NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
On March 19, 2014, we effected a four-for-one stock split of our outstanding shares of common stock. All references to shares of our common stock in our consolidated financial statements refer to the number of shares of common stock after giving effect to the stock split (unless otherwise indicated).
Background and Current Operations
United Cannabis Corporation ("we", "our", "us", or "UCANN") a Colorado corporation, was originally formed as a California corporation under the name MySkin, Inc. (MySkin) on November 15, 2007. MySkin was engaged in the business of providing management services to a medical spa in Los Angeles, California which provided various advanced skin care services until March 31, 2014, when this business was sold.
In early 2014, we decided to exit the medical spa management business and change our focus to providing products, services and intellectual property licenses to the cannabis industry.
On March 26, 2014, we entered into a License Agreement with Earnest Blackmon, Tony Verzura and Chad Ruby pursuant to which Messrs. Blackmon, Verzura and Ruby licensed certain intellectual property to us in exchange for a total of 38,690,000 shares of our common stock.
In connection with this transaction:
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·
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Messrs. Blackmon, Verzura and Ruby licensed to us all of their knowledge and know-how relating to the design and buildout of cultivation facilities, growing/cultivation systems, seed-to-sale protocols and procedures, products, a genetic catalogue including over 150 different strains, an advanced cannabinoid therapy program called "A.C.T. Now", security, regulatory compliance, and other methods and processes which relate to the cannabis industry.
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·
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The territory for this license is the entire world and the license runs in perpetuity. There are no royalty payments under the License Agreement.
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·
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Messrs. Blackmon, Verzura and Ruby were appointed to our board of directors effective April 7, 2014.
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·
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Mr. Blackmon was elected as our President, Mr. Ruby was elected as Chief Operating Officer and Mr. Verzura was elected as Vice President.
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·
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A total of 41,690,000 previously outstanding shares of common stock were cancelled resulting in a total of 43,620,000 shares of common stock outstanding on March 26, 2014.
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UCANN was formed as a Colorado corporation on March 25, 2014, and on May 2, 2014, MySkin merged into UCANN, a wholly-owned subsidiary of MySkin, for the purpose of changing domicile from California to Colorado and changing the corporation's name to United Cannabis Corporation.
On March 31, 2014, we sold all right, title and interest in the tangible and intangible assets, trademarks, customer lists, intellectual property and rights, which we owned and were related to our advanced skin care business since we have entered into a new business and we no longer have any use for these assets. The assets were sold to MySkin Services, Inc. (MTA), a business partly owned by Marichelle Stoppenhagen, our former officer and director, in exchange for the $15,000 payable which we owed to Ms. Stoppenhagen and/or MTA. In addition, MTA assumed all costs associated with these assets starting on March 31, 2014.
Government Regulation
- Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws.
F-9
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2015, 23 states and the District of Columbia allow their citizens to use medical marijuana, and four states and the District of Columbia have legalized marijuana for recreational use. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration has effectively stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical and recreational marijuana. However, there is no guarantee that the current administration will not change its stated policy regarding the low-priority enforcement of federal laws, or that any future administration would not change this policy and decide to enforce the federal laws vigorously. Any such change in the federal governments enforcement of current federal laws could cause significant financial damage to us.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries UC Nevada L.L.C., UC Colorado Corporation and UCANN California Corporation. All intercompany accounts and transactions have been eliminated. Our consolidated financial statements are stated in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
Use of Estimates
- The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements and the reported amounts of revenues and expenses during the periods presented.
We make our estimate of the ultimate outcome for these items based on historical trends and other information available when our consolidated financial statements are prepared. We recognize changes in estimates in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available. We believe that our significant estimates, assumptions and judgments are reasonable, based upon information available at the time they were made. Our actual results could differ from these estimates, making it possible that a change in these estimates could occur in the near term.
Fair Value of Financial Instruments
- Our financial instruments consist principally of cash and cash equivalents, accounts receivable, non-marketable equity securities, accounts payable, notes payable and other current assets and liabilities. We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1
:
Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2
:
Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3
:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The carrying amount of our cash and cash equivalents, accounts receivable, accounts payable, and other current assets and liabilities in our consolidated financial statements approximates fair value because of the short-term nature of the instruments. Investments in non-marketable equity securities are carried at cost less other-than-temporary impairments. The carrying amount of our notes payable and convertible debt at December 31, 2015, approximates their fair values based on our incremental borrowing rates.
There have been no changes in Level 1, Level 2, and Level 3 categorizations and no changes in valuation techniques for these assets or liabilities for the years ended December 31, 2015 and 2014.
F-10
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
- We consider investments with original maturities of 90 days or less to be cash equivalents. We do not have any cash equivalents as of December 31, 2015 or December 31, 2014.
Accounts Receivable
Our accounts receivable consists primarily of trade accounts arising in the normal course of business. 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 accounts based on a review of all outstanding amounts on a monthly basis. We determine our allowance for doubtful accounts by regularly evaluating individual customer receivables and considering the customers financial condition and credit history, and current economic conditions.
Our allowance for doubtful accounts was $4,340 and $0 as of December 31, 2015 and 2014, respectively. We recorded bad debt expense, included in general and administrative expenses, of $24,185 and $0 during the years ended December 31, 2015 and 2014, respectively.
Prepaid Expenses -
Prepaid expenses are primarily comprised of advance payments made to third parties for independent contractors services or other general expenses. Prepaid services and general expenses are amortized over the applicable periods which approximate the life of the contract or service period.
Property and Equipment
Our property and equipment are recorded at cost. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Assets acquired under capital leases are depreciated over the lesser of the useful life of the asset or the lease term. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from our accounts and any resulting gain or loss is reflected in our consolidated statements of operations.
Intangible Assets
Our intangible assets, consisting of applications for trademarks, design mark and provisional patents are recorded at cost, and once approved, will be amortized using the straight-line method over an estimated useful life of 10 to 20 years.
Investments in Non-Marketable Equity Securities
Our investments in non-marketable equity securities are carried at cost, less write-down-for-impairments, if any. Impairments are based on methodologies, including the valuation achieved in the most recent private placement by the investee, an assessment of the impact of industry and general private equity market conditions, and discounted projected future cash flows. Investments in non-marketable equity securities that expire in less than 12 months, for example stock options or warrants, are classified as current assets; otherwise, we classify investments in non-marketable equity securities as other noncurrent assets.
Long-Lived Assets
Our intangible assets and other long-lived assets are subject to an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible assets and other long-lived assets may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows.
We have not recorded any impairment charges related to long-lived assets as of December 31, 2015 or December 31, 2014.
Equity Method Investments
Our investments in entities representing ownership of at least 20% but not more than 50%, where we exercise significant influence, are accounted for under the equity method.
Deferred Revenue
- We defer revenue for which product or service has not yet been delivered or is subject to refund until such time that we and our customer jointly determine that the product or service has been delivered or no refund will be required.
F-11
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
-
We recognize revenue in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605,
Revenue Recognition
, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on our management's judgments regarding the fixed nature of the selling prices of the products and services delivered and the collectability of those amounts.
Revenue for services with a payment in the form of stock, warrants or other financial assets is recognized when the services are performed. The value of revenue paid for with warrants is measured using the Black-Scholes-Merton pricing model. Revenue from product sales, including delivery fees, is recognized when an order has been obtained, the price is fixed and determinable, the product is shipped, title has transferred and collectability is reasonably assured. Generally, our suppliers drop-ship orders to our clients with origin terms. For any shipments with destination terms, we defer revenue until delivery is made to the customer. During the years ended December 31, 2015 and 2014, sales returns were not significant and as such, no sales return allowance had been recorded as of December 31, 2015 or December 31, 2014.
Reimbursable expenses, including those relating to travel, other out-of-pocket expenses and any third-party costs, are included as a component of revenues. Typically, an equivalent amount of reimbursable expenses are included in cost of revenues. Reimbursable expenses related to time and materials and fixed-fee engagements are recognized as revenue in the period in which the expense is incurred and collectability is reasonably assured. Taxes collected from customers and remitted to governmental authorities are presented in our consolidated statement of operations on a net basis.
Cost of Revenues
Our policy is to recognize cost of revenues in the same manner as, and in conjunction with, revenue recognition. Our cost of revenues includes the costs directly attributable to revenue recognized and includes expenses related to the production, packaging and labeling of our Prana medicinals products and personnel-related costs, fees for third-party services, travel and other consulting costs related to our advisory services.
Shipping and Handling Costs -
For product sales, shipping and handling costs are included as a component of cost of revenues. During the years ended December 31, 2015 and 2014, we incurred shipping and handling costs of $1,013 and $0, respectively.
Advertising Costs -
All advertising costs are expensed as incurred. During the years ended December 31, 2015 and 2014, we incurred $16,500 and $304 of advertising costs, respectively, and included these costs in sales and marketing expense in our consolidated statements of operations.
Research and Development Expenses -
Research and development (R&D) costs are charged to expense as incurred. Our R&D expenses include, but are not limited to, consulting service fees and materials and supplies used in the development of our proprietary products and services.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of fees for professional and consulting services, promotional events and advertising costs.
General and Administrative Expenses -
General and administrative expenses consist primarily of personnel-related costs, fees for professional and consulting services, travel costs, rent, bad debt expense, general corporate costs, and other costs of administration such as human resources, finance and administrative roles.
Share-Based Compensation
- We periodically issue shares of our common stock to non-employees in non-capital raising transactions for fees and services. We account for stock issued to non-employees in accordance with ASC 505,
Equity
, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.
F-12
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We account for stock option grants issued and vesting to employees based on ASC 718,
Compensation Stock Compensation
, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. Accounting for share-based compensation to employees requires the measurement and recognition of compensation expense for all share-based payment awards made to employees based on estimated fair values. We estimate the fair value of all stock option awards on the date of grant using the Black-Scholes-Merton pricing model, which is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk free interest rates and expected dividends. We also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates
Income Taxes
- Income taxes are recorded using the asset and liability method. Under the asset and liability method, tax assets and liabilities are recognized for the tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that enactment occurs. To the extent that we do not consider it more likely than not that a future tax asset will be recovered, we will provide a valuation allowance against the excess.
We follow the provisions of ASC 740,
Income Taxes
. As a result of the ASC 740, we make a comprehensive review of our portfolio of tax positions in accordance with recognition standards established by ASC 740. As a result of the implementation of ASC 740, we recognized no material adjustments to liabilities or stockholders deficit.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in our consolidated financial statements in the period during which, based on all available evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits, if any, are classified as interest expense and penalties and are included in selling, general and administrative expenses in our consolidated statements of operations.
Commitments and Contingencies
- Certain conditions may exist as of the date our consolidated financial statements are issued, which may result in a loss but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of the legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Net Loss Per Share
- We compute net loss per share in accordance with ASC 260,
Earnings per Share
. Under the provisions of ASC 260, basic net loss per share includes no dilution and is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share takes into consideration shares of common stock outstanding (computed under basic net loss per share) and potentially dilutive securities that are not anti-dilutive.
F-13
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share, because the effect of their inclusion would have been anti-dilutive.
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Years Ended December 31,
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2015
|
|
|
2014
|
|
Warrants to purchase common stock
|
|
|
3,000,000
|
|
|
|
3,997,692
|
|
Stock options
|
|
|
600,000
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
3,600,000
|
|
|
|
3,997,692
|
|
Other Comprehensive Income (Loss)
We report as other comprehensive income (loss) those revenues, gains and losses not included in the determination of net income. During the years ended December 31, 2015 and 2014, we did not have any gains and losses resulting from activities or transactions that resulted in other comprehensive income or loss.
Segment Reporting
UCANN operates as one segment.
Concentration of Credit Risk
- Financial instruments that potentially subject us to credit risk consist of cash. We maintain our cash with high credit quality financial institutions; at times, such balances with any one financial institution may not be insured by the FDIC.
The following tables show significant concentrations in our revenues and accounts receivable for the periods indicated:
Percentage of Revenue:
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|
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Years Ended December 31,
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|
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|
2015
|
|
|
2014
|
|
Customer A
|
|
|
36
|
%
|
|
|
|
%
|
Customer B
|
|
|
32
|
%
|
|
|
80
|
%
|
Customer C
|
|
|
18
|
%
|
|
|
4
|
%
|
Percentage of Accounts Receivable:
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|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Customer D
|
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|
56
|
%
|
|
|
|
%
|
Customer E
|
|
|
41
|
%
|
|
|
|
%
|
Customer F
|
|
|
|
%
|
|
|
46
|
%
|
Customer G
|
|
|
|
%
|
|
|
33
|
%
|
Customer H
|
|
|
1
|
%
|
|
|
21
|
%
|
Recently Issued Accounting Pronouncements
- From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our consolidated financial statements upon adoption.
In May 2014, the FASB issued guidance on revenue from contracts with customers, which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for us at the beginning of fiscal year 2018, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing reporting.
F-14
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2014, the FASB issued guidance on disclosure of uncertainties about an entity's ability to continue as a going concern. This guidance requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity's ability to continue as a going concern. The guidance is effective for us at the beginning of fiscal year 2017, with early adoption permitted. We do not expect that the adoption of this standard will have a material effect on our consolidated financial statements.
In April 2015, the FASB issued guidance requiring us to present debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset. Amortization of these costs will continue to be reported as interest expense. This guidance is effective for us at the beginning of fiscal year 2016, and early adoption is allowed. Retrospective application is required. Upon adoption, the deferred financing costs associated with our notes payable will be reclassified from Deferred financing costs to Notes payable, net.
