The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BUSINESS
CannaVEST Corp. (formerly Foreclosure
Solutions, Inc.) (the “Company”, “we” or “us”) is in the business of developing, producing,
marketing and selling end consumer products to the nutraceutical industry containing the hemp plant extract, Cannabidiol (“CBD”),
and reselling to third parties raw product acquired by us pursuant to our supply relationships in Europe. We seek to take advantage
of an emerging worldwide trend to re-energize the production of industrial hemp and to foster its many uses for consumers. CBD
is derived from hemp stalk and seed.
We were incorporated on December
9, 2010, in the state of Texas, to provide information on pre-foreclosure and foreclosed residential properties to homebuyers and
real estate professionals on its website. However, the Company was not able to secure financing for this business plan and on November
16, 2012, the shareholders owning 6,979,900 of the outstanding shares of the Company’s common stock sold their shares in
private transactions to four buyers. Commensurate with this transaction the former officer and director of the Company resigned
and control of the Company changed. In addition, the Company’s business offices moved from Dallas, Texas to Las Vegas, Nevada.
On January 29, 2013, the Company amended its Certificate of Formation to change its name to CannaVEST Corp. and on March 14, 2013,
the Company increased the size of its board of directors and elected three directors. On July 26, 2013 the Company reincorporated
in the state of Delaware.
On December 31, 2012, the Company
entered into an Agreement for Purchase and Sale of Assets (the “PhytoSPHERE Agreement”) with PhytoSPHERE Systems, LLC
(“PhytoSPHERE”) whereby upon the closing of the transaction contemplated by the PhytoSPHERE Agreement, the Company
acquired certain assets of PhytoSPHERE (the “Transaction”). The closing of the Transaction occurred on January 29,
2013. Throughout the year ended December 31, 2013, the Company issued 5,825,000 shares of common stock and paid cash in the amount
of $950,000 as payment for the assets acquired in the Transaction.
Description of our Subsidiaries
- The Company owns 100% of the issued and outstanding membership interests of three subsidiaries: US Hemp Oil, LLC (“US Hemp
Oil”), CannaVest Laboratories, LLC (“CannaVest Laboratories”) and Plus CBD, LLC (formerly, Global Hemp Source,
LLC) (“Plus CBD”).
US Hemp Oil provides farming,
procurement, processing, marketing and distribution services of bulk wholesale hemp seed. In addition, US Hemp Oil is involved
with industry advocacy, creating greater public awareness and media exposure for the nutritional profile of hemp seeds and the
environmental benefits of growing industrial hemp. CannaVEST Laboratories (formerly PhytoSPHERE Systems, LLC) provides processing
technology and product development of hemp-based pharmaceutical and nutraceutical products. Plus CBD is the operating entity for
Company sales and expense of CBD oil and end consumer products.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
- The accompanying unaudited condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned
subsidiaries. The statements have been prepared in conformity with accounting principles generally accepted in the United States
of America (“GAAP”). All references to GAAP are in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles. All intercompany
accounts and transactions have been eliminated in consolidation.
The unaudited condensed interim
financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (the “SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals
and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with
GAAP have been omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the audited financial statements and notes for the year ended December 31, 2013, filed with the SEC
on the Company’s Annual Report on Form 10-K filed on March 28, 2014. The results for the three and six months ended June
30, 2014, are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Use of Estimates
- The Company’s condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of
these condensed consolidated financial statements requires us to make significant estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We evaluate our
estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. Significant estimates include the valuation of intangible
assets, the amortization lives of intangible assets and the allowance for doubtful accounts. It is at least reasonably possible
that a change in the estimates will occur in the near term.
Reportable Segment
- The Company’s internal reporting is organized into three channels: CBD products, laboratory services and hemp farming activities.
These channels qualify as individual operating segments and are aggregated and viewed as one reportable segment due to their similar
economic characteristics, products, production, distribution processes and regulatory environment.
Investments
- The
Company held a 24.97% interest in KannaLife Sciences, Inc. (“KannaLife”), a phyto-medical company specializing in the
research and development of pharmacological products derived from plants. This investment was accounted for under the equity method
of accounting. The Company’s financial results for the six months ended June 30, 2014 include a loss of $38,552 representing
its share of KannaLife’s net loss for the period.
On June 2, 2014, the Company
sold its 24.97% interest in KannaLife to PhytoSPHERE in exchange for 500,000 shares of the Company’s common stock held by
PhytoSPHERE, an affiliate of KannaLife.
