UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2014
Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _________ to ________ |
Commission File Number: 333-173215
CannaVest Corp.
(Exact name of registrant as specified in its charter)
DELAWARE |
80-0944870 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2688 South Rainbow Avenue, Suite B, Las Vegas, NV 89146
(Address number of
principal executive offices) (Zip Code)
Registrant’s telephone number, including area code 866-290-2157
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes x
No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
o No x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
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Large accelerated filer o |
Accelerated filer o |
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Non-accelerated filer o |
Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o
No x
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. As of June 30, 2014, the aggregate market value of the voting and nonvoting common equity held
by nonaffiliates of the issuer was $39,764,250. (need to update the float)
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date. As of March 31, 2015, the issuer
had 34,929,166 shares of issued and outstanding common stock, par value $0.0001.
DOCUMENTS INCORPORATED BY REFERENCE.
None
CANNAVEST CORP.
FORM 10-K
TABLE OF CONTENTS
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PART I |
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Item 1. |
BUSINESS |
1 |
Item 1A. |
RISK FACTORS |
4 |
Item 1B. |
UNRESOLVED STAFF COMMENTS |
4 |
Item 2. |
PROPERTIES |
5 |
Item 3. |
LEGAL PROCEEDINGS |
5 |
Item 4. |
MINE SAFETY DISCLOSURES |
6 |
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PART II |
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Item 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
6 |
Item 6. |
SELECTED FINANCIAL DATA |
7 |
Item 7. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
8 |
Item 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
13 |
Item 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
13 |
Item 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
13 |
Item 9A. |
CONTROLS AND PROCEDURES |
13 |
Item 9B. |
OTHER INFORMATION |
15 |
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PART III |
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Item 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
16 |
Item 11. |
EXECUTIVE COMPENSATION |
19 |
Item 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
20 |
Item 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
22 |
Item 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
23 |
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PART IV |
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Item 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
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SIGNATURES |
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports,
proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file with the SEC at the
SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from
the SEC’s internet site at http://www.sec.gov.
On our Internet website, http://www.CannaVest.com,
we post the following recent filings as soon as reasonably practicable after they are electronically filed with or furnished to
the SEC: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and
any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.
When we use the terms “CannaVest”,
“Company”, “we”, “our” and “us” we mean CannaVest Corp., a Delaware corporation,
and its consolidated subsidiaries, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains
forward-looking statements. To the extent that any statements made in this report contain information that is not historical, these
statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “expects”,
“plans”, “may,”, “anticipates”, “believes”, “should”, “intends”,
“estimates”, and other words of similar meaning. These statements are subject to risks and uncertainties that cannot
be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking
statements. Such risks and uncertainties include, without limitation, marketability of our products; legal and regulatory risks
associated with the share exchange our ability to raise additional capital to finance our activities; the effectiveness, profitability
and; the future trading of our common stock; our ability to operate as a public company; our ability to protect our proprietary
information; general economic and business conditions; the volatility of our operating results and financial condition; our ability
to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time
to time in our filings with the SEC, or otherwise.
Information regarding market and industry
statistics contained in this report is included based on information available to us that we believe is accurate. It is generally
based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts
and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties
accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any
obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking
statements.
PART I
ITEM 1. BUSINESS
Overview
We are 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.
Historically cultivated for industrial
and practical purposes, hemp is used today for textiles, paper, auto parts, biofuel, cosmetics, animal feed, supplements and much
more. The global hemp market in 2015 is estimated to offer over 25,000 products—an impressive scope for such a historically
misunderstood and restricted commodity. The market for hemp-derived products is expected to increase exponentially over the next
five years, and CannaVest is well positioned to be a dominant player in the hemp industry.
Our operations initially consisted of supplying
our raw product to third parties. However in the third quarter of 2013, we launched our first consumer products, which included
tinctures and capsules under our Cibdex™ brand, and beauty products under our Cibaderm™ brand. During
2014, we launched PlusCBD™, our new brand that includes: oil, capsules, drops, CBD powder, water soluble CBD, various dietary
supplements and beauty products. We expect to continue to add new products to our PlusCBD™ portfolio to enhance our line
of CBD and hemp-related consumer products.
We expect to realize revenue to fund our
working capital needs through the sale of raw and finished products to third parties. However, we cannot be assured that our working
capital needs to develop, launch, market and sell our products will be met through the sale of raw and finished products to third
parties. If not, we may not be able to maintain profitable operations. If we are unable to maintain profitable operations sufficient
to fund our business, we would need to raise additional capital through either the issuance of equity, acquisition of debt or sale
of a segment of our operations in the future. In the event we are unable to maintain profitable operations or raise sufficient
additional capital, our ability to continue as a going concern would be in jeopardy and investors could lose all of their investment
in the Company.
Current Operations
We currently manufacture, market, and sell
products containing hemp-derived CBD. Hemp derived CBD is one of at least 80 cannabinoids found in hemp, and is non-psychoactive.
It has been shown, in clinical settings, to not only promote overall wellness, but also to potentially treat a wide array of conditions.
Dr. Sanjay Gupta’s CNN documentary, WEED, was just the latest in an explosion of mainstream media attention to the
therapeutic potential of CBD. We are already capitalizing on this exposure by offering safe, legal CBD from industrial hemp oil
in a variety of consumer products.
Our current product portfolio includes:
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1. |
PlusCBD™ – CannaVest branded CBD-rich industrial hemp oil packaged with the highest concentrations available, designed for health and wellness. |
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2. |
Cibdex™ – Both 25 mg CBD capsules and flavored tinctures packaged in bottles with concentrations of 100mg or 500 mg of CBD. |
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3. |
Cibaderm™ – Beauty products containing CBD-rich hemp oil including lotion, body wash, salve, shampoo, conditioner and hand cream. |
Numerous other products are currently in
development and we will continue to scale up our processing capability to accommodate new products in our pipeline.
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
(formerly, PhytoSPHERE Systems, 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 provides processing technology and product development of hemp-based
nutraceutical products. Plus CBD is the operating entity for Company sales and expense of CBD oil and end consumer products.
Hemp – an Overview
Hemp is an industrial plant related to
marijuana. Fiber from the plant has long been used to make paper, clothing, rope and other products. Hemp oil is found in body-care
products such as lotion, soap and cosmetics and in a host of foods, including energy bars, waffles, milk-free cheese, veggie burgers
and bread.
Numerous uses exist, including hemp plant
extracts that are used as a medicine, nutritional supplements and food sources. Beyond this, applications into textiles, building
materials, bio-fuels, paper, bio-plastics, livestock feed/bedding as well as personal care products are readily available.
Hemp is a cousin to marijuana as both are
classified under the same biological category of Cannabis L Sativa. The basic difference between the two is that marijuana has
significant amounts of tetrahydrocannabinol (THC) (5–20%), a psychoactive ingredient; whereas hemp has virtually no THC (less
than 0.3%). This 0.3% THC in hemp is not high enough to provide the colloquial “high” to support recreational usage.
Typical marijuana ranges from 5–20% THC for psychoactive usage. Canada, China and the United Kingdom are examples of major
industrialized countries that have grown hemp responsibly and thrived from their endeavors.
Inventory and Sales
Currently, we have over 1,000 metric tons
of hemp oil inventory on hand or that is being processed. In addition, we have commitments from suppliers overseas for a significant
amount of future inventory. Based on expected increasing demand, we have invested significant capital to develop and maintain relationships
with growers on a global scale to ensure access to a significant percentage of the worldwide hemp crop. We source our raw materials
from well-established and well-recognized hemp growers in Europe. We have contracts with these growers in place to ensure adequate
supplies going forward. We have arrangements with some of these growers to have exclusive rights to their supply. Despite this
already large footprint, we continue to explore and develop other relationships to ensure that we can meet the expected demand
for bulk hemp products well into the future.
Subject to applicable law, the Company
plans to initiate growing operations in the U.S., initially on a pilot scale with the goal of becoming a national grower of product.
Changes in the Law and Development Programs
For the first time since 1937, industrial
hemp has been decriminalized at the federal level and can be grown legally in the United States, but on a limited basis. A landmark
provision passed in the Agricultural Act of 2014 recognizes hemp as distinct from its genetic cousin, marijuana. Federal law now
exempts industrial hemp from U.S. drug laws in order to allow for crop research by universities, colleges and state agriculture
departments. The new Federal law allows for agricultural pilot programs for industrial hemp “in states that permit the growth
or cultivation of hemp.”
In 2014, we entered an agreement with Kentucky’s
Murray State University to assist in providing seeds, and also to provide agronomy, processing and quality testing consulting for
the University’s hemp research pilot program under the Agricultural Act of 2014. We are working closely with Murray State
to optimize hemp cultivars, yields and planting schematics. Additionally, we are pursuing opportunities within Kentucky to evaluate
investment in processing equipment and mills.
Product Quality
Our laboratory and production facility
is uniquely equipped with qualified industry leaders and state of the art equipment for testing constituents in hemp and extracting
CBD from the plant base material. We have developed vigorous Quality Assurance/Quality Control processes and procedures to ensure
safety and quality. Each product is tested multiple times for cannabinoid content, pesticide residues, aromatic terpene compounds,
heavy metals and biological pathogens that could be harmful to the consumer. These protocols ensure that our products are safe,
consistent and the highest quality on the market. In December 2014, we collaborated with Project CBD, which is a non-profit
educational service dedicated to promoting and publicizing research into the medical utility of CBD. Project CBD’s mission
is, in part, to support the efforts of physicians and other researchers to collect and publish data from patients to determine
the patterns of CBD efficacy.
In our collaboration, we, together with
Project CBD, had samples of our hemp oil tested by an independent analytical lab to determine the safety of our products. Specifically,
the independent lab tested for the absence or presence of heavy metals and industrial solvent residues in our products. The testing
showed no detectable levels of solvents and only trace elements of heavy metals well below acceptable levels established by the
U.S. Pharmacopeia Convention.
Acquisition of PhytoSPHERE Systems,
LLC
On December 15, 2012, we entered into an
Agreement for Purchase and Sale of Assets (the “Purchase Agreement”) with PhytoSPHERE Systems, LLC, a Delaware limited
liability company (“PhytoSPHERE”), whereby on January 29, 2013, we acquired certain assets of PhytoSPHERE. Pursuant
to the Purchase Agreement, we acquired from PhytoSPHERE tangible equipment, inventory including 460 kg of raw hemp oil, all URLs
and domain names of PhytoSPHERE, all landline telephone numbers and postal addresses affiliated with PhytoSPHERE, an exclusive
license to use the names “PhytoSPHERE” and “PhytoSPHERE Systems” in the development and commercialization
of hemp-based products including CBD, existing bank accounts with a total balance of $50,775, vendor lists, permits, licenses and
other approvals, and all rights and obligations under existing and pending supply contracts.
Under current Federal regulations, hemp
may be grown in the United States only under certain conditions. However, it may legally be imported pursuant to Federal and State
regulation. Our acquisition of PhytoSPHERE’s supply chain contracts allow us to secure raw hemp product from our European
suppliers self-contained hemp cultivation and hemp oil processing facilities. Pursuant to the Purchase Agreement, we acquired from
PhytoSPHERE all of its rights, and assumed all of its liabilities, under contracts to secure raw hemp products from production
and processing facilities in Europe, which allows us to secure raw product for the development and production of our products.
We also secured the exclusive license to the name “PhytoSPHERE” and “PhytoSPHERE Systems” for use in the
development and commercialization of hemp-based products.
Purchase of the PhytoSPHERE assets has
allowed us to develop broadly applicable raw ingredients, incorporate these raw ingredients in our own product lines and sell raw
ingredients to third parties. Through our supply relationships, we are expanding our efforts to cultivate thousands of acres of
industrial hemp in special microclimates located abroad. As demand for specialty hemp oil products continues to grow, we will develop
a broader supply chain beyond those acquired from PhytoSPHERE, and are currently working to establish production in the United
States in accordance with federal and state law. With our suppliers, we will manage the entire growth and manufacturing operation
starting from the initial planting of specialty cultivars through the monitoring of the growth cycle to harvesting the crops and
producing the end products.
In payment under the Purchase Agreement,
we issued 5,825,000 shares of our common stock to PhytoSPHERE and paid $950,000 in cash.
Disposition of investment in KannaLife
Sciences, Inc.
On June 2, 2014, the Company sold its 24.97%
equity investment in KannaLife Sciences, Inc. (“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.
Market, Customers and Distribution Methods
The market, customers and distribution
methods for hemp-based products are large and diverse. These markets range from hemp-based bio plastics to textiles. This is an
ever-evolving distribution system that today includes early adopter retailers and ecommerce entities, and product development companies
that use our PlusCBD oil to develop consumer products for distribution. There are only a few outlets in mainstream commercial and
retail stores that currently stock and sell our products. However, we believe that as awareness grows for the “green,”
environmentally-friendly products derived from hempcannabis, the industry will adapt its current product lines to integrate them
with hemp-based additives or replace harmful components in their existing products with the components of hempcannabis.
To understand the market and consumers
as well as distribution methods, we have studied all the uses of hempcannabis and its legal structure in the U.S. and abroad,
including in the European Union, Africa and Latin America. There are more than 50,000 known uses for hempcannabis based products,
most of which were used in the past and were replaced by cotton, petroleumoil, concrete, corn and soybeans. We believe the market
potentially represents billions of dollars in worldwide product sales. The Company will focus on products that we believe will
have the greatest positive environmental impact, profitability and ease to market. These tend to be new, innovative products as
well as the replacement of raw base materials for products that exist today, such as foods and nutritional supplements.
Our target customers are first and foremost
end consumers via internet sales, direct-to-consumer health and wellness stores, collectives, cooperatives, affiliate sales and
master distributors. Secondarily, we are targeting manufactures of products that can readily replace their raw base materials for
our base materials, making the products more environmentally friendly and sustainable. Next, we will target national and regional
broker networks and major distribution companies who have preexisting relationships with major retail chain stores. In addition,
we are directly pursuing distribution opportunities with national retailers. As we continue to develop our business, these markets
may change, be re-prioritized or eliminated as management responds to consumer and regulatory developments.
HempMeds Agreement
On August 11, 2014, we terminated the Non-Exclusive
License and Distribution Agreement with HempMeds PX, LLC (the “HempMeds Agreement”). On or about August 13, 2014,
HempMeds PX, LLC (“HempMeds”) demanded arbitration against us and recommended that the parties engage Private Trials
in Las Vegas, Nevada to conduct the arbitration, denying that HempMeds was in breach of the HempMeds Agreement. On August
22, 2014, HempMeds filed a complaint in the Eighth Judicial District, Clark County, Nevada (the “Nevada Complaint”)
against us for breach of the HempMeds Agreement, unjust enrichment, and interference with prospective business advantage, claiming
that it had satisfied all of its obligations under the HempMeds Agreement and that we breached that agreement by terminating it
without just cause. Concurrently, HempMeds filed a Motion for Preliminary Injunction, asking the Court to reinstate the HempMeds
Agreement, namely the provision that identified HempMeds as the exclusive on-line seller of certain products of the Company.
The court denied HempMeds’ motion on October 3, 2014. We have not yet answered the Nevada Complaint because the parties
have agreed to arbitration and are attempting to resolve the issue of where the arbitration will be held. We deny HempMeds’
claims and intend to vigorously defend the allegations and file appropriate counter-claims. Since the action was recently
filed and no discovery has been conducted, an estimate of the possible loss or recovery cannot be made at this time.
Competition
There are many developers of hemp-based
consumer products, many of which are under-capitalized which we consider to be viable acquisition targets. We routinely evaluate
opportunities to purchase existing product lines, sources of CBD and other assets from certain competing companies. There are also
large, well-funded companies that currently do not offer hemp-based products but may do so in the future.
