NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization and General Description of Business
Cannabis Science, Inc. (
We
or
the Company
), was incorporated under the laws of the State of Colorado, on February 29, 1996, as Patriot Holdings, Inc. On August 26, 1999, the Company changed its name to National Healthcare Technology, Inc. On June 6, 2007, the Company changed its name from National Healthcare Technology, Inc., to Brighton Oil & Gas, Inc., and converted to a Nevada corporation. On March 25, 2008 the Company changed its name to Gulf Onshore, Inc. On April 7, 2009, the Company changed its name to Cannabis Science, Inc., and obtained a new CUSIP number.
On May 7, 2009 the Company common shares commenced trading under the new stock symbol OTC: CBIS.
Cannabis Science, Inc. is at the forefront of medical marijuana research and development with two key drugs under development, namely CS-TATI-1 targeting both newly diagnosed and treatment-experienced patients with drug-resistant HIV strains, as well as those intolerant of currently available therapies and CS-S/BCC-1 targeting basal and squamous cell carcinomas. The Company works with world authorities on phytocannabinoid science targeting critical illnesses, and adheres to scientific methodologies to develop, produce, and commercialize phytocannabinoid-based pharmaceutical products. In sum, we are dedicated to the creation of cannabis-based medicines, both with and without psychoactive properties, to treat disease and the symptoms of disease, as well as for general health maintenance.
On November 15, 2013, the Company submitted a patent application N2010968 in Europe entitled "Composition for the Treatment of Neurobehavioral Disorders." The subject of the patent is development of cannabinoid-based formulations to treat a variety of neurobehavioral disorders, such as attention deficit hyperactivity disorder (ADHD), anxiety, and sleep disorders.
B. Basis of Presentation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in U.S. dollars. The Company
s fiscal year end is December 31.
The operating results of GGECO University, Inc. (
GGECO
), acquired on February 9, 2012, for the period February 10, 2012 through December 31, 2013 were consolidated with the consolidated financial statements of the Company for the year ended December 31, 2013 and 2012. The s-type corporation of GGECO was dissolved in 2012 and all operations combined into the Company
s. An independent valuation firm determined the intangibles acquired in GGECO to be $192,119 consisting of $150,000 for educational materials, $20,000 for the trade name, and $22,119 for the workforce. The total purchase price of $450,132, including acquired net liabilities, audit and valuation costs was recorded. A total of $66,274 in unimpaired goodwill remains at December 31, 2013.
The operating results of Cannabis Consulting, Inc. (
CCI
), acquired on March 21, 2012, for the period March 21, 2012 through December 31, 2012 and January 1, 2013 through December 31, 2013 were consolidated with the consolidated financial statements of the Company. The s-type corporation of CCI was dissolved in 2012 and all operations combined into the Company
s. The Company has allocated $125,000 of the purchase price to intangibles based on an internal valuation in addition to $22,000 of goodwill. No impairment in the fair market value of CCI was determined at December 31, 2013.
In 2012, the Company formed Cannabis Science Europe GmbH (
CSE
) to operate joint-venture operations with dupetit Natural Products Ltd. The JV asset was sold to Endocan Corporation (formerly X-Change Corporation) on December 12, 2012. No operations had commenced at the time of sale of the JV asset. For the year ended December 31, 2013, CSE had minimal expenditures in the normal course of winding up the entity subsequent to the disposal of the JV asset.
On May 6, 2013, the Company formed Cannabis Science International Holdings B.V. and on May 10, 2013, the Company formed Cannabis Science B.V. for the purpose of wholly-owned operating subsidiaries for the Company
s European and world-wide operations. No business or operating activities have commenced in the subsidiaries as of December 31, 2013.
C. Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined.
D. Basic and Diluted Net Income (Loss) Per Share
Under ASC 260, "Earnings Per Share" ("EPS"), the Company provides for the calculation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity. For the years ended December 31, 2013 and 2012, basic and diluted loss per share are the same since the calculation of diluted per share amounts would result in an anti-dilutive calculation.
E. Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
F. Long-Lived Assets
Under ASC Topic 360,
Property, Plant, and Equipment
, the Company is required to periodically evaluate the carrying value of long-lived assets to be held and used. ASC Topic 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets
carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.
G. Inventory
Inventories are stated at the lower of cost or market, using the average cost method. Cost includes materials related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue.
