See accompanying
notes to the condensed consolidated financial statements.
See accompanying
notes to the condensed consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
See accompanying
notes to the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
UNAUDITED
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-based, specialty pharmaceutical corporation (“CanX Acquisition”) as more
fully set forth in our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”)
on January 4, 2016. On June 8, 2016 the Company announced that the Financial Industry Regulatory Authority (“FINRA”)
had approved a change in the trading symbol for the Company’s common stock to “CVSI.” The Company’s common
stock formerly traded under the symbol “CANV.”
The Company operates two distinct business
segments: a consumer product segment in manufacturing, marketing and selling plant-based Cannabidiol (“CBD”) products
to a range of market sectors; and, a specialty pharmaceutical segment focused on developing and commercializing novel therapeutics
utilizing synthetic CBD. The specialty pharmaceutical segment began development activities during the second quarter of 2016.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
–
The condensed 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 for its current business model on January 29, 2013. On May 2, 2016,
the Company filed Articles of Dissolution for its wholly-owned subsidiaries US Hemp Oil, LLC and CannaVEST Laboratories, LLC, with
the Secretary of State of Nevada, effective as of April 29, 2016. Neither US Hemp Oil, LLC nor CannaVEST Laboratories, LLC had
any assets or liabilities.
The unaudited condensed consolidated interim
financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally
present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) have been omitted pursuant to such rules and regulations. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited financial statements and notes for the year ended December
31, 2015, filed with the SEC on the Company’s Annual Report on Form 10-K filed on April 14, 2016. The results for the three
and nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year ending
December 31, 2016.
Change in Accounting Policy
–
During the first quarter of fiscal year 2016, the Company changed its accounting policy for shipping and handling costs from sales
of Company products. Under the new accounting policy, these costs are included in cost of goods sold, whereas, they were previously
included in selling, general and administrative expenses. Including these expenses in cost of goods sold better aligns these costs
with the related revenue in the gross profit calculation. This accounting policy change has been applied retrospectively.
The Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2015 have been reclassified to reflect this change in accounting policy.
The impact of this reclassification was an increase of $111,391 to cost of goods sold for the three months ended September 30,
2015 and a corresponding decrease to selling, general and administrative expenses in the same period. The impact of this reclassification
was an increase of $235,213 to cost of goods sold for the nine months ended September 30, 2015, and a corresponding decrease to
selling, general and administrative expenses in the same period. This reclassification had no impact on Net Sales, Operating Loss,
Net Loss or Net Loss per Share.
Liquidity
– For the
three months ended September 30, 2016 and 2015, the Company had a net loss of $1,900,736 and $989,549, respectively. For the nine
months ended September 30, 2016 and 2015, the Company had a net loss of $5,660,755 and $5,641,426, respectively. In addition, for
the nine months ended September 30, 2016 and 2015, the Company had negative cash flows from operations of $1,429,277 and $2,924,177,
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 through the third quarter of 2017, 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 specialty pharmaceutical
business segment will require additional capital of approximately $1,500,000 over the next 12 months. 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. 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 flow 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
|
|
|
|
|
·
|
discount rates.
|
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 three and nine months ended September 30, 2016 and 2015, there were no impairments.
Use of Estimates
–
The Company’s consolidated financial statements have been prepared in accordance with 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 warrants, a note payable beneficial conversion
feature 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; consumer products and specialty pharmaceutical. 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 specialty pharmaceutical segment
is newly established to develop a variety of drug candidates which use synthetic CBD as a primary active ingredient. The specialty
pharmaceutical segment began development activities during the second quarter of 2016.
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 September 30, 2016 and December 31, 2015, the Company had no cash equivalents.
Concentrations of Credit Risk
– As of September 30, 2016, 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
$547,221 at September 30, 2016.
At September 30, 2016, the Company had
two notes receivable totaling $540,351, one of which is from sale of inventory to Medical Marijuana, Inc. (“MJNA”),
and the second note is from a litigation settlement with MJNA (Note 3).
