U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended June 30, 2013.

 

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the transition period from              to             

 

Commission File Number

333-173215

 

CannaVEST Corp.

(Exact name of registrant as specified in its charter)

 

DELAWARE 80-0944970

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

2688 South Rainbow Avenue, Suite B

Las Vegas, Nevada 89146

(Address of principal executive offices)

 

866-290-2157

(Registrant’s telephone number, including area code)

 

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  £

 

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  £    No  S

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer £   Accelerated filer £
Non-accelerated filer £ (Do not check if a smaller reporting company)   Smaller reporting company S

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  £     No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 13, 2013, the issuer had 10,108,334 shares of issued and outstanding common stock, par value $.0001.

 

 
 

 

 

TABLE OF CONTENTS

 

Page

PART I - FINANCIAL INFORMATION

 
   

Item 1. Financial Statements

3
   

Condensed Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012

3
   

Condensed Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2013 and 2012

4
   

Condensed Statements of Changes in Stockholders’ Equity (Deficit) (unaudited) from December 31, 2011 to June 30, 2013

5
   

Condensed Statement of Cash Flows (unaudited) for the Three and Six Months Ended June 30, 2013 and 2012

6
   

Notes to Condensed Financial Statements (unaudited)

7
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13
   

Item 3. Quantitative And Qualitative Disclosures About Market Risk

15
   

Item 4. Controls and Procedures

16
   

PART II - OTHER INFORMATION

 
   

Item 1. Legal Proceedings

16
   
Item 1A. Risk Factors 16
 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

16

   

Item 3. Defaults Upon Senior Securities

17

   

Item 4. Mine Safety Disclosures

17
   

Item 5. Other Information

17
   

Item 6. Exhibits

17
   
SIGNATURES 18

 

2
 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CANNAVEST CORP.

CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

AS OF JUNE 30, 2013 AND FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2013 AND 2012

 

CANNAVEST CORP.

CONDENSED BALANCE SHEETS  

 

   June 30, 2013   December 31, 2012 
ASSETS  Unaudited     
Current Assets          
Cash  $76,670   $431 
Accounts Receivable   1,561,496     
Total Current Assets   1,638,166    431 
           
Other Current Assets          
Prepaid Inventory   975,471     
Inventory   2,177,823     
Total Other Current Assets   3,153,294     
           
Total Current Assets   4,791,460    431 
           
Property and Equipment, Net   18,315     
           
Other Assets          
Goodwill   26,998,125     
Intangibles, Net   4,995,895     
Investment in KannaLife   500,000     
Total Other Assets   32,494,020     
           
TOTAL ASSETS  $37,303,795   $431 
           
LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities          
Accounts Payable  $27,134   $ 
Accrued Interest   20,523     
Amount due to related party   300    500 
Other Current Liabilities          
PhytoSPHERE Agreement   23,750,000     
Total Current Liabilities   23,797,957    500 
           
Long Term Liabilities          
Due to Roen Ventures, LLC   3,280,500     
Total Long Term Liabilities   3,280,500     
           
TOTAL LIABILITIES   27,078,457    500 
           
STOCKHOLDERS’ EQUITY (DEFICIT)          
Common stock - par value $0.0001; 190,000,000 shares authorized; 8,900,000 and 7,000,000 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively   890    700 
Additional Paid in Capital   10,643,257    143,447 
Accumulated Deficit   (418,809)   (144,216)
           
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)   10,225,338    (69)
           
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)  $37,303,795   $431 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

3
 

 

CANNAVEST CORP.

