UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

☐  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:

333-155318

  

CANNLABS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		20-4168979
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

3888 E. Mexico Avenue

Denver, CO  80210

(Address of principal executive offices) (Zip Code)

(303) 309-0105

(Registrant’s telephone number, including area code)

(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 ☒   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 ☒  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	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

YES ☐  NO ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  62,631,404 shares of common stock outstanding at July 7, 2015. 

 

TABLE OF CONTENTS

 

			Page  No.
PART I	FINANCIAL INFORMATION
ITEM 1.	Financial Statements		3
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		27
ITEM 4.	Controls and Procedures		27
PART II	OTHER INFORMATION
ITEM 1.	Legal Proceedings		27
ITEM 1A.	Risk Factors		28
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
ITEM 3.	Defaults Upon Senior Securities		28
ITEM 4.	Mine Safety Disclosures		28
ITEM 5.	Other Information		28
ITEM 6.	Exhibits		29

 

 

 CANNLABS, INC. and SUBSIDIARIES

 

CONTENTS

 

								PAGE
CONDENSED CONSOLIDATED BALANCE SHEETS								F-3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS								F-4
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT								F-5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS								F-6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS								F-7 to F-20

CannLabs, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

		March 31, 2015				December 31, 2014
			(Unaudited)				(Audited)
ASSETS
CURRENT ASSETS
Cash		$	17,590			$	11,340
Accounts receivable net of allowance for doubtful accounts of $37,093 and $0			70,285				143,950
Costs and estimated earnings in excess of billings			50,833				-
Prepaid expenses			6,203				106,818
TOTAL CURRENT ASSETS			144,911				262,108
PROPERTY AND EQUIPMENT
Equipment			171,036				171,036
Furniture and fixtures			19,807				19,807
Leasehold Improvements			194,435				194,435
Assets under capital lease			887,729				869,131
			1,273,007				1,254,409
Less:  accumulated depreciation			363,444				258,177
			909,563				996,232
OTHER ASSETS
Deposit			37,394				38,394
Patents and trademarks, net of amortization of $461 and $277			33,787				20,893
			71,181				59,287
TOTAL ASSETS		$	1,125,655			$	1,317,627
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	1,024,501			$	932,360
Deferred revenue			75,775				120,163
Obligations under capital leases			242,525				237,512
Notes payable - stockholders			158,800				218,800
Line of credit - stockholder			175,000				-
TOTAL CURRENT LIABILITIES			1,676,601				1,508,835
LONG-TERM LIABILITIES
Notes payable - stockholders			750,000				750,000
Line of credit - stockholder			750,000				300,000
Obligations under capital leases, net of current portion			324,977				387,763
			1,824,977				1,437,763
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Convertible preferred stock, $.001 par value, 10,000,000 shares authorized, 500,000 issued and outstanding at March 31, 2015 and December 31, 2014			500				500
Common stock, $.001 par value; 200,000,000 shares authorized, 64,564,704 shares issued and outstanding at March 31, 2015 and 64,564,704 shares issued and outstanding at December 31, 2014			64,565				65,165
Additional paid in capital			6,692,816				6,686,575
Deferred compensation			(4,623,576	)			(5,145,719	)
Accumulated deficit			(1,640,839	)			(1,605,731	)
STOCKHOLDERS’ EQUITY BEFORE NON CONTROLLING INTEREST			493,466				790
Non controlling interest in variable interest entities			(2,869,389	)			(1,629,761	)
TOTAL STOCKHOLDERS’ DEFICIT			(2,375,923	)			(1,628,971	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	1,125,655			$	1,317,627

 

See accompanying notes to the condensed consolidated financial statements.

 

 

CannLabs, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2015 and 2014

(Unaudited)

			Three Months				Three Months
			Ended				Ended
			March 31,				March 31,
			2015				2014
REVENUES		$	470,488			$	112,273
COST OF REVENUES			339,666				55,533
GROSS PROFIT			130,822				56,740
OPERATING EXPENSES
General and administrative (1)			449,468				86,786
Administrative payroll (2)			705,255				37,681
Sales and marketing			195,515				29,380
Total operating expenses			1,350,238				153,847
LOSS BEFORE OTHER INCOME (EXPENSE)			(1,219,416	)			(97,107	)
OTHER EXPENSE
Interest expense			(45,320	)			(5,000	)
Total other expenses			(45,320	)			(5,000	)
NET LOSS			(1,264,736	)			(102,107	)
NET LOSS ATTRIBUTABLE TO THE NONCONTROLLING INTEREST			(1,239,628	)			(149,937	)
ACCRUED PREFERRED DIVIDENDS			10,000				-
NET INCOME(LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(35,108	)		$	47,830
BASIC AND DILUTED NET INCOME(LOSS) PER COMMON SHARE		$	(0.00	)		$	0.00
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			65,058,037				54,000,000

 

(1)

- Includes $2,953 and $0 of non-cash compensation for the three months ended March 31, 2015 and 2014

(2)

- Includes $524,831 and $0 of non-cash compensation for the three months ended March 31, 2015 and 2014

 

See accompanying notes to the condensed consolidated financial statements.