H. Fair Value Measurements
Under ASC Topic 820, the Company discloses the estimated fair values of financial instruments. The carrying amounts reported in the balance sheet for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
In accordance with the reporting requirements of ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments (see Note 4). The estimated fair value of other current assets and current liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.
I. Technology License and Royalties
The Company's former principal business activity focused on oil and gas exploration. We have divested ourselves of all oil and gas properties and are investigating other business opportunities. We have no technology licenses or rights to any royalties for formerly owned oil and gas properties.
J. Goodwill and Intangible Assets
Under ASC Topic 350 Intangibles-Goodwill and Other, goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. The Company did not identify any impairment on its outstanding goodwill from its most recent testing, which was performed as of October 1, 2013. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Other acquired intangible assets with finite lives, such as customer lists, are required to be amortized over the estimated lives. These intangibles are generally amortized using the straight line method over estimated useful lives of five years.
The Company tests the carrying value of goodwill and indefinite life intangible assets for impairment at least once a year and more frequently if an event or circumstance indicates the asset may be impaired. An impairment loss is recognized if the amount of the asset
s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset
s fair value less selling expenses or its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash generating units).
The Company is adopting ASU update number 2012-02
Intangibles
Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment whereby the Company will first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more than likely than not that the indefinite-lived intangible asset is impaired, then we are not required to take further action. If the Company concludes otherwise, then we will determine the fair value of the indefinite-lived intangible asset and perform the required quantitative impairment test by comparing the fair value with the carrying amount.
The Company did not record an impairment loss on goodwill for 2013 and recorded an impairment loss of $405,858 for year ended December 31, 2012 that was included in operating expenses and resulting net operating loss.
K. Research and Development Expenses
Under ASC Topic 730
Research and Development
, costs are expensed as incurred. These expenses include the costs of our proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements. Before a compound receives regulatory approval, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Once a compound receives regulatory approval, any milestone payments will be recorded as Identifiable intangible assets, less accumulated amortization and, unless the asset is determined to have an indefinite life, amortization of the payments will be on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter.
L. Income Taxes
Under ASC Topic 740,
Income Taxes
, the Company in required to account for its income taxes through the establishment of a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss and tax credit carry forwards. Deferred tax expense or benefit is recognized as a result of timing differences between the recognition of assets and liabilities for book and tax purposes during the year.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are recognized for deductible temporary differences and operating loss, and tax credit carry forwards. A valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized.
Unfiled Federal Tax Returns
In February 2009, the Company filed appropriate federal tax returns for the years ending December 31, 2003 through 2007 and may be subject to failure to file penalties. For the years ending December 31, 2008 through December 31, 2013, the Company has not filed any federal tax returns. The Company estimates that the amount of penalties, if any, will not have a material effect on the results of operations, cash flows or financial position. No provisions have been made in the financial statements for such penalties, if any.
The Company is working with its accountants to prepare and file overdue federal tax returns for 2008 through 2013, which are anticipated to be completed and filed by the end of fiscal 2014.
M. Marketable Securities
Under ASC Topic 210; Regulation S-X
Marketable Securities
, the Company is required to measure all marketable securities at their carrying value while recognizing unrealized gains and losses as of the reporting date.
N. Stock-Based Compensation
Under ASC Topic 718,
Compensation-Stock Compensation
, the Company is required to measure all employee share-based payments, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the statements of operations. The Company has adopted ASC Topic 718 (SFAS 123R) as of January 1, 2006 and recognizes stock-based compensation expense using the modified prospective method.
O. Revenue Recognition
Revenue is recognized at the time the educational materials or online seminars are provided and billed to the customer and collection of such fee is reasonably assured. License fees and joint-venture profit sharing when evidenced by executed agreements, and other fees are recognized when earned and collection is reasonably assured.