One customer represented 60.5% of our accounts
receivable balance at September 30, 2016 and two customers represented 83% of our accounts receivable balance at December 31, 2015.
Accounts Receivable
–
Generally, the Company requires payment prior to shipment. However, in certain circumstances, the Company provides 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 September 30, 2016 and December 31, 2015, 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.
In the normal course of business, the Company
may offer discounts or promotions for various products to incentivize sales growth and brand awareness. Such discounts or promotions
are recorded as a reduction to sales revenue.
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 $115,990 and $111,391 for the three months ended September 30, 2016 and 2015, respectively.
Shipping and handling costs totaled $313,498 and $235,213 for the nine months ended September 30, 2016 and 2015, respectively.
Shipping and handling costs are recorded in cost of goods sold.
Returns
–
Finished
Products
– Within ten (10) days of a customer’s receipt of the Company’s finished products, the customer
may return (i) finished products that do not conform to the Company’s product specifications, or (ii) finished products which
are defective, provided that notice of condition is given within five (5) days of the customer’s receipt of the finished
products. The failure to comply with the foregoing time requirements shall be deemed a waiver of the 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 the 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. The 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 the 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 September 30, 2016 or December 31, 2015 due to insignificant return amounts experienced during the nine months ended September
30, 2016 and the year ended December 31, 2015, respectively.
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. Performance based stock options vest once
the applicable performance condition is satisfied. 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 condensed consolidated
statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant.
The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant. Stock-based
compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.
For performance based stock options, compensation is recognized once the applicable performance condition is satisfied.
The Company recognizes stock-based compensation
for equity awards granted to consultants as selling, general and administrative expense on the condensed 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 September 30, 2016 or December 31, 2015. As of September 30, 2016, the Company had $1,326,911 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, as of September
30, 2016 and December 31, 2015 were as follows:
|
|
Useful Lives
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
3 years
|
|
$
|
340,472
|
|
|
$
|
323,265
|
|
Tenant improvements
|
|
14 to 39 months
|
|
|
70,592
|
|
|
|
70,592
|
|
Laboratory and other equipment
|
|
5 years
|
|
|
361,710
|
|
|
|
361,710
|
|
|
|
|
|
|
772,774
|
|
|
|
755,567
|
|
Less: accumulated depreciation
|
|
|
|
|
(462,644
|
)
|
|
|
(315,952
|
)
|
|
|
|
|
$
|
310,130
|
|
|
$
|
439,615
|
|
Depreciation expense for the three months
ended September 30, 2016 and 2015 was $48,977 and $47,678, respectively, and for the nine months ended September 30, 2016 and 2015
was $146,692 and $141,222, 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 recorded as a discount to secured convertible and unsecured 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 11,924,776 and 9,258,888 of stock options outstanding that are anti-dilutive at September 30, 2016 and September 30, 2015,
respectively. In addition, the Company may be required to issue 11,000,000 shares of common stock related to certain performance
based stock options outstanding. As of September 30, 2016, there were also warrants outstanding to purchase up to 2,100,000 shares
of common stock. 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 and a variable amount of shares of common stock related to the potential conversion feature of the Iliad
Note (as defined below) (Note 8).
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. Research and development expense for the consumer products segment was $292,738
and $658,817 for the three and nine months ended September 30, 2016, respectively. Research and development expense for the specialty
pharmaceutical segment was $103,500 and $220,781 for the three and nine months ended September 30, 2016, respectively.
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 September 30, 2016 and December 31, 2015, 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 2013.
Recent Issued and Newly Adopted Accounting
Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606)
(“ASU 2014-09”), as amended by ASU 2015-14, 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, 2018
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 ASU 2014-15,
Presentation of Financial Statements – Going Concern
(“ASU 2014-15”)
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. ASU 2014-15 (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 a statement in the footnotes that there is substantial
doubt about the entity’s ability to continue as a going concern, 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. ASU 2014-15
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 July 2015, the FASB issued ASU 2015-11,
Inventory: Simplifying the Measurement of Inventory
(“ASU 2015-11”), 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 or 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 periods. 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 implemented this standard during the first quarter of 2016.