In November 2015, the FASB issued guidance requiring entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet instead of separating into current and noncurrent amounts. This guidance is effective for us at the beginning of fiscal year 2017, on a prospective or retrospective basis. Early adoption is permitted for all companies in any interim or annual period. We have not determined in what period it will adopt or what adoption method we will use and we are currently assessing the impact that this guidance may have on our consolidated financial statements.
In February 2016, the FASB issued guidance on leases which requires entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new guidance also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The new guidance will be effective for us at the beginning of fiscal year 2019. Early adoption is permitted. We are in the process of evaluating the impact the adoption of this guidance will have on our consolidated financial statements and related disclosures.
NOTE 3 GOING CONCERN
Our consolidated financial statements have been prepared on a going concern basis which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. During the year ended December 31, 2015, we incurred losses of $2,883,362 and used cash of $525,148 in our operating activities. As at December 31, 2015, we had a working capital deficit of $2,410,679 and an accumulated deficit of $5,508,329. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and, or, obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. There is no assurance that these events will be satisfactorily completed.
Currently we are not in compliance with the covenants under our debt agreements. As a result, we are proactively working with our lenders and evaluating options for maintaining compliance, which include requesting covenant amendments, waivers or forbearances, and could include a possible reduction of our debt level, including the payment of prepayment penalties. Our failure to comply with these covenants would be an event of default that, if not waived, could result in the acceleration of most our outstanding indebtedness, including the acceleration of our convertible notes and certain notes payable. If the lenders were to make such a demand for repayment, we would be unable to pay the obligations as we do not have existing facilities or sufficient cash on hand to satisfy these obligations. Due to this material uncertainty, there is substantial doubt about our ability to continue as a going concern. While we will continue to work with our existing lenders, there can be no assurance that we will be successful.
NOTE 4 INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
On June 9, 2014, we received 1,187,500 common shares and 3,000,000 warrants to purchase common shares of WeedMD RX Inc. (WMD), a private Canadian company in the cannabis industry, in exchange for future consulting services and use of our intellectual property. The shares represented a 4.29% equity investment in WMD at the time of the investment and we do not have significant influence over the investee. We recorded our investment in these non-marketable equity securities at estimated cost, based on our estimate of the fair value of the securities on the date of the transaction.
F-15
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The WMD common shares were recorded at $0.50 per share, or $593,750 in total, taking into consideration WMDs most recent sale of their common shares prior to the date of the transaction (CAD $0.50). In December 2015, we determined that WMDs lack of operating activities during 2015 resulted in a significant adverse effect on our carrying value of these securities (an impairment indicator) and accordingly, we recorded an other-than-temporary impairment charge of $388,475 and included this amount in loss on investments in non-marketable securities in our consolidated statements of operations. The remaining balance, $205,275, or $0.17 per share, was determined based on the consideration we received in our subsequent sale of 1,100,000 WMD shares in March 2016, and this amount is classified as investment in non-marketable equity securities on our consolidated balance sheets. See also Note 20,
Subsequent Events
.
The warrants we received entitled us to purchase WMD shares for CAD $0.50 (USD $0.46 on the date of the related agreement) each for a period of six months from the date the warrant was issued.
F-16
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The WMD warrants were recorded at $0.10 per warrant utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
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|
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|
|
Risk free interest rate
|
|
|
0.60
|
%
|
Expected term (years)
|
|
|
0.5
|
|
Expected volatility
|
|
|
70
|
%
|
Expected dividends
|
|
|
0
|
%
|
On December 9, 2014, the 3,000,000 WMD warrants expired unexercised and we recorded a $300,000 loss on investment in non-marketable equity securities in our consolidated statements of operations.
NOTE 5 PREPAID EXPENSES
Our prepaid expenses consist of:
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|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Prepaid investor relations services
|
|
$
|
1,667
|
|
|
$
|
121,500
|
|
Prepaid licensing fees
|
|
|
35,000
|
|
|
|
39,000
|
|
Other prepaid services and fees
|
|
|
19,674
|
|
|
|
16,900
|
|
|
|
$
|
56,341
|
|
|
$
|
177,400
|
|
NOTE 6 INTANGIBLES
Our intangible assets are comprised of provisional patent applications and applications for a design mark and trademarks. Our intangible assets will be amortized on a straight-line basis over estimated useful lives of 20 years for patents and 10 years for design marks and trademarks once the applications are approved. Costs associated with applications that are not approved will be expensed in the period that the application is rejected or abandoned.
NOTE 7 EQUITY METHOD INVESTMENTS
Our equity method investments consist of:
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|
|
|
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|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Lone Mountain Partners, LLC 25% interest
|
|
$
|
|
|
|
$
|
50,000
|
|
Cannabinoid Research & Development Company Limited 50% interest
|
|
|
88,000
|
|
|
|
88,000
|
|
Total equity method investments
|
|
$
|
88,000
|
|
|
$
|
138,000
|
|
Lone Mountain
On August 14, 2014, we acquired a 25% membership interest in Lone Mountain Partners, LLC, (Lone Mountain) for $50,000 and a commitment to provide future services, including, but not limited to, assisting with the application to obtain licenses to operate a medical marijuana entity in Nevada and to provide standard operating procedures, security protocols, extract processing and equipment design, cultivation and processing center management, staffing and assistance with ongoing management of Lone Mountain. During the second half of 2014, we advanced Lone Mountain $40,900 for license application fees. As of December 31, 2014, Lone Mountain did not have any operations or operating activities. We accounted for our $50,000 cash contribution as an equity method investment and the $40,900 advance as amounts due from related parties on our consolidated balance sheets.
During the first half of 2015, Lone Mountain incurred operating losses in excess of $400,000. We recognized our 25% share of these losses up to the carrying amount of our equity method investment and advances to Lone Mountain and included this total $90,900 expense in equity in net loss of unconsolidated affiliate in our consolidated statements of operations.
We entered into a settlement agreement effective July 16, 2015, as amended on September 9, 2015, whereby we transferred our 25% equity interest in LMP to one of the LMP members in exchange for a mutual release from all claims against us, LMP and the other LMP members. This transaction did not impact our consolidated financial statements as we had previously written off our investment in and advances to LMP.
F-17
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CRD
On August 15, 2014, we acquired a 50% interest in Cannabinoid Research & Development Company Limited (CRD), a Jamaican company, in exchange for 40,000 shares of our common stock valued at $88,000 based on the previous days closing price of our stock. We also committed to provide expertise on design-build, genetics, cultivation, production, processing, productizing, labeling, packaging, marketing, branding and distribution of products, as well as use of our intellectual property in the operations of CRD. As of December 31, 2015, CRD did not have any operations or operating activities. We accounted for this $88,000 as an Equity method investment on our consolidated balance sheets.
NOTE 8 ACCRUED EXPENSES
Our accrued expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accrued consulting fees
|
|
$
|
110,000
|
|
|
$
|
110,000
|
|
Accrued wages and related
|
|
|
629,780
|
|
|
|
433,963
|
|
Accrued interest expense
|
|
|
101,185
|
|
|
|
6,832
|
|
Accrued other expenses
|
|
|
87,568
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
928,533
|
|
|
$
|
550,795
|
|
NOTE 9 FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITIES
The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Derivative liabilities
|
$
|
|
|
$
|
|
|
$
|
383,581
|
|
$
|
383,581
|
|
We did not have any liabilities carried at fair value measured on a recurring basis as of December 31, 2014.
2015 Derivative Liabilities
We valued our derivative liabilities related to embedded conversion features applicable to our borrowings of $381,000 under our 2015 convertible notes payable (see Note 12 below) and accrued interest payable of $5,121 thereon in accordance with fair value measurement guidelines. For the year ended December 31, 2015, the following table reconciles the beginning and ending balances for our financial instruments that are carried at fair value measured on a recurring basis:
|
|
|
|
|
Derivative liabilities as of December 31, 2014
|
|
$
|
|
|
Additions to derivative liabilities for convertible debt conversion features recorded as debt discount
|
|
|
355,293
|
|
Additions to derivative liabilities for interest payable conversion features recorded as interest expense
|
|
|
4,695
|
|
Loss on revaluation of derivative liabilities during the year
|
|
|
23,593
|
|
Derivative liabilities as of December 31, 2015
|
|
$
|
383,581
|
|
The estimated fair value of the derivative liabilities related to our 2015 convertible notes payable was measured as the aggregate estimated fair value of each component of the compound embedded derivative liabilities (see Note 12 below), based on Level 2 and Level 3 inputs, using a binomial lattice pricing model. Changes in the fair value of the compound embedded derivative liability at each reporting date are included in gain/ (loss) on derivative liabilities in our consolidated statement of operations.
F-18
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014 Derivative Liability
We valued our derivative liability related to embedded conversion features applicable to our initial borrowing of $282,500 under the Typenex convertible note payable (see Note 12 below) and accrued interest payable of $28,473 thereon in accordance with the Level 3 guidelines. For the year ended December 31, 2014, the following table reconciles the beginning and ending balances for our financial instruments that are carried at fair value measured on a recurring basis:
|
|
|
|
|
Derivative liability as of December 31, 2013
|
|
$
|
|
|
Additions to derivative liability for convertible debt conversion feature recorded as debt discount
|
|
|
151,937
|
|
Additions to derivative liability for interest payable conversion feature recorded as interest expense
|
|
|
15,320
|
|
Gain on revaluation of derivative liability during the year
|
|
|
(6,099
|
)
|
Settlement of derivative liability on December 29, 2014
|
|
|
(161,158
|
)
|
Derivative liability as of December 31, 2014
|
|
$
|
|
|
The fair values of embedded conversion features issued with our Typenex convertible note and accrued interest payable were estimated using the Black-Scholes option pricing model. The key inputs to this valuation model during the year ended December 31, 2014, were as follows:
|
|
Risk-free interest rate
|
0.43% 0.72%
|
Dividend yield
|
|
Volatility
|
146% 172%
|
Expected life in years
|
1.72 2.09
|
Exercise price
|
$3.00
|
NOTE 10 DEFERRED REVENUE
Our deferred revenue consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred revenue WeedMD
|
|
$
|
563,750
|
|
|
$
|
743,750
|
|
Deferred revenue - FoxBarry
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
763,750
|
|
|
|
943,750
|
|
Less current portion
|
|
|
(380,000
|
)
|
|
|
(500,000
|
|
Deferred revenue, net of current portion
|
|
$
|
383,750
|
|
|
$
|
443,750
|
|
As described in Note 4 above, on September 9, 2014, we received 1,187,500 common shares and 3,000,000 warrants to purchase common shares of WMD in exchange for future consulting services and use of our intellectual property. We recorded the $893,750 fair value of these securities as deferred revenue and we recognized $150,000 of this amount as revenue during the period July 1, 2014 through December 31, 2014, based upon our initial three year estimate of the service period involved. Based on recent discussions with WMD, we now expect to deliver the remaining consulting services and use of our intellectual property to WMD on a relatively consistent monthly basis during the four year period January 1, 2015 through December 31, 2018. Accordingly, we are now recognizing $15,000 of deferred revenue per month. During the years ended December 31, 2015 and 2014, we recognized $180,000 and $150,000, respectively, of revenue applicable to this arrangement. At December 31, 2015, we expect to recognize $180,000 of the remaining $563,750 WMD deferred revenue during the next twelve months and accordingly, we have classified the $180,000 as a current liability on our consolidated balance sheets.
On December 28, 2014, we entered into a royalty and consulting services agreement with FoxBarry Farms, LLC (FoxBarry) whereby we received a $200,000 prepaid royalty payment from FoxBarry. At the time, we planned to recognize deferred royalty revenue based on actual applicable sales as defined in the agreement. During the years ended December 31, 2015 and 2014, we did not recognize any deferred revenue related to this agreement. In August 2015, we discontinued providing consulting services to FoxBarry as our initial project with FoxBarry was abandoned due to operational issues. At the same time we entered into discussions with FoxBarry to earn the $200,000 prepaid royalty through new projects or as a potential termination fee associated with our original agreement. We have classified the $200,000 as a current liability on our consolidated balance sheets as we expect to recognize this amount during the next twelve months.
F-19
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 NOTES PAYABLE
Our notes payable consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Note payable - WeedMD
|
|
$
|
175,000
|
|
|
$
|
175,000
|
|
Note payable Slainte
|
|
|
600,000
|
|
|
|
600,000
|
|
Total notes payable
|
|
$
|
775,000
|
|
|
$
|
775,000
|
|
On July 7, 2014, we issued a $175,000, unsecured, demand promissory note bearing interest at 5% to WeedMD for cash used in our business development activities. Interest expense during the years ended December 31, 2015 and 2014, applicable to this note was $8,750 and $4,267, respectively. Accrued interest payable at December 31, 2015 and 2014 was $13,017 and $4,267, respectively, and these amounts are included in accrued expenses on our consolidated balance sheets.
On December 18, 2014, we issued a $600,000 unsecured promissory note (the Slainte Note) bearing interest at 12% to Slainte Ventures, LLC (Slainte). The principal and accrued interest were due on the earlier of December 17, 2015, or upon the closing of certain capital raising transactions as described in the note. The default rate of interest under the note is 18%. Debt issuance costs of $13,500 were immediately recognized as interest expense as, at the time, we expected to close on a capital raising transaction in early 2015. Additional interest expense during the years ended December 31, 2015 and 2014, applicable to this note was $80,482 and $2,565, respectively. Accrued interest payable at December 31, 2015 and 2014, was $83,047 and $2,565, respectively.
