WASHINGTON, D.C. 20549
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.
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, 2015, the aggregate market value of the voting and nonvoting common equity held
by nonaffiliates of the issuer was $11,994,718.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date.
As of April 14, 2016, the issuer
had 51,513,924 shares of issued and outstanding common stock, par value $0.0001.
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.
This Annual Report on Form 10-K, the other
reports, statements, and information that the Company has previously filed with or furnished to, or that we may subsequently file
with or furnish to, the SEC and public announcements that we have previously made or may subsequently make include, may include,
or may incorporate by reference certain statements that may be deemed to be “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended, and that are intended to enjoy the protection of the
safe harbor for forward-looking statements provided by that Act. 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 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 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, except for the judgment against Mr. Mona in 2012 in
connection with the lawsuit filed by Far West Industries, as previously reported by the Company in its Annual Report on Form
10-K filed with the SEC for the fiscal year ended December 31, 2014, and other filings made by the Company pursuant to the
Exchange Act and Act, 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.
|
|
|
|
|
|
Director since the below date (1)
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
|
Michael Mona, Jr. (1,2)
|
|
61
|
|
Director, President and Chief Executive Officer
|
|
January 28, 2013 (2)
|
Joseph Dowling (4)
|
|
58
|
|
Chief Financial Officer and Secretary
|
|
|
Michael Mona, III (3)
|
|
30
|
|
Vice President, Operations
|
|
|
Bart P. Mackay (1)
|
|
59
|
|
Director
|
|
March 14, 2013
|
Larry Raskin
|
|
59
|
|
Director
|
|
May 7, 2014
|
James McNulty
|
|
65
|
|
Director
|
|
January 4, 2016
|
(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 Chief Financial Officer on June 16, 2014 and Secretary on August 25, 2014
Michael Mona, Jr.
Mr. Mona
is the founder of CV Sciences and possesses more than 30 years’ of senior management experience in a range of
industries including real estate/construction, industrial farming operations, chemical processing and consumer products. Mr.
Mona is a recognized industry leader in hemp farming operations and chemical extraction, and has established a global supply
chain of hemp based products. Prior to founding CV Sciences, Mr. Mona was an entrepreneur, founding two successful real
estate/construction companies, M&M Development, Inc., where he has served as the President since 1994, and Mona Co.
Development. As our President and Chief Executive Officer, Mr. Mona is specially qualified to serve on the Board because of
his detailed knowledge of our global operations and supply chain, and the end-consumer market sectors that we serve.
Joseph Dowling.
Mr. Dowling
was appointed as Chief Financial Officer of the Company on June 16, 2014 and was appointed Secretary on August 25, 2014.
Prior to his appointment as CFO, Mr. Dowling held numerous senior positions including President and Chief Financial Officer
of MediVas, LLC, a biotechnology company focused on drug formulation and delivery, 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 was appointed as Vice President of Operations on July 31, 2013 and has been instrumental in developing the worldwide
supply chain for hemp products. Mr. Mona’s expertise in hemp farming, processing, testing and product development has
greatly aided the Company in developing new markets for hemp-based products. Mr. Mona heads our consumer product business
segment and also leads our efforts to bring hemp, as a viable economic crop, back to the United States through our
affiliation with the Kentucky State Department of Agriculture. Prior to CV Sciences, Mr. Mona held various management
positions in the real estate/construction industry including serving as a managing member of Mona Co. Development from 2009-2013. Mr.
Mona graduated from the University of San Diego in Business Administration.
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 LLC (formerly 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 member of 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 Safety Associates of Memphis, Tennessee from 1988 to 1994. Mr. Raskin’s extensive business background makes
him a valuable member of the Board.
James McNulty
. Mr. McNulty was
initially appointed as a director of the Company on January 4, 2016. Mr. McNulty has served as Chief Financial Officer of Hopkins
Capital Group, an affiliation of limited liability companies which engage in venture activities primarily in development of pharmaceuticals,
since 2000. Mr. McNulty was Chief Financial Officer of Biodelivery Sciences International, Inc. (NASDAQ: BDSI) from 2000 until
his retirement from BDSI in December 2014. BDSI is a specialty pharmaceutical company that is leveraging its novel and proprietary
patented drug delivery technologies to develop and commercialize, either on its own or in partnerships with third parties, new
applications of proven therapeutics. The development strategy focuses on utilization of the FDA’s 505(b)(2) approval process
to potentially obtain timely and efficient approval of new formulations of previously approved therapeutics which incorporate
the company's licensed drug delivery technologies. Mr. McNulty has performed accounting and consulting services, including expert
testimony as a Certified Public Accountant since 1975. Mr. McNulty chairs the Company’s audit committee which was formally
chartered on March 16, 2016. Mr. McNulty’s knowledge of the pharmaceutical industry and technical accounting issues as well
as 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
The Company has formal Compensation and
Audit Committees. All other functions of the Board, including those functions performed by a Nominating Committee, are being undertaken
by the Board of Directors as a whole.
The Compensation Committee consists of
Larry Raskin and James McNulty, and 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 Exchange Act, 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.
The Audit Committee consists of
James McNulty and Bart Mackay, and has established a charter that requires all members of the Audit Committee to be
independent in accordance with applicable listing standards. Our securities are quoted on the OTC Bulletin Board, which does
not have any director independence requirements. Further, companies with securities only listed on the OTC Bulletin Board are
not required to comply with the independence standards set forth in Rule 10A-3(b)(1) of the Exchange Act. Mr. Mackay is not
independent under the New York Stock Exchange Listing Manual. Our Board of Directors has also determined that Mr. McNulty
is an “audit committee financial expert” as defined in Item 407(d) of Regulation S-K.
The Audit Committee’s responsibilities
include: a) selecting and evaluating the performance of our independent auditors; b) reviewing the scope of the audit to be conducted
by our independent auditors, as well as the result of their audit, and approving audit and non-audit services to be provided; c)
reviewing and assessing our financial reporting activities and disclosure, including our earnings press releases and periodic reports,
and the accounting standards and principles followed; d) reviewing the scope, adequacy and effectiveness of our internal control
over financial reporting; e) reviewing management’s assessment of our compliance with our disclosure controls and procedures;
f) reviewing our public disclosure policies and procedures; g) reviewing our guidelines and policies regarding risk assessment
and management, our tax strategy and our investment policy; h) reviewing and approving related-party transactions; and i) reviewing
threatened or pending litigation matters and investigating matters brought to the committee’s attention that are within the
scope of its duties.
We do not have a formal 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 year 2015 with the exception of the late
filing of two Form 4s by each of Michael Mona, Jr., Michael Mona, III, Larry Raskin and Roen Ventures, LLC, Mai Dun Limited,
LLC, Mercia Holdings, LLC, Mackay Ventures, LLC and Bart Mackay, as a group (the “Mackay Group”), the late filing
of four Form 4s by Joseph Dowling and the failure to file a Form 5 by the Mackay Group. Each of the abovementioned reports
contained one transaction except for one late-filed Form 4 filed by Michael Mona, III and one late-filed Form 4 filed by the
Mackay Group which each had two transactions.
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 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
We have an informal plan for compensating
our directors for their services, whereby each director, other than our Chairman, receives $500 per meeting of the Board of Directors
attended. Each of our directors are expected in the future to receive stock grants as further compensation for their services.
Name of Directors
* indicates Independent Director
|
|
Fiscal
Year
|
|
Fees
earned or
paid in
cash
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
All other
compensation
($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Mona, Jr. (1)
|
|
2015
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
2014
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bart Mackay
|
|
2015
|
|
$
|
1,500
|
|
|
$
|
35,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
36,500
|
|
|
|
2014
|
|
$
|
2,000
|
|
|
$
|
70,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
72,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Larry Raskin
|
|
2015
|
|
$
|
1,500
|
|
|
$
|
–
|
|
|
$
|
9,986
|
|
|
$
|
–
|
|
|
$
|
11,486
|
|
|
|
2014
|
|
$
|
1,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Ted Sobieski (2)
|
|
2014
|
|
$
|
500
|
|
|
$
|
70,500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
71,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* James McNulty (3)
|
|
2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
-
|
|
|
(1)
|
See disclosure above under “Executive Compensation” and “Summary Compensation Table”.
|
|
(2)
|
Resigned on May 7, 2014.
|
|
(3)
|
Appointed on January 4, 2016.
|
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. On March 16, 2015, Bart Mackay was awarded 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 grant. In September 2015, the Compensation Committee
approved the grant of 25,000 stock options to Mr. Raskin. The stock option has a term of ten (10) years, was 100% vested as of
the date of grant 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. As of November 2, 2015, 25,000 option shares have vested, and Mr. Raskin has not exercised any stock options.
On December 17, 2015, the Board of Directors of the Company approved an award of 25,000 shares of common stock to Bart Mackay
with a value equal to the fair market value of the Company’s common stock at the time of grant.
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.
On September 23, 2015, the Compensation
Committee approved the grant of 1,470,000 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 100% of the option shares vesting on the date
of grant. On December 28, 2015, the Compensation Committee approved the grant of 530,000 stock options to Mr. Mona. The stock option
has a term of ten (10) years, is durational-based, with 100% of the option shares vesting on the date of 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 Financial Standards Accounting Board ASC 718
Share-Based-Payment
(“ASC 718”).
