WASHINGTON, D.C. 20549
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
o
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”,
and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
x
State the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed
second fiscal quarter. As of June 30, 2017, the aggregate market value of the voting and nonvoting common equity held by nonaffiliates
of the issuer was $21,974,000.
Indicate the number of shares outstanding
of each of the registrant’s classes of common stock, as of the latest practicable date.
As of March 26, 2018, the issuer
had 90,512,563 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 “anticipate”, “estimate”, “plan”, “project”, “continuing”,
“ongoing”, “expect”, “believe”, “intend”, “may”, “will”,
“should”, “could”, 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 OTC Markets; 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 SEC enforcement actions discussed in
Item 3 “Legal Proceedings” above and judgment against Mr. Mona, Jr. 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 the Securities
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.
Name
|
|
Age
|
|
Position
|
|
Director since the below date (1)
|
Michael Mona, Jr. (2)
|
|
63
|
|
Director, President and Chief Executive Officer
|
|
January 28, 2013
|
Joseph Dowling (3)
|
|
60
|
|
Chief Financial Officer and Secretary
|
|
|
Michael Mona, III (4)
|
|
32
|
|
Director, Chief Operating Officer
|
|
May 24, 2016
|
Larry Raskin
|
|
61
|
|
Director
|
|
May 7, 2014
|
James McNulty
|
|
67
|
|
Director
|
|
January 4, 2016
|
Gary Sligar
|
|
66
|
|
Director
|
|
June 2, 2016
|
Stephen M. Schmitz
|
|
61
|
|
Director
|
|
May 10, 2017
|
Larry Raskin (5)
|
|
62
|
|
Director
|
|
May 7, 2014
|
Bart Mackay (6)
|
|
61
|
|
Director
|
|
March 14, 2013
|
|
(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 Chief Financial Officer on June 16, 2014 and Secretary on August 25, 2014.
|
|
(4)
|
Appointed as Chief Operating Officer on March 15, 2017.
|
|
(5)
|
Resigned on May 5, 2017.
|
|
(6)
|
Resigned on June 1, 2016.
|
Michael Mona, Jr.
Mr. Mona, Jr.
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, Jr. is a recognized
industry leader in hemp farming operations and chemical extraction, and has established a global supply chain of hemp based products
for the Company. Prior to founding CV Sciences, Mr. Mona, Jr. 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, Jr. 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 (“CFO”) 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 serving as President
and CFO of MediVas, LLC, a biotechnology company focused on drug formulation and delivery from 2005 to 2013 where he led
day-to-day operations, drug research and development, product development and commercialization and strategic
alliance building including license agreements with Pfizer, Merck, Wyeth, DSM, Guidant and Boston Scientific. Mr. Dowling
served as a Managing Director in the mergers and acquisitions group at Citigroup from 2005 to 2013. 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, III was
appointed as Vice President of Operations on July 31, 2013 and has been instrumental in developing the worldwide supply chain for
our hemp products. Mr. Mona, III was appointed as Chief Operating Officer in March 2016 and as a director of the Company on May
24, 2016. Mr. Mona, III’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, III 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 joining CV Sciences, Mr. Mona, III 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, III graduated from the University of San
Diego in Business Administration.
Larry Raskin
. Mr. Raskin was initially
appointed as a director of the Company on May 7, 2014 and resigned from this position on May 5, 2017. 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 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 CFO of Hopkins Capital Group, an affiliation
of limited liability companies which engage in venture activities primarily in the development of pharmaceuticals, since 2000.
Mr. McNulty currently serves as CEO of MYMD Pharmaceuticals, is a Director of Quantum Sciences Technology, Inc., and is CFO of
Defender Pharmaceuticals, Inc., all of which are privately-held companies. Mr. McNulty was CFO of Biodelivery Sciences International,
Inc. (NASDAQ: BDSI) (“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.
Gary Sligar
. Mr. Sligar was initially
appointed as a director of the Company on June 2, 2016. Mr. Sligar’s career spans 35 years in the commercial real estate
industry including appraisal, commercial mortgage, property/asset management, leasing, construction and development. Since 2000,
Mr. Sligar has co-owned and managed Paradise Properties LLC, a Florida-based real estate investment/development company focusing
on office, retail, hotel, restaurant and multifamily properties in Southwest Florida. In 2008, Mr. Sligar founded TRECAP Partners,
LLC which was subsequently acquired by Hunt Investment Management, an SEC-registered investment advisor and a subsidiary of the
Hunt Companies, Inc. Mr. Sligar served as President of Hunt Investment Management until 2012 and a consultant to Hunt Investment
Management from 2012 to 2014. Mr. Sligar also served on the Board of Directors of Hunt Investment Management from 2011 to 2013.
Prior to Paradise Properties, LLC, Mr. Sligar was the founder and Chief Executive Officer of Compass Management and Leasing, Inc.
from 1989 until its sale to Lasalle Partners in 1999. Before the formation of Compass Management and Leasing, Inc., Mr. Sligar
was the Executive Vice President responsible for the New York office asset management operations for Equitable Real Estate from
1986 to 1989. Mr. Sligar is a graduate of Tulsa University and has completed certain graduate studies at the University of Houston.
Mr. Sligar’s extensive business background makes him a valuable member of the Board.
Stephen M. Schmitz, MD, MPH
, was initially
appointed as a director of the Company on May 10, 2017. Dr. Schmitz is a board certified physician with nearly 20 years of experience
in the pharmaceutical industry with extensive experience in drug safety, dietary supplement safety, clinical development and regulatory
affairs. He has worked for several major pharmaceutical companies in the Boston area, in the therapeutic areas of neurosciences,
ophthalmology, medical devices and orphan (rare) diseases. While the focus of his pharma career has been in drug safety, he has
also worked in clinical development and served as the medical monitor for numerous studies. Before entering the pharmaceutical
industry, Dr. Schmitz worked in preventive medicine, and practiced family medicine and occupational medicine. Dr. Schmitz earned
his B.S. in Biology from Fairfield University, an M.D. from Rutgers Medical School, and his M.P.H. from the Boston University School
of Public Health. Since 2012, Dr. Schmitz has worked in drug safety for Shire, a global pharmaceutical company. Dr. Schmitz’
knowledge of the pharmaceutical industry as well as extensive business background makes him a valuable addition to the Board.
Bart P. Mackay.
Mr. Mackay was initially
appointed as a director of the Company on March 14, 2013 and resigned as a director of the Company on June 1, 2016. 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 made him a valuable member of 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
all three independent Board members, James McNulty, Gary Sligar and Stephen M. Schmitz, 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, Gary Sligar and Stephen M. Schmitz, 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:QB, which does not
have any director independence requirements. Further, companies with securities only listed on the OTC:QB are not required to
comply with the independence standards set forth in Rule 10A-3(b)(1) of the Exchange Act. 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 Committees 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 committees 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 2017 with the exception of: (i) one late Form 4 filed by each of Gary Sligar, Stephen Schmitz, James
McNulty, Joseph Dowling, Michael J. Mona Jr., and Michael
Mona, III; and (ii) one late Form 3 filed by Stephen Schmitz. Each of the abovementioned reports contained one transaction except
for one Form 4 filed by each of Mr. Mona, Jr., Mr. Dowling, Mr. Mona, III, Mr. McNulty and Dr. Schmitz, which contained 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 Chief Operating Officer, 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 Board members who are also Company management, receives $500
per meeting of the Board of Directors attended in person. Each of our directors are expected in the future to receive stock grants
as further compensation for their services.
Name of Directors
* indicates Independent Director
|
|
Fiscal Year
|
|
|
Fees earned or paid in cash
($)
|
|
|
Stock Awards ($)
|
|
|
Option Awards
($)
|
|
|
|
All other Compensation
($)(6)
|
|
|
|
Total
($)
|
|
Bart Mackay (1)
|
|
|
2017
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
2016
|
|
|
$
|
500
|
|
|
$
|
10,625
|
|
|
$
|
–
|
|
|
$
|
30,831
|
|
|
$
|
41,956
|
|
Larry Raskin (2)
|
|
|
2017
|
|
|
$
|
500
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
500
|
|
|
|
|
2016
|
|
|
$
|
500
|
|
|
$
|
–
|
|
|
$
|
64,138
|
|
|
$
|
–
|
|
|
$
|
64,638
|
|
James McNulty (3)
|
|
|
2017
|
|
|
$
|
500
|
|
|
$
|
–
|
|
|
$
|
25,816
|
|
|
$
|
–
|
|
|
$
|
26,316
|
|
|
|
|
2016
|
|
|
$
|
1,000
|
|
|
$
|
–
|
|
|
$
|
64,138
|
|
|
$
|
–
|
|
|
$
|
65,138
|
|
Gary Sligar (4)
|
|
|
2017
|
|
|
$
|
500
|
|
|
$
|
–
|
|
|
$
|
42,796
|
|
|
$
|
–
|
|
|
$
|
43,296
|
|
|
|
|
2016
|
|
|
$
|
500
|
|
|
$
|
–
|
|
|
$
|
64,138
|
|
|
$
|
–
|
|
|
$
|
64,638
|
|
Stephen M. Schmitz(5)
|
|
|
2017
|
|
|
$
|
500
|
|
|
$
|
–
|
|
|
$
|
26,094
|
|
|
$
|
–
|
|
|
$
|
26,594
|
|
|
|
|
2016
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
(1)
|
Resigned on June 1, 2016.
|
|
(2)
|
Resigned on May 5, 2017.
|
|
(3)
|
Appointed on January 4, 2016.
|
|
(4)
|
Appointed on June 2, 2016.
|
|
(5)
|
Appointed on May 10, 2017.
|
|
(6)
|
Represents the Black-Scholes value for the issuance of a warrant of 100,000 shares to Bart Mackay on July 6, 2016 in recognition of his valuable service to the Company and in connection with his resignation as previously reported in the July 2016 8-K (defined below).
|
On June 2, 2016, 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 July 6, 2016, the Board of Directors of the Company approved the issuance
of a warrant for 100,000 shares to Bart Mackay. The warrant has a term of ten (10) years, was 100% vested as of the date of issuance
and was issued with an exercise price equal to the fair market value of the Company’s common stock at the time of issuance.
On July 6, 2016, the Board of Directors approved
the grant of 200,000 stock options to each of Larry Raskin, James McNulty and Gary Sligar in recognition of such individual’s
respective Board service. The stock options have a term of ten (10) years, are durational-based, vesting in twenty-four (24) equal
monthly installments measured from the date of grant and were granted with an exercise price equal to the fair market value of
the Company’s common stock at the time of grant. As of March 29, 2018, 166,666 option shares have vested with respect to
each such grant to Mr. McNulty and Mr. Sligar. On July 6, 2016, the Board of Directors of the Company approved the grant of 50,000
stock options to Larry Raskin, James McNulty and Gary Sligar. The stock options have a term of ten (10) years, are 100% vested
as of the date of grant and were granted with an exercise price equal to the fair market value of the Company’s common stock
at the time of grant. None of the recipients has exercised any of the foregoing stock options and all of Mr. Raskin’s options
terminated 60 days following the date of his resignation from the Board.
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 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 Topic 718
Share-Based-Payment
(“ASC 718”).
