SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________to__________________________
Commission File Number:000-54582
United Cannabis Corporation
(Exact name of Registrant as specified in its charter)
| | |
Colorado | | 46-5221947 |
(State or other jurisdiction of incorporation or formation) | | (I.R.S. employer identification number) |
1600 Broadway, Suite 1600
Denver, Colorado 80202
(Address of principal executive offices)
(303) 386-7104
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| | |
Large accelerated filer ¨ | | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of May 16, 2016, the registrant had shares 44,988,500 of common stock outstanding.
FORWARD-LOOKING STATEMENTS
The information in this report contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”), which are subject to the “safe harbor” created by those sections. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “should,” “could,” “predicts,” “potential,” “continue,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions, and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. In evaluating these statements, you should specifically consider various factors, uncertainties and risks that could affect our future results or operations. These factors, uncertainties and risks may cause our actual results to differ materially from any forward-looking statement set forth in this Form 10-Q. You should carefully consider these risk and uncertainties described and other information contained in the reports we file with or furnish to the SEC before making any investment decision with respect to our securities. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
UNITED CANNABIS CORPORATION
INDEX
2
PART 1. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | |
| | March 31,
2016 | | | December 31, 2015 | |
ASSETS | | (Unaudited) | | | (Audited) | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 28,298 | | | $ | 118,420 | |
Account receivable, net | | | 86,306 | | | | 53,435 | |
Due from related parties | | | 8,284 | | | | 8,284 | |
Prepaid expenses | | | — | | | | 56,341 | |
Deferred financing costs, net | | | 11,572 | | | | 32,400 | |
Total current assets | | | 134,460 | | | | 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 | | $ | 269,858 | | | $ | 594,428 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLERS’ (DEFICIT) EQUITY | | | | | | | | |
LIABILITIES | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 62,665 | | | $ | 104,238 | |
Accrued expenses | | | 281,785 | | | | 928,533 | |
Derivative liabilities | | | 628,329 | | | | 383,581 | |
Current portion of deferred revenue | | | 380,000 | | | | 380,000 | |
Notes payable | | | 615,000 | | | | 775,000 | |
Convertible notes payable, net of $92,364 and $272,793 debt discount, respectively | | | 311,614 | | | | 108,207 | |
Total current liabilities | | | 2,279,393 | | | | 2,679,559 | |
Deferred revenue, net of current portion | | | 338,750 | | | | 383,750 | |
Total liabilities | | | 2,618,143 | | | | 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; 44,988,500 issued and outstanding at March 31, 2016 and December 31, 2015, respectively | | | 3,698,342 | | | | 3,039,448 | |
Accumulated deficit | | | (6,046,627 | ) | | | (5,508,329 | ) |
Total stockholders’ deficit | | | (2,348,285 | ) | | | (2,468,881 | ) |
Total liabilities and stockholders’ deficit | | $ | 269,858 | | | $ | 594,428 | |
See accompanying notes to condensed unaudited financial statements.
1
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2016 | | | 2015 | |
Revenues | | | | | | |
Revenues, non-affiliated | | $ | 245,390 | | | $ | 84,405 | |
Revenues, affiliate | | | — | | | | 4,425 | |
Total revenues | | | 245,390 | | | | 88,830 | |
Cost of revenues | | | (100,023 | ) | | | (27,055 | ) |
Gross Profit | | | 145,367 | | | | 61,775 | |
Operating expenses | | | | | | | | |
General and administrative | | | (208,170 | ) | | | (559,162 | ) |
Loss from operations | | | (62,803 | ) | | | (497,387 | ) |
Other costs and expenses | | | | | | | | |
Loss on settlement of disputed terms of warrant | | | — | | | | (768,602 | ) |
Loss on derivative liabilities | | | (155,156 | ) | | | — | |
Loss on early extinguishment of debt | | | (84,139 | ) | | | — | |
Interest expense | | | (56,581 | ) | | | (19,911 | ) |
Amortization of debt discount | | | (179,620 | ) | | | — | |
Equity in net loss of unconsolidated Affiliate | | | — | | | | (50,000 | ) |
Loss before provision for taxes on income | | | (538,299 | ) | | | (1,335,900 | ) |
Provision for taxes on income | | | — | | | | — | |
Net Income (Loss) | | $ | (538,299 | ) | | $ | (1,335,900 | ) |
| | | | | | | | |
Basic loss per common share, basic and diluted | | $ | (0.01 | ) | | $ | (0.03 | ) |
Basic and diluted weighted average number of shares outstanding | | | 44,988,500 | | | | 44,407,767 | |
See accompanying notes to condensed unaudited financial statements.