CONDENSED STATEMENTS OF OPERATIONS

UNAUDITED

 

  For the three months ended   For the six months ended 
  June 30,   June 30, 
   2013   2012   2013   2012 
Revenue  $107,683   $   $1,190,058   $ 
                     
Cost of Goods Sold   16,292        221,742     
                     
Gross Profit   91,391        968,316     
                     
Operating Expenses:                    
General & Administrative   1,131,660    11,352    1,222,386    27,396 
                     
Operating loss   (1,040,269)   (11,352)   (254,070)   (27,396)
                     
Interest expense   (20,523)   (974)   (20,523)   (1,852)
                     
Loss before taxes   (1,060,792)   (12,326)   (274,593)   (29,248)
                     
Provision for income taxes                
                     
NET LOSS  $(1,060,792)  $(12,326)  $(274,593)  $(29,248)
                     
Loss per Share  $(0.12)  $(0.00)  $(0.03)  $(0.00)
                     
Weighted Average Number of Shares – Basic & Diluted   8,867,033    7,000,000    8,246,961    7,000,000 

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

4
 

 

CANNAVEST CORP.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the period from December 31, 2011 to June 30, 2013

  

    Common Stock     Additional
Paid In
    Accumulated        
    Shares     Amount     Capital     Deficit     Total  
                               
Balance, December 31, 2011 (audited)     7,000,000      $ 700     59,800      $ (98,605)      $ (38,105)  
                                         
Forgiveness of shareholder advances                 83,647             83,647  
                                         
Net loss                       (45,611)       (45,611)  
                                         
Balance, December 31, 2012 (audited)     7,000,000       700       143,447       (144,216)       (69)  
                                         
Shares issued for first installment of PhytoSPHERE Agreement     900,000       90       4,499,910             4,500,000  
                                         
Shares issued for second installment of PhytoSPHERE Agreement     1,000,000       100       5,999,900             6,000,000  
                                         
Net loss                             (274,593)       (274,593)  
                                         
Balance June 30, 2013 (unaudited)     8,900,000     $ 890     $ 10,643,257     $ (418,809)     $ 10,225,338  

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

5
 

 

CANNAVEST CORP.

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

UNAUDITED

 

  For the six months ended, 
  June 30, 2013   June 30, 2012 
OPERATING ACTIVITIES          
Net Loss  $(274,593)  $(29,248)
Adjustments to reconcile net loss to net cash flows used in operating activities:          
Amortization of intangible assets   951,492     
Change in operating assets and liabilities:          
Prepaid expense       1,750 
Prepaid inventory   285,039     
Accounts receivable   (1,165,059)    
Inventory   (1,832,345)    
Accounts payable and accrued expenses   47,657    9,143 
Net cash flows used in operating activities   (1,987,809)   (18,355)
           
INVESTING ACTIVITIES          
Cash received on acquisition   50,775     
Purchase of property and equipment   (17,027)    
Cash paid on PhytoSPHERE agreement   (750,000)    
Investment in KannaLife   (500,000)    
Net cash flows used in investing activities   (1,216,252)    
           
FINANCING ACTIVITIES          
Proceeds from loan from Roen Ventures   3,280,500     
  Proceeds from loan from related party       17,300 
  Repayment of loan from related party   (200)    
Net cash flows from financing activities   3,280,300    17,300 
           
Net increase (decrease) in cash   76,239    (1,055)
Cash, beginning of period   431    1,168 
Cash, end of period  $76,670   $113 
           
NON CASH TRANSACTION          
Accounts receivable assumed from acquisitions  $396,438     
Inventory assumed from acquisitions   345,477     
Prepaid inventory assumed from acquisition   1,260,510     
Property and equipment assumed from acquisitions   1,288     
Intangible assets   5,947,387     
Goodwill   26,998,125     
Amount due from PhytoSPHERE agreement   (23,750,000)    
Common Shares issued for PhytoSPHERE Transaction   (10,500,000)    

 

The accompanying notes are an integral part of these unaudited condensed financial statements.