Summary Compensation
Name and Principal Position
|
|
Fiscal Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Option Awards
($)(1)
|
|
|
Non-Equity Incentive Plan Compensation
($)(2)
|
|
|
|
All other Compensation
($)(3)
|
|
|
|
Total
($)
|
|
Michael Mona, Jr.
|
|
|
2017
|
|
|
$
|
330,000
|
|
|
$
|
390,456
|
|
|
$
|
313,200
|
|
|
$
|
403,387
|
|
|
$
|
30,736
|
|
|
$
|
1,467,779
|
|
Chairman and CEO
|
|
|
2016
|
|
|
$
|
314,808
|
|
|
$
|
20,000
|
|
|
$
|
–
|
|
|
$
|
485,442
|
|
|
$
|
47,560
|
|
|
$
|
867,810
|
|
Joseph Dowling
|
|
|
2017
|
|
|
$
|
275,000
|
|
|
$
|
175,000
|
|
|
$
|
92,421
|
|
|
$
|
74,071
|
|
|
$
|
18,000
|
|
|
$
|
634,492
|
|
Chief Financial Officer
|
|
|
2016
|
|
|
$
|
262,340
|
|
|
$
|
20,000
|
|
|
$
|
–
|
|
|
$
|
98,745
|
|
|
$
|
10,500
|
|
|
$
|
391,585
|
|
Michael Mona, III
|
|
|
2017
|
|
|
$
|
225,000
|
|
|
$
|
175,000
|
|
|
$
|
107,120
|
|
|
$
|
182,601
|
|
|
$
|
15,793
|
|
|
$
|
705,514
|
|
Chief Operating Officer
|
|
|
2016
|
|
|
$
|
202,212
|
|
|
$
|
20,000
|
|
|
$
|
–
|
|
|
$
|
314,710
|
|
|
$
|
37,915
|
|
|
$
|
574,837
|
|
____________
|
(1)
|
These amounts reflect the grant date fair value of stock options as determined under ASC Topic 718 and using the Black-Scholes model. The underlying valuation assumptions for stock option awards made are further disclosed in Note 10 to our consolidated financial statements filed with our Annual Reports on Form 10-K for the year ended December 31, 2017.
|
|
(2)
|
These amounts reflect the vesting date fair value of performance-based stock options as determined under ASC
Topic 718 and using the Black-Scholes model. As further discussed below, on July 6, 2016, each of the executives was granted a
performance-based option to purchase shares of the Company’s Common Stock which vest and become exercisable upon the completion
of each of four defined option performance conditions. On October 5, 2016, the first performance criteria was met. On July 14,
2017, the second performance criteria was met.
|
|
(3
)
|
These amounts reflect $12,482 related to an auto
lease and $17,894 related to life insurance premiums paid by the Company on behalf of Michael Mona Jr, $15,793 related to an auto
lease paid by the Company on behalf of Michael Mona III and $18,000 related to an auto allowance provided to Joseph Dowling during
the year ended December 31, 2017. These amounts reflect $36,824 related to an auto lease and $10,736 related to a life insurance
premiums paid by the Company on behalf of Michael Mona, Jr., $37,915 related to an auto lease paid by the Company on behalf of
Michael Mona III and $10,500 related to an auto allowance provided to Joseph Dowling during the year ended December 31, 2016.
|
Compensation
Arrangements
The Board of Directors
approved a salary of $330,000 for our President and Chief Executive Officer on July 6, 2016 in connection with the entry of the
Company into an Employment Agreement with Mr. Mona, Jr. on the same date (the “Mona Employment Agreement”), as previously
discussed in the Current Report on Form 8-K filed by the Company with the SEC on July 11, 2016 (the “July 2016 8-K”).
During fiscal year 2017, Mr. Mona, Jr.’s total compensation was $1,467,779. During fiscal year 2016, Mr. Mona, Jr.’s
total compensation was $867,810. On December 8, 2014, the Compensation Committee approved the grant of 4,000,000 stock options
to Mr. Mona, Jr. (the “December 2014 Option”). 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 the grant. On September 23, 2015, the Compensation Committee approved the grant of 1,470,000 stock options to Mr. Mona, Jr.
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. On December 28, 2015, the Compensation
Committee approved the grant of 530,000 stock options to Mr. Mona, Jr. 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 previously discussed in the July 2016 8-K, on July 6, 2016, the Compensation Committee approved
the grant of 6,000,000 standalone stock options to Mr. Mona, Jr. which were not granted under the Company’s Amended and Restated
2013 Equity Incentive Plan (the “Amended 2013 Plan”). As set forth in the Current Report on Form 8-K filed with the
SEC on March 22, 2017 (the “March 2017 8-K”), the terms of the option were subsequently amended and the stock grant
has a term of ten (10) years, is performance-based, with the option shares vesting upon the completion of each of four defined
option performance conditions. As previously reported by the Company in the March 2017 8-K, on March 15, 2017, the Board approved
an amendment to the Mona Employment Agreement to provide eligibility for a cash bonus upon the occurrence of certain liquidity
events of the Company as more particularly set forth in the March 2017 8-K and approved the re-pricing of the exercise price of
the December 2014 Option to $0.38 per share, which represents the fair market value of the Company’s common stock as of such
date. Section 162(m) of the Internal Revenue Code of 1986, as amended, denies a deduction to any publicly-held corporation for
compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered
employee exceeds $1.0 million, subject to certain exceptions. It is possible that compensation attributable to the standalone option
awards granted to Mr. Mona, Jr. and Mr. Dowling and Mr. Mona, III, as further discussed below, when combined with all other types
of compensation received by such individuals from the Company, may cause this limitation to be exceeded in any particular year.
Also, as previously reported by the Company in the March 2017 8-K, on March 15, 2017, the disinterested members of the Board approved
the grant of 200,000 stock options to Mr. Mona, Jr. 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. Also, on March 15, 2017, as previously reported by the Company in the March 2017 8-K, the disinterested members of the
Board approved the grant of 5,000,000 standalone stock options to Mr. Mona, Jr., which were not granted under the Amended 2013
Plan. The grant has a term of ten (10) years, is performance-based, with the option shares vesting upon the completion of each
of three defined option performance conditions.
The Board of
Directors approved a salary of $275,000 for our Chief Financial Officer on July 6, 2016 in connection with the entry of the Company
into an Employment Agreement with Mr. Dowling on the same date, as previously discussed in the July 2016 8-K. During fiscal year
2017, Mr. Dowling’s total compensation was $634,492. During the fiscal year 2016, Mr. Dowling’s total compensation
was $391,585. On June 16, 2014, the Compensation Committee approved the grant of 600,000 stock options to Mr. Dowling (the “Dowling
October 2014 Option”). The stock option is durational-based, with 25% vested on June 16, 2015, and the remaining options
vesting in 36 equal monthly installments measured from June 16, 2015, and was granted with an exercise price equal to the fair
market value of the Company’s common stock at the time of the grant. On May 13, 2015, the Compensation Committee approved
a grant of 100,000 stock options to Mr. Dowling (the “May 2015 Option”). The stock option is durational-based, with
25% vested on May 13, 2016, and the remaining options vesting in 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% 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. On December 28, 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.
As previously discussed in the July 2016 8-K, on July 6, 2016, the Compensation Committee approved the grant of 1,000,000 standalone
stock options to Mr. Dowling which were not granted under the Amended 2013 Plan. As set forth in the March 2017 8-K, the terms
of the options were subsequently amended and the stock grant has a term of ten (10) years, is performance-based, with the option
shares vesting upon the completion of each of four defined option performance conditions. As previously reported by the Company
in the March 2017 8-K, on March 15, 2017, the Board approved the re-pricing of the exercise price of the Dowling October 2014
Option and May 2015 Option to $0.38 per share, which represents the fair market value of the Company’s common stock as of
such date. Also, as previously reported by the Company in the March 2017 8-K, on March 15, 2017, the Board approved the grant
of 100,000 stock options to Mr. Dowling. 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 previously discussed in the Current Report on Form 8-K filed with the SEC on April 12, 2017 (the “April 2017 8-K”),
on April 7, 2017, the Compensation Committee approved the grant of 1,000,000 standalone stock options to Mr. Dowling which were
not granted under the Amended 2013 Plan. As set forth in the April 2017 8-K, the terms of the options were subsequently amended
and the stock grant has a term of ten (10) years, is performance-based, with the option shares vesting upon the completion of
each of three defined option performance conditions.
The Board of
Directors approved a salary of $225,000 for our Chief Operating Officer on July 6, 2016 in connection with the entry of the Company
into an Employment Agreement with Mr. Mona, III on the same date (the “Mona III Employment Agreement”) as previously
discussed in the July 2016 8-K. During fiscal year 2017, Mr. Mona, III’s total compensation was $705,514. During fiscal
year 2016, Mr. Mona, III’s total compensation was $574,837. On October 1, 2014, the Compensation Committee approved the
grant of 500,000 stock options to Mr. Mona, III (the “Mona III October 2014 Option”). The stock option has a term
of ten (10) years, is durational-based, with 125,000 option shares vested on June 16, 2015, and the remaining option shares vesting
in thirty-six (36) equal monthly installments measured from June 16, 2015, and was granted with an exercise price equal to the
fair market value of the Company’s common stock at the time of the grant. 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 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 previously discussed in the July 2016 8-K, on July
6, 2016, the Compensation Committee approved the grant of 4,000,000 standalone stock options to Mr. Mona, III which were not granted
under the Amended 2013 Plan. As set forth in the March 2017 8-K, the terms of the options were subsequently amended and the stock
grant has a term of ten (10) years, is performance-based, with the option shares vesting upon the completion of each of four defined
option performance conditions. As previously reported by the Company in the March 2017 8-K, on March 15, 2017, the Board approved
an amendment to the Mona III Employment Agreement to provide eligibility for a cash bonus upon the occurrence of certain liquidity
events of the Company as more particularly set forth in the March 2017 8-K and approved the re-pricing of the exercise price of
the Mona III October 2014 Option to $0.38 per share, which represents the fair market value of the Company’s common stock
as of such date. Also, as previously reported by the Company in the March 2017 8-K, on March 15, 2017, the disinterested members
of the Board approved the grant of 100,000 stock options to Mr. Mona, III. 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 previously discussed in the April 2017 8-K, on April 7, 2017, the Compensation Committee
approved the grant of 1,000,000 standalone stock options to Mr. Mona, III which were not granted under the Amended 2013 Plan.
As set forth in the April 2017 8-K, the terms of the options were subsequently amended and the stock grant has a term of ten (10)
years, is performance-based, with the option shares vesting upon the completion of each of three defined option performance conditions.
Option Grants
On July 23, 2014, Company stockholders
approved the CV Sciences, Inc. 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.
On each of December 21, 2015, October 24, 2016 and July 14, 2017, the Company’s stockholders approved an amendment to the
Amended 2013 Plan to increase the number of shares that may be issued under the Amended 2013 Plan. There are currently 25,000,000
shares of common stock authorized for issuance under the Amended 2013 Plan. This plan serves as the successor to the 2013 Equity
Incentive Plan. There were no option awards under the 2013 Equity Incentive Plan prior to it being amended and restated. As of
December 31, 2017, the Company had 9,176,723 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 2017.
|
Option Awards
|
|
Name
|
|
Award Grant and Commencement of Vesting Date
|
|
Number of securities underlying unexercised option (#) exercisable
|
|
|
Number of securities underlying unexercised option (#) unexercisable
|
|
|
|
Option exercise price
($)
|
|
|
|
Option Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Mona, Jr.
|
|
12/8/2014
|
|
|
4,000,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
12/8/2024
|
|
Chairman, CEO
|
|
9/23/2015
|
|
|
1,470,000
|
|
|
|
–
|
|
|
$
|
0.73
|
|
|
|
9/23/2025
|
|
|
|
10/28/2015
|
|
|
530,000
|
|
|
|
–
|
|
|
$
|
0.16
|
|
|
|
10/28/2025
|
|
|
|
10/5/2016
|
|
|
1,500,000
|
|
|
|
–
|
|
|
$
|
0.37
|
|
|
|
7/5/2026
|
|
|
|
3/15/2017
|
|
|
200,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
3/15/2027
|
|
|
|
7/14/2017
|
|
|
1,500,000
|
|
|
|
–
|
|
|
$
|
0.37
|
|
|
|
7/5/2026
|
|
|
|
7/14/2017
|
|
|
1,250,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
3/15/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Dowling
|
|
10/1/2014
|
|
|
524,940
|
|
|
|
75,060
|
|
|
$
|
0.38
|
|
|
|
10/1/2024
|
|
Chief Financial Officer
|
|
5/21/2015
|
|
|
64,577
|
|
|
|
35,423
|
|
|
$
|
0.38
|
|
|
|
5/21/2025
|
|
|
|
9/23/2105
|
|
|
200,000
|
|
|
|
–
|
|
|
$
|
0.73
|
|
|
|
9/23/2025
|
|
|
|
12/28/2015
|
|
|
150,000
|
|
|
|
–
|
|
|
$
|
0.16
|
|
|
|
12/28/2025
|
|
|
|
10/5/2016
|
|
|
250,000
|
|
|
|
–
|
|
|
$
|
0.37
|
|
|
|
7/5/2026
|
|
|
|
3/15/2017
|
|
|
100,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
3/15/2027
|
|
|
|
7/14/2017
|
|
|
250,000
|
|
|
|
–
|
|
|
$
|
0.37
|
|
|
|
7/5/2026
|
|
|
|
7/14/2017
|
|
|
250,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
3/15/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Mona, III
|
|
10/1/2014
|
|
|
500,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
10/1/2024
|
|
Chief Operating Officer
|
|
9/23/2015
|
|
|
343,000
|
|
|
|
–
|
|
|
$
|
0.73
|
|
|
|
9/23/2025
|
|
|
|
10/5/2016
|
|
|
1,000,000
|
|
|
|
–
|
|
|
$
|
0.37
|
|
|
|
7/5/2026
|
|
|
|
3/15/2017
|
|
|
100,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
3/15/2027
|
|
|
|
7/14/2017
|
|
|
1,000,000
|
|
|
|
–
|
|
|
$
|
0.37
|
|
|
|
7/5/2026
|
|
|
|
7/14/2017
|
|
|
250,000
|
|
|
|
–
|
|
|
$
|
0.38
|
|
|
|
3/15/2027
|
|
Pension, Retirement or Similar Benefit
Plans
There are no arrangements or plans in which
we provide pension, retirement or similar benefits to our directors or executive officers. We have no material bonus or profit
sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except
that stock options may be granted at the discretion of the Board or a committee thereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Beneficial Ownership of Directors, Officers
and 5% Stockholders
Beneficial ownership is determined in
accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage of ownership
of that person, shares of common stock subject to options and warrants held by that person that are currently exercisable or become
exercisable within 60 days are deemed outstanding even if they have not actually been exercised. Those shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any other person. The following table sets forth,
as of March 29, 2018, 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
|
|
|
6.0%
|
Mackay Ventures, LLC (4)
|
|
|
6,027,094
|
|
|
6.7%
|
Michael Mona III (5)
|
|
|
4,912,583
|
|
|
5.3%
|
Joseph Dowling (6)
|
|
|
1,658,332
|
|
|
1.7%
|
Michael Mona, Jr (7)
|
|
|
10,450,000
|
|
|
10.3%
|
Bart Mackay (8)
|
|
|
6,256,726
|
|
|
7.0%
|
James McNulty (9)
|
|
|
1,778,831
|
|
|
2.0%
|
Gary Sligar (10)
|
|
|
333,331
|
|
|
*
|
Stephen Schmitz (11)
|
|
|
1,175,998
|
|
|
1.3*
|
|
|
|
|
|
|
|
All executive officers and directors as a group (six persons)
|
|
|
20,309,075
|
|
|
19.2%
|
________________
*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 90,512,653 shares of our common
stock outstanding on March 29, 2018, 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. The address of
Mai Dun Limited, LLC is 6325 S. Jones Blvd., Suite 500, Las Vegas, Nevada 89118.
