The following discussion of our plan of operation, financial condition and results of operations should be read in conjunction with the Company's financial statements, and notes thereto, included elsewhere herein. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those discussed in this Annual Report.
Our company was incorporated in the State of Delaware on April 4, 2001, under the name "Flagstick Venture, Inc." On March 28, 2008, a majority of our stockholders approved changing our name to Signature Exploration and Production Corp. as our business model had changed to become an independent energy company engaged in the acquisition and development of crude oil and natural gas leases in the United States.
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On March 18, 2014, we purchased assets from Craig Ellins, which included the revolutionary GrowBLOX™ technology. We plan to utilize this technology to commercially cultivate and produce medical grade cannabis for sale in the U.S. states and territories in which it is legal. We also plan to research the medical treatment potential of cannabis and develop treatments from those findings. On April 4, 2014, we officially changed our name to GrowBLOX™ Sciences, Inc. to reflect this new corporate direction
Plan of Operation
Our goal is to be an industry leader in the cultivation technology and research and development of medical cannabis drugs and treatments. To achieve our goal, we plan to use a vertically-integrated approach involving the development of methods and products to improve cultivation and provide consistent medical-grade yield, innovation of biopharmaceutical and nutraceutical products using the harvested materials, and marketing and distribution in coordination with business partnerships to establish in markets in which the distribution and use of medical cannabis is legal.
We have created a majority owned partnership (55\%), GB Sciences Nevada, LLC to obtain licensing for cultivation and distribution of cannabis in the state of Nevada. We have been granted a special use permit by Clark County, NV for a cultivation and dispensary location. Upon state approval, we will set up a cultivation facility and a dispensary in Clark County, Nevada. We are also seeking approval to set up a dispensary in the city of Las Vegas, Nevada. We plan to use our Nevada operations as a model for establishing business in other U.S. states and territories by seeking out partnerships in each strategic area. At this time, we have created subsidiary companies in Puerto Rico, Florida and New Jersey.
We are finalizing the production and testing of the GrowBLOX™ system. We anticipate the shipment of the first containers from production in China during July 2014. After testing and revisions are made, an initial round of production will provide containers for the first cultivation facility in Clark County, Nevada in January 2015.
We also plan to set up biopharmaceutical research and development of products using our harvested cannabis. Our initial phase will be the accelerated "virtual pharma" and will include obtaining license patents on promising projects, testing and FDA approval, and co-developing the resulting product for marketing and sale. The next phase will involve setting up a traditional biopharmaceutical research method to allow our company to begin the R&D process in-house and fully own resulting patents and products.
Results of Operations
Comparison of the fiscal year ended March 31, 2014 and March 31, 2013.
2014 2013 Loss on oil and gas properties $ - $ 36,000 General and administrative 188,000 76,000 Other income/(expense) (468,000 ) 148,000 Net income/(loss) $ ( 634,000 ) $ 36,000
Loss on oil and gas properties. Loss on oil and gas properties increased by $36,000 due to a lease cancelation during 2013.
General and Administrative. General and administrative expenses increased in 2014 due to an increase in professional and consulting fees for obtaining licenses in Nevada.
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Other Income/(Expense). Other expenses increased by $616,000 in 2014 due to the change in the fair value of convertible notes and warrants by 57,000 and a loss on loan modifications of $559,000.
Liquidity and Capital Resources
We had cash balances totaling approximately $339,000 as of March 31, 2014. Historically, our principal source of funds has been cash generated from financing activities. We raised have $5 million in capital in the past three months.
Cash flow from operations. We have been unable to generate either significant liquidity or cash flow to fund our current operations. We anticipate that cash flows from operations will be insufficient to fund our business operations for the next twelve-month period.
Cash flows from investing activities. There was $15,200 and $0.00 cash used in investing activities for the years ended March 31, 2014 and 2013.
Cash flows from financing activities. Net cash provided by financing activities was generated from promissory notes and sale of common stock that total $565,150 and $37,700 for the years ended March 31, 2014 and 2013.
Variables and Trends
We have no operating history with respect to our current business plan.. In the event we are able to obtain the necessary financing to move forward with our business plan, we expect our expenses to increase significantly as we grow our business. Accordingly, the comparison of the financial data for the periods presented may not be a meaningful indicator of our future performance and must be considered in light these circumstances.
Critical Accounting Policies
The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. Policies involving the most significant judgments and estimates are summarized below.
Fair Value of Financial Instruments
The Company holds certain financial liabilities which are measured at fair value on a recurring basis in accordance with ASC Topic 825-10-15. ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability.
Convertible notes issued with detachable warrants were measured at fair value, in accordance with ASC Topic 825-10-15, as one instrument, and that fair value was allocated to each component. The Company made the fair value election due to this methodology providing a fairer representation of the economic substance of the transaction within the fair value hierarchy. Due to the lack of relevant and market reflective Level 1 and Level 2 inputs, the Company valued the instruments using Level 3 inputs, which require significant judgment and estimates on behalf of management in developing model assumptions. The factors considered in developing those assumptions included; the Company's inability to attract investment at terms more favorable to the Company, the lack of success in developing oil properties thus far, the continuing reduction in the net assets of the Company and the Company's history of default on currently outstanding debt.
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Based on management's evaluation of the assumptions discussed above, the liabilities were initially recorded in an amount equal to the transaction price, which represented the fair value of the total liability at initial recognition.. The model used by the Company is calibrated so that the model value at initial recognition equals the transaction price. On an ongoing basis the fair value model used in valuing the convertible notes and derivative liability utilizes the following inputs; exercise price per warrant, conversion price per share, contract term, volatility, current stock prices and risk free rates. The following assumptions were made in the model: (1) risk free interest rate of 0.19\% to 0.51\%, (2) remaining contractual life of 1 to 4.98 years, (3) expected stock price volatility of 697\% and (4) expected dividend yield of zero.
The computation of the expense associated with stock-based compensation requires the use of a valuation model. The FASB issued accounting guidance requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. This accounting guidance requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets: 3-8 years for machinery and equipment, leasehold improvements are amortized over the shorter of the estimated useful lives or the underlying lease term. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.
Intangible assets with definite lives are amortized, but are tested for impairment annually and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Our annual testing date is March 31. We test intangibles for impairment by first comparing the carrying value of net assets to the fair value of the related operations. If the fair value is determined to be less than carrying value, a second step is performed to compute the amount of the impairment. In this process, a fair value for intangibles is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below carrying value represents the amount of intangible impairment. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the customer list. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Please see page F-6, Note 3 of the audited financial statements.
Recent Accounting Pronouncements
Please see page F-6, Note 3 of the audited financial statements.
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