Intellectual Property
We have filed trademark applications on
our brands, logos and marks including, but not limited to CannaVest, Cibaderm™, Cibdex™, Real Scientific
Hemp Oil™ (RSHO), Plus CBD™ and CBD Simple™. We review our intellectual property
portfolio on a periodic basis and we will continue to broaden our portfolio in a fiscally prudent manner. We intend to file for
patent protection on certain products and methods important to our business, as those processes are developed and patentable. In
connection with our purchase of assets from PhytoSPHERE, we acquired all URLs and domain names of PhytoSPHERE and an exclusive
license to use the names “PhytoSPHERE” and “PhytoSPHERE Systems” in the development and commercialization
of hemp-based products, including CBD.
Research and Development
We opened a laboratory facility in San
Diego, California in September 2013. Our lab specializes in process development and product testing. We incurred research and development
expenses of $999,280 and $524,476, respectively, for the years ended December 31, 2014 and 2013.
Source and Availability of Raw Materials
The Company is a party to a contract for
the growth and processing of 2,600 kilograms of product currently being delivered and scheduled to be delivered through August
31, 2015. The total amount left to be paid under this contract is approximately $7.2 million through December 2015. The Company
is party to a second purchasing contract to provide up to 1 million kilograms of raw product to the Company. There is approximately
$1.8 million remaining to be paid under this second contract through December 31, 2015. We have contractual rights for the growth
and processing of hemp oil for delivery through October 2018 under both of these contracts. We anticipate the cost under both contracts
will remain consistent with current year prices.
Employees
As of March 26, 2015, we have 34 full-time
employees and 2 part-time employees. We are currently in discussions with qualified individuals to engage them for positions in
sales and marketing, research and development, and operations. Management believes the Company has good relationships with its
employees.
ITEM 1A. RISK FACTORS
Not applicable to a “smaller reporting
company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable to a “smaller reporting
company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 2. PROPERTIES
The Company leases certain office space
in Las Vegas, Nevada 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 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. On December 24, 2014, the Company entered into a new lease for a 4,966 square foot
expansion of its San Diego office facilities. The term of the office expansion lease extends to August 2017 and includes monthly
base rent of $12,247.
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 increase 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 February 23, 2015, the Company entered into another amendment to
again increase the amount of laboratory space under the lease and extended the term of the lease through December 31, 2016. This
amendment increased the amount of lab space under lease to 4,345 square feet, and increased the monthly base rent under the lease
to $7,798.
On May 13, 2014, the Company entered into
a lease for approximately 5,000 square feet of warehouse space in San Diego, California for a term of 3 years. The base rent under
this lease is $5,000 per month.
ITEM 3. LEGAL PROCEEDINGS
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. Although Far West’s counsel thereafter filed a Third Amended Complaint which improperly sought to re-name
the Company as a defendant, on October 16, 2014, Far West filed a dismissal of the Company after the Company threatened to bring
a motion for sanctions for violating the Court order of May 13, 2014. Accordingly, the Company has been formally dismissed
from the action.
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 $15,791.00. 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. After a hearing held on August 14, 2014, the Court took the matter
under submission. On March 19, 2015, the Court issued a ruling appointing Steve Schuck as lead plaintiff and setting an
initial pre-trial conference for April 30, 2015. The Company has not yet answered the Complaint but management intends
to vigorously defend the allegations.
On
March 17, 2015, shareholder Michael Ruth filed a shareholder derivative suit in Nevada District Court alleging two causes of action:
1) Breach of Fiduciary Duty, and 2) “Gross Mismanagement.” The claims are premised on the same event as the already-pending
securities class action case in New York – it is alleged that the Form 8-K filings misstated goodwill and sales of the Company,
which when corrected, lead to a significant drop in stock price. The Company has not been served with the Complaint but intends
to vigorously defend the case after service is made.
On August 11,
2014, we terminated the Non-Exclusive License and Distribution Agreement with HempMeds PX, LLC (the “HempMeds Agreement”).
On or about August 13, 2014, HempMeds PX, LLC (“HempMeds”) demanded arbitration against us and recommended that the
parties engage Private Trials in Las Vegas, Nevada to conduct the arbitration, denying that HempMeds was in breach of the HempMeds
Agreement. On August 22, 2014, HempMeds filed a complaint in the Eighth Judicial District, Clark County, Nevada (the “Nevada
Complaint”) against us for breach of the HempMeds Agreement, unjust enrichment, and interference with prospective business
advantage, claiming that it had satisfied all of its obligations under the HempMeds Agreement and that we breached that agreement
by terminating it without just cause. Concurrently, HempMeds filed a Motion for Preliminary Injunction, asking the Court
to reinstate the HempMeds Agreement, namely the provision that identified HempMeds as the exclusive on-line seller of certain products
of the Company. The court denied HempMeds’ motion on October 3, 2014. We have not yet answered the Nevada Complaint
because the parties have agreed to arbitration and are attempting to resolve the issue of where the arbitration will be held.
We deny HempMeds’ claims and intend to vigorously defend the allegations and file appropriate counter-claims. Since
the action was recently filed and no discovery has been conducted, an estimate of the possible loss or recovery cannot be made
at this time.
On September 11, 2014, we filed a complaint
for trademark infringement against Kannaway, LLC, General Hemp, LLC and HDDC Holdings, LLC (collectively, “defendants”)
in the United States District Court, Southern District of California, Case No. 14-cv-2160-CAB-BLM, asserting that defendants have
infringed on CannaVest’s Cannabis Beauty® and Cannabis Beauty Defined trademarks. CannaVest alleges, among other
things, that defendant HDDC Holdings, LLC (“HDDC”) assigned its rights in the CANNABIS BEAUTY DEFINED® mark to
CannaVest (the “HDDC Assignment”) which was promptly filed with the USPTO but, despite the foregoing, HDDC’s
sister company, defendant Kannaway, LLC (“Kannaway”), is improperly using the trademark on personal care products in
competition with CannaVest. On February 20, 2015, Defendants filed a counterclaim against CannaVest, asserting that the HDDC
Assignment was signed under “duress” and that HDDC licensed the mark to the other defendants for 50 years before it
assigned the mark to CannaVest. Lastly, Counterclaimants assert claims for unfair competition against CannaVest, although
they do not identify the commercial activity giving rise to the claim. We filed a Motion to Dismiss the counterclaim which
will be heard on April 17, 2015. On February 12, 2015, the Court granted our motion for preliminary injunction, enjoining
defendants from using the Cannabis Beauty Defined trademark or any confusingly similar mark. CannaVest has posting an undertaking
for $1.2M to secure the preliminary injunction under FRCP 65(c). Management intends to vigorously prosecute this complaint
and defend the counterclaims. Since no discovery has been conducted, an estimate of the possible recovery or loss cannot
be made at this time.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC Bulletin
Board under the symbol “CANV”. Trading of securities on the OTC Bulletin Board is often sporadic and investors may
have difficulty buying and selling or obtaining market quotations.
The following table sets forth the reported
high and low closing bid prices for our common stock as reported on the OTC Bulletin Board for the following periods. These prices
do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.
Fiscal Year Ended December 31, 2014 |
| |
High | | |
Low | |
First quarter | |
$ | 201.00 | | |
$ | 26.24 | |
Second quarter | |
$ | 38.60 | | |
$ | 12.70 | |
Third quarter | |
$ | 14.00 | | |
$ | 1.94 | |
Fourth quarter | |
$ | 3.84 | | |
$ | 2.25 | |
Fiscal Year Ended December 31, 2013 |
| |
High | | |
Low | |
First quarter | |
$ | 18.95 | | |
$ | 4.50 | |
Second quarter | |
$ | 20.00 | | |
$ | 10.01 | |
Third quarter | |
$ | 39.00 | | |
$ | 12.00 | |
Fourth quarter | |
$ | 45.00 | | |
$ | 14.90 | |
No cash dividends have been paid on our
common stock for the 2014 and 2013 fiscal years and no change of this policy is under consideration by our Board.
The payment of cash dividends in the future
will be determined by our Board in light of conditions then existing, including our earnings, financial requirements, and opportunities
for reinvesting earnings, business conditions, and other factors. There are otherwise no restrictions on the payment of dividends.
There were more than 8,000 shareholders of record of our common stock on March 31, 2015.
We did not repurchase any shares of our
common stock during the fiscal year covered by this report. However, on June 2, 2014, the Company sold its capital stock in KannaLife
to PhytoSPHERE in exchange for 500,000 shares of the Company’s common stock held by PhytoSPHERE.
See the “Equity Compensation Plan
Information” table in Item 12 of this Annual Report on Form 10-K
Recent Sales of Unregistered Securities
As previously reported on the Company’s
Current Report on Form 8-K filed with the SEC on April 3, 2014, between April 3, 2014 and April 23, 2014, the Company sold an
aggregate of 781,666 shares of its restricted common stock for an aggregate purchase price of $1,142,500 pursuant to a private
placement offering unanimously approved by the Board of Directors to sell up to $15 million of restricted common stock to
accredited investors. On April 23, 2014, the Board of Directors terminated the offering.
On January 28, 2015, we commenced an offering
whereby the Company intends to sell up to 12 million shares of its restricted common stock in a private placement to accredited
investors at a price per share of $2.00 (the “Offering”). The issuance of the shares in connection with the Offering
was exempt from registration under the Securities Act of 1933, as amended (the “Act”), in reliance on exemptions from
the registration requirement of the Act in transaction not involve in a public offering pursuant to Rule 506(b) of Regulation D,
as Promulgated by the Securities and Exchange Commission under the Act.
As of March 31, 2015, the Company sold
an aggregate of 1,260,000 shares of its restricted common stock pursuant to the Offering to 27 investors for an aggregate purchase
price of $2,520,000.
The shares of common stock referenced herein
were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(2) of the Securities
Act of 1933, as amended, (“Securities Act”), and/or Regulation D, as promulgated by the U.S. Securities and Exchange
Commission under the Securities Act, based upon the following: (a) each of the persons to whom the shares of common stock were
issued (each such person, an “Investor”) confirmed to the Company that it is an “accredited investor,”
as defined in Rule 501 of Regulation D promulgated under the Securities Act and has such background, education and experience in
financial and business matters as to be able to evaluate the merits and risks of an investment in the securities, (b) there was
no public offering or general solicitation with respect to the offering of such shares, (c) each investor was provided with certain
disclosure materials and all other information requested with respect to the Company, (d) each investor acknowledged that all securities
being purchased were being purchased for investment intent and were “restricted securities” for purposes of the Securities
Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration
under the Securities Act and (e) a legend has been, or will be, placed on the certificates representing each such security stating
that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction
exempt from registration under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a “smaller reporting
company” as defined in Item 10(f)(1) of SEC Regulation S-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial
condition and results of operations for the years ended December 31, 2014 and December 31, 2013 should be read in conjunction with
the financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our
discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our
plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated
in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors appearing
earlier in this Current Report. We use words such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,”
“will,” “should,” “could,” and similar expressions to identify forward-looking statements.
OVERVIEW
Our business focus is to produce, market
and distribute hemp-based consumer products as well as supply raw hemp products including CBD to third parties in the industry.
We cannot assure you that market conditions or our financial resources will be sufficient to undertake these and other steps that
we anticipate will be necessary. The development of products in this highly regulated industry carries significant risks and uncertainties
that are beyond our control. As a result, we cannot assure that we will successfully market and sell our planned products or, if
we are able to do so, that we can achieve sales volume levels that will allow us to cover our fixed costs.
We expect that we will need to raise approximately
$15 million in the next 12 months to fund our business and have begun raising funds under a private placement. Given the small
size of our company and the early stage of our operations, we may find it difficult to raise sufficient capital to meet our needs.
We do not have any firm commitments for all of our capital needs, and there are no assurances it will be available to us. If we
are unable to access capital as necessary, our ability to generate revenues and to continue as a going concern will be in jeopardy.
Non-GAAP Financial Measures
We currently focus on Adjusted EBITDA to
evaluate our business relationships and our resulting operating performance and financial position. Adjusted EBITDA is defined
as EBITDA (net income plus interest expense, income tax expense, depreciation and amortization), further adjusted to exclude certain
non-cash expenses and other adjustments as set forth below. We present Adjusted EBITDA because we consider it an important measure
of our performance and it is a meaningful financial metric in assessing our operating performance from period to period by excluding
certain items that we believe are not representative of our core business, such as certain non-cash items and other adjustments.
We believe that Adjusted EBITDA, viewed
in addition to, and not in lieu of, our reported results in accordance with accounting principles generally accepted in the United
States (“GAAP”), provides useful information to investors regarding our performance for the following reasons:
| · | because non-cash equity grants made to
employees and non-employees at a certain price and point in time do not necessarily reflect how our business is performing at any
particular time, stock-based compensation expense is not a key measure of our operating performance; and |
| · | revenues and expenses associated with
acquisitions, dispositions, equity issuance and related offering costs can vary from period to period and transaction to transaction
and are not considered a key measure of our operating performance. |
We used Adjusted EBITDA:
| · | as
a measure of operating performance; |
| · | to evaluate the effectiveness of our business
strategies; and |
| · | in communication with our board of directors
concerning our financial performance |
Adjusted EBITDA is a non-GAAP measure and
does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities
as a measure of liquidity. The term Adjusted EBITDA is not defined under GAAP, and Adjusted EBITDA is not a measure of net income
(loss), operating income or any other performance measure derived in accordance with GAAP.
Adjusted EBITDA has limitations as an analytical
tool and should not be consider in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these
limitations are:
| · | Adjusted EBITDA does not reflect all cash
expenditures, future requirements for capital expenditures or contractual requirements; |
| · | Adjusted EBITDA does not reflect changes
in, or cash requirements for, working capital needs; and |
| · | Adjusted EBITDA can differ significantly
from company to company depending on strategic decisions regarding capital structure, the tax jurisdictions in which companies
operate, the level of capital investment, thus, limiting is usefulness as a comparative measure. |
Adjusted EBITDA should not be considered
as a measure of discretionary cash available to us for investment in our business. We compensate for these limitations by relying
primarily on GAAP results and using Adjusted EBITDA as supplemental information.
A reconciliation from our net loss to Adjusted
EBITDA, a non-GAAP measure, for the years ended December 31, 2014 and 2013 is detailed below:
| |
For the Years Ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Net loss | |
$ | (1,311,951 | ) | |
$ | (2,300,196 | ) |
Interest income | |
| (30,703 | ) | |
| – | |
Interest expense | |
| 615,344 | | |
| 372,109 | |
Income tax expense | |
| – | | |
| – | |
Amortization of purchased intangible assets | |
| 821,500 | | |
| 753,500 | |
Depreciation of property & equipment | |
| 112,100 | | |
| 13,754 | |
EBITDA | |
| 206,290 | | |
| (1,160,833 | ) |
| |
| | | |
| | |
EBITDA Adjustments: | |
| | | |
| | |
Stock-based compensation expense (1) | |
| 7,957,988 | | |
| – | |
KannaLife Sciences disposition related revenues (2) | |
| (7,899,306 | ) | |
| – | |
Allocated loss on KannaLife Sciences equity investment (3) | |
| 38,552 | | |
| 310,754 | |
Other | |
| 34,816 | | |
| – | |
Total EBITDA Adjustments | |
| 132,050 | | |
| 310,754 | |
| |
| | | |
| | |
Adjusted EBITDA | |
$ | 338,340 | | |
$ | (850,079 | ) |
_________________
| (1) | Represents stock-based compensation expense related to stock options awarded to employees, consultants and non-executive directors
based on the grant date fair value under the Black-Scholes valuation model. |
| (2) | Represents non-cash revenues related to sale of KannaLife Sciences equity investment. |
| (3) | Represents allocated losses related to KannaLife Sciences investment. |
Critical Accounting Policies
The preparation of these financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.