2
UNITED CANNABIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2016 | | | 2015 | |
| | | | | | |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (538,299 | ) | | $ | (1,335,900 | ) |
Increase in accounts receivable | | | (32,871 | ) | | | (27,604 | ) |
Increase in due from related parties | | | — | | | | 3,112 | |
Increase (decrease) in prepaid expenses | | | 56,341 | | | | (3,845 | ) |
Decrease in deferred financing costs | | | 20,828 | | | | — | |
Increase (Decrease) in accounts payable and accrued expenses | | | (1,418 | ) | | | 103,181 | |
Decrease in deferred revenue | | | (45,000 | ) | | | (45,000 | ) |
Amortization of debt discount | | | 179,620 | | | | — | |
Loss on revaluation of derivative liabilities | | | 155,156 | | | | — | |
Stock based compensation | | | 46,382 | | | | 214,037 | |
Loss on early extinguishment of debt | | | 84,139 | | | | — | |
Loss on settlement of disputed warrants | | | — | | | | 768,602 | |
Equity in net loss of unconsolidated subsidiary | | | — | | | | 50,000 | |
Cash used in operations | | | (75,122 | ) | | | (273,417 | ) |
Cash flow from investing activities: | | | | | | | | |
Purchase of intangible assets | | | — | | | | (12,385 | ) |
| | | — | | | | (12,385 | ) |
Cash flow from financing activities: | | | | | | | | |
Proceeds from convertible note | | | 81,978 | | | | — | |
Payment of convertible note including prepayment penalty | | | (81,978 | ) | | | — | |
Payments on notes payable | | | (15,000 | ) | | | — | |
| | | (15,000 | ) | | | — | |
Net Cash flows | | | (90,122 | ) | | | (285,802 | ) |
Cash and cash equivalents, beginning of period | | | 118,420 | | | | 321,353 | |
Cash and cash equivalents, end of period | | $ | 28,298 | | | $ | 35,551 | |
| | | | | | | | |
Supplemental cash flow disclosures | | | | | | | | |
Cash paid for interest | | $ | — | | | | — | |
Cash paid for income taxes | | $ | — | | | | — | |
See accompanying notes to condensed unaudited financial statements.
3
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
NOTE 1 –BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
On March 19, 2014, we affected a four-for-one stock split of our outstanding shares of common stock. All references to shares of our common stock in our condensed 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", "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 have entered into a new business and 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.
4
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 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.
As of March 31, 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 government’s 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 periods ended March 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 March 31, 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 do not have cash equivalents as of March 31, 2016 and December 31, 2015.
5
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 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 customer’s financial condition and credit history, and current economic conditions. Our allowance for doubtful accounts was $4,340 as of March 31, 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.
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) 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 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.
6
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
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.
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2016 | | | 2015 | |
Warrants to purchase common stock | | | 708,334 | | | | 3,170,044 | |
Stock options | | | 3,680,000 | | | | 600,000 | |
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UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
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 months ended March 31, 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 Company personnel, under the terms of trust agreements, and thus, such 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 Revenue:
| | | | | | | | |
| | Three Months Ended
March 31, | |
| | 2016 | | | 2015 | |
Customer A | | | 92 | % | | | 51 | % |
Customer B | | | 8 | % | | | 26 | % |
Customer C | | | — | % | | | 17 | % |
Percentage of Accounts Receivable:
| | | | | | | | |
| | Three Months Ended
March 31, | |
| | 2016 | | | 2015 | |
Customer A | | | 52 | % | | | 68 | % |
Customer B | | | 38 | % | | | 30 | % |
Customer C | | | 9 | % | | | 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 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 three months ended March 31, 2016, we incurred losses of $538,299 and used cash of $75,122 in operating activities. As at March 31, 2016, we had a working capital deficit of $2,144,125 and an accumulated deficit of $6,046,627. 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.