On October 6, 2015, we borrowed funds from a third party and did not apply the borrowed funds to the Slainte Note resulting in a default under the terms of the note. On March 18, 2016, we received a default waiver from Slainte as further described in Note 20,
Subsequent Events
.
NOTE 12 CONVERTIBLE NOTES PAYABLE
2015 Convertible Notes
From time to time during 2015, we issued convertible promissory notes (the 2015 Notes) to unaffiliated third parties. The net proceeds from these transactions are used for general working capital purposes. The difference between the face amount of the 2015 Notes and the net proceeds is recorded as deferred financing costs on our consolidated balance sheets if such difference is the result of payments related to debt issuance costs. Deferred financing costs are amortized on a straight-line basis, which approximates the effective interest rate method, during the first 180 days that the 2015 Notes are outstanding and this amortization is included in interest expense in our consolidated statements of operations.
The following table summarizes our convertible promissory notes issued during the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Issue Date
|
Issued to
|
|
Maturity
Date
|
Interest
Rate
|
Default
Interest
Rate
|
Base
Conversion
Rate
|
VCR
Look
back
Period
|
VCR
Calculated
Using
|
|
Principal
|
10/6/2015
|
Vis Viers Group, Inc.
|
Unsecured
|
6/30/2016
|
8%
|
22%
|
58%
|
10 days
|
3 lowest closing bids
|
|
$
|
59,000.00
|
10/12/15
|
JSJ Investments Inc.
|
Unsecured
|
7/8/2016
|
12%
|
18%
|
55%
|
10 days
|
5 lowest trades
|
|
|
102,000.00
|
12/9/15
|
Tangiers Investment Group, LLC
|
Secured by Certain Assets
|
12/8/2016
|
10%
|
20%
|
55%
|
10 days
|
3 lowest closing bids
|
|
|
220,000.00
|
Total principal outstanding at December 31, 2015
|
|
$
|
381,000.00
|
F-20
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2015 Notes, including accrued interest payable, may be converted into shares of our common stock at the Conversion Price, as defined below, in whole, or in part, at any time beginning 180 days after the date of issuance, at the option of the holder (the Conversion Feature).
The Conversion Price is equal the Base Conversion Rate specified in the table above multiplied by the Variable Conversion Rate (VCR) which is equal to the average of the number of lowest trading prices or closing bid prices of our common stock (specified in the table above) during the ten trading day period prior to the date of conversion divided by the closing price of our common stock on the day of conversion.
Both of these conversion rates results in a beneficial conversion features (BCF) recorded as unamortized convertible debt discount which is required to be valued and amortized to interest expense over the term of the Note. We amortize our convertible debt discount on a straight-line basis, which approximates the effective interest rate method, during the first 180 days that each 2015 Note is outstanding and this amortization is included in amortization of debt discount in our consolidated statements of operations. If a 2015 Note is repaid during the first 180 days, the remaining unamortized deferred financing costs and unamortized debt discount are expensed on the date of repayment.
The 2015 Notes are convertible into an unlimited number of unregistered, restricted common shares (Unlimited Shares Feature). The difference between the closing price of our common stock and the VCR is referred to as the Variable Conversion Rate Differential (VCRD). Both the Unlimited Shares Feature and the VCRD meet the definition of an embedded derivative and together are referred to as a compound embedded derivative liability or, hereafter, simply a derivative liability.
In accordance with U.S. GAAP, our derivative liabilities are recorded at fair value on the date of issuance and subsequently remeasured to fair value each reporting period with any change in fair value being recognized as gain (loss) on derivative liabilities in our consolidated statement of operations.
Similarly, accrued interest payable applicable to the 2015 Notes is convertible into shares of our our common stock, without limit, at the same Conversion Price. The fair value of the derivative liabilities applicable to accrued interest payable is measured and recognized at each reporting date as derivative liabilities with a corresponding charge to interest expense. As noted above, all derivative liabilities are re-measured in subsequent reporting periods with any change in fair value being included in gain (loss) on derivative liabilities.
The 2015 Notes also contain prepayment options whereby we may, during the first 180 days that each note is outstanding, prepay the note by paying prepayment premiums ranging from 10% to 40% of the principal then outstanding depending on the date of prepayment.
In general, per the terms of our 2015 Notes, The note holders may not make any conversions that would result in the note holder holding more than 9.99% of our issued and outstanding common stock at any one time.
At December 31, 2015, we have reserved 10.2 million shares of our authorized but unissued common stock for potential conversion of the 2015 Notes.
Should we default on a conversion or repayment of a 2015 Note, the note, accrued interest and default penalties and fees are immediately due and payable. The minimum default penalty amount ranges from 25% to 50% (or more, under certain circumstances) times the then outstanding principal and unpaid interest.
During the year ended December 31, 2015, we recorded deferred financing fees of $41,100 in connection with the issuance of our 2015 Notes and we recognized $8,700 of amortization of deferred financing costs during the year ended December 31, 2015. This amount is included in interest expense in our consolidated statements of operations.
The aggregate fair value of the derivative liabilities applicable to our 2015 Notes on the dates of issuance was $355,293 and was recorded as derivative liabilities on our consolidated balance sheets. The related BCF debt discount was recorded as a reduction to our convertible notes payable on our consolidated balance sheets. During the year ended December 31, 2015, we recognized $82,500 of amortization related to the 2015 Notes and recorded this amount as amortization of debt discount in our consolidated statements of operations.
F-21
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognized $5,121 of interest expense applicable to our 2015 Notes during the year ended December 31, 2015, and included this amount of accrued interest payable as accrued expenses on our consolidated balance sheets. During the same period, we recorded an additional $4,694 of interest expense and an increase to our derivative liabilities related to the recognition of the BCF applicable to the $5,121 of interest payable.
During the year ended December 31, 2015, we recognized $82,500 of BCF debt discount amortization and recorded this as an increase to our convertible notes payable, net of debt discount on our consolidated balance sheets.
2014 Typenex Note
On August 13, 2014, we entered into a Securities Purchase Agreement with Typenex Co-Investment, LLC ("Typenex"), for the sale of a 10% convertible promissory note (the Typenex Note) in the principal amount of $1,657,500 (the Closing Amount) convertible into shares of our common stock. The Typenex Note had an original issue discount (OID) of $150,000. Typenex retained $7,500 of the Closing Amount for due diligence and legal bills related to the transaction and paid $25,000 on our behalf to a third party for brokerage fees (together, the Fees). The financing closed on August 13, 2014 (the Closing Date). The Typenex Note was secured by all of our assets.
On August 13, 2014, in conjunction with the $1,657,500 Typenex Note, we received five, unsecured, $250,000 Investor Notes bearing interest at 8% per annum, totaling $1,250,000 that were scheduled to mature with respect to principal and interest on September 13, 2016. On December 29, 2014, we settled the amounts owing under the Typenex Note and the amounts owed to us under the Investor Notes as more fully described in below.
During the year ended December 31, 2014, we recognized $37,807 of interest income applicable to these Investor Notes.
The Typenex Notes interest rate was 10% per annum. All interest and principal was required to be paid twenty-five months after the date of the first borrowing under the Typenex Note (the Maturity Date). The outstanding balance on the Typenex Note was convertible into our common stock, at Typenexs option, at $3.00 per share (the Optional Conversion).
The Typenex Note also contained repayment requirements beginning six months after the first borrowing under the Typenex Note. The repayment requirements gave us the option of making periodic repayments in cash or with shares of our common stock at a price discounted to market in accordance with the terms of the Typenex Note.
In addition, we issued to Typenex warrants (the Typenex Warrants) to purchase 997,692 shares of our common stock, subject to adjustment in the event of a cashless exercise, as defined in the Typenex Warrants. Warrant #1 to Purchase Shares of Common Stock (Typenex Warrant #1) for 170,044 shares was immediately exercisable with the remainder (Typenex Warrants #2 - #6) only becoming exercisable, in five tranches, if and when the Investor Notes were paid. The Typenex Warrants were exercisable at $3.00 per share (the Exercise Price) until August 31, 2017, on a cash or cashless basis. Under the terms of the Typenex Warrants, if we, at any time while the Typenex Warrants were outstanding, sell or issue our common stock or securities convertible into or exercisable for shares of our common stock, including common stock issued under the Typenex Note, at an effective price per share less than the Exercise Price, then, subject to a few exceptions set forth in the Typenex Warrants, the Exercise Price will be reduced to such lower price provided that the number of shares of common stock issuable under the Typenex Warrants could not exceed a number of shares equal to three times the number of shares of common stock issuable under the Typenex Warrants as of the Closing Date.
On August 15, 2014, we received net cash proceeds from our initial borrowing under the Typenex Note of $225,000 as follows: total initial borrowing of $282,500 less the $32,500 of Fees and less $25,000 of OID applicable to the initial borrowing. We expensed the Fees immediately as interest expense as the initial borrowing and all subsequent tranches were immediately convertible into our common stock by the lender.
With regards to our $282,500 initial borrowing, on August 15, 2014, we recorded the $25,000 of OID plus the $118,373 fair value of the Typenex Warrant #1, plus $139,127 of the $151,937 fair value of the initial borrowing BCF, or, in total, $282,500, as debt discount and recorded the excess, $12,810, as loss on origination of derivative liability in our consolidated statements of operations. We were amortizing the $282,500 debt discount associated with the initial borrowing on a straight line basis, which approximates the effective interest method, over the nine month repayment term of the initial borrowing.
F-22
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With regards to the remaining $1,375,000 liability owed under the Typenex Note, we recorded the remaining $125,000 of OID as debt discount. We were amortizing the $125,000 debt discount on a straight line basis, which approximates the effective interest method, over the twenty-five month term of the Typenex Note. We also recorded the $576,152 fair value of the Typenex Warrants #2 - #6 as debt discount. Debt discount amortization relating to these warrants would be recognized on a straight line basis over the term of each future borrowing under the Typenex Note.
On December 29, 2014, we paid off the Typenex Note and accrued interest thereon and we repurchased and cancelled the Typenex Warrants #2 - #6 for the purchase of 827,648 of our shares of common stock held by Typenex. Principal and interest owed to us under the Investor Notes were offset against the principal and interest we owed to Typenex under the Typenex Note and, in addition, we paid Typenex $381,714 in cash. We removed the assets and liabilities, including the derivative liability related to the Typenex Note and interest payable conversion features, from our consolidated balance sheets and reduced our common stock balance by the amount previously assigned to the Typenex Warrants #2 - #6 and recorded a loss on extinguishment of debt and repurchase of warrants as follows:
|
|
|
|
|
|
|
|
|
Convertible note payable
|
|
|
|
|
|
$
|
1,657,500
|
|
Less: unamortized discount
|
|
|
|
|
|
|
(822,250
|
)
|
Accrued interest payable
|
|
|
|
|
|
|
63,326
|
|
Derivative liability
|
|
|
|
|
|
|
161,158
|
|
Typenex Warrants #2 - #6 repurchased
|
|
|
|
|
|
|
576,152
|
|
Less: investor notes receivable
|
|
|
|
|
|
|
(1,250,000
|
)
|
Less: accrued interest receivable
|
|
|
|
|
|
|
(37,807
|
)
|
Less: cash paid
|
|
|
|
|
|
|
(381,714
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
$
|
33,635
|
|
During the year ended December 31, 2014, we recognized $161,402 of debt discount amortization and interest expense totaling $63,326 applicable to the Typenex Note.
During the year ended December 31, 2014, the fair value of the BCF applicable to Typenex Note accrued interest was $15,320 and this amount was recorded as interest expense and an increase to our derivative liability in our consolidated financial statements.
NOTE 13 NOTES PAYABLE, RELATED PARTIES
On September 30, 2013, we issued a Convertible Note (the "Convertible Note") for $50,000 to NYX Capital Advisors, Inc. (NYX), an entity owned by the husband of our former President and director, in connection with $50,000 cash paid by NYX. The Convertible Note bears no interest and was convertible at any time, at the option of the holder, into 10,000,000 shares of our common stock at $0.005 per share. The Convertible Note was converted into our common shares on February 24, 2014.
NOTE 14 STOCKHOLDERS DEFICIT
2014 Change of Control
On February 27, 2014, NYX and Mr. Paul Enright, our former President, entered into a Stock Purchase Agreement, pursuant to which NYX sold to Mr. Enright an aggregate of 40,000,000 shares of our common stock, representing approximately 87% of our issued and outstanding shares as of that date.
On March 26, 2014, we cancelled 41,690,000 previously outstanding shares of our common stock and issued 38,690,000 shares to Messrs. Blackmon, Ruby and Verzura, representing approximately 89% of our issued and outstanding shares as of that date.
2014 Stock Split
On March 21, 2014, we effected a four-for-one stock split of our common stock in the form of a stock dividend of three shares of common stock for each share of common stock outstanding to stockholders of record on March 19, 2014.
F-23
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2014 Equity Offering
On March 26, 2014, we sold 600,000 Units for a total amount of $900,000 to 45 accredited investors. Each Unit consisted of one share of our common stock, two A Warrants and three B Warrants. Each A Warrant entitles the holder to purchase one share of our common stock at a price of $7.50 per share during the two year period commencing April 1, 2014. The A Warrants are callable once our common stock has traded at a price of at least $15.00 for 20 consecutive trading days. Each B Warrant entitles the holder to purchase one share of our common stock at a price of $15.00 per share during the three year period commencing April 1, 2014. The B Warrants are callable once our common stock has traded at a price of at least $22.00 for 20 consecutive trading days.
2014 Change in Authorized Share Capital
Effective May 2, 2014, we increased the authorized number of our preferred shares from five million to ten million and the authorized number of our common shares from 50 million to 100 million. At the same time we also changed the par value of both our preferred and common stock from $0.001 per share to no par value per share.