A “critical accounting policy”
is one which is both important to the understanding of the financial condition and results of operations of the Company and requires
management’s most difficult, subjective, or complex judgments, and often requires management to make estimates about the
effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:
Acquisition of PhytoSPHERE Assets
- We have accounted for the acquisition of the assets of PhytoSPHERE Systems, LLC in accordance with the Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations (“ASC Topic 805”). ASC Topic 805 establishes principles
and requirements for recognizing and measuring the total consideration transferred to and the assets acquired, liabilities assumed
and any non-controlling interests in the acquired target in an asset purchase. ASC Topic 805 also provides guidance for recognizing
and measuring goodwill acquired and other tangible and intangible assets.
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 quarterly basis.
Management has determined 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. As of December 31, 2014 and 2013, we recorded an allowance for doubtful accounts
related to our accounts receivable in the amount of $100,000 and $400,000, respectively.
Inventory - Inventory is
stated at lower of cost or market, with cost being determined on average cost basis. There was no reserve for obsolete inventory
as of December 31, 2014 and 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.
Revenue Recognition - Our
revenue recognition policy is consistent with the criteria set forth in Staff Accounting Bulletin 104— Revenue Recognition
(“SAB 104”) for determining when revenue is realized or realizable and earned. We recognize revenue in accordance with
the requirements of SAB 104 that:
|
Ÿ |
persuasive evidence of an arrangement exists including a signed purchase order; |
|
Ÿ |
delivery has occurred; |
|
Ÿ |
the seller’s price to the buyer is fixed or determinable; and |
|
Ÿ |
collectability is reasonably assured. |
The Company recognizes revenue in accordance
with the ASC Topic 605, Revenue Recognition (“ASC Topic 605”) 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.
Long-Lived Assets - In accordance
with ASC Topic 360, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
the Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparing its carrying value
to the undiscounted projected future cash flows that the asset(s) are expected to generate. If the carrying amount of an asset
is not recoverable, we recognize an impairment loss based on the excess of the carrying amount of the long-lived asset over its
respective fair value, which is generally determined as the present value of estimated future cash flows or at the appraised value.
The impairment analysis is based on significant assumptions of future results made by management, including revenue and cash flow
projections. Circumstances that may lead to impairment of property and equipment include a significant decrease in the market price
of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used or in its
physical condition and a significant adverse change in legal factors or in the business climate that could affect the value of
a long-lived asset including an adverse action or assessment by a regulator.
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.
Stock-Based Compensation
- Certain employees, officers, directors and consultants of the Company participate in various long-term incentive plans that provide
for granting stock options and restricted stock awards. Stock options generally vest in equal increments over a two- to four-year
period and expire on the tenth anniversary following the date of grant. Restricted stock awards generally vest 100% at the grant
date.
The Company recognizes stock-based compensation
for equity awards granted to employees, officers, and directors as compensation and benefits expense on the consolidated statements
of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair
value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant. Stock-based compensation
is recognized over the requisite service period of the individual awards, which generally equals the vesting period.
The Company recognizes stock-based compensation
for equity awards granted to consultants as selling, general and administrative expense on the consolidated statements of operations.
The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant and unvested shares are
revalued at each reporting period. The fair value of restricted stock awards is equal to the closing price of the Company’s
stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite
service period of the individual awards, which generally equals the vesting period.
Recent Accounting Pronouncements
Refer to Note 2 of our consolidated financial
statements for a discussion of recent accounting standards and pronouncements.
Results of Operations
Year ended December 31, 2014 vs. December
31, 2013
Revenues
We had sales of $10,190,667 and gross profit
of $5,803,665, representing a gross profit percentage of 56.9% for the year ended December 31, 2014 versus sales of $2,154,063
and gross profit of $1,273,593, representing a gross profit percentage of 59.1% for the year ended December 31, 2013. The sales
increase in 2014 over 2013 is the result of the Company’s expansion of its existing customer markets.
Selling, general and administrative
expenses - For the year ended December 31, 2014, the Company incurred selling, general and administrative (the “SG&A”)
expenses in the amount of $13,357,633 compared with $2,366,450 for the year ended December 31, 2013. This increase is primarily
driven by the continued growth of Company operations, increase in our headcount, marketing and legal expense, and stock based compensation.
SG&A expense during 2014 includes $7,851,685 of stock-based compensation, a non-cash expense. Our legal expenses have increased
due to various matters that we are vigorously defending. The SG&A expenses include $821,500 and $753,500 of amortization expense
of intangible assets acquired through the Agreement for Purchase and Sale of Assets (the “PhytoSPHERE Agreement”) entered
into by the Company with PhytoSPHERE for the years ended December 31, 2014 and 2013, respectively.
Research and development expenses
- For the years ended December 31, 2014 and 2013, the Company incurred research and development expenses of $999,280 and
$524,476, respectively. These expenses are related to the cost of process development, rental of our laboratory facility, payroll
expenses, laboratory supplies, product development and testing, and outsourced research personnel for the period. The increase
in 2014 over 2013 relates primarily to expansion of our laboratory facility and related expenses. Research and development expense
during 2014 includes $64,148 of stock-based compensation, a non-cash expense.
Interest income/expense –
Interest income was $30,703 and $0, respectively, for the years ended December 31, 2014 and 2013. Interest expense was $615,344
for the year ended December 31, 2014 versus interest expense of $372,109 for the year ended December 31, 2013. Interest for 2014
includes interest accrued under the Roen Ventures Note in the amount of $25,870 and $589,474 representing the amortization of the
remaining debt discount at the date of conversion. Interest for 2013 includes $161,583 of interest accrued on the note payable
to Roen Ventures plus $210,526 as amortization of the discount calculated on the note payable to Roen Ventures, LLC related to
a beneficial conversion feature.
Gain/Loss on Equity Investment
- For the years ended December 31, 2014 and 2013, the Company recognized losses of $38,552 and $310,754, respectively, representing
its pro rata share (24.97%) of the loss of KannaLife. 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.
Liquidity and Capital Resources
A summary of our changes in cash flows for the years ended December
31, 2014 and 2013 is provided below:
| |
For the years ended December 31, | |
| |
2014 | | |
2013 | |
Net cash flows provided by (used in): | |
| | | |
| | |
Operating activities | |
$ | (6,711,999 | ) | |
$ | (4,879,234 | ) |
Investing activities | |
| (1,384,384 | ) | |
| (1,875,819 | ) |
Financing activities | |
| 8,155,131 | | |
| 8,998,292 | |
Net increase in cash | |
| 58,748 | | |
| 2,243,239 | |
Cash, beginning of year | |
| 2,243,670 | | |
| 431 | |
Cash, end of year | |
$ | 2,302,418 | | |
$ | 2,243,670 | |
Cash requirements and liquidity needs are
primarily funded through our cash flow from operations and our ability to obtain proceeds from selling Company stock.
Operating Activities
Net cash provided by or used in operating
activities includes net loss adjusted for non-cash expenses such as depreciation and amortization, loss on equity investment, gain
on sale of equity investment, bad debt expense and stock-based compensation. Operating assets and liabilities primarily include
balances related to funding of inventory purchases and customer accounts receivable. Operating assets and liabilities that arise
from the funding of inventory purchases and customer accounts receivable can fluctuate significantly from day to day and period
to period depending on the timing of inventory purchases and customer behavior.
Net cash used in operating activities for
the years ended December 31, 2014 and 2013 totaled $6,711,999 and $4,879,234, respectively. Cash used for prepayments of inventory
and inventory purchases was approximately $7,977,718 for the year ended December 31, 2014 compared to $2,602,166 for the year ended
December 31, 2013. Cash provided by accounts receivable collection was $1,205,952 for the year ended December 31, 2014 compared
to $1,744,064 used to fund accounts receivable for the year ended December 31, 2013. During the year ended December 31, 2014, collection
of accounts receivable was greater than anticipated resulting in a $300,000 reduction of our allowance for doubtful accounts with
a corresponding adjustment (credit) to bad debt expense of $300,000. Cash provided by accounts payable and accrued expenses was
$369,411 for the year ended December 31, 2014 and $247,325 for the year ended December 31, 2013. Amortization of the debt discount
totaled $589,474 for the year ended December 31, 2014 compared to $210,526 for the year ended December 31, 2013. Additionally,
in June 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. This was a non-cash transaction and accordingly is an adjustment to cash used in operating
activities for the year ended December 31, 2014. Stock-based compensation totaled $7,915,833 for the year ended December 31, 2014
while there was no expense in 2013. Depreciation and amortization totaled $933,600 for the year ended December 31, 2014 compared
to $767,254 for the year ended December 31, 2013.
Investing Activities
Net cash used in investing activities for
the year ended December 31, 2014 and 2013 totaled $1,384,384 and $1,875,819, respectively. The net cash used in investing activity
for the year ended December 31, 2014 consisted of $449,211 of property and equipment purchases, $264,827 of principal repayments
on note receivable and issuance of a $1,200,000 note receivable in connection with sale of inventory to a customer. The net cash
used in investing activity for the year ended December 31, 2013 consisted primarily of cash paid for the PhytoSPHERE Agreement
totaling $950,000 and the investment in KannaLife totaling $750,000.
Financing Activities
Net cash provided by financing activities
for the year ended December 31, 2014 and 2013 totaled $8,155,131 and $8,998,292, respectively. Cash flows provided by financing
activities in 2014 primarily include $8,247,500 in proceeds from the sale of common stock. Cash flows provided by financing activities
in 2013 primarily include proceeds of $6,192,069 from the Roen Ventures, LLC loan and $2,731,423 in proceeds from the sale of common
stock.
The Company has yet to attain a level of
operations which allows it to meet operating and working capital cash flow needs. Therefore, the Company has commenced an offering
and plans to raise an additional amount up to $24 million through a private placement. We expect to be dependent upon obtaining
additional financing in order to adequately fund working capital, infrastructure and expenses in order to execute plans for future
operations so that we can achieve a level of revenue adequate to support our cost structure, none of which can be assured.
Off-Balance Sheet Arrangements
The Company has two supply agreements in
place with European farmers to supply raw material in future years. These arrangements are critical to Company operations since
the worldwide supply of raw hemp is currently limited.
The first contract is for the growth and
processing of 2,600 kilograms of product currently being delivered and scheduled to be delivered through August 31, 2015. The total
amount left to be paid under this contract is approximately $7.2 million through December 2015. The second contract provides up
to 1 million kilograms of raw product to the Company. There is approximately $1.8 million remaining to be paid under this second
contract. We have contractual rights for the growth and processing of hemp oil for delivery through October 2018 under both of
these contracts. We anticipate the cost under both contracts will remain consistent with current year prices.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not applicable to a “smaller reporting
company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The full text of the Company's audited
consolidated financial statements for the fiscal years ended December 31, 2014 and 2013, begins on page F-1 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Our management, which is comprised of one
person holding the offices of President and Chief Executive Officer and one person holding the offices of Chief Financial Officer
and Secretary, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report
(the “Evaluation Date”). Based on such evaluation, our management concluded that our disclosure controls and procedures
were not effective, at a reasonable assurance level, as of the Evaluation Date, to ensure that information required to be disclosed
in reports that we file or submit under that Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms and to ensure that information required to be disclosed in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management in a manner that allows timely decisions regarding required
disclosures.
MANAGEMENT’S ANNUAL REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rule 13a-15(f)
of the Exchange Act. The Company’s internal control system is designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies
and procedures that:
|
Ÿ |
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
|
Ÿ |
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
|
Ÿ |
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitation, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
An evaluation was performed under the supervision
and with the participation of the Company’s management of the effectiveness of the design and operation of the Company’s
procedures and internal control over financial reporting as of December 31, 2014. In making this assessment, the Company used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework of 1992 (the “1992 COSO Framework”). The Company is in the process of integrating the updated, 2013 version
of the 1992 COSO Framework. Based on that evaluation, the Company’s management concluded that the Company’s internal
controls over financial reporting were not effective in that there were material weaknesses as of December 31, 2014. See Inherent
Limitations of Internal Controls for discussion of material weaknesses.
The Company has a small Board of Directors
(3 members) and does not provide sufficient entity level oversight over financial reporting due to its small size. All three current
Board members also function as the Company’s audit committee. The Company is evaluating expansion of its current Board, including
the addition of an independent Board member with sufficient accounting and financial experience to chair the audit committee.
A material weakness is a deficiency or
combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s
internal controls.
Attestation Report of the Registered
Public Accounting Firm
This annual report does not include an
attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s registered public accounting firm pursuant to the Dodd-Frank Wall
Street Reform and Consumer Protection Act, wherein non-accelerated filers are exempt from Sarbanes-Oxley internal control audit
requirements.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING
There was no change in our internal control
over financial reporting identified in connection with our evaluation that occurred during the year ended December 31, 2014, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including the possibility of human error and the circumvention and overriding
of controls and procedures. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of the 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 a cost-effective control system, misstatements due to error fraud may occur and not be detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error
or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons
within the organization. The design of any system of controls is also 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 objectives under all potential
future conditions.
Management is aware that there is a lack
of segregation of duties and accounting personnel with appropriate qualifications at the Company due to the small number of employees
dealing with general administrative and financial matters. This constitutes a deficiency in the internal controls. Management has
taken steps to rectify these deficiencies. The Company hired a full-time Chief Financial Officer in June 2014 who is focused on
developing policies and procedures to require proper segregation of duties. In addition, the Company hired a new Controller in
November 2014 and an Assistant Controller in February 2015.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The
Directors and Executive Officers of the Company
Our executive officers, key employees and
directors are listed in the below table. There are no arrangements, agreements or understandings between non-management security
holders and management under which non-management security holders may directly or indirectly participate in or influence the management
of our affairs. There are no arrangements or understandings between any director and any other person pursuant to which any director
or executive officer was or is to be selected as a director or executive officer, as applicable. There currently are no legal proceedings,
and during the past ten years there have been no legal proceedings that are material to the evaluation of the ability or integrity
of any of our directors or director nominees.
Name |
|
Age |
|
Position |
|
Director since the below date (1) |
|
|
|
|
|
|
|
Michael Mona, Jr. (1,2) |
|
60 |
|
Director, President and Chief Executive Officer |
|
January 28, 2013 (2) |
Joseph Dowling (4) |
|
57 |
|
Chief Financial Officer, Secretary |
|
|
Michael Mona, III (3) |
|
29 |
|
Vice President, Operations |
|
|
Bart P. Mackay (1) |
|
58 |
|
Director |
|
March 14, 2013 |
Larry Raskin |
|
58 |
|
Director |
|
May 7, 2014 |
(1) Each director serves until the next annual meeting of stockholders. |
(2) Elected as President and Chief Executive Officer on November 16, 2012 |
(3) Appointed as Vice President, Operations on July 25, 2013 |
(4) Appointed as Secretary on August 25, 2014 |
Michael Mona, Jr. Mr. Mona possesses
over 25 years of experience in the field of construction, investments and project development, holding various senior positions
in these fields since 1987. Since 1994, Mr. Mona has served as the President of M&M Development, Inc. and in such
role has overseen the construction and operation of various apartment projects, hotels and recreational vehicle parks throughout
Las Vegas, Nevada. As our President, Mr. Mona is specially qualified to serve on the Board because of his detailed knowledge of
our operations and market.
Joseph Dowling. Mr. Dowling was
appointed as Chief Financial Officer of the Company on June 16, 2014 and was appointed Secretary on July 23, 2014. Prior to his
appointment as CFO, Mr. Dowling held numerous senior positions including President and Chief Financial Officer of MediVas, LLC,
a life science company, and from 1998 to 2005 served as a Managing Director at Citigroup, a global financial services firm. Earlier
in his career, Mr. Dowling served in various finance and accounting roles in both public accounting and in the banking industry.
