CANB CAN B Corporation (QB)

Notes to Consolidated Financial Statements

Three Months Ended September 30, 2017 and 2016

(Unaudited)

NOTE 1 – Organization and Description of Business

Canbiola, Inc. was originally incorporated as WrapMail, Inc. (“WRAP”) in Florida on October 11, 2005.  Effective January 5, 2015, WRAP acquired 100% ownership of Prosperity Systems, Inc. (“Prosperity”), a New York corporation incorporated on April 2, 2008.  On May 15, 2017, WRAP changed its name to Canbiola, Inc. (the “Company” or “CANB” or “Canbiola”). The Company operates several divisions, including document management and email marketing platforms and a division specializing in the sale of products containing CBD. The Company used to operate its document and information platform from its wholly owned subsidiary, Prosperity Systems, Inc (“Prosperity”); however, after the acquisition of Prosperity, the Company transferred Prosperity’s operations to WRAP and is presently in the process of dissolving Prosperity. For the periods presented, the assets, liabilities, revenues, and expenses are those of CANB. Prosperity had no activity for the periods presented. Effective December 27, 2010, WRAP effected a 10 for 1 forward stock split of its common stock. Effective June 4, 2013, WRAP effected a 1 for 10 reverse stock split of its common stock. The accompanying consolidated financial statements retroactively reflect these stock splits.

Canbiola, Inc. is a US Company specializing in the sale of a variety of Cannabidiol (Hemp) based products such as oils, creams, moisturizers, chews, vapes, isolate, gel caps, concentrate and water. Canbiola is developing their own line of proprietary products as well as seeking synergistic value through acquisitions in the Hemp Industry. Canbiola aims to be the premier provider of the highest quality Hemp natural products on the market through sourcing the very best raw material and developing a variety of products we believe will improve people's lives in a variety of areas.

NOTE 2 – Going Concern Uncertainty

The consolidated financial statements have been prepared on a “going concern” basis, which contemplates the realization of assets and liquidation of liabilities in a normal course of business. As of September 30, 2017, the Company had cash and cash equivalents of $4,225 and negative working capital of $731,850. For the nine months ended September 30, 2017 and 2016, the Company had net losses of $466,245 and $342,142, respectively. These factors raise substantial doubt as to the Company’s ability to continue as a going concern.  The Company plans to improve its financial condition by raising capital through sales of shares of its common stock.  Also, the Company plans to start a health supplements business to attain profitable operations. The consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

NOTE 3 – Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they may not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The interim financial statements should be read in conjunction with the Company’s latest annual financial statement. In the opinion of management, the unaudited financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation. Operating results for the three-month period ended September 30, 2017 may not necessarily be indicative of the results that may be expected for the year ending December 31, 2017.

NOTE 4 – Summary of Significant Accounting Policies

(a)  Principles of Consolidation

The consolidated financial statements include the accounts of CANB and its wholly owned subsidiary Prosperity from the date of its acquisition on January 5, 2015. All intercompany balances and transactions have been eliminated in consolidation.

(b)  Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

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(c)  Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, note receivable, notes and loans payable, accounts payable, and accrued expenses payable. Except for the note receivable, the fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments. Based on comparable instruments with similar terms, the fair value of the note receivable approximates its carrying value.

Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

(d)  Cash and Cash Equivalents

The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents.

(e)  Inventory

All inventories are finished goods, and stated at the lower of cost or market. Cost is principally determined using the first-in, first-out (FIFO) method.

(f)  Property and Equipment, Net

Property and equipment, net, is stated at cost less accumulated depreciation.  Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets.  Maintenance and repairs are charged to operations as incurred.

(g)  Intangible Assets, Net

Intangible assets, net, are stated at cost less accumulated amortization.  Amortization is calculated using the straight-line method over the estimated economic lives of the respective assets.

(h)  Goodwill and Intangible Assets with Indefinite Lives

The Company does not amortize goodwill and intangible assets with indefinite useful lives, but instead tests for impairment at least annually.  When conducting the annual impairment test for goodwill, the Company compares the estimated fair value of a reporting unit containing goodwill to its carrying value.  If the estimated fair value of the reporting unit is determined to be less than its carrying value, goodwill is reduced and an impairment loss is recorded.

 (i)  Long-lived Assets

The Company reviews long-lived assets held and used, intangible assets with finite useful lives and assets held for sale for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  If an evaluation of recoverability is required, the estimated undiscounted future cash flows associated with the asset is compared to the asset’s carrying amount to determine if a write-down is required.  If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value.

(j)  Revenue Recognition

The Company recognizes revenue over agreed periods of services delivered to customers, provided there are no uncertainties regarding customer acceptance, persuasive evidence of an arrangement exists; the sales price is fixed or determinable; and collectability is deemed probable.

