The loser in the bid to grow medical marijuana for LSU claims the winning company’s financial disclosures are full of “red flags” that could invite federal investigation and tarnish the university’s reputation, according to a three-page letter released Tuesday.
Reports filed by GB Sciences Inc., of Las Vegas, the winner of the LSU contract, with U.S. Securities and Exchange Commission show the company’s “financial footing is at best shaky.” And statements GB Sciences officials have used to raise enough money to fulfill its obligation with LSU “could find a basis for expecting a federal investigation to be imminent,” Kenneth L. Perego II wrote to LSU Board of Supervisors. The Alexandria physician chairs CB Medical LLC, which narrowly lost the contest for a contract to produce marijuana for medical purposes in Louisiana.
Perego asked the 16-member board that oversees policy at LSU to “consider seriously this information before finalizing the award to GB Sciences.”
The company’s chairman and CEO, John Poss, dismissed the letter’s claims Tuesday in a short statement: “GB Sciences participated in a fair and transparent competitive process and we are honored to have been selected by LSU.”
LSU is seeking a grower of marijuana that also can extract oils from the plant to make into pharmaceuticals. The state Board of Pharmacy estimates up to 26,000 patients will use medical marijuana. If the industry grows, that estimate could increase to 576,000 based on the diagnoses outlined in the state law.
GB Sciences has changed its name frequently and has had financial problems since established in 2001. The company’s goal is to develop cannabinoid medicines and therapies. But to generate near-term profits, “we intend to cultivate and dispense cannabis for medical purposes,” the company stated in its Aug. 14 quarterly report to the SEC.
Under the general outline of the contract, GB Sciences would pay the LSU AgCenter $3.4 million or, if greater, a commission of 10 percent of gross receipts for an initial five-year term. The contract could be renewed for additional five-year terms. In addition, GB Sciences would pay the AgCenter $500,000 annually to help fund research.
LSU would retain at least 50 percent of all intellectual property rights, which could generate tens of millions of dollars if any of the research proves marketable.
“The contract has not been finalized yet, but is in its final review. LSU has a clear and transparent procurement process and is taking every factor into account,” Jason Droddy, LSU’s interim vice president for strategic communications, wrote in an email Tuesday responding to questions posed to university executives and board members.
“The Board of Supervisors is aware of various claims,” Droddy said, “but satisfactory protections exist in the contract to minimize financial risk to the university.”
Perego’s letter details a list of inconsistencies and questions in GB Sciences filings with the SEC.
For instance, a January 2016 letter to shareholders, GB Sciences management claimed a subsidiary had fully engineered an innovation that would be released to customers in mid-2016. But in a July 2017 report to the SEC, the company said it couldn’t raise $1.25 million but would continue working on the production version of the innovation.
“It is illogical that the production version would have needed still to be finalized 18 months later,” Perego wrote.
Federal authorities pay close attention to what companies do when seeking funds.
In explaining the parameters of what, generally, would attract SEC interest, a lawyer formally with the agency said false and misleading statements would be near the top of that list, particularly coming from officials of a company trying to raise money.
“The SEC enforcement division, without fail, takes interest in such allegations because they are central to the SEC’s mission and mandate of investor protections,” said Jacob S. Frenkel, of Washington, D.C., in an interview. He is former senior counsel in the SEC’s Division of Enforcement and often testifies as an expert in securities litigation.
Approving the contract with GB Sciences was on the agenda at the LSU board’s last meeting in July.
Some of the board members raised questions saying the process had moved too swiftly for them to thoroughly study the contract. The board agreed to a motion that approved the contract pending an opportunity for the wary board members to ask their questions.
Four members of the LSU Board met with company officials Aug. 4.
Attending were supervisors Glenn Armentor, of Lafayette, and Stan Jacobs, of New Orleans, both of whom raised questions during the July meeting. Supervisor Ronnie Anderson, of Baton Rouge, head of the board committee in charge of the contract, and Supervisor Lee Mallett also were there, LSU’s Droddy wrote.
Armentor, who did not respond to repeated requests for comment, “indicated that his questions were satisfied after the discussion,” Droddy wrote.
credit:420intel.com