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 2015-09”), 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.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging
Issues Task Force)
(“ASU 2016-15), which provides amendments to specific statement of cash flows classification issues.
ASU 2016-15 is effective for public companies for fiscal years beginning after December 15, 2017, 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 September 30, 2016
and December 31, 2015 was comprised of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Medical Marijuana, Inc. settlement note and accrued interest
|
|
$
|
60,351
|
|
|
$
|
60,351
|
|
Medical Marijuana, Inc. promissory note and accrued interest
|
|
|
480,000
|
|
|
|
480,000
|
|
MediJane Holdings note and accrued interest
|
|
|
–
|
|
|
|
77,330
|
|
|
|
|
540,351
|
|
|
|
617,681
|
|
Less current portion
|
|
|
(540,351
|
)
|
|
|
(617,681
|
)
|
Long-term portion
|
|
$
|
–
|
|
|
$
|
–
|
|
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 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 its 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 September 30, 2016, 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 each of September 30, 2016 and 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 September 30,
2016 and 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.
The MediJane Holdings, Inc. (“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%. 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 returned in June 2016. At September 30, 2016 and December 31, 2015, the fair value of the remaining
Company products to be returned was determined to be $0 and $77,330, respectively, equal to the cost value of the Company products
to be returned, reduced by $9,218, which was recorded as a bad debt expense in 2016.
Inventory at September 30, 2016 and December
31, 2015 was comprised of the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
12,192,168
|
|
|
$
|
13,668,255
|
|
Finished goods
|
|
|
1,013,920
|
|
|
|
465,665
|
|
|
|
$
|
13,206,088
|
|
|
$
|
14,133,920
|
|
Accrued expenses at September 30, 2016
and December 31, 2015 were as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Accrued interest on secured convertible promissory note
|
|
$
|
–
|
|
|
$
|
69,063
|
|
Accrued payroll expenses
|
|
|
247,953
|
|
|
|
160,960
|
|
Other accrued liabilities
|
|
|
147,308
|
|
|
|
292,696
|
|
|
|
$
|
395,261
|
|
|
$
|
522,719
|
|
6.
|
INTANGIBLE ASSETS, NET
|
Intangible assets consisted of the following
at September 30, 2016 and December 31, 2015:
|
|
Original Fair Market Value
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Useful Life (Years)
|
|
Balance - September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
$
|
1,170,000
|
|
|
$
|
858,000
|
|
|
$
|
312,000
|
|
|
|
5
|
|
In-process research and development
|
|
|
3,730,000
|
|
|
|
–
|
|
|
|
3,730,000
|
|
|
|
–
|
|
Trade names
|
|
|
330,000
|
|
|
|
183,667
|
|
|
|
146,333
|
|
|
|
5
|
|
Non-compete agreements
|
|
|
2,787,000
|
|
|
|
1,998,383
|
|
|
|
788,617
|
|
|
|
5
|
|
|
|
$
|
8,017,000
|
|
|
$
|
3,040,050
|
|
|
$
|
4,976,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 agreements
|
|
|
2,787,000
|
|
|
|
1,580,333
|
|
|
|
1,206,667
|
|
|
|
5
|
|
|
|
$
|
8,017,000
|
|
|
$
|
2,397,000
|
|
|
$
|
5,620,000
|
|
|
|
|
|
Amortization expense for the three months
ended September 30, 2016 and 2015 totaled $214,350 and $205,500, respectively, and for the nine months ended September 30, 2016
and 2015 totaled $643,050 and $616,500, respectively.
Total receivables from MJNA totaled $540,351
at both September 30, 2016 and December 31, 2015, respectively.
During the three months ended September
30, 2016 and 2015, the Company paid $149,531 and $755,072, respectively, to a stockholder of the Company who is a supplier of hemp
oil and hemp to the Company. During the nine months ended September 30, 2016 and 2015, the Company paid the same stockholder of
the Company $252,509 and $5,372,133, respectively. In addition, during the second quarter of 2016, the Company issued 500,000 shares
of common stock in connection with consulting services from a European supplier valued based on the closing trading price of the
Company’s common stock on the date of issuance.