 

 

CannLabs, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit)

For the Three Months Ended March 31, 2015

		Convertible
		Preferred								Common																Retained
		Stock								Stock								Additional								Earnings
		Number of								Number of								Paid in				Deferred				(Accumulated				Non Controlling
		Shares				Amount				Shares				Amount				Capital				Compensation				Deficit)				Interest				Total
Balance at December 31, 2014  (Audited)			500,000			$	500				65,164,704			$	65,165			$	6,686,575			$	(5,145,719	)		$	(1,605,731	)		$	(1,629,761	)		$	(1,628,971	)
Forfeited common stock			-				-				(600,000	)			(600	)			(11,533	)			12,133				-				-				-
Deferred compensation			-				-				-				-				-				510,010				-				-				510,010
Issuance of options for services			-				-				-				-				17,774				-				-				-				17,774
Accrued preferred dividends			-				-				-				-				-				-				(10,000	)			-				(10,000	)
Net loss			-				-				-				-				-				-				(25,108	)			(1,239,628	)			(1,264,736	)
Balance at March 31, 2015 (Unaudited)			500,000			$	500				64,564,704			$	64,565			$	6,692,816			$	(4,623,576	)		$	(1,640,839	)		$	(2,869,389	)		$	(2,375,923	)

 

See accompanying notes to the condensed consolidated financial statements.

 

CannLabs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)

		For the				For the
		Three Months Ended				Three Months Ended
		March 31,				March 31,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(1,264,736	)		$	(102,107	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for bad debts			37,093				-
Fair value of options issued in exchange for services			17,774				-
Depreciation  and amortization			105,451				16,096
Officer compensation from conversion of loan receivable, stockholder			-				13,770
Deferred compensation			510,010				-
(Increase) decrease in assets, net of effect of variable interest entity:
Accounts receivable			36,572				(11,397	)
Costs and estimated earnings in excess of billings			(50,833	)			-
Prepaid expenses			100,615				-
Deposits			1,000				(600	)
Increase in liabilities, net of effect of variable interest entity:
Accounts payable and accrued expenses			82,141				32,625
Deferred revenue			(44,388	)			27,378
Net cash provided by (used in) operating activities			(469,301	)			(24,235	)
CASH FLOWS FROM INVESTING ACTIVITIES
Due from stockholders			-				200
Purchase of equipment			(18,598	)			(71,781	)
Purchase of patents and trademarks			(13,078	)			-
Net cash used in investing activities			(31,676	)			(71,581	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable - stockholders			(60,000	)			-
Repayments of obligations under capital leases			(57,773	)			(15,528	)
Proceeds from notes payable - stockholders			-				158,800
Proceeds from line of credit - stockholder			625,000				-
Net cash provided by financing activities			507,227				143,272
NET INCREASE (DECREASE) IN CASH			6,250				47,456
CASH - BEGINNING OF PERIOD			11,340				54,394
CASH - END OF PERIOD		$	17,590			$	101,850
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes		$	-			$	-
Interest		$	16,512			$	3,484
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Obligations under capital leases for assets under capital leases		$	-			$	67,995
Forfeited shares of common stock		$	12,133			$	-
Accrued dividends on preferred stock		$	10,000			$	-

 

See accompanying notes to the condensed consolidated financial statements.

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Business

On June 12, 2014, CannLabs, Inc.(“CannLabs”), formerly Speedsport Branding, Inc., entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with Carbon Bond Holdings, Inc. (“Carbon Bond”) and CLB Acquisition Corp., CannLabs’ newly-formed wholly-owned subsidiary (“Acquisition Sub”). Upon the closing of the transaction contemplated under the Merger Agreement (“Merger”), Acquisition Sub merged into and with Carbon Bond, and Carbon Bond, as the surviving corporation, became a wholly-owned subsidiary of CannLabs.