Mr. Dowling graduated from University of California, Los Angeles in Economics and is a certified public accountant.
Michael Mona, III. Mr. Mona graduated
from the University of San Diego in 2009, with a Bachelor of Arts in Business Administration. Mr. Mona has been since 2009 a managing
member of Mona Co. Development, and prior to joining the Company in 2013 was the President and Managing Member of Caps of SD LLC.
Prior to joining the Company, Mr. Mona was Vice President, Product Development for Medical Marijuana, Inc., and was responsible
for the development and testing of hemp-based products.
Bart P. Mackay. Mr. Mackay is an
attorney licensed since 1984 with emphasis in corporate finance, technology and entrepreneurial legal matters. Mr. Mackay has been
a principal of Mackay Ventures, Inc. since 2001. Mr. Mackay has extensive experience in establishing and developing new enterprises
both from management and operational aspects, including the formation and growth of several of his own ventures. Mr. Mackay’s
extensive business background makes him a valuable addition to the Board.
Larry Raskin. Mr. Raskin was
initially appointed as a director of the Company on May 7, 2014. Mr. Raskin has been the Global Vice President of Leadership
Development of ACN Inc., a telecommunications company, since 2012. Mr. Raskin joined ACN Inc. in 1994 and has held various
positions in the company, including Vice President of Sales North America from 2001 to 2006 and Senior Vice President in 2012
prior to stepping into his current position. Prior to joining ACN Inc., Mr. Raskin was National Marketing Director at
National Sagety Associates of Memphis, Tennessee from 1988 to 1994. Mr. Raskin’s extensive business background makes
him a valuable addition to the Board.
CORPORATE GOVERNANCE
General
We believe that good corporate governance
is important to ensure that the Company is managed for the long-term benefit of our stockholders. This section describes key corporate
governance practices that we have adopted.
Board of Directors Meetings and Attendance
The Board has responsibility for establishing
broad corporate policies and reviewing our overall performance rather than day-to-day operations. The primary responsibility of
the Board is to oversee the management of the Company and, in doing so, serve the best interests of the Company and its stockholders.
The Board selects, evaluates and provides for the succession of executive officers and, subject to stockholder election, directors.
It reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments
of corporate resources. The Board also participates in decisions that have a potential major economic impact on the Company. Management
keeps the directors informed of Company activity through regular communication, including written reports and presentations at
Board and committee meetings.
Committees of the Board of Directors
Other than the Compensation Committee,
we do not have any committees of the Board, including an Audit Committee or a Nominating Committee, or any other committees performing
similar functions. The functions of those committees are being undertaken by the Board of Directors as a whole.
The Compensation Committee consists of
Larry Raskin and Bart Mackay, and the Compensation Committee has established a charter that requires all members of the Compensation
Committee to be “non-employee directors” for purposes of Rule 16b-3 of the Securities Exchange Act of 1934, as amended,
and satisfy the requirements of an “outside director” for purposes of Section 16(m) of the Internal Revenue Code. The
Compensation Committee is responsible for overseeing and, as appropriate, making recommendations to the Board of Directors regarding
the annual salaries and other compensation of our executive officers, our general employee compensation and other policies and
providing assistance and recommendations with respect to our compensation policies and practices. The Compensation Committee is
authorized to carry out these activities and other actions reasonably related to the Compensation Committee's purposes or assigned
by the Board of Directors from time to time. The Compensation Committee's specific responsibilities are delineated in its charter.
We do not have a policy regarding the consideration
of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates,
nor has our Board established a process for identifying and evaluating director nominees, nor do we have a policy regarding director
diversity. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders,
including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received
a recommendation from any stockholder for any candidate to serve on our Board. We do not know if any of our stockholders will make
a recommendation for any candidate to serve on our Board given the relatively small size of our company.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange
Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of
our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5
respectively. Executive officers, directors and greater than 10% stockholders are required by the SEC regulations to furnish
us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us,
and to the best of our knowledge, all executive officers, directors and persons holding greater than 10% of our issued and
outstanding stock have filed the required reports in a timely manner during fiscal 2014 with the exception of the late filing
of one Form 3 by each of Michael Mona, Jr., and PhytoSPHERE, the late filing of Form 4 by Michael Mora III and Joseph Dowling
and the failure to file a Form 5 by each of PhytoSPHERE, Mercia Holdings LLC, Mai Dun Limited LLC and Bart Mackay.
Other Directorships
Other than as disclosed above, during the
last 5 years, none of our directors held any other directorships in any company with a class of securities registered pursuant
to section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment
company under the Investment Company Act of 1940.
Code of Ethics
We have adopted a corporate code of ethics
that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons
performing similar functions. A copy of the code was filed as Exhibit 14.1 to our Annual Report on Form 10-K filed with the SEC
on April 16, 2013 and is attached as Exhibit 14.1 to this Annual Report on Form 10-K.
Family Relationships
Our Vice President of Operations, Michael
Mona, III, is the son of our President, Chief Executive Officer and Director, Michael Mona, Jr.
Compensation of Directors
Our directors, other than Mr. Mona, have
each received compensation for their service as directors in the amount of $1,000, from inception to the date of this report.
We have a formal plan for compensating our directors for their services, whereby each director, other than our Chairman, receives
$500 per meeting of the Board of Directors attended. Each of our directors are expected in the future to receive stock grants
as further compensation for their services.
On October 1, 2014, two
non-employee Company directors were each granted 25,000 shares of common stock with a value equal to the fair market value of
the Company’s common stock at the time of the grant.
Conflicts of Interest
Our directors and officers are not obligated
to commit their full time and attention to our business and, accordingly, they may encounter a conflict of interest in allocating
their time between our operations and those of other businesses. In the course of their other business activities, they may become
aware of investment and business opportunities which may be appropriate for presentation to us as well as other entities to which
they owe a fiduciary duty. As a result, they may have conflicts of interest in determining to which entity a particular business
opportunity should be presented. They may also in the future become affiliated with entities that are engaged in business activities
similar to those we intend to conduct.
In general, officers and directors of a
corporation are required to present business opportunities to the corporation if:
|
· |
the corporation could financially undertake the opportunity; |
|
· |
the opportunity is within the corporation’s line of business; and |
|
· |
it would be unfair to the corporation and its stockholders not to bring the opportunity to the attention of the corporation. |
We have adopted a code of ethics that obligates
our directors, officers and employees to disclose potential conflicts of interest and prohibits those persons from engaging in
such transactions without our consent.
ITEM 11. EXECUTIVE COMPENSATION
The following
table summarizes all compensation recorded by us in each of the last two completed fiscal years for our Chief Executive Officer
and the two next most highly compensated officers. The value attributable to any option awards is computed in accordance with FASB
ASC 718 Share-Based-Payment (“ASC 718”).
Name and Principal | |
| | |
Salary | | |
Bonus | | |
Stock Awards | | |
Option Awards | | |
Non-Equity Incentive Plan Compensation | | |
Nonqualified Deferred Compensation | | |
All Other Compensation | | |
Total Earnings | |
Position | |
Year | | |
($) | | |
($) | | |
($)(1) | | |
($)(2) | | |
($) | | |
($) | | |
($) | | |
($) | |
| |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Michael Mona, Jr. | |
2014 | | |
$ | 209,521 | | |
$ | 10,000 | | |
$ | – | | |
$ | 8,323,224 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 8,542,745 | |
Chairman, CEO | |
2013 | | |
| 45,923 | | |
| 10,000 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 7,500 | | |
| 63,423 | |
| |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Michael Mona, III | |
2014 | | |
$ | 137,808 | | |
$ | 10,000 | | |
$ | 705,000 | | |
$ | 1,149,819 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 2,002,627 | |
VP, Operations | |
2013 | | |
| 44,769 | | |
| 10,000 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| 54,769 | |
| |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Joseph Dowling | |
2014 | | |
$ | 100,000 | | |
$ | 10,000 | | |
$ | – | | |
$ | 1,506,949 | | |
$ | – | | |
$ | – | | |
$ | – | | |
$ | 1,616,949 | |
Chief Financial Officer and Secretary | |
2013 | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | | |
| – | |
____________________
| (1) | These amounts reflect the grant date fair value of stock awards as determined by the market price
of the Common Stock on the date of grant. |
| (2) | These amounts reflect the grant date fair value of stock options as determined under FASB ASC Topic
718 and using the Black-Scholes model. The underlying valuation assumptions for stock option awards made are further disclosed
in Note 11 to our consolidated financial statements filed with our Annual Reports on Form 10-K for the year ended December 31,
2014. |
Compensation Arrangements
The Board of
Directors approved a salary of $300,000 for our President and Chief Executive Officer on August 25, 2014. During fiscal year
2014, Mr. Mona was paid an aggregate sum of $5,939,950. In 2014, the Compensation Committee approved the grant of 4,000,000
stock options to Mr. Mona. The stock option is durational-based, with 67% vested as of the date of grant and the remainder
vesting in twelve (12) equal monthly installments measured from January 31, 2015, and was granted with an exercise price
equal to the fair market value of the Company’s common stock at the time of the grant.
The Board of Directors approved a salary
of $180,000 for our Vice President, Operations on August 25, 2014. During fiscal year 2014, Mr. Mona III was paid an aggregate
sum of $1,428,782. On October 6, 2014, the Compensation Committee approved the grant of 500,000 stock options to Mr. Mona and a
stock award under the Company’s Form S-8 Registration Statement filed with the SEC on October 6, 2014 of an aggregate of
500,000 shares of common stock. The stock award provided for the issuance of 250,000 shares of common stock on October 6, 2014
and 250,000 shares of common stock on January 1, 2015. The stock option has a term of ten (10) years, is durational-based, with
25% (or 125,000 option shares) vested immediately, and the remaining option shares vesting in thirty-six (36) equal monthly increments.
As of March 31, 2015, 145,833 option shares have vested, and Mr. Mona III has not exercised any stock options.
Joseph Dowling
was appointed as the Company’s Chief Financial Officer on June 16, 2014 with an annual salary of $200,000 and during fiscal
2014 was paid an aggregate sum of $244,340. On October 6, 2014, the Compensation Committee approved the grant of 600,000 stock
options to Mr. Dowling. The stock option is durational-based, with 25% vested on the one year anniversary of Mr. Dowling’s
service to the Company, and the remaining options vesting in 36 equal monthly installments.
Option Grants
On July 23, 2014, Company shareholders
approved the Amended and Restated Equity Incentive Plan (the “Amended 2013 Plan”), which provides for the granting
of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. This Amended
2013 Plan serves as the successor to the 2013 Equity Incentive Plan. There were no option awards under the 2013 Equity Incentive
Plan. Under the Amended 2013 Plan, the Company may grant up to 10,000,000 new shares. As of December 31, 2014,
the Company had 3,530,000 of authorized unissued shares reserved and available.
Pension, Retirement or Similar Benefit
Plans
There are no arrangements or plans in which
we provide pension, retirement or similar benefits to our directors or executive officers. We have no material bonus or profit
sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except
that stock options may be granted at the discretion of the Board or a committee thereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership of Directors, Officers
and 5% Stockholders
Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership
of that person, shares of common stock subject to options and warrants held by that person that are currently exercisable or become
exercisable within 60 days are deemed outstanding even if they have not actually been exercised. Those shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any other person. The following table sets forth,
as of March 31, 2015, certain information as to shares of our common stock owned by (i) each person known to beneficially own
more than five percent of our outstanding common stock or preferred stock, (ii) each of our directors, and executive officers
named in our summary compensation table, and (iii) all of our executive officers and directors as a group. Unless otherwise indicated,
the address of each named beneficial owner is the same as that of our principal executive offices located at 2688 South Rainbow
Avenue, Suite B, Las Vegas, NV 89146.
Name and Address of Beneficial Owner (1) | |
Number of Shares of Common Stock Beneficially Owned (2) | | |
Percent of Common Stock Beneficially Owned | |
Mai Dun Limited, LLC (3) | |
| 5,463,162 | | |
| 15.64% | |
Roen Ventures, LLC (3) | |
| 10,000,000 | | |
| 28.63% | |
Mackay Ventures, Inc. (3) | |
| 618,564 | | |
| 1.77% | |
MJNA Investment Holdings, LLC (4) | |
| 4,925,000 | | |
| 14.10% | |
Medical Marijuana, Inc. (5) | |
| 3,930,252 | | |
| 11.25% | |
Michael Mona III (6) | |
| 1,875,833 | | |
| 5.37% | |
Michael Mona, Jr. (7) | |
| 3,304,659 | | |
| 9.46% | |
Bart Mackay (3) | |
| 16,081,726 | | |
| 46.04% | |
Larry Raskin (8) | |
| 400,000 | | |
| 1.15% | |
All executive officers and directors as a group (five persons) | |
| 21,662,218 | | |
| 62.02% | |
_________________
(1) |
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules of the Commission, shares of our common stock that each named person and group has the right to acquire within 60 days pursuant to options, warrants, or other rights, are deemed outstanding for purposes of computing shares beneficially owned by the percentage ownership of each such person and group. Applicable percentages are based on 34,929,166 shares of our common stock outstanding on March 31, 2015, and are calculated as required by rules promulgated by the SEC. |
(2) |
Unless otherwise noted, all shares listed are owned of record and the record owner has sole voting and investment power, subject to community property laws where applicable. |
(3) |
Bart Mackay is the sole member of each of Roen Ventures, LLC and Mai Dun Limited, LLC. The address of each of Roen Ventures, LLC, Mai Dun Limited, LLC and Mackay Ventures, Inc. is S. Rancho Drive, Suite A-7, Las Vegas, Nevada 89106. Bart Mackay, the sole member/stockholder of Roen Ventures, LLC, Mai Dun Limited, LLC and Mackay Ventures, Inc. is deemed to have shared voting and investment power over the shares of our common stock owned by each of Roen Ventures, LLC, Mai Dun Limited, LLC and Mackay Ventures, Inc. |
(4) |
The address of MJNA Investment Holdings, LLC, a subsidiary of Medical Marijuana, Inc., is 12975 Brook Printer PL, Suite 160, Poway, CA 92064 |
(5) |
Medical Marijuana, Inc. has beneficial ownership of 80% of shares owned by MJNA Holdings, LLC, through its 80% ownership interests of MJNA Investment Holdings, LLC. |
(6) |
Michael Mona III owns 980,000 shares of record, is a beneficial owner and beneficiary of Mik Nik Trust, which owns 750,000 shares, and on October 6, 2014 was granted a stock option to purchase 500,000 shares of common stock. The stock option is durational-based, with 25% (or 125,000 option shares) vested immediately, and the remaining option shares vesting in thirty-six (36) equal monthly increments. As of March 31, 2015, 145,833 option shares have vested. |
(7) |
On December 8, 2014, the Compensation Committee approved the grant of 4,000,000 stock options to Michael Mona, Jr., the Company’s President and Chief Executive Officer. The stock option is durational-based, with 67% vested as of the date of grant and the remainder vesting in twelve (12) equal monthly installments measured from January 31, 2015. |
* |
Less than 1%. |
EQUITY COMPENSATION PLAN INFORMATION
On July 23,
2014, Company shareholders approved the Amended and Restated Equity Incentive Plan (the “Amended 2013 Plan”), which
provides for the granting of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based
awards. The Amended 2013 Plan serves as the successor to the 2013 Equity Incentive Plan.
Plan Category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | | |
Weighted-average exercise price of outstanding options, warrants and rights | | |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |
Equity compensation plans approved by security holders | |
| 6,470,000 | | |
$ | 2.70 | | |
| 3,530,000 | |
Equity compensation plans not approved by security holders | |
| – | | |
| – | | |
| – | |
Total | |
| 6,470,000 | | |
$ | 2.70 | | |
| 3,530,000 | |
(1) Consists
solely of awards granted under our Amended 2013 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Except for the transactions described below,
none of our directors, officers or principal shareholders, nor any associate or affiliate of the foregoing, have any interest,
direct or indirect, in any transaction or in any proposed transaction since January 1, 2014 which materially affects the Company
or has affected the Company.