|
|
(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)
|
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 1, 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 125,000 option shares vested as of June 16, 2015, and the remaining
option shares vesting in thirty-six (36) equal monthly increments (such vesting schedule was modified from the original vesting
schedule in connection with the re-pricing of the exercise price of such option as set forth
in
the March 2017 8-K). As of March 29, 2018, 468,750 of the option shares have vested and 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 March 29, 2018, 100% of the option shares have vested.
On July 6, 2016, Mr. Mona, III was granted a standalone option to purchase 4,000,000 shares of the Company’s common stock,
which was not granted under the Amended 2013 Plan. The option is performance-based, and vests and becomes exercisable upon the
completion of each of four defined option performance conditions. On October 5, 2016, the first performance criterion was met resulting
in vesting of the option as to 1,000,000 shares. On July 14, 2017, the second performance criterion was met resulting in vesting
of the option as to 1,000,000 shares. On March 15, 2017, Mr. Mona III was granted a stock option to purchase 100,000 shares of
common stock. The stock option has a term of ten (10) years, is durational-based, was fully-vested on the grant date and has an
exercise price equal to the fair market value of the Company’s common stock at the time of grant. As of March 29, 2018, 100%
of the option shares have vested. In April 2017, the disinterested members of the Board approved a grant of 1,000,000 performance-based
stock options to purchase shares of the Company’s common stock to Mr. Mona, III, which were not granted under the Amended
2013 Plan. The option is performance-based, and vests and becomes exercisable upon the completion of each of three defined option
performance conditions. On July 14, 2017, the first performance criterion was met resulting in vesting of the option as to 250,000
shares. As of March 29, 2018, 250,000 shares have vested.
|
|
(6)
|
On October 16, 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 March 29, 2018, 562,500 option shares have vested and another 25,000 shares will vest within 60 days. On May 13, 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 13, 2016, and the remaining options vesting in 36 equal monthly installments. As of March 29, 2018, 66,666 option
shares have vested and 4,166 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 March 29, 2018, 100% of the option shares have vested. On July 6, 2016, Mr. Dowling was granted a standalone
option to purchase 1,000,000 shares of the Company’s common stock, which was not granted under the Amended 2013 Plan. The
option is performance-based, and vests and becomes exercisable upon the completion of each of four defined option performance conditions.
On October 5, 2016, the first performance criterion was met resulting in vesting of the option as to 250,000 shares. On July 14,
2017, the second performance criterion was met resulting in vesting of the option as to 250,000 shares. On March 15, 2017, Mr.
Dowling was granted a stock option to purchase 100,000 shares of common stock. The stock option has a term of ten (10) years, is
durational-based, was fully-vested on the grant date and has an exercise price equal to the fair market value of the Company’s
common stock at the time of grant. As of March 29, 2018, 100% of the option shares have vested. In April 2017, the disinterested
members of the Board approved a grant of 1,000,000 performance-based stock options to purchase shares of the Company’s common
stock to Mr. Dowling, which were not granted under the Amended 2013 Plan. The option is performance-based, and vests and becomes
exercisable upon the completion of each of three defined option performance conditions. On July 14, 2017, the first performance
criterion was met resulting in vesting of the option as to 250,000 shares. As of March 29, 2018, 250,000 shares have vested.
|
|
(7)
|
On December 8, 2014, the Compensation Committee approved the grant of 4,000,000 stock options to Michael
Mona, Jr., the Company’s President and Chief Executive Officer (the “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 March 29, 2018,
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 March 29, 2018, 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 Amended 2013 Plan, the
stock options to purchase shares of common stock granted under the Amended 2013 Plan may not be transferred, however, pursuant
to the Decree. Mr. Mona believes that Ms. Mona has shared beneficial ownership of 3,000,000 of the shares of the Company’s
common stock that would be acquired upon exercise of the option. On July 6, 2016, Mr. Mona, Jr. was granted a standalone option
to purchase 6,000,000 shares of the Company’s common stock, which was not granted under the Amended 2013 Plan. The option
is performance-based, and vests and becomes exercisable upon the completion of each of four defined option performance conditions.
On October 5, 2016, the first performance criterion was met resulting in vesting of the option as to 1,500,000 shares. On July
14, 2017, the second performance criterion was met resulting in vesting of the option as to 1,500,000 shares. On March 15, 2017,
Mr. Mona, Jr. was granted a stock option to purchase 200,000 shares of common stock. The stock option has a term of ten (10) years,
is durational-based, was fully-vested on the grant date and has an exercise price equal to the fair market value of the Company’s
common stock at the time of grant. As of March 29, 2018, 100% of the option shares have vested. Also, on March 15, 2017, the disinterested
members of the Board approved the grant of 5,000,000 standalone stock options to Mr. Mona, Jr., which were not granted under the
Amended 2013 Plan. The grant has a term of ten (10) years, is performance-based, with the option shares vesting upon the completion
of each of three defined option performance conditions. On July 14, 2017, the first performance criterion was met resulting in
vesting of the option as to 1,250,000 shares. As of March 29, 2018, 1,250,000 shares have vested.
|
|
(8)
|
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 the Company’s common stock owned by each of Mai Dun Limited, LLC and Mackay Ventures
LLC. On July 6, 2016, the Board approved the issuance of a common stock purchase warrant to Mr. Mackay with the right to purchase
up to 100,000 shares of the Issuer’s Common Stock (the “Warrant”). The Warrant was 100% vested as of the date
of granted and was granted with an exercise price equal to the fair market value of the Company’s common stock at the time
of grant. As of March 29, 2018, all 100,000 warrant shares have vested. The address of Bart Mackay is 6325 S. Jones Blvd., Suite
500, Las Vegas, Nevada 89118.
|
|
(9)
|
Mr. McNulty acquired 50,000 shares pursuant to the CanX purchase agreement at the
closing of the transactions contemplated thereby and 45,000
shares subsequently in October 2016 upon achievement of the first milestone as
contemplated by
the Purchase Agreement. Mr.
McNulty was a
shareholder of CanX, and
acquired his shares of the
Company in exchange pursuant
to the merger
transaction. On July 6, 2016,
the Board approved the grant of 50,000 stock options to Mr. McNulty. 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 March 29, 2018, all 50,000 option shares have vested, and Mr. McNulty has not
exercised any stock options. On July 6, 2016, the Board approved a grant of 200,000 stock options to Mr. McNulty. The stock
option has a term of ten (10) years, is durational-based vesting in twenty-four (24) equal monthly installments measured
from July 6, 2016 and an exercise price equal to the fair
market value of the Company’s common stock at the time of grant.
As of March 29, 2018, 166,665 shares have vested and another 16,666 will vest within 60 days, and Mr. McNulty has not
exercised any stock options. On April 12, 2017, Mr. McNulty acquired 1,450,500 shares of common stock of the Company
pursuant to the Purchase Agreement Amendment and an
agreement regarding share allocation amongst the former CanX shareholders. Mr. McNulty was a shareholder of CanX and
acquired these
shares pursuant
to the
issuance of
the additional contingent consideration by the
Company without the Company having achieved the remaining
post-closing milestones and the revisions to the buy-out option of the Company for the royalty payments otherwise due to the
former shareholders of CanX.
|
|
(10)
|
On July 6, 2016, the Board approved the grant of 50,000 stock options to Mr. Sligar. 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 March 29, 2018, all 50,000 option shares have vested,
and Mr. Sligar has not exercised any stock options. On July 6, 2016, the Board approved a grant of 200,000 stock options to Mr.
Sligar. The stock option has a term of ten (10) years, is durational-based vesting in twenty-four (24) equal monthly installments
measured from July 6, 2016 and an exercise price equal to the fair market value of the Company’s common stock at the time
of grant. As of March 29, 2018, 166,665 shares have vested and another 16,666 will vest within 60 days, and Mr. Sligar has not
exercised any stock options. On July 14, 2017, the Board approved a grant of 100,000 stock options to Mr. Sligar. 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 March 29, 2018, all 100,000 shares have vested
and Mr. Sligar has not exercised any stock options.
|
|
(11)
|
Beneficial ownership of
Stephen Schmitz is reported based upon his direct ownership of 920,000 shares and his indirect ownership of 56,000 shares
which are held in the name of his adult son who resides part-time with Dr. Schmitz. Dr. Schmitz disclaims beneficial
ownership of the shares held by his son as such shares are in a custodial account for which Dr. Schmitz ex-wife serves as
the custodian. On May
16, 2017,
the Board
approved the
grant of 250,000
stock options to
Dr. Schmitz. The stock
option has a term of ten
(10) years
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, with 50,000
option shares vested as of the date of grant, and the
remaining 200,000 shares vesting in twenty-four (24) equal monthly installments measured from May 16, 2017. As of
March 29, 2018, 133,333 shares have vested and another 16,666 will vest within 60 days. On December 1, 2017, the Board
approved the grant of 200,000 stock options to Dr. Schmitz. The stock option has a term of ten (10) years, is
durational-based vesting in twenty-four (24) equal monthly installments measured from November 13, 2017 and an
exercise price equal to the fair market value of the
Company’s common stock at the time of grant. As of March 29, 2018, 33,333 shares
have vested and another 16,666 will vest within 60 days, and Dr. Schmitz has not exercised any stock options.
|
EQUITY COMPENSATION PLAN INFORMATION
On July 23, 2014, Company stockholders
approved the CV Sciences, Inc. 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.
On each of December 21, 2015, October 24, 2016 and July 14, 2017, the Company’s stockholders approved an amendment to the
Amended 2013 Plan to increase the number of shares that may be issued under the Amended 2013 Plan. There are currently 25,000,000
shares of common stock authorized for issuance under the Amended 2013 Plan. This plan serves as the successor to the 2013 Equity
Incentive Plan. There were no option awards under the 2013 Equity Incentive Plan prior to it being amended and restated. The information
set forth in the table below is provided as of December 31, 2017. As previously discussed in the July 2016 8-K and above, on July
6, 2016, the Compensation Committee approved the grant of 6,000,000 standalone stock options to Mr. Mona, Jr., 4,000,000 standalone
stock options to Mr. Mona, III, and 1,000,000 standalone options to Mr. Dowling, which were not granted under the Amended 2013
Plan. As set forth in the March 2017 8-K, the terms of the options were subsequently amended and each grant has a term of ten
(10) years, is performance-based, with the option shares vesting upon the completion of each of four defined option performance
conditions. Additionally on March 15, 2017, the disinterested members of the Board approved the grant of 5,000,000 standalone
stock options to Mr. Mona, Jr., which were not granted under the Amended 2013 Plan. The grant has a term of ten (10) years, is
performance-based, with the option shares vesting upon the completion of each of three defined option performance conditions.