Summary Compensation
Name and Principal Position
|
|
|
Year
|
|
|
|
Salary
($)
|
|
|
|
Bonus
($)
|
|
|
|
Stock Awards
($) (1)
|
|
|
|
Option
Awards
($)
(2)
|
|
|
|
Non-Equity
Incentive Plan Compensation
($)
|
|
|
|
Nonqualified
Deferred Compensation
($)
|
|
|
|
All Other
Compensation
($)
|
|
|
|
Total Earnings
($)
|
|
Michael Mona, Jr.
|
|
|
2015
|
|
|
$
|
300,000
|
|
|
$
|
15,000
|
|
|
$
|
–
|
|
|
$
|
790,740
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,105,740
|
|
Chairman, CEO
|
|
|
2014
|
|
|
$
|
209,521
|
|
|
$
|
10,000
|
|
|
$
|
–
|
|
|
$
|
8,323,224
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
8,542,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Mona, III
|
|
|
2015
|
|
|
$
|
180,000
|
|
|
$
|
15,000
|
|
|
$
|
590,000
|
|
|
$
|
183,959
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
968,959
|
|
VP, Operations
|
|
|
2014
|
|
|
$
|
137,808
|
|
|
$
|
10,000
|
|
|
$
|
705,000
|
|
|
$
|
1,149,819
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,002,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Dowling
|
|
|
2015
|
|
|
$
|
215,384
|
|
|
$
|
15,000
|
|
|
$
|
–
|
|
|
$
|
240,339
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
470,723
|
|
Chief Financial Officer and Secretary
|
|
|
2014
|
|
|
$
|
100,000
|
|
|
$
|
10,000
|
|
|
$
|
–
|
|
|
$
|
1,506,949
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,616,949
|
|
______________________________
|
(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 13 to our consolidated financial statements filed with our Annual Reports on Form 10-K for the year ended December 31,
2015.
|
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 2015, Mr. Mona
was paid an aggregate sum of $1,105,740. In September 2015, the Compensation Committee approved the grant of 1,470,000 stock options
to Mr. Mona. The stock option has a term of ten (10) years, was 100% vested as of the date of grant 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. In December
2015, the Compensation Committee approved the grant of 530,000 stock options to Mr. Mona. The stock option has a term of ten (10)
years, was 100% vested as of the date of grant and was granted with an exercise price equal to the fair market value of the Company’s
common stock at the time of grant.
The Board of Directors
approved a salary of $180,000 for our Vice President, Operations on August 25, 2014. During fiscal year 2015, Mr. Mona III was
paid an aggregate sum of $968,959. In September 2015, the Compensation Committee approved the grant of 343,000 stock options to
Mr. Mona III. The stock option has a term of ten (10) years, is durational based, with 50% vesting on the one year anniversary
date of grant, and the remainder vesting in twelve (12) equal monthly installments measured from September 23, 2016, 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.
Joseph Dowling
was appointed as the Company’s Chief Financial Officer on June 16, 2014 with an annual salary of $200,000. The Board of Directors
approved a salary increase to $250,000 for Mr. Dowling on September 4, 2015. During the fiscal year 2015 Mr. Dowling was paid an
aggregate sum of $470,723. On May 21, 2015, the Compensation Committee approved a grant of 100,000 stock options to Mr. Dowling.
The stock option is durational-based, with 25% vested on May 21, 2016, and the remaining options vesting in 36 equal monthly installments.
In September 2015, the Compensation Committee approved the grant of 200,000 stock options to Mr. Dowling. The stock option
has a term of ten (10) years, is durational based, with 50% vesting on the one year anniversary date of grant, and the remainder
vesting in twelve (12) equal monthly installments measured from September 23, 2016, 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. In December 2015, the Compensation
Committee approved the grant of 150,000 stock options to Mr. Dowling. The stock option is durational-based, with 50% of the shares
subject to the option vested on September 23, 2016 and the remaining options vesting in twelve (12) successive equal monthly installments
measured from September 23, 2016, 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.
Option Grants
On July 23, 2014,
Company stockholders approved the Amended and Restated 2013 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. On December 21, 2015, Company stockholders approved an amendment to the
Amended 2013 Plan, increasing the number of shares that may be issued under the Amended 2013 Plan to 15,000,000 shares of
common stock. As of December 31, 2015, the Company had 5,200,964 of authorized unissued shares reserved and available for
issuance under the Amended 2013 Plan.
Outstanding Equity Awards at Fiscal Year
End
The following table provides a summary
of all outstanding equity awards for Named Executive Officers at the end of fiscal year 2015.
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Award Grant
and Commencement of Vesting Date
|
|
Number
of securities underlying unexercised option (#) exercisable
|
|
|
Number
of securities underlying unexercised option (#) unexercisable
|
|
|
Equity
incentive plan awards: Number of securities underlying unexercised unearned options
(#)
|
|
|
Option
exercise price
($)
|
|
|
Option Expiration
Date
|
|
Number
of shares or units of stock that have not vested
(#)
|
|
|
Market
value of shares of units of stock that have not vested
($)
|
|
|
Equity
incentive plan awards: Number of unearned shares, units or other rights that have not vested
(#)
|
|
|
Equity
incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested
($)
|
|
Michael Mona, Jr.
|
|
12/08/2014
|
|
|
4,000,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
2.64
|
|
|
12/08/2024
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Chairman and CEO
|
|
9/23/2015
|
|
|
1,470,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.73
|
|
|
9/23/2025
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
12/28/2015
|
|
|
530,000
|
|
|
|
–
|
|
|
|
–
|
|
|
$
|
0.16
|
|
|
12/28/2025
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Dowling
|
|
10/1/2014
|
|
|
224,988
|
|
|
|
375,012
|
|
|
|
–
|
|
|
$
|
2.82
|
|
|
10/1/2024
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Secrretary and CFO
|
|
5/21/2015
|
|
|
–
|
|
|
|
100,000
|
|
|
|
–
|
|
|
$
|
1.39
|
|
|
5/21/2025
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
9/23/2015
|
|
|
–
|
|
|
|
200,000
|
|
|
|
–
|
|
|
$
|
0.73
|
|
|
9/23/2025
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
12/28/2015
|
|
|
–
|
|
|
|
150,000
|
|
|
|
–
|
|
|
$
|
0.16
|
|
|
12/28/2025
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Mona, III
|
|
10/1/2014
|
|
|
374,960
|
|
|
|
125,040
|
|
|
|
–
|
|
|
$
|
2.82
|
|
|
10/1/2024
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
VP of Operations
|
|
9/23/2015
|
|
|
–
|
|
|
|
343,000
|
|
|
|
–
|
|
|
$
|
0.73
|
|
|
9/23/2025
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
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 April 14, 2016, 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
Boulevard, 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 (3)
|
|
|
5,463,162
|
|
|
|
10.61
|
%
|
Mackay Ventures, LLC (4)
|
|
|
6,027,094
|
|
|
|
11.70
|
%
|
James J. Mahoney (5)
|
|
|
4,502,165
|
|
|
|
8.74
|
%
|
Rhonda Mona (6)
|
|
|
3,824,164
|
|
|
|
7.42
|
%
|
Michael Mona III (7)
|
|
|
2,157,082
|
|
|
|
4.19
|
%
|
Joseph Dowling (8)
|
|
|
287,500
|
|
|
|
*
|
|
Michael Mona, Jr. (9)
|
|
|
6,000,000
|
|
|
|
11.65
|
%
|
Bart Mackay (10)
|
|
|
6,156,726
|
|
|
|
11.95
|
%
|
Larry Raskin (11)
|
|
|
490,000
|
|
|
|
*
|
|
James McNulty (12)
|
|
|
50,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and directors as a group (six persons)
|
|
|
–
|
|
|
|
29.39
|
%
|
_______________________
* Less than 1%
|
(1)
|
Beneficial ownership has been
determined in accordance with Rule 13d-3 under the Exchange Act. Pursuant to the rules
of the SEC, 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 51,513,924 shares
of our common stock outstanding on April 14, 2016, 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)
|
Representing Mai Dun Limited, LLC’s direct ownership of 5,463,162 shares.
|
|
(4)
|
Beneficial ownership of Mackay Ventures LLC is reported based upon its direct ownership of 618,564
shares and its 99% ownership in Mai Dun Limited, LLC. The address of Mackay Ventures LLC is 6325 S. Jones Blvd., Suite 500, Las
Vegas, Nevada 89118.
|
|
(5)
|
James J. Mahoney acquired his shares from Roen Ventures, LLC in satisfaction of certain debt owing
by Roen Ventures, LLC to Mr. Mahoney.
|
|
(6)
|
Represents 824,164 shares owned by Aegean Limited, LLC, which is solely owned by Ms. Mona and 3,000,000
shares subject to the December 2014 Option (as defined below). Pursuant to that certain Decree of Divorce, dated July 23, 2015
(the "Decree"), issued by the District Court, Clark County, Nevada (the "Court"), the Court awarded 3,000,000
shares of the December 2014 Option to Ms. Rhonda Mona, the ex-wife of Mr. Mona. Pursuant to the Company’s Amended and Restated
2013 Equity Incentive Plan (the “Plan”), the stock options to purchase shares of our common stock granted under the
Plan may not be transferred, however, pursuant to the Decree the Ms. Mona believes that Ms. Mona has shared beneficial ownership
of 3,000,000 of the shares of our common stock that would be acquired upon exercise of the option.
|
|
(7)
|
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 has a term of ten (10) years, is durational-based, with 229,166 option shares vested on the grant date, and the
remaining option shares vesting in twenty-six (26) equal monthly increments. As of April 14, 2016, 406,249 option shares have vested
and another 20,833 will vest within 60 days. In September 2015, the Compensation Committee approved the grant of 343,000
stock options to Mr. Mona III. The stock option has a term of ten (10) years, is durational based, with 50% vesting on the
one year anniversary date of grant, and the remainder vesting in twelve (12) equal monthly installments measured from September
23, 2016, 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. As of April 14, 2016, no option shares have vested and no option shares will vest within 60 days.
|
|
(8)
|
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 June 16, 2015, and the remaining options vesting in 36 equal
monthly installments. As of April 14, 2016, 262,500 option shares have vested and another 25,000 shares will vest within 60 days.