As previously disclosed in that certain
Current Report on Form 8-K filed by the Company with the SEC on March 8, 2013, 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. As previously disclosed in that certain Current
Report on Form 8-K filed by the Company with the SEC on July 31, 2013, on July 25, 2013, the disinterested members of our Board
approved an amendment to the Note, to provide for an increase in the amount of loans to be provided in the future in an amount
of up to $6,000,000 and the ability of Roen Ventures to convert, in its sole discretion, the outstanding balance under the Note
into shares of the common stock of the Company at a conversion price to be determined following the conclusion of a valuation of
the common stock of the Company determined pursuant to ASC 718 Stock Compensation. As previously disclosed in that certain
Current Report on Form 8-K filed by the Company with the SEC on November 13, 2013, a Board valuation was prepared pursuant to Internal
Revenue Code Section 409A and Financial Accounting Standards Board Accounting Standards Codification 718 Stock Compensation
(the “Valuation”). The Valuation determined that the fair market value of the Company’s restricted, non-marketable
common stock is $0.68 per share. On November 7, 2013, the disinterested members of our Board approved a second amendment to the
Note to provide for a conversion price of $0.60 per share, which represents an approximate 12% discount to the fair market value
of the Company’s restricted, non-marketable common stock pursuant to the Valuation. As previously disclosed in that certain
Current Report on Form 8-K filed by the Company with the SEC on January 28, 2014, on January 22, 2014, Roen Ventures delivered
a Notice of Election to Convert to Common Shares (the “Conversion Notice”) pursuant to which Roen Ventures exercised
its right under the Note to convert all amounts owing under the Note into shares of common stock of the Company at the set conversion
price of $0.60 per share. As of the date of the Conversion Notice, the balance of the loans evidenced by the Note was $6,000,000,
including all principal and interest owing thereunder. Therefore, pursuant to the Conversion Notice, on January 22, 2014, the Company
issued Roen Ventures 10,000,000 shares of its common stock. As of the date of this Annual Report on Form 10-K, Bart Mackay, a member
of the Board, through his two wholly-owned limited liability companies, Mercia Holdings, LLC and Mai Dun Limited, LLC, owns 100%
of the interests in Roen Ventures
On December 8, 2014 and as set forth in
the Current Report on Form 8-K filed with the SEC on December 18, 2014, the Compensation Committee approved the grant of 4,000,000
stock options to Michael Mona, Jr., the Company’s President and Chief Executive Officer. The stock option has a term of ten
(10) years, is durational-based, with 67% vested as of the date of grant and the remainder vesting in twelve (12) equal monthly
installments measured from January 31, 2015, and was granted with an exercise price equal to the fair market value of the Company’s
common stock at the time of grant. As of March 31, 2015, Mr. Mona has not exercised any stock options.
On October 6, 2014, the Compensation Committee
approved the grant of 500,000 stock options to Michael Mona, III, the Company’s Chief Operating Officer and a stock award
under the Company’s Form S-8 Registration Statement filed with the SEC on October 6, 2014 of an aggregate of 500,000 shares
of common stock. The stock award provided for the issuance of 250,000 shares of common stock on October 6, 2014 and 250,000 shares
of common stock on January 1, 2015. The stock option has a term of ten (10) years, is durational-based, with 25% (or 125,000 option
shares) vested immediately, and the remaining option shares vesting in thirty-six (36) equal monthly increments. As of March 31,
2015, 145,833 option shares have vested, and Mr. Mona III has not exercised any stock options.
On October 6, 2014, the Compensation Committee
approved the grant of 600,000 stock options to Joseph Dowling, the Company’s Chief Financial Officer. The stock option has
a term of ten (10) years, is durational-based, with 25% of the option shares vesting on June 16, 2015, and the remaining option
shares vesting in thirty-six (36) equal monthly installments.
For the years ended December 31, 2014 and
2013, the Company recognized sales to the following related parties:
| |
| |
For the years ended December 31, | |
Party | |
Relationship | |
2014 | | |
2013 | |
| |
| |
| | |
| |
Medical Marijuana, Inc. ("MJNA") | |
Stockholder | |
$ | – | | |
$ | 92,690 | |
HempMeds PX | |
80% owned by MJNA | |
| 5,443,978 | | |
| 871,315 | |
Dixie/RedDice Holdings | |
60% owned by MJNA | |
| – | | |
| 365,058 | |
Canchew Biotechnologies | |
50% owned by MJNA | |
| – | | |
| 825,000 | |
Total sales to related parties | |
| |
$ | 5,443,978 | | |
$ | 2,154,063 | |
| |
| |
| | | |
| | |
Percent of total sales | |
| |
| 53.4% | | |
| 100.0% | |
During 2014, the Company discontinued sales
to HempMeds PX (see Part I, Item 3).
At December 31, 2013, 100% of the Company’s
accounts receivable balance totaling $1,740,502 are from these parties. At December 31, 2014, the Company had a note receivable
from Dixie Botanicals of $335,173.
During the year ended December 31, 2014
and 2013, the Company paid $9,072,025 and $1,953,690, respectively, to a stockholder of the Company who is a supplier of hemp oil
and hemp to the Company.
There have been no other transactions since
the beginning of our last fiscal year or any currently proposed transactions in which we are, or plan to be, a participant and
the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two
completed fiscal years, and in which any related person had or will have a direct or indirect material interest.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The following table summarizes the fees,
as applicable, of PKF Certified Public Accountants, a Professional Corporation, our independent auditor for the years ended December
31, 2014 and 2013; Turner, Stone & Company, L.L.P., our independent auditor for fiscal year 2012 and the interim period through
May 6, 2013, and Anton & Chia, LLP, our independent auditor from May 7, 2013 through November 14, 2013, billed to us for each
of the last two fiscal years for audit services and billed to us in each of the last two years for other services:
Fee Category | |
2014 | | |
2013 | |
Audit Fees (1) | |
$ | 87,022 | | |
$ | 20,426 | |
Audit-Related Fees (2) | |
$ | 39,531 | | |
$ | – | |
Tax Fees (3) | |
$ | 11,400 | | |
$ | 3,300 | |
All Other Fees (4) | |
$ | 505 | | |
$ | – | |
(1) Audit fees includes the audit of our
annual financial statements, review of financial statements included in our Form 10-Q quarterly reports and services that are normally
provided by the independent auditors in connection with engagements for those fiscal years. This category also includes advice
on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
(2) Audit-related fees consist of assurance
and related services by the independent auditors that are reasonably related to the performance of the audit or review of our financial
statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include
consultation regarding our correspondence with the SEC and other accounting consulting.
(3) Tax fees consist of professional services
rendered by our advisors for tax compliance and tax advice. The services for the fees disclosed under this category include tax
return preparation and technical tax advice.
(4) All other fees consist of fees for
other miscellaneous items.
Our Board has adopted a procedure for pre-approval
of all fees charged by our independent auditors. Under the procedure, the Board approves the engagement letter with
respect to audit and review services. Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board
at the next meeting. The audit fees paid to the auditors with respect to 2014 and 2013 were pre-approved by the entire
Board.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Please see the Exhibit Index which follows
the signature page to this annual report on Form 10-K and which is incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized,
|
CANNAVEST CORP.
(Registrant) |
|
|
|
|
|
|
|
By |
/s/ Michael Mona, Jr. |
|
|
Michael Mona, Jr.
President and Chief Executive Officer |
|
|
Dated March 31, 2015 |
|
|
|
|
By |
/s/ Joseph D. Dowling |
|
|
Joseph D. Dowling
Chief Financial Officer |
|
|
Dated March 31, 2015 |
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature |
|
Title |
Date |
|
|
|
|
/s/ Michael Mona, Jr. |
|
President, Chief Executive Officer and |
March 31, 2015 |
Michael Mona, Jr. |
|
Director |
|
|
|
|
|
/s/ Bart P. Mackay |
|
Director |
March 31, 2015 |
Bart P. Mackay |
|
|
|
|
|
|
|
/s/ Larry Raskin |
|
Director |
March 31, 2015 |
Larry Raskin |
|
|
|
EXHIBIT INDEX
Exhibit No. |
|
Description of Exhibit |
2.1 (1) |
|
Agreement and Plan of Merger, dated as of July 25, 2013, by and between CannaVEST Corp., a Texas corporation, and CannaVEST Corp., a Delaware corporation. |
3.1 (1) |
|
Certificate of Incorporation of CannaVEST Corp., as filed on January 26, 2013. |
3.2 (1) |
|
Bylaws of CannaVEST Corp., dated as of January 26, 2013. |
4.1 (2) |
|
CannaVEST Corp. Specimen Stock Certificate |
10.1 (3) |
|
Stock Purchase Agreement, dated as of November 16, 2012, by and among Mai Dun Limited, LLC, Mercia Holdings, LLC, General Hemp, LLC, Bamburgh Holdings, LLC, H.J. Cole and Foreclosure Solutions, Inc. |
10.2 (3) |
|
Stock Purchase Agreement (Non-Affiliate), dated as of November 12, 2012, by and among Mai Dun Limited, LLC, Mercia Holdings, LLC, General Hemp, LLC, Bamburgh Holdings, LLC, on the one hand, and Kevin Halter, on the other hand. |
10.3 (2) |
|
Agreement for Purchase and Sale of Assets of PhytoSPHERE Systems LLC, dated December 15, 2012, by and between Foreclosure Solutions, Inc. and PhytoSPHERE Systems, LLC. |
10.4 (4) |
|
Stock and Warrant Purchase Agreement, dated March 4, 2013, by and among KannaLife Sciences, Inc., CannaVEST Corp. and Medical Marijuana, Inc. |
10.5 (5) |
|
Non-Exclusive License and Distribution Agreement by and between the Company and HempMeds PX, LLC, dated August 9, 2013 and effective as of July 1, 2013. + |
10.6 (2) |
|
CannaVEST Corp. 2013 Equity Incentive Plan. |
10.7 (6) |
|
Amended and Restated Equity Incentive Plan of CannaVEST Corp. |
10.8 (7) |
|
Form of Stock Option Award Grant Notice and Form of Stock Award Agreement. |
14.1(8) |
|
CannaVEST Corp. Code of Ethics. |
21.1* |
|
List of Subsidiaries |
23.1 |
|
Consent of Independent Registered Accounting Firm. |
31.1* |
|
Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
31.2* |
|
Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
32.1* |
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* |
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 INS |
|
XBRL Instance Document** |
101 SCH |
|
XBRL Schema Document** |
101 CAL |
|
XBRL Calculation Linkbase Document** |
101 LAB |
|
XBRL Labels Linkbase Document** |
101 PRE |
|
XBRL Presentation Linkbase Document** |
101 DEF |
|
XBRL Definition Linkbase Document** |
* Filed herewith.
** The XBRL related information in Exhibit
101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended,
or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document
pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing
or document.
+ Portions of this exhibit have been omitted
pursuant to a request for confidential treatment and the non-public information has been filed separately with the Commission.
|
(1) |
Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on August 13, 2013. |
|
(2) |
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 31, 2013. |
|
(3) |
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on November 30, 2012. |
|
(4) |
Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on March 8, 2013. |
|
(5)
(6)
(7) |
Incorporated by reference from
an exhibit to our Quarterly Report on Form 10-Q filed on November 14, 2013.
Incorporated by reference from
an exhibit to our Schedule 14A filed on July 2, 2014.
Incorporated by reference from
an exhibit to our Form S-8 filed on October 6, 2014. |
|
(8) |
Incorporated by reference from an exhibit to our Annual Report on Form 10-K filed on April 16, 2013. |
* Filed herewith.
CANNAVEST CORP. AND SUBSIDIARIES
Index to Financial Statements
Annual Financial Statements |
Page |
Report of Independent Registered Public Accounting Firm |
F-2 |
Consolidated Balance Sheets as of December 31, 2014 and 2013 |
F-3 |
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 |
F-4 |
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2014 and 2013 |
F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 |
F-6 - F-7 |
Notes to Consolidated Financial Statements |
F-8 |
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of CannaVest Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets
of CannaVest Corp. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated
statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two-year
period ended December 31, 2014. CannaVest Corp.’s management is responsible for these consolidated financial statements.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of CannaVEST Corp. and subsidiaries as of December 31,
2014 and 2013, and the results of its operations and its cash flows for each of the years in the two-year period ended December
31, 2014, in conformity with accounting principles generally accepted in the United States of America.
|
/s/ PKF |
San Diego, California |
PKF |
March 31, 2015 |
Certified Public Accountants |
|
A Professional Corporation |
CANNAVEST CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
December 31, 2014 | | |
December 31, 2013 | |
Assets | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash (Note 2) | |
$ | 2,302,418 | | |
$ | 2,243,670 | |
Accounts receivable, net (Note 2) | |
| 282,407 | | |
| 1,430,202 | |
Notes receivable - current portion (Note 3) | |
| 1,508,468 | | |
| – | |
Prepaid inventory | |
| 519,620 | | |
| 1,734,831 | |
Inventory (Note 4) | |
| 11,666,251 | | |
| 2,473,322 | |
Prepaid expenses and other current assets | |
| 527,104 | | |
| 174,317 | |
Total current assets | |
| 16,806,268 | | |
| 8,056,342 | |
| |
| | | |
| | |
Property & equipment, net (Note 2) | |
| 516,423 | | |
| 214,128 | |
Intangibles, net (Note 6) | |
| 2,535,000 | | |
| 3,356,500 | |
Goodwill (Note 6) | |
| 1,855,512 | | |
| 1,855,512 | |
Accounts receivable, net of current portion | |
| – | | |
| 310,300 | |
Note receivable - long term portion (Note 3) | |
| 26,705 | | |
| – | |
Investment in KannaLife Sciences (Note 7) | |
| – | | |
| 439,246 | |
Total other assets | |
| 4,933,640 | | |
| 6,175,686 | |
| |
| | | |
| | |
Total assets | |
$ | 21,739,908 | | |
$ | 14,232,028 | |
| |
| | | |
| | |
Liabilities and stockholders' equity | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable | |
$ | 546,387 | | |
$ | 24,622 | |
Accrued expenses (Note 5) | |
| 118,206 | | |
| 222,703 | |
Common stock to be issued (Note 10) | |
| – | | |
| 175,000 | |
Amount due to related party | |
| – | | |
| 300 | |
Total current liabilities | |
| 664,593 | | |
| 422,625 | |
| |
| | | |
| | |
Non-current liabilities | |
| | | |
| | |
Line of credit - Roen Ventures, LLC, net of debt discount (Note 9) | |
| – | | |
| 5,502,595 | |
Total liabilities | |
| 664,593 | | |
| 5,925,220 | |
| |
| | | |
| | |
Commitments and contingencies (Note 12) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' equity (Note 10) | |
| | | |
| | |
Preferred stock, par value $0.0001; 10,000,000 shares authorized; no shares issued and outstanding | |
| – | | |
| – | |
Common stock, par value $0.0001; 190,000,000 shares authorized; 33,419,166 and 15,580,000 shares issued and outstanding as of December 31, 2014 and 2013, respectively | |
| 3,341 | | |
| 1,558 | |
Additional paid-in capital | |
| 24,828,337 | | |
| 10,749,662 | |
Accumulated deficit | |
| (3,756,363 | ) | |
| (2,444,412 | ) |
Total stockholders' equity | |
| 21,075,315 | | |
| 8,306,808 | |
Total liabilities and stockholders' equity | |
$ | 21,739,908 | | |
$ | 14,232,028 | |
See accompanying notes to consolidated financial
statements.
