the six months ended September 30, 2019, as compared to net cash used of $6,383,922 for the six months ended September 30, 2018. 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 six months ended September 30, 2019, the Company used $554,782 in investing activities compared to $8,207,600 during the six months ended September 30, 2018. The cash used in investing activities during the six months ended September 30, 2019 and 2018 was primarily for the purchase of property and equipment and the acquisition of intangible assets.
Financing Activities
During the six months ended September 30, 2019 and 2018, cash flows provided by financing activities totaled $3,967,798 and $13,940,837, respectively. Cash flows from financing activities for the six months ended September 30, 2019, related primarily to $2,600,000 in proceeds from the issuance of a convertible note, $1,495,200 in proceeds from the sale of common stock and warrant exercises, and $319,854 in net cash flows from discontinued operations, offset by $106,229 of principal payments on debt and finance lease obligations and $341,027 in brokerage fees. Cash flows from financing activities for the six months ended September 30, 2018 related primarily to $8,370,720 in proceeds from the sale of common stock and warrants in private placements and $6,714,856 of net cash flows provided by discontinued operations, offset by $1,000,000 paid to settle the Pacific Leaf Royalty Agreement and $144,739 of principal payments on debt and finance lease obligations.
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 $90,071,120 at September 30, 2019. The Company had a working capital deficit of $6,074,924 including a deficit of $48,828 from discontinued operations at September 30, 2019, compared to $3,245,409 including a deficit of $1,133,890 from discontinued operations at March 31, 2019. In addition, the Company has consumed cash in its operating activities of $3,546,456 including $1,253,851 from discontinued operations for the six months ended September 30, 2019, compared to $6,383,922 including $1,180,054 from discontinued operations for the same period last year. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
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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 consolidated 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.
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, 2019.
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 September 30, 2019, the Company carried out an evaluation, under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of disclosure controls and procedures, as defined in Rule 13(a)-15(e) and Rule 15d-15(e) under the 1934 Act. Based on this evaluation, management concluded that as of September 30, 2019, 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
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persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Controls
During the fiscal quarter ended September 30, 2019, 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.
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PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
On October 8, 2019, the Company’s subsidiary GB Sciences, Louisiana, LLC received service of a lawsuit filed by a consultant for $105,210 in unpaid fees. The $105,210 in fees are accrued in current liabilities from discontinued operations as of September 30, 2019.
From time to time, the Company also becomes involved in certain legal proceedings and claims which arise in the ordinary course of business. In our opinion, based on consultations with outside counsel, the results of any of these ordinary course matters, individually and in the aggregate, are not expected to have a material effect on our results of operations, financial condition, or cash flows. As more information becomes available, if management should determine that an unfavorable outcome is probable on such a claim and that the amount of such probable loss that it will incur on that claim is reasonably estimable, we will record a reserve for the claim in question. If and when we record such a reserve is recorded, it could be material and could adversely impact our results of operations, financial condition, and cash flows.
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, 2019, as filed with the SEC.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On December 4, 2018, the Company entered into a Placement Agent’s Agreement to offer a total of 15,000,000 units at the price of $0.20 per unit up to a total of $3 million. Each unit consisted of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock at the price of $0.60 for a period of five years. On January 15, 2019, the Placement Agent’s Agreement was amended to decrease the unit price from $0.20 per unit to $0.15 per unit for a total of 20,000,000 units and decrease the exercise price of the warrants included in each unit from $0.60 to $0.30, applied retroactively to funds raised prior to the date of the amendment, with no other changes to the agreement. During the six months ended September 30, 2019, the Company received a total of $478,696 in proceeds from the private placement, net of $71,529 in brokerage fees and issued 3,668,167 shares of its common stock and 3,668,167 warrants to purchase one share of its common stock at $0.30 per share.
ITEM 3. Defaults Upon Senior Securities
As of the date of this report, the Company is in default on the 8% Senior Secured Convertible Promissory Note dated February 28, 2019 due to CSW Ventures, L.P. due to nonpayment of the quarterly interest payment that was due on October 1, 2019 and nonpayment of an income tax liability related to the March 31, 2018 tax year. The terms of the note provide that the Company has 5 days to cure a default caused by nonpayment of interest and ten days to cure a default caused by noncompliance with affirmative or negative debt covenants. As of the date of this report, the lender has not provided formal notice of the default and the Company is negotiating a forbearance agreement with the lender. Upon written notice of default to the Company, the lender may accelerate the payment of principal and interest and enforce its remedies under the Security Agreement.
On October 23, 2019, as an inducement to entering into a forbearance agreement, the Company entered into an additional Amendment to Promissory Note with CSW Ventures, L.P., which reduced the conversion price of the CSW Note from $0.11 to $0.08. The final terms of the forbearance agreement have not been negotiated and executed as of the date of this report.
The Company may also be in default on the 8% Convertible Promissory Note dated April 23, 2019 payable to Iliad Research and Trading, L.P. through cross-default and cross-acceleration provisions but has not received formal notice of default from the lender.
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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.
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The following exhibits are included as part of this report:
* This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
40