On May 21, 2015, the Compensation Committee approved a grant of 100,000 stock options to Mr. Dowling. The stock option is durational-based,
with 25% vested on May 21, 2016, and the remaining options vesting in 36 equal monthly installments. As of April 14, 2016, no option
shares have vested and no option shares will vest within 60 days. In December 2015, the Compensation Committee approved the grant
of 150,000 stock options to Mr. Dowling. The stock option is durational-based, with 50% of the shares subject to the option vested
on September 23, 2016 and the remaining options vesting in twelve (12) successive equal monthly installments measured from September
23, 2016. As of April 14, 2016, no option shares have vested and no option shares will vest within 60 days.
|
|
(9)
|
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 “December 2014 Option”). 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. In September 2015, the Compensation Committee approved the grant of 1,470,000 stock options to
Mr. Mona. The stock option has a term of ten (10) years, was 100% vested as of the date of grant 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. As of April 14,
2016, both grants were fully vested and 5,470,000 option shares have vested under both grants. In December 2015, the Compensation
Committee approved the grant of 530,000 stock options to Mr. Mona. The stock option has a term of ten (10) years, was 100% vested
as of the date of grant 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 April 14, 2016, 530,000 option shares have vested. Pursuant to the Decree issued by the Court, the
Court awarded 3,000,000 shares of the December 2014 Option to Ms. Rhonda Mona, the ex-wife of Mr. Mona. Pursuant to the Plan, the
stock options to purchase shares of common stock granted under the Plan may not be transferred, however, pursuant to the Decree
the Mr. Mona believes that Ms. Mona has shared beneficial ownership of 3,000,000 of the shares of our common stock that would be
acquired upon exercise of the option.
|
|
(10)
|
Beneficial ownership of Bart Mackay is reported based upon his direct ownership of 75,000 shares,
his 100% ownership in Mackay Ventures, LLC and his 1% interest in Mai Dun Limited, LLC. Bart Mackay is deemed to have shared voting
and investment power over the shares of our common stock owned by each of Mai Dun Limited, LLC and Mackay Ventures LLC.
|
|
(11)
|
Mr. Raskin purchased 400,000 shares of common stock in the Company’s previous private placement,
as disclosed in Mr. Raskin’s Form 4 filed with the SEC on May 7, 2014. On May 5, 2015, the Compensation Committee approved
the grant of 40,000 stock options to Mr. Raskin. The stock option is fully-vested on the date of grant, and as of July 20, 2015,
40,000 of the option shares have vested. On May 5, 2015, the Compensation Committee approved the issuance of a stock award in the
amount of 25,000 shares of the Company’s common stock to Mr. Raskin. In September 2015, the Compensation Committee
approved the grant of 25,000 stock options to Mr. Raskin. The stock option has a term of ten (10) years, was 100% vested
as of the date of grant 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. As of April 14, 2016, 25,000 option shares have vested, and Mr. Raskin has not exercised any
stock options.
|
|
(12)
|
Mr. McNulty acquired 50,000 shares pursuant to that certain Agreement and Plan of Reorganization
dated December 30, 2015 by and among CANNAVEST Merger Sub, Inc., a wholly-owned subsidiary of the Company, CANNAVEST Acquisition
LLC, a wholly-owned subsidiary of the Company, CanX, Inc. and The Starwood Trust, as the Shareholder Representative. Mr. McNulty
was a shareholder of CanX, Inc., and acquired his shares of the Company in exchange pursuant to the merger transaction.
|
EQUITY COMPENSATION PLAN INFORMATION
On July 23, 2014, Company shareholders
approved 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.
On December 21, 2015, Company shareholders approved an amendment to the Amended 2013 Plan, increasing the number of shares that
may be issued to 15,000,000 shares of common stock.
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
|
|
|
9,799,036
|
|
|
$
|
1.97
|
|
|
|
5,200,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
9,799,036
|
|
|
$
|
1.97
|
|
|
|
5,200,964
|
|
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, 2015 which materially affects the Company
or has affected the Company.
On January 2, 2015, the Compensation Committee
approved the award of 250,000 shares of common stock to the Company’s Vice President of Operations, Michael Mona, III, with
a value equal to the fair market value of the Company’s common stock at the time of the award. On September 23, 2015, the
Compensation Committee approved the grant of 343,000 stock options to Michael Mona, III, the Company’s Vice President of
Operations. The stock option has a term of ten (10) years, is durational-based, with 50% of the option shares vesting on September
23, 2016, and the remaining option shares vesting in twelve (12) equal monthly installments.
On May 21, 2015, the Compensation Committee
approved the grant of 100,000 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 May 21, 2016, and the remaining option
shares vesting in thirty-six (36) equal monthly installments. On September 23, 2015, the Compensation Committee approved the grant
of 200,000 stock options to Mr. Dowling. The stock option has a term of ten (10) years, is durational-based, with 50% of the option
shares vesting on September 23, 2016, and the remaining option shares vesting in twelve (12) equal monthly installments. On December
28, 2015, the Compensation Committee approved the grant of 150,000 stock options to Mr. Dowling. The stock option has a term of
ten (10) years, is durational-based, with 50% of the option shares vesting on December 28, 2016, and the remaining option shares
vesting in twelve (12) equal monthly installments.
On September 23, 2015, the Compensation
Committee approved the grant of 1,470,000 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 100% of the option shares vesting on the date
of grant. On December 28, 2015, the Compensation Committee approved the grant of 530,000 stock options to Mr. Mona. The stock
option has a term of ten (10) years, is durational-based, with 100% of the option shares vesting on the date of grant.
For the year ended December 31, 2015,
the Company recognized sales to the following related parties:
Party
|
|
Relationship
|
|
For the Year ended December 31, 2015
|
|
Medical Marijuana, Inc. ("MJNA")
|
|
Stockholder
|
|
$
|
2,002,910
|
|
HempMeds PX
|
|
80% owned by MJNA
|
|
|
–
|
|
Total sales to related parties
|
|
|
|
$
|
2,002,910
|
|
Percent of total sales
|
|
|
|
|
17.4%
|
|
At December 31, 2015, the Company had three
notes receivable totaling $617,681, one of which is from sale of inventory to MJNA, and a note from a litigation settlement with
MJNA (Note 3).
We recognized litigation revenue of $756,714
for the year ended December 31, 2015 related to the Company’s Settlement Agreement. Pursuant to the Settlement Agreement,
the MJNA Parties paid the Company the sum of $150,000 and delivered a promissory note in the principal amount of $600,000, bearing
interest at 6% per annum (the “Settlement Note”). In November 2015, MJNA failed to timely pay the fourth payment installment
under the Settlement Agreement and therefore defaulted on the Settlement Note. On December 3, 2015, the Company foreclosed on the
Settlement Note collateral consisting of Company common stock. The foreclosure resulted in the Company obtaining rights to receive
624,750 shares of our common stock in full satisfaction of the remaining principal and accrued interest balance on the Settlement
Note. At the foreclosure date, the Company took immediate possession of 500,000 shares of our common stock held in escrow. At December
31, 2015, the Company was arranging to obtain the remaining 124,750 shares of our common stock.. The Settlement Note balance of
$60,351 at December 31, 2015 represents the fair value at the foreclosure date of the remaining 124,750 shares of our common stock
(Note 3).
We also recognized revenue related to the
sale of our products to MJNA of $2,002,910 for the year ended December 31, 2015 and received a promissory note in the principal
amount $2,002,910 (“MJNA Promissory Note”) that was to be paid in 12 equal installments beginning on November 3, 2015
in exchange for the product shipped to MJNA. The MJNA Promissory Note is secured by 2,000,000 shares of the Company’s common
stock held in escrow. MJNA has failed to make any payments on the MJNA Promissory Note and is in default. The MJNA Promissory Note
is likely not collectible, and the probable form of collection is for the Company to foreclose on the 2,000,000 shares of Company
common stock.
During the year ended December 31, 2015,
the Company paid $3,948,304 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.
Director Independence
Our securities are quoted on the OTC Bulletin
Board, which does not have any director independence requirements. However, the Board of Directors has determined that two members
of our Board, Mr. Raskin and Mr. McNulty, are independent under the New York Stock Exchange Listing Manual. Prior to their respective
resignations on October 31, 2013 and May 7, 2014, the Board had determined that each of Mr. Edward Wilson and Mr. Theodore Sobieski
were independent under the New York Stock Exchange Listing Manual.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The following table summarizes the
fees, as applicable, of PKF Certified Public Accountants (“PKF”), a Professional Corporation, our independent auditor for the years
ended December 31, 2015 and 2014; 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
|
|
2015
|
|
|
2014
|
|
Audit Fees (1)
|
|
$
|
93,595
|
|
|
$
|
87,022
|
|
Audit Related Fees (2)
|
|
$
|
25,403
|
|
|
$
|
39,531
|
|
Tax Fees (3)
|
|
$
|
7,200
|
|
|
$
|
11,400
|
|
All Other Fees (4)
|
|
$
|
19,940
|
|
|
$
|
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 fees
rendered by our outside tax advisors (other than PKF) for tax compliance and tax advice. The services for the fees disclosed under
this category include tax return preparation and technical advice.
(4) All other fees consist of fees for
other miscellaneous items.
Our Audit Committee has adopted a
procedure for pre-approval of all fees charged by our independent auditors. Under the procedure, the Audit Committee
approves the engagement letter with respect to audit and review services. Other fees are subject to pre-approval by the
Audit Committee, or, in the period between meetings, by a designated member of the Board of Directors or Audit
Committee. Any such approval by the designated member is disclosed to the entire Board of Directors at the next
meeting. The audit fees paid to the auditors with respect to 2015 were pre-approved by the Audit Committee. The
audit fee paid to the auditor with respect to 2014 were pre-approved by the entire Board of Directors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
ORGANIZATION AND BUSINESS
|
CV Sciences, Inc. (the “Company,”
“we,” “our” or “us”) was incorporated under the name Foreclosure Solutions, Inc. in the State
of Texas on December 9, 2010. 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. On January 4, 2016, the Company filed a Certificate of Amendment of Certificate
of Incorporation reflecting its corporate name change to “CV Sciences, Inc.”, effective on January 5, 2016. In addition,
on January 4, 2016, the Company amended its Bylaws to reflect its corporate name change to “CV Sciences, Inc.” The
Company previously operated under the corporate name of CannaVest Corp.