8
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
NOTE 4 – INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES
On June 9, 2014, we received 1,187,500 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 $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 exchange of the 1,100,000 shares of common stock of WMD to the unrelated third party, we own to 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:
| | | | | | | | |
| | March 31,
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 40,000 shares of our common stock valued at $88,000 based on the previous day’s 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 March 31, 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
| | | | | | | | |
| | March 31, 2016 | | | December 31, 2015 | |
Accrued consulting fees | | $ | 110,000 | | | $ | 110,000 | |
Accrued wages and related expenses | | | 12,113 | | | | 629,780 | |
Accrued interest expense | | | 34,387 | | | | 101,185 | |
Accrued other expenses | | | 67,500 | | | | 87,568 | |
| | $ | 224,000 | | | $ | 928,533 | |
The $110,000 accrued consulting fees at March 31, 2016 and December 31, 2015 represent fees owed to consultants working on a research and development project that is approximately 80% complete.
9
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
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 March 31, 2016
| | | | | | | | | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Derivative liabilities - convertible notes | | $ | — | | | $ | — | | | $ | 391,102 | | | $ | 391,102 | |
Derivative liabilities - note payable | | | — | | | | 145,023 | | | | — | | | | 145,023 | |
Derivative liabilities - warrants | | | — | | | | 92,204 | | | | — | | | | 92,204 | |
Total | | $ | — | | | $ | 237,227 | | | $ | 391,102 | | | $ | 628,329 | |
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 $9,594 thereon in accordance with fair value measurement guidelines. For the three months ended March 31, 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 | | | 70,082 | |
Additions to conversion features recorded as interest expense | | | 7,836 | |
Extinguishment of derivative liabilities associated with payment of convertible note | | | (70,397 | ) |
Derivative liabilities as of March 31, 2016 | | $ | 391,102 | |
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:
| | | | | | | | |
| | March 31,
2016 | | | December 31,
2015 | |
Deferred revenue - WeedMD | | $ | 518,750 | | | $ | 563,750 | |
Deferred revenue - FoxBarry | | | 200,000 | | | | 200,000 | |
| | | 718,750 | | | | 763,750 | |
Less - current portion | | | (380,000 | ) | | | (380,000 | ) |
Deferred revenue, net of current portion | | $ | 338,750 | | | $ | 383,750 | |
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 recent discussions 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 month period ending March 31, 2016 and 2015, we recognized a total of $45,000 of revenue applicable to this arrangement, respectively. At March 31, 2016, we expect to recognize $180,000 of the remaining $518,750 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.
10
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
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. We will recognize deferred royalty revenue based on actual applicable sales as defined in the agreement. During the three months ended March 31, 2016 and 2015, we did not recognize any deferred revenue related to this agreement. We have classified the $200,000 as a current liability on our condensed consolidated balance sheets as we expect to recognize this amount during the next twelve months.
NOTE 11 – NOTES PAYABLE
Our notes payable consisted of the following:
| | | | | | | | |
| | March 31,
2016 | | | December 31,
2015 | |
Note payable - WeedMD | | $ | — | | | $ | 175,000 | |
Note payable - Slainte Ventures, LLC | | | 600,000 | | | | 600,000 | |
Note payable – Donaldson Consulting | | | 15,000 | | | | — | |
Total notes payable | | $ | 615,000 | | | $ | 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%.
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.
| | | | | | | | |
| | March 16,
2016 | | | March 31,
2016 | |
Expected life (years) | | | 5.0 | | | | 4.96 | |
Risk-free interest rate | | | 1.41 | % | | | 1.21 | % |
Expected volatility | | | 226 | % | | | 227 | % |
11
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
In connection with these warrants, the Company recognized a loss on the change in fair value of warrant liability of $229,609 during the three months ended March 31, 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.