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(k) Stock-Based Compensation

Stock-based compensation is accounted for at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 718, “Compensation – Stock Compensation” (“ASC718”) and ASC 505-50, Equity – Based Payments to Non-Employees.

In addition to requiring supplemental disclosures, ASC 718 addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments.  ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.

In accordance with ASC 505-50, the Company determines the fair value of the stock based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached, or (2) the date at which the counterparty’s performance is complete.

Options and warrants

The fair value of stock options and warrants is estimated on the measurement date using the Black-Scholes model with the following assumptions, which are determined at the beginning of each year and utilized in all calculations for that year:

·

Risk-Free Interest Rate.

We utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of our awards.  

·

Expected Volatility.

We calculate the expected volatility based on a volatility index of peer companies as we did not have sufficient historical market information to estimate the volatility of our own stock.

·

Dividend Yield.

We have not declared a dividend on its common stock since its inception and have no intentions of declaring a dividend   in the foreseeable future and therefore used a dividend yield of zero.

·

Expected Term.

The expected term of options granted represents the period of time that options are expected to be outstanding.  We estimated the expected term of stock options by using the simplified method.  For warrants, the expected term represents the actual term of the warrant.

·

Forfeitures.

Estimates of option forfeitures are based on our experience. We will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

(l)  Advertising

Advertising costs are expensed as incurred and amounted to $35,312 and $10,301 for the nine months ended September 30, 2017 and 2016, respectively.      

(m) Research and Development

Research and development costs are expensed as incurred.

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(n)  Income Taxes

Income taxes are accounted for under the assets and liability method.  Current income taxes are provided in accordance with the laws of the respective taxing authorities.  Deferred income taxes are provided for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is not more likely than not that some portion or all of the deferred tax assets will be realized.

The Company has adopted the provisions required by the Income Taxes topic of the FASB Accounting Standards Codification.  The Codification Topic requires the recognition of potential liabilities as a result of management’s acceptance of potentially uncertain positions for income tax treatment on a “more-likely-than-not” probability of an assessment upon examination by a respective taxing authority.  The Company believes that it has not taken any uncertain tax positions and thus has not recorded any liability.

(o)  Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed on the basis of the weighted average   number of common shares outstanding during the period.

Diluted net income (loss) per common share is computed on the basis of the weighted average number of common shares and dilutive securities (such as stock options and convertible securities) outstanding.  Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation. For the three and nine months ended September 30, 2016, the diluted net loss per share calculation excluded the effect of convertible notes payable, Series A preferred stock and stock options outstanding (see Notes 7, 8 and 10).

(p)  Recent Accounting Pronouncements

Certain accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and therefore have not yet been adopted by the Company.  These include:

In August 2014, the FASB issued ASU 2014-15 “Disclosure about an Entity’s Ability to Continue as a Going Concern”. The update establishes management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern including related disclosures.

In 2016, the FASB issued ASU 2016-2 (topic 842) which establishes a new lease accounting model for lessees. Under the new guidance, lessees will be required to recognize right of use assets and liabilities for most leases having terms of 12 months or more.

The impact on the Company’s financial statements has not yet been determined.

(q) Reclassifications

Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current year presentation. These reclassification adjustments had no effect on the Company's previously reported net income.

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NOTE 5 – Note Receivable

At September 30, 2017 and December 31, 2016, the $39,000 note receivable bears interest at a rate of 3% per annum and is due November 30, 2020. The receivable arose from the Company’s sale of its 50% interest in Stock Market Manager, Inc. to Endeavour Cooperative Partners, LLC (“Endeavour”) on November 30, 2015. Endeavour is affiliated with Carl Dilley, a Company director.

Expected future amortization expense for intangible assets as of September 30, 2017 follows:

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The derivative liability of the convertible notes payable at September 30, 2017 consisted of:

The above convertible notes contain a variable conversion feature based on the future trading price of the Company common stock. Therefore, the number of shares of common stock issuable upon conversion of the notes is indeterminate. Accordingly, we have recorded the fair value of the embedded conversion features as a derivative liability at the respective issuance dates (or amendment dates) of the notes ($437,575 total for the nine months ended September 30, 2017) and charged the applicable amounts to debt discounts ($179,250 total for the nine months ended September 30, 2017) and the remainder to other expense ($258,325 total for the nine months ended September 30, 2017). The increase (decrease) in the fair value of the derivative liability from the respective issuance dates (or amendment dates) of the notes to the measurement date ($236,854 total decrease for the nine months ended September 30, 2017) is charged (credited) to other expense (income). The fair value of the derivative liability of the notes is measured at the respective issuance dates and quarterly thereafter using the Black Scholes option pricing model. Assumptions used for the calculations of the derivative liability of the notes at September 30, 2017 include (1) stock price of $0.0092 per share, (2) exercise price of $0.0045 per share, (3) terms ranging from 0 days to 312 days, (4) expected volatility of 281% and (5) risk free interest rates ranging from 0.00% to 1.28%.