P. Development Stage Enterprise
The Company left the development stage as defined under the provisions of ASC Topic 915-10 during the year ended December 31, 2013. The Company is actively working on formulations for cannabinoid-based drug development, filing INDs, and commencing drug trials for FDA approved medicine. The Company
s businesses of GGECO and CCI acquired during 2012 are continuing and the Company
s other activities under license agreements with Apothecary has completed over a year of active business and development with expanding operations along with associated business of which the Company earned $76,938 in royalty license revenues in 2013 and expects increased revenues in 2014. The Company continues to work to develop its two key drugs, namely CS-TATI-1 targeting both newly diagnosed and treatment-experienced patients with drug-resistant HIV strains, as well as those intolerant of currently available therapies and CS-S/BCC-1 targeting basal and squamous cell carcinomas, along with its cannabinol (CBN) patent. In addition, the Company is working to progress licensing activity with Apothecary along with MOU activity with Prescription Vending Machines, Inc., a wholly-owned subsidiary of Medbox, Inc.
Q. Recent Accounting Pronouncements
During the year ended December 31, 2013 and through April 21, 2014, there were several new accounting pronouncements issued by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company
s financial statements.
R. Reclassifications
For comparative purposes, certain prior period consolidated financial statements have been reclassified to conform with report classifications of the current year.
2. GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern. The Company reported an accumulated deficit of $92,508,452 and had a stockholders
deficit of $3,518,819 at December 31, 2013.
In view of the matters described, there is substantial doubt as to the Company's ability to continue as a going concern without a significant infusion of capital. At December 31, 2013, the Company had insufficient operating revenues and cash flow to meet its financial obligations. There can be no assurance that management will be successful in implementing its plans. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We anticipate that we will have to raise additional capital to fund operations over the next 12 months. To the extent that we are required to raise additional funds to acquire research and growing facilities, and to cover costs of operations, we intend to do so through additional public or private offerings of debt or equity securities. There are no commitments or arrangements for other offerings in place, no guaranties that any such financings would be forthcoming, or as to the terms of any such financings.
Any future financing may involve substantial dilution to existing investors. We had been relying on our common stock to pay third parties for services which has resulted substantial dilution to existing investors.
3. MARKETABLE SECURITIES
See Note 5 for transaction details on 7,500,000 common shares in the Endocan Corporation (OTC: ENDO) with a fair market value of $225,000 held by the Company at December 31, 2013.
4.
FAIR VALUE MEASUREMENTS AND DISCLOSURES
ASC Topic 820,
Fair Value Measurement
, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities that the Company can access at the measurement date.
Level 2
Inputs to the valuation methodology are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs to the valuation methodology are unobservable inputs for the asset of liability.
The asset or liabilitys fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is a description of the valuation methodologies used for the Companys liabilities measured at fair value. There have been no changes in the methodologies used at December 31, 2013.
Investment in marketable securities:
Trading securities valued at the closing price of Endocan Corporation shares held by the Company at year end.
Intangibles from GGECO and CCI acquisitions:
Valued at replacement cost. The replacement cost is determined as the cost of replacing the asset with a modern unit of the near equivalent utility.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following tables set forth by level, within the fair value hierarchy, the Company
s liabilities at fair value as of December 31, 2013 and 2012.
|
|
|
|
|
|
|
| |
December 31, 2012
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Investment in trading securities
|
$
|
525,000
|
$
|
-
|
$
|
-
|
$
|
525,000
|
Intangibles from acquisitions, GGECO and CCI,
|
|
|
|
|
|
|
|
|
net of accumulated amortization
|
|
-
|
|
-
|
|
157,918
|
|
157,918
|
Total assets as of December 31, 2012
|
$
|
525,000
|
$
|
-
|
$
|
157,918
|
$
|
682,918
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Investment in trading securities
|
$
|
225,000
|
$
|
-
|
$
|
-
|
$
|
225,000
|
Intangibles from acquisitions GGECO and CCI,
|
|
|
|
|
|
|
|
|
net of accumulated amortization
|
|
-
|
|
-
|
|
237,480
|
|
237,480
|
Total assets as of December 31, 2013
|
$
|
225,000
|
$
|
-
|
$
|
237,480
|
$
|
462,480
|
5. RELATED PARTY TRANSACTIONS
At December 31, 2013, a total of $191,344 (December 31, 2012: $196,703) in loans payable was due to Bogat Family Trust, Raymond Dabney the Company
s Managing Consultant as trustee. The loan amount due is non-interest bearing, unsecured and have no specified terms of repayment. Raymond Dabney also performs management services to the Company under a Management Consulting Agreement signed on February 9, 2012.