Pursuant to the terms and conditions of the Merger Agreement, (i) each share of Carbon Bond common stock issued and outstanding immediately prior to the closing of the Merger was exchanged for the right to receive one share of the CannLabs’ common stock. Accordingly, an aggregate of 59,295,000 shares of the CannLabs’ common stock were issued to the holders of Carbon Bond’s common stock.

Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination.  That is, the share exchange is equivalent to the issuance of stock by CannLabs for the net monetary assets of Carbon Bond, accompanied by a recapitalization, and is accounted for as a change in capital structure.  Accordingly, the accounting for the share exchange will be identical to that resulting from a reverse acquisition, except no goodwill will be recorded.  Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, CannLabs, are those of the legal acquiree Carbon Bond, which is considered to be the accounting acquirer.

Carbon Bond, a Colorado “S” Corporation was formed on October 21, 2013 for the purpose of providing administrative services and licensing proprietary software for CannLabs, Inc. a privately held “S” Corporation (“CannLabs Colorado”), which is a stand-alone cannabis testing laboratory in Denver, Colorado. Carbon Bond and CannLabs Colorado are commonly managed.  Carbon Bond had no operations until January 1, 2014.

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, since Carbon Bond and CannLabs Colorado are commonly managed, the financial statements were retrospectively consolidated for all periods presented. The following table summarizes CannLabs Colorado’s assets and liabilities transferred as of January 1, 2013: 

		January 1, 2013
Assets:
Cash		$	8,111
Accounts receivable			18,800
Prepaid expenses			1,993
Stockholder’s loan			3,750
Fixed assets, net			23,934
Deposit			1,425
Total assets		$	58,013
Liabilities:
Accounts payable and accrued expenses		$	2,962
Deferred revenue			750
Obligations under capital leases			20,075
Notes payable - stockholder			13,000
Total liabilites		$	36,787
Net assets		$	21,226
Less: Consideration			-
Non controlling interest - variable interest entity		$	21,226

 

On April 1, 2014, Carbon Bond formally entered into an administrative services and software licensing agreement with CannLabs Colorado with an effective date of January 1, 2014.  The administrative services agreement requires CannLabs Colorado to pay a monthly fee consisting of certain expenses paid by Carbon Bond for the prior month plus 15%.  The software licensing agreement requires CannLabs Colorado to pay a monthly fee of $10,000 to Carbon Bond for the use of certain software.

CannLabs – Connecticut, Inc. (“CannLabs – CT”) was formed on May 15, 2014 as a Nevada corporation for the purpose of licensing a laboratory in Connecticut, and is owned by two of the majority stockholders of CannLabs, Inc.  On July 31, 2014, Carbon Bond formally entered into an administrative services and software licensing agreement with CannLabs - CT with an effective date of May 15, 2014.  The administrative services agreement requires CannLabs - CT to pay a monthly fee consisting of certain expenses paid by Carbon Bond for the prior month plus 15%.  The software licensing agreement requires CannLabs - CT to pay a monthly fee of $10,000 to Carbon Bond for the use of certain software. Carbon Bond and CannLabs – CT are commonly managed.

CannLabs – Nevada, INC. (“CannLabs – NV”) was formed on May 15, 2014 as a Nevada corporation for the purpose of licensing a laboratory in Nevada, and is owned by two of the majority stockholders of CannLabs, Inc.  On July 31, 2014, Carbon Bond formally entered into an administrative services and software licensing agreement with CannLabs - NV with an effective date of May 15, 2014.  The administrative services agreement requires CannLabs - NV to pay a monthly fee consisting of certain expenses paid by Carbon Bond for the prior month plus 15%.  The software licensing agreement requires CannLabs - NV to pay a monthly fee of $10,000 to Carbon Bond for the use of certain software, which has not been charged through December 31, 2014, as CannLabs – NV is not currently operational. Carbon Bond and CannLabs – NV are commonly managed.

According to the requirements of FASB ASC 810 Consolidation, Carbon Bond has evaluated its relationship with CannLabs Colorado, CannLabs – CT, and CannLabs - NV, and has concluded that, CannLabs Colorado, CannLabs – CT and CannLabs – NV are variable interest entities for accounting purposes.  As a result of the contractual arrangements, which enable Carbon Bond to manage CannLabs Colorado, CannLabs – CT and CannLabs – NV (collectively, the “VIEs”), Carbon Bond is the primary beneficiary of the VIEs.  Accordingly, Carbon Bond adopted the provisions of FASB ASC 810 and consolidates the VIEs, reflecting the results of the combined entities as of March 31, 2015 and for the three months ended March 31, 2015 and 2014, as if the asset transfer agreement entered into with CannLabs Colorado happened retroactively at the earliest period presented.