The change in corporate name
was undertaken in connection with the acquisition of CanX Inc., a Florida corporation (“CanX”). As more fully set forth
in our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 4, 2016 (the “CanX 8-K”),
on December 30, 2015, we entered into an Agreement and Plan of Reorganization (the “Purchase Agreement”) with CANNAVEST
Merger Sub, Inc., a Florida corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), CANNAVEST Acquisition
LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (the “LLC”), CanX and the Starwood
Trust, as the Shareholders’ Representative (the “CanX Acquisition”). Pursuant to the Purchase Agreement, Merger
Sub merged with and into CanX with CanX surviving such merger. Immediately following effectiveness of the merger, CanX merged with
and into the LLC with the LLC surviving such merger. Upon consummation of these transactions, CanX ceased to exist and all property,
rights, privileges, powers and franchises of CanX vested in the LLC, and all debts, liabilities and duties of CanX became the debts,
liabilities and duties of the LLC. In consideration for the acquisition of CanX and its wholly-owned subsidiary, Canabine, LLC,
a Florida limited liability company, the Company paid and issued to the former shareholders of CanX at closing an aggregate sum
of $250,000 in cash and 5,000,000 shares of the Company’s common stock. Subject to the Company achieving certain post-closing
milestones, the Company will pay and issue certain additional contingent consideration to the former shareholders of CanX, as more
particularly set forth in the CanX 8-K (see Note 6).
As a result of the CanX
Acquisition, the Company is positioned both as a specialty pharmaceutical company focused on developing and commercializing
novel therapeutics utilizing synthetic Cannabidiol (“CBD”); and, to continue our existing consumer product
business segment in manufacturing, marketing and selling plant-based CBD products to a range of market sectors.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
-
The consolidated financial statements include the accounts of CV Sciences, Inc. and its wholly-owned subsidiaries US Hemp
Oil, LLC, CannaVest Laboratories, LLC, Plus CBD, LLC. and CANNAVEST Acquisition, LLC; and the accounts of a 70% interest in
CannaVest Europe, GmbH (collectively, the “Company”). All intercompany accounts and transactions have been
eliminated in consolidation. The Company commenced commercial operations on January 29, 2013.
Liquidity
–
For the years ended December 31, 2015 and 2014, the Company had net losses of $12,233,128 and $1,311,951, respectively. In addition,
for the years ended December 31, 2015 and 2014, the Company had negative cash flows from operations of $4,208,267 and $6,711,999,
respectively. Management believes the Company has the funds needed to continue its consumer product business segment and meet
its other obligations over the next year solely from current revenues and cash flow due to increased sales and because our current
inventory levels are sufficient to support sales for 2016, resulting in reduced cash outflow for inventory purchases. In addition,
we do not intend to purchase raw inventory from our supply chain arrangements from the 2016 crop. The Company’s pharmaceutical
business segment will require additional capital of approximately $1,500,000 over the next 12 months. We currently have an executed
term sheet on a financing arrangement that would provide this capital. Management believes that it will be able to obtain such
financing on terms acceptable to the Company, however, there can be no assurances that the Company will be successful. If the
Company is unable to raise additional capital, the Company would likely be forced to curtail pharmaceutical development.
Business Combinations
-
We apply the provisions of the Accounting Standards Codification (“ASC”) 805,
Business Combinations
(“ASC
805”), in the accounting for our acquisitions including without limitation the CanX Acquisition. ASC 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 805 requires us to recognize separately from
goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date
is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired
and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities
assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and
subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record
adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the
measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to our consolidated statements of operations.
Accounting for business combinations
requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates
for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable.
Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based
in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.
Examples of critical
estimates in valuing certain of the intangible assets we have acquired include but are not limited to:
|
·
|
future expected cash flows from supply
chain relationships with growers and processors of our hemp extracted CBD oil;
|
|
·
|
expected costs to develop the In-process
Research and Development (“IPR&D”) into commercially viable pharmaceutical products and estimated cash flows from
the projects when completed;
|
|
·
|
the acquired company’s brand, trade
names and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in
the combined Company’s product portfolio; and
|
Goodwill and Intangible
Assets
– The Company evaluates the carrying value of goodwill and intangible assets annually during the fourth quarter
in accordance with ASC 350
Intangibles – Goodwill and Other
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 classify
intangible assets into three categories: (1) intangible assets with definite lives subject to amortization, (2) intangible assets
with indefinite lives not subject to amortization, and (3) goodwill. We determine the useful lives of our identifiable intangible
assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining
useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term
strategy for using the asset, any laws or regulations which could impact the useful life of the asset and other economic factors,
including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily
on a straight-line basis, over their useful lives, generally five years.
IPR&D has an indefinite
life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset.
If the related project is not completed in a timely manner or the project is terminated or abandoned, the Company may have an impairment
related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value. The intangible assets
with estimable useful lives are amortized on a straight line basis over their respective estimated useful lives to their estimated
residual values. This method of amortization approximates the expected future cash flow generated from their use.
During
the years ended December 31, 2015 and 2014, there were no impairments.
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, valuation of contingent consideration, inputs for valuing notes payable beneficial conversion features and stock-based
compensation, 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
– With the recent CanX Acquisition, the Company has two business segments. Our consumer products segment
develops, manufactures and markets products based on plant-based CBD, including under the name
PlusCBD™
in a
variety of market sectors including nutraceutical, beauty care, specialty foods and vape. Our drug development segment is newly
established to develop a variety of drug candidates which use synthetic CBD as a primary active ingredient.
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, 2015 and 2014, the Company had no cash equivalents.
Concentrations of Credit
Risk
- As of December 31, 2015, 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
$154,431 at December 31, 2015.
At December 31, 2015, the Company
had three notes receivable totaling $617,681, two of which are from sale of inventory to MediJane Holdings and Medical Marijuana,
Inc. (“MJNA”), and the third note is from a litigation settlement with MJNA (Note 3). Two customers represented 83%
of our accounts receivable balance at December 31, 2015. Sales from two customers accounted for 30% of total sales for the year
ended December 31, 2015 (Note 10).
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 10).
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 for large accounts are generally secured. Smaller accounts receivable, generally less than $10,000, 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 each December 31, 2015 and 2014, the Company had recorded
an allowance for doubtful accounts related to accounts receivable in the amount of $100,000.
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.
Sales Tax
–
The Company is responsible for collecting tax on sales to end customers and remitting these taxes to applicable jurisdictions.
These taxes are assessed based on the location of the end customer and the laws of the jurisdiction in which they reside.
Shipping and Handling
– Shipping and handling costs totaled $377,316 and $57,885 for the years ended December 31, 2015 and 2014, 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
–
Sales of bulk oil products are generally final, and beginning in 2015 the Company does not accept returns under any circumstances.
There is no allowance for customer
returns at December 31, 2015 or 2014 due to insignificant return amounts experienced during the years ended December 31, 2015 and
2014.
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, 2015 and 2014. 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, 2015, the Company
had $7,812,530 of inventory in Germany and The Netherlands.
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, 2015 and 2014 were as follows:
|
|
Useful Lives
|
|
2015
|
|
|
2014
|
|
Office furniture and equipment
|
|
3 years
|
|
$
|
323,265
|
|
|
$
|
231,440
|
|
Tenant improvements
|
|
14 to 39 months
|
|
|
70,592
|
|
|
|
56,474
|
|
Laboratory and other equipment
|
|
5 years
|
|
|
361,710
|
|
|
|
354,363
|
|
|
|
|
|
|
755,567
|
|
|
|
642,277
|
|
Less: accumulated depreciation
|
|
|
|
|
(315,952
|
)
|
|
|
(125,854
|
)
|
|
|
|
|
$
|
439,615
|
|
|
$
|
516,423
|
|
Depreciation expense
for the years ended December 31, 2015 and 2014 was $190,335 and $112,100, respectively.
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.
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.
Debt Issuance Costs –
Debt issuance costs have been capitalized as a discount to secured convertible promissory notes payable and are being amortized
to interest expense using the interest method over the expected terms of the related debt agreements.
Loss per Share
- The Company calculates earning or loss per share (“EPS”) in accordance with ASC Topic 260,
Earnings per Share
,
which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted
average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average
number of shares of common stock outstanding plus all potentially dilutive shares of common stock outstanding during the period.
The Company had 9,799,036 and 6,470,000 of stock options outstanding that are anti-dilutive at December 31, 2015 and 2014, respectively.
In addition, during the first quarter of 2016, the Company issued 5,562,535 shares of common stock in connection with conversion
of convertible debt. Also, during the first quarter of 2016, the Company issued 500,000 shares of common stock in connection with
investment banking services. A total of 6,062,535 shares of dilutive common stock were issued during the first quarter of 2016.
The Company may also be required to issue up to 19,500,000 shares of common stock related to contingent consideration from the
CanX Acquisition. All shares of common stock issued under the CanX Acquisition will be dilutive (Note 6).
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, 2015 and 2014 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 2011.
Recent Issued and Newly
Adopted Accounting Pronouncements
In May 2014, the Financial Accounting
Standards Board (“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
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 evaluating the potential impact of this guidance on the Company’s
consolidated financial statements.
In April 2015, the FASB issued
ASU 2015-03,
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”), which requires companies to present debt issuance costs as a direct deduction from the carrying
value of the related debt liability. ASU 2015-03 will be effective for fiscal years starting after December 15, 2015, including
any interim periods within those years, however, early implementation is permitted. The Company has implemented this standard
for the year ended December 31, 2015.