Common Stock Issued For Warrant Outstanding
On February 10, 2015, we issued 621,000 shares of our common stock, valued at $987,390 based on the previous days closing price, to Typenex in exchange for the return of Typenex Warrant #1 that we issued to Typenex on August 13, 2014, as part of a financing arrangement described in Note 12 above.
On February 10, 2015, we calculated the fair value of Typenex Warrant #1 to be $218,788, or approximately $1.29 per underlying share, utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
1.59
|
|
Exercise price
|
|
$
|
3.00
|
|
Risk free interest rate
|
|
|
1.05
|
%
|
Expected term (years)
|
|
|
2.6
|
|
Expected volatility
|
|
|
183
|
%
|
Expected dividends
|
|
|
0
|
%
|
Typenex Warrant #1 gave Typenex the right to purchase 170,044 shares of our common stock on the issuance date and provided for adjustments to the number of shares underlying the warrant upon occurrence of certain events including subsequent sales of our common stock. Our repurchase of Typenex Warrant #1 resulted in Typenex forgoing its potential right to receive shares in excess of the original 170,044 shares underlying the warrant on the issuance date. On February 10, 2015, we recorded the $987,390 fair value of the common shares issued as an increase to common stock and the $218,788 fair value of Typenex Warrant #1 reacquired and cancelled as a decrease to common stock and the difference, $768,602, as a loss on extinguishment of debt and repurchase of warrants in our consolidated statements of operations.
Common Stock Issued For Equity Method Investment
On August 25, 2014, we issued 40,000 shares of common stock valued at $88,000, based on the previous trading days closing price, as consideration for a 50% ownership interest in CRD. The $88,000 is included in equity method investments on our consolidated balance sheets.
Common Stock Issued For Services
On August 14, 2014, we issued 10,000 shares of common stock valued at $9,200, based on the previous trading days closing price, as consideration for marketing services. The $9,200 was recorded as share-based compensation expense and is included in sales and marketing expense in our consolidated statements of operations.
On August 15, 2014, we issued 20,000 shares of common stock valued at $24,800, based on the previous trading days closing price, as consideration for consulting services. The $24,800 was recorded as share-based compensation expense and is included in included in general and administrative expenses in our consolidated statements of operations.
F-24
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 17, 2014, we issued 150,000 shares of common stock valued at $162,000, based on the previous trading days closing price, as consideration for prepaid investor relations services. The $162,000 was amortized on a straight-line basis over the 12 month term of the investor relations service agreement. During the year ended December 31, 2015 and 2014, we recorded $121,500 and $40,500, respectively, of amortization as share-based compensation expense and included this in general and administrative expenses in our consolidated statements of operations.
On October 17, 2014, we issued 100,000 shares of common stock valued at $40,000, based on the previous trading days closing price, as consideration for prepaid product distribution fees. The $40,000 is being amortized on a straight-line basis over the ten year term of the licensing and distribution agreement. During the year ended December 31, 2015 and 2014, we recorded $4,000 and $1,000, respectively, of amortization as share-based compensation expense and included this in cost of revenues in our consolidated statements of operations. The remaining $35,000 as at December 31, 2015, is included in prepaid expenses on our consolidated balance sheets.
On October 22, 2014, we issued 50,000 shares of common stock valued at $24,000, based on the previous trading days closing price, as consideration for consulting services. The $24,000 was recorded as share-based compensation expense and is included in included in general and administrative expenses in our consolidated statements of operations.
On October 24, 2014, we issued 20,000 shares of common stock valued at $11,800, based on the previous trading days closing price, as consideration for consulting services. The $11,800 was recorded as share-based compensation expense and is included in included in general and administrative expenses in our consolidated statements of operations.
On December 1, 2014, we issued 30,000 shares of common stock valued at $19,500, based on the previous trading days closing price, as consideration for prepaid consulting services. The $19,500 was recognized as share-based compensation expense as services were rendered. During the year ended December 31, 2015 and 2014, we recorded $10,579 and $8,921, respectively, of share-based compensation expense and these amounts are included in general and administrative expenses in our consolidated statements of operations.
On December 30, 2014, we issued 20,000 shares of common stock valued at $13,800, based on the previous trading days closing price, as consideration for consulting services. The $13,800 was recorded as share-based compensation expense and is included in included in general and administrative expenses in our consolidated statements of operations.
On March 2, 2015, we issued 30,000 shares of common stock valued at $42,600, based on the previous trading days closing price, as consideration for consulting services from an independent contractor. The $42,600 of share-based compensation expense is included in included in general and administrative expenses in our consolidated statements of operations.
On April 23, 2015 we issued 60,000 shares of common stock valued at $47,400, based on the previous trading days closing price, as consideration for prepaid consulting fees. The $47,400 was recognized as share-based compensation expense as services were rendered. During the year ended December 31, 2015, we recorded $47,400 of share-based compensation expense and included this amount in general and administrative expenses in our consolidated statements of operations.
On April 23, 2015, we issued 126,500 shares of common stock valued at $99,935, based on the previous trading days closing price, as consideration for prepaid corporate finance fees. The $99,935 was recognized as share-based compensation expense as services were rendered. During the year ended December 31, 2015, we recorded $99,935 of share-based compensation expense and included this amount in general and administrative expenses in our consolidated statements of operations.
On August 17, 2015 we issued 50,000 shares of common stock valued at $19,000, based on the previous trading days closing price, as consideration for prepaid consulting fees. The $19,000 was recognized as share-based compensation expense as services were rendered. During the year ended December 31, 2015, we recognized $19,000 of share-based compensation expense and included this amount in general and administrative expenses in our consolidated statements of operations.
On August 24, 2015, we issued a total of 11,000 shares of common stock valued at $5,280, based on the previous trading days closing price, as consideration for consulting services from two independent contractors. The $5,280 of share-based compensation expense is included in included in general and administrative expense in our consolidated statements of operations.
F-25
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 19, 2015, we issued 30,000 shares of common stock valued at $12,000, based on the previous trading days closing price, as consideration for prepaid product distribution fees. The $12,000 is being amortized on a straight-line basis over the remaining nine year term of the related licensing and distribution agreement. During the year ended December 31, 2015, we recorded $375 of share-based compensation expense and included this in cost of revenues in our consolidated statements of operations. The remaining $11,625 as at December 31, 2015, is included in prepaid expenses on our consolidated balance sheets.
Warrants:
The following table summarizes our share warrants outstanding as of December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
2014
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Warrants outstanding, beginning of period
|
|
|
3,170,044
|
|
|
$
|
11.52
|
|
|
|
|
$
|
|
|
Issued
|
|
|
|
|
|
|
|
|
3,997,692
|
|
|
|
9.75
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchased and cancelled
|
|
|
(170,044
|
)
|
|
|
3.00
|
|
(827,648
|
)
|
|
|
3.00
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding, end of period
|
|
|
3,000,000
|
|
|
$
|
12.00
|
|
3,170,044
|
|
|
$
|
11.52
|
|
Warrants exercisable, end of period
|
|
|
3,000,000
|
|
|
$
|
12.00
|
|
3,170,044
|
|
|
$
|
11.52
|
|
The weighted-average remaining contractual life for warrants outstanding and exercisable at December 31, 2015, is 0.25 years. The aggregate intrinsic value of warrants outstanding and exercisable at December 31, 2015 is $0.
As described in Note 12 above, on August 13, 2014, we issued Typenex warrants to purchase 997,692 of our common shares and recorded the $694,525 fair value of these warrants as an increase to common stock on our consolidated balance sheets. On December 29, 2014, we repurchased 827,648 of these warrants, cancelled them and recorded a $576,152 decrease in common stock.
The warrants were recorded at approximately $0.70 per warrant utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
1.03
|
|
Exercise price
|
|
$
|
3.00
|
|
Risk free interest rate
|
|
|
0.88
|
%
|
Expected term (years)
|
|
|
3.05
|
|
Expected volatility
|
|
|
146
|
%
|
Expected dividends
|
|
|
0
|
%
|
2004 Equity Incentive Plan
On November 20, 2014, our board of directors approved our 2014 Stock Incentive Plan (the Plan) and the Plan became effective on November 19, 2015. The Plan provides officers, directors, selected employees and outside consultants an opportunity to acquire or increase a direct ownership interest in our operations and future success. Our board of directors currently administers the Plan and makes all decisions concerning which officers, directors, employees and other persons are granted awards, how many to grant to each recipient, when awards are granted, the terms and conditions applicable to awards, how the Plan should be interpreted, whether to amend or terminate the Plan and whether to delegate administration of the Plan to a committee. A maximum of 4,000,000 common shares are subject to the Plan. The Plan provides for the grant of stock options, stock awards, restricted stock units and stock appreciation rights. Stock options may be non-qualified stock options or incentive stock options except that stock options granted to outside directors, consultants or advisers providing services to us shall in all cases be non-qualified stock options. The Plan will terminate on November 20, 2024, unless the administrator terminates the Plan earlier. As of December 31, 2015, 3,400,000 common shares were available for issue under the Plan.
F-26
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options
On January 9, 2015, we awarded 200,000 stock options to each of Messrs. Blackmon, Verzura and Ruby under our 2014 Stock Incentive Plan. The options were fully vested at the time of grant and give the option holder the right to purchase shares of our common stock at $0.70 per share during the ten year term of the option.
We calculated the fair value of each option to be approximately $0.70 per option utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
0.70
|
|
Exercise price
|
|
$
|
0.70
|
|
Risk free interest rate
|
|
|
1.98
|
%
|
Expected term (years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
173
|
%
|
Expected dividends
|
|
|
0
|
%
|
At December 31, 2014, the fair value of these 600,000 options totaling $417,664 was included in accrued expenses on our consolidated balance sheets. On January 9, 2015, the option grant date, we increased common stock and decreased accrued expenses by this amount to account for the issuance of the 600,000 options on that date.
The following table summarizes our stock options outstanding as of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock options outstanding, beginning of period
|
|
|
|
|
|
$
|
|
|
Issued
|
|
|
600,000
|
|
|
|
0.70
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
Stock options outstanding, end of period
|
|
|
600,000
|
|
|
$
|
0.70
|
|
Stock options exercisable, end of period
|
|
|
600,000
|
|
|
$
|
0.70
|
|
The weighted-average remaining contractual life for stock options outstanding and exercisable at December 31, 2015, is 9.0 years. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2015 is $0.
NOTE 15 SHARE-BASED COMPENSATION
Share-based Compensation
We recognize share-based compensation expense in cost of revenues, sales and marketing expenses, R&D expenses and general and administrative expenses based on the fair value of common shares issued for services. In addition, we accrue share-based compensation expense for estimated share-based awards earned during the years ended December 31, 2015 and 2014, under our 2014 Equity Incentive Plan. Share-based compensation expense for the years ended December 31, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Share-based compensation expense shares issued for services
|
|
$
|
47,880
|
|
|
$
|
83,600
|
|
Share-based compensation expense amortization of shares issued for prepaid services
|
|
|
302,789
|
|
|
|
50,421
|
|
Share-based compensation expense accrual of shares to be issued for services
|
|
|
67,500
|
|
|
|
|
|
Share-based compensation expense accrual of estimated share-based awards to officers
|
|
|
612,512
|
|
|
|
417,664
|
|
|
|
$
|
1,030,681
|
|
|
$
|
551,685
|
|
F-27
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commercial Commitments
On May 6, 2014, we entered into a consultancy agreement with two third party consultants that has a nine month term which can be renewed and/or extended by mutual agreement; currently, the renewal of the agreement is under negotiations. The agreement provides for a $50,000 payment at signing, which has been paid, and for three more $50,000 payments (a total of $200,000) and the issuance of 100,000 shares of our common stock upon the achievement of certain goals as set forth in appendix II of the agreement. During the years ended December 31, 2015 and 2014, we recognized $0 and $160,000 of expense applicable to this agreement and this amount is included in R&D expenses in our consolidated statements of operations. At December 31, 2015 and 2014, the project was approximately 80% complete and $110,000 is included in accrued expenses on our consolidated balance sheets. The value of the 100,000 shares will be recognized upon achievement of the goals. The project has been suspended and it is unknown when it will resume.
Legal Proceedings
We are involved in disputes and legal actions arising in the normal course of our business. There have been no material developments in legal proceedings in which we are involved during the year ended December 31, 2015.
NOTE 17 INCOME TAXES
The Internal Revenue Code (IRC) allows net operating losses (NOL's) to be carried forward and applied against future profits for a period of twenty years. The change of ownership following our merger with MySkin may limit our ability to utilize these NOLs under the terms of IRC Section 381.
We did not provide any current or deferred federal income tax provision or benefit for any of the periods presented in our consolidated financial statements because we have experienced losses since our inception. When it is more likely than not, that a tax asset cannot be realized through future income, we must record an allowance against any potential future tax benefit. We provided a full valuation allowance against our net deferred tax assets, consisting of net operating loss carry forwards, because we determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward periods.
We have not taken a tax position that, if challenged, would have a material effect on our consolidated financial statements for the years ended December 31, 2015 and 2014, as defined under ASC 740. We did not recognize any adjustment to our liability for uncertain tax positions and therefore did not record any adjustment to the beginning balance of our accumulated deficit on our consolidated balance sheets.