CANNAVEST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
For the years ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Product sales, net | |
$ | 10,190,667 | | |
$ | 2,154,063 | |
Cost of goods sold | |
| 4,387,002 | | |
| 880,470 | |
Gross Profit | |
| 5,803,665 | | |
| 1,273,593 | |
| |
| | | |
| | |
Operating Expenses: | |
| | | |
| | |
Selling, general and administrative | |
| 13,357,633 | | |
| 2,366,450 | |
Research and development | |
| 999,280 | | |
| 524,476 | |
Total Operating Expenses | |
| 14,356,913 | | |
| 2,890,926 | |
| |
| | | |
| | |
Operating Loss | |
| (8,553,248 | ) | |
| (1,617,333 | ) |
| |
| | | |
| | |
Other income (expense): | |
| | | |
| | |
Interest income | |
| 30,703 | | |
| – | |
Interest expense | |
| (615,344 | ) | |
| (372,109 | ) |
Allocated losses on KannaLife Sciences investment | |
| (38,552 | ) | |
| (310,754 | ) |
Gain on sale of KannaLife Sciences investment (Note 7) | |
| 7,899,306 | | |
| – | |
Other | |
| (34,816 | ) | |
| – | |
Total Other Income (Expense) | |
| 7,241,297 | | |
| (682,863 | ) |
| |
| | | |
| | |
Loss before taxes | |
| (1,311,951 | ) | |
| (2,300,196 | ) |
Provision for income taxes | |
| – | | |
| – | |
Net Loss | |
$ | (1,311,951 | ) | |
$ | (2,300,196 | ) |
| |
| | | |
| | |
Weighted average common shares outstanding | |
| | | |
| | |
Basic | |
| 31,581,101 | | |
| 9,879,098 | |
Net income per common share | |
| | | |
| | |
Basic | |
$ | (0.04 | ) | |
$ | (0.23 | ) |
See accompanying notes to consolidated financial
statements.
CANNAVEST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2014 AND
2013
| |
Common Stock | | |
Additional
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| |
Balance - December 31, 2012 | |
| 7,000,000 | | |
$ | 700 | | |
$ | 143,447 | | |
$ | (144,216 | ) | |
$ | (69 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued pursuant to PhytoSPHERE acquisition (Note 6) | |
| 5,825,000 | | |
| 582 | | |
| 7,069,418 | | |
| – | | |
| 7,070,000 | |
Shares issued for cash (net of expenses) (Note 10) | |
| 2,750,000 | | |
| 275 | | |
| 2,731,148 | | |
| – | | |
| 2,731,423 | |
Restricted shares issued under employment agreement (Note 10) | |
| 5,000 | | |
| 1 | | |
| 5,649 | | |
| – | | |
| 5,650 | |
To record beneficial conversion feature of debt (Note 9) | |
| – | | |
| – | | |
| 800,000 | | |
| – | | |
| 800,000 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (2,300,196 | ) | |
| (2,300,196 | ) |
Balance - December 31, 2013 | |
| 15,580,000 | | |
| 1,558 | | |
| 10,749,662 | | |
| (2,444,412 | ) | |
| 8,306,808 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for cash (net of expenses) (Note 10) | |
| 8,031,666 | | |
| 803 | | |
| 8,421,697 | | |
| – | | |
| 8,422,500 | |
Shares issued for conversion of note from Roen Ventures, LLC (Note 9) | |
| 10,000,000 | | |
| 1,000 | | |
| 5,999,000 | | |
| – | | |
| 6,000,000 | |
Shares issued pursuant to employment agreement (Note 10) | |
| 7,500 | | |
| – | | |
| 42,125 | | |
| – | | |
| 42,125 | |
Shares received in exchange for sale of equity investment (Note 7) | |
| (500,000 | ) | |
| (50 | ) | |
| (8,299,950 | ) | |
| – | | |
| (8,300,000 | ) |
Stock-based compensation (Note 11) | |
| 300,000 | | |
| 30 | | |
| 7,915,803 | | |
| – | | |
| 7,915,833 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (1,311,951 | ) | |
| (1,311,951 | ) |
Balance - December 31, 2014 | |
| 33,419,166 | | |
$ | 3,341 | | |
$ | 24,828,337 | | |
$ | (3,756,363 | ) | |
$ | 21,075,315 | |
See accompanying notes to consolidated financial
statements.
CANNAVEST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
For the years ended December 31, | |
| |
2014 | | |
2013 | |
OPERATING ACTIVITIES | |
| | | |
| | |
Net loss | |
$ | (1,311,951 | ) | |
$ | (2,300,196 | ) |
Adjustments to reconcile net loss to net cash flows used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 933,600 | | |
| 767,254 | |
Amortization of debt discount | |
| 589,474 | | |
| 210,526 | |
Stock issued pursuant to employment agreement | |
| 42,125 | | |
| 5,650 | |
Stock-based compensation | |
| 7,915,833 | | |
| – | |
Loss on equity investment | |
| 38,552 | | |
| 310,754 | |
Gain on sale of equity investment | |
| (7,899,306 | ) | |
| – | |
Bad debt expense | |
| (300,000 | ) | |
| 400,000 | |
Other | |
| 34,816 | | |
| – | |
Change in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 1,205,952 | | |
| (1,744,064 | ) |
Prepaid inventory | |
| 1,215,211 | | |
| (474,321 | ) |
Inventory | |
| (9,192,929 | ) | |
| (2,127,845 | ) |
Prepaid expenses and other current assets | |
| (352,787 | ) | |
| (174,317 | ) |
Accounts payable | |
| 190,859 | | |
| 24,622 | |
Accrued expenses | |
| 178,552 | | |
| 222,703 | |
Net cash used in operating activities | |
| (6,711,999 | ) | |
| (4,879,234 | ) |
| |
| | | |
| | |
INVESTING ACTIVITIES | |
| | | |
| | |
Cash received on acquisition | |
| – | | |
| 50,775 | |
Purchase of equipment | |
| (449,211 | ) | |
| (226,594 | ) |
Cash paid on PhytoSPHERE Agreement | |
| – | | |
| (950,000 | ) |
Investment in KannaLife Sciences | |
| – | | |
| (750,000 | ) |
Issuance of note receivable | |
| (1,200,000 | ) | |
| – | |
Repayment of principal on Dixie note receivable | |
| 264,827 | | |
| – | |
Net cash flows used in investing activities | |
| (1,384,384 | ) | |
| (1,875,819 | ) |
| |
| | | |
| | |
FINANCING ACTIVITIES | |
| | | |
| | |
Common stock issued for cash | |
| 8,247,500 | | |
| 2,731,423 | |
Proceeds of loan from Roen Ventures | |
| – | | |
| 6,192,069 | |
Repayment of loan to Roen Ventures | |
| (92,069 | ) | |
| (100,000 | ) |
Common stock to be issued | |
| – | | |
| 175,000 | |
Repayment of loan from related party | |
| (300 | ) | |
| (200 | ) |
Net cash flows from financing activities | |
| 8,155,131 | | |
| 8,998,292 | |
CANNAVEST CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS –
Continued
| |
For the years ended December 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Net increase in cash | |
| 58,748 | | |
| 2,243,239 | |
Cash, beginning of year | |
| 2,243,670 | | |
| 431 | |
Cash, end of year | |
$ | 2,302,418 | | |
$ | 2,243,670 | |
| |
| | | |
| | |
Supplemental disclosures of non-cash transactions: | |
| | | |
| | |
Value of debt discount | |
$ | – | | |
$ | 800,000 | |
Accounts receivable assumed from acquisition | |
| – | | |
| 396,438 | |
Inventory assumed from acquisition | |
| – | | |
| 345,477 | |
Prepaid inventory assumed from acquisition | |
| – | | |
| 1,260,510 | |
Property and equipment assumed from acquisition | |
| – | | |
| 1,288 | |
Goodwill | |
| – | | |
| 1,855,512 | |
Intangible assets acquired from acquisition | |
| – | | |
| 4,110,000 | |
Amount due to PhytoSPHERE Agreement | |
| – | | |
| (1,314,878 | ) |
Common Shares issued for acquisition | |
| – | | |
| 7,070,000 | |
Conversion of Line of credit – Roen Ventures, LLC to common stock | |
| 6,000,000 | | |
| – | |
Conversion of accounts receivable to note receivable | |
| (600,000 | ) | |
| – | |
Common stock to be issued | |
| (175,000 | ) | |
| – | |
Common stock received in exchange for sale of investment | |
| 8,300,000 | | |
| – | |
| |
| | | |
| | |
Supplemental cash flow disclosures: | |
| | | |
| | |
Interest paid | |
$ | 187,453 | | |
$ | – | |
Taxes paid | |
| – | | |
| – | |
See accompanying notes to consolidated financial
statements.
CANNAVEST CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1. |
ORGANIZATION AND BUSINESS |
CannaVest Corp. (formerly Foreclosure
Solutions, Inc.) (the “Company”, “we” or “us”) was originally 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. The sole director, the President, Secretary and Treasurer was H.J. Cole (“Cole”). On
March 31, 2011 the Company filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”).
The SEC declared the Registration Statement effective on July 29, 2011.
On November 16, 2012, Mai Dun
Limited, LLC, Mercia Holdings, LLC, General Hemp, LLC and Bamburgh Holdings, LLC (the “Buyers”) acquired a total of
5,000,000 shares of common stock from Cole pursuant to that certain Stock Purchase Agreement by and among the Buyers, Cole and
CannaVest Corp., a Texas Corporation. Concurrently with the purchase, the Buyers acquired an additional 1,979,900 shares of common
stock of the Company from other shareholders in a series of private transactions. An aggregate total of 6,979,900 shares of the
Company were purchased for a total purchase price of $375,000. Upon completion of the purchase, the Buyers collectively acquired
99.7% of the total issued and outstanding shares of common stock of the Company. 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 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 the Company acquired certain assets of PhytoSPHERE. The
closing occurred on January 29, 2013. Throughout the year ended December 31, 2013, the Company issued 5,825,000 shares of common
stock and paid $950,000 as payment for the assets purchased.
On July 25, 2013, the Company’s
predecessor, CannaVest Corp., a Texas corporation (“CannaVest Texas”), merged with the Company, a wholly-owned Delaware
subsidiary of CannaVest Texas, to effectuate a change in the Company’s state of incorporation from Texas to Delaware.
The Company’s business
is that of developing, producing, marketing and selling end consumer products to the nutraceutical industry containing hemp plant
extract, Cannabidiol (“CBD”) and reselling to third parties raw product acquired by the Company pursuant to its supply
relationships in Europe. The Company is currently establishing pilot hemp growing operations in the United States with the goal
of establishing industrial hemp operations nationally in the near future.
|
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
- The consolidated financial statements include the accounts of CannaVest Corp. and its wholly-owned subsidiaries US Hemp Oil,
LLC, CannaVest Laboratories, LLC and Plus CBD, LLC (collectively, the “Company”). All intercompany accounts and transactions
have been eliminated in consolidation. The Company commenced commercial operations on January 29, 2013.
Business Acquisition
- We have accounted for the acquisition of the assets of PhytoSPHERE Systems, LLC in accordance with the Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations (“ASC Topic 805”). ASC Topic 805 establishes principles
and requirements for recognizing and measuring the total consideration transferred to and the assets acquired, liabilities assumed
and any non-controlling interests in the acquired target in an asset purchase. ASC Topic 805 also provides guidance for recognizing
and measuring goodwill acquired and other tangible and intangible assets. (Note 6)
Investments - The
Company had 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.
Use of Estimates
- The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”). The preparation of these 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.
Cash and Cash Equivalents
- For purposes of the consolidated 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 December
31, 2014 and 2013, the Company had no cash equivalents.
Concentrations of Credit
Risk - As of December 31, 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. The Company’s cash balance in excess of FDIC limits totaled
$2,130,366 at December 31, 2014.
At December 31, 2014 the Company
has a $1,200,000 note receivable related to a single customer, MediJane Holdings, Inc. In addition, one customer represented 62%
of our accounts receivable balance at December 31, 2014. Sales from two customers accounted for 65% of total sales for the year
ended December 31, 2014 (Note 8).
Accounts Receivable
– Generally, the Company requires payment prior to shipment. However, in certain circumstances, the Company grants credit
to companies located throughout the U.S. Accounts receivable consists of trade accounts arising in the normal course of business.
Accounts receivable are unsecured and 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 quarterly basis.
Management has determined 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. As of December 31, 2014 and 2013, the Company has recorded an allowance
for doubtful accounts related to accounts receivable in the amount of $100,000 and $400,000, respectively.
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.
Shipping
and Handling – Shipping and handling costs totaled $57,885 and $19,301 for the years ended December 31, 2014
and 2013, respectively, and are recorded in selling, general and administrative expense.
Returns
- Finished Products - Within ten (10) days of customer’s receipt of Company’s finished products, customers
may return (i) finished products that do not conform to Company’s product specifications or (ii), finished products which
are defective, provided that notice of condition is given within five (5) days of receiving the finished products. The failure
to comply with the foregoing time requirements shall be deemed a waiver of customer’s claim for incorrect or defective shipments.
In the event of the existence of one or more material defects in any finished product upon delivery to customer, the Company shall,
at its sole option and cost, either (a) take such measures as are required to cure the defect(s) designated in the notice, or (b)
replace such defective finished product(s). The Company may, at its sole option, require the return or destruction of the defective
finished products. Customer shall afford the Company the opportunity to verify that such defects existed prior to shipment and
were not, for purposes of example and not limitation, the result of improper transport, handling, storage, product rotation or
misuse by customer.
Bulk Oil Products - All
sales of bulk oil products are final, and the Company does not accept returns under any circumstances.
There is no allowance for customer
returns at December 31, 2014 or 2013 due to insignificant return amounts experienced during the years ended December 31, 2014 and
2013.
Compensation and Benefits
- The Company records compensation and benefits expense for all cash and deferred compensation, benefits, and related taxes as
earned by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors
who perform similar services to those performed by the Company’s employees, primarily information technology and project
management activities.
Stock-Based Compensation
- Certain employees, officers, directors and consultants of the Company participate in various long-term incentive plans that provide
for granting stock options and restricted stock awards. Stock options generally vest in equal increments over a two- to four-year
period and expire on the tenth anniversary following the date of grant. Restricted stock awards generally vest 100% at the grant
date.
The Company recognizes stock-based
compensation for equity awards granted to employees, officers, and directors as compensation and benefits expense on the consolidated
statements of operation. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant.
The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant. Stock-based
compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.
The Company recognizes stock-based
compensation for equity awards granted to consultants as selling, general and administrative expense on the consolidated statements
of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant and unvested
awards are revalued at each reporting period. The fair value of restricted stock awards is equal to the closing price of the Company’s
stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite
service period of the individual awards, which generally equals the vesting period.
Inventory - Inventory
is stated at lower of cost or market, with cost being determined on average cost basis. There was no reserve for obsolete inventory
as of December 31, 2014 and 2013. Amounts paid to suppliers in advance for inventory is classified as prepaid inventory. Once the
Company has assumed ownership, the cost of prepaid inventory is reclassified to inventory. As of December 31, 2014, the Company
had $5,766,147 of inventory in Dusseldorf, Germany.
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. Tenant improvements are amortized on a straight-line basis over the remaining life of the related lease. 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).
Property and equipment,
net, at December 31, 2014 and 2013 were as follows:
| |
Useful Lives | |
2014 | | |
2013 | |
| |
| |
| | | |
| | |
Office furniture and equipment | |
3 years | |
$ | 231,440 | | |
$ | 5,159 | |
Tenant improvements | |
14 to 39 months | |
| 56,474 | | |
| – | |
Laboratory and other equipment | |
5 years | |
| 354,363 | | |
| 222,723 | |
| |
| |
| 642,277 | | |
| 227,882 | |
Less: accumulated depreciation | |
| |
| (125,854 | ) | |
| (13,754 | ) |
| |
| |
$ | 516,423 | | |
$ | 214,128 | |
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. During the years ended December 31, 2014 and 2013, there were no impairments.