 

6
 

  

CANNAVEST CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

  1. ORGANIZATION AND BUSINESS

 

CannaVEST Corp. (formerly Foreclosure Solutions, Inc.) (the “Company”, “we” or “us”) was incorporated on December 9, 2010, in the state of Texas, to provide information on pre-foreclosure and foreclosed residential properties to homebuyers and real estate professionals on its website. However, the Company was not able to secure financing for this business plan and on November 16, 2012 the shareholders owning 6,979,900 of the outstanding shares sold their shares in private transactions to four buyers. Commensurate with this transaction the former officer and director resigned and control of the Company changed. In addition, the Company’s business offices moved from Dallas, Texas to Las Vegas, Nevada. On January 29, 2013, the Company amended its Certificate of Formation to change its name to CannaVEST Corp. and on March 14, 2013, the Company increased the size of its board of directors and elected three independent directors. On July 26, 2013 the Company reincorporated in the state of Delaware.

 

On December 15, 2012, the Company entered into an Agreement for Purchase and Sale of Assets (the “PhytoSPHERE Agreement”) with PhytoSPHERE Systems, LLC (“PhytoSPHERE”) whereby upon the closing of the transaction the Company acquired certain assets of PhytoSPHERE in exchange for an aggregate payment of $35,000,000 to be paid in five installments of either cash or common stock shares, as determined in the Company’s sole discretion. The closing occurred on January 29, 2013, at which time the Company took delivery of the acquired assets and made its first installment payment in the amount of $4,500,000 by issuing 900,000 common stock shares with a quoted market price on that date of $5.00. On April 4, 2013, the Company made its second installment payment in the amount of $6,000,000 by issuing 1,000,000 shares of common stock at a per share price of $6.00, determined by the maximum price set forth in the PhytoSPHERE Agreement. During the fiscal quarter ended June 30, 2013, the Company paid $750,000 in cash and on July 23, 2013, issued 1,208,334 shares at a per share price of $6.00, determined by the maximum price set forth in the PhytoSPHERE Agreement, completing its third installment in the aggregate amount of $8,000,004. The remaining installments are due on or before September 30, 2013 and December 31, 2013 in the amounts of $9,999,996 and $6,500,000, respectively.

 

The Company’s business is that of developing, producing, marketing and selling end consumer products to the nutriceutical industry containing hemp plant extract, Cannabidoil (CBD) and reselling to third parties raw product acquired by the Company pursuant to its supply relationships in Europe.

 

  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. All references to Generally Accepted Accounting Principles (“GAAP”) are in accordance with The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles.

 

The unaudited condensed interim financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2012, filed with the SEC on the Company’s Annual Report on Form 10-K. The results for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.

 

Use of Estimates

 

The Company’s condensed financial statements have been prepared in accordance with GAAP. The preparation of these condensed 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.

 

7
 

 

CANNAVEST CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

Cash and Cash Equivalents

 

For purposes of the 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 June 30, 2013 and December 31, 2012, the Company had no cash equivalents.

 

Concentration of credit risk

 

As of June 30, 2013, 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.

 

Accounts Receivable

 

Accounts receivable consists of trade accounts arising in the normal course of business, and accounts receivable purchased by the Company from PhytoSPHERE under the PhytoSPHERE Agreement. No interest is charged on past due accounts. Accounts for which no payments have been received after 30 days are considered delinquent and customary collection efforts are initiated. Accounts receivable are carried at original invoice amount less a reserve made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.

 

Management determines 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. There was no allowance for doubtful accounts at either June 30, 2013 or December 31, 2012.

 

Revenue Recognition

 

The Company will recognize revenue in accordance with ASC and SEC guidance 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.

 

Inventory

 

Inventory is stated at lower of cost or market, with cost being determined on average cost basis. There was no reserve for inventory at either June 30, 2013 or December 31, 2012.

 

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. 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.

 

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.

 

8
 

 

CANNAVEST CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

Fair Value Measurements

 

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company’s adoption of fair value measurements and disclosures did not have a material impact on the financial statements and financial statement disclosures.

 

Goodwill and Intangible Assets

 

The Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.

 

We make critical assumptions and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, market competition, inflation and discount rates. A 10% decrease in the estimated discounted cash flows for the reporting units tested would result in an impairment that is not material to our results of operations. A 1.0 percentage point increase in the discount rate used would also result in an impairment that is not material to our results of operations.