Cash and Cash Equivalents
- For purposes of the statements of cash flows, the Company considers amounts held by financial institutions and short-term investments
with an original maturity of three months or less when purchased to be cash and cash equivalents. At each of June 30, 2014 and
December 31, 2013, the Company had no cash equivalents.
Concentration of Credit
Risk
- As of June 30, 2014, the Federal Deposit Insurance Corporation (“FDIC”) provided insurance coverage
of up to $250,000 per depositor per bank. The Company has not experienced any losses in such accounts and does not believe that
the Company is exposed to significant risks from excess deposits.
Accounts Receivable
- Accounts receivable consists of trade accounts arising in the normal course of business. No interest is charged on past due accounts.
Accounts for which no payments have been received after 30 days are considered delinquent and customary collection efforts are
initiated. Accounts receivable are carried at original invoice amount less a reserve made for doubtful receivables based on a review
of all outstanding amounts on a monthly basis.
Management determines the allowance
for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition
and credit history, and current economic conditions. There was an allowance for doubtful accounts of $400,000 at each of June 30,
2014 and December 31, 2013.
Revenue Recognition
- The Company recognizes revenue in accordance with the ASC Topic 605,
Revenue Recognition,
which requires persuasive evidence
of an arrangement, delivery of a product or service, a fixed or determinable price and assurance of collection within a reasonable
period of time. The Company records revenue when goods are delivered to customers and the rights of ownership have transferred
from the Company to the customer.
Inventory
- Inventory
is stated at lower of cost or market, with cost being determined on average cost basis. There was no reserve for inventory as of
June 30, 2014 or December 31, 2013.
Amounts paid to suppliers for
inventory not received is classified as prepaid inventory. Once received, the cost of inventory received is reclassified to inventory.
Property & Equipment
- Equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred
to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets’ estimated useful
lives ranging from three to five years. Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the
historically-recorded asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from
disposal is charged or credited to other income / expense.
Research & Development
Expense
- Research and development costs are charged to expense as incurred and include, but are not limited to, employee
salaries and benefits, cost of inventory used in product development, consulting service fees, the cost of renting and maintaining
our laboratory facility and depreciation of laboratory equipment.
Fair Value of Financial
Instruments
- In accordance with ASC Topic 825,
Financial Instruments
, the Company calculates the fair value of
its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to its
financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair
value of the Company’s current assets and current liabilities approximates their carrying amount due to their readily available
nature and short maturity.
Goodwill and Intangible
Assets
- The Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual
evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors
or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether
goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting
unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the
income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying
amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss
would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied
fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities
of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other
assets and liabilities is the implied fair value of goodwill.
We make critical assumptions
and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several
years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions,
market competition, inflation and discount rates.
We amortize the cost of other
intangible assets over their estimated useful lives, which range up to five years, unless such lives are deemed indefinite. Intangible
assets with indefinite lives are tested in the fourth quarter of each fiscal year for impairment, or more often if indicators warrant.
Earnings (Loss) per Share
- The Company calculates earning or loss per share (“EPS”) in accordance with ASC Topic 260,
Earnings per Share
,
which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted
average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number
of shares of common stock outstanding plus all potentially dilutive shares of common stock outstanding during the period. The Company
had no dilutive shares outstanding at June 30, 2014 and 2013.
Income Taxes
-
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation
allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with
ASC Topic 740,
Income Taxes
, the Company recognizes the effect of uncertain income tax positions only if the positions are
more likely than not of being sustained in an audit, based on the technical merits of the position. Recognized uncertain income
tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement
are reflected in the period in which those changes in judgment occur.
The provision for income taxes
differs from the expected tax by applying income before taxes at the applicable rate as the sale of KannaLife was deemed to have
a gain for income tax purposes of $0.
Recent Issued and Newly
Adopted Accounting Pronouncements
- In February 2013, the FASB issued Accounting Standards Update No. 2013-04,
Liabilities
(Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is
Fixed at the Reporting Date
(“ASU No. 2013-04”). The amendments in ASU No. 2013-04
provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements
for which the total amount of the obligation within the scope of ASU No. 2013-04 is fixed at the reporting date, except for obligations
addressed within existing guidance in GAAP. The guidance requires an entity to measure those obligations as the sum of the amount
the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting
entity expects to pay on behalf of its co-obligors. The guidance in ASU No. 2013-04 also requires an entity to disclose the nature
and amount of the obligation as well as other information about those obligations. The amendment in this standard is effective
retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating
the effect, if any, adoption of ASU No. 2013-04 will have on our condensed consolidated financial statements.