Our provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Statutory U.S. federal tax rate
|
|
39%
|
|
|
39%
|
|
Effect of increase in valuation allowance
|
|
(39%
|
)
|
|
(39%
|
)
|
|
|
%
|
|
|
%
|
|
Changes in our cumulative net deferred tax assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Net loss carry forward
|
|
$
|
1,124,511
|
|
|
$
|
962,662
|
|
Valuation allowance
|
|
|
(1,124,511
|
)
|
|
|
(962,662
|
)
|
|
|
$
|
|
|
|
$
|
|
|
F-28
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of our income taxes computed at the statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Tax benefit at statutory rate
|
|
$
|
1,124,511
|
|
|
$
|
962,662
|
|
Valuation allowance
|
|
|
(1,124,511
|
)
|
|
|
(962,662
|
)
|
|
|
$
|
|
|
|
$
|
|
|
NOTE 18 RELATED PARTY TRANSACTIONS
Affiliate Customer
During 2010, Messrs. Blackmon and Verzura have made loans to, or equity investments in, one of our customers and, effective June 30, 2015, Messrs. Blackmon and Verzura had completely divested themselves of those interests. As Messrs. Blackmon and Verzura may have had significant influence on management or operating polices of the customer until June 30, 2015; we have classified sales to this customer as revenues, affiliate, in our consolidated statements of operations and accounts receivable from this customer as due from related parties on our consolidated balance sheets.
Lone Mountain
During the year ended December 31, 2014, we made certain payments on behalf of Lone Mountain during the organizational phase of this venture and we classified these payments as due from related parties on our consolidated balance sheets. As further described in Note 6 above, during the first half of 2015, we expensed our $40,900 advance to Lone Mountain and included this amount in equity in net loss of unconsolidated affiliate in our consolidated statements of operations.
CRD
On April 20, 2015, we advanced CRD $5,000 and included this amount in due from related parties.
Blue River Inc.
In February 2015, Messrs. Blackmon, Verzura and Ruby formed Blue River Inc. (Blue River), a Colorado corporation in the cannabis industry that plans to manufacture and wholesale medicinal and recreational cannabis products including our Prana medicinals products. During the year ended December 31, 2015, we advanced Blue River $3,284 and included this amount in due from related parties.
Amounts due from related parties consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Affiliated customer
|
|
$
|
|
|
|
$
|
3,112
|
|
Lone Mountain
|
|
|
|
|
|
|
40,900
|
|
Blue River
|
|
|
3,284
|
|
|
|
|
|
CRD
|
|
|
5,000
|
|
|
|
|
|
Total due from related parties
|
|
$
|
8,284
|
|
|
$
|
44,012
|
|
NOTE 19 DISCONTINUED OPERATIONS
On March 31, 2014, we sold all right, title and interest in the tangible and intangible assets, trademarks, customer lists, intellectual property and rights, which we owned and were related to the advanced skin care business. The assets were sold to MySkin Services, Inc. (MTA), a business partly owned by Ms. Stoppenhagen, our former President and director, in exchange for a $15,000 payable we owed to Ms. Stoppenhagen and/or MTA. In addition, MTA assumed all costs associated with these assets starting on March 31, 2014. See Note 1 for further detail on our change in operations.
F-29
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following details our loss from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenues
|
|
$
|
|
|
|
$
|
20,684
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
63,872
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
|
|
|
|
15,704
|
|
Total operating expenses
|
|
|
|
|
|
|
79,576
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, before income taxes
|
|
|
|
|
|
|
(58,892
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
|
|
|
$
|
(58,892
|
)
|
NOTE 20 SUBSEQUENT EVENTS
On January 15, 2016, we awarded 1,050,000 stock options to each of Messrs. Blackmon and Verzura and 980,000 stock options to Mr. Ruby under our 2014 Stock Incentive Plan. The options were fully vested at the time of grant and gave the option holder the right to purchase shares of our common stock at $0.20 per share during the ten year term of the option.
We calculated the fair value of each option to be approximately $0.20 per option utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
0.20
|
|
Exercise price
|
|
$
|
0.20
|
|
Risk free interest rate
|
|
|
2.03
|
%
|
Expected term (years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
173
|
%
|
Expected dividends
|
|
|
0
|
%
|
On March 18, 2016, we entered into an agreement with Slainte whereby we released Slainte from any and all claims relating to the Slainte Note and Slainte waived default, amended the terms and extended the maturity date of the Slainte Note until December 17, 2016, and agreed to accept a warrant in lieu of interest due on the loan.
The warrant allows Slainte to purchase 416,667 shares of our common stock; plus that number of shares of our common stock equal in number to (i) the product of the then-applicable interest rate under the Slainte Note and the amount of principal outstanding on the Note, calculated on a daily basis and paid for actual days elapsed, during the period beginning on December 18, 2015, and ending on the date on which the Note is paid in full, divided by (ii) $0.18; plus that number of shares of our common stock equal in number to (i) the product of 0.02 and the sum of the amount of principal and interest outstanding on the Note on the first day of each calendar month, beginning with February 1, 2016, divided by (ii) $0.18.
The warrant is exercisable at a price of $0.18 per share, subject to adjustment in the event of stock splits, the sale of our shares of common stock at a price below $0.18 per share or the sale of equity securities with a conversion price of less than $0.18 per share.
The warrant can be exercised at any time during the five year period following the full repayment of the loan; the exercise price can be paid in cash or through a cashless exercise feature; and the warrant grants certain registration rights to Slainte applicable to all shares of our common stock owned or controlled by Slainte, including shares issued upon exercise of the warrant.
F-30
UNITED CANNABIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, Slainte granted us a put option, exercisable upon repayment of the loan prior to December 17, 2016, that requires Slainte to purchase from us, for $100,000, that number of shares of our common stock equal in number to (i) $100,000.00 divided by (ii) the product of 0.80% and the average price of our common stock for the 30 trading days immediately prior to the date the put option is exercised.
On March 24, 2016, an unrelated third party agreed to assume all of our obligations pursuant to the $175,000 note payable to WeedMD dated July 7, 2014, in consideration for the transfer by us of 1,100,000 shares of the common stock of WeedMD to the unrelated third party. WeedMD consented to the assumption of the loan and released us from any further liability with respect to the loan.
On March 30, 2016, we borrowed $81,978, from Slainte and used the proceeds to repay principal and accrued interest applicable to our $59,000 convertible promissory note dated October 6, 2015, to Vis Vires Group, Inc.
The loan, together with interest at 12% per year, is payable on December 30, 2016. We can prepay the loan at any time. If the loan is repaid on or before September 30, 2016, the principal amount which is being repaid will increase by 10%. If the loan is repaid after September 30, 2016, the principal amount which is being repaid will increase by 15%. The amount of the principal increase may be paid with shares of our common stock. The number of shares to be issued for such purpose will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the prepayment date.
If the loan is not paid when due, then at any time on or before January 10, 2017, Slainte may convert the outstanding principal and interest on the loan into shares of our common stock. The number of shares to be issued on conversion will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the conversion date by the outstanding principal and interest on the loan on the conversion date.
On April 6, 2016, we borrowed $75,000, from Slainte and used the proceeds to repay principal and accrued interest applicable to our $102,000 convertible promissory note dated October 12, 2015, to JSJ Investments Inc.
The loan, together with interest at 12% per year, is payable on December 30, 2016. We may prepay the loan at any time. If the loan is repaid on or before September 30, 2016 the principal amount which is being repaid will increase by 10%. If the loan is repaid after September 30, 2016 the principal amount which is being repaid will increase by 15%. The amount of the principal increase may be paid with shares of our common stock. The number of shares to be issued for such purpose will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the prepayment date.
If the loan is not paid when due, then at any time on or before January 10, 2017, Slainte may convert the outstanding principal and interest on the loan into shares of our common stock. The number of shares to be issued on conversion will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the conversion date by the outstanding principal and interest on the loan on the conversion date.
On April 6, 2016, we borrowed $25,000 from Ernest Blackmon and $25,000 from Tony Verzura and used the proceeds to repay principal and interest applicable used to our $102,000 convertible promissory note dated October 12, 2015, to JSJ Investments Inc. The loans, together with interest at 12% per year, are payable on December 30, 2016. We may prepay the loans at any time. If the loans are repaid on or before September 30, 2016, the principal amount which is being repaid will increase by 10%. If the loans are repaid after September 30, 2016, the principal amount which is being repaid will increase by 15%.
In accordance with ASC 855-10 we have analyzed its operations subsequent to December 31, 2015, to the date these consolidated financial statements were issued, and has determined that, other that as disclosed above, we do not have any material subsequent events to disclose in these consolidated financial statements.
F-31
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,813
|
|
|
$
|
118,420
|
|
Account receivable, net of collection reserve of $30,000 at September 30, 2016 and $4,340 December 31, 2015, respectively
|
|
|
28,054
|
|
|
|
53,435
|
|
Due from related parties
|
|
|
8,284
|
|
|
|
8,284
|
|
Prepaid expenses
|
|
|
|
|
|
|
56,341
|
|
Deferred financing costs, net
|
|
|
|
|
|
|
32,400
|
|
Total current assets
|
|
|
51,151
|
|
|
|
268,880
|
|
Intangible assets
|
|
|
32,273
|
|
|
|
32,273
|
|
Investments in non-marketable securities
|
|
|
15,125
|
|
|
|
205,275
|
|
Equity method investments
|
|
|
88,000
|
|
|
|
88,000
|
|
Total assets
|
|
$
|
186,549
|
|
|
$
|
594,428
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLERS (DEFICIT)
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
61,542
|
|
|
$
|
104,238
|
|
Accrued expenses
|
|
|
362,446
|
|
|
|
928,533
|
|
Advances from and accrued amounts owed to officers and directors
|
|
|
81,830
|
|
|
|
|
|
Derivative liabilities
|
|
|
547,200
|
|
|
|
383,581
|
|
Current portion of deferred revenue
|
|
|
180,000
|
|
|
|
380,000
|
|
Notes payable
|
|
|
600,000
|
|
|
|
775,000
|
|
Convertible notes payable, net of a $0.0 and $272,793 debt discount, at September 30, 2016 and December 31, 2015, respectively
|
|
|
331,978
|
|
|
|
108,207
|
|
Total current liabilities
|
|
|
2,164,996
|
|
|
|
2,679,559
|
|
Deferred revenue, net of current portion
|
|
|
248,750
|
|
|
|
383,750
|
|
Total liabilities
|
|
|
2,413,746
|
|
|
|
3,063,309
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock, no par value: 10,000,000 authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, no par value, 100,000,000 shares authorized; 47,832,198 and 44,988,500 issued and outstanding at September 30, 2016 and December 31, 2015, respectively
|
|
|
4,244,085
|
|
|
|
3,039,448
|
|
Accumulated deficit
|
|
|
(6,471,282
|
)
|
|
|
(5,508,329
|
)
|
Total stockholders deficit
|
|
|
(2,227,197
|
)
|
|
|
(2,468,881
|
)
|
Total liabilities and stockholders deficit
|
|
$
|
186,549
|
|
|
$
|
594,428
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
F-32
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, non-affiliated
|
|
$
|
264,964
|
|
|
$
|
133,553
|
|
|
$
|
707,660
|
|
|
$
|
531,318
|
|
Revenues, affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,425
|
|
Total revenues
|
|
|
264,964
|
|
|
|
133,553
|
|
|
|
707,660
|
|
|
|
535,743
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues-non-affiliated
|
|
|
(68,813
|
)
|
|
|
(22,652
|
)
|
|
|
(252,550
|
)
|
|
|
(129,670
|
)
|
Cost of revenues- affiliated
|
|
|
|
|
|
|
(46,409
|
)
|
|
|
|
|
|
|
(46,409
|
|
Total cost of revenues
|
|
|
(68,813
|
)
|
|
|
(69,061
|
)
|
|
|
(252,550
|
)
|
|
|
(176,079
|
)
|
Gross profit
|
|
|
196,151
|
|
|
|
64,492
|
|
|
|
455,110
|
|
|
|
359,664
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
116,811
|
|
|
|
362,194
|
|
|
|
546,272
|
|
|
|
1,414,672
|
|
Income (loss) from operations
|
|
|
79,340
|
|
|
|
(297,702
|
)
|
|
|
(91,162
|
)
|
|
|
(1,055,008
|
)
|
Other income and costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivative liabilities
|
|
|
(331,618
|
)
|
|
|
|
|
|
|
(332,456
|
)
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(130,423
|
)
|
|
|
|
|
Interest expense
|
|
|
(40,044
|
)
|
|
|
(20,353
|
)
|
|
|
(153,438
|
)
|
|
|
(60,396
|
)
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
(266,711
|
)
|
|
|
|
|
Gain (loss) on conversion of convertible notes
|
|
|
(4,253
|
)
|
|
|
|
|
|
|
11,237
|
|
|
|
|
|
Loss on settlement of disputed terms of warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(768,602
|
)
|
Equity in net loss of unconsolidated Affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,900
|
)
|
Loss before provision for taxes
|
|
|
(296,575
|
)
|
|
|
(318,055
|
)
|
|
|
(962,953
|
)
|
|
|
(1,974,906
|
)
|
Provision for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(296,575
|
)
|
|
$
|
(318,055
|
)
|
|
$
|
(962,953
|
)
|
|
$
|
(1,974,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.006
|
)
|
|
$
|
(0.007
|
)
|
|
$
|
(0.021
|
)
|
|
$
|
(0.037
|
)
|
Basic and fully diluted weighted average number of shares outstanding
|
|
|
47,056,060
|
|
|
|
44,925,837
|
|
|
|
45,519,746
|
|
|
|
44,729,886
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
F-33
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(962,953
|
)
|
|
$
|
(1,974,906
|
)
|
Increase in accounts receivable
|
|
|
(279
|
)
|
|
|
(27,715
|
)
|
Increase in collection reserve
|
|
|
25,660
|
|
|
|
19,845
|
|
(Increase) decrease in prepaid expenses
|
|
|
56,341
|
|
|
|
(7,718
|
)
|
Decrease in deferred financing costs
|
|
|
32,400
|
|
|
|
|
|
Increase in accounts payable and accrued expenses
|
|
|
72,634
|
|
|
|
310,148
|
|
Decrease in deferred revenue
|
|
|
(335,000
|
)
|
|
|
|
|
Amortization of debt discount
|
|
|
266,711
|
|
|
|
|
|
Stock based compensation
|
|
|
118,160
|
|
|
|
642,109
|
|
Loss on revaluation of derivative liabilities
|
|
|
365,576
|
|
|
|
|
|
Loss on issue of warrants to cure default on note payable to Slainte Ventures
|
|
|
92,004
|
|
|
|
|
|
Loss on modification of note payable to Slainte Ventures
|
|
|
133,077
|
|
|
|
|
|
Gain on payoff of convertible note payable to JSJ Investments
|
|
|
(107,592
|
)
|
|
|
|
|
Gain on payoff of convertible note payable to Vis Vires Group
|
|
|
(48,939
|
)
|
|
|
|
|
Gain on conversion of convertible notes payable
|
|
|
(11,237
|
)
|
|
|
|
|
Discount and fees on convertible note
|
|
|
15,500
|
|
|
|
|
|
Value of non-marketable securities recognized as revenue
|
|
|
|
|
|
|
(135,000
|
)
|