 

We amortize the cost of other intangible assets over their estimated useful lives, which range up to ten years, unless such lives are deemed indefinite. Intangible assets with indefinite lives are tested in the third quarter of each fiscal year for impairment, or more often if indicators warrant.

 

Loss per Share

 

The Company calculates 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 common stock shares outstanding during the period. Diluted EPS is computed based on the weighted average number of common stock shares outstanding plus all potentially dilutive common stock shares outstanding during the period.  

 

9
 

 

CANNAVEST CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

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. At June 30, 2013 and 2012, the Company established valuation allowances equal to the full amount of its deferred tax assets due to the uncertainty of the utilization of the net operating losses in future periods. 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.

 

Recent Issued and Newly Adopted Accounting Pronouncements

 

Adopted

 

Effective January 2013, we adopted FASB Accounting Standards Update (“ASU”) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial and derivative instruments to enable users of a company’s financial statements to understand the effect of those arrangements on its financial position. Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. The adoption of this update did not have a material impact on the Company’s financial statements.

 

Effective January 2013, we adopted FASB ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02). This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This standard is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the Company’s financial statements. The Company currently records its investment in KannaLife Sciences, Inc. (“KannaLife”) at cost since it cannot exert significant influence or control.

 

Not Adopted

 

In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU No.2013-04”). The amendments in ASU 2013-04 provide guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of ASU No. 2013-04 is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in ASU No. 2013-04 also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendment in this standard is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We are evaluating the effect, if any, adoption of ASU No. 2013-04 will have on our 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.

 

10
 

 

CANNAVEST CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

  3. ACQUISITION OF ASSETS OF PHYTOSPHERE SYSTEMS, LLC

 

On December 31, 2012, we entered into the PhytoSPHERE Agreement with PhytoSPHERE whereby the Company acquired certain assets of PhytoSPHERE in exchange for an aggregate payment of $35,000,000, payable in five (5) installments of either cash or common stock of the Company, in the sole discretion of the Company. The closing of the transactions contemplated by the PhytoSPHERE Agreement occurred on January 29, 2013. At the closing, the Company issued to PhytoSPHERE 900,000 shares of common stock in satisfaction of its first payment obligation due under the PhytoSPHERE Agreement. On April 4, 2013 the Company made its second installment payment in the amount of $6,000,000 by issuing 1,000,000 shares of common stock to PhytoSPHERE with a per share price of $6.00, determined by the maximum price set forth in the PhytoSPHERE Agreement. During the fiscal quarter ended June 30, 2013, the Company paid $750,000 in cash and on July 23, 2013, issued 1,208,334 shares at a per share price of $6.00, determined by the maximum price set forth in the PhytoSPHERE Agreement, completing its third installment in the aggregate amount of $8,000,004. The remaining installments are due on or before September 30, 2013 and December 31, 2013 in the amounts of $9,999,996 and $6,500,000, respectively.

 

  4. INVESTMENT IN KANNALIFE SCIENCES, INC.

 

On March 4 and April 11, 2013, pursuant to a Stock and Warrant Purchase Agreement (the “Purchase Agreement”), the Company acquired a total of 2,039,626 shares of the Series A Preferred Stock of KannaLife, 11,960,000 shares of KannaLife’s common stock and warrants to purchase additional shares of common stock in KannaLife. KannaLife is a Delaware corporation and phyto-medical company specializing in the research and development of pharmacological products derived from plants. These share holdings constituted a 16.65% share of the issued and outstanding Series A Preferred Stock and common stock of KannaLife as of June 30, 2013. The shares were acquired through two payments of $250,000 each and included the exercise of a portion of the Company’s common stock warrant. The Purchase Agreement also contemplates two additional closings of $250,000 on or before July 1, 2013 and October 1, 2013. The Company has not yet consummated the third closing, as it awaits financial reports and other information from KannaLife. Upon consummating the third and fourth closings, the Company would own 33.3% of the issued and outstanding Series A Preferred Stock and common stock of KannaLife.