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 (“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 (together with
the Investor, the “Investors”). During the first quarter of 2016, the Company repaid all remaining obligations under
the SPA and has no intention of seeking further capital from the Investor, or any other investor(s) in the Financing.
The Company’s
borrowings and conversions under the SPA for the nine months ended September 30, 2016 and for the year ended December 31,
2015 is summarized in the table below:
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Maturity
|
|
|
Balance
|
|
|
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
|
|
|
|
255,000
|
|
|
|
510,000
|
|
|
|
10%
|
|
Tranche 3 (Note 3)
|
|
|
July 24, 2016
|
|
|
|
510,000
|
|
|
|
510,000
|
|
|
|
10%
|
|
Tranche 4 (Note 4)
|
|
|
September 16, 2016
|
|
|
|
255,000
|
|
|
|
255,000
|
|
|
|
10%
|
|
Total borrowings
|
|
|
|
|
|
|
1,020,000
|
|
|
|
1,785,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes converted (Note 1)
|
|
|
|
|
|
|
–
|
|
|
|
(510,000
|
)
|
|
|
|
|
Convertible notes converted (Note 2)
|
|
|
|
|
|
|
(255,000
|
)
|
|
|
(255,000
|
)
|
|
|
|
|
Convertible notes converted/repaid (Note 3)
|
|
|
|
|
|
|
(510,000
|
)
|
|
|
–
|
|
|
|
|
|
Convertible notes repaid (Note 4)
|
|
|
|
|
|
|
(255,000
|
)
|
|
|
–
|
|
|
|
|
|
Unamortized debt issuance cost
|
|
|
|
|
|
|
–
|
|
|
|
(99,805
|
)
|
|
|
|
|
Unamortized 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
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
During the nine months ended September
30, 2016, the Company repaid the remaining principal and interest balance under the Notes as follows: (i) issued 3,062,535 shares
of its common stock to the Investors in connection with conversion of the remaining $255,000 principal balance of Promissory Note
2; (ii) repaid $357,000 of the aggregate principal amount of Promissory Note 3 plus interest in the amount of $148,944 in cash
to the Investors, and 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 Promissory Note 3; and, (iii) repaid the entire principal amount of Promissory Note 4 in the amount
of $255,000 plus interest in the amount of $93,075 in cash to the Investors.
On May 25, 2016 (the “Purchase Price
Date”), the Company entered into a Securities Purchase Agreement (“Iliad SPA”) with Iliad Research and Trading,
L.P. (the “Lender” or “Iliad”) pursuant to which the Lender loaned the Company $2,000,000. On the Purchase
Price Date, the Company issued to Lender a Secured Convertible Promissory Note (the “Iliad Note”) in the principal
amount of $2,055,000 in exchange for payment by Lender of $2,000,000. The principal sum of the Iliad Note reflects the amount
invested, plus a 2.25% “Original Issue Discount” (“OID”) and a $10,000 reimbursement of Lender’s
legal fees. Out of the proceeds from the Iliad Note, the Company paid the sum of $25,000 to its placement agent, Myers & Associates,
L.P. The Company received net proceeds of $1,975,000 in exchange for the Iliad Note. The Iliad Note requires the repayment of
all principal and any interest, fees, charges and late fees on the date that is thirteen months after the Purchase Price Date
(the “Maturity Date”). Interest is to be paid on the outstanding balance at a rate of ten percent (10%) per annum
from the Purchase Price Date until the Iliad Note is paid in full. Interest is accrued during the term of the Iliad Note and all
interest calculations shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30)-day months and shall
compound daily. Subject to adjustment as set forth in the Iliad Note, the conversion price for each Lender conversion shall be
$0.50 (the “Lender Conversion Price”), convertible into shares of fully paid and non-assessable common stock. Beginning
on the date that is six months after the Purchase Price Date and continuing until the Maturity Date, Iliad shall have the right
to redeem a portion of the Iliad Note in any amount up to the Maximum Monthly Redemption Amount ($275,000, which is the maximum
aggregate redemption amount that may be redeemed in any calendar month), for which payments may be made in cash or by converting
the redemption amount into shares of Company common stock at a conversion price which is the lesser of (a) the Lender Conversion