Increase in advances from and accrued amounts owed to officers and directors
|
|
|
29,330
|
|
|
|
16,981
|
|
Increase in due from related parties
|
|
|
|
|
|
|
(7,543
|
)
|
Loss on settlement of disputed warrants
|
|
|
|
|
|
|
768,602
|
|
Equity in net loss of unconsolidated subsidiary
|
|
|
|
|
|
|
90,900
|
|
Cash used in operations
|
|
|
(258,607
|
)
|
|
|
(304,297
|
)
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of intangible assets
|
|
|
|
|
|
|
(14,385
|
)
|
|
|
|
|
|
|
|
(14,385
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes
|
|
|
316,478
|
|
|
|
|
|
Advances from officers and directors
|
|
|
52,500
|
|
|
|
|
|
Payoff convertible notes
|
|
|
(183,978
|
)
|
|
|
|
|
Payments on notes payable
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
155,000
|
|
|
|
|
|
Net Cash flows
|
|
|
(103,607
|
)
|
|
|
(318,682
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
118,420
|
|
|
|
321,353
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,813
|
|
|
$
|
2,671
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
F-34
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
Cash paid for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Issuance of stock options in exchange for accrued wages payable to officers and directors
|
|
$
|
612,512
|
|
|
$
|
|
|
Issuance of common stock upon conversion of Tangiers Investment Group convertible note
|
|
$
|
473,965
|
|
|
$
|
|
|
Reduction of convertible notes payable due to the conversion by Tangiers Investment Group
|
|
$
|
220,000
|
|
|
$
|
|
|
Decrease in non-marketable securities due to the exchange of 1,100,000 shares of common stock of WeedMD
|
|
$
|
(190,150
|
)
|
|
$
|
|
|
Reduction of notes payable due to assumption of note payable to WeedMD by unrelated third party in exchange for the exchange of 1,100,000 shares of common stock of WeedMD
|
|
$
|
175,000
|
|
|
$
|
|
|
Reduction of discount on notes due to revaluation of derivatives
|
|
$
|
|
|
|
$
|
|
|
Accounts payable exchanged for note payable to a third party
|
|
$
|
30,000
|
|
|
$
|
|
|
Cancellation of warrant
|
|
$
|
|
|
|
$
|
(218 788
|
)
|
Issuance of common stock in settlement of disputed terms of warrant
|
|
$
|
|
|
|
$
|
987,390
|
|
Issuance of common stock for services
|
|
$
|
|
|
|
$
|
214,215
|
|
Issuance of stock options
|
|
$
|
|
|
|
$
|
417 664
|
|
See accompanying notes to the unaudited condensed consolidated financial statements
F-35
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
NOTE 1 BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
Background and Current Operations
United Cannabis Corporation ("we", "our", "us", "UCANN", or the Company) a Colorado corporation, was originally formed as a California corporation under the name MySkin, Inc. on November 15, 2007. MySkin was engaged in the business of providing management services to a medical spa in Los Angeles, California which provided various advanced skin care services until March 31, 2014, when this business was sold to the prior President of the Company.
In early 2014 we decided to exit the medical spa management business and change our focus to providing products, services and intellectual property to the cannabis industry.
On March 26, 2014, we entered into a License Agreement with Earnest Blackmon, Tony Verzura and Chad Ruby pursuant to which Messrs. Blackmon, Verzura and Ruby licensed certain intellectual property to us in exchange for a total of 38,690,000 shares of our common stock.
In connection with this transaction:
|
|
·
|
Messrs. Blackmon, Verzura and Ruby licensed to us all of their knowledge and know-how relating to the design and buildout of cultivation facilities, growing/cultivation systems, seed-to-sale protocols and procedures, products, a genetic catalogue including over 150 different strains, an advanced (non-psychoactive) cannabinoid therapy program called "A.C.T. Now", security, regulatory compliance, and other methods and processes which relate to the cannabis industry.
|
|
|
·
|
The territory for this license is the entire world and the license runs in perpetuity. There are no royalty payments under the License Agreement.
|
|
|
·
|
Messrs. Blackmon, Verzura and Ruby were appointed to our board of directors effective April 7, 2014.
|
|
|
·
|
Mr. Blackmon was elected as our President, Mr. Ruby was elected as Chief Operating Officer and Mr. Verzura was elected as Vice President.
|
|
|
·
|
A total of 41,690,000 previously outstanding shares of common stock were cancelled resulting in a total of 43,620,000 shares of common stock outstanding on March 26, 2014.
|
UCANN was formed as a Colorado corporation on March 25, 2014, and on May 2, 2014, MySkin, Inc. merged into UCANN, a wholly-owned subsidiary of MySkin, Inc., for the purpose of changing domicile from California to Colorado and changing the corporation's name to United Cannabis Corporation.
On March 31, 2014, we sold all right, title and interest in the tangible and intangible assets, trademarks, customer lists, intellectual property and rights, which we owned and were related to our advanced skin care business since we entered into a new business and no longer had any use for these assets. The assets were sold to MySkin Services, Inc. (MTA), a business partly owned by Marichelle Stoppenhagen, our former officer and director, in exchange for the $15,000 payable which we owed to Ms. Stoppenhagen and/or MTA. In addition, MTA assumed all costs associated with these assets starting on March 31, 2014.
Government Regulation
- Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws.
F-36
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
As of September 30, 2016, 23 states and the District of Columbia allow their citizens to use medical marijuana, and voters in the states of Colorado, Washington, Oregon, Alaska and the District of Columbia approved ballot measures to legalize cannabis for adult recreational use. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration has effectively stated that it is not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical and recreational marijuana. However, there is no guarantee that the current administration will not change its stated policy regarding the low-priority enforcement of federal laws, or that any future administration would not change this policy and decide to enforce the federal laws vigorously. Any such change in the federal governments enforcement of current federal laws could cause significant financial damage to us.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
- We prepared these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP). The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information in accordance with Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three month and nine month periods ended September 31, 2016 and 2015 are not necessarily indicative of the results for the full year. While we believe that the disclosures presented herein are adequate and not misleading, these interim financial statements should be read in conjunction with the audited financial statements and the footnotes thereto contained in our annual report on Form 10-K for the year ended December 31, 2015.
Principles of Consolidation
Our condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries UC Nevada L.L.C. and UC Colorado Corporation. All intercompany accounts and transactions have been eliminated.
Use of Estimates
- The preparation of our condensed consolidated financial statements in conformity with GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented.
We make our estimate of the ultimate outcome for these items based on historical trends and other information available when our condensed consolidated financial statements are prepared. We recognize changes in estimates in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available. We believe that our significant estimates, assumptions and judgments are reasonable, based upon information available at the time they were made. Our actual results could differ from these estimates, making it possible that a change in these estimates could occur in the near term.
Financial Instruments
We have adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825,
Financial Instruments
, which requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
The carrying amounts of our short-term financial instruments, including accounts receivable, , accounts payable, accrued expenses and deferred revenue approximates fair value due to the relatively short period to maturity for these instruments. Investments in non-marketable equity securities are carried at cost. The carrying amount of our notes payable at September 30, 2016 and December 31, 2015, approximates their fair values based on our incremental borrowing rates.
Cash and Cash Equivalents
- We consider investments with original maturities of 90 days or less to be cash equivalents. We did not have cash equivalents as of September 30, 2016 and December 31, 2015.
F-37
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Accounts Receivable
Our accounts receivable consists primarily of trade accounts arising in the normal course of business. 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 accounts based on a review of all outstanding amounts on a monthly basis.
We determine our allowance for doubtful accounts by regularly evaluating individual customer receivables and considering the customers financial condition and credit history, and current economic conditions. Our allowance for doubtful accounts was $30,000 and $4,340 as of September 30, 2016 and December 31, 2015, respectively.
Intangible Assets
Our intangible assets, consisting of trademarks, design marks and provisional patent applications are recorded at cost, and once approved, will be amortized using the straight-line method over an estimated useful life of 10 to 20 years. We test for impairment of our intangible assets on an annual basis.
Investments in Non-Marketable Equity Securities
Our investments in non-marketable equity securities are carried at cost, less write-down-for-impairments, and are adjusted for impairment based on methodologies, and assessment of the impact of general private equity market conditions, and discounted projected future cash flows. Investments in non-marketable equity securities that expire in less than 12 months, for example stock options or warrants, are classified as current assets; otherwise, we classify investments in non-marketable equity securities as noncurrent assets.
Long-Lived Assets
In accordance with ASC 350, we regularly review the carrying value of intangible and other long-lived assets for the existence of facts or circumstances, both internally and externally, that suggest impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible assets and other long-lived assets may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows.
Equity Method Investments
Our investments in entities representing ownership of at least 20% but less than 50%, where we exercise significant influence, are accounted for under the equity method.
Deferred Revenue
- We defer revenue for which product or service has not yet been delivered or is subject to refund until such time that we and our customer jointly determine that the product or service has been delivered or no refund will be required.
Revenue Recognition -
We recognize revenue in accordance with ASC 605,
Revenue Recognition
, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) is based on our management's judgments regarding the fixed nature of the selling prices of the products and services delivered and the collectability of those amounts.
Revenue for services with a payment in form of stock, warrants or other financial assets is recognized when the services are performed. The value of revenue is measured using the Black-Scholes model for warrants.
Cost of Revenues
- Our cost of revenues consists primarily of costs associated with the production and delivery of our products and services. These include expenses related to the production, packaging and labeling of our Prana medicinals products and consulting expense related to our advisory services.
Research and Development Expenses -
Research and development (R&D) costs are charged to expense as incurred. Our R&D costs include, but are not limited to, consulting service fees and materials and supplies used in the development of our proprietary products and services.
General and Administrative Expenses -
General and administrative expenses consist primarily of personnel-related costs, rent, corporate costs, fees for professional and consulting services, advertising costs, and other costs of administration such as marketing, human resources, finance and administrative roles.
F-38
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Stock-Based Compensation
- We periodically issue shares of our common stock to non-employees in non-capital raising transactions for fees and services. We account for stock issued to non-employees in accordance with ASC 505,
Equity
, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.
We account for stock option grants issued and vesting to employees based on ASC 718,
Compensation Stock Compensation
, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. Accounting for stock-based compensation to employees requires the measurement and recognition of compensation expense for all share-based payment awards made to employees based on estimated fair values. We estimate the fair value of all stock option awards on the date of grant using the Black-Scholes-Merton pricing model, which is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk free interest rates and expected dividends. We also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates.
Income Taxes
- We follow the provisions of ASC 740,
Income Taxes
. Under ASC 740 deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Commitments and Contingencies
- Certain conditions may exist as of the date our condensed consolidated financial statements are issued, which may result in a loss but which will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of the legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Net Income Loss Per Share
- We compute net loss per share in accordance with ASC 260,
Earnings per Share
. Under the provisions of ASC 260, basic net loss per share includes no dilution and is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share takes into consideration shares of common stock outstanding (computed under basic net loss per share) and potentially dilutive securities that are not anti-dilutive.
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share, because the effect of their inclusion would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
2016
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Warrants to purchase common stock
|
|
1,895,122
|
|
|
3,000,000
|
|
|
|
1,895,122
|
|
|
|
3,000,000
|
|
Stock options
|
|
3,680,000
|
|
|
600,000
|
|
|
|
3,680,000
|
|
|
|
600,000
|
|
Total potentially dilutive securities
|
|
5,575,122
|
|
|
3,600,000
|
|
|
|
5,575,122
|
|
|
|
3,600,000
|
|
F-39
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Other Comprehensive Income (Loss)
We report as other comprehensive income (loss) those revenues, gains and losses not included in the determination of net income. During the three and nine months ended September 30, 2016 and 2015, we did not have any gains and losses resulting from activities or transactions that resulted in comprehensive income or loss.
Segment Reporting
UCANN operates as one segment.
Concentration of Credit Risk
- Financial instruments that potentially subject us to credit risk consist of cash. Because of our perceived association with the marijuana industry, we are not always able to maintain our cash with high credit quality financial institutions; and at times, cash is held by our employees, under the terms of trust agreements, and as a result, these balances are not insured by the FDIC.