As Carbon Bond is the primary beneficiary of the VIEs, which qualify as variable interest entities, the assets and liabilities and revenues and expenses of the VIEs have been included in the accompanying consolidated financial statements.  As of March 31, 2015 and for the three months then ended, the VIEs had assets of $69,605, liabilities of $2,938,994, revenues of $363,435, and net losses of $1,239,628. As of December 31, 2014 and for the year then ended, the VIEs had assets of $143,950, liabilities of $1,773,711, revenues of $1,338,550, and net losses of $1,658,463. The liabilities as of December 31, 2014 include balances due to Carbon Bond.  These intercompany payables and transactions are eliminated upon consolidation of the VIEs with CannLabs, Inc.

On December 11, 2014, Carbon and Cook (“C&C”) was formed as a Nevada corporation for the purpose of performing consulting services to the cannabis industry. C&C is a wholly owned subsidiary of Carbon Bond.

On January 15, 2015, Experentia Laboratories, Inc. was formed as a Nevada corporation for the purpose of performing laboratory services. Experentia is a wholly owned subsidiary of Carbon Bond.

On January 15, 2015, StrainData was formed as a Nevada corporation for the purpose of providing a web application to consumers for educational and locational assistance with cannabis products. StrainData is a wholly owned subsidiary of Carbon Bond.

Basis of Presentation

The accompanying consolidated financial statements of CannLabs, Inc and Subsidiaries including its VIEs (collectively the “Company”), have been prepared in accordance with generally accepted accounting principles in the United States of America.  All intercompany transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (“SEC”). Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

It is management’s opinion that all adjustments necessary for the fair statement of the results for interim periods have been made, and disclosures have been made so as not to make such financial information misleading.

Use of Estimates

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

Comprehensive Income

The Company follows FASB ASC 220 in reporting comprehensive income.  Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.  The Company has no items of other comprehensive income (loss), therefore comprehensive income (loss) is equal to net income (loss).

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses and notes payable - stockholders.  The carrying value of cash, accounts receivable, accounts payable and accrued expenses approximate fair value, because of their short maturity. The Company believes the carrying amount of its notes payable – stockholders approximates its fair value based on rates and other terms currently available to the Company for similar debt instruments.

 

Concentration of Credit Risk Involving Cash

The Company may have deposits with a financial institution which at times exceed Federal Depository Insurance Corporation (“FDIC”) coverage. The Company has not experienced any losses from maintaining cash accounts in excess of federally insured limits.  

Accounts Receivable

Trade accounts receivable are reported at the amount management expects to collect from outstanding balances.  Differences between the amount due and the amount management  expects to collect are reported in the results of operations in the period in which those differences are determined, with an offsetting entry to a valuation allowance for trade accounts receivable.  Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.

The normal credit terms extended to customers are 30 days. The Company reviews all receivables that exceed terms and establishes an allowance for doubtful accounts, if necessary, based on management’s assessment of the collectability of trade and other receivables.  A considerable amount of judgment is required in assessing the amount of the allowance.  The Company considers the historical level of credit losses, makes judgments about the credit worthiness of each customer based on ongoing credit evaluations and monitors current economic trends that might impact the level of credit losses in the future.

As of March 31, 2015 and December 31, 2014, allowances for doubtful accounts were $37,093 and $0.  Allowances charged for doubtful accounts amounted to $37,093 and $0 for the three months ended March 31, 2015 and 2014.

Property and Equipment

Property, equipment and leasehold improvements are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets from three to seven years except for leasehold improvements and assets under capital leases which are depreciated over the remaining lease term. Maintenance and repairs of property are charged to operations, and major improvements are capitalized.  Upon retirement, sale, or other disposition of property and equipment, the costs and accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is included in operations.  Depreciation of property and equipment was $105,267 and $16,096 for the three months ended March 31, 2015 and 2014.  Depreciation included in cost of sales was $98,312 and $15,668 for the three months ended March 31, 2015 and 2014.

Revenue Recognition

In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (Codified in FASB ASC 605), The Company will recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, (ii) a retailer, distributor or wholesaler receives the goods or services, (iii) the price is fixed or determinable, and (iv) collectability of the sales revenues is reasonably assured. Subject to these criteria, the Company will generally recognize revenue from laboratory tests in three ways.  For samples presented without a bulk or twelve month contract, revenue is recognized upon completion of the testing.  Customers with bulk contracts have three months to use a predetermined number of tests.  Revenue is recognized for these contracts on a pro rata basis, based on the number of tests used versus the number of tests allowed.  Twelve month contracts require prepayment monthly for the succeeding month.  Revenue is recognized based on the monthly payment required for the month in which the tests are performed.  Because tests may not be carried over to subsequent months, the monthly revenue is recognized in full in the appropriate month.