 

  5. LINE OF CREDIT - ROEN VENTURES

 

On March 1, 2013, the Company entered into a lending arrangement with Roen Ventures, LLC, a Nevada limited liability company (“Roen Ventures”), which is owned 50% by the Company’s President and Chief Executive Officer who is also a director, Michael Mona, Jr. The Promissory Note (the “Note”) issued to Roen Ventures provides a line of credit up to $4,000,000, bears interest at 5.0% and is unsecured. As previously disclosed in our Current Report on Form 8-K filed with the SEC on July 31, 2013, on July 25, 2013, the disinterested members of our Board of Directors approved an amendment to the terms of the Note to increase the line of credit to $6,000,000 and provide for the ability of Roen Ventures to convert, in its sole discretion, the outstanding balance of the Note into shares of the common stock of the Company at a conversion price to be determined following the conclusion of an independent valuation of the common stock of the Company.  There are no specific repayment terms except that all unpaid principal and accrued interest under the Note is due and payable on March 1, 2015. As of June 30, 2013, the Company had a balance of $3,280,500 on this Note.  

 

  6. STOCKHOLDERS’ EQUITY (DEFICIT)

 

Common Stock

 

The Company is authorized to issue up to 190,000,000 shares of common stock (par value $0.0001). As of June 30, 2013 and December 31, 2012, the Company had 8,900,000 and 7,000,000 common stock shares issued and outstanding, respectively. On January 29, 2013, the Company issued 900,000 shares of Common Stock to PhytoSPHERE in connection with the Company’s acquisition of assets from PhytoSPHERE and in satisfaction of the first payment obligation to PhytoSPHERE (Note 3). On April 4, 2013, the Company issued 1,000,000 shares of common stock to PhytoSPHERE in satisfaction of its second payment obligation to PhytoSPHERE (Note 3).  On July 23, 2013, the Company issued 1,208,334 shares of common stock to PhytoSPHERE in partial satisfaction of its third payment obligation to PhytoSPHERE (Note 3). The Company satisfied its remaining obligation to PhytoSPHERE on the third payment by payment of cash.  

 

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CANNAVEST CORP.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

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 of directors of the Company (the “Board”). Accordingly, the Board is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the common stock holders. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. If the Company issues preferred stock shares and the Company is subsequently liquidated or dissolved, the preferred shareholders may have preferential rights to receive a liquidating distribution for their shares prior to any distribution to common shareholders.

 

Options/Warrants

 

As of June 30, 2013 and December 31, 2012, there were no outstanding options or warrants for the purchase of the Company’s common stock.  

  

  7. COMMITMENTS

 

The Company leases its office space pursuant to a month-to-month lease agreement dated April 1, 2013, which provides for a monthly rent of $1,500. The landlord is a limited liability company of which a director of the Company is the sole member.

 

On March 18, 2013, the Company entered into a purchasing contract with a third party supplier of CBD to provide up to a maximum of 1,000 kg of product. In addition the Company entered into a consulting agreement with the third party supplier to provide consulting oversight for the growth and production of the product from the period beginning March 1, 2013 through August 30, 2014.

 

  8. SUBSEQUENT EVENTS

 

On July 23, 2013, the Company issued PhytoSPHERE 1,208,334 shares of its common stock in partial satisfaction of its third payment obligation due under the PhytoSPHERE Agreement. The Company satisfied its remaining obligation to PhytoSPHERE on the third payment by payment of cash.

 

On July 25, 2013 the shareholders approved the Company’s 2013 Equity Incentive Plan (the “Plan”) which reserves 1,000,000 shares of the Company’s common stock for issuance under the Plan. There are currently no option shares outstanding under the Plan.

 

 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following information specifies certain forward-looking statements of the management of CannaVEST Corp. (the “Company”, “we” or “us”). Forward-looking statements are statements that estimate the likelihood of occurrence of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”, “continue”, or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict, and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

 

Forward-looking statements include, but are not limited to, the following:

 

·Statements relating to our future business and financial performance;
·The anticipated launch of our products; and
·Other material future developments that you may take into consideration.