In May 2014, the FASB issued
Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
(Topic 606)
(“ASU 2014-09”),
which completes the joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by
creating common revenue recognition guidance for GAAP and the International Financial Reporting Standards. ASU 2014-09 will become
effective for the Company beginning January 1, 2017 and early adoption is not permitted. The Company is currently evaluating the
potential impact of ASU 2014-09 on our condensed consolidated financial statements.
Other recent accounting pronouncements
issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the
SEC did not, or are not believed by management to have a material impact on the Company’s present or future financial statements.
3. INVENTORY
Inventory is comprised of the following:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Raw materials
|
|
$
|
3,213,753
|
|
|
$
|
1,867,751
|
|
Work in process
|
|
|
190,933
|
|
|
|
470,442
|
|
Finished goods
|
|
|
467,802
|
|
|
|
135,129
|
|
|
|
$
|
3,872,488
|
|
|
$
|
2,473,322
|
|
4. INTANGIBLE ASSETS
Intangible assets consisted of the following at June
30, 2014:
Description
|
|
Original Fair
Market Value
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Vendor relationships
|
|
$
|
1,170,000
|
|
|
$
|
331,500
|
|
|
$
|
838,500
|
|
Trade name
|
|
|
230,000
|
|
|
|
65,167
|
|
|
|
164,833
|
|
Noncompete agreement
|
|
|
2,710,000
|
|
|
|
767,833
|
|
|
|
1,942,167
|
|
|
|
$
|
4,110,000
|
|
|
$
|
1,164,500
|
|
|
$
|
2,945,500
|
|
Intangible assets consisted of the following at December
31, 2013:
Description
|
|
Original Fair
Market Value
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
Vendor relationships
|
|
$
|
1,170,000
|
|
|
$
|
214,500
|
|
|
$
|
955,500
|
|
Trade name
|
|
|
230,000
|
|
|
|
42,167
|
|
|
|
187,833
|
|
Noncompete agreement
|
|
|
2,710,000
|
|
|
|
496,833
|
|
|
|
2,213,167
|
|
|
|
$
|
4,110,000
|
|
|
$
|
753,500
|
|
|
$
|
3,356,500
|
|
Amortization expense for the
three months ended June 30, 2014 and 2013 was $205,500 and $205,500, respectively, and $411,000 and $342,500, respectively, for
the six months ended June 30, 2014 and 2013.
5. RELATED PARTY TRANSACTIONS
On March 1, 2013, the Company
issued a Promissory Note (the “Note”) to Roen Ventures, LLC, a Nevada limited liability company (“Roen Ventures”),
in exchange for loans provided and to be provided in the future in an amount of up to $2,000,000, subsequently increased to $6,000,000.
As of December 31, 2013, the principal balance of the Note was $6,092,069. On January 27, 2014, the Company converted $6,000,000
of the Note balance into 10,000,000 shares of common stock of the Company pursuant to the terms of the Note, as amended. On January
28, 2014, the Company repaid Roen Ventures accrued interest on the Note in the amount of $187,453 and principal under the Note
in the amount of $92,069.
The Company had determined that
the conversion feature of the Note was considered a beneficial conversion feature and determined its value on July 25, 2013, the
date of the amendment increasing the principal amount of the Note to $6,000,000, to be $800,000. The Company calculated the beneficial
conversion feature at its intrinsic value. Accordingly, the beneficial conversion feature was accounted for as a debt discount
to the Note and was to be amortized using the effective interest method as interest expense over the remaining life of the Note
or upon conversion, if sooner. Upon conversion of the Note, the remaining balance of the debt discount totaling $589,474 was amortized
to interest expense in the accompanying condensed consolidated financial statements.
At June 30, 2014 and December
31, 2013, the Company’s accounts receivable totaling $1,653,553 and $1,430,202, respectively, were 96% and 100%, respectively,
from subsidiary companies of Medical Marijuana, Inc. (“MJNA”), a stockholder of the Company. For the three and six
months ended June 30, 2014, the Company recognized revenues of $3,005,786 and $5,637,655, respectively, which are approximately
88% and 94%, respectively, related to sales to affiliated companies of MJNA. For the three and six months ended June 30, 2013,
the Company recognized revenues of $107,683 and $1,190,058, respectively, which represented 100% for both periods, related to sales
to affiliated companies of MJNA.