 

The Company uses various performance measures under the percentage of completion method to recognize fixed-price contracts generated from consulting and research and development agreements. Estimating contract costs at completion and recognizing revenue appropriately involve significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and revenue recognition timing. From time to time, facts develop that require us to revise estimated total costs or expected revenue. CannLabs records the cumulative effect of revised estimates in the period when the facts requiring revised estimates become known. The Company recognizes the full amount of anticipated losses on any contract in the period a loss becomes known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the Company’s financial performance. When agreements contain more than one deliverable, the Company allocates revenue to separate elements under the agreement based on relative selling prices in accordance with FASB ASC 605-25.

Income Taxes

Effective April 19, 2010, CannLabs Colorado elected, by unanimous consent of its stockholders, to be taxed under the provisions of Subchapter “S” of the Internal Revenue Code.  Effective October 21, 2013, Carbon Bond elected, by unanimous consent of its stockholders, to be taxed under the provisions of Subchapter “S” of the Internal Revenue Code.  A majority of the states where Carbon Bond is conducting business also recognize Subchapter “S” status for income tax purposes. Carbon Bond does not pay federal and state income taxes on its taxable income. Instead, the stockholders are liable for individual federal and state income taxes on their respective shares of Carbon Bond’s taxable income or have included their respective shares of Carbon Bond’s net operating loss in their individual income tax returns.

On May 27, 2014, Carbon Bond elected by unanimous consent of its stockholders to be treated as a “C” corporation under the Internal Revenue Code. As of May 27, 2014, Carbon Bond had an accumulated deficit of $734. In accordance with Staff Accounting Bulletin (“SAB”) Topic 4:B the accumulated deficit of the “S” corporation is treated as a constructive distribution of the “S” corporation earnings and a subsequent contribution of capital, therefore, the accumulated deficit of $734 was reclassified to additional paid in capital.

The Company follows FASB Accounting Standards Update (“ASU”) No. 2009-06, Income Taxes (Topic 740): Implementation Guidance on Accounting for Uncertainty in Income Taxes. FASB ASC 740 which requires an asset and liability approach to financial accounting and reporting for income taxes.  Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax positions must meet a more-likely-than-not recognition threshold.

As of January 1, 2015, the Company had no unrecognized tax benefits and accordingly, the Company did not recognize interest or penalties during 2015 related to unrecognized tax benefits.  There has been no change in unrecognized tax benefits during the three months ended March 31, 2015 and 2014, and there was no accrual for uncertain tax positions as of March 31, 2015.  Tax years from 2011 through 2014 remain subject to examination by major tax jurisdictions.

Advertising Expenses

Advertising expenses, which include general advertising, printed materials and trade shows are expensed as incurred. Advertising expenses for the three months ended March 31, 2015 and 2014 were $65,226 and $5,106.

 

Research and Development Costs

In accordance with FASB ASC 730, research and development costs are expensed when incurred.  Research and development expenses for the three months ended March 31, 2015 and 2014 were $51,488 and $0.

Start-up Costs

In accordance with FASB ASC 720, start-up costs are expensed as incurred.

Loss Per Share

The Company follows FASB ASC 260 when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings per share. Because the Company reported a net loss for the three months ended March 31, 2015, common stock equivalents, including preferred stock, stock options and warrants were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. For the three months ended March 31, 2014, the Company had no common stock equivalents, therefore basic and diluted income per share were the same.

Segment Information

The Company is organized and operates as one operating segment. In accordance with FASB ASC 280, Segment Reporting, the chief operating decision-maker has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company subject to Board approval. Since the Company operates in one segment and provides one group of similar services, all financial segment and service line information required by FASB ASC 280 can be found in the consolidated financial statements.

Recently Adopted Accounting Pronouncements

As of March 31, 2015 and for the three months then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this Update provide guidance about management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

NOTE 2 – MANAGEMENT PLANS

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has incurred a significant loss and experienced negative cash flow over the past year.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 

Since inception, the Company has focused on developing and implementing its business plan.  The Company believes that its existing cash resources will not be sufficient to sustain operations during the next twelve months.  The Company currently needs to generate additional revenue in order to sustain its operations.  In the event that the Company cannot generate sufficient revenue to sustain its operations, the Company will need to reduce expenses or obtain financing through the sale of debt and/or equity securities.  The issuance of additional equity may result in dilution to existing shareholders.  If the Company is unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to the Company, the Company would likely be unable to execute upon the business plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on the business, financial condition and results of operations.