In July 2015, the FASB issued
ASU 2015-11,
Inventory: Simplifying the Measurement of Inventory
, which requires inventory measured using any method other
than last-in, first out or the retail inventory method to be subsequently measured at the lower of cost of net realizable value,
rather than at the lower of cost or market. ASU 2015-11 is effective for annual reporting periods beginning after December 15,
2016 and for interim periods within such annual period. Early application is permitted. The Company is evaluating the potential
impact of this guidance on the Company’s consolidated financial statements.
In September 2015, the FASB
issued ASU 2015-16,
Business Combinations
(“ASU 2015-16”)
,
which simplifies the accounting for measurement-period adjustments by eliminating the requirement to restate prior period financial
statements for measurement period adjustments. The new guidance requires the cumulative impact of measurement period adjustments,
including the impact on prior periods, to be recognized in the reporting period in which the adjustment is identified. ASU 2015-16
is effective for public companies for fiscal years beginning after December 15, 2015, and interim periods within those fiscal
years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The Company
is evaluating the potential impact of this guidance on the Company’s consolidated financial statements.
In February 2016, the FASB issued
ASU 2016-02,
Leases
(“ASU 2016-02”), which, for operating leases, requires a lessee to recognize a right-of-use
asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard
also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease
term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the potential
impact of this guidance on the Company’s consolidated financial statements.
In March 2016, the FASB issued
ASU 2016-09,
Compensation – Stock Compensation
(“ASU 2016-09”), which involve multiple aspects of the
accounting for share-based transactions, including income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating
the potential impact of this guidance 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, 2015 and 2014 are comprised of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Dixie Botanicals note and accrued interest
|
|
$
|
–
|
|
|
$
|
335,173
|
|
MediJane Holdings note and accrued interest
|
|
|
60,351
|
|
|
|
1,200,000
|
|
Medical Marijuana, Inc. settlement note and accrued interest
|
|
|
480,000
|
|
|
|
–
|
|
Medical Marijuana, Inc. promissory note and accrued interest
|
|
|
77,330
|
|
|
|
–
|
|
|
|
|
617,681
|
|
|
|
1,535,173
|
|
Less current portion
|
|
|
617,681
|
|
|
|
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 was subject to a promissory note between the parties, whereby MJNA was to make monthly
payments including interest at 7% per annum over a two year period (“Dixie Note”). In July 2015, a settlement was reached
whereby an accelerated payment of $150,000 was made in full satisfaction of the Dixie Note. As a result, the Company recorded a
loss on the Dixie Note of $7,880 for the year ended December 31, 2015.
The MJNA settlement note relates
to an agreement as reported in the Company’s Form 8-K filed with the SEC on July 20, 2015 (the “July Form 8-K”).
As further discussed in the July Form 8-K, on July 14, 2015, the Company entered into a settlement agreement with MJNA, HempMeds
PX, LLC, Kannaway, LLC, General Hemp, LLC, HDDC Holdings, LLC, Rabbit Hole Technologies, Inc., Hemp Deposit and Distribution Corporation
and MJNA Holdings, LLC (collectively, the “MJNA Parties”) to settle multiple litigation matters between the Company
and the MJNA Parties (the “Settlement Agreement”).
Pursuant to the Settlement Agreement,
the MJNA Parties paid the Company the sum of $150,000 and delivered a promissory note in the principal amount of $600,000 (“Settlement
Note”), bearing interest at the rate of 6% per annum, payable in six equal monthly installments of $101,757 commencing August
15, 2015. The promissory note was secured by shares of the Company’s common stock held by the MJNA Parties. In November 2015,
MJNA failed to timely pay the fourth payment installment under the Settlement and therefore defaulted on the Settlement Note. On
December 3, 2015, the Company foreclosed on the Settlement Note collateral consisting of Company common stock. The foreclosure
resulted in the Company obtaining rights to receive 624,750 shares of our common stock in full satisfaction of the remaining principal
and accrued interest balance. At the foreclosure date, the Company took immediate possession of 500,000 shares held in escrow.
At December 31, 2015, the Company was arranging to obtain the remaining 124,750 shares as collateral under the Settlement Note.
The Settlement Note balance of $60,351 at December 31, 2015 represents the fair value at the foreclosure date of the remaining
124,750 shares.
In August 2015, we entered into
an agreement to sell MJNA our products and received from MJNA a promissory note in the principal amount of $2,002,910 (“MJNA
Promissory Note”) that was to be paid in 12 equal installments beginning on November 3, 2015 in exchange for the product
shipped to MJNA. The MJNA Promissory Note is secured by 2,000,000 shares of the Company’s common stock held in escrow. MJNA
has failed to make any payments on the MJNA Promissory Note and is in default. The MJNA Promissory Note is likely not collectible,
and the probable form of collection is for the Company to foreclose on the 2,000,000 shares of Company common stock. At December
31, 2015, the fair value of the collateral was determined to be $480,000, equal to the $0.24 per share closing price of the Company’s
Common Stock as of December 31, 2015, multiplied by the 2,000,000 shares of Company common stock. As a result, the Company recorded
a loss of $1,522,910 related to the MJNA Promissory Note for the year ended December 31, 2015.
The MediJane Holdings (“MJMD”)
note relates to the sale of Company products during December 2014 in exchange for a convertible promissory note in the amount of
$1,200,000 (“MJMD Note”). The full amount of the MJMD Note was due on June 23, 2015 along with accrued interest at
10%. In October 2015, we converted $42,350 of the principal amount of the MJMD Note into MJMD common stock. MJMD was unable to
secure financing in support of its operations and was not able to sell or otherwise commercialize the Company products purchased.
In February 2016, the Company entered into an amendment to the MJMD Note, providing for the return of Company products previously
sold to MJMD. A portion of the Company products previously sold to MJMD were returned to the Company in February 2016 with the
remaining products to be returned in June 2016. At December 31, 2015, the fair value of the Company products to be returned was
determined to be $77,330, equal to the cost value of the Company products to be returned. As a result, the Company recorded a loss
of $1,203,258 related to the MJMD Note and also recorded a loss of $42,350 in connection with the MJMD common stock owned by the
Company.
Inventory at December 31, 2015
and 2014 is comprised of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Raw materials
|
|
$
|
13,668,255
|
|
|
$
|
11,209,119
|
|
Finished goods
|
|
|
465,665
|
|
|
|
457,132
|
|
|
|
$
|
14,133,920
|
|
|
$
|
11,666,251
|
|
Accrued expenses at December
31, 2015 and 2014 were as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Accrued interest on convertible debt
|
|
$
|
69,063
|
|
|
$
|
–
|
|
Accrued payroll expenses
|
|
|
160,960
|
|
|
|
68,920
|
|
Other accrued liabilities
|
|
|
292,696
|
|
|
|
49,286
|
|
|
|
$
|
522,719
|
|
|
$
|
118,206
|
|
On December 30, 2015, we
completed the CanX Acquisition, a business combination pursuant to a merger agreement with CanX. The assets acquired include in-process research and development, trade names and non-compete agreements
associated with pharmaceutical product development programs and a line of consumer products. The purchase price included
$250,000 in cash, 5,000,000 shares of Company common stock, plus contingent consideration of $250,000 (subject to a new
financing transaction with gross proceeds greater than $750,000) and 19,500,000 shares of Company common stock based on
achieving certain post-closing milestones. The CanX Acquisition positions the Company to pursue both pharmaceutical product
development and branded consumer products utilizing CBD.
The contingent
consideration arrangement requires us to issue up to 19,500,000 shares of Company common stock to the selling CanX
shareholders upon successful completion of the following milestones: a) 4,500,000 shares of Company common stock the first
time the Company completes development of a U.S. Food & Drug Administration (“FDA”) current good
manufacturing practice grade batch of successfully synthetically formulated “ready to ship” CBD for use in drug
development activities, as confirmed in writing by the third party formulating entity engaged to conduct such development
;
b) 5,000,000 shares of Company common stock the first time the Company files an investigational new
drug application with the FDA in connection with a development program utilizing CBD as the active pharmaceutical ingredient
(a “CBD Drug Product”); c) 5,000,000 shares of Company common stock the first time the Company commences a Phase
I clinical trial as authorized by the FDA for a CBD Drug Product; and, d) 5,000,000 shares of Company common stock the first
time the Company commences a Phase II clinical trial as authorized by the FDA for a CBD Drug Product.
Payment of contingent
consideration based on achievement of the milestones described above will range depending on whether or not the milestones
are achieved and the Company’s stock price at the date of issuance of the stock for payment of the milestones. The fair
value of contingent consideration on the acquisition date was estimated by utilizing a discounted cash flow method and
applied estimates for probabilities of achieving commercialization of potential drug candidates over the period of
potential patent expiration, estimated at 20 years. The discounted cash flow measure is based on significant Level 3 inputs
not observable in the market.
In connection with the CanX Acquisition,
the Company acquired IPR&D totaling $3,730,000, which is classified as an indefinite life asset and is not being amortized.
In conjunction with this acquisition, the Company recognized $2,788,300 of goodwill. However, none of the goodwill, IPR&D and
other intangible assets acquired are expected to be deductible for income tax purposes. Accordingly, in conjunction with the valuation
of intangible assets acquired, it was determined that a deferred income tax liability of $1,556,300 was required to reflect the
book to tax differences of the CanX Acquisition. This same amount was added to the goodwill balance.
The fair value of
IPR&D on the acquisition date was estimated by utilizing the multiple-period excess earnings method with revenues
projected to commence in 2021, is adjusted for probabilities, and used a discount rate of approximately 21%. The
multiple-period excess earnings method measure is based on significant Level 3 inputs not observable in the market.
As a result of the CanX Acquisition,
we expect to build on our reputation, experience and expertise in CBD to expand our corporate mission to include bringing the attributes
of CBD to the prescription drug market. These factors, among others, contributed to a purchase price in excess of the estimated
fair value of the CanX Acquisition net identifiable assets and, as a result, we recorded goodwill in connection with this transaction.