On January 10, 2014, MJNA agreed
to assume $725,000 of the Company’s accounts receivable from Red Dice Holdings, LLC and write-off $11,496 of such accounts
receivable. MJNA paid the Company $125,000 on January 17, 2014 towards this balance. The remaining $600,000 is subject to a Secured
Promissory Note (the “Note”) issued by MJNA to the Company, whereby MJNA will make monthly payments to the Company,
including interest at 7% per annum, over a two-year period. This note is secured by shares of common stock of the Company owned
indirectly by MJNA through MJNA’s subsidiary, PhytoSPHERE, valued at two times the principal amount of the note based on
the five-day average closing price of the Company’s common stock at the time of determination. Such determination shall occur
every 60 days, at which time the number of shares pledged shall be increased or decreased, accordingly. At June 30, 2014, $297,691
of the note was classified as a current asset and $183,651 of the note was classified as a non-current asset.
On June 2, 2014, the Company
sold its 24.97% equity investment in KannaLife to PhytoSPHERE in exchange for 500,000 shares of Company common stock held by PhytoSPHERE,
an affiliate of KannaLife. Accordingly, the Company recognized a gain on sale of equity investment of $7,899,306 based on the number
of shares of Company common stock received at the closing trading price of Company common stock on June 2, 2014 of $16.60 per share.
6. STOCKHOLDERS’ EQUITY
Common Stock
-
The Company is authorized to issue up to 190,000,000 shares of common stock (par value $0.0001). As of June 30, 2014 and December
31, 2013, the Company had 33,116,666 and 15,580,000 shares of common stock issued and outstanding, respectively. During the six
months ended June 30, 2014, the Company issued 8,031,666 shares of its common stock pursuant to a private placement offering for
total proceeds of $8,422,500. The Company had received payment of $175,000 toward the purchase of these shares at December 31,
2013. In addition, 10,000,000 shares of the Company’s common stock were issued for a debt conversion (Note 5).
Preferred Stock
- The Company is authorized to issue up to 10,000,000 shares of $.0001 par value preferred stock with designations, rights and
preferences to be determined from time to time by the Board of Directors of the Company. Each such series or class shall have voting
powers, if any, and such preferences and/or other special rights, with such qualifications, limitations or restrictions of such
preferences and/or rights as shall be stated in the resolution or resolutions providing for the issuance of such series or class
of shares of preferred stock.
Options/Warrants
- On July 23, 2014, the Company’s stockholders approved the Company’s Amended and Restated 2013 Equity Incentive Plan
(the “Plan”) which reserves 10,000,000 shares of the Company’s common stock for issuance under the Plan. As of
June 30, 2014 and December 31, 2013, there were no outstanding options or warrants for the purchase of the Company’s common
stock.
7. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases certain office
space pursuant to a month-to-month lease agreement dated April 1, 2013, which provides for a monthly rent of $1,500. The landlord
is a limited liability company of which a former director of the Company is the sole member.
On March 18, 2013, the Company
entered into a purchasing contract with a third party supplier of CBD to provide up to a maximum of 1,000 kg of product. In addition,
the Company entered into a consulting agreement with the third party supplier to provide consulting oversight for the growth and
production of the product from the period beginning March 1, 2013 through August 30, 2014. Approximately $2.1 million is due by
the Company pursuant to the terms of these agreements by October 2014.
On December 19, 2013, the Company
entered into a purchasing contract with a third party supplier of CBD to provide up to a maximum of 1 million kilograms of raw
product to the Company. There is approximately $1.7 million remaining to be paid by the Company under the contract.
On August 13, 2013, the Company
entered into a lease for approximately 2,400 square feet laboratory space in San Diego, California. The monthly base rent was approximately
$4,200 per month for a term of 12 months. On April 1, 2014, the Company entered into an amendment to the lease for laboratory space,
which increased the amount of laboratory space under the lease and extended the term of the lease for one additional year through
August 2015. This amendment increased the amount of lab space under lease to 3,276 and added storage space for an additional 887
square feet. The monthly base rent under the lease was increased to approximately $6,320 per month.
On March 27, 2014, the Company
entered into a lease for 5,325 square feet of office space in San Diego, California for a term of 39 months. The monthly base rent
under the lease is approximately $12,250, subject to an increase of 3% annually. The lease allows for rent abatement allowing one
month free rent following each 12 month period of paid rent during the term of the lease. The lease commenced on May 7, 2014, the
date the Company took possession of the new space.
Contingencies
On March 8, 2008, Far West Industries
(“Far West”) sued Michael J. Mona, Jr., President and Chief Executive Officer of the Company and others for damages
resulting from fraud arising out of a land transaction in California (the “California Action”). On February 23, 2012,
a judgment was entered in the California Action in favor of Far West against Mr. Mona and others in the amount of $17,777,562.