NOTE 12 – CONVERTIBLE NOTES PAYABLE
2015 Convertible Notes
During the year ended 2015, we issued three convertible promissory notes to unaffiliated third parties. The net proceeds from these transactions were are used for general working capital purposes. During the three months ended March 31, 2016 we issued one convertible promissory note, the net proceeds from which was used to pay the principal and accrued interest of one 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 March 31, 2016:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Issue
Date | | Issued To | | | | Maturity
Date | | Interest
Rate | | | Default
Rate | | | Base
Conversion
Rate | | VCR
Look
Back
Period | | VCR
Calculated
Using | | Principal
Balance | |
| | | | | | | | | | | | | | | | | | | | | |
10/12/15 | | SJS
Investments | | Unsecured | | 7/8/16 | | | 12 | % | | | 18 | % | | | 55 | % | 10
Days | | 5 Lowest
trades | | $ | 102,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
12/9/15 | | Tangiers
Investment
Group | | Secured
by
Certain
Assets | | 12/8/16 | | | 10 | % | | | 20 | % | | | 55 | % | 10
Days | | 3 lowest
closing
bids | | | 220,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
3/30/16 | | Slainte
Ventures | | Unsecured | | 12/30/16 | | | 12 | % | | Mandatory Conversion | | | | N/ | A | 10
Days | | 10 day
average | | | 81,978 | |
| | | | | | | | | | | | | | | | | | | | | | | $ | 403,978 | |
The convertible 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.
12
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
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 Note is outstanding and this amortization is included in amortization of debt discount in our consolidated statements of operations. If a 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 convertible 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 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.
The 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 convertible 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 March 31, 2016, we have reserved 10.2 million shares of our authorized but unissued common stock for potential conversion of the convertible notes.
Should we default on a conversion or repayment of a convertible notes, 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.
As of December 31, 2015, we had unamortized deferred financing fees of $32,400 outstanding in connection with the issuance of our convertible notes. During the three months ended March 31, 2016, we recognized $20,827 of amortization of deferred financing costs. This amount is included in interest expense in our consolidated statements of operations.
The aggregate fair value of the derivative liabilities applicable to our convertible 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 three months ended March 31, 2016, we recognized $179,620 of amortization related to the convertible notes and recorded this amount as amortization of debt discount in our consolidated statements of operations.
We recognized $9,628 of interest expense applicable to our convertible notes during the three months ended March 31, 2016, and included this amount of accrued interest payable as accrued expenses on our consolidated balance sheets.
13
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
Slainte Convertible Note
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.
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 these 3,080,000 options totaling $612,512, which 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.
14
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
The following table summarizes our stock options outstanding as of March 31, 2016:
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2016 | |
| | Number of Shares | | | Weighted Average Remaining Life (years) | | | Weighted Average Exercise Price | |
Stock options outstanding, beginning of period | | | 600,000 | | | | 9.8 | | | $ | 0.70 | |
Issued | | | 3,080,000 | | | | 10.0 | | | | 0.20 | |
Exercised | | | — | | | | — | | | | — | |
Expired | | | — | | | | — | | | | — | |
Stock options outstanding, end of period | | | 3,680,000 | | | | 9.6 | | | $ | 0.26 | |
Stock options exercisable, March 31, 2016 | | | 3,680,000 | | | | 9.6 | | | $ | 0.26 | |
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 day’s 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.
On February 10, 2015, 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. On February 10, 2015, we cancelled the Warrant and recorded the $218,788 fair value as an increase to common stock.
Common Stock Issued For Services
On March 2, 2015, we issued 30,000 shares of common stock valued at $42,600, based on the previous trading day’s closing price, as consideration for consulting services from an independent contractor. The $42,600 is included in included in general and administrative expense in our condensed consolidated statements of operations.