As previously discussed in the April 2017 8-K, on April 7, 2017, the Compensation Committee approved the grant of 1,000,000 standalone
stock options to each of Mr. Dowling and Mr. Mona, III which were not granted under the Amended 2013 Plan. As set forth in the
April 2017 8-K, the terms of the options were subsequently amended and the stock grant has a term of ten (10) years, is performance-based,
with the option shares vesting upon the completion of each of three defined option performance conditions.
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
|
Weighted-average exercise price of outstanding options, warrant 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
|
|
|
12,084,662
|
|
|
$
|
0.50
|
|
|
|
12,915,338
|
|
Equity compensation plans not approved by security holders
|
|
|
7,250,000
|
|
|
|
0.37
|
|
|
|
–
|
|
|
|
|
19,334,662
|
|
|
$
|
0.45
|
|
|
|
12,915,338
|
|
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, 2017 which materially affects the Company
or has affected the Company.
In March 2017, the Company entered into an
amendment to the principal agreement for the CanX Acquisition (the “Amendment”), as more fully set forth in March
2017 8-K. Pursuant to such Amendment, which was approved by the disinterested members of the Board of Directors of the Company,
the Company agreed to issue the remaining 15,000,000 shares of contingent consideration to the former CanX shareholders, without
the Company having yet achieved any of the remaining post-closing milestones.
Additionally, pursuant to such Amendment,
the parties agreed to revise the Company’s buy-out option of the royalties payable to the CanX shareholders in the future,
to allow the Company to buy-out the future royalty payments in exchange for the issuance of 6,400,000 shares of the Company’s
restricted common stock (the “Royalty Buy-Out Shares”) to the former CanX shareholders. The Company concurrently exercised
the buy-out option, as so revised.
In the aggregate, pursuant to
the Amendment, the Company agreed to issue to the former CanX shareholders a total of 21,400,000 shares of restricted
common stock which were issued in April 2017. As previously disclosed in the January 2016 8-K, James McNulty, a member of the
Board, is a former shareholder of CanX and thereby received a portion of the consideration paid to the former CanX
shareholders pursuant to the Amendment and an agreement regarding share allocation amongst the former CanX shareholders. During the year
ended December 31, 2017, the Company recorded an expense of $2,432,000 for the value of all the Royalty Buy-Out Shares as a
separate line item in the Company’s Consolidated Statement of Operations.
In March 2017, as further set forth in the
March 2017 8-K, the disinterested members of the Board approved the grant of 5,000,000 performance-based stock options (the “Mona
Performance Options”) to purchase shares of the Company’s common stock to the Company’s CEO and member of the
Board, Mr. Mona, Jr. The Mona Performance Options are contingent and vest only upon the Company achieving three specific milestones
related to the success of the Company’s drug development program and were granted outside of the Company’s Amended
2013 Plan. Vesting of such options accelerates upon a sale of the Company or change in control. As of March 29, 2018, 1,250,000
shares have vested.
In March 2017, as further set forth in the
March 2017 8-K, the disinterested members of the Board approved a grant of an aggregate of 200,000 fully-vested stock options to
purchase shares of the Company’s common stock to Mr. Mona, Jr., 100,000 to Mr. Dowling and 100,000 to Mr. Mona, III pursuant
to the bonus plan set forth in the executives Employment Agreements for fiscal year 2016 performance.
Also, in March 2017, as further set forth in
the March 2017 8-K, the disinterested members of the Board, as the administrator of the Amended 2013 Plan, approved the amendment
to certain stock options granted to employees of the Company, including certain options granted to each of Mr. Mona, Jr., Mr. Dowling
and Mr. Mona, III, to reduce the exercise price of such stock options. As a result of the amendment to the stock option grants,
each of the covered stock options, including those issued to Mr. Mona, Jr., Mr. Dowling and Mr. Mona, III, have been amended to
provide for a strike price equal to $0.38 per share, which represents 100% of the fair market value of the Company’s common
stock as of the date of the amendment to these stock option grants.
In April 2017, the disinterested members of
the Board approved a grant of 1,000,000 performance-based stock options to purchase shares of the Company’s common stock
to each of Mr. Dowling, the Company’s CFO, and Mr. Mona, III, the Company’s Chief Operating Officer and a member of
the Board.
The performance-based stock options are contingent
and vest only upon the Company achieving three specific milestones related to the success of the Company’s drug development
program and were granted outside of the Company’s Amended 2013 Plan. Vesting of such options accelerates upon a sale of the
Company or change in control. As of March 29, 2018, 250,000 shares of each such option have vested.
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:QB, which does not have any director independence requirements. However, the Board of Directors has determined that three
members of our Board, Dr. Schmitz, Mr. McNulty and Mr. Sligar, are independent under the New York Stock Exchange Listing Manual
with regards to both their service on the Board and on each of the Audit and Compensation Committees and made the same determination
regarding our former Board member, Mr. Raskin (who previously served on the Compensation Committee).
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The following table summarizes the fees,
as applicable, of Tanner LLC (“Tanner”) our independent auditors for the years ended December 31, 2017 and 2016, respectively;
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
|
|
2017
|
|
|
2016
|
|
Audit Fees (1)
|
|
$
|
175,642
|
|
|
$
|
82,539
|
|
Audit Related Fees (2)
|
|
|
–
|
|
|
|
-
|
|
Tax Fees (3)
|
|
|
–
|
|
|
|
-
|
|
All Other Fees (4)
|
|
|
–
|
|
|
|
-
|
|
|
|
$
|
175,642
|
|
|
$
|
82,539
|
|
As set forth in the Current Report on Form
8-K filed by the Company with the SEC on February 24, 2017 (the “February 2017 8-K”), on February 23, 2017, PKF Certified
Public Accountants (“PKF”), a Professional Corporation, resigned as the independent registered public accounting firm
of the Company. As further set forth in the February 2017 8-K, on February 23, 2017, the Company’s Board approved the engagement
of Tanner as its independent registered public accounting firm in connection with the audit for the fiscal year ended December
31, 2016. In addition to the amounts reported above as paid to Tanner, additional amounts were paid to PKF for audit and other
fees in connection with the audit of the Company’s financial statements for the fiscal year ended December 31, 2016. The
following table summarizes the fees, as applicable, of PKF for the years ended December 31, 2017 and 2016, respectively; 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
(which are in addition to the amounts set forth above):
Fee Category
|
|
2017
|
|
|
2016
|
|
Audit Fees (1)
|
|
$
|
–
|
|
|
$
|
77,000
|
|
Audit Related Fees (2)
|
|
|
–
|
|
|
|
47,056
|
|
Tax Fees (3)
|
|
|
–
|
|
|
|
730
|
|
All Other Fees (4)
|
|
|
–
|
|
|
|
25,025
|
|
|
|
|
$
|
|
|
$
|
149,811
|
|
(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 or Tanner) 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 2017 and 2016 were pre-approved by the Audit Committee.
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-based, specialty pharmaceutical corporation (the “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 consolidated financial statements include the accounts of CV Sciences, Inc. and, as applicable, 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. On
January 20, 2017, the Company filed for dissolution of CannaVest Europe, GmbH, an entity that prior to dissolution, the
Company had a 70% interest in, with the District Court, Dusseldorf Germany, effective December 31, 2016. None of US Hemp Oil,
CannaVest Laboratories or CannaVest Europe GmbH had any assets or liabilities at the time of their dissolution.
Certain prior year amounts have been reclassified
for consistency with the current year presentation. These reclassifications had no impact on net sales, operating loss, net loss
or net loss per share.
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.
Liquidity
–
For the years ended December 31, 2017 and 2016, the Company had net losses of $4,897,139 and $14,141,298, respectively. In addition,
for the year ended December 31, 2017, the Company had positive cash flows from operations of $3,615,004, and for the year ended
December 31, 2016, the Company had negative cash flows from operations $2,053,740. 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 end of fiscal year 2019, 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 2017 and 2018 crop.
The Company’s specialty pharmaceutical
business segment will require additional capital over the next 12 months. Management believes that it will be able to obtain such
capital 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”) Topic 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, 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 in 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
|
|
·
|
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 Topic 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 a reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of a reporting unit’s
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 to their estimated residual values, 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. This method of amortization approximates the expected future cash flow generated from their use. During the year ended
December 31, 2016, an impairment expense of $2,746,512 was recorded related to the PhytoSPHERE Systems LLC acquired goodwill and
intangible assets (See Note 7). No impairments were noted during the year ended December 31, 2017.
Use of Estimates
– The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“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, inputs for valuing notes payable beneficial conversion features and stock-based
compensation, valuation of inventory, classification of current and non-current inventory amounts, and the allowance for doubtful
accounts.
Reportable Segment
–
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 developing 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 December 31, 2017 and 2016, the Company had no cash equivalents.
Restricted Cash
– The
Company’s current arrangement with its credit card processor provides the credit card processor with the right to
withhold a cash reserve balance from the Company’s credit card receipt transactions for a period of time not to
exceed 270 days, for which the credit card processor will refund the Company the entire amounts withheld at their
sole discretion. As of December 31, 2017, the Company had $778,559 in restricted cash withheld by former credit card
processors. The following table provides a reconciliation of cash and restricted cash reported within the consolidated
balance sheets to the total of the same amounts shown in the statement of cash flows as of December 31, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Cash
|
|
$
|
2,012,965
|
|
|
$
|
781,857
|
|
Restricted cash
|
|
|
778,579
|
|
|
|
275,611
|
|
Total cash and restricted cash shown in the statement of cash flows
|
|
$
|
2,791,544
|
|
|
$
|
1,057,468
|
|
Concentrations of Credit Risk
– As of December 31, 2017, 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
$1,547,408 as of December 31, 2017.
There was no concentration of
accounts receivable as of December 31, 2017. One customer represented 58% of our accounts receivable balance as of December
31, 2016. There was no significant sales concentration for the years ended December 31, 2017 and 2016.
Accounts Receivable
–
Generally, the Company requires payment prior to shipment. However, in certain circumstances, the Company extends credit to companies
located throughout the U.S. Accounts receivable consists of trade accounts arising in the normal course of business. 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, 2017 and 2016, the Company maintained an allowance
for doubtful accounts related to accounts receivable in the amount of $200,000 and $100,000, respectively.
Revenue Recognition
–
The Company recognizes revenue in accordance with the ASC Topic 605,
Revenue Recognition
which requires persuasive evidence
of an arrangement, delivery of a product or service, a fixed or determinable price and assurance of collection within a reasonable
period of time. The Company records revenue when goods are delivered to customers and the rights of ownership have transferred
from the Company to the customer which in most cases is when goods are delivered to the common carrier.
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. Such
taxes are accounted for on a net basis, and not included in revenues.
Shipping and Handling
– Shipping and handling fees charged to customers are included in product sales. Shipping and handling fees charged to
customers totaled $230,213 and $101,515 for the years ended December 31, 2017 and 2016, respectively. Total shipping and
handling costs were $854,436 and $497,227 for the years ended December 31, 2017 and 2016, respectively, and 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 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. 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 customer.
Bulk Oil Products
–
Sales of bulk oil products are final and the Company no longer accepts returns under any circumstances. There was no
allowance for customer returns as of December 31, 2017 or 2016 due to insignificant return amounts experienced during the
years ended December 31, 2017 and 2016, 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, restricted stock awards, restricted stock units, stock bonus awards and performance-based
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, directors, consultants and former directors as compensation and benefits expense
on the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model
on the date of grant. The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the
date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally
equals the vesting period. 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 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. Forfeited stock options are accounted for as they occur.
Inventory
– Inventory is stated at lower of cost or net realizable value, with cost being determined on an average cost basis. As
of December 31, 2017 and 2016, the Company had $680,516 of inventory in Germany and The Netherlands. During the year ended
December 31, 2016, the Company recorded an impairment of inventory expense of $3,562,459 (See Note 4). No impairment of
inventory expense was recorded for the year ended December 31, 2017.
Operating Leases
–
The Company leases its facilities under operating leases. For leases that contain rent escalation or rent concession provisions,
the Company records the total rent payable during the lease term on a straight-line basis over the term of the lease. The Company
records the difference between the rent paid and the straight-line rent as deferred rent liability.
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 shorter of the useful life or 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
December 31, 2017 and 2016 were as follows:
|
|
Useful Lives
|
|
2017
|
|
|
2016
|
|
Office furniture and equipment
|
|
3 years
|
|
$
|
537,607
|
|
|
$
|
340,472
|
|
Tenant improvements
|
|
14 to 39 months
|
|
|
1,545,885
|
|
|
|
70,592
|
|
Laboratory and other equipment
|
|
5 years
|
|
|
398,997
|
|
|
|
321,071
|
|
|
|
|
|
|
2,482,489
|
|
|
|
732,135
|
|
Less: accumulated depreciation
|
|
|
|
|
(399,056
|
)
|
|
|
(489,433
|
)
|
|
|
|
|
$
|
2,083,433
|
|
|
$
|
242,702
|
|
Depreciation expense for the years ended
December 31, 2017 and 2016 was $147,395 and $195,167 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.