The following tables show significant concentrations in our revenues and accounts receivable for the periods indicated:
Percentage of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Customer A
|
|
|
88
|
%
|
|
|
9
|
%
|
|
|
80
|
%
|
|
|
35
|
%
|
Customer B
|
|
|
12
|
%
|
|
|
25
|
%
|
|
|
20
|
%
|
|
|
34
|
%
|
Customer C
|
|
|
|
|
|
|
19
|
%
|
|
|
|
|
|
|
31
|
%
|
Customer D
|
|
|
|
|
|
|
37
|
%
|
|
|
|
|
|
|
0
|
%
|
Percentage of Accounts Receivable:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Customer A
|
|
|
57
|
%
|
|
|
56
|
%
|
Customer B
|
|
|
43
|
%
|
|
|
41
|
%
|
Customer C
|
|
|
|
|
|
|
1
|
%
|
Recently Issued Accounting Pronouncements
- From time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our condensed consolidated financial statements upon adoption.
In May 2014 the FASB issued guidance on revenue from contracts with customers, which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective at the beginning of fiscal year 2017, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact that the adoption will have on our condensed consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing reporting.
NOTE 3 GOING CONCERN
Our condensed consolidated financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our liabilities in the normal course of business for the foreseeable future. During the nine months ended September 30, 2016, we incurred losses of $962,953 and used cash of $258,607 in operating activities. At September 30, 2016, we had a working capital deficit of $2,132,349 and an accumulated deficit of $6,471,282. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and, or, obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. There is no assurance that these events will be satisfactorily completed.
F-40
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
NOTE 4 INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
On June 9, 2014, we received 1,187,500 common shares; and 3,000,000 warrants, which expired unexercised, to purchase shares of common stock of WeedMD RX Inc. (WMD), a private Canadian company in the cannabis industry, in exchange for future consulting services and use of our intellectual property. The $593,750 cost assigned to the WMD shares was classified as investment in non-marketable equity securities and as a component of deferred revenue in the amount of $593,750 on our condensed consolidated balance sheets.
On March 24, 2016, an unrelated third party agreed to assume all of our obligations, including accrued and unpaid interest, pursuant to the terms of a $175,000 note payable we owed to WeedMD, in consideration for the transfer by us of 1,100,000 shares of the common stock of WMD to the unrelated third party. WMD consented to the assumption of the loan by the unrelated third party, and released us from any further liability with respect to the loan. After the transfer of the 1,100,000 shares of common stock of WMD to the unrelated third party, we own 87,500 shares of common stock of WMD, and reduced our investment in none-marketable equity securities to $15, 125.
NOTE 5 PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Prepaid investor relations services
|
|
$
|
|
|
|
$
|
1,667
|
|
Prepaid licensing fees
|
|
|
|
|
|
|
35,000
|
|
Other prepaid services and fees
|
|
|
|
|
|
|
19,674
|
|
|
|
$
|
|
|
|
$
|
56,341
|
|
NOTE 6 INTANGIBLES
Our intangible assets are comprised of provisional patent applications and applications for a design mark and trademarks. Our intangible assets will be amortized on a straight-line basis over estimated useful lives of 20 years for patents and 10 years for design marks and trademarks once the applications are approved. Costs associated with applications that are not approved will be expensed in the period that the application is rejected or abandoned.
NOTE 7 EQUITY METHOD INVESTMENTS
On August 15, 2014, we acquired a 50% interest in Cannabinoid Research & Development Company Limited (CRD), a Jamaican company, in exchange for 40,000 shares of our common stock valued at $88,000 based on the previous days closing price of our stock. We also committed to provide expertise on design-build, genetics, cultivation, production, processing, productizing, labeling, packaging, marketing, branding and distribution of products, as well as use of our intellectual property in the operations of CRD. As of September 30, 2016, CRD did not have any operations or operating activities. We accounted for this $88,000 as an equity method investment on our condensed consolidated balance sheets.
NOTE 8 ACCRUED EXPENSES
Our accrued expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Accrued consulting fees
|
|
$
|
152,500
|
|
|
$
|
110,000
|
|
Accrued wages and related expenses
|
|
|
|
|
|
$
|
629,780
|
|
Accrued interest expense
|
|
|
142,446
|
|
|
$
|
101,185
|
|
Accrued other expenses
|
|
|
67,500
|
|
|
$
|
87,568
|
|
|
|
$
|
362,446
|
|
|
$
|
928,533
|
|
F-41
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Included in accrued consulting fees at September 30, 2016 and December 31, 2015 is $110,000 that represent fees owed to consultants working on a research and development project that is approximately 80% complete.
NOTE 9 FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITIES
The following table provides the liabilities carried at fair value measured on a recurring basis as of September 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative liabilities - convertible notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Derivative liabilities - warrants
|
|
|
|
|
|
|
547,200
|
|
|
|
|
|
|
|
547,200
|
|
Total
|
|
$
|
|
|
|
$
|
547,200
|
|
|
$
|
|
|
|
$
|
547,200
|
|
Convertible Notes Payable
We valued our derivative liabilities related to embedded conversion features applicable to our borrowings of $322,000 under our convertible notes payable with embedded derivative features (see Note 12 below) and accrued interest payable of $28,724 thereon in accordance with fair value measurement guidelines. For the nine months ended September 30, 2016, the following table reconciles the beginning and ending balances for our financial instruments that are carried at fair value measured on a recurring basis:
|
|
|
|
|
Derivative liabilities as of December 31. 2015
|
|
$
|
383,581
|
|
Loss on revaluation of derivative liabilities during the period
|
|
|
370,805
|
|
Loss on modification and cure of default of note payable to Slainte Ventures
|
|
|
237,027
|
|
Effect of payoff of JSJ and Vis Vires convertible notes
|
|
|
(178,484
|
)
|
Conversion of note payable to Tangiers Investment Group
|
|
|
(265,729
|
)
|
Derivative liabilities as of September 30, 2016
|
|
$
|
547,200
|
|
The estimated fair value of the derivative liabilities related to our convertible notes payable was measured as the aggregate estimated fair value of each component of the compound embedded derivative liabilities (see Note 12 below), based on Level 2 and Level 3 inputs, using a binomial lattice pricing model. Changes in the fair value of the compound embedded derivative liability at each reporting date are included in gain/ (loss) on derivative liabilities in our consolidated statement of operations.
NOTE 10 DEFERRED REVENUE
Our deferred revenue consists of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Deferred revenue - WeedMD
|
|
$
|
428,750
|
|
|
$
|
563,750
|
|
Deferred revenue - FoxBarry
|
|
|
|
|
|
|
200,000
|
|
|
|
|
428,750
|
|
|
|
763,750
|
|
Less - current portion
|
|
|
(180,000
|
)
|
|
|
(380,000
|
)
|
Deferred revenue, net of current portion
|
|
$
|
248,750
|
|
|
$
|
383,750
|
|
F-42
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
As described in Note 4 above, on June 9, 2014, we received 1,187,500 common shares and 3,000,000 warrants to purchase common shares of WMD in exchange for future consulting services and use of our intellectual property. We recorded the $893,750 fair value of these securities as deferred revenue, and we recognized $150,000 of this amount as revenue during the period July 1, 2014 through December 31, 2014, based upon our initial three year estimate of the service period involved. Based on consultations with WMD, we expect to deliver the remaining consulting services and use of our intellectual property to WMD on a relatively consistent monthly basis during the four year period January 1, 2015 through December 31, 2018. Accordingly, we are now recognizing $15,000 of deferred revenue per month, and thus, during the three and nine month periods September 30 2016 and 2015, we recognized a total of $45,000 and $135,000 of revenue applicable to this arrangement, respectively. At September 30, 2016, we expect to recognize $180,000 of the remaining $428,751 WMD deferred revenue during the next twelve months and accordingly, we have classified the $180,000 as a current liability on our condensed consolidated balance sheets.
On December 28, 2014, we entered into a royalty and consulting services agreement with FoxBarry Farms, LLC (FoxBarry) whereby we received a $200,000 prepaid royalty payment from FoxBarry, which we classified on our balance sheet as deferred revenue. Over the past twelve months, in spite of repeated efforts by our management, we have not been able to communicate with, or locate the principals of FoxBarry; and further, our research indicates that FoxBarry has ceased doing business, and is no longer an operating entity. When we entered into the transaction with FoxBarry, it was our policy to recognize the related deferred royalty revenue, based on actual applicable sales as defined in the agreement. However, since FoxBarry appears to no longer be in existence, and all of our conditions pursuant to the agreement have been satisfied, we elected to recognize $200,000 of deferred during the three and nine months ended September 30, 2016. For the three and nine months ended September 2015, we did not recognize any deferred revenue related to this agreement.
NOTE 11 NOTES PAYABLE
Our notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Note payable - WeedMD
|
|
$
|
|
|
|
$
|
175,000
|
|
Note payable - Slainte Ventures, LLC
|
|
|
600,000
|
|
|
|
600,000
|
|
Total notes payable
|
|
$
|
600,000
|
|
|
$
|
775,000
|
|
On July 7, 2014, we issued a $175,000, unsecured demand promissory note bearing interest at 5% to WeedMD for cash used in our business development activities. As discussed in Note 4 above, on March 24, 2016, an unrelated third party agreed to assume all of our obligations pursuant to the $175,000 note payable to WeedMD, in consideration for the transfer by us of 1,100,000 shares of the common stock of WeedMD to the unrelated third party. WeedMD consented to the assumption of the loan and released us from any further liability with respect to the loan.
On December 18, 2014, we issued a $600,000 unsecured promissory note bearing interest at 12% to an unrelated third party, Slainte Ventures, LLC. The principal and accrued interest are due on the earlier of December 17, 2015, or upon the closing of certain capital raising transactions as described in the note. The default rate of interest under the note is 18%.
F-43
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
On March 16, 2016, we entered into an agreement with Slainte whereby Slainte waived default, amended the terms and extended the maturity date of the Slainte Note until December 17, 2016, and agreed to accept a warrant in lieu of interest due on the loan. The warrant allows Slainte to purchase 416,667 shares of our common stock; plus that number of shares of our common stock equal in number to (i) the product of the then-applicable interest rate under the Slainte Note and the amount of principal outstanding on the Note, calculated on a daily basis and paid for actual days elapsed, during the period beginning on December 18, 2015, and ending on the date on which the Note is paid in full, divided by (ii) $0.18; plus that number of shares of our common stock equal in number to (i) the product of 0.02 and the sum of the amount of principal and interest outstanding on the Note on the first day of each calendar month, beginning with February 1, 2016, divided by (ii) $0.18. The warrant is exercisable at a price of $0.18 per share, subject to adjustment in the event of stock splits, the sale of our shares of common stock at a price below $0.18 per share or the sale of equity securities with a conversion price of less than $0.18 per share. The warrant can be exercised at any time during the five year period following the full repayment of the loan; the exercise price can be paid in cash or through a cashless exercise feature; and the warrant grants certain registration rights to Slainte applicable to all shares of our common stock owned or controlled by Slainte, including shares issued upon exercise of the warrant. In addition, Slainte granted us a put option, exercisable upon repayment of the loan prior to December 17, 2016, that requires Slainte to purchase from us, for $100,000, that number of shares of our common stock equal in number to (i) $100,000 divided by (ii) the product of 80% and the average price of our common stock for the 30 trading days immediately prior to the date the put option is exercised.
These warrants are accounted for as a liability under ASC 815. The Company assesses the fair value of the warrants quarterly based on the Black-Scholes pricing model. See below for variables used in assessing the fair value.
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|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Expected life (years)
|
|
|
5.0
|
|
|
|
4.96
|
|
Risk-free interest rate
|
|
|
1.41
|
%
|
|
|
1.21
|
%
|
Expected volatility
|
|
|
226
|
%
|
|
|
227
|
%
|
In connection with these warrants, the Company recognized a loss on the change in fair value of warrant liability of $310,173 during the nine months ended September 30, 2016.
Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The Company believes this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. The Company currently has no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.
Due to the fair value of the warrants issued in connection with the amended note agreement, the modification was considered substantial (i.e. greater than 10% of the carrying value of the debt). As a result, an extinguishment of debt was deemed to have occurred, resulting in the recognition of an extinguishment loss of $133,077.
F-44
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
NOTE 12 CONVERTIBLE NOTES PAYABLE
During the year ended 2015, we issued three convertible promissory notes to unaffiliated third parties. The net proceeds from these transactions were used for general working capital purposes. During the nine months ended September 30, 2016 we issued four convertible promissory notes, the net proceeds from which were used to pay the principal and accrued interest of two of the convertible notes issued during the year ended December 31, 2015. The difference between the face amount of the convertible notes and the net proceeds was recorded as deferred financing costs on our consolidated balance sheets, if such difference was the result of payments related to debt issuance costs. Any deferred financing costs are amortized on a straight-line basis, which approximates the effective interest rate method, during the first 180 days that the convertible notes are outstanding, and this amortization is included in interest expense in our consolidated statements of operations.