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.
During the years ended December 31, 2014 and 2013 there were no impairments.
Long-Lived Assets
- In accordance with ASC Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews
property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of property and equipment is measured by comparing its carrying value to the undiscounted
projected future cash flows that the asset(s) are expected to generate. If the carrying amount of an asset is not recoverable,
we recognize an impairment loss based on the excess of the carrying amount of the long-lived asset over its respective fair value,
which is generally determined as the present value of estimated future cash flows or at the appraised value. The impairment analysis
is based on significant assumptions of future results made by management, including revenue and cash flow projections. Circumstances
that may lead to impairment of property and equipment include a significant decrease in the market price of a long-lived asset,
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition and
a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset including
an adverse action or assessment by a regulator.
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
has 6,470,000 of stock options outstanding that are anti-dilutive at December 31, 2014. The Company has no dilutive shares outstanding
at December 31, 2013.
Research and 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.
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 Company recognizes both interest and penalties related
to uncertain tax positions as part of the income tax provision. As of December 31, 2014 and 2013 the Company did not have a liability
for unrecognized tax uncertainties. The Company is subject to routine audits by taxing jurisdictions. Management believes the Company
is no longer subject to tax examinations for the years prior to 2010.
Recent Issued and Newly
Adopted Accounting Pronouncements
In February 2013, the
Financial Accounting Standards Board (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. The Company elected to adopt ASU No. 2013-04 during the first fiscal quarter of 2014. The adoption of this update did
not have a material impact on the Company’s 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 the Company’s consolidated financial statements.
In August 2014, the
Financial Accounting Standards Board, or the FASB, issued guidance requiring management to evaluate on a
regular basis whether any conditions or events have arisen that could raise substantial doubt about the entity’s
ability to continue as a going concern. The guidance (1) provides a definition for the term “substantial doubt,”
(2) requires an evaluation every reporting period, interim periods included, (3) provides principles for considering
the mitigating effect of management’s plans to alleviate the substantial doubt, (4) requires certain disclosures if
the substantial doubt is alleviated as a result of management’s plans, (5) requires an express statement, as well as
other disclosures, if the substantial doubt is not alleviated, and (6) requires an assessment period of one year from the
date the financial statements are issued. The standard is effective for the Company’s reporting year beginning January
1, 2017 and early adoption is permitted. The Company is currently evaluating the extent and impact on the Company’s
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.
Notes receivable at December
31, 2014 and 2013 are comprised of the following:
| |
2014 | | |
2013 | |
| |
| | |
| |
Dixie Botanicals note | |
$ | 335,173 | | |
$ | – | |
MediJane Holdings note | |
| 1,200,000 | | |
| – | |
| |
| 1,535,173 | | |
| – | |
| |
| | | |
| | |
Less current portion | |
| 1,508,468 | | |
| – | |
Long-term portion | |
$ | 26,705 | | |
$ | – | |
The Dixie Botanicals note relates
to an accounts receivable balance that was due on December 31, 2013. On January 10, 2014, Medical Marijuana, Inc. (“MJNA”)
agreed to assume $725,000 of the accounts receivable and wrote-off $11,496. MJNA paid the Company $125,000 on January 17, 2014
towards this balance. The remaining $600,000 is subject to a promissory note between the parties, whereby MJNA will make monthly
payments including interest at 7% per annum over a two year period. The note is secured by MJNA’s ownership share of the
Company, through MJNA’s subsidiary PhytoSPHERE Systems, LLC at two times the principal amount of the note as collateral.
The MediJane Holdings (“MJMD”)
note relates to the sale of Company products in exchange for a convertible promissory note in the amount of $1,200,000. The full
amount of $1,200,000 is due on June 23, 2015 along with accrued interest at 10%. The Company has the option to convert the full
amount of the note, along with accrued interest into shares, of common stock of MJMD.
Inventory at December 31, 2014
and 2013 is comprised of the following:
| |
2014 | | |
2013 | |
| |
| | |
| |
Raw materials | |
$ | 11,209,119 | | |
$ | 1,867,751 | |
Work in process | |
| – | | |
| 470,442 | |
Finished goods | |
| 457,132 | | |
| 135,129 | |
| |
$ | 11,666,251 | | |
$ | 2,473,322 | |
Accrued expenses at December
31, 2014 and 2013 were as follows:
| |
2014 | | |
2013 | |
| |
| | |
| |
Accrued interest | |
$ | – | | |
$ | 161,583 | |
Accrued payroll expenses | |
| 68,920 | | |
| 20,955 | |
Other accrued liabilities | |
| 49,286 | | |
| 40,165 | |
| |
$ | 118,206 | | |
$ | 222,703 | |
|
6. |
ACQUISITION OF ASSETS OF PHYTOSPHERE SYSTEMS, LLC |
On December 15, 2012, we entered
into an Agreement for Purchase and Sale of Assets (the “Purchase Agreement”) with PhytoSPHERE Systems, LLC, a Delaware
limited liability company (“PhytoSPHERE”), whereby on January 29, 2013 we acquired certain assets of PhytoSPHERE. Pursuant
to the Purchase Agreement, we acquired from PhytoSPHERE tangible equipment, inventory including 460 kg of raw hemp oil, all URLs
and domain names of PhytoSPHERE, all landline telephone numbers and postal addresses affiliated with PhytoSPHERE, an exclusive
license to use the names “PhytoSPHERE” and “PhytoSPHERE Systems” in the development and commercialization
of hemp-based products including CBD, existing bank accounts with a total balance of $50,775, vendor lists, permits, licenses and
other approvals, and all rights and obligations under existing and pending supply contracts. The Company purchased the assets of
PhytoSPHERE as the basis for adoption of the Company’s new business model, which is to manufacture, market and sell products
containing hemp oil. As part of the purchase price, the Company acquired intangible assets which could not be specifically identified
which has been classified as goodwill on the accompanying consolidated financial statements. Goodwill represents the residual value
after all identifiable assets were valued and what not valued independently and is primarily attributable to assembled workforce,
operating and process know-how and potential expansion into local and global markets. We expect goodwill to be deductible for tax
purposes.
As compensation for the purchase,
the Company issued 5,825,000 shares of common stock and paid $950,000 in cash.
The purchase price of the acquisition
was determined to be $8,020,000 based on management’s estimate of the fair market value of the business acquired. The fair
market value was determined to be the more appropriate basis of valuation as the Company’s common stock was not trading and
the Company had no operations at the time of acquisition in order to estimate a fair market value of Company common stock. The
Company’s common stock issued was contemporaneously valued with the purchase price of PhytoSPHERE.
The following is the allocation
of the purchase price:
Assets acquired | |
| | |
Tangible assets | |
| | |
Cash | |
$ | 50,775 | |
Accounts receivable | |
| 396,438 | |
Inventory | |
| 345,477 | |
Prepaid inventory | |
| 1,260,510 | |
Property and equipment | |
| 1,288 | |
Total tangible assets | |
| 2,054,488 | |
| |
| | |
Identifiable intangible assets | |
| | |
Vendor relationships | |
| 1,170,000 | |
Trade name | |
| 230,000 | |
Noncompete agreement - PhytoSPHERE | |
| 2,710,000 | |
Total identifiable intangible assets | |
| 4,110,000 | |
| |
| | |
Unidentifiable intangible assets | |
| | |
Goodwill residual estimate | |
| 1,855,512 | |
Total assets acquired from PhytoSPHERE | |
$ | 8,020,000 | |
Due to the complexity and limited
information available from the selling company of PhytoSPHERE, supplemental proforma information has not been presented. The operations
and management of PhytoSPHERE was not indicative of the current operations and strategy, accordingly, the proforma information
would not be indicative of future operations or be beneficial to the users of these financial statements.
We have amortized the identifiable
intangible assets using the straight-line method over a useful life of five years. We determined that the useful life of those
assets are based on the term of the noncompete agreement and estimated lives of relationships acquired. Amortization of intangible
assets is expected to be approximately $822,000 for the years ending December 31, 2015, 2016 and 2017 and $68,500 for the year
ending December 31, 2018.
Intangible assets consist of
the following at December 31, 2014 and 2013:
| |
Original Fair Market Value | | |
Accumulated Amortization | | |
Net | |
| |
| | |
| | |
| |
Balance - December 31, 2013: | |
| | | |
| | | |
| | |
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 | |
| |
| | | |
| | | |
| | |
Balance - December 31, 2014: | |
| | | |
| | | |
| | |
Vendor relationships | |
$ | 1,170,000 | | |
$ | 448,000 | | |
$ | 722,000 | |
Trade name | |
| 230,000 | | |
| 88,167 | | |
| 141,833 | |
Noncompete agreement | |
| 2,710,000 | | |
| 1,038,833 | | |
| 1,671,167 | |
| |
$ | 4,110,000 | | |
$ | 1,575,000 | | |
$ | 2,535,000 | |
Amortization expense for the
year ended December 31, 2014 and 2013 totaled $821,500 and $753,500, respectively.
|
7. |
KANNALIFE SCIENCES INVESTMENT |
During 2013, the Company invested
$750,000 in KannaLife Sciences, Inc. (“KannaLife”), which represented a 24.97% ownership stake. For the years ended
December 31, 2014 and 2013, the Company recognized its prorata share of KannaLife losses of $38,552 and $310,754, respectively.
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.
During the year ended December
31, 2013, the Company made a payment of $2,001 for rent expense to MonaCo Development, an entity owned 100% by Michael J. Mona,
Jr, the Company’s President and Chief Executive Officer. Additionally, the Company made a payment of $7,500 to Mr. Mona in
2013 for services provided prior to the consummation of an employment agreement between the Company and Mr. Mona.
During the year ended December
31, 2013, the Company paid a total of $30,000 to Mr. Stuart Titus, a stockholder of the Company, for consulting services provided.
As of December 31, 2014, Mr. Titus is no longer providing services to the Company.
Bart Mackay, a Board Director
of the Company owns 100% of Roen Ventures, LLC through two wholly-owned limited liability companies, Mai Dun, Ltd., and Mercia
Holdings, LLC. For the years ended December 31, 2014 and 2013, Mr. Mackay received $500 and $2,000, respectively, in fees paid
for services provided to the Company.
As of December 31, 2013, the
Company owed Roen Ventures, LLC a total of $6,092,069 under a Promissory Note (Note 9). Under the terms of the note, Roen Ventures,
LLC had the option to convert the balance owed, up to $6,000,000 into common shares of the Company at a conversion price of $0.60
per share. In addition, the Company owed Roen $161,583 in accrued interest under the note at December 31, 2013 and paid interest
totaling $187,723 in January 2014. The note was converted during 2014 (Note 10).
Michael J. Mona, Jr., the President
and Chief Executive Officer of the Company previously held a 50% interest in Roen Ventures, LLC which he subsequently sold to Mr.
Mackay during 2013.
For the years ended December
31, 2014 and 2013, the Company recognized sales to the following related parties which represented 100% of total sales recognized
in 2013:
| |
| |
For the years ended December 31, | |
Party | |
Relationship | |
2014 | | |
2013 | |
| |
| |
| | |
| |
Medical Marijuana, Inc. ("MJNA") | |
Stockholder | |
$ | – | | |
$ | 92,690 | |
HempMeds PX | |
80% owned by MJNA | |
| 5,443,978 | | |
| 871,315 | |
Dixie/Red Dice Holdings | |
60% owned by MJNA | |
| – | | |
| 365,058 | |
Canchew Biotechnologies | |
40% owned by MJNA | |
| – | | |
| 825,000 | |
| |
| |
$ | 5,443,978 | | |
$ | 2,154,063 | |
| |
| |
| | | |
| | |
| |
| |
| 53.4% | | |
| 100.0% | |
During 2014, the Company
discontinued sales to HempMeds PX (Note 12).
100% of the Company’s accounts
receivable at December 31, 2013 totaling $1,740,502 were from these parties. In addition, the Company had a note receivable from
Dixie Botanicals of $335,173 at December 31, 2014 (Note 3).
During the years ended December
31, 2014 and 2013, the Company paid $9,072,025 and $1,953,690, respectively, to a stockholder of the Company who is a supplier
of hemp oil and hemp to the Company.
On January 1, 2015, 250,000
shares of common stock was granted to the V.P. of Operations.
|
9. |
LINE OF CREDIT – ROEN VENTURES, LLC |
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. The Note was an unsecured obligation of the Company
accruing interest at 5% that was due on July 25, 2015. As previously disclosed in our Current Report on Form 8-K filed with the
SEC on July 31, 2013, the disinterested members of our Board of Directors (the “Board”) approved an amendment to the
terms of the Note to increase the credit line to $6,000,000 and provide for the ability of Roen Ventures to convert, at its sole
discretion, the outstanding balance of the Note into shares of the common stock of the Company at a conversion price determined
following the conclusion of a valuation of the Company’s common stock. The valuation determined pursuant to ASC 718 Stock
Compensation that the fair market value of our restricted common stock was $0.68 per share. On November 7, 2013, disinterested
members of the Board approved an amendment to the Note to allow for conversion of the Note at a conversion price equal to $0.60
per share, which represents a discount of approximately 12% off the fair market value of our restricted common stock.
The Company has determined that
the conversion feature is considered a beneficial conversion feature and determined its value on the date of the amendment for
$6,000,000 on July 25, 2013 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 amortized using the effective interest
method as interest expense over the remaining life of the Note or upon conversion, if sooner. The amortization of debt discounts
for the years ended December 31, 2014 and 2013 was $589,474 and $210,526, respectively, and is included in interest expense in
the accompanying consolidated statements of operations.
On January 22, 2014, Roen Ventures
LLC delivered a Notice of Election to Convert to Common Shares. As a result, in January 2014 the Company issued a total of 10,000,000
shares of the Company’s common stock under the terms of the Conversion Notice.
Common
Stock
The
Company is authorized to issue up to 190,000,000 shares of common stock (par value $0.0001). As of December 31, 2014 and 2013,
the Company had 33,419,166 and 15,580,000 shares of common stock issued and outstanding, respectively. During 2014, the Company
issued 8,039,166 shares of its common stock, of which 7,500 shares related to an employment agreement and 8,031,666 were pursuant
to a private placement offering. The Company had received payment of $175,000 toward the purchase of these shares at December 31,
2013. In addition, during 2014, 10,000,000 shares of the Company’s common stock were issued for a debt conversion (Note 9);
and, 300,000 shares were issued on October 31, 2014 at a price of $2.82 per share, the Company’s closing price for common
stock, for compensation to directors and officers.
The
Company issued a total of 7,500 and 5,000 shares of common stock under an employment agreement during the years ended December
31, 2014 and 2013, respectively. The agreement terminated in December 2014 and no further grants will be awarded under this agreement.
On November
7, 2013, the Board of Directors approved the terms of an offering of up to $10 million of its restricted common stock in a private
placement to accredited investors at a price of $1.00 per share. The offering was conducted pursuant to Rule 506(b) of Regulation
D, as promulgated by the SEC under the Securities Act of 1933, as amended. As of December 31, 2013, the Company sold a total of
2,750,000 shares under the offering and received net proceeds of $2,731,423. As of December 31, 2013, $175,000 was received for
175,000 shares that were issued subsequent to year end.
On January 28, 2015, we
commenced an offering whereby the Company intends to sell up to 12 million shares of its restricted common stock in a
private placement to accredited investors at a price per share of $2.00 (the “Offering”). The issuance of the
shares in connection with the Offering was exempt from registration under the Securities Act of 1933, as amended (the
“Act”), in reliance on exemptions from the registration requirement of the Act in transaction not involve in a
public offering pursuant to Rule 506(b) of Regulation D, as Promulgated by the Securities and Exchange Commission under the
Act.