As of December 31, 2017 and 2016, the Company determined that long-lived assets were not impaired.
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 23,073,277 and 15,591,000 stock options outstanding that were
anti-dilutive as of December 31, 2017 and 2016, respectively. In addition, the Company may be required to issue 18,000,000
shares of common stock related to certain performance-based stock options outstanding. As of December 31, 2017 and 2016,
there were also warrants outstanding to purchase up to 2,850,000 and 2,100,000 respectively, shares of common stock.
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 $251,134
and $834,963 for the years ended December 31, 2017 and 2016, respectively. Research and development expense for the specialty pharmaceutical
segment was $473,195 and $324,046 for the years ended December 31, 2017 and 2016, respectively.
Advertising
–
The Company supports its products with advertising to build brand awareness of the Company’s various products in
addition to other marketing programs executed by the Company’s marketing team.
The
Company believes the continual investment in advertising is critical to the development and sale of its
PlusCBD™
brand
products.
Advertising costs of $380,284 and $311,217 were expensed as
incurred during the years ending December 31, 2017 and 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 December 31, 2017 and 2016 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.
Recently 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,
Revenue from Contracts with Customers (Topic 606)
,
ASU 2016-08,
Revenue from Contracts with Customers (Topic 606),
ASU 2016-10,
Revenue from Contracts with Customers (Topic
606),
ASU 2016-12,
Revenue from Contracts with Customers (Topic 606)
and ASU 2016-20,
Technical Corrections and Improvements
to Topic 606, Revenue from Contracts with Customers,
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 became effective for the Company beginning January 1, 2018 and early adoption was not permitted.
The Company is currently evaluating the potential impact of ASU 2014-09 on the Company’s consolidated financial statements
but does not expect it to have a significant impact.
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, 2016 and early adoption was permitted. The
Company implemented ASU 2014-15 ASU 2014-15 during the annual reporting period of 2016.
In April 2015, the FASB issued ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”), which requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. ASU 2015-03 is effective for financial statements issued for fiscal years beginning
after December 15, 2015 and interim periods within those fiscal years. The Company implemented ASU 2015-03 during the annual reporting
period of 2016.
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 implemented ASU
2015-11 during the annual reporting period of 2017.
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.
ASU 2015-16 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 and was effective for public companies for fiscal
years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption was permitted
for any interim and annual financial statements that have not yet been issued. The Company implemented ASU 2015-16 during the
annual reporting period of 2016.
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17) which requires that deferred tax liabilities
be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods
beginning after December 15, 2016 and for interim periods within such periods. Early application is permitted. The Company implemented
ASU 2015-17 during the annual reporting period 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. ASU 2016-02 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 ASU 2016-02
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 implemented ASU 2016-09 during the annual reporting period of 2017.
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 ASU 2016-15 on the Company’s
consolidated financial statements but does not expect it to have a significant impact.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”), which requires that a statement of cash
flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted
cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for
fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. In addition, ASU 2016-18 should be applied using a retrospective
transition method to each period presented. The Company implemented ASU 2016-18 during the annual reporting period of 2016.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), which revises the
definition of a business. ASU 2017-01 requires that for an acquisition to be considered a business, the business would have to
include an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01
also narrows the definition of the term “outputs,” which are now considered the result of inputs and substantive processes
that provide goods and services to customers, other revenue, or investment income, such as dividends and interest. ASU 2017-01
is effective for public companies for annual periods beginning after December 15, 2017. Early adoption is permitted. The Company
is evaluating the potential impact of ASU 2017-01 on the Company’s consolidated financial statements but does not expect
it to have a significant impact.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”),
which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment
test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
ASU 2017-04 requires the entity to apply these amendments on a prospective basis for which it is required to disclose the nature
of and reason for the change in accounting upon transition. This disclosure shall be provided in the first annual period and in
the interim period within the first annual period when the entity initially adopts the amendments. The Company shall adopt these
amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption
is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently
evaluating the potential impact of ASU 2017-04 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.
Inventory as of December 31, 2017
and 2016 was comprised of the following:
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
6,648,144
|
|
|
$
|
7,699,057
|
|
Finished goods
|
|
|
1,841,542
|
|
|
|
1,631,442
|
|
|
|
$
|
8,489,686
|
|
|
$
|
9,330,499
|
|
During the year ended December 31, 2016,
the Company recorded a 3,562,459 impairment of certain raw material inventory. No such impairments of inventory were noted during
the year ended December 31, 2017.
Accrued expenses as of December
31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Accrued payroll expenses
|
|
$
|
1,037,122
|
|
|
$
|
208,126
|
|
Other accrued liabilities
|
|
|
894,798
|
|
|
|
170,092
|
|
|
|
$
|
1,931,920
|
|
|
$
|
378,218
|
|
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 positioned 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 (the “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.
The fair value of contingent consideration
based on achievement of the milestones described above will range depending on whether 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.
In March 2017, the Company entered into
an amendment to the principal agreement for the CanX Acquisition (the “Amendment”), as more fully set forth in our
Current Report on Form 8-K filed with the SEC on March 22, 2017 (the “March 2017 8-K”). Pursuant to such Amendment,
which was approved by the disinterested members of the Board of Directors of the Company, the Company agreed to issue the remaining
15,000,000 shares of contingent consideration to the former CanX shareholders, without the Company having yet achieved any of the
remaining post-closing milestones.
Additionally, pursuant to such Amendment,
the parties agreed to revise the Company’s buy-out option of the royalties payable to the CanX shareholders in the future,
to allow the Company to buy-out the future royalty payments by the issuance of 6,400,000 shares of the Company’s restricted
common stock (the “Royalty Buy-Out Shares”) to the former CanX shareholders. The Company concurrently exercised the
buy-out option, as so revised.
In the aggregate, pursuant to the Amendment,
the Company agreed to issue to the former CanX shareholders a total of 21,400,000 shares of restricted common stock (See Note
11). As previously disclosed in the January 2016 8-K, James McNulty, a member of the Board, is a former shareholder of CanX and
thereby received his pro rata portion of the consideration paid to the former CanX shareholders. During the year ended December
31, 2017, the Company recorded an expense of $2,432,000 for the value of the Royalty Buy-Out Shares as a separate line item in
the Company’s Consolidated Statement of Operations.
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, the
Company expects 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, the Company recorded goodwill in connection
with this transaction.
6.
|
GOODWILL AND INTANGIBLE ASSETS
|
During the fourth quarter of 2017
and 2016, the Company completed its annual impairment assessments and concluded that the goodwill and its associated
intangibles related to the purchase of PhytoSPHERE Systems, LLC in the first quarter of fiscal year 2013, as originally
reported by the Company in that certain Current Report on Form 8-K filed with the SEC on February 12, 2013, was impaired as
of December 31, 2016, due to the expiration of the Company’s raw material supply arrangements as the Company does not
intend to purchase any inventory under its supply agreements from the 2017 and 2018 crop. As such, a goodwill and intangible
impairment expense of $2,746,512 was recorded in the consumer products segment for the year ended December 31, 2016. No
impairments were noted during the year ended December 31, 2017.
Goodwill activity for the years ended December
31, 2017 and 2016 was as follows:
Balance - December 31, 2015
|
|
$
|
4,643,812
|
|
Impairment of PhytoSPHERE goodwill
|
|
|
(1,855,512
|
)
|
Balance - December 31, 2016
|
|
|
2,788,300
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
$
|
2,788,300
|
|
Intangible asset activity for the years
ended December 31, 2017 and 2016 was as follows:
|
|
Vendor Relationships
|
|
|
In-Process Research and Development
|
|
|
Trade Names
|
|
|
Non-compete Agreements
|
|
|
Total
|
|
Balance - December 31, 2015
|
|
$
|
1,170,000
|
|
|
$
|
3,730,000
|
|
|
$
|
330,000
|
|
|
$
|
2,787,000
|
|
|
$
|
8,017,000
|
|
Impairment of PhytoSPHERE intangible assets
|
|
|
(1,170,000
|
)
|
|
|
–
|
|
|
|
(230,000
|
)
|
|
|
(2,710,000
|
)
|
|
|
(4,110,000
|
)
|
Balance - December 31, 2016
|
|
|
–
|
|
|
|
3,730,000
|
|
|
|
100,000
|
|
|
|
77,000
|
|
|
|
3,907,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
$
|
–
|
|
|
$
|
3,730,000
|
|
|
$
|
100,000
|
|
|
$
|
77,000
|
|
|
$
|
3,907,000
|
|
Intangible assets consist of the following
as of December 31, 2017 and 2016:
|
|
Original Fair Market Value
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
Useful Life (Years)
|
|
Balance - December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
3,730,000
|
|
|
|
–
|
|
|
|
3,730,000
|
|
|
|
–
|
|
Trade names
|
|
|
100,000
|
|
|
|
40,000
|
|
|
|
60,000
|
|
|
|
5
|
|
Non-compete agreements
|
|
|
77,000
|
|
|
|
30,800
|
|
|
|
46,200
|
|
|
|
5
|
|
|
|
$
|
3,907,000
|
|
|
$
|
70,800
|
|
|
$
|
3,836,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
$
|
3,730,000
|
|
|
$
|
–
|
|
|
$
|
3,730,000
|
|
|
|
–
|
|
Trade names
|
|
|
100,000
|
|
|
|
20,000
|
|
|
|
80,000
|
|
|
|
5
|
|
Non-compete agreements
|
|
|
77,000
|
|
|
|
15,400
|
|
|
|
61,600
|
|
|
|
5
|
|
|
|
$
|
3,907,000
|
|
|
$
|
35,400
|
|
|
$
|
3,871,600
|
|
|
|
|
|
Amortization expense for the year ended
December 31, 2017 and 2016 totaled $35,400 and $857,400, respectively.
Based on identified intangible assets that
are subject to amortization as of December 31, 2017, we expect future amortization expense to be as follows for the years ending
December 31:
|
2018
|
|
|
$
|
35,400
|
|
|
2019
|
|
|
|
35,400
|
|
|
2020
|
|
|
|
35,400
|
|
|
|
|
|
$
|
106,200
|
|
The Company’s outstanding borrowings
under secured convertible promissory notes payable as of December 31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Iliad Note (defined below)
|
|
$
|
–
|
|
|
$
|
1,897,976
|
|
Iliad Note 2 (defined below)
|
|
|
609,926
|
|
|
|
–
|
|
|
|
$
|
609,626
|
|
|
$
|
1,897,976
|
|
Iliad Secured Convertible Promissory Notes Payable
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.,
which is a registered broker-dealer. 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.
In November 2016, the Company entered
into an Amendment to the Iliad Note (the “Iliad Amendment”), whereby the Lender and the Company agreed that the Maximum
Monthly Redemption Amount for the period from November 2016 to January 2017 (the “Reduction Period”) be reduced from
$275,000 to $166,667 (the “Reduced Maximum Monthly Redemption Amount”). In addition, if the Lender fails to convert
the full Reduced Maximum Monthly Redemption Amount during any month in the Reduction Period, then any such unconverted amount
shall increase the Reduced Maximum Monthly Redemption Amount in the following month or months. Furthermore, the Company shall
not be allowed to pay any of the Reduced Maximum Monthly Reduction Amounts in cash. As such, all amounts converted must be converted
into Redemption Conversion Shares of the Company’s common stock. Also, as part of the Iliad Amendment, the Lender agrees
that, with respect to any Redemption Conversion Shares received during the Reduction Period, in any given calendar week its Net
Sales of such Redemption Conversion Shares shall not exceed the greater of (a) 10% of the Company’s weekly dollar trading
volume in such week or (b) $50,000 (the “Volume Limitation”). However, if the Lender’s Net Sales are less than
the Volume Limitation for any given week, then in the following week or weeks, the Lender shall be allowed to sell an additional
amount of Redemption Conversion Shares equal to the difference between the amount the Lender was allowed to sell and the amount
the Lender actually sold. For the purpose of the Iliad Amendment, Net Sales is defined as the gross proceeds from sales of the
Redemption Conversion Shares sold in a calendar week during the Reduction Period minus any trading commissions or costs associated
with clearing and selling such Redemption Conversion Shares minus the purchase price paid for any shares of the Company’s
common stock purchased in the open market during such week. The Lender and the Company both agree that in the event the Lender
breaches the Volume Limitation where its Net Sales of Redemption Conversion Shares during any week during the Reduction Period
exceeds the dollar volume the Lender is permitted to sell during such week pursuant to the Volume Limitation (the “Excess
Sales”), then the Company’s sole and exclusive remedy for such breach shall be the reduction of the outstanding balance
of the Iliad Note by an amount equal to 200% of the Excess Sales upon delivery of written notice to the Lender setting forth its
basis for such reduction.