The following table summarizes our convertible promissory notes as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue
Date
|
|
Issued To
|
|
Security
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Base
Conversion
Rate
|
|
|
Principal
Balance
|
|
3/30/2016
|
|
Slainte
Ventures
|
|
Unsecured
|
|
12/30/16
|
|
|
12
|
%
|
|
N/A
|
|
|
$
|
81,978
|
|
4/06/16
|
|
Slainte
Ventures
|
|
Unsecured
|
|
12/30/16
|
|
|
12
|
%
|
|
N/A
|
|
|
|
75,000
|
|
7/5/2016
|
|
Slainte
Ventures
|
|
Unsecured
|
|
12/30/16
|
|
|
12
|
%
|
|
N/A
|
|
|
|
50,000
|
|
8/10/16
|
|
JSJ
Investments
|
|
Unsecured
|
|
5/10/17
|
|
|
12
|
%
|
|
$0.20 per
share during
first 180 days; 45% discount
thereafter
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
331,978
|
|
The convertible notes, including accrued interest payable, may be converted into shares of our common stock at the Conversion Price, in whole, or in part, at various times, after the date of issuance, at the option of the holder (the Conversion Feature), as defined by the terms of the convertible note.
The Conversion Price is equal the Base Conversion Rate specified in the table above multiplied by the Variable Conversion Rate (VCR), which is equal to the lowest trading price or closing bid price of our common stock during the ten trading day period prior to the date of conversion, divided by the closing price of our common stock on the day of conversion.
If these conversion rates results in a beneficial conversion feature (BCF), the BCF is recorded as an unamortized convertible debt discount, which is required to be valued and amortized to interest expense over the term of the Note. We amortize our convertible debt discount on a straight-line basis, which approximates the effective interest rate method, and this amortization is included in amortization of debt discount in our consolidated statements of operations. If a convertible note is repaid, any remaining unamortized deferred financing costs and unamortized debt discount are expensed on the date of repayment.
If a convertible notes is convertible into an unlimited number of unregistered, restricted common shares, it is classified as having and unlimited shares feature (Unlimited Shares Feature). The difference between the closing price of our common stock and the VCR is referred to as the Variable Conversion Rate Differential (VCRD). If, both the Unlimited Shares Feature and the VCRD meet the definition of an embedded derivative, then together they create a compound embedded derivative liability or, hereafter, simply a derivative liability.
In accordance with U.S. GAAP, our derivative liabilities are recorded at fair value on the date of issuance and subsequently remeasured to fair value each reporting period with any change in fair value being recognized as gain (loss) on derivative liabilities in our consolidated statement of operations.
F-45
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
Similarly, accrued interest payable applicable to the convertible notes is convertible into shares of our common stock, without limit, at the same Conversion Price. The fair value of the derivative liabilities applicable to accrued interest payable is measured and recognized at each reporting date as derivative liabilities with a corresponding charge to interest expense. As noted above, all derivative liabilities are re-measured in subsequent reporting periods with any change in fair value being included in gain (loss) on derivative liabilities.
At September 30, 2016, we have reserved 10.2 million shares of our authorized but unissued common stock for potential conversion of the convertible notes.
Slainte Convertible Notes
On March 30, 2016, we borrowed $81,978, from Slainte Ventures and used the proceeds to repay principal and accrued interest applicable to our $59,000 convertible promissory note dated October 6, 2015, to Vis Vires Group, Inc. The loan, together with interest at 12% per year, is payable on December 30, 2016. We can prepay the loan at any time. If the loan is repaid on or before September 30, 2016, the principal amount which is being repaid will increase by 10%. If the loan is repaid after September 30, 2016, the principal amount which is being repaid will increase by 15%. The amount of the principal increase may be paid with shares of our common stock. The number of shares to be issued for such purpose will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the prepayment date. If the loan is not paid when due, then at any time on or before January 10, 2017, Slainte may convert the outstanding principal and interest on the loan into shares of our common stock. The number of shares to be issued on conversion will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the conversion date by the outstanding principal and interest on the loan on the conversion date.
On April 6, 2016, we borrowed $75,000 from Slainte Ventures and used the proceeds, along with $52,500 of advances to the Company by officers and directors of the Company, to repay principal and accrued interest applicable to our $102,000 convertible promissory note, dated October 12, 2015, to JSJ Investments, Inc. The loan, together with interest at 12% per year, is payable on December 30, 2016. We can prepay the loan at any time. If the loan is repaid on or before September 30, 2016, the principal amount which is being repaid will increase by 10%. If the loan is repaid after September 30, 2016, the principal amount which is being repaid will increase by 15%. The amount of the principal increase may be paid with shares of our common stock. The number of shares to be issued for such purpose will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the prepayment date. If the loan is not paid when due, then at any time on or before January 10, 2017, Slainte may convert the outstanding principal and interest on the loan into shares of our common stock. The number of shares to be issued on conversion will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the conversion date by the outstanding principal and interest on the loan on the conversion date.
On July 5, 2016, we borrowed $50,000 from Slainte Ventures and used the proceeds for working capital purposes. The loan, together with interest at 12% per year, is payable on December 30, 2016. We can prepay the loan at any time. If the loan is repaid on or before September 30, 2016, the principal amount which is being repaid will increase by 10%. If the loan is repaid after September 30, 2016, the principal amount which is being repaid will increase by 15%. The amount of the principal increase may be paid with shares of our common stock. The number of shares to be issued for such purpose will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the prepayment date. If the loan is not paid when due, then at any time on or before January 10, 2017, Slainte may convert the outstanding principal and interest on the loan into shares of our common stock. The number of shares to be issued on conversion will be determined by dividing the average closing price of our common stock (which in no case can be greater than $0.45) for the ten trading days preceding the conversion date by the outstanding principal and interest on the loan on the conversion date.
F-46
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
JSJ Convertible Note
On August 10, 2016, we borrowed $125,000 from JSJ Investments and used the proceeds for working capital purposes. The loan, together with interest at 12% per year, is payable on May 10, 2017. We can prepay the loan at any time. If the loan is repaid on or before October 16, the principal amount which is being repaid will increase by 25%. If the loan is repaid on or before October 16, 2016 through February 12, 2016, the principal amount which is being repaid will increase by 30%. Thereafter, the note may be repaid only upon written consent from JSJ, and the principal amount that is being repaid will increase by 30%. At any time after the date of the note, JSJ is entitled to convert all of the outstanding and unpaid principal in to shares of our common stock. Until February 12, 2017, the conversion price is $0.20 per share, and thereafter, the conversion price will be at a 45% discount to the lowest closing price of our common stock for the ten trading days preceding the conversion date. JSJ may not make any conversions that would result in the note holder holding more than 4.99% of our issued and outstanding common stock at any one time.
NOTE 13 STOCKHOLDERS DEFICIT
Stock Options
On January 9, 2015, we awarded 200,000 stock options to each of Messrs. Blackmon, Verzura and Ruby under our 2014 Stock Incentive Plan. The options were fully vested at the time of grant and give the option holder the right to purchase shares of our common stock at $0.70 per share during the ten year term of the option.
We calculated the fair value of each option to be approximately $0.70 per option utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
0.70
|
|
Exercise price
|
|
$
|
0.70
|
|
Risk free interest rate
|
|
|
1.98
|
%
|
Expected term (years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
173
|
%
|
Expected dividends
|
|
|
0
|
%
|
At December 31, 2015, the fair value of these 600,000 options totaling $417,664 was included in accrued expenses on our condensed consolidated balance sheets and on January 9, 2015, the option grant date, we increased common stock and decreased accrued expenses by this amount to account for the issuance of these options on that date.
On January 12, 2016, we awarded 1,050,000 stock options to each of Messrs. Blackmon, Verzura and 980,000 stock potions to Mr. Ruby under our 2014 Stock Incentive Plan. The options were fully vested at the time of grant and give the option holder the right to purchase shares of our common stock at $0.20 per share during the ten year term of the option.
We calculated the fair value of each option to be approximately $0.20 per option utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
0.20
|
|
Exercise price
|
|
$
|
0.20
|
|
Risk free interest rate
|
|
|
1.98
|
%
|
Expected term (years)
|
|
|
10.0
|
|
Expected volatility
|
|
|
173
|
%
|
Expected dividends
|
|
|
0
|
%
|
At December 31, 2015, the fair value of 3,080,000 options totaling $612,512, was included in accrued expenses on our condensed consolidated balance sheets, and on January 15, 2016, the option grant date, we increased common stock and decreased accrued expenses by this amount to account for the issuance of these options on that date.
F-47
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
The following table summarizes our stock options outstanding, as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock options outstanding, beginning of period
|
|
|
3,680,000
|
|
|
|
9.1
|
|
|
$
|
0.26
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding, end of period
|
|
|
3,680,000
|
|
|
|
9.1
|
|
|
$
|
0.26
|
|
Stock options exercisable, September 30, 2016
|
|
|
3,680,000
|
|
|
|
9.1
|
|
|
$
|
0.26
|
|
Common Stock Issued In Exchange For Outstanding Warrant
On February 10, 2015, we issued 621,000 shares of our common stock valued at $987,390 based on the previous days closing price, to Typenex Co-Investment, LLC ("Typenex") in exchange for the return of Warrant #1 to Purchase Shares of Common Stock (the Warrant) that we issued to Typenex on August 13, 2014, as part of a financing arrangement. We calculated the fair value of the Warrant to be $218,788, or approximately $1.29 per underlying share, utilizing the Black Scholes option pricing model and the following assumptions on the date of valuation:
|
|
|
|
|
Stock price
|
|
$
|
1.59
|
|
Exercise price
|
|
$
|
3.00
|
|
Risk free interest rate
|
|
|
1.05
|
%
|
Expected term (years)
|
|
|
2.6
|
|
Expected volatility
|
|
|
183
|
%
|
Expected dividends
|
|
|
0
|
%
|
The Warrant gave Typenex the right to purchase 170,044 shares of our common stock on the issuance date and provided for adjustments to the number of shares underlying the Warrant upon occurrence of certain events including subsequent sales of our common stock. Our repurchase of the Warrant resulted in Typenex forgoing its potential right to receive shares in excess of the original 170,044 shares underlying the Warrant on the original issuance date. On February 10, 2015, we recorded the $768,602 fair value of the common shares issued in excess of the $218,788 fair value of the Warrant reacquired as a loss on settlement of disputed terms of warrant in our condensed consolidated statements of operations and as an increase in common stock on our condensed consolidated balance sheets.
Warrants:
The following table summarizes our share warrants outstanding as of September 30, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
Warrants outstanding, December 31, 2015
|
|
|
3,000,000
|
|
|
|
1.00
|
|
|
$
|
12.00
|
|
Issued
|
|
|
956,836
|
|
|
|
4.53
|
|
|
|
0.18
|
|
Shares issuable at the election of the noteholder in lieu of the payment of interest under the terms of the amended Slainte note
|
|
|
938,287
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(3,000,000
|
)
|
|
|
|
|
|
|
|
|
Warrants outstanding, end of period
|
|
|
1,895,122
|
|
|
|
4.53
|
|
|
$
|
0.18
|
|
Warrants exercisable, September 30, 2016
|
|
|
1,895,122
|
|
|
|
4.53
|
|
|
$
|
0.18
|
|
F-48
UNITED CANNABIS CORPORATION
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
NOTE 14 SHARE-BASED COMPENSATION
Share-based Compensation
We recognize share-based compensation expense in cost of revenues and general and administrative expense based on the fair value of common shares issued for services. Share-based compensation expense for the nine months ended September 30, 2016 and 2015 is, as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Share-based compensation expense consulting services
|
|
$
|
118,160
|
|
|
$
|
47,880
|
|
Share-based compensation expense amortization of shares issued for prepaid services
|
|
|
|
|
|
|
279,229
|
|
Share-based compensation expense accrual of estimated share-based awards
|
|
|
|
|
|
|
315,000
|
|
|
|
$
|
118,160
|
|
|
$
|
642,109
|
|
NOTE 15 COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commercial Commitments
On February 20, 2016, we entered into a consulting agreement with a third party that has a twelve month term, and which can be extended by mutual agreement. The agreement provides for the issuance of a five (5) year warrant to the consultant, upon the execution of the agreement, to purchase 250,000 shares of our common stock at a price of $0.18 per share, plus the payment of $7,500 on the first day of each month, beginning March 1, 2016, coupled with the monthly issuance of five (5) year warrants to purchase our common stock in an amount of shares determined by dividing $7,500 by $0.18 per share. These warrants are exercisable at a price of $0.18 per share. During the nine months ended September 30, 2016, we recognized $118,160 of stock based compensation expense applicable to this consulting agreement.
On May 6, 2014, we entered into a consulting agreement with two third party consultants that has a nine month term, which can be renewed and/or extended by mutual agreement. Currently, the renewal of the agreement is under negotiation. The agreement provides for a $50,000 payment to the consultants at signing, which has been paid, and for three more $50,000 payments (a total of $200,000) and the issuance of 100,000 shares of our common stock upon the achievement of certain goals as set forth in appendix II of the agreement. During the three and nine months ended September 30, 2016 and 2015, we recognized no expenses applicable to this agreement At September 30, 2016 and December 31, 2015 the project was approximately 80% complete and $110,000 is included in accrued expenses on our consolidated balance sheets. The value of the 100,000 shares will be recognized upon achievement of the goals. The project has been suspended and it is unknown when it will resume.
Legal Proceedings
We were not subject to any legal proceedings during the nine months ended September 30, 2016, and, to the best of our knowledge, no legal proceedings are pending or threatened.
NOTE 16 SUBSEQUENT EVENTS
In accordance with ASC 855-10 we have analyzed our operations subsequent to September 30, 2016, to the date these condensed consolidated financial statements were issued, and have determined that we do not have any material subsequent events to disclose in these condensed financial statements.
F-49
TABLE OF CONTENTS
No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by United Cannabis Corporation. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the securities offered in any jurisdiction to any person to whom it is unlawful to make an offer by means of this prospectus.