15
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
Warrants:
The following table summarizes our share warrants outstanding as of March 31, 2016 and December 31, 2015:
| | | | | | | | | | | | |
| | Three Months Ended March 31, 2016 | |
| | Number of Shares | | | Weighted Average Remaining Life (years) | | | Weighted Average Exercise Price | |
Warrants outstanding, December 31, 2015 | | | 3,000,000 | | | | 1 | | | $ | 12.00 | |
Issued | | | 708,334 | | | | 5 | | | | 0.18 | |
Issuable under terms of the amended Slainte note payable | | | 265,914 | | | | | | | | | |
Exercised | | | — | | | | — | | | | — | |
Expired | | | (3,000,000 | ) | | | — | | | | — | |
Warrants outstanding, end of period | | | 974,248 | | | | 4.95 | | | $ | 0.18 | |
Warrants exercisable, March 31, 2016 | | | 974,248 | | | | 4.95 | | | $ | 0.18 | |
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 three months ended March 31, 2016 and 2015 is as follows:
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2016 | | | 2015 | |
Share-based compensation expense – shares issued for consulting services | | $ | 46,382 | | | $ | 42,600 | |
Share-based compensation expense – amortization of shares issued for prepaid services | | | — | | | | 66,437 | |
Share-based compensation expense – accrual of estimated share-based awards | | | — | | | | 105,000 | |
| | $ | 46,382 | | | $ | 214,037 | |
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 three months ended March 31, 2016, we recognized $46,382 of 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 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 March 31, 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.
16
UNITED CANNABIS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
Legal Proceedings
We were not subject to any legal proceedings during the three months ended March 31, 2016, and, to the best of our knowledge, no legal proceedings are pending or threatened.
NOTE 16 – SUBSEQUENT EVENTS
On April 6, 2016, we borrowed $75,000, from Slainte Ventures, LLC, and used the proceeds to repay a portion of the 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 a portion of the principal and interest applicable 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 our operations subsequent to March 31, 2016, to the date these condensed consolidated financial statements were issued, and have determined that, other that as disclosed above, we do not have any material subsequent events to disclose in these condensed financial statements.
17
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We were originally formed on November 15, 2007 as a California corporation under the name MySkin, Inc. 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 former President of the Company.
In early 2014 we decided to exit the medical spa management business and change our focus to creating unique products which can be used to treat a wide range of diseases that can be used by patients globally. Our products are subject to all existing marijuana laws in the United States.
We own intellectual property relating to the legalized growth, production, manufacture, marketing, management, utilization and distribution of medical and recreational marijuana and marijuana infused products. We have entered into what we believe are significant agreements with partners outside of Colorado where we have agreed to provide intellectual property and consulting services. We also have formalized strategic relationships with four other businesses in the marijuana industry.
Our primary goal is to advance the use of phytocannabinoids therapeutics in medicine through research, product development and education. We are dedicated to improving the lives of patients. We provide the intellectual property, patent-pending technology, trusted brands, clinical data, technical training, sales tools and methodologies necessary to assist our clients businesses for success. Our ACT Now Program utilizes our patent-pending Prana Bio Nutrient Medicinals with a HIPPAA compliant electronic health record (“EHR”) software that enables physicians to create comprehensive sequencing charts specific to their patients’ medical aliments. The ACT Now EHR software allows for global monitoring, patient management, and effective cannabinoid therapy protocols.
Our Prana Bio Nutrient Medicinal products are designed to help supplement deficiencies related to the endocannabinoid system including pain, neuropathy, arthritis, MS, IBS, autism, seizures, eczema, sleep, anxiety, head trauma, opioid dependency and clinical endocannabinoid deficiencies. The endocannabinoid system is a signaling system within the human body that utilizes hundreds of receptors to help maintain homeostasis between the central nervous system and the immune system.
Our Prana Aromatherapy Transdermal Roll-on line uses a proprietary blend of essential oils infused with cannabinoids designed to provide targeted and large surface relief with combinations of aromatherapy. The transdermal is a part of the complete patent-pending Prana Bio Nutrient Medicinals line, which is offered in 5 categories (P1, P2, P3, P4, P5), with three delivery methods (sublingual, capsules, topical). Dosages range from 1mg to 50mg, are available in both raw and activated formulations, and paired with specific cannabis derived terpene profiles.