The Company’s current plan is to monetize the StrainData platform through advertising and further develop the consulting division. Additionally, the Company is anticipating that the Marijuana Enforcement Division in Colorado will enforce the mandates for additional testing in cannabis products, which it has delayed beginning in October 2014.

If sufficient revenues are not generated to sustain operations or additional funding cannot be obtained in the short term, the Company will need to reduce monthly expenditures to a level that will enable the Company to continue until such funds can be obtained.  

NOTE 3 – CAPITAL LEASES

The Company leases various laboratory equipment under capital leases. The economic substance of the leases are that the Company is financing the acquisition of the assets through leases, and accordingly, they are recorded on the Company’s books as assets and liabilities.

The following is an analysis of the leased assets included in property and equipment at March 31, 2015 and December 31, 2014 and depreciation expense for the three months ended March 31, 2015 and 2014:

		March 31, 2015			December 31, 2014
Machinery and equipment		$	887,729		$	869,131
Less: Accumulated depreciation			267,818			185,636
		$	619,911		$	683,495
			Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Depreciation Expense		$	82,182		$	10,358

 

The following is a schedule of future minimum payments required under the lease together with their present values as of March 31, 2015:

				March 31, 2015
	2015			$	211,272
	2016				279,613
	2017				135,530
	Total minimum lease payments				626,415
	Total amount representing interest				58,913
	Present value of minimum lease payments			$	567,502

 

NOTE 4 – NOTES PAYABLE – STOCKHOLDERS

In January 2014, Carbon Bond assumed a note payable for $100,000 to a stockholder. The note bears interest at 10% per annum, is unsecured, and will be repaid upon the Company raising $1.5 million. For the three months ended March 31, 2015, the Company has accrued interest of $2,500 and for the three months ended March 31, 2014, the Company paid $2,500 with respect to this note.

In January 2014, the Company issued notes payable in the total amount of $58,800 to two stockholders. The notes are non-interest bearing, are unsecured, and have no formal repayment terms.

In March 2014, the Company issued a note payable for $100,000 to a stockholder. The note bears interest at 10% and has no formal repayment terms. On June 10, 2014, the note payable –stockholder was converted into 71.4 shares of the Carbon Bond’s common stock. Upon the stock split 54,000 to 1 these shares were converted into 3,855,600 shares.

Upon the closing of the Merger, the Company entered into a Note Purchase Agreement with an accredited investor (the “Note Purchase Agreement”), pursuant to which the investor agreed to purchase up to $750,000 of senior secured convertible promissory notes (the “Senior Secured Notes”) in a series of three closings to occur on August 15, 2014, September 15, 2014 and October 15, 2014. As of March 31, 2015, the Company has issued senior secured convertible promissory notes in the amount of $750,000, in accordance with the Note Purchase Agreement, which bears interest at 8% per annum. In connection with the Note Purchase Agreement, the Company also entered into a Security Agreement and an Intellectual Property Security Agreement. In addition, the subsidiary of the Company, Carbon Bond entered into a Subsidiary Guarantee in favor of the Buyer. For the three months ended March 31, 2015, the Company has paid no interest and accrued interest expense of $33,567 with respect to these notes payable.

On December 31, 2014, the Company issued a note payable for $60,000 to a stockholder. The note is non-interest bearing and has a term of two weeks. The note was repaid on January 13, 2015. 

NOTE 5 – LINE OF CREDIT – STOCKHOLDER

On November 19, 2014, the Company entered into a credit facility with a stockholder with a maximum principal amount of $750,000. Each advance cannot exceed $200,000 per month. The credit facility bears interest at 10% per annum and is payable in full on November 18, 2016. The credit facility is collateralized by all property of CannLabs, Inc. As of March 31, 2015, the Company has borrowed $750,000 under the credit facility, no interest has been paid and $17,411 of interest expense has been accrued. Additionally, the stockholder has advanced an additional $175,000 to the Company, bearing interest at 10% which is payable on demand.

NOTE 6 – INCOME TAXES

Income tax expense was $0 for the three months ended March 31, 2015 and 2014.

As of January 1, 2015, the Company had no unrecognized tax benefits, and accordingly, the Company did not recognize interest or penalties during 2014 related to unrecognized tax benefits. There has been no change in unrecognized tax benefits during the three months ended March 31, 2015, and there was no accrual for uncertain tax positions as of March 31, 2015. Tax years from 2011 through 2014 remain subject to examination by major tax jurisdictions.