On January 1, 2013, the Company entered into five year Management Agreements and issued 166,667 Series A preferred shares each to Robert J. Melamede, President and Bogat Family Trust, Raymond Dabney trustee, for services rendered.
At December 31, 2013, the Company held 7,500,000 common shares in the Endocan Corporation (formerly X-Change Corporation) (OTCBB: ENDO) (
Endocan
) representing approximately 8.6% of the issued and outstanding shares of X-Change, of which 5,000,000 common shares were acquired at a fair market value of $150,000 or $0.03 on December 12, 2012 and 2,500,000 common shares were acquired at a fair market value of $262,250 or $0.1049 per share on February 8, 2013. The 5,000,000 common shares were received as consideration for the sale of its rights and interest in the dupetit Natural Products GmbH joint-venture operating agreement to Endocan under an Asset Purchase Agreement and the 2,500,000 common shares were received as consideration for the sale of its rights and interest in the Maliseet joint-venture operating agreement to Endocan under an Asset Purchase Agreement. The value of the shares at December 31, 2013 was determined to be $0.03 per share or $225,000 with the Company recording an unrealized loss of $562,250 for the year ended December 31, 2013 and an unrealized gain of $375,000 for the year ended December 31, 2012. Dr. Dorothy Bray, CEO and director is also President and director of Endocan, Robert Kane, V.P. of Investor Relations is the CFO and a director of Endocan and Mr. Kane was appointed CFO and Director of Cannabis Science, Inc. on November 13, 2013. Chad S. Johnson, Esq., COO, general counsel and a director is also a director and general counsel for Endocan.
For the year ended December 31, 2013, the following related party stock-based compensation was recorded:
|
|
|
Related Party
|
Position
|
Amount
|
Dr. Dorothy Bray
|
CEO
|
$ 261,360
|
Dr. Robert Melamede
|
President, CFO
|
326,250
|
Dr. Richard Ogden
|
CSO
|
85,750
|
Robert Kane
|
CFO
|
14,647
|
Bogat Family Trust
1
|
Managing Consultant
|
50,000
|
Raymond Dabney
|
Managing Consultant
|
276,250
|
Chad S. Johnson, Esq.
|
COO and General Counsel
|
533,677
|
Mario Lap
|
Director
|
238,840
|
|
|
$1,786,774
|
1
Raymond Dabney, managing consultant is acting trustee of Bogat Family Trust.
See Note 8 for details of stock issuances to director and officers for services rendered.
During the year ended December 31, 2013, a stockholder of the Company, Intrinsic Venture Corp., loaned and converted accounts payable for the following amounts to the Company that were secured by promissory notes, as follows:
Note Amount
Issue Date
$20,000 January 2, 2013 (non-cash)
$5,000
January 4, 2013
$15,000
January 16, 2013
$22,000
February 4, 2013
$11,000
February 7, 2013
$25,000
February 28, 2013
$20,000
March 8, 2013
$30,500
April 1, 2013
$2,500
August 30, 2013
$22,000
September 13, 2013
$2,500
October 1, 2013
$1,275
October 16, 2013
$420,000
December 31, 2013 (non-cash)
New loans and converted accounts payable from Intrinsic Venture Corp. included in notes payable to stockholders were $594,275 during the year ended December 31, 2013. Notes payable to Intrinsic Venture Corp. totaled $1,831,969 and $1,307,063 at December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013, a stockholder of the Company, Intrinsic Capital Corp., loaned the following amounts to the Company that were secured by promissory notes, as follows:
Note Amount
Issue Date
$22,000
May 17, 2013
$15,000
May 31, 2013
$10,229
July 3, 2013
$38,328
July 23, 2013
$1,250
August 15, 2013
$1,250
August 30, 2013
$10,000
September 9, 2013
$14,000
September 11, 2013
$1,250
September 30, 2013
$1,000
October 17, 2013
$2,750
October 22, 2013
$1,000
November 4, 2013
$8,000
November 19, 2013
$6,659
November 19, 2013
$5,000
November 25, 2013
$1,250
December 2, 2013
$1,250
December 11, 2013
New loans from Intrinsic Capital Corp. included in notes payable to stockholders totaled $140,216 during the year ended December 31, 2013.