Our short term plan involves licensing the technology associated with our products to companies which are licensed to grow and sell medical marijuana in states where medical marijuana is legal. As of April 30, 2016 we had signed license agreements with two companies.
Our long term plan is to perform clinical trials on the most promising products in our product line that are currently being manufactured in California. We intend to perform our phase I clinical trials at the West Indies University in Jamaica. We will fund the initial clinical trials by licensing our Prana product line to manufacturers in all legal territories in the United States and with revenue received for providing technical, financial and licensing consulting services. After our phase 1 clinical trials are complete, we plan on partnering with companies that have expertise in global pharmaceutical distribution and research for phase II and III clinical trials in the United States.
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Results of Operations
Material changes in line items in our Statement of Operations for the three months ended March 31, 2016 as compared to the same period last year, are discussed below:
| | | | |
| | Increase (I) or | | |
Item | | Decrease (D) | | Reason |
| | | | |
Revenues | | I | | Major dispensary in California aggressively selling one of our products licensed to them. |
| | | | |
Gross profit, as a % of revenue | | D | | Slightly lower profit margins on license fees and reduced amount of consulting as a percentage of total revenue. |
| | | | |
General and Administrative expenses | | D | | Lower amounts spent on sales and marketing, research and development, and salaries and wages. |
The factors that will most significantly affect future operating results will be:
| | |
| · | State by state regulatory changes in the United States; |
| · | Political party influence and which party(s) will gain control of Congress; and |
| · | Rescheduling of marijuana by the federal government. |
Capital Resources and Liquidity
Our material sources and (uses) of cash during the three months ended March 31, 2016 and 2015 were:
| | | | | | | | |
| | 2016 | | | 2015 | |
Cash used in operations | | $ | (75,122 | ) | | $ | (273,417 | ) |
Payment on notes payable | | | (15,000 | ) | | | — | |
Acquisition of intangible assets | | | — | | | | (12,385 | ) |
General
Other than the repayment of our notes and convertible notes, we presently have no material capital commitments for the twelve months ending March 31, 2017.
Other than as disclosed above, we do not know of any:
| | |
| · | trends, demands, commitments, events or uncertainties that will result in, or that are reasonable likely to result in, our liquidity increasing or decreasing in any material way; or |
| · | any significant changes in our expected sources and uses of cash. |
We do not have any commitments or arrangements from any person to provide us with any equity capital.
During the next twelve months, we anticipate that we will incur approximately $832,000 of general and administrative expenses in order to execute our current business plan. We also expect to incur significant sales, marketing, research and development expenses during the next twelve months. We must obtain additional financing to continue our operations. We may not be able to obtain additional funding on terms that are favorable to us or at all. We may not be able to obtain sufficient funding to continue our operations, or if we do receive funding, to generate adequate revenues in the future or to operate profitably. These conditions raise substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
None.
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Significant Accounting Policies
See Note 2 to the financial statements included as part of this report for a description of our significant accounting policies.
Recent 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.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 to the financial statements included as part of this Report.
ITEM 4.
CONTROLS AND PROCEDURES.
An evaluation was carried out under the supervision and with the participation of our management, including our Principal Financial Officer and Principal Executive Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Disclosure controls and procedures are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Form 10-Q, is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and is communicated to our management, including our Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our management concluded that, as of March 31, 2016, our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6.
EXHIBITS.
| | |
Exhibits | | |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Security Exchange Act Rule 13a-14 and 15d-14. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Security Exchange Act Rule 13a-14 and 15d-14. |
| | |
32.1 | | Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101 | | XBRL Exhibits |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| UNITED CANNABIS CORPORATION |
| | |
May 20, 2016 | By: | /s/ Earnest Blackmon |
| | Earnest Blackmon |
| | Principal Executive and Financial Officer |
| | |
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