Price of $0.50 and (b) the Market Price, defined as 70% (“the Conversion Factor”), subject to adjustment as follows:
if at any time (1) the average of the three lowest closing bid prices in the previous twenty (20) trading days is below $0.25
per share then the Conversion Factor will be reduced by 10%, (2) the Company is not Deposit/Withdrawal At Custodian eligible,
then the Conversion Factor will be reduced by an additional 5%, or (3) there has occurred a “Major Default” then the
Conversion Factor will be reduced by an additional 5%. The Company may prepay the Iliad Note at any time by payment to Lender
of 125% of the principal, interest and other amounts then due under the Note. The Company may prepay the Iliad Note notwithstanding
an earlier notice of conversion from the Lender, provided that in such event the Lender may convert an amount not to exceed $300,000
under the Iliad Note. In connection with the Iliad Note, as set forth above, the Company incurred an original issue discount of
$45,000 and $35,000 of other debt issuance costs, which will be amortized over the Iliad Note term. The Iliad Note is securitized
by the Company’s accounts receivable, inventory and equipment.
The Company’s borrowing under the
Iliad Note for the nine months ended September 30, 2016 and for the year ended December 31, 2015 is summarized in the table below:
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Maturity
|
|
|
Balance
|
|
|
Balance
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note payable
|
|
|
June 24, 2017
|
|
|
$
|
2,055,000
|
|
|
$
|
–
|
|
|
|
10%
|
|
Interest accrued
|
|
|
|
|
|
|
73,779
|
|
|
|
–
|
|
|
|
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
|
|
|
|
(53,797
|
)
|
|
|
–
|
|
|
|
|
|
Unamortized debt discount - beneficial conversion feature
|
|
|
|
|
|
|
(107,419
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
|
|
|
|
1,967,563
|
|
|
|
–
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
(1,967,563
|
)
|
|
|
–
|
|
|
|
|
|
Long-term borrowings - net of current portion
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
Due to the variability in potential convertible
common shares, the Company recorded a beneficial conversion feature of $370,000 at the time of the transaction, which will be amortized
over six months. During the three and nine months ended September 30, 2016, the Company recorded interest expense of $185,000 and
$262,581, respectively for amortization of the beneficial conversion feature. The assumptions used by the Company for calculating
the fair value of the beneficial conversion feature using the Binomial Lattice valuation model were: (i) Volatility of 74.0%; (ii)
Risk-Free Interest Rate of 0.44%; and (iii) Expected Term of five months.
Unsecured Note Payable
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, for which the interest-only payments obligation commenced on 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. In connection with the Promissory Note, the Company incurred an
original issue discount of $30,000 and $18,570 of other debt issuance costs, which will be amortized over the Promissory Note term.
The Company’s borrowing under the
Promissory Note for the nine months ended September 30, 2016 and for the year ended December 31, 2015 is summarized below:
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Maturity
|
|
|
Balance
|
|
|
Balance
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured promissory note payable
|
|
|
February 1, 2018
|
|
|
$
|
850,000
|
|
|
$
|
–
|
|
|
|
12%
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
|
|
|
|
(32,380
|
)
|
|
|
–
|
|
|
|
|
|
Unamortized debt discount - fair value of warrants
|
|
|
|
|
|
|
(177,867
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
|
|
|
|
639,753
|
|
|
|
–
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Long-term borrowings - net of current portion
|
|
|
|
|
|
$
|
639,753
|
|
|
$
|
–
|
|
|
|
|
|
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 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. The Company recorded the fair value
of the Warrant of $266,800 as a debt discount associated with the Promissory Note. During the three and nine months ended September
30, 2016, the Company recorded interest expense of $33,350 and $88,933, respectively, for amortization of the Warrant fair value.