6. NOTES PAYABLE
As of December 31, 2013, a total of $2,102,186 (December 31, 2012: $1,307,218) of notes payable are due to stockholders that are non-interest bearing and are due 12 months from the date of issue and loan origination beginning on October 1, 2013 through September 30, 2014. A stockholder, to whom $1,831,969 in promissory notes are due, also performs business and accounting services for the Company on a month-to-month basis. On March 31, 2014, the Company entered into a Debt Extension Agreement with the note holder to avoid default. (see Note 11. Subsequent Events)
As of December 31, 2013, a total of $270,217 (December 31, 2012: $0) is due to two stockholders under promissory notes that are non-interest bearing and are due 12 months from the date of issue and loan origination beginning on May 17 through September 30, 2014.
7. INCOME TAXES
Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences 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. Current year and accumulated deferred tax benefit at the effective Federal income tax rate of 34% is $18,876,106 (in addition to the pre-acquisition annual limitation carry-forward discussed in the following paragraph), and a valuation allowance has been set up for the full amount because of the unlikelihood that the accumulated deferred tax benefit will be realized in the future.
At December 31, 2013 and 2012, the Company had available federal and state net operating loss (NOL) carryforwards amounting to approximately $43,000,000 and $37,000,000, respectively, that are available to offset future federal and state taxable income and that expire in various periods through 2033 for federal tax purposes and 2018 for state tax purposes. No benefit has been recorded for the loss carryforwards, and utilization in future years may be limited under Sections 382 and 383 of the Internal Revenue Code if significant ownership changes have occurred or from future tax legislation changes.
The following table sets forth the significant components of the net deferred tax assets for operations in the US as of December 31, 2013 and 2012.
|
|
|
|
|
|
|
|
| |
|
|
|
|
2013
|
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
NOL expense (benefit)
|
|
$
|
(14,599,039)
|
|
$
|
(12,581,377)
|
Less: valuation allowance
|
|
|
14,599,039
|
|
|
12,581,377
|
Net deferred tax assets
|
|
$
|
-
|
|
$
|
-
|
A reconciliation of income tax expense at the statutory federal rate of 34% to income tax expense at the Company's effective tax rate for the years ended December 31, 2013 and 2012 is as follows:
|
|
|
|
|
| |
|
|
2013
|
|
|
2012
|
|
Income tax expense (benefit) at
|
|
|
|
|
|
|
statutory federal rate
|
$
|
(2,017,662)
|
34%
|
$
|
(5,452,774)
|
34%
|
State income taxes
|
|
|
|
|
|
|
NOL limitation (Note 3)
|
|
|
|
|
|
|
Increase (decrease) in valuation allowance
|
|
2,017,662
|
-34%
|
|
5,452,774
|
-34%
|
Income tax expense (benefit) at
|
|
|
|
|
|
|
Company's effective tax rate
|
$
|
-
|
0%
|
$
|
-
|
0%
|
|
|
|
|
|
|
|
8. EQUITY TRANSACTIONS
The Company is authorized to issue 850,000,000 shares of common stock with a par value of $0.001 per share. These shares have full voting rights. There were 770,523,906 and 663,790,573 issued and outstanding as of December 31, 2013 and 2012, respectively.
The Company is also authorized to issue 100,000,000 shares of common stock, Class A with a par value of $0.001 per share. These shares have 10 votes per share. There were 0 issued and outstanding as of December 31, 2013 and 2012.
The Company is also authorized to issue 1,000,000 shares of preferred stock. These shares have full voting rights of 1,000 votes per share. There were 1,000,000 and 666,666 issued and outstanding as of December 31, 2013 and 2012, respectively.
On February 9, 2012, the Company established a 2012 Equity Compensation Plan that authorizes the Company to issue up to 50,000,000 common shares to staff or consultants for services to or on behalf of the Company. The Company filed a Registration Statement Form S-8 with the U.S. Securities and Exchange Commission on February 14, 2012, file no. 333-179501, to register the shares covered under the plan. As of December 31, 2013, the Company has issued 41,250,000 common shares as compensation under the plan to various executives and consultants of the Company.
During the year ended December 31, 2013, the Company issued the following common stock:
On January 30, 2013, the Company issued 5,000,000 common shares with a fair market value of $290,000 to Chad S. Johnson, Esq. due under a January 1, 2013 bonus agreement for services in the capacity of COO.