On October 18, 2012, the judgment in the California Action was domesticated in Nevada and enforcement proceedings commenced including,
but not limited to an examination of Mr. Mona as a judgment debtor, and garnishments of various accounts belonging to Mr. Mona.
During the period, Mr. Mona loaned $3,000,000 to Roen Ventures, which was subsequently loaned to the Company. The suit alleges
that the loan transactions were intended to prejudice creditors like Far West by concealing and wasting assets that would otherwise
be available to satisfy the judgment that Far West has against Mr. Mona. Pursuant to a Second Amendment Complaint filed by Far
West Industries on February 20, 2014, the Company was added as a defendant to the suit. On March 17, 2014, the Company was served
with a complaint from Far West Industries. In summary, Far West alleges that the Company is in possession of funds as a result
of an allegedly fraudulent transfer between Mr. Mona, Roen Ventures, LLC, and the Company. On May 13, 2014, a motion to dismiss
filed by the Company was granted and thus, the Company will no longer be a defendant in the lawsuit.
On April 23, 2014, Tanya Sallustro
filed a purported class action complaint (the “Complaint”) in the Southern District of New York (the “Court”)
alleging securities fraud and related claims against the Company and certain of its officers and directors and seeking compensatory
damages including litigation costs. Ms. Sallustro alleges that between March 18-31, 2014, she purchased 325 shares of the Company’s
common stock for a total investment of $15,791. The Complaint refers to Current Reports on Form 8-K and Current Reports on Form
8-K/A filings made by the Company on April 3, 2014 and April 14, 2014, in which the Company amended previously disclosed sales
(sales originally stated at $1,275,000 were restated to $1,082,375 - reduction of $192,625) and restated goodwill as $1,855,512
(previously reported at net zero). Additionally, the Complaint states after the filing of the Company’s Current Report on
Form 8-K on April 3, 2014 and the following press release, the Company’s stock price “fell $7.30 per share, or more
than 20%, to close at $25.30 per share.” Subsequent to the filing of the Complaint, six different individuals have filed
a motion asking to be designated the lead plaintiff in the litigation. The Court scheduled a hearing on August 14, 2014 to consider
the motions for designation as lead plaintiff. The other individuals seeking lead plaintiff designation are: Wayne Chesner; Anamaria
Schelling; Mark Williams; Otilda LaMont; Jane Ish and Steve Schuck.
The Company has not yet answered
the Complaint and management intends to vigorously defend the allegations. Since the action was recently filed and no discovery
has been conducted, an estimate of the possible loss cannot be made at this time.
8. SUBSEQUENT EVENTS
On July 23, 2014, the Company’s
stockholders approved the Company’s Amended and Restated 2013 Equity Incentive Plan (the “Plan”) which reserves
10,000,000 shares of the Company’s common stock for issuance under the Plan. There are no outstanding options or warrants
for the purchase of the Company’s common stock.
As previously reported in that
certain Current Report on Form 8-K filed with the SEC on August 11, 2014, on August 9, 2013 the Company entered into a Non-Exclusive
License and Distribution Agreement (the “HempMeds Agreement”) with HempMeds PX, LLC (“HempMeds”), which
was effective as of July 1, 2013. HempMeds is a wholly-owned subsidiary of MJNA, a stockholder of the Company. The HempMeds Agreement
granted HempMeds a non-exclusive, worldwide license and right to promote, market, sell, distribute and service the Company’s
products and set forth the terms and conditions under which HempMeds would promote, market, sell, distribute and service the Company’s
products including initial pricing for such services, which could be adjusted by the Company upon 30 days prior notice to HempMeds
and the achievement of minimum purchase and sales quotas. Under the terms of the HempMeds Agreement, HempMeds was to be invoiced
monthly for goods shipped with payment due 15 days after the date of invoice. In addition the HempMeds Agreement granted HempMeds
an exclusive license to distribute the Company’s products online through HempMeds’ websites.
The initial term of the HempMeds
Agreement to be was effective through June 30, 2016, and automatically renew for additional one-year periods unless terminated
by either party upon 90 days prior notice of termination or otherwise in accordance with its terms.
On August 11, 2014, the HempMeds
Agreement was terminated by the Company in accordance with the terms of the HempMeds Agreement which permitted the Company to terminate
the HempMeds Agreement in the event of certain defaults by HempMeds. The Company had previously notified HempMeds that it was in
breach of various provisions of the HempMeds Agreement including provisions regarding HempMeds distribution of competing products,
the requirement that HempMeds obtain prior approval of marketing and promotional materials, the Company’s ability to access
HempMeds sales data, and HempMeds payment of amounts due under the HempMeds Agreement, amongst others.