 

You are cautioned not to place undue reliance on these forward-looking statements. The assumptions used for purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We cannot guaranty that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statement.

 

The following information should be read in conjunction with the information contained in the unaudited Consolidated Financial Statements included within this Quarterly Report on Form 10-Q for the period ended June 30, 2013 (this “Report”), and the Notes thereto, which form an integral part of this Report.

 

Executive Summary of Our Business

 

We are in the business of developing, producing, marketing and selling end consumer products to the nutriceutical industry containing the hemp plant extract, Cannabidoil (“CBD”), and reselling to third parties raw product acquired by us pursuant to our supply relationships in Europe. We seek to take advantage of an emerging worldwide trend to re-energize the production of industrial hemp and to foster its many uses for consumers. CBD is derived from hemp stalk and seed.

 

To date, our operations have consisted of supplying our raw product to third parties. We anticipate launching our first product to large commercial buyers in the third quarter of 2013, and having products on the market available to consumers shortly thereafter. Our line of products is expected to grow throughout the year – by year end 2013 we anticipate a full line of CBD and hemp-related consumer products.

 

In order to accomplish our business plan, we will need to finalize the development of our products and implement a marketing and sales program designed to establish brand awareness and consumer acceptance of our products. To date, the sole source of our working capital has been a line of credit of up to $4,000,000 from Roen Ventures, LLC (“Roen Ventures”). As previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 31, 2013, on July 25, 2013, the disinterested members of our Board of Directors approved an amendment to the terms of the credit line with Roen Ventures to increase the credit line to $6,000,000 and provide for the ability of Roen Ventures to convert, in its sole discretion, the outstanding balance of the credit line into shares of the common stock of the Company at a conversion price to be determined following the conclusion of an independent valuation of the common stock of the Company. In addition, we expect to realize revenue to fund our working capital needs through the sale of raw product to third parties. However, we cannot be assured that our working capital needs to develop, launch, market and sell our products will be met through the sale of raw product to third parties and the Roen Ventures line of credit. If not, we may never be able to achieve profitable operations. In that event, our ability to continue as a going concern would be in jeopardy and investors could lose all of their investment in the Company.

 

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The Company was originally incorporated as Foreclosure Solutions, Inc. on December 9, 2010, in the State of Texas, to provide information on pre-foreclosure and foreclosed residential properties to homebuyers and real estate professionals on its website. However, the Company was not able to secure financing for this business plan and on November 16, 2012, the shareholders owning 6,979,900 of the outstanding shares sold their shares in private transactions to four buyers. Commensurate with this transaction, the former sole officer and director of the Company resigned and control of the Company changed all as further described in the Amendment to our Current Report on Form 8-K filed on February 13, 2013.

 

Plan of Operations

 

Our Planned Operating Segments

 

We plan to diversify our business primarily into three operating segments:

 

-Securing and supplying raw hemp product for sale to third parties;
-Developing, producing, marketing and selling consumer products to the nutriceutical industry containing hemp plant extract, CBD; and
-Investing in companies in our industry.

 

Investment Selection

 

We are committed to a value-oriented investment philosophy that seeks to minimize the risk of capital loss without foregoing potential capital appreciation. We are developing criteria that we believe are important in identifying and investing in prospective acquisition or financing targets. These criteria provide general guidelines for our investment and acquisition decisions.

 

Results of Operations

 

The following discussion of our results of operations should be read in conjunction with our financial statements included herewith.  This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.  Such discussion represents only the best present assessment of our management.

 

Results for the three months ended June 30, 2013 and 2012

 

Revenues and Cost of Goods Sold

 

For the three-month period ended June 30, 2013, the Company realized revenues of $107,683 and resulting gross profit of $91,391 related to the sale of raw materials to third parties. The Company realized no revenues for the same period ended June 30, 2012. The increase in revenues is due to the revised business plan of the Company, enacted for fiscal year 2013 to sell hemp oil and related products. During fiscal year 2012, the Company had not begun operations under the prior business model as it was unable to secure financing for that business model.