The CanX Acquisition constituted
the acquisition of a business and was recognized at fair value. The following reflects our allocation of the consideration:
Cash consideration
|
|
$
|
250,000
|
|
Company common stock
|
|
|
1,150,000
|
|
Contingent purchase price liability
|
|
|
250,000
|
|
Contingent purchase price equity
|
|
|
3,489,000
|
|
Aggregate consideration
|
|
$
|
5,139,000
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
In-process research and development
|
|
$
|
3,730,000
|
|
Trade names
|
|
|
100,000
|
|
Non-compete agreements
|
|
|
77,000
|
|
Deferred tax liability
|
|
|
(1,556,300
|
)
|
Goodwill
|
|
|
2,788,300
|
|
Total purchase price allocation
|
|
$
|
5,139,000
|
|
The pro forma effects of the
CanX Acquisition on the accompanying consolidated financial statements as if the acquisition had been completed on January 1, 2014
and 2015, are as follows:
|
|
(Unaudited)
|
|
|
|
For the years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Total product sales, net
|
|
$
|
11,695,570
|
|
|
$
|
10,190,667
|
|
Net loss
|
|
|
(12,368,106
|
)
|
|
|
(1,311,951
|
)
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
(0.04
|
)
|
There were no revenues or expenses
from the CanX Acquisition included in the Company’s consolidated statement of operations.
|
7.
|
GOODWILL AND INTANGIBLE ASSETS
|
Goodwill activity for the years
ended December 31, 2015 and 2014 was as follows:
Balance - December 31, 2013
|
|
$
|
1,855,512
|
|
Additions due to acquisitions
|
|
|
–
|
|
Balance - December 31, 2014
|
|
|
1,855,512
|
|
Additions due to CanX acquisition
|
|
|
2,788,300
|
|
Balance - December 31, 2015
|
|
$
|
4,643,812
|
|
During the fourth quarter of
2015 and 2014 we completed our annual impairment assessments and concluded that goodwill was not impaired in any of those years.
Intangible activity for the
years ended December 31, 2015 and 2014 was as follows:
|
|
Vendor Relationships
|
|
|
In-Process Research and Development
|
|
|
Trade Names
|
|
|
Non-compete Agreements
|
|
|
Total
|
|
Balance - December 31, 2013
|
|
$
|
1,170,000
|
|
|
$
|
–
|
|
|
$
|
230,000
|
|
|
$
|
2,710,000
|
|
|
$
|
4,110,000
|
|
Additions due to acquisitions
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Balance - December 31, 2014
|
|
|
1,170,000
|
|
|
|
–
|
|
|
|
230,000
|
|
|
|
2,710,000
|
|
|
|
4,110,000
|
|
Additions due to CanX acquisition
|
|
|
–
|
|
|
|
3,730,000
|
|
|
|
100,000
|
|
|
|
77,000
|
|
|
|
3,907,000
|
|
Balance - December 31, 2015
|
|
$
|
1,170,000
|
|
|
$
|
3,730,000
|
|
|
$
|
330,000
|
|
|
$
|
2,787,000
|
|
|
$
|
8,017,000
|
|
Intangible assets consist
of the following at December 31, 2015 and 2014:
|
|
Original Fair Market Value
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Useful Life (Years)
|
|
Balance - December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
$
|
1,170,000
|
|
|
$
|
682,500
|
|
|
$
|
487,500
|
|
|
|
5
|
|
In-process research and development
|
|
|
3,730,000
|
|
|
|
–
|
|
|
|
3,730,000
|
|
|
|
–
|
|
Trade names
|
|
|
330,000
|
|
|
|
134,167
|
|
|
|
195,833
|
|
|
|
5
|
|
Non-compete agreement
|
|
|
2,787,000
|
|
|
|
1,580,333
|
|
|
|
1,206,667
|
|
|
|
5
|
|
|
|
$
|
8,017,000
|
|
|
$
|
2,397,000
|
|
|
$
|
5,620,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
$
|
1,170,000
|
|
|
$
|
448,000
|
|
|
$
|
722,000
|
|
|
|
5
|
|
Trade names
|
|
|
230,000
|
|
|
|
88,167
|
|
|
|
141,833
|
|
|
|
5
|
|
Non-compete agreement
|
|
|
2,710,000
|
|
|
|
1,038,833
|
|
|
|
1,671,167
|
|
|
|
5
|
|
|
|
$
|
4,110,000
|
|
|
$
|
1,575,000
|
|
|
$
|
2,535,000
|
|
|
|
|
|
Amortization expense
for the year ended December 31, 2015 and 2014 totaled $822,000 and $821,500, respectively.
Based on identified intangible
assets that are subject to amortization as of December 31, 2015, we expect future amortization expense to be as follows for the
years ending December 31:
2016
|
|
$
|
857,400
|
|
2017
|
|
|
857,400
|
|
2018
|
|
|
104,400
|
|
2019
|
|
|
35,400
|
|
2020
|
|
|
35,400
|
|
|
8.
|
KANNALIFE SCIENCES INVESTMENT
|
During 2013, the Company invested
$750,000 in KannaLife Sciences, Inc. (“KannaLife”), which represented a 24.97% ownership stake. For the year ended
December 31, 2014 the Company recognized its prorata share of KannaLife losses of $38,552.
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
(“KannaLife Transaction”). Accordingly, the Company recognized a non-cash 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. The KannaLife Transaction was a non-cash transaction and accordingly is an adjustment to cash used in
operating activities for the year ended December 31, 2014.
|
9.
|
SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
|
On May 19, 2015 (the “Closing
Date”), the Company entered into a Securities Purchase Agreement (“SPA”) with Redwood Management, LLC (the “Investor”
or “Redwood”) pursuant to which the Investor committed to lend to the Company up to $6,500,000 (the “Financing”).
During the year ended December
31, 2015, the Company issued four tranches of convertible promissory notes in the aggregate principal amount of $1,785,000 to the
Investor and other third parties who were assigned rights by the Investor to participate in the Financing. During the first quarter
of 2016, the Company repaid all obligations under the SPA and has no intention of seeking further capital from the Investor, or
any other investor(s) in the Financing. Activity under the SPA during 2015 and the first quarter of 2016 are described below.
The
Company’s borrowings and conversions under the SPA for the year ended December 31, 2015 is summarized in the table below:
|
|
December 31, 2015
|
|
|
|
Maturity
|
|
|
Balance
|
|
|
Interest Rate
|
|
Senior Secured Convertible Promissory Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 1 (Note 1)
|
|
|
May 19, 2016
|
|
|
$
|
510,000
|
|
|
|
10%
|
|
Tranche 2 (Note 2)
|
|
|
June 12, 2016
|
|
|
|
510,000
|
|
|
|
10%
|
|
Tranche 3 (Note 3)
|
|
|
July 24, 2016
|
|
|
|
510,000
|
|
|
|
10%
|
|
Tranche 4 (Note 4)
|
|
|
September 16, 2016
|
|
|
|
255,000
|
|
|
|
10%
|
|
Total borrowings
|
|
|
|
|
|
|
1,785,000
|
|
|
|
|
|
Convertible notes converted (Note 1)
|
|
|
(510,000
|
)
|
Convertible notes converted (Note 2)
|
|
|
(255,000
|
)
|
Unamortized debt issuance costs
|
|
|
(99,805
|
)
|
Debt discount - beneficial conversion feature
|
|
|
(38,392
|
)
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
881,803
|
|
Less current portion
|
|
|
881,803
|
|
Long-term borrowings - net of current portion
|
|
$
|
–
|
|
The Company’s obligations
under the Financing were secured by substantially all of the Company’s assets. On the Closing Date, the Company issued to
the Investor a 10% Senior Secured Promissory Note (the “Initial Note”) in the principal amount of $510,000, in exchange
for payment by the Investor of the total sum of $500,000. The principal sum of the Initial Note reflects the amount invested, plus
a 2% Original Issue Discount (“OID”). On June 12, 2015, the Company issued to the Investor a promissory note for the
second tranche of the Financing in the principal amount of $510,000, in exchange for payment by the Investor of the total sum of
$500,000 (“Note 2”). The principal sum of Note 2 reflects the amount invested, plus a 2% OID.
On July 24, 2015, Redwood entered
into separate assignment agreements (each, an “Assignment Agreement”) with each of the BOU Trust (“BOU”),
Old Main Capital, LLC (“Old Main Capital”) and Blue Marina Investments (“Blue Marina” and together with
BOU and Old Main Capital, the “New Investors” and, together with Redwood, the “Investors”) pursuant to
which Redwood assigned certain of its rights under the SPA, to each New Investor, specifically the right to purchase a specified
amount of the 10% Senior Secured Convertible Promissory Notes issuable by the Company to Redwood pursuant to the terms of the SPA
and the rights related thereto under the Transaction Documents (as defined below). In consideration for such assignment, the New
Investors each agreed to be bound by the provisions of the Transaction Documents that apply to the “Purchasers” (as
defined in the SPA).
Pursuant to the Financing, on
July 24, 2015, and pursuant to the terms of the SPA and the Assignment Agreements, the Company issued to Redwood a third 10% Senior
Secured Convertible Promissory Note in the principal amount of $204,000 (the “Redwood Note 3”), in exchange for payment
by Redwood of the sum of $200,000. The principal sum of Redwood Note 3 reflects the amount invested plus the OID.
Pursuant to the Financing, on
July 24, 2015, and pursuant to the terms of the SPA and the Assignment Agreements, the Company issued to: (i) BOU a 10% Senior
Secured Convertible Promissory Note in the principal amount of $51,000, in exchange for payment by BOU of the sum of $50,000; (ii)
Old Main Capital a 10% Senior Secured Convertible Promissory Note in the principal amount of $204,000, in exchange for payment
by Old Main Capital of the sum of $200,000; and (iii) Blue Marina a 10% Senior Secured Convertible Promissory Note in the principal
amount of $51,000, in exchange for payment by Blue Marina of the sum of $50,000 ((i), (ii) and (iii) collectively, the “New
Investor Notes”). Out of the proceeds of Redwood Note 3 and the New Investor Notes, the Company paid Chardan brokerage commissions
equal to $25,000, resulting in net proceeds to the Company of $475,000. Redwood Note 3 and the New Investor Notes are referred
to herein collectively as “Note 3”.