NOTE 8 – Preferred Stock

The Company issued a total of 10 shares of CANB Series A Preferred Stock (5 shares to MWL and 5 shares to Marco Alfonsi) in exchange for the retirement of a total of 100,000,000 shares of CANB common stock (50,000,000 shares from MWL and 50,000,000 shares from Marco Alfonsi).

Each share of Series A Preferred Stock is convertible into 10,000,000 shares of CANB common stock and is entitled to 20,000,000 votes.

NOTE 9 – Common Stock

On January 2, 2016, the Company issued 104,500 shares of CANB common stock to a technical consultant in satisfaction of a $12,864 account payable to that vendor.

On March 9, 2016, the Company issued 140,000 shares of CANB common stock to a technical consultant in satisfaction of a $8,693 account payable to that vendor.

On October 6, 2016, the Company issued 400,000 shares of CANB common stock to a technical consultant in satisfaction of a $25,617 account payable to that vendor.

On February 2, 2017, the Company issued 200,000 shares of CANB common stock to a financial consultant for services rendered. The $11,000 fair value of the 200,000 shares of CANB common stock was charged to consulting fees in the three months ended March 31, 2017.

On February 13, 2017, the Company issued 1,685,900 shares of CANB common stock to the brother of the Chief Executive Officer of the Company in satisfaction of notes payable of $15,000 and accrued interest payable of $1,859.

On March 22, 2017, the Company issued 6,785,316 shares of CANB common stock to a lender in satisfaction of notes payable of $50,000 and accrued interest payable of $5,979.

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On April 17, 2017, the Company issued 5,000,000 shares of CANB common stock to a consultant for services rendered. The $103,500 fair value of the 5,000,000 shares of CANB common stock will be charged to consulting fees in the three months ended June 30, 2017.

On June 21, 2017, the Company issued 250,000 shares of CANB common stock to a consultant for services rendered. The $5,975 fair value of the 250,000 shares of CANB common stock will be charged to consulting fees in the three months ended June 30, 2017.

On June 28, 2017, the Company issued 250,000 shares of CANB common stock to a consultant for services rendered. The $5,000 fair value of the 250,000 shares of CANB common stock will be charged to consulting fees in the three months ended June 30, 2017.

On August 25, 2017, the Company issued 7,142,857 shares of CANB common stock to a lender in satisfaction of notes payable of $50,000 and accrued interest payable of $3,331.

On August 25, 2017, the Company issued 250,000 shares of CANB common stock to a consultant for services rendered. The $3,750 fair value of the 250,000 shares of CANB common stock will be partially charged to consulting fees in the three months ended September 30, 2017.

On September 5, 2017, the Company issued 250,000 shares of CANB common stock to a consultant for services rendered. The $4,375 fair value of the 250,000 shares of CANB common stock will be partially charged to consulting fees in the three months ended September 30, 2017.

On September 7, 2017, the Company issued 2,500,000 shares of CANB common stock to a consultant for services rendered. The $32,750 fair value of the 2,500,000 shares of CANB common stock will be charged to consulting fees in the three months ended September 30, 2017.

On September 11, 2017, the Company issued 250,000 and 250,000 shares of CANB common stock to two consultants for services rendered, respectively. The $3,350 fair value of each 250,000 shares of CANB common stock will be partially charged to consulting fees in the three months ended September 30, 2017.

On September 25, 2017, the Company issued 2,500,000 shares of CANB common stock to a consultant for services rendered. The $2,525 fair value of the 2,500,000 shares of CANB common stock will be partially charged to consulting fees in the three months ended September 30, 2017.

Issued and outstanding stock options as of September 30, 2017 consist of:

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Issued and outstanding warrants as of September 30, 2017 consist of:

NOTE 11 – Income Taxes

No provisions for income taxes were recorded for the periods presented since the Company incurred net losses in those periods.

The provisions for (benefits from) income taxes differ from the amounts determined by applying the U.S. Federal income tax rate of 35% to pretax income (loss) as follows:

Deferred income tax assets consist of:

Based on management's present assessment, the Company has not yet determined it to be more likely than not that a deferred income tax asset of $1,344,080 attributable to the future utilization of the $3,829,650 net operating loss carryforward as of September 30, 2017 will be realized. Accordingly, the Company has maintained a 100% allowance against the deferred income tax asset in the consolidated financial statements at September 30, 2017. The Company will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carryforward expires in years 2025, 2026, 2027, 2028, 2029, 2030, 2031, 2032, 2033, 2034, 2035, 2036, and 2037 in the amount of $1,369, $518,390, $594,905, $686,775, $159,141, $151,874, $135,096, $166,911, $311,890, $25,511, $338,345, $386,297, and $353,146, respectively.

Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs.  Therefore, the amount available to offset future taxable income may be limited.

The Company's U.S. Federal and state income tax returns prior to 2014 are closed and management continually evaluates expiring statutes of limitations, audits, proposed settlements, changes in tax law and new authoritative rulings. The statute of limitations on the 2013 tax year returns expired in March 2017.

The Company recognizes interest and penalties associated with uncertain tax positions as part of the income tax provision and would include accrued interest and penalties with the related tax liability in the consolidated balance sheets. There were no interest or penalties paid during 2017 and 2016.

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NOTE 12 – Commitments and Contingencies

Employment Agreements

On May 14, 2015, the Company executed an Executive Employment Agreement with Marco Alfonsi (“Alfonsi”) for Alfonsi to serve as the Company's chief executive officer for cash compensation of $5,000 per month (increased to $6,000 per month in August 2015). Pursuant to the agreement, the Company issued 10,000,000 restricted shares of CANB common stock to Alfonsi on June 14, 2015. Alfonsi may terminate his employment upon 30 days written notice to the Company. The Company may terminate Alfonsi's employment upon written notice to Alfonsi by a vote of the Board of Directors.

On August 17, 2015, the Company executed an Employment Agreement with Romuald Stone ("Stone") for Stone to serve as the Company's Chief Technology Officer for cash compensation of $12,500 per month. Effective August 17, 2016, the agreement terminated.

Consulting Agreements

On September 6, 2017, the Company executed a Consulting Agreement with T8 Partners LLC (“T8”) for T8 to serve as the Company's consultant for stock compensation of a total of 10,000,000 restricted shares. Pursuant to the agreement, the Company issued 2,500,000 restricted shares of CANB common stock to T8 on September 7, 2017. Effective October 27, 2017, the Company terminated the agreement due to non-performance by T8.

Lease Agreements

On December 1, 2014, Prosperity entered into a lease agreement with KLAM, Inc. for office space in Hicksville, New York for an initial term of one year commencing December 1, 2014. The lease provides for monthly rentals of $2,500 and provides Prosperity an option to renew the lease after the initial term. The Company has continued to occupy this space after November 30, 2015 under a month to month arrangement at $2,500 per month. KLAM, Inc. is controlled by the wife of the Company's chief executive officer Marco Alfonsi.

On September 11, 2015, the Company executed a lease agreement with an unrelated third party for office space in Hicksville, New York for a term of 37 months. The lease provides for monthly rentals of $2,922 for lease year 1, $3,009 for lease year 2, and $3,100 for lease year 3. The lease also provides for additional rent based on increases in base year operating expenses and real estate taxes.

Rent expense was $48,795 for each of the nine months ended September 30, 2017 and 2016.

At September 30, 2017, the future minimum lease payments under non-cancellable operating leases were:

Major Customers

For the nine months ended September 30, 2017, two customers accounted for approximately 45% and 29%, respectively, of total service revenues.

For the nine months ended September 30, 2016, three customers accounted for approximately 36%, 30%, and 15%, respectively, of total service revenues.

Public Offering of Units

On August 2, 2016, the Company’s Registration Statement on Form S-1 was declared effective by the Securities and Exchange Commission. On a self-underwritten basis, the Company was offering up to 40,000,000 Units at a price of $0.05 per Unit or $2,000,000 maximum. Each Unit consisted of one share of Company common stock and one warrant to purchase ½ share of Company common stock of a price of $0.10 per share for a period of three years. There was no minimum offering amount or escrow required as a condition to closing. On May 5, 2017, the Company withdrew the Registration Statement; no units were sold in the offering.

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Litigation

On November 25, 2016, the landlord under the lease agreement dated September 11, 2015 (“QPR”) served us a Notice of Default. On December 5, 2016, QPR filed a Petition to Recover Possession of Real Property seeking unpaid rent of $12,540 (as of November 21, 2016) and possession of the premises. The Company subsequently paid QPR and QPR dismissed the action.

NOTE 13 – Related Party Transactions

ProAdvanced Group, Inc. (“PAG”), an entity controlled by the Company’s chief executive officer, is a customer of CANB. At September 30, 2017, CANB had an account receivable from PAG of $1,190.

Island Stock Transfer (“IST”), an entity controlled by Carl Dilley, a Company director, is both a customer and vendor of CANB. As of June 30, 2017, CANB had an account receivable from IST of $3,500 and an account payable to IST of $2,351. For the nine months ended September 30, CANB had revenues from IST of $3,500.

Stock Market Manager, Inc. (see Note 5) is also an entity controlled by Mr. Dilley. At September 30, 2017, CANB had an account payable to Stock Market Manager Inc. of $1,676.