There is no income tax benefit for the losses for the three months ended March 31, 2015, since management has determined that the realization of the net tax deferred asset is not assured and has created a valuation allowance for the entire amount of such benefits.

There is no income tax benefit for the income for the three months ended March 31, 2014, since the Company was an “S” corporation and the stockholders are liable for individual federal and state income taxes on their respective shares of Carbon Bond’s taxable income or have included their respective shares of Carbon Bond’s net operating loss in their individual income tax returns.

 

NOTE 7 – CONVERTIBLE PREFERRED STOCK

Upon the closing of the Merger, the Company, pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”) issued to an accredited investor 500,000 shares of the Company’s 8% Series A Convertible Preferred Stock (the “Series A Preferred Shares”) at an original issue price of $1.00 per share (the “Original Issue Price”) and warrants to purchase 20,000,000 shares of the Company’s common stock (the “Warrants”) for an aggregate purchase price of $500,000. The shares of common stock underlying the Series A Preferred Shares and Warrants are subject to a registration rights agreement (the “Registration Rights Agreement”) under which the Company is obligated to seek registration of such shares within 60 days of the closing of the private placement, however, there are no penalties under the Registration Rights Agreement unless the Registration Statement is not effective within 120 days of the closing of the private placement.

The Registration Rights Agreement has been amended to change the Effectiveness Date to September 30, 2015. Since management believes that it is remote that the Company will not register the shares by September 30, 2015, the Company has not accrued any penalties as of March 31, 2015 in accordance with FASB ASC 450.

 

In accordance with FASB ASC 480 and 815, the Series A Preferred Shares have been classified as permanent equity and were valued at $500,000 at June 12, 2014.   Since the Series A Preferred Shares have been classified as equity, the embedded conversion option would be clearly and closely related to it and would not need to be bifurcated in accordance with FASB ASC 815.  The Warrants associated with the Series A Preferred Shares were also classified as equity, in accordance with FASB ASC 480-10-25.  Therefore it is not necessary to bifurcate the Warrants from the Series A Preferred Shares. 

The Series A Preferred Shares have a preference in liquidation equal to one times the Original Issue Price, plus all accrued and unpaid dividends on each share of Series A Preferred Stock to be paid out of assets available for distribution prior to holders of common stock and thereafter, the Company will then distribute the remaining assets to holders of common stock, other junior preferred shares (if any) and the Series A Preferred Shares on an as-if-converted-basis.  The Series A Preferred Shares shall vote together with the Common Stock on an as-converted basis, and not as a separate class.

The holders of Series A Preferred Shares will, at any time, be entitled to convert each Series A Preferred Share into shares of common stock at a conversion price of $0.01664 per share. The Series A Preferred Shares contain provisions that protect their holders against dilution by adjustment of the purchase price in certain events such as stock dividends, stock splits and other similar events.

As of March 31, 2015, the value of the cumulative 8% dividends was $32,247, which has been accrued.  The Series A Preferred Shares cumulative dividend will be paid when and if declared by the Board of Directors and in preference to payment of any dividends on the common stock.

NOTE 8 – STOCKHOLDERS’ EQUITY

On June 10, 2014, Carbon Bond issued 5,295,000 shares to directors, board members, officers, employees, and consultants.  The shares were valued at $137,670, fair value, were recorded as a contra-equity account. In January 2015, the Company’s Chief Technology Officer and Director resigned. As a result of his resignation, 600,000 shares of his restricted stock award were forfeited in accordance with the Company’s Equity Incentive Plan. The remaining expense of $122,020, after forfeitures is being expensed over the vesting terms for directors, board members, officers and employees and over the term of the contract for consultants and the prepaid portion is reflected as a contra-equity account. For the three months ended March 31, 2015, the Company expensed $12,935. These shares will vest between June 10, 2015 and June 12, 2017.

On July 14, 2014, two officers of the Company surrendered 1,500,000 shares each to the Company, which were recorded as Treasury Stock at no cost.

On July 14, 2014, the Company appointed a new Chief Executive Officer and entered into a three year employment agreement with the individual. As part of his employment agreement, the Company issued 3 million shares of the Company’s common stock, which vest 50% on January 1, 2016 and quarterly over the remaining initial three year term. The stock is valued at $6,000,000, is being expensed over the vesting term and the prepaid portion is reflected as a contra-equity account. For the three months ended March 31, 2015, the Company expensed $500,000.