On September 16, 2015, the Company
and the Investor entered into an Amendment No. 1 to the SPA (the “Amendment”) pursuant to which the parties amended
the terms of the fourth tranche of funding to provide that as of the date of the Amendment, the Investor is irrevocably bound,
subject to the equity conditions, discussed below, to fund the fourth tranche of the Financing and that such tranche shall have
a conversion price equal to 60% of the lowest traded price in the 30 days prior to conversion, as further discussed below. The
parties further agreed that the fourth tranche would be broken into two sub-tranches – each in the amount of $250,000. Pursuant
to the Financing, on September 16, 2015, and pursuant to the terms of the SPA, the Company issued to the Investor a promissory
note for the first half of the fourth tranche in the principal amount of $255,000, in exchange for payment by the Investor of the
total sum of $250,000 (“Note 4”). The principal sum of Note 4 reflects the amount invested, plus a 2% OID. The Investor
did not fund the second sub-tranche of the fourth tranche.
In connection with the Financing,
and in addition to the SPA and the Initial Note, on the Closing Date, the Company and the Investor entered into a Security Agreement,
an Intellectual Property Security Agreement and a Registration Rights Agreement, and each of our subsidiary companies entered into
a Subsidiary Guarantee (the “Transaction Documents”).
On September 16, 2015, the Company
and the Investor also entered into an Amendment No. 1 to the promissory notes (the “Notes Amendment”) pursuant to which
the parties amended the terms of the Initial Note, Note 2 and Redwood Note 3 to provide that each such promissory note shall have
a conversion price for amortization payments equal to 60% of the lowest traded price in the 15 days prior to conversion, as further
discussed below.
Pursuant to the Financing, and
provided the Company was not in default under the terms of any of the Transaction Documents, the Investor was to provide additional
funding in the aggregate amount of $4,750,000 in exchange for delivery of additional 10% Senior Secured Convertible Promissory
Notes (each, a “Note” and together with the Initial Note, Note 2, Note 3 and Note 4, the “Notes”). The
Company has not received any such additional funding in connection with the Financing and does not intend to further utilize the
Financing to receive any additional funding.
The Notes were scheduled to mature
in 12 months, and were convertible at the option of the Investor at any time into shares of the Company’s common stock at
a conversion price equal to the lowest Volume Weighted Average Price (“VWAP”) in the 15 trading days prior to the Closing
Date (the “Fixed Conversion Price”). Amortization payments under the Notes commenced on the five-month anniversary
of the issuance of a Note, and 1/15
th
of the principal amount and accrued interest were payable in bi-weekly installments
until the maturity of such Note; provided, however, that pursuant to the terms of the Notes Amendment, the Company had a thirty
(30)-day extension to make the first amortization payment under the Initial Note, Note 2 and Redwood Note 3. The Company could
choose in its discretion to make amortization payments under the Notes in common stock, at a conversion price equal to the lower
of (a) 70% of the VWAP for the 15 consecutive trading days prior to conversion, or (b) the Fixed Conversion Price (the lower of
(a) and (b), the “Amortization Conversion Price”); provided, that if the average daily dollar volume of the Company’s
common stock for the previous 20 days prior to payment was less than $50,000, then the conversion price would be equal to 60% of
the lowest traded price in the 30 days prior to conversion; and provided, further, that pursuant to the terms of the Amendment
and the Notes Amendment, the conversion price under the Initial Note, Note 2 and Redwood Note 3 and the promissory notes issued
in connection with the fourth tranche (including without limitation Note 4) would have a conversion price equal to 60% of the lowest
traded price in the 15 days prior to conversion. The Company could only make amortization payment in common stock, in lieu of cash,
if no event of default had occurred under the Notes and it met certain financial and non-financial covenants as defined in the
Transaction Documents. As of December 31, 2015, the Company was in compliance with all such covenants.
During the year ended December
31, 2015, the Company issued 5,716,230 shares of its common stock to the Investors in connection with the conversion of Note 1
and partial conversion of Note 2 in the aggregate principal amount of $765,000 and $13,373 of accrued interest. The total of $778,373
was allocated to common stock and additional paid in capital as a result of the conversion.
In connection with the Financing,
the Company incurred debt issuance costs of $364,504, which will be amortized over the entire term of the Financing term. Debt
issuance costs of $264,699 were amortized to interest expense during the year ended December 31, 2015.
Due to the 60% conversion feature
described above, the Company recorded a beneficial conversion feature amount of $612,500 as a debt discount associated with the
Notes. During the year ended December 31, 2015, the Company recorded an expense of $574,108 for amortization of the beneficial
conversion feature amount.
The following table presents
the range of assumptions used by the Company for calculating the fair value of the beneficial conversion feature of the Notes
using the Monte Carlo simulation valuation model issued during the year ended December 31, 2015:
|
|
Assumption Range
|
Volatility
|
|
89.0% - 99.0%
|
Risk-Free Interest Rate
|
|
0.04% - 0.24%
|
Expected Term
|
|
6 months
|
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 Notes. The Company estimates the expected term for beneficial conversion feature to be six months, corresponding
to the applicable conversion date for the Notes. Expected volatility is calculated based on the Company’s peer group, consisting
of eight other companies in our industry, and the Company.
During the first quarter of fiscal
year 2016, the Company repaid the remaining principal balance of the Notes in full as further described below.
In connection with the conversion
of the remaining principal amount of $255,000 of Note 2, the Company issued 3,062,535 shares of its common stock to the Investors.
The Company repaid $357,000 of
the aggregate principal amount of Note 3 plus interest in the amount of $148,944 in cash to the Investors. The Company issued 2,500,000
shares of its common stock to the Investors in connection with the conversion of the remaining principal amount of $153,000 of
Note 3.
The Company repaid the entire
principal amount of Note 4 in the amount of $255,000 plus interest in the amount of $93,075 in cash to the Investors.
Bart Mackay, a Board Director
of the Company owns 100% of Roen Ventures, LLC through Mackay Ventures LLC (“Mackay Ventures”), which is solely owned
by Bart Mackay, which owns a 99% interest in each of Mai Dun Limited, LLC (“Mai Dun”) and Mercia Holdings, LLC (“Mercia”),
and Mr. Mackay owns the remaining 1% in each of Mai Dun and Mercia. Mai Dun and Mercia each own a 50% interest in Roen Ventures,
LLC. For the years ended December 31, 2015 and 2014, Mr. Mackay received $1,500 and $500, 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 11). 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 12).
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, 2015 and 2014, the Company recognized sales to the following related parties:
|
|
|
|
For the years ended December 31,
|
|
Party
|
|
Relationship
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Medical Marijuana, Inc. ("MJNA")
|
|
Stockholder
|
|
$
|
2,002,910
|
|
|
$
|
–
|
|
HempMeds PX
|
|
80% owned by MJNA
|
|
|
–
|
|
|
|
5,443,978
|
|
Total sales to related parties
|
|
|
|
$
|
2,002,910
|
|
|
$
|
5,443,978
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total sales
|
|
|
|
|
17.4%
|
|
|
|
53.4%
|
|
At December 31, 2015, the Company
had three notes receivable totaling $617,681, two of which are from sale of inventory to MediJane Holdings and MJNA, and the third note from a litigation settlement with MJNA. At December 31, 2014, the Company had a note receivable from
Dixie Botanicals of $335,173, a company 60% owned by MJNA (Note 3).
We recognized litigation revenue
of $756,714 for the year ended December 31, 2015 related to the Settlement Agreement. Pursuant to the Settlement Agreement, the
MJNA Parties paid the Company the sum of $150,000 and delivered the Settlement Note. In November 2015, MJNA failed to timely pay
the fourth payment installment under the Settlement Note and therefore defaulted on the Settlement Note. On December 3, 2015,
the Company foreclosed on the Settlement Note collateral consisting of Company common stock. The foreclosure resulted in the Company
obtaining rights to receive 624,750 shares of our common stock in full satisfaction of the remaining principal and accrued interest
balance of the Settlement Note. At the foreclosure date, the Company took immediate possession of 500,000 shares of our common
stock held in escrow. At December 31, 2015, the Company was arranging to obtain the remaining 124,750 shares of our common stock.
The Settlement Note balance of $60,351 at December 31, 2015 represents the fair value at the foreclosure date of the remaining
124,750 shares (Note 3).
We also recognized
revenue related to the sale of our products to MJNA of $2,002,910 for the year ended December 31, 2015 and received the MJNA Promissory
Note in the principal amount $2,002,910 that was to be paid in 12 equal installments beginning on November 3, 2015 in exchange
for the product shipped to MJNA. The MJNA Promissory Note is secured by 2,000,000 shares of the Company’s common stock held
in escrow. MJNA has failed to make any payments on the MJNA Promissory Note and is in default. The MJNA Promissory Note is likely
not collectible, and the probable form of collection is for the Company to foreclose on the 2,000,000 shares of Company common
stock. Bad debt expense of $1,522,921 related to the write down of the MJNA Promissory Note was recognized for the year ended
December 31, 2015.
During the years ended December
31, 2015 and 2014, the Company paid $3,948,304 and $9,077,025, respectively, to a stockholder of the Company who is a supplier
of hemp oil and hemp to the Company.
|
11.
|
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, 2015 and 2014 was $0 and $589,474, 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, 2015 and 2014,
the Company had 45,451,389 and 33,419,166 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. In addition, during 2014, 10,000,000 shares of the Company’s common stock were issued for
a debt conversion (Note 11); 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 shares of common stock under an employment agreement during the year ended December 31, 2014. The
agreement terminated in December 2014 and no further grants will be awarded under this agreement.
On January 28, 2015, we commenced
an offering to sell up to $24 million shares of the Company’s 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. During 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.