The assumptions used by the Company for calculating the fair value of the Warrant using the Black-Scholes valuation model were:
(i) Volatility of 83.3%; (ii) Risk-Free Interest Rate of 2.12%; and (iii) Expected Term of five years.
Common Stock
The Company is authorized to issue up to
190,000,000 shares of common stock (par value $0.0001). As of September 30, 2016 and December 31, 2015, the Company had 52,338,924
and 45,451,389 shares of common stock issued and outstanding, respectively. During the nine months ended September 30, 2016, the
Company issued 5,562,535 shares of common stock in connection with conversion of convertible debt and also issued 500,000 shares
of common stock in connection with investment banking services. In addition, the Company issued 500,000
shares of common stock in connection with consulting services from a European supplier and issued 25,000 shares of common stock
to a former member of the Company’s Board of Directors. Furthermore, the Company issued 300,000 shares of common stock in
connection with investor relation services. The common stock issued in connection with professional services during the nine months
ended September 30, 2016 were valued based on the closing trading price of the Company’s common stock on the date of issuance.
Preferred Stock
The Company is authorized to issue up to
10,000,000 shares of $0.0001 par value preferred stock with designations, rights and preferences to be determined from time to
time by the Board of Directors of the Company. Each such series or class shall have voting powers, if any, and such preferences
and/or other special rights, with such qualifications, limitations or restrictions of such preferences and/or rights as shall be
stated in the resolution or resolutions providing for the issuance of such series or class of shares of preferred stock. As of
September 30, 2016 and December 31, 2015 there was no preferred stock issued and outstanding.
Options/Warrants
On July 23, 2014, Company stockholders
approved the CV Sciences, Inc. Amended and Restated 2013 Equity Incentive Plan (“Amended 2013 Plan”), which provides
for the granting of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards.
There are 15,000,000 shares of common stock authorized for issuance under the Amended 2013 Plan. This plan serves as the successor
to the 2013 Equity Incentive Plan prior to it being amended and restated. There were no option awards under the 2013 Equity Incentive
Plan prior to it being amended and restated.
In January 2016, the Company issued a common
stock purchase warrant with the right to purchase up to 2,000,000 shares of the Company common stock (Note 8).
In July 2016, the Company’s
Board of Directors approved the grant of 250,000 stock options to purchase shares of the Company’s common stock to each of
the non-management members of the Board of Directors; and, also approved a warrant to purchase 100,000 shares of the Company’s
common stock to a former member of the Board of Directors.
In July 2016, the Company’s Board
of Directors approved the grant of 11,000,000 performance-based stock options (the “Performance Options”) to purchase
shares of the Company’s common stock to three senior management members of the Company. The Performance Options are contingent
and vest only upon the Company achieving specific milestones related to the success of the Company’s drug development program
and were granted outside of the Company’s Amended 2013 Plan.
10.
|
STOCK-BASED COMPENSATION
|
The Company’s Amended 2013 Plan provides
for the granting of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards.
As of September 30, 2016, the Company had 3,075,224 of authorized unissued shares reserved and available for issuance
upon exercise and conversion of outstanding awards under the Amended 2013 Plan.
