Note 6 - Convertible Notes

9 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Convertible Debt [Text Block]

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.

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

December 31, 2019

, convertible notes having a carrying value of

$

999,823

, net of unamortized discount of 

$ (

257,177

)

remained outstanding from the

March 2017

and

July 2017

note offerings, and accrued interest on the notes was

$

178,381

. Interest expense for the

nine

months ended

December 31, 2019

, was

$

364,575

, of which 

$

307,752

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

nine

months ended

December 31, 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 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 reduced the carrying amount of convertible notes payable by

$152,775.

After conversion, the remaining balance outstanding was

$1,330,000.

On

July 12, 2019,

the Company entered into the Amendment to Note Documents and the Amended and Restated

8%

Senior Secured Promissory Note (together, “Amended CSW Note”). The Amended CSW Note increased the note balance by

$100,000

to reflect an additional

$100,000

advanced to the Company on

July 12, 2019,

by

$41,863

to add accrued interest to date to the principal balance, and decreased the conversion price to

$0.11

per share, with the remaining terms substantially 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.

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.

On

October 23, 2019,

the Company entered into the Amendment to Promissory Note. The

October 23, 2019

amendment decreased the conversion price to

$0.08

per share, with the remaining terms substantially unchanged from the Amended 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 Amended CSW Note immediately prior to the

2nd

Amended CSW Note. The carrying value of the Amended CSW Note on the date of extinguishment was

$1,269,067,

net of a beneficial conversion feature discount of

$92,796,

and we recorded a loss on extinguishment of

$92,796.

On

November 27, 2019,

the Company entered into the Second Amendment to Note Documents and the Second Amended and Restated

8%

Senior Secured Promissory Note (together,

“2nd

Amended CSW Note”). The

2nd

Amended CSW Note decreased the conversion price to

$0.04

per share and increased the note balance by

$30,000

to reflect an advance received on that date, with the remaining terms substantially unchanged from the Amended CSW Note.

We evaluated the modification under the guidance in ASC

470

-

50

and determined that the

2nd

Amended CSW Note represents an extinguishment because the change in the fair value of the conversion feature exceeded

10%

of the carrying value of the Amended CSW Note immediately prior to the

2nd

Amended CSW Note; however,

no

loss on extinguishment was recorded because the net consideration paid for the

2nd

Amended CSW Note was equal to the extinguished carrying value of the Amended CSW Note. The carrying value of the Amended CSW Note on the date of extinguishment was

$1,361,863.

On

December 16, 2019,

the Company received notice from CSW Ventures, L.P. of the conversion of a total of

$120,000

of the principal balance of the Amended CSW Note at

$0.04

per share and we issued

3,000,000

shares of common stock. In connection with the conversions,

$57,551

in unamortized discount was recorded as interest expense and the Company has reduced the carrying amount of convertible notes payable by

$62,449.

After conversion, the remaining balance outstanding was

$1,271,863

and the carrrying amount of the note was

$687,021,

net of

$584,842

in unamortized discount from the beneficial conversion feature.

During the

nine

months ended

December 31, 2019

, we recorded interest expense of 

$

89,624

related to the CSW Note and its amendments consisting of 

$

27,270

in accrued interest and 

$

62,354

related to amortization of the note discount.

The Company is in default on the amended CSW Note due to non-payment of the quarterly interest payments due on

October 1, 2019,

and

January 1, 2020,

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 anticipates that the CSW Note will be settled in full upon close of the sale of

75%

of the Company's interests in its Nevada operations to an entity affiliated with CSW Ventures, LP (Note

10

). Upon written notice of default to the Company, the lender

may

accelerate the payment of principal and interest, impose a penalty interest rate of

10%,

and enforce its remedies under the Security Agreement.

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

nine

months ended

December 31, 2019

, interest expense related to the note was

$

164,150

, of which 

$

109,870

was amortization of the note discount.

The Company

may

be in default on the Iliad Note due to nonpayment of an income tax liability related to the

March 31, 2018

tax year. In addition, 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.

The Company has

not

received formal notice of default from the lender and intends to work with the lender to negotiate terms of a forbearance arrangement. In the event of default, the lender's rights under the promissory note include enforcing a penalty interest rate of

15%

and increasing the balance outstanding under the note by

10%.

As inducement for the temporary forbearance of formal default proceedings, the Company has honored the conversion of a total of a total of

$125,000

of debt owed under the Iliad Note at reduced conversion rates. On

October 30, 2019,

the Company received notice of the conversion of

$75,000

at

$0.06

per share and issued

1,250,000

shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by

$64,706,

and the Company recorded an expense in that amount. On

November 18, 2019,

the Company received notice of the conversion of

$50,000

of the note balance at

$0.0375

per share and issued

1,333,333

shares of its common stock. The fair value of the shares issued exceeded the fair value of the shares issuable under the original terms of the Note by

$62,353,

and the Company recorded an expense in that amount. In total, the Company recorded

$

127,059

in noncash expense for the

two

conversions of the Iliad note at below contractual conversion rates for the

three

and

nine

months ended

December 31, 2019

.