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CANV > SEC Filings for CANV > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for CANNAVEST CORP.

Form 10-Q for CANNAVEST CORP.


14-Aug-2014

Quarterly Report


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 Condensed Consolidated Financial Statements included within this Quarterly Report on Form 10-Q for the period ended June 30, 2014 (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 nutraceutical industry containing the hemp plant extract, Cannabidiol ("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.

Our operations initially consisted of supplying our raw product to third parties, however in the third quarter of 2013, we launched our first consumer products which are available to consumers through our distributor, HempMeds PX, LLC, a subsidiary of Medical Marijuana, Inc. On August 11, 2014, the Company terminated the distribution agreement with HempMeds PX, LLC, as further described below under Part II, Item 5 "Other Information" of this Quarterly Report on Form 10-Q. We sell raw CBD which we have branded Real Scientific Hemp Oil ("RSHO"). In addition we sell tinctures under our Cibadex brand, and beauty products under our Cibaderm brand. We expect to continue to add new products to our portfolio going forward to enhance our line of CBD and hemp-related consumer products.

In order to accomplish our business plan, we will continue to make refinements to our current products and continue the development of additional products. We have implemented marketing and sales programs designed to establish brand awareness and consumer acceptance of our products and will continue to increase our efforts in this area. To date, we received working capital of $6,000,000 pursuant to a promissory note (the "Note") issued by the Company to Roen Ventures, LLC ("Roen Ventures"). During the six-month period ended June 30, 2014, Roen Ventures converted the Note into 10,000,000 shares of the Company's common stock, as discussed in Note 5 of the Notes to our Condensed Consolidated Financial Statements included herewith. An additional $8,422,500 of new capital was raised during the first and second quarters of 2014 through the issuance of shares of Company common stock through a private placement offering. Since inception we have achieved approximately $7.9 million in revenue through product sales.

We expect to realize revenue to fund our working capital needs through the sale of raw and finished products 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 and finished products to third parties. If not, we may not be able to maintain profitable operations. If we are unable to maintain profitable operations sufficient to fund our business, we would need to raise additional capital through either the issuance of equity, acquisition of debt or sale of a segment of our operations in the future. In the event we are unable to maintain profitable operations or raise sufficient additional capital, our ability to continue as a going concern would be in jeopardy and investors could lose all of their investment in the Company.

Plan of Operations

Our Planned Operating Segments

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

Securing and supplying raw hemp product for sale to third parties;
Developing, producing, marketing and selling consumer products to the nutraceutical industry containing CBD;
Establishing and helping others to establish farming operations centered on the growth of industrial hemp; 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 and six months ended June 30, 2014 and 2013

Revenues, Cost of Goods Sold and Gross Profit - For the three months ended June 30, 2014, the Company realized revenues of $3,005,786 and resulting gross profit of $1,795,816 related to the sale of consumer products and RSHO primarily through our distributor HempMeds PX, LLC. The Company realized revenues of $107,683 and gross profit of $91,391 for the three months ended June 30, 2013. The increase in revenues is due to increased sales of both consumer products and RSHO during 2014. During 2013, the Company sold RSHO to affiliated companies, however the general market for the Company's products and oil was not yet established. Increased sales for the three months ended June 30, 2014, was attributable to increased demand for our RSHO from our distributor HempMeds PX,
LLC. The increase in gross profit is a result of a different pricing structure for products sold during the three months ended June 30, 2014, compared with the three months ended June 30, 2013. On August 11, 2014, the Company terminated the distribution agreement with HempMeds PX, LLC, as further described below under Part II, Item 5 "Other Information" of this Quarterly Report on Form 10-Q, which may have an impact on future revenues.