On July 18, 2013, the Company issued 1,000,000 common shares, with a fair market value of $71,500 or $0.0715 per share, to a scientific advisor for services rendered under a February 11, 2013 management agreement.
On February 28, 2013, the Company issued 13,500,000 common shares for settlement of $13,500 of stockholder debt, for a loss on settlement of $1,092,150, assigned from the stockholder notes payable originating on July 1, 2011 and July 11, 2011.
On March 7, 2013, the Company issued 500,000 common shares, with a fair market value of $35,750 or $0.0715 per share, to a scientific advisor for services rendered under a two-year management agreement.
On March 26, 2013, the Company effectively issued 100,000 common shares at a fair market value of $0.0775 for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On March 28, 2013, the Company issued 500,000 common shares with a fair market value of $38,750, or $0.775 per share, to Dr. Richard Ogden, CSO pursuant to a two-year February 26, 2013 management agreement.
On April 12, 2013, the Company retroactively cancelled 41,750,000 common shares as if they had never been issued previously to Dr. Mohammad Afaneh pursuant to his termination in Q4 and a court approved settlement in February 2013. All transactions pertaining to these shares issued to Dr. Afaneh were reversed as if they have never occurred in these consolidated financial statements for the year ended December 31, 2012.
On April 26, 2013, the Company effectively issued 100,000 common shares at a fair market value of $6,600 or $0.066 per share for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On May 20, 2013, the Company issued 5,000,000 common shares with a fair market value of $230,500 to the newly appointed CEO and director, Dr. Dorothy Bray, for services rendered under a two-year management agreement.
On May 26, 2013, the Company effectively issued 100,000 common shares at a fair market value of $0.0553 for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On June 7, 2013, the Company issued 833,333 common shares at $0.03 per share to an accredited investor under a private placement subscription for total proceeds of $25,000.
On June 24, 2013, the Company issued 5,000,000 common shares with a fair market value of $185,000 to the newly appointed director and director and officer of European subsidiaries, Mario Lap, for services rendered under a two-year management agreement.
On July 1, 2013, the Company effectively issued 100,000 common shares at a fair market value of $0.0387 for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On July 25, 2013, the Company issued 15,000,000 common shares for settlement of $15,000 of stockholder debt, for a loss on settlement of $582,000, assigned from the stockholder notes payable originating on December 31, 2012.
On July 26, 2013, the Company effectively issued 100,000 common shares at a fair market value of $0.0398 for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On August 26, 2013, the Company effectively issued 100,000 common shares at a fair market value of $0.041 for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On September 26, 2013, the Company effectively issued 100,000 common shares at a fair market value of $0.0452 for services rendered under a February 26, 2013 management agreement with Dr. Richard Ogden, CSO of the Company.
On October 21, 2013, the Company issued bonuses of 5,000,000 shares S-8 registered common stock with a fair market value of $190,000 or $0.038 per share to each of Dr. Dorothy Bray, Chad S. Johnson, and Mario Lap pursuant to prior management agreements.
On October 26, 2013, the Company issued 100,000 Rule 144 restricted shares of common stock to Dr. Richard Ogden, CSO for services rendered under a February 26, 2013 Management Agreement. The fair market value of the shares was $0.04 or $4,000.
On November 5, 2013, the Company issued 5,000,000 S-8 registered free-trading shares of common stock each to two consultants for services rendered under two-year consulting agreements. The fair market value of the shares was $0.034 per share or $170,000.
On November 12, 2013, the Company issued 1,000,000 S-8 registered free-trading shares of common to Dr. Khadija Benlhassan for services rendered under a one-year Management Agreement. The fair market value of the shares was $0.035 per share or $35,000.
On November 14, 2013, the Company issued 1,500,000 S-8 registered free-trading shares of common stock to Robert Kane, CFO for services rendered under a two-year Management Agreement. The fair market value of the shares was $0.035 per share or $52,500. In addition, the Company issued 5,000,000 Rule 144 restricted shares of common stock for director services rendered under a two-year Management Agreement. The fair market value of the shares was $0.035 per share or $175,000. Prior to these appointments Robert Kane was V.P. of investor relations for the Company. A majority of shareholders resolution was executed on November 14, 2013 to effect the appointment of Robert Kane as a director of the Company.