In January 2017, the Company entered into
Amendment #2 to the Iliad Note (the “Iliad Amendment 2”). In accordance with the Iliad Amendment 2, during the period
between January 27, 2017 and February 24, 2017, the Company agreed to allow the Lender to convert up to $500,000 (the “Additional
Redemption Amount”) in Redemption Conversions under the Note, provided that the Lender shall not effectuate a Redemption
Conversion of any Maximum Monthly Redemption Amount between January 27, 2017 and March 1, 2017. During this time period, the Company
was not allowed to pay any of the Additional Redemption Amount in cash and all such amounts had to be converted into Redemption
Conversion Shares of the Company’s common stock. In addition, the Lender agreed that the sale of any Redemption Conversion
Shares between January 27, 2017 and April 30, 2017 (the “Limitation Period”) was subject to the Volume Limitation.
Immediately following the expiration of the Volume Period, the Volume Limitation will be cancelled.
In March 2017, the Company entered into
Amendment #3 to the Iliad Note (the “Iliad Amendment 3”). In accordance with the Iliad Amendment 3, during the period
from March 1, 2017 to March 31, 2017, the Company agreed to allow the Lender to convert up to $500,000 (the “Additional Redemption
Amount 2”) in Redemption Conversions under the Note, provided that the Lender not effectuate a Redemption Conversion of any
Maximum Monthly Redemption Amount from March 1, 2017 until April 1, 2017. During this time period, the Company was not allowed
to pay any of the Additional Redemption Amount 2 in cash and all such amounts had to be converted into Redemption Conversion Shares
of the Company’s common stock. In addition, the Lender agreed that the sale of any Redemption Conversion Shares between March
1, 2017 and May 31, 2017 (the “Limitation Period 2”) shall be subject to the Volume Limitation. Immediately following
the expiration of the Volume Period, the Volume Limitation will be cancelled.
In August 2017, the Company entered into
Amendment #4 to the Iliad Note (the “Iliad Amendment 4”), whereby the Lender and the Company agreed to extend the Maturity
Date of the Iliad Note to April 1, 2018. In addition, the parties agreed to amend the Volume Limitation in the Iliad Note, with
respect to any Conversion Shares, such that in any given calendar week the Lender’s Net Sales of such Conversion Shares shall
not exceed the greater of (a) 15% of the Company’s weekly dollar trading volume in such week or (b) $50,000 (the “Volume
Limitation”). However, if the Lender’s Net Sales are less than the Volume Limitation for any given week, then in the
following week or weeks, the Lender shall be allowed to sell an additional amount of Conversion Shares equal to the difference
between the amount the Lender was allowed to sell and the amount the Lender actually sold. For the purpose of the Iliad Amendment
4, Net Sales is defined as the gross proceeds from sales of the Conversion Shares sold in a calendar week minus any trading commissions
or costs associated with clearing and selling such Conversion Shares minus the purchase price paid for any shares of the Company’s
common stock purchased in the open market during such week. The Lender and the Company both agree that in the event the Lender
breaches the Volume Limitation where its Net Sales of Conversion Shares during any week exceeds the dollar volume the Lender is
permitted to sell during such week pursuant to the Volume Limitation (the “Excess Sales”), then the Company’s
sole and exclusive remedy for such breach shall be the reduction of the outstanding balance of the Iliad Note by an amount equal
to 200% of the Excess Sales upon delivery of written notice to the Lender setting forth its basis for such reduction. In connection
with the Iliad Amendment 4, Lender confirmed that no Events of Default or other material breaches exist under the Iliad Note and
related Transaction Documents (as defined in the Iliad SPA).
During the year ended December 31, 2017, the Company issued
8,370,121 shares of its common stock to Iliad in connection with the conversions of the Iliad Note in the aggregate principal amount
of $1,727,583 and $77,417 of accrued interest. The total of $1,805,000 was allocated to common stock and additional paid-in capital.
The Company’s borrowings and conversions
under the Iliad SPA for the years ended December 31, 2017 and 2016 are summarized in the table below:
|
|
Maturity
|
|
|
2017
|
|
|
2016
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note payable
|
|
|
April 1, 2018
|
|
|
$
|
1,897,976
|
|
|
$
|
2,055,000
|
|
|
|
10%
|
|
Interest accrued
|
|
|
|
|
|
|
137,334
|
|
|
|
128,311
|
|
|
|
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
|
|
|
|
35,335
|
|
|
|
(35,335
|
)
|
|
|
|
|
Conversion of convertible promissory notes and accrued interest to common stock
|
|
|
|
|
|
|
(1,805,000
|
)
|
|
|
(175,000
|
)
|
|
|
|
|
Conversion of convertible promissory notes and accrued interest to accrued liabilities
|
|
|
|
|
|
|
75,000
|
|
|
|
(75,000
|
)
|
|
|
|
|
Cash repayment of promissory notes and accrued interest
|
|
|
|
|
|
|
(340,645
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
|
|
|
|
–
|
|
|
|
1,897,976
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
–
|
|
|
|
(1,897,976
|
)
|
|
|
|
|
Long-term borrowings - net of current portion
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
On the Purchase Price Date,
the Company recorded a beneficial conversion feature of $370,000 (the “Iliad Instrument”), which was
originally recorded in additional paid-in capital (“APIC”) and was scheduled for amortization over six months.
The Company determined in 2016 that the Iliad Instrument qualifies for derivative accounting treatment. The $370,000 fair
value of the Iliad Instrument at the Purchase Price Date is unchanged as a result of the change in derivative accounting
treatment, however, in 2016 we reclassified the Iliad Instrument from APIC to a liability in accordance with derivative
accounting treatment. During the year ended December 31, 2017, the Company recorded a gain of $222,800, for the change in fair value of the Iliad Instrument as part of a separate line item in the
Company’s Consolidated Statement of Operations. The assumptions used by the Company for calculating the fair
value of the Iliad Instrument at the Purchase Price Date 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; and as of December 31, 2017 were (i)
Volatility of 61.0%, (ii) Risk-Free Interest Rate of 0.74%; and (iii) Expected Term of zero months.
In March 2017, the Company entered into
another Securities Purchase Agreement (“Iliad SPA 2”) with Iliad pursuant to which the Lender loaned the Company $750,000.
On March 1, 2017 (the “Subsequent Purchase Price Date”), the Company issued to Lender a Secured Convertible Promissory
Note (the “Iliad Note 2”) in the principal amount of $770,000 in exchange for payment by Lender of $750,000. The principal
sum of the Iliad Note reflects the amount invested, plus a $15,000 OID and a $5,000 reimbursement of Lender’s legal fees.
The Company received net proceeds of $750,000 in exchange for the Iliad Note 2. The Iliad Note 2 requires the repayment of all
principal and any interest, fees, charges and late fees on the date that is fourteen months after the Subsequent Purchase Price
Date (the “Maturity Date”). Interest is to be paid on the outstanding balance at a rate of eight percent (8%) per annum
from the Subsequent Purchase Price Date until the Iliad Note 2 is paid in full. Interest is accrued during the term of the Iliad
Note 2 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 2, the conversion price for each Lender conversion
shall be 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 Subsequent Purchase Price Date and continuing until the Maturity Date, Iliad shall have the right
to redeem a portion of the Iliad Note 2 in an amount not to exceed $100,000. Provided the Company has not suffered an “Event
of Default” and is in compliance with certain “Equity Conditions” (unless waived by Iliad, in either case), the
Company may make payments on such redemptions in cash or by converting the redemption amount into shares of Company common stock
at a conversion price which is the lesser of (a) $0.50 per share and (b) 70% (“the Conversion Factor”) of the average
of the three (3) lowest closing bid prices in the previous 20 trading days, 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 5%, (3) the Company is not DTC eligible, then the Conversion Factor will be reduced by an additional 5% or (4) there
has occurred a “Major Default” then the Conversion Factor will be reduced by an additional 5% for each of the first
three Major Defaults that occur after the effective date. The Company may prepay the Iliad Note 2 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 $200,000
under the Iliad Note 2. In connection with the Iliad Note 2, as set forth above, the Company incurred an original issue discount
of $15,000 and $5,000 of other debt issuance costs, which will be amortized over the Iliad Note 2 term. The Iliad Note 2 is securitized
by the Company’s accounts receivable, inventory and equipment.
The Company’s borrowings under the
Iliad SPA 2 for the years ended December 31, 2017 and 2016 are summarized in the table below:
|
|
Maturity
|
|
|
2017
|
|
|
2016
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured promissory note payable
|
|
|
April 30, 2018
|
|
|
$
|
770,000
|
|
|
$
|
–
|
|
|
|
8%
|
|
Interest accrued
|
|
|
|
|
|
|
51,890
|
|
|
|
–
|
|
|
|
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
|
|
|
|
(5,714
|
)
|
|
|
–
|
|
|
|
|
|
Conversion of convertible promissory notes and accrued interest to accrued liabilities
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
–
|
|
|
|
|
|
Cash repayment of promissory notes and accrued interest
|
|
|
|
|
|
|
(131,250
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
|
|
|
|
609,926
|
|
|
|
–
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
(609,926
|
)
|
|
|
–
|
|
|
|
|
|
Long-term borrowings - net of current portion
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
On the Subsequent Purchase Price
Date, the Company recorded a derivative liability of $29,300 which is scheduled for amortization over 8 months. During the
year ended December 31, 2017, the Company recorded a gain of $29,300, for the change in fair value of the derivative
liability as part of a separate line item in the Company’s Consolidated Statement of Operations. The assumptions used
by the Company for calculating the fair value of the derivative liability at the Subsequent Purchase Price Date and as of
December 31, 2017 using the Binomial Lattice valuation model were: (i) Volatility of 85.0%; (ii) Risk-Free Interest Rate of
0.84%; and (iii) Expected Term of 8 months; and at December 31, 2017 were (i) Volatility of 84.0%, (ii) Risk-Free Interest
Rate of 0.93%; and (iii) Expected Term of 4 months.
Redwood 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 (collectively, the “Notes”, and individually, “Note
1”, “Note 2”, “Note 3”, and “Note 4”) 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 obligations under the SPA
and has no intention of seeking further capital from the Investor, or any other investor(s) in the Financing.
During the year ended December 31, 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 Note 2; (ii) repaid
$357,000 of the aggregate principal amount of 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 Note 3; and, (iii) 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.
The Company’s borrowings and conversions
under the SPA for the year ended December 31, 2016, are summarized in the table below:
|
|
Maturity
|
|
|
Balance
|
|
|
Interest Rate
|
|
Senior Secured Convertible Promissory Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 2 (Note 2)
|
|
|
June 12, 2016
|
|
|
|
255,000
|
|
|
|
10%
|
|
Tranche 3 (Note 3)
|
|
|
July 24, 2016
|
|
|
|
510,000
|
|
|
|
10%
|
|
Tranche 4 (Note 4)
|
|
|
September 16, 2016
|
|
|
|
255,000
|
|
|
|
10%
|
|
Total borrowings
|
|
|
|
|
|
|
1,020,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes converted (Note 2)
|
|
|
|
|
|
|
(255,000
|
)
|
|
|
|
|
Convertible notes converted/repaid (Note 3)
|
|
|
|
|
|
|
(510,000
|
)
|
|
|
|
|
Convertible notes repaid (Note 4)
|
|
|
|
|
|
|
(255,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
|
|
|
|
–
|
|
|
|
|
|
Less current portion
|
|
|
|
|
|
|
–
|
|
|
|
|
|
Long-term borrowings - net of current portion
|
|
|
|
|
|
$
|
–
|
|
|
|
|
|
Current Unsecured Note Payable
In November 2017, the Company entered into
a Commercial Premium Finance Agreement with First Insurance Funding in order to fund a portion of the Company’s insurance
policies. The amount financed was $149,044 and bears interest at a rate of 4.65%. The Company is required to make nine payments
of $16,883 a month to satisfy this current unsecured note payable. As of December 31, 2017 and 2016, the Company’s current
unsecured note payable was $116,370 and $125,964, respectively.
Unsecured Note Payable
On January 29, 2016, the Company issued
an unsecured promissory note to Wiltshire, LLC (“Wiltshire”) in the principal amount of $850,000 (the “Promissory
Note”) in consideration of a loan provided to the Company by Wiltshire. The Promissory Note bore interest at 12% per annum,
and the Company was 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 was due under the Promissory Note on February
1, 2018. 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 were to be amortized over the Promissory Note term.
