Item 5.02 Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
On March 29, 2016, the Board of Directors of
the Company engaged AON Radford, an independent compensation consultant, to prepare a report regarding the Company’s management
and board compensation arrangements to assess the compensation arrangements of the Board and management. Pursuant to the AON Radford
Executive and Board of Directors Compensation Studies delivered to the Board, the Compensation Committee and the Board approved
the arrangements set forth herein.
Compensatory Arrangements of Certain
Officers
Stock Options
. The disinterested members
of the Board approved the grant of stock options, in the quantities and upon the terms set forth below, to Michael Mona, Jr.,
the Company’s Founder, President and Chief Executive Officer, Joseph Dowling, the Company’s Chief Financial Officer,
and Michael Mona III, the Company’s
Co-Founder and
Chief
Operating Officer (together, the “Executives”). As set forth in Item 3.02, above, the stock options were granted pursuant
to an exemption from registration under the Act, in reliance on exemptions from the registration requirements of the Act in transactions
not involved in a public offering pursuant to Rule 506(b) of Regulation D, as promulgated by the SEC under the Act.
The disinterested members of the Board granted
Mr. Mona 6,000,000 stock options and Mr. Mona III 4,000,000 stock options. The Board granted Mr. Dowling 1,000,000 stock options.
The stock options (a) are durational based, conditioned upon the Company’s achievement of certain milestones set forth below
(the “Milestones”), (b) have an exercise price equal to the fair market value of the Company’s common stock at
the time of grant, or $0.368, and (c) have a term of ten (10) years from the date of grant. The Milestones are as follows:
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(i)
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25% of the stock options vest 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
Cannabidiol (“CBD”) for use in drug development activities;
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(ii)
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25% of the stock options vest 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”);
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(iii)
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25% of the stock options vest the first time the Company commences a Phase I clinical trial as
authorized by the FDA for a CBD Drug Product; and
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(iv)
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25% of the stock options vest the first time the Company commences a Phase II clinical trial as
authorized by the FDA for a CBD Drug Product.
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Vesting shall accelerate upon a sale of the
company or change in control, including a “Disposition Event” as defined under the Agreement and Plan of Reorganization
dated December 30, 2015 by and among the Company (formerly CannaVest Corp.), CANNAVEST Merger Sub, Inc., CannaVest Acquisition
LLC, CanX, Inc. and The Starwood Trust (the “Purchase Agreement”). The Purchase Agreement is filed as an exhibit to
the Company’s Current Report on Form 8-K filed with the SEC on January 4, 2016.
Salaries and Severance
. The disinterested
members of the Board set the salaries for the Executives as follows: Michael Mona, Jr. - $330,000; Joseph Dowling - $275,000; and
Michael Mona III - $225,000; provided, however, that such salary increases shall take effect together and at the same time, and
only upon determination by the Chief Executive Officer, in his sole discretion, that such salary increases are prudent given the
Company’s financial condition and prospects. The disinterested members of the Board set the severance arrangements for the
Executives as follows: in the event of termination without “Cause” or voluntary termination for “Good Reason”,
each of the Executives shall be entitled to severance equal to their then-current base salary until the end of the employment term
(December 31, 2018), or for a period of twelve (12) months, whichever is greater. In the event of the death or disability of an
Executive, he (or his estate) shall receive his then-current base salary for a period of one (1) year.
Bonus Compensation
. Each of the Executives
shall be entitled to annual cash performance bonuses upon achievement of certain goals set forth by the Compensation Committee,
and in any event in the discretion of the Board after taking into consideration the performance of the Company, the Executive’s
performance and the financial condition of the Company. The targeted amount of the annual bonus shall be a percentage of the Executive’s
then effective base salary (60% for Mr. Mona, and 40% for each of Messrs. Mona III and Dowling); provided, however, that the payment
and amount of any annual bonus shall be in the sole discretion of the Board.
Compensatory Arrangements of Directors
On July 6, 2016, the Board approved amendments
to the compensation plan for the Directors, excluding any Director who also is an Executive, which provides that each director
shall be entitled to compensation for service on the Board as follows: (i) cash compensation shall be $500 per director per meeting
attended; (ii) a stock option to purchase 200,000 shares of Company common stock commencing on July 6, 2016, vesting in equal monthly
increments over a period of twenty-four (24) months of continued service, with an exercise price equal to the fair market value
of the Company’s common stock at the time of grant, or $0.368, and with a term of ten (10) years from the date of grant;
and (iii) on July 6, 2016 and on each anniversary thereof, a stock option to purchase 50,000 shares of Company common stock, fully-vested
upon issuance at an exercise price to be determined as of the date of grant pursuant to the Company’s 2013 Amended and Restated
Equity Incentive Plan (the “Plan”), with the exercise price for the initial grant on July 6, 2016 equal to the closing
price of the Company’s common stock on July 6, 2016, or $0.368, and a term of ten (10) years from the date of grant.
In recognition for his valuable service
as a Director, the Board also approved the issuance of a common stock purchase warrant to Bart Mackay with the right to purchase
up to 100,000 shares of the Company’s common stock (the “Warrant”). The Warrant is exercisable at any time prior
to the fifth anniversary of the issuance at an exercise price of $0.368 per share, subject to adjustment upon the occurrence of
certain events such as stock splits and dividends. The Company approved the issuance of the Warrant pursuant to an exemption from
registration under the Act, in reliance on exemptions from the registration requirements of the Act in transactions not involved
in a public offering pursuant to Rule 506(b) of Regulation D, as promulgated by the SEC under the Act. A copy of the form of the
Warrant is filed as Exhibit 4.1 to this Current Report on Form 8-K.