On November 26, 2013, the Company issued 100,000 Rule 144 restricted shares of common stock to Dr. Richard Ogden, CSO for services rendered under a February 26, 2013 Management Agreement. The fair market value of the shares was $0.0325 or $3,250.
On December 13, 2013, the Company issued 750,000 S-8 registered free-trading shares of common stock to Dr. Roscoe Moore, scientific advisory, services rendered under Management and Bonus Agreement. The fair market value of the shares was $0.0325 per share or 24,375.
On December 18, 2013, the Company issued 5,000,000 S-8 registered free-trading shares of common stock to a marketing consultant for services rendered under a consulting agreement. The fair market value of the shares was $0.0312 per share or $156,000.
On December 18, 2013, the Company issued 1,500,000 Rule 144 restricted shares of common stock for settlement of $24,000 owing to a consultant. The Company recognized a loss of $51,000 for settlement of the debt.
On December 19, 2013, the Company effectively issued 1,500,000 Rule 144 restricted shares of common stock with a fair market value of $44,850, or $0.0299 per share, to a consultant for services rendered.
On December 26, 2013, the Company issued 100,000 Rule 144 restricted shares of common stock to Dr. Richard Ogden, CSO for services rendered under a February 26, 2013 Management Agreement. The fair market value of the shares was $0.034 or $3,400.
On December 27, 2013, the Company issued 150,000 Rule 144 restricted shares of common stock to Dr. Roscoe Moore, scientific advisor as a June 1, 2013 annual bonus for services rendered under a June 1, 2012 Management Agreement. The fair market value of the shares was $0.0419 or $6,285.
During the three months ended December 31, 2013, the Company entered into debt settlement agreements as follows:
On November 5, 2013, the Company issued 9,000,000 common shares to an accredited investor (
Seller
) for settlement of $9,000 of stockholder debt, for a loss on settlement of $297,000, assigned from the stockholder notes payable originating on January 27, 2012.
On November 6, 2013, the Company issued 9,000,000 common shares to an accredited investor (
Seller
) for settlement of $9,000 of stockholder debt, for a loss on settlement of 283,500, assigned from the stockholder notes payable originating on January 27, 2012.
The aforementioned shares for the settlement of debts were issued without legend under an exemption under Rule 144(b)(1) of the Act. Over six months has passed since the debts accrued on the books of the Company; the Seller is not now, and during the three month period preceding the transaction has not been considered an
affiliate
of the Company. Furthermore, pursuant to Rule 144(d)(1)(i) the Company is, and has been for a period of at least 90 days immediately before the proposed sale, subject to the reporting requirements of section 13 or 15(d) of the Securities and Exchange Act of 1934, and the proposed resale of the Shares in addition to the Company not being considered a shell company under Rule 144(i)(1). All relating shares were issued to settle the debts.
On November 25, 2013, the Company entered into a debt settlement agreement to settle $24,000 of accrued debt owing to a consultant in exchange for 1,500,000 Rule 144 restricted shares of common stock, for a loss on settlement of $51,000. The shares were issued subsequent to the year ended December 31, 2013 on February 12, 2014.
Stock Options:
The following options were issued to the Company
s V.P of investor relations, CFO and Director for services rendered under a September 16, 2011 agreement:
(i)
the option to purchase 100,000 common shares at ten cents ($0.10) per share;
(ii)
the option to purchase 100,000 common shares at twenty cents ($0.20) per share;
(iii)
the option to purchase 500,000 common shares at thirty five cents ($0.35) per share; and
(iv)
the option to purchase 1,000,000 common shares at fifty cents ($0.50) per share.
A summary of the status of the Company
s option grants as of December 31, 2013 and the changes during the period then ended is presented below:
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Shares
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Weighted-AverageExercise Price
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Outstanding December 31, 2012
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1,700,000
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$
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0.41
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Granted
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Exercised
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Expired
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Outstanding December 31, 2013
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1,700,000
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$
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0.41
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Options exercisable at December 31, 2013
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1,700,000
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$
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0.41
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These options expire on the date of termination of the management agreement and services thereunder with Robert Kane. The weighted average fair value at date of grant for options during year ended December 31, 2013 was estimated using the Black-Scholes option valuation model with the following:
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Average expected life in years
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2
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Average risk-free interest rate
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2.00
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%
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Average volatility
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75
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%
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Dividend yield
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0
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%
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9. EQUIPMENT
Accumulated Net Book Value
Cost Depreciation December 31, 2013 December 31, 2012
Equipment $ 3,000 $ 3,000 $ - $ 367
Laboratory equipment - - - 8,895
Software 5,000 3,484 1,516 4,017
Computers 5,716 5,716 - 3,133
$ 13,716 $ 12,200 $ 1,516 $ 16,412
All equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and the cost of renewals and betterments are capitalized. Depreciation is computed using the straight-line method over the estimated lives of the related assets, 2 years for computer, 2 years for software, and 5 years for equipment and laboratory equipment.