On November 9, 2017, the Company extinguished
and replaced the Promissory Note with a new note to Wilshire in the principal amount of $850,000 (the “Wiltshire Note 2”)
in consideration of a new loan to the Company by Wiltshire. The Wiltshire Note 2 bears interest at 16% per annum, the Company is
obligated to make monthly interest-only payments of $11,333, for which the interest-only payments obligation commenced on November
9, 2017. All principal and accrued interest is due under the Wiltshire Note 2 on May 9, 2019. In connection with the Wiltshire
Note 2, the Company incurred legal expenses of $12,500.
The Company’s borrowings under the Promissory Note and Wiltshire Note 2 for the years ended December
31, 2017 and 2016 are summarized in the table below:
|
|
2017
|
|
|
2016
|
|
Unsecured promissory note - principal amount (Promissory Note)
|
|
$
|
850,000
|
|
|
$
|
850,000
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
–
|
|
|
|
(26,309
|
)
|
Unamortized debt discount - fair value of warrants
|
|
|
–
|
|
|
|
(144,517
|
)
|
Debt extinguishment (Promissory Note)
|
|
|
(850,000
|
)
|
|
|
–
|
|
Unsecured promissory note - principal amount (Wiltshire 2)
|
|
|
850,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of debt
|
|
|
850,000
|
|
|
|
679,174
|
|
Less current portion
|
|
|
–
|
|
|
|
–
|
|
Long-term borrowings - net of current portion
|
|
$
|
850,000
|
|
|
$
|
679,174
|
|
Pursuant to the terms of the Promissory
Note, the Company issued to Wiltshire a common stock purchase warrant providing Wiltshire 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 years ended December 31, 2017 and
2016, the Company recorded interest expense of $111,225 and $122,283, respectively, for the amortization of the Warrant fair value.
The assumptions used by the Company for calculating the fair value of the Warrant at inception 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.
Pursuant to the terms of the Wiltshire
Note 2, the Company issued to Wiltshire a common stock purchase warrant providing Wiltshire with the right to purchase up to 750,000
shares of the Company’s common stock (the “Warrant 2”). The Warrant 2 is exercisable at any time subsequent
to the date of issuance on November 9, 2017, and before the date that is five years from the date of issuance at an exercise price
of $0.248 per share, subject to adjustment upon the occurrence of certain events such as stock splits and dividends. The Company
used extinguishment accounting to record the repayment of the Promissory Note and Issuance of the Wiltshire Note 2. As a result,
the fair value of the Warrant 2 of $136,650 was included in the loss on extinguishment of debt amount totaling $188,822 that was
included in the Company’s Consolidated Statement of Operations for the year ended December 31, 2017. The assumptions used
by the Company for calculating the fair value of the Warrant 2 at inception using the Black-Scholes valuation model were: (i)
Volatility of 95.9%; (ii) Risk-Free Interest Rate of 2.59%; and (iii) Expected Term of five years.
During the years ended December 31,
2017 and 2016, the Company paid $202,000 and $412,822, respectively, to a stockholder of the Company who is a supplier of
hemp oil and hemp to the Company. In addition, during the year ended 2016, the Company issued 500,000 shares of common stock
in connection with the purchase of inventory from a European supplier valued based on the closing trading price of
the Company’s common stock on the date of issuance.
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, 2017 and 2016, the Company
had 90,512,563 and 57,617,545 shares of common stock issued and outstanding, respectively.
During the year ended
December 31, 2017, the Company issued 8,995,018 shares of common stock in connection with conversion of convertible debt and also
issued 500,000 shares of common stock in exchange for purchase of inventory. The shares of common stock issued in connection with
the purchase of inventory during the year ended December 31, 2017 were valued based on the closing trading price of the Company’s
common stock on the date of issuance, and had a fair value of $202,000.
In March 2017, the Company entered into an
amendment to the principal agreement in relation to the CanX Acquisition (the “Amendment”), as more fully set forth
in the March 2017 8-K. Pursuant to such Amendment, which was approved by the Board of Directors of the Company, the Company agreed
to issue the remaining 15,000,000 shares of contingent consideration to the former CanX shareholders, without the Company having
yet achieved any of the remaining equity-based milestones obligations.
Additionally, pursuant to such Amendment, the
parties agreed to revise the Company’s future royalties buy-out option to allow the Company to buy-out future royalty payments
by the issuance of 6,400,000 shares of the Company’s restricted common stock to the former CanX shareholders, with the Company
concurrently exercising the buy-out option, as so revised.
In the aggregate of the milestone and future
royalty payments, the Company agreed to issue to the former CanX shareholders a total of 21,400,000 shares of restricted common
stock. As previously disclosed in the January 2016 8-K, James McNulty, a member of the Board, is a former shareholder of CanX and
thereby received his pro rata portion of the consideration paid to the former CanX shareholders. During the year ended December
31, 2017, the Company recorded an expense of $2,432,000 for the value of its stock-based contingent consideration payments as a
separate line item in the Company’s Consolidated Statement of Operations.
During the year ended December 31, 2016, the
Company issued 6,465,756 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. Also, 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. In addition, the Company issued 300,000 shares of common stock in connection with investor relation services.
Furthermore, the Company issued
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 December 2016, the Company obtained 124,600 shares as collateral under an outstanding note receivable which
were immediately cancelled upon receipt. The common stock issued in connection with professional services during the year ended
December 31, 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 $.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, 2017, and 2016, there is no preferred stock issued and outstanding.
Options/Warrants/RSU’s
On July 23, 2014, Company stockholders
approved the CV Sciences, Inc. 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.
On each of December 21, 2015, October 24, 2016 and July 14, 2017, the Company’s stockholders approved an amendment to the
Amended 2013 Plan to increase the number of shares that may be issued under the Amended 2013 Plan. There are currently 25,000,000
shares of common stock authorized for issuance under the Amended 2013 Plan. This plan serves as the successor to the 2013 Equity
Incentive Plan. There were no option awards under the 2013 Equity Incentive Plan prior to it being amended and restated.
In April 2017, the disinterested members
of the Board approved a grant of an aggregate of 2,000,000 performance-based stock options to purchase shares of the Company’s
common stock to two senior management members of the Company (including one management member of the Board). The performance-based
stock options are contingent and vest only upon the Company achieving three specific milestones related to the success of the Company’s
drug development program and were granted outside of the Company’s Amended 2013 Plan. Vesting of such options accelerates
upon a sale of the Company or change in control.
In March 2017, as further set forth in
the March 2017 8-K, the disinterested members of the Board approved the grant of 5,000,000 performance-based stock options (the
“Mona Performance Options”) to purchase shares of the Company’s common stock to one senior management member
of the Company. The Mona Performance Options are contingent and vest only upon the Company achieving three specific milestones
related to the success of the Company’s drug development program and were granted outside of the Company’s Amended
2013 Plan. Vesting of such options accelerates upon a sale of the Company or change in control.
In March 2017, as further set forth in
the March 2017 8-K, the disinterested members of the Board approved a grant of an aggregate of 400,000 fully-vested stock options
to purchase shares of the Company’s common stock to three senior management members of the Company (including the two management
members of the Board) pursuant to the bonus plan set forth in the Employment Agreements for fiscal year 2016 performance.
Also in March 2017, as further set forth
in the March 2017 8-K, the disinterested members of the Board, as the administrator of the Amended 2013 Plan, approved the amendment
to certain stock options granted to employees of the Company, including certain options granted to three senior management members
of the Company, to reduce the exercise price of such stock options. As a result of the amendment to the stock option grants, each
of the covered stock options, including those issued to three senior management members of the Company, have been amended to provide
for a strike price equal to $0.38 per share, which represents 100% of the fair market value of the Company’s common stock
as of the date of the amendment to these stock option grants.
In addition, in March 2017, the Company
issued 5,000,000 restricted stock units (RSU’s) to a consultant under an agreement for consulting services. The restricted
stock units were to vest as follows: 1,000,000 vested immediately and 4,000,000 vested according to future performance-based criteria.
During 2017, 2,000,000 shares were issued to settle the vested RSU’s. The consultant relationship was terminated in December
2017 and no further RSU’s will vest or be issued under this agreement.
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 December 31, 2017, the Company had 9,176,723 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 Company recognized expense of $3,419,799
and $2,732,908 relating to stock options and warrants issued to employees, officers, directors, consultants and former directors
for the years ended December 31, 2017 and 2016, respectively. The Company also recognized expenses of $0 and $541,126 relating
to common stock issued to employees, officers, directors, consultants and former directors during the years ended December
31, 2017 and December 31, 2016, respectively. For the years ended December 31, 2017 and 2016, stock-based compensation of
$3,419,799 and $3,274,034 and was expensed to Selling, General and Administrative. As of December 31, 2017, total unrecognized
compensation cost related to non-vested stock-based compensation arrangements granted to employees, officers, and directors was $1,178,635
which is expected to be recognized over a weighted-average period of 1.52 years.
The following table summarizes stock option
activity for the Amended 2013 Plan during the years ended December 31, 2017 and 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
|
|
|
3,220,000
|
|
|
|
0.36
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(74,631
|
)
|
|
|
0.55
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(103,405
|
)
|
|
|
2.34
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding - December 31, 2016
|
|
|
12,841,000
|
|
|
|
1.57
|
|
|
|
8.54
|
|
|
|
415,135
|
|
Granted
|
|
|
10,312,000
|
|
|
|
0.36
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(6,930,976
|
)
|
|
|
2.37
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
(398,747
|
)
|
|
|
0.43
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding - December 31, 2017
|
|
|
15,823,277
|
|
|
|
0.46
|
|
|
|
7.91
|
|
|
|
5,406,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercisable - December 31, 2017
|
|
|
12,084,662
|
|
|
|
0.50
|
|
|
|
7.73
|
|
|
|
2,059,545
|
|
Total unvested - December 31, 2017
|
|
|
3,738,615
|
|
|
|
0.35
|
|
|
|
8.48
|
|
|
|
2,896,954
|
|
Total vested or expected to vest - December 31, 2017
|
|
|
15,823,277
|
|
|
|
1.57
|
|
|
|
8.54
|
|
|
|
5,406,499
|
|
The following table summarizes unvested
stock options for the Amended 2013 Plan as of December 31, 2017 and 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
|
|
|
|
3,220,000
|
|
|
|
0.27
|
|
|
Vested
|
|
|
|
(1,932,191
|
)
|
|
|
0.96
|
|
|
Cancellations
|
|
|
|
(74,631
|
)
|
|
|
1.35
|
|
|
Unvested stock options - December 31, 2016
|
|
|
|
3,724,233
|
|
|
|
0.63
|
|
|
Granted
|
|
|
|
10,312,000
|
|
|
|
0.21
|
|
|
Vested
|
|
|
|
(3,366,642
|
)
|
|
|
0.50
|
|
|
Cancellations
|
|
|
|
(6,930,976
|
)
|
|
|
0.32
|
|
|
Unvested stock options - December 31, 2017
|
|
|
|
3,738,615
|
|
|
|
0.36
|
|
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
for the Amended 2013 Plan using the Black-Scholes valuation model that have been granted during the years ended December 31,
2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
Employees Weighted Average
|
|
|
Non-Employees Weighted Average
|
|
|
Employees Weighted Average
|
|
|
Non-Employees Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
102.58%
|
|
|
|
95.94%
|
|
|
|
87.63%
|
|
|
|
90.38%
|
|
Risk-Free Interest Rate
|
|
|
1.62%
|
|
|
|
2.59%
|
|
|
|
1.47%
|
|
|
|
1.37%
|
|
Expected Term
|
|
|
3.17
|
|
|
|
10.00
|
|
|
|
5.68
|
|
|
|
10.00
|
|
Dividend Rate
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Fair Value Per Share on Grant Date
|
|
$
|
0.13
|
|
|
$
|
0.33
|
|
|
$
|
0.27
|
|
|
$
|
0.32
|
|
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 ASC Topic 718,
Stock
Compensation, 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 has established performance
milestones in connection with the Company’s drug development efforts for its lead drug candidate CVSI-007. In fiscal year
2016 the Company achieved the milestone of completing 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, and an aggregate
of 2,750,000 options vested for three members of senior management outside of the Amended 2013 Plan. During fiscal year 2017,
the Company achieved the milestone of receiving the minutes from the Pre- Investigational New Drug Application meeting held with
the FDA in June 2017 which resulted in an aggregate of 4,500,000 options vested for three members of senior management outside
of the Amended 2013 Plan. The following table summarizes stock option activity outside of the Amended 2013 Plan during the year
ended December 31, 2017:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contract Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - December 31, 2016
|
|
|
2,750,000
|
|
|
$
|
0.37
|
|
|
|
9.77
|
|
|
$
|
170,500
|
|
Granted
|
|
|
4,500,000
|
|
|
|
0.37
|
|
|
|
8.78
|
|
|
|
1,813,500
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding - December 31, 2017
|
|
|
7,250,000
|
|
|
|
0.37
|
|
|
|
8.78
|
|
|
|
1,813,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercisable - December 31, 2017
|
|
|
7,250,000
|
|
|
|
0.37
|
|
|
|
8.78
|
|
|
|
1,813,500
|
|
Total unvested - December 31, 2017
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total vested or expected to vest - December 31, 2017
|
|
|
7,250,000
|
|
|
|
0.37
|
|
|
|
8.78
|
|
|
|
1,813,500
|
|
The following table summarizes unvested
stock options outside of the Amended 2013 Plan as of December 31, 2017:
Unvested stock options - December 31, 2016
|
|
–
|
|
|
$
|
–
|
|
|
Granted
|
|
|
7,250,000
|
|
|
|
0.37
|
|
|
Vested
|
|
|
(7,250,000
|
)
|
|
|
0.37
|
|
|
Cancellations
|
|
|
–
|
|
|
|
–
|
|
|
Unvested stock options - December 31, 2017
|
|
|
–
|
|
|
|
–
|
|
As of December 31, 2017, there were
10,750,000 remaining unvested stock options granted outside of the Amended 2013 Plan which vest upon the completion of future
performance conditions.