For the six months ended June 30, 2014, the Company realized revenues of $5,637,655 and resulting gross profit of $3,406,682 related to the sale of consumer products and RSHO primarily through our distributor HempMeds PX, LLC. The Company realized revenues of $1,190,058 and gross profit of $968,316 for the six months ended June 30, 2013. The increase in revenues is due to increased sales of both consumer products and RSHO during 2014. During 2013, the Company sold RSHO to affiliated companies, however the general market for the Company's products and oil was not yet established. Increased sales for the six months ended June 30, 2014 was attributable to increased demand for our RSHO from our distributor HempMeds PX, LLC. The increase in gross profit is a result of a different pricing structure for products sold during the six months ended June 30, 2014 compared with the six months ended June 30, 2013. On August 11, 2014, the Company terminated the distribution agreement with HempMeds PX, LLC, as further described below under Part II, Item 5 "Other Information" of this Quarterly Report on Form 10-Q, which may have an impact on future revenues.

Selling, General and Administrative Expenses - For the three months ended June 30, 2014, the Company incurred selling, general and administrative expenses in the amount of $1,507,423 compared with $419,002 for the three months ended June 30, 2013. This increase is related to the continued growth of Company operations, web development and increased marketing and legal costs. This amount also includes $205,500 and $205,500 of amortization expense of vendor relationships and non-compete agreements acquired through the Agreement for Purchase and Sale of Assets (the "PhytoSPHERE Agreement") entered into by the Company with PhytoSPHERE Systems, LLC ("PhytoSPHERE") for the three months ended June 30, 2014 and 2013, respectively.

For the six months ended June 30, 2014, the Company incurred selling, general and administrative expenses in the amount of $2,431,789 compared with $613,394 for the six months ended June 30, 2013. This increase is related to the continued growth of Company operations, web development and increased marketing and legal costs. This amount also includes $411,000 and $342,500 of amortization expense of vendor relationships and non-compete agreements acquired through the PhytoSPHERE Agreement entered into by the Company with PhytoSPHERE for the six months ended June 30, 2014 and 2013, respectively.

Research and Development Expenses- For the three months ended June 30, 2014, the Company incurred research and development expenses of $156,501. For the six months ended June 30, 2014, the Company incurred research and development expenses of $307,522. The Company did not incur any research and development expenses for the three or six months ended June 30, 2013. These expenses are related to the cost of process development, rental of our laboratory facility, payroll expenses, laboratory supplies, product development and testing, and outsourced research personnel for the period.

Interest expense - For the three months ended June 30, 2014, the Company did not incur any interest expense. For the six months ended June 30, 2014, the Company recognized interest expense of $615,344. This included interest accrued under the Roen Ventures Note in the amount of $25,870, amortization of the debt discount on the Note in the amount of $42,105 up until the date the Note was converted to shares of the Company's common stock, and $547,369 representing the amortization of the remaining debt discount at the date of conversion. The Company nets any interest recorded in accounts receivable and cash balances with interest expense as typically these amounts are not material.

Gain/Loss on Equity Investment- For the six months ended June 30, 2014, the Company recognized a loss of $38,552, representing its pro rata share (24.97%) of the loss of KannaLife Sciences, Inc. ("KannaLife") for the period. The Company did not recognize any gain or loss from investment for the six months ended June 30, 2013, as the Company did not own a sufficient amount of KannaLife stock to require recognition of any gain or loss for the period.

On June 2, 2014, the Company sold its 24.97% equity investment in Kannalife to PhytoSPHERE in exchange for 500,000 shares of Company common stock held by PhytoSPHERE, an affiliate of KannaLife. Accordingly, the Company recognized a gain on sale of equity investment of $7,899,306 based on the number of shares of Company common stock received at the closing trading price of Company common stock on June 2, 2014 of $16.60 per share.

Income Taxes - The provision for income taxes differs from the expected tax by applying the income before taxes at the applicable rate as the sale of KannaLife was deemed to have a gain for income tax purposes of $0.

Liquidity and Capital Resources - A summary of our changes in cash flow for the six months ended June 30, 2014 and 2013 is provided below:

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