10. INTANGIBLE ASSETS
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December 31, 2013
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December 31, 2012
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Intellectual assets, primarily intellectual property $ 445,299 $ 320,299
Less accumulated amortization
(238,590)
(133,761)
$ 206,709
$ 186,538
Intangible assets are stated at fair value on the date of purchase less accumulated amortization. Amortization is computed using the straight-line method over the estimated lives of the related assets (5 years for intellectual assets).
The Company will recognize approximately $60,000 in intangible amortization expense per year over the next four years with intangibles being fully amortized by fiscal 2018.
11. SUBSEQUENT EVENTS
On March 31, 2014, the Company entered into a Debt Extension Agreement with Intrinsic Venture Corp., to avoid default on approximately $1.8 million in promissory notes due, to extend due dates by 12 months on all promissory notes including those becoming due during fiscal 2014. The Company has agreed to issue 5,000,000 rule 144 restricted shares of common stock with a fair market value of $0.1666 per share or $833,000 as consideration for the extensions on the aforementioned promissory notes.
Subsequent to the year ended December 31, 2013, the Company issued the following stock for the settlement of debt and for services:
On January 3, 2014, the Company issued 10,000,000 common shares for settlement of $10,000 of stockholder debt, for a loss on settlement of $590,000, assigned from the stockholder notes payable originating on May 17, 2013.
On January 6, 2014, the Company issued 10,000,000 common shares for settlement of $10,000 of stockholder debt, for a loss on settlement of $681,000, assigned from the stockholder notes payable originating on January 30, 2012.
On January 7, 2014, the Company issued 9,500,000 common shares for settlement of $9,500 of stockholder debt, for a loss on settlement of $845,500, assigned from the stockholder notes payable originating on May 17, 2013.
On January 15, 2014, the Company issued bonuses of 2,000,000 S-8 registered free-trading shares and 5,500,000 rule 144 restricted shares of common stock with fair market values of $192,400 and $529,100, respectively, or $0.0962 per share to each of Dorothy Bray, CEO, Mario Lap, Director of European operations and subsidiaries, and Chad S. Johnson, Esq., Director and General Counsel and pursuant to 2013 management agreements.
On January 15, 2014, the Company issued a bonus of 2,500,000 rule 144 restricted shares of common stock with a fair market value of $240,500 or $0.0962 per share to Robert Kane, CFO and director pursuant to a 2013 management agreement.
On January 24, 2014, the Company issued 5,000,000 S-8 registered free-trading shares of common stock to a marketing consultant for services rendered under a December 18, 2013 consulting agreement. The fair market value of the shares was $0.0312 per share or $156,000.
On February 13, 2014, the Company entered into a partnership agreement with Michigan Green Technologies, LLC. Under the agreement, the Company participates in 20% of all net profit of the operating entity. In addition, the Company is working with its partner to active lobbying for the legalization of hemp and cannabis in Michigan which will lead to additional business opportunities for the Company through its partnership.
On March 8, 2014, the Company issued a private placement offering for 4,000,000 units at $0.25 per unit. Each unit is comprised of one share of common stock and one non-transferable warrant with each one warrant to purchase one share of the Company
s common stock at an exercise price of $0.50. The warrants shall expire 2 years from the date of issuance of the warrant certificate (collectively
Offered Units
). As of April 9, 2014, the Company received all of the $1,000,000 into its corporate bank account for the Offered Units. The net offering proceeds were $995,000 after issuance costs. The Company is currently in the process of issuing shares and delivering warrants to investors who participated in the offering.
Common shares reconciliation table:
Issued and outstanding as of December 31, 2013
770,523,906
Pending and subsequent event issuances
63,500,000
Unissued and outstanding as of April 21, 2014
834,023,906