The following table presents the weighted-average
assumptions used by the Company for calculating the fair value of its employee stock options granted outside of the Amended 2013
Plan using the Black-Scholes valuation model during the year ended December 31, 2017:
|
|
Assumptions
|
|
|
|
|
|
Volatility
|
|
|
81.10%
|
|
Risk-Free Interest Rate
|
|
|
1.84%
|
|
Expected Term
|
|
|
4.63
|
|
Dividend Rate
|
|
|
0.00%
|
|
Fair Value Per Share on Grant Date
|
|
$
|
0.15
|
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
Commitments
The Company entered an 8-year lease agreement
(the “Lease”) consolidating its operations in approximately 24,000 square feet in San Diego, California that commenced
on February 1, 2018. The Company is required to pay monthly base rent, utilities and common area maintenance expenses. The Company
received a landlord rent incentive of $1,067,459 for tenant improvements. The Lease rent incentive is recorded as a deferred benefit
and is amortized over the Lease term.
The following table provides the Company’s
Lease commitment as of December 31, 2017:
|
|
Operating Lease Commitment
|
|
|
|
|
|
2018
|
|
$
|
427,101
|
|
2019
|
|
|
651,112
|
|
2020
|
|
|
670,595
|
|
2021
|
|
|
690,744
|
|
2022
|
|
|
711,280
|
|
Thereafter
|
|
|
2,329,750
|
|
|
|
$
|
5,480,582
|
|
The Company incurred rent expense of $479,614
and $476,430 for the years ended December 31, 2017 and 2016, respectively.
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 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.
On October 21, 2016, Dun Agro
B.V. (“Dun Agro”) filed a complaint against the Company in the District Court of the North Netherlands, location
Groningen, The Netherlands, alleging non-performance under a contract, seeking compensatory damages of approximately
2,050,000 euros, excluding interest and costs. The plaintiff alleges that the Company was obligated to perform under that
certain Supply Agreement between the Company and Dun Agro dated December 19, 2013, and to purchase 1,000,000 kilograms
of harvested raw material related to the 2016 crop. The Company filed its reply to the complaint before the March 29, 2017
deadline. Management intends to vigorously defend the complaint allegations and an estimate of possible loss cannot be made
at this time.
On
June 15, 2017, the SEC filed an enforcement action against the Company and its Chief Executive Officer. We have cooperated with
the SEC’s investigation and believe the claims made in the SEC’s complaint are without merit. We believe the allegations
in the complaint mischaracterize the actions of the Company and our Chief Executive Officer in connection with the matters related
to our quarterly results in fiscal year 2013. The complaint seeks disgorgement of a $10,000 bonus paid to our Chief Executive Officer
as well as other incentive-based and equity-based compensation, and payment of unspecified monetary penalties by the Company and
our Chief Executive Officer pursuant to Section 304 of the Sarbanes Oxley Act of 2002 and Section 21(d)(3) of the Exchange Act.
Further, the complaint seeks to permanently bar our Chief Executive Officer from acting as an officer or director of any issuer
that has a class of securities registered pursuant to Section 12 of the Exchange Act. We intend to vigorously contest the allegations
in the complaint.
The
Company is a plaintiff in two litigation matters involving former credit card processors of the Company. On September 10, 2017,
the Company filed a complaint against one such credit card processor, PayToo Merchant Services, Corporation (“Pay Too”),
a Florida corporation, in the Circuit Court in Broward County, Florida, asserting breach of contract claims for PayToo’s
failure to remit approximately $250,000 to the Company for credit card sales processed by PayToo from January 2017 to February
2017. On December 11, 2017, the Company filed a complaint against the other credit card processor, T1 Payments, LLC (“T1”),
a Nevada corporation, in District Court, Clark County, Nevada, asserting breach of contract claims for T1’s failure to remit
approximately $500,000 to the Company for credit card sales processed by T1 from February 2017 to October 2017.
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, consolidated results of operations or financial condition.
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 years ended December 31, 2017 and 2016:
|
|
Consumer Products Segment
|
|
|
Specialty Pharmaceutical Segment
|
|
|
Consolidated Totals
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
20,679,239
|
|
|
$
|
–
|
|
|
$
|
20,679,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
14,488,664
|
|
|
$
|
–
|
|
|
$
|
14,488,664
|
|
Loss on extinguishment of debt
|
|
|
(188,822
|
)
|
|
|
–
|
|
|
|
(188,822
|
)
|
Gain on change in derivative liability
|
|
|
248,875
|
|
|
|
–
|
|
|
|
248,875
|
|
Royalty buy-out
|
|
|
(2,432,000
|
)
|
|
|
–
|
|
|
|
(2,432,000
|
)
|
Selling, general and administrative
|
|
|
(16,016,615
|
)
|
|
|
(235,761
|
)
|
|
|
(16,252,376
|
)
|
Research and development
|
|
|
(251,134
|
)
|
|
|
(473,195
|
)
|
|
|
(724,329
|
)
|
Operating loss
|
|
$
|
(4,151,032
|
)
|
|
$
|
(708,956
|
)
|
|
$
|
(4,859,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales, net
|
|
$
|
11,060,636
|
|
|
$
|
–
|
|
|
$
|
11,060,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
6,997,635
|
|
|
$
|
–
|
|
|
$
|
6,997,635
|
|
Gain on collection of related party notes receivable
|
|
|
379,486
|
|
|
|
–
|
|
|
|
379,486
|
|
Gain on change of derivative liability
|
|
|
147,200
|
|
|
|
–
|
|
|
|
147,200
|
|
Impairment of inventory
|
|
|
(3,562,459
|
)
|
|
|
–
|
|
|
|
(3,562,459
|
)
|
Impairment of PhytoSPHERE goodwill and intangible assets
|
|
|
(2,746,512
|
)
|
|
|
–
|
|
|
|
(2,746,512
|
)
|
Selling, general and administrative
|
|
|
(12,741,211
|
)
|
|
|
(388,739
|
)
|
|
|
(13,129,950
|
)
|
Research and development
|
|
|
(834,963
|
)
|
|
|
(324,046
|
)
|
|
|
(1,159,009
|
)
|
Operating loss
|
|
$
|
(12,360,824
|
)
|
|
$
|
(712,785
|
)
|
|
$
|
(13,073,609
|
)
|
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. As of December 31,
2017 and 2016, the Company established valuation allowances equal to the full amount of its deferred tax assets, net of
certain tax liabilities, due to the uncertainty of the utilization of the net operating losses in future periods.
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
3,593,000
|
|
|
$
|
5,061,830
|
|
Business credit carryforwards
|
|
|
100,000
|
|
|
|
80,551
|
|
Bad debt expense
|
|
|
56,000
|
|
|
|
39,834
|
|
Intangible assets
|
|
|
1,113,000
|
|
|
|
1,742,639
|
|
Stock-based compensation
|
|
|
575,000
|
|
|
|
579,970
|
|
Unrealized capital loss
|
|
|
12,000
|
|
|
|
16,870
|
|
Inventory reserve
|
|
|
997,000
|
|
|
|
1,419,084
|
|
Deferred rent
|
|
|
299,000
|
|
|
|
–
|
|
Other
|
|
|
59,000
|
|
|
|
44,410
|
|
|
|
|
6,804,000
|
|
|
|
8,985,188
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(331,000
|
)
|
|
|
(18,052
|
)
|
CanX intangible assets
|
|
|
(1,074,000
|
)
|
|
|
(1,556,300
|
)
|
|
|
|
(1,405,000
|
)
|
|
|
(1,574,352
|
)
|
Valuation allowance
|
|
|
(6,473,000
|
)
|
|
|
(8,967,136
|
)
|
Net deferred tax liabilities
|
|
$
|
(1,074,000
|
)
|
|
$
|
(1,556,300
|
)
|
The valuation allowance decreased by $2,494,136
for the year ended December 31, 2017 and increased by $4,837,842 for the year ended December 31, 2016.
As of December 31, 2017, the
Company has Federal and state net operating loss (“NOL”) carryforwards of approximately $12.9 million and $13.1
million, respectively, which are available to offset future taxable income and which begin to expire in 2033. These loss
carryforwards will likely be further limited pursuant to Internal Revenue Code Section 382 due to the change in control.
Under Section 382 of the Internal Revenue Code, a substantial change in the Company’s ownership may limit the amount of
NOL carryforwards that can be utilized annually to offset future taxable income. The Company has not completed a study to
determine whether a substantial change in ownership has occurred and, if so, the effect on its ability to utilize its NOL
carryforwards. A valuation allowance has been recorded to fully reserve the potential benefits of these carryforwards as of
December 31, 2017 and 2016. If it is determined that a substantial change in the Company’s ownership occurred in prior
years, or if a substantial change in ownership occurs in the future, the Company’s ability to utilize its net operating
loss carryforwards in any fiscal year may be significantly limited and the Company may be unable to fully utilize its net
operating loss carryforwards prior to their expiration dates.
On December 22, 2017, U.S.
tax legislation was enacted containing a broad range of tax reform provisions including a corporate tax rate reduction.
The Company has not completed its accounting for the income tax effects of U.S. tax reform. However, the Company has made
a reasonable estimate of the 2017 financial statement impact. Accordingly, the Company recorded a $481,500 net gain for
the year ended December 31, 2017, to decrease deferred tax liabilities to reflect the reduction in the U.S. corporate tax
rate from 34 percent to 21 percent beginning January 1, 2018. We are still analyzing certain aspects of the law and refining
our calculations of basis differences as of December 31, 2017, which could affect the measurement of these balances. We
will continue to update our calculations as additional required information is prepared and analyzed, interpretations
and assumptions are refined, additional guidance is issued, and due to actions we may take as a result of the legislation.
These updates could significantly impact the provision for income taxes, the amount of taxes payable, and the deferred tax
asset and liability balances.
The differences between the expected
income tax benefit and the actual recorded income tax (expense) benefit computed using a statutory federal rate of 34% as of
December 31, 2017 and 34% as of December 31, 2016 is as detailed below:
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Income tax benefit at statutory rate
|
|
$
|
(1,829,000
|
)
|
|
$
|
(4,808,041
|
)
|
State taxes
|
|
|
(37,000
|
)
|
|
|
(732,064
|
)
|
Effect of change in future tax rate on deferred tax balances
|
|
|
2,226,000
|
|
|
|
–
|
|
Stock-based compensation
|
|
|
685,000
|
|
|
|
553,832
|
|
Change in derivative liability
|
|
|
(85,000
|
)
|
|
|
180,430
|
|
Amortization of discount on convertible note
|
|
|
–
|
|
|
|
(50,048
|
)
|
Non-deductible interest on convertible notes
|
|
|
135,000
|
|
|
|
–
|
|
Royalty buyout
|
|
|
827,000
|
|
|
|
–
|
|
Other permanent differences
|
|
|
85,000
|
|
|
|
3,951
|
|
Other
|
|
|
5,500
|
|
|
|
–
|
|
Change in valuation allowance
|
|
|
(2,494,000
|
)
|
|
|
4,851,940
|
|
Total provision
|
|
$
|
(481,500
|
)
|
|
$
|
–
|
|
The Company paid the
$100,000 installment obligations in cash under the Iliad Note 2 on January 6, 2018. On February 6, 2018, and March 5,
2018.