 

General and Administrative Expenses

 

For the three-month period ended June 30, 2013 the Company incurred General and Administrative costs in the amount of $1,131,660 compared with $11,352 for the period ended June 30, 2012. This increase is related to the cost of ramping up the operations of the Company and implementation of its revised business strategy related to the development, production, marketing and selling products containing hemp plant extract, CBD, and reselling raw product acquired by the Company to third parties. This amount also includes amortization of the right to purchase inventory and non-compete agreements acquired through the PhytoSPHERE Agreement.

 

Results for the six months ended June 30, 2013 and 2012

 

Revenues and Cost of Goods Sold

 

For the six-month period ended June 30, 2013, the Company realized revenues of $1,190,058 and resulting gross profit of $968,316 related to the sale of raw materials to third parties. The Company realized no revenues for the same period ended June 30, 2012. The increase in revenues is due to the revised business plan of the Company, enacted for fiscal year 2013 to sell hemp oil and related products. During fiscal year 2012, the Company had not begun operations under the prior business model as it was unable to secure financing for that business model.

 

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General and Administrative Expenses

 

For the six month period ended June 30, 2013, the Company incurred General and Administrative costs in the amount of $1,222,386 compared with $27,396 for the same period ended June 30, 2012. This increase is related to the cost of ramping up the operations of the Company and implementation of its revised business strategy related to the development, production, marketing and selling products containing hemp plant extract, CBD, and reselling raw product acquired by the Company to third parties. This amount also includes amortization of the right to purchase inventory and non-compete agreements acquired through the PhytoSPHERE Agreement.

 

Liquidity and Capital Resources

 

As of June 30, 2013, the Company had a cash balance of $76,670. In addition, as of June 30, 2013, the Company had $719,500 available pursuant to the terms of the Roen Ventures line of credit, which has been our primary source of liquidity. We will need to raise additional funds through the issuance of debt or sale of our securities in order to continue funding our ongoing operations through fiscal year 2013.

 

The Company is a party to contracts for the growth and processing of hemp oil product to be delivered over the period beginning August 1, 2013 and ending August 31, 2014. The total amount remaining to be paid under such contracts is approximately 2.74 million Euros or approximately $3.56 million through May 31, 2014.

 

Our common stock currently trades on the OTCBB under the symbol “CANV.”

 

Liquidity and Going Concern

 

The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. At June 30, 2013, the Company had a working capital deficit of $(18,906,497) and an accumulated deficit of $418,809. The working capital deficit is primarily a result of an amount of $23,750,000 due as a result of the acquisition of a license and certain assets of PhytoSPHERE. Through June 30, 2013, the Company borrowed $3,280,500 under the Roen Ventures line of credit. These funds were used in ongoing operations, to fund the Company’s payment obligations pursuant to the investment in KannaLife Sciences, Inc., to purchase raw product for resale and explore investment opportunities. The Company needs to raise additional capital from external sources in order to sustain operations while executing its business plan. The Company cannot provide any assurance that it will be able to raise additional capital. If the Company is unable to secure additional capital, it may be required to reduce its current operating expenses, modify its existing business plan and take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations.

 

We have generated minimal revenues since our inception, although we have sold and shipped raw product to third parties for which we have only received payments totaling approximately $30,000. Our revenues alone are currently insufficient to pay our operating expenses and our ability to continue as a going concern is dependent upon our ability to obtain the necessary financing to meet our obligations and repay our current and future liabilities when they become due until such time, if ever, that we are able to generate sufficient revenues to attain profitable operations. We have experienced losses and negative cash flows from operations since inception. The report of our independent registered public accounting firm on our financial statements for fiscal year end 2013 contained an explanatory paragraph regarding our ability to continue as a going concern. There can be no assurance that acceptable financing to fund our ongoing operations can be obtained on suitable terms, if at all. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. In that event, we may be forced to cease operations and our shareholders could lose their entire investment in the Company.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.