As of March 31, 2015, the Company
sold an aggregate of 1,260,000 shares of its restricted common stock pursuant to the Offering to 27 investors for an aggregate
purchase price of $2,520,000.
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. 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. As of
December 31, 2014 and 2013 there is no preferred stock issued and outstanding.
Options/Warrants
On July
23, 2014, Company shareholders approved the Amended and Restated Equity Incentive Plan, which provides for the granting of stock
options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. This plan serves as
the successor to the 2013 Equity Incentive Plan (Note 11).
|
11. |
STOCK-BASED COMPENSATION |
On July 23, 2014, Company shareholders
approved the Amended and Restated Equity Incentive Plan (the “Amended 2013 Plan”), which provides for the granting
of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. The Amended
2013 Plan serves as the successor to the 2013 Equity Incentive Plan. There were no option awards under the 2013 Equity Incentive
Plan. Under the Amended 2013 Plan, the Company may grant up to 10,000,000 new stock. As of December 31, 2014,
the Company had approximately 3,530,000 of authorized unissued shares reserved and available for issuance upon exercise and
conversion of outstanding awards.
The stock options are exercisable
at no less than the fair market value of the underlying shares on the date of grant, and restricted stock and restricted stock
units are issued at a value not less than the fair market value of the common stock on the date of the grant. Generally, stock
options awarded are vested in equal increments ranging from two to four years on the annual anniversary date on which such equity
grants were awarded. The stock options generally have a maximum term of 10 years. The following table summarizes stock option activity
for the Amended 2013 Plan during the year ended December 31, 2014:
| |
Number of Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contract Term (Years) | | |
Aggregate
Intrinsic Value | |
| |
| | |
| | |
| | |
| |
Outstanding - December 31, 2013 | |
| – | | |
| – | | |
| | | |
| | |
Granted | |
| 6,470,000 | | |
$ | 2.70 | | |
| | | |
| | |
Exercised | |
| – | | |
| – | | |
| | | |
| | |
Forfeited | |
| – | | |
| – | | |
| | | |
| | |
Expired | |
| – | | |
| – | | |
| | | |
| | |
Outstanding - December 31, 2014 | |
| 6,470,000 | | |
$ | 2.70 | | |
| 9.88 | | |
$ | – | |
| |
| | | |
| | | |
| | | |
| | |
Total exercisable - December 31, 2014 | |
| 3,048,869 | | |
$ | 2.66 | | |
| 9.93 | | |
$ | – | |
Total unvested - December 31, 2014 | |
| 3,421,131 | | |
$ | 2.74 | | |
| 9.84 | | |
$ | – | |
Total vested or expected to vest - December 31, 2014 | |
| 6,470,000 | | |
$ | 2.70 | | |
| 9.88 | | |
$ | – | |
The following table
summarizes unvested stock options as of December 31, 2014:
| |
Number of Shares | | |
Weighted Average Fair Value Per Share on Grant Date | |
| |
| | |
| |
Unvested stock options - December 31, 2013 | |
| – | | |
$ | – | |
Granted | |
| 6,470,000 | | |
| 2.22 | |
Vested | |
| 3,048,869 | | |
| 2.11 | |
Forfeited | |
| – | | |
| – | |
Unvested stock options - December 31, 2014 | |
| 3,421,131 | | |
$ | 2.31 | |
The following table presents
the weighted-average assumptions used by the Company for calculating the fair value of its employee, non-employee, officer and
director stock options using the Black-Scholes valuation model that have been granted during the year ended December 31,
2014:
| |
Employees Weighted Average | |
Non-Employees Weighted Average |
| |
| |
|
Volatility | |
103.48% | |
96.69% |
Risk-Free Interest Rate | |
1.81% | |
2.31% |
Expected Term | |
5.32 | |
10.00 |
Dividend Rate | |
0.00% | |
0.00% |
Fair Value Per Share on Grant Date | |
$2.21 | |
$2.45 |
The risk-free interest rates
are based on the implied yield available on U.S. Treasury constant maturities with remaining terms equivalent to the respective
expected terms of the options. The Company estimates the expected term for stock options awarded to employees, non-employees, officers
and directors using the simplified method in accordance with Staff Accounting Bulletin 110, Certain Assumptions
Used in Valuation Methods, because the Company does not have sufficient relevant historical information to develop reasonable
expectations about future exercise patterns. The Company estimates the expected term for stock options awarded to employees, non-employees,
officers and directors using the contractual term. Expected volatility is calculated based on the Company’s peer group, consisting
of five companies in the industry in which the Company does business because the Company does not have sufficient historical volatility
data. The Company will continue to use peer group volatility information until historical volatility of the Company is available
to measure expected volatility for future grants. In the future, as the Company gains historical data for volatility of its own
stock and the actual term over which stock options are held, expected volatility and the expected term may change, which could
substantially change the grant-date fair value of future stock option awards, and, consequently, compensation of future grants.
The Company recognized $7,069,833
relating to stock options and $888,125 relating to common stock issued to employees, non-employees, officers, and directors during
the year ended December 31, 2014. For the year ended December 31, 2014, stock-based compensation of $7,851,685 and $64,148,
was expensed to Selling, General and Administration and Research and Development, respectively. As of December 31, 2014, total
unrecognized compensation cost related to non-vested stock-based compensation arrangements granted to employees, officers, and
directors was $7,251,258, which is expected to be recognized over a weighted-average period of 2.28 years.
|
12. |
COMMITMENTS AND CONTINGENCIES |
Commitments
The Company has non-cancelable
operating leases, which expire through 2017. The leases generally contain renewal options ranging from 1 to 3 years and require
the Company to pay costs such as real estate taxes and common area maintenance. The following table provides the Company’s
lease commitments at December 31, 2014:
For the years ending December 31, | |
Total Operating Leases | |
| |
| |
2015 | |
$ | 383,446 | |
2016 | |
| 427,914 | |
2017 | |
| 206,482 | |
| |
$ | 1,017,842 | |
The Company incurred rent expense
of $285,960 and $99,080 for the years ended December 31, 2014 and 2013, respectively.
The Company is a party to a contract
for the growth and processing of 2,600 kilograms of product currently being delivered and scheduled to be delivered through August
31, 2015. The total amount left to be paid under this contract is approximately $7.2 million through December 2015. The Company
is party to a second purchasing contract to provide up to 1 million kilograms of raw product to the Company. There is approximately
$1.8 million remaining to be paid under this second contract through December 31, 2015. We have contractual rights for the growth
and processing of hemp oil for delivery through October 2018 under both of these contracts. We anticipate the cost under both contracts
will remain consistent with current year prices.
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. Although Far West’s counsel thereafter filed a Third Amended Complaint which improperly sought to re-name
the Company as a defendant, on October 16, 2014, Far West filed a dismissal of the Company after the Company threatened to bring
a motion for sanctions for violating the Court order of May 13, 2014. Accordingly, the Company has been formally dismissed
from the action.
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. After a hearing held on August 14, 2014, the Court took the matter under submission. On March 19, 2015, the Court
issued a ruling appointing Steve Schuck as lead plaintiff and setting an initial pre-trial conference for April 30, 2015.
The Company has not yet answered the Complaint but management intends to vigorously defend the allegations and an estimate of the
possible loss cannot be made at this time.
On
March 17, 2015, shareholder Michael Ruth filed a shareholder derivative suit in Nevada District Court alleging two causes of action:
1) Breach of Fiduciary Duty, and 2) “Gross Mismanagement.” The claims are premised on the same event as the already-pending
securities class action case in New York – it is alleged that the Form 8-K filings misstated goodwill and sales of the Company,
which when corrected, lead to a significant drop in stock price. The Company has not been served with the Complaint but intends
to vigorously defend the case after service is made.
On August
11, 2014, we terminated the Non-Exclusive License and Distribution Agreement with HempMeds PX, LLC (the “HempMeds Agreement”).
On or about August 13, 2014, HempMeds PX, LLC (“HempMeds”) demanded arbitration against us and recommended that the
parties engage Private Trials in Las Vegas, Nevada to conduct the arbitration, denying that HempMeds was in breach of the HempMeds
Agreement. On August 22, 2014, HempMeds filed a complaint in the Eighth Judicial District, Clark County, Nevada (the “Nevada
Complaint”) against us for breach of the HempMeds Agreement, unjust enrichment, and interference with prospective business
advantage, claiming that it had satisfied all of its obligations under the HempMeds Agreement and that we breached that agreement
by terminating it without just cause. Concurrently, HempMeds filed a Motion for Preliminary Injunction, asking the Court
to reinstate the HempMeds Agreement, namely the provision that identified HempMeds as the exclusive on-line seller of certain products
of the Company. The court denied HempMeds’ motion on October 3, 2014. We have not yet answered the Nevada Complaint
because the parties have agreed to arbitration and are attempting to resolve the issue of where the arbitration will be held.
We deny HempMeds’ claims and intend to vigorously defend the allegations and file appropriate counter-claims. Since
the action was recently filed and no discovery has been conducted, an estimate of the possible loss or recovery cannot be made
at this time.
On September 11, 2014, we filed
a complaint for trademark infringement against Kannaway, LLC, General Hemp, LLC and HDDC Holdings, LLC (collectively, “defendants”)
in the United States District Court, Southern District of California, asserting that defendants have infringed on the Company’s
Cannabis Beauty® and Cannabis Beauty Defined trademarks. The Company alleges, among other things, that defendant HDDC
Holdings, LLC (“HDDC”) assigned its rights in the CANNABIS BEAUTY DEFINED® mark to the Company (the “HDDC
Assignment”) which was promptly filed with the USPTO but, despite the foregoing, HDDC’s sister company, defendant Kannaway,
LLC (“Kannaway”), is improperly using the trademark on personal care products in competition with the Company.
On February 20, 2015, Defendants filed a counterclaim against the Company, asserting that the HDDC Assignment was signed under
“duress” and that HDDC licensed the mark to the other defendants for 50 years before it assigned the mark to the Company.
Lastly, Counterclaimants assert claims for unfair competition against the Company, although they do not identify the commercial
activity giving rise to the claim. We filed a Motion to Dismiss the counterclaim which will be heard on April 17, 2015.
On February 12, 2015, the Court granted our motion for preliminary injunction, enjoining defendants from using the Cannabis Beauty
Defined trademark or any confusingly similar mark. The Company has posting an undertaking for $1.2M to secure the preliminary
injunction under FRCP 65(c). Management intends to vigorously prosecute this complaint and defend the counterclaims.
Since no discovery has been conducted, an estimate of the possible recovery or loss cannot be made at this time.
Deferred tax assets and liabilities
are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. The
Company periodically assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all
available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates
of future taxable income and ongoing prudent and feasible profits. At December 31, 2014 and 2013, the Company established valuation
allowances equal to the full amount of its deferred tax assets due to the uncertainty of the utilization of the net operating losses
in future periods.
| |
2014 | | |
2013 | |
| |
| | |
| |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 1,083,064 | | |
$ | 466,161 | |
Allowance for doubtful accounts | |
| 39,834 | | |
| 159,338 | |
Intangible assets | |
| 310,548 | | |
| 141,730 | |
Investment in KannaLife Sciences | |
| – | | |
| 123,787 | |
Stock-based compensation | |
| 128,703 | | |
| – | |
Other | |
| 33,596 | | |
| 113,399 | |
| |
| 1,595,745 | | |
| 1,004,415 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Property and equipment | |
| (85,217 | ) | |
| (43,658 | ) |
Total deferred tax assets | |
| 1,510,528 | | |
| 960,757 | |
Valuation allowance | |
| (1,510,528 | ) | |
| (960,757 | ) |
Net deferred tax assets | |
$ | – | | |
$ | – | |
The valuation allowance increased
$549,771 and $910,281 for years ended December 31, 2014 and 2013, respectively.
At December 31, 2014, the Company
has Federal and state net operating loss (“NOL”) carryforwards of approximately $2,753,000 and $2,522,000, respectively,
which are available to offset future taxable income and which begin to expire in 2023. These loss carryforwards will likely be
further limited pursuant to Internal Revenue Code Section 382 due to the change in control.
The differences between the expected
income tax benefit and the actual recorded income tax benefit computed using a statutory federal rate of 34% is as follows for
the years ended December 31,
| |
2014 | | |
2013 | |
| |
| | |
| |
Income tax benefit at statutory rate | |
$ | (444,442 | ) | |
$ | (782,067 | ) |
State taxes | |
| (94,475 | ) | |
| (132,094 | ) |
Stock-based compensation | |
| 2,293,891 | | |
| – | |
Investment in KannaLife Sciences | |
| (2,567,000 | ) | |
| – | |
Amortization of discount on convertible note | |
| 200,421 | | |
| 3,880 | |
Permanent differences | |
| (8,114 | ) | |
| – | |
Other | |
| 69,948 | | |
| – | |
Change in valuation allowance | |
| 549,771 | | |
| 910,281 | |
Total provision | |
$ | – | | |
$ | – | |
On February 23, 2015, we signed
an amended lease for our laboratory facility in San Diego, California. Pursuant to the term of the lease, we will lease an additional
704 square feet of laboratory space for an additional $1,478 per month. The term of the lease commenced on March 1, 2015 with a
term of 22 months through December 31, 2016.
On January 28, 2015, we commenced
an offering whereby the Company intends to sell up to 12 million shares of its restricted common stock in a private placement
to accredited investors at a price per share of $2.00 (Note 10).
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We hereby consent to the incorporation
by reference in the Registration Statement on Form S-8 (No. 333-199173), pertaining to the CannaVEST Corp. 2013 Amended and Restated
Equity Incentive Plan, of our report dated March 31, 2015, relating to the consolidated financial statements of CannaVEST Corp.
and Subsidiaries included in the Annual Report on Form 10-K for the year ended December 31, 2014.
San Diego, California
March 31, 2015 |
/s/ PKF
PKF
Certified Public Accountants
A Professional Corporation
|
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a)
AND 15(d)-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Michael J. Mona, Jr., President and
Chief Executive Officer of CannaVest, Corp. (the “Company”) certify that:
1. I have reviewed
this report on Form 10-K of the Company;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s
other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
|
Dated: March 31, 2015 |
By: |
/s/ Michael J. Mona, Jr. |
|
|
Michael J. Mona, Jr.
President and Chief Executive Officer
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13a-14(a)
AND 15(d)-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
I, Joseph D. Dowling, Chief Financial Officer
of CannaVest Corp. (the “Company”) certify that:
1. I have reviewed
this report on Form 10-K of the Company;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s
other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
|
Dated: March 31, 2015 |
By: |
/s/ Joseph D. Dowling |
|
|
Joseph D. Dowling
Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with
the Annual Report of CannaVest Corp. (the “Registrant”) on Form 10-K for the year ended December 31, 2014 (the “Report”),
I, Michael J. Mona, Jr., President and Chief Executive Officer of the Registrant, do hereby certify, pursuant to 18 U.S.C. §1350,
as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) the Report, as
filed with the Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
|
|
Dated: March 31, 2015 |
By: |
/s/ Michael J. Mona, Jr. |
|
|
Michael J. Mona, Jr.
President and Chief Executive Officer
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with
the Annual Report of CannaVest Corp. (the “Registrant”) on Form 10-K for the year ended December 31, 2014 (the “Report”),
I, Joseph D. Dowling, Chief Financial Officer of the Registrant, do hereby certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) the Report, as
filed with the Securities and Exchange Commission, fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
|
|
Dated: March 31, 2015 |
By: |
/s/ Joseph D. Dowling |
|
|
Joseph D. Dowling
Chief Financial Officer (Principal Financial Officer) |
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