During the year ended December
31, 2015, the Company issued 5,716,230 shares of its common stock to investors in connection with the conversion of secured convertible
promissory notes payable in the aggregate principal amount of $765,000 and $13,373 of accrued interest (Note 9).
During the year ended December
31, 2015 the Company issued 225,993 shares of common stock totaling $328,402 to non-employees for professional services. Additionally,
during the year ended December 31, 2015, the Company issued 300,000 shares of common stock totaling $625,000 to an officer and
director. The common stock issued was valued based on the closing trading price of the Company’s common stock on the date
of issuance.
In December 2015, the Company
received back 500,000 shares of its common stock totaling $241,889 on foreclosure of a note receivable (Note 3).
On December 30, 2015, the Company
issued 5,000,000 shares of its common stock in connection with the CanX Acquisition (Note 6).
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, 2015 and 2014 there is no preferred stock issued and outstanding.
Options/Warrants
On July
23, 2014, Company stockholders approved the Amended and Restated 2013 Equity Incentive Plan, which provides for the granting of
stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. On December 21,
2015, Company stockholders approved an amendment to the Amended and Restated 2013 Equity Incentive Plan, increasing the number
of shares that may be issued under such plan to 15,000,000 shares of common stock. This plan serves as the successor to the 2013
Equity Incentive Plan (Note 13).
|
13.
|
STOCK-BASED COMPENSATION
|
On July 23, 2014, Company shareholders
approved the Amended and Restated 2013 Equity Incentive Plan (as amended, 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.
On December 21, 2015, Company stockholders approved an amendment to the Amended 2013 Plan, increasing
the number of shares that may be issued under such plan to 15,000,000 shares of common stock. 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. As of December 31,
2015, the Company had approximately 5,201,000 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 years ended December 31, 2015 and 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
|
|
|
|
–
|
|
Granted
|
|
|
3,605,000
|
|
|
|
0.71
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(262,632
|
)
|
|
|
2.59
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(13,332
|
)
|
|
|
2.82
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding - December 31, 2015
|
|
|
9,799,036
|
|
|
|
1.97
|
|
|
|
9.20
|
|
|
|
57,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercisable - December 31, 2015
|
|
|
7,287,981
|
|
|
|
2.09
|
|
|
|
9.16
|
|
|
|
45,050
|
|
Total unvested - December 31, 2015
|
|
|
2,511,055
|
|
|
|
1.62
|
|
|
|
9.33
|
|
|
|
12,750
|
|
Total vested or expected to vest - December 31, 2015
|
|
|
9,799,036
|
|
|
|
1.97
|
|
|
|
9.20
|
|
|
|
57,800
|
|
The following table
summarizes unvested stock options as of December 31, 2015 and 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
|
|
Granted
|
|
|
3,605,000
|
|
|
|
0.53
|
|
Vested
|
|
|
(4,252,444
|
)
|
|
|
1.36
|
|
Forfeited
|
|
|
(262,632
|
)
|
|
|
2.25
|
|
Unvested stock options - December 31, 2015
|
|
|
2,511,055
|
|
|
|
1.37
|
|
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 years ended December 31,
2015 and 2014:
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Employees Weighted Average
|
|
|
Non-Employees Weighted Average
|
|
|
Employees Weighted Average
|
|
|
Non-Employees Weighted Average
|
|
Volatility
|
|
|
89.16%
|
|
|
|
96.68%
|
|
|
|
103.48%
|
|
|
|
96.69%
|
|
Risk-Free Interest Rate
|
|
|
1.57%
|
|
|
|
2.12%
|
|
|
|
1.81%
|
|
|
|
2.31%
|
|
Expected Term
|
|
|
5.30
|
|
|
|
10.00
|
|
|
|
5.32
|
|
|
|
10.00
|
|
Dividend Rate
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Fair Value Per Share on Grant Date
|
|
|
$0.49
|
|
|
|
$1.68
|
|
|
|
$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 expense of $5,094,791
and $7,069,833 relating to stock options for the years ended December 31, 2015 and 2014, respectively. The Company also recognized
expense of $625,000 and $888,125 relating to common stock issued to employees, officers, and directors during the years ended December 31,
2015 and 2014, respectively. For the year ended December 31, 2015, stock-based compensation of $5,640,914 and $78,877, was expensed
to Selling, General and Administration and Research and Development, respectively. 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, 2015, total unrecognized compensation cost related to non-vested stock-based compensation arrangements
granted to employees, officers, and directors was $3,114,359, which is expected to be recognized over a weighted-average
period of 2.22 years.
|
14.
|
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, 2015:
|
|
Total Operating Leases
|
|
For the years ending December 31,
|
|
|
|
|
|
|
|
2016
|
|
$
|
488,107
|
|
2017
|
|
|
266,675
|
|
|
|
$
|
754,782
|
|
The Company incurred rent expense
of $441,723 and $285,960 for the years ended December 31, 2015 and 2014, respectively.
The Company has two supply arrangements
in place with European farmers to supply raw material in future years. The first arrangement contemplates growth and processing
of 2,600 kilograms of product and the second contract provides up to 1 million kilograms of raw product to the Company. There is
approximately $302,000 remaining to be paid under this second contract related to the 2015 crop. 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
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 filed a motion asking to be
designated the lead plaintiff in the litigation. On March 19, 2015, the Court issued a ruling appointing Steve Schuck
as lead plaintiff. Counsel for Mr. Schuck filed a “consolidated amended complaint” on September 14, 2015.
On December 11, 2015, the Company filed a motion to dismiss the consolidated amended complaint. After requesting
several extensions, counsel for Mr. Schuck filed an opposition to the motion to dismiss on March 21, 2016. The
Company’s reply brief is due April 25, 2016. Management intends to vigorously defend the allegations and
an estimate of possible loss cannot be made at this time.
On
March 17, 2015, stockholder 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 discussed above – 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 filed a motion to dismiss the
suit on June 29, 2015. Instead of opposing the Company’s motion, Mr. Ruth filed an amended complaint on July 20, 2015.
Thereafter, Mr. Ruth and the Company agreed to stay the action pending the outcome of the securities class action case in New York
discussed above. Management intends to vigorously defend the allegations. Since no discovery has been conducted and
the case remains stayed, an estimate of the possible loss or recovery cannot be made at this time.
Royalties
In
addition to the contingent consideration in connection with the CanX Acquisition, the Company is obligated to pay a 5% royalty
of net sales on each of the first and second CBD Drug Products respectively, subject to, and commencing from the first commercial
release by the Company of each of the first and second CBD Drug Products developed by the Company formulated to treat human medical
conditions (Note 6).
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, 2015 and 2014, 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.
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,317,485
|
|
|
$
|
1,083,064
|
|
Bad debt expense
|
|
|
1,125,787
|
|
|
|
39,834
|
|
Intangible assets
|
|
|
479,565
|
|
|
|
310,548
|
|
Stock-based compensation
|
|
|
163,938
|
|
|
|
128,703
|
|
Other
|
|
|
105,347
|
|
|
|
33,596
|
|
|
|
|
4,192,122
|
|
|
|
1,595,745
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(62,828
|
)
|
|
|
(85,217
|
)
|
CanX intangible assets
|
|
|
(1,556,300
|
)
|
|
|
–
|
|
|
|
|
(1,619,128
|
)
|
|
|
(85,217
|
)
|
Valuation allowance
|
|
|
(4,129,294
|
)
|
|
|
(1,510,528
|
)
|
Net deferred tax liabilities
|
|
$
|
(1,556,300
|
)
|
|
$
|
–
|
|
The valuation allowance increased
$2,618,766 and $549,771 for years ended December 31, 2015 and 2014, respectively.
At December 31, 2015, the Company
has Federal and state net operating loss (“NOL”) carryforwards of approximately $5,842,000 and $5,678,000, 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,
|
|
2015
|
|
|
2014
|
|
Income tax benefit at statutory rate
|
|
$
|
(4,119,076
|
)
|
|
$
|
(444,442
|
)
|
State taxes
|
|
|
(375,792
|
)
|
|
|
(94,475
|
)
|
Stock-based compensation
|
|
|
1,686,065
|
|
|
|
2,293,891
|
|
Investment in KannaLife
|
|
|
–
|
|
|
|
(2,567,000
|
)
|
Amortization of discount on convertible note
|
|
|
195,207
|
|
|
|
200,421
|
|
Permanent differences
|
|
|
(5,170
|
)
|
|
|
(8,114
|
)
|
Other
|
|
|
–
|
|
|
|
69,948
|
|
Change in valuation allowance
|
|
|
2,618,766
|
|
|
|
549,771
|
|
Total provision
|
|
$
|
–
|
|
|
$
|
–
|
|
On January 29, 2016, the Company
issued an unsecured promissory note to a lender in the principal amount of $850,000 (“Promissory Note”) in consideration
of a loan provided to the Company by the lender. The Promissory Note bears interest at 12% per annum, and the Company is obligated
to make monthly interest-only payments in the amount of $8,500, commencing March 1, 2016. All principal and accrued and unpaid
interest is due under the Promissory Note on February 1, 2018. The Company has the right to prepay the Promissory Note without
penalty or premium, provided that if a prepayment of principal is made before July 1, 2016, the investor is entitled to a prepayment
interest guarantee equal to six months interest payments on the Promissory Note.
Pursuant to the terms of the Promissory
Note, the Company issued to the lender a common stock purchase warrant providing the lender with the right to purchase up to 2,000,000
shares of the Company’s common stock (the “Warrant”). The Warrant is exercisable, subject to certain limitations,
subsequent to July 1, 2017 and before the date that is five (5) years from the date of issuance at an exercise price of $0.20 per
share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends.
During the first quarter of
2016, the Notes were converted to common stock and paid in full (Note 9).
On March 30, 2016, the Company issued
500,000 shares of common stock to an investment bank in connection with the CanX Acquisition.