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 nine months ended September 30, 2016:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contract Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding - December 31, 2015
|
|
|
9,799,036
|
|
|
$
|
1.97
|
|
|
|
9.20
|
|
|
$
|
57,800
|
|
Granted
|
|
|
2,270,000
|
|
|
|
0.40
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(55,101
|
)
|
|
|
0.52
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(89,159
|
)
|
|
|
2.52
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding - September 30, 2016
|
|
|
11,924,776
|
|
|
|
1.67
|
|
|
|
8.68
|
|
|
|
119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercisable - September 30, 2016
|
|
|
8,640,237
|
|
|
|
1.95
|
|
|
|
8.48
|
|
|
|
105,875
|
|
Total unvested - September 30, 2016
|
|
|
3,284,539
|
|
|
|
0.95
|
|
|
|
9.21
|
|
|
|
13,125
|
|
Total vested or expected to vest - September 30, 2016
|
|
|
11,924,776
|
|
|
|
1.67
|
|
|
|
8.68
|
|
|
|
119,000
|
|
The following table summarizes unvested
stock options as of September 30, 2016:
|
|
Number of Shares
|
|
|
Weighted Average Fair Value Per Share on Grant Date
|
|
Unvested stock options - December 31, 2015
|
|
|
2,511,055
|
|
|
$
|
1.37
|
|
Granted
|
|
|
2,270,000
|
|
|
|
0.29
|
|
Vested
|
|
|
(1,441,415
|
)
|
|
|
0.97
|
|
Cancellations
|
|
|
(55,101
|
)
|
|
|
0.37
|
|
Unvested stock options - September 30, 2016
|
|
|
3,284,539
|
|
|
|
0.79
|
|
The Company recognized expenses of
$539,976 and $1,753,804 relating to stock options and warrants issued to employees, consultants, officers, and directors during
the three months ended September 30, 2016 and 2015, respectively. The Company recognized expenses of $1,357,684 and $3,477,592
relating to stock options and warrants issued to employees, consultants, officers, and directors during the nine months ended September
30, 2016 and 2015, respectively. The Company recognized expenses of $108,001 and $0 relating to common stock issued to employees,
consultants, officers, and directors during the three months ended September 30, 2016 and 2015, respectively. The Company
recognized expenses of $541,126 and $0 relating to common stock issued to employees, consultants, officers, and directors
during the nine months ended September 30, 2016 and 2015, respectively. For the three months ended September 30, 2016 and
2015, stock-based compensation of $647,977 and $1,746,440, was expensed to selling, general and administration, respectively. For
the nine months ended September 30, 2016 and 2015, stock-based compensation of $1,898,810 and $3,448,715, was expensed to selling,
general and administration, respectively. For the three months ended September 30, 2016 and 2015, stock-based compensation of $0
and $7,364, was expensed to research and development, respectively. For the nine months ended September 30, 2016 and 2015, stock-based
compensation of $0 and $28,877, was expensed to research and development, respectively. As of September 30, 2016, total unrecognized
compensation cost related to non-vested stock-based compensation arrangements granted to employees, officers, and directors was $2,427,741,
which is expected to be recognized over a weighted-average period of 1.80 years.
11.
|
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 September 30, 2016:
For the years ending December 31,
|
|
Total Operating Leases
|
|
2016
|
|
$
|
488,107
|
|
2017
|
|
|
266,675
|
|
|
|
$
|
754,782
|
|
The Company incurred rent expense of $120,162
and $126,475 for the three months ended September 30, 2016 and 2015, respectively, and incurred rent expense of $348,051 and $297,579
for the nine months ended September 30, 2016 and 2015, 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. At September
30, 2016, there was approximately $110,000 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 was filed on April 25, 2016. Defendant Stuart Titus was served with the Summons & Complaint in the case and he
has recently completed briefing his motion to dismiss, through separate counsel. No hearing date has been set by the Court at this
time with respect to the motions to dismiss. 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.
In the normal course of
business, the Company is a party to a variety of agreements pursuant to which they may be obligated to indemnify the other party.
It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional
nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments
made by us under these types of agreements have not had a material effect on our business, condensed consolidated results of operations
or financial condition.
Royalties
In addition to the contingent
consideration in connection with the CanX Acquisition (Note 1), which includes consideration for various milestones reached which
may require issuance of up to 19,500,000 shares of the Company’s common stock, the Company is obligated to pay a 5% royalty
of net sales on each of the first and second CBD drug products, subject to, and commencing with the first commercial release by
the Company of each of the first and second CBD drug products by the Company formulated to treat human medical conditions.