 

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Item 4. CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS AND PROCEDURES

 

Our management, which is comprised of one person holding the offices of principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, our management concluded that our disclosure controls and procedures were not effective, at a reasonable assurance level, as of the Evaluation Date, to ensure that information required to be disclosed in reports that we file or submit under that Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management in a manner that allows timely decisions regarding required disclosures.

 

An evaluation was performed under the supervision and with the participation of the Company’s management of the effectiveness of the design and operation of the Company’s procedures and internal control over financial reporting as of June 30, 2013. In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that evaluation, the Company’s management concluded that the Company’s internal controls over financial reporting were not effective in that there was a material weakness as of June 30, 2013.

 

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company’s internal controls.

 

The Company’s management has identified a material weakness in the effectiveness of internal control over financial reporting related to a shortage of resources in the accounting department required to assure appropriate segregation of duties with employees having appropriate accounting qualifications related to the Company’s unique industry accounting and disclosure rules. 

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There was no change in our internal control over financial reporting identified in connection with our evaluation that occurred during our the fiscal quarter ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

None.

 

Item 1A. RISK FACTORS

 

Not required for “smaller reporting companies.”

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Stock Issuances

 

On April 4, 2013, we issued 1,000,000 shares of restricted common stock to PhytoSPHERE pursuant to the terms the Agreement for Purchase and Sale of Assets (the “PhytoSPHERE Agreement”) in satisfaction of our second payment obligation due under the PhytoSPHERE Agreement. The shares represent 9.89% of the issued and outstanding shares of our common stock as of August 13, 2013, and were calculated based on a price per share of our common stock of $6.00 pursuant to the terms of the PhytoSPHERE Agreement for an aggregate total value of $6,000,000.

 

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The shares of common stock referenced herein were issued in reliance upon the exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933, as amended, (“Securities Act”), and/or Regulation D, as promulgated by the U.S. Securities and Exchange Commission under the Securities Act, based upon the following: (a) each of the persons to whom the shares of common stock were issued (each such person, an “Investor”) confirmed to the Company that it is an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and has such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities, (b) there was no public offering or general solicitation with respect to the offering of such shares, (c) each investor was provided with certain disclosure materials and all other information requested with respect to the Company, (d) each investor acknowledged that all securities being purchased were being purchased for investment intent and were “restricted securities” for purposes of the Securities Act, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act and (e) a legend has been, or will be, placed on the certificates representing each such security stating that it was restricted and could only be transferred if subsequently registered under the Securities Act or transferred in a transaction exempt from registration under the Securities Act.

 

There were no repurchases of equity securities by the Company during the fiscal quarter ended June 30, 2013.

  

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

 

None.

 

Item 6. EXHIBITS:

 

Exhibit No.   Description of Exhibit
2.1*   Agreement and Plan of Merger, dated as of July 25, 2013, by and between CannaVEST Corp., a Texas corporation, and CannaVEST Corp., a Delaware corporation.
3.1*   Certificate of Incorporation of CannaVEST Corp., as filed on January 26, 2013
3.2*   Bylaws of CannaVEST Corp., dated as of January 26, 2013
4.1(1)   CannaVEST Corp. Specimen Stock Certificate.
10.1(1)   CannaVEST Corp. 2013 Equity Incentive Plan
31.1*   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1*   Temporary Hardship Exemption Provided by Rule 201
     
101 INS**   XBRL Instance Document
101 SCH**   XBRL Schema Document
101 CAL**   XBRL Calculation Linkbase Document
101 LAB**   XBRL Labels Linkbase Document
101 PRE**   XBRL Presentation Linkbase Document
101 DEF**   XBRL Definition Linkbase Document

 

* Filed herewith.

 

** To be filed by amendment per Rule 201 of Regulation S-T.

 

Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the Commission.

 

  (1) Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 31, 2013.

*               *               *

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CANNAVEST CORP.
     
August 13, 2013 By: /s/ Michael Mona, Jr.
   

Michael Mona, Jr.

(President and Chief Executive Officer)

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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