The Company operates in two distinct business
segments: a consumer product segment in manufacturing, marketing and selling plant-based CBD products to a range of market sectors;
and, a specialty pharmaceutical segment focused on developing and commercializing novel therapeutics utilizing synthetic CBD. The
Company’s segments maintain separate financial information for which operating results are evaluated on a regular basis by
the Company’s senior management in deciding how to allocate resources and in assessing performance. The Company evaluates
its consumer product segment based on net product sales, gross profit and operating income or loss. The Company currently evaluates
its specialty pharmaceutical segment based on the progress of its clinical development programs.
The following table presents information
by reportable operating segment for the three and nine month periods ended September 30, 2016 and 2015:
|
|
Consumer Products Segment
|
|
|
Specialty Pharmaceutical Segment
|
|
|
Consolidated Totals
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
2,939,997
|
|
|
$
|
–
|
|
|
$
|
2,939,997
|
|
Gross profit
|
|
|
1,888,949
|
|
|
|
–
|
|
|
|
1,888,949
|
|
Selling, general and administrative
|
|
|
2,952,533
|
|
|
|
119,908
|
|
|
|
3,072,441
|
|
Research and development
|
|
|
292,738
|
|
|
|
103,500
|
|
|
|
396,238
|
|
Operating (loss) income
|
|
$
|
(1,356,322
|
)
|
|
$
|
(223,408
|
)
|
|
$
|
(1,579,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
4,151,180
|
|
|
$
|
–
|
|
|
$
|
4,151,180
|
|
Gross profit
|
|
|
2,458,797
|
|
|
|
–
|
|
|
|
2,458,797
|
|
Litigation settlement income
|
|
|
756,714
|
|
|
|
–
|
|
|
|
756,714
|
|
Selling, general and administrative
|
|
|
3,888,898
|
|
|
|
–
|
|
|
|
3,888,898
|
|
Research and development
|
|
|
228,822
|
|
|
|
–
|
|
|
|
228,822
|
|
Operating (loss) income
|
|
$
|
(902,209
|
)
|
|
$
|
–
|
|
|
$
|
(902,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
7,850,430
|
|
|
$
|
–
|
|
|
$
|
7,850,430
|
|
Gross profit
|
|
|
5,178,911
|
|
|
|
–
|
|
|
|
5,178,911
|
|
Selling, general and administrative
|
|
|
8,904,694
|
|
|
|
242,717
|
|
|
|
9,147,411
|
|
Research and development
|
|
|
658,817
|
|
|
|
220,781
|
|
|
|
879,598
|
|
Operating (loss) income
|
|
$
|
(4,384,600
|
)
|
|
$
|
(463,498
|
)
|
|
$
|
(4,848,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
9,279,117
|
|
|
$
|
–
|
|
|
$
|
9,279,117
|
|
Gross profit
|
|
|
5,365,497
|
|
|
|
–
|
|
|
|
5,365,497
|
|
Litigation settlement income
|
|
|
756,714
|
|
|
|
–
|
|
|
|
756,714
|
|
Selling, general and administrative
|
|
|
10,716,814
|
|
|
|
–
|
|
|
|
10,716,814
|
|
Research and development
|
|
|
972,844
|
|
|
|
–
|
|
|
|
972,844
|
|
Operating (loss) income
|
|
$
|
(5,567,447
|
)
|
|
$
|
–
|
|
|
$
|
(5,567,447
|
)
|
In October 2016, the Company’s
Board of Directors approved the issuance of 4,500,000 shares of the Company’s common stock to former CanX shareholders upon
completion of the development of a U.S. Food & Drug Administration (the “FDA”) current good manufacturing practice
grade batch of successfully synthetically formulated “ready to ship” CBD for use in drug development activities.
In addition, in connection
with the completion of the development of an FDA current good manufacturing practice grade batch of successfully synthetically
formulated “ready to ship” CBD for use in drug development activities, an aggregate 2,750,000 options vested for three
members of senior management.
In October
2016, the Company’s shareholders
approved
an amendment to
the Amended 2013 Plan
to increase the number of common stock
shares issuable from 1
5,000,000
to 20,000,000 authorized shares.