During the year ended December 31, 2014, two employees ceased employment with the Company and forfeited 175,000 shares of unvested common stock and $4,550 was removed from the contra-equity account and $289 of expense was reversed.

On November 17, 2014, the Company renegotiated its contract with a consultant and reduced the number of shares initially awarded to the consultant by 200,000 shares. In accordance with the renegotiation $5,200 was removed from the contra-equity account and $1,733 of expense was reversed. 

 

NOTE 9 – STOCK OPTIONS AND WARRANTS

The Board of Directors (“Board”) of the Company adopted an Equity Incentive Plan (“2014 Plan”) effective June 12, 2014. Under the 2014 Plan, the Company is authorized to grant options to purchase up to 4,000,000 shares of the Company’s common stock to any officer, other employee, or director of, or any consultant or other independent contractor who provides services to the Company. The 2014 Plan is intended to permit stock options granted to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the 2014 Plan, which are not intended to qualify as Incentive Stock Options, are deemed to be non-qualified options (Non-Statutory Stock Options”).

The 2014 Plan is administered by the Board or its compensation committee, which determines the persons to whom awards will be granted, the number of awards to be granted, and the specific terms of each grant, including the vesting thereof, subject to the terms of the 2014 Plan.

In connection with Incentive Stock Options, the exercise price of each option may not be less than 100% of the fair market value of the common stock on the date of the grant (or 110% of the fair market value in the case of a grantee holding more than 10% of the outstanding stock of the Company).

Volatility in all instances presented is the Company’s estimate of volatility that is based on the volatility of other public companies that are in closely related industries to the Company.

The following table presents the weighted-average assumptions used to estimate the fair values of the options granted during the three months ended March 31, 2015:

Risk-free interest rate			2.00	%
Expected volatility			27.3	%
Expected life (in years)			7.8	%
Dividend yield			0.00	%
Weighted-average estimated fair value of options granted during the period		$	0.39

 

The following table summarizes the activities for stock options issued for the three months ended March 31, 2015:  

										Weighted
						Weighted				Average				Average
		Number of				Average				Contractual Term				Intrinsic
		Shares				Exercise Price				(in Years)				Value (1)
Balance as of December 31, 2014			215,000			$	1.82
Granted			95,000				0.38
Exercised			-				-
Expired			-				-
Balance as of March 31, 2015			310,000			$	1.60				8.5			$	44,150
Exercisable, at March 31, 2015			15,000			$	0.78				4.6			$	10,200
Exercisable, at March 31, 2015 and expected to vest			15,000			$	0.78				4.6			$	10,200

 

(1)          The aggregate instrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of $1.46 of the Company’s common stock on March 31, 2015.

 

During the three months ended March 31, 2015, the fair value of stock options granted to two employees and one consultant during the period was $34,975. The fair value of the stock options is expensed over the vesting term for employees and over the term of the consulting agreement for non-employees in accordance with the terms of the related stock option agreements.

 

For the three months ended March 31, 2015, the Company expensed $17,495 relative to the fair value of the stock options granted.

 

As of March 31, 2015, there was $162,605 of unrecognized compensation expense related to outstanding employee stock options. This amount is expected to be recognized over a weighted-average period of 8.5 years.

 

The following table summarizes the activities for warrants issued for the three months ended March 31, 2015: 

										Weighted
						Weighted				Average				Average
		Number of				Average				Contractual Term				Intrinsic
		Shares				Exercise Price				(in Years)				Value (1)
Balance as of December 31, 2014			20,000,000			$	0.15
Granted			-				-
Exercised			-				-
Expired			-				-
Balance as of March 31, 2015			20,000,000			$	0.15				4.2			$	26,200,000
Exercisable, at March 31, 2015			20,000,000			$	0.15				4.2			$	26,200,000
Exercisable, at March 31, 2014 and expected to vest			20,000,000			$	0.15				4.2			$	26,200,000

 

(1)          The aggregate instrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of $1.46 of the Company’s common stock on March 31, 2015.

 

 

NOTE – 10 OPERATING LEASES

 

 For the three months ended March 31, 2015 and 2014, total rent expense under leases amounted to $60,121 and $5,212.  At March 31, 2015, the Company was obligated under various non-cancelable operating lease arrangements for property as follows: 

				March 31,
				2015
	2015				114,058
	2016				95,429
	2017				64,453
	2018				66,054
	2019				61,941
	Thereafter				-
				$	401,935

 

NOTE 11 – SUBSEQUENT EVENTS

 

Subsequent to March 31, 2015, the Company has received an additional $320,000 from a stockholder. These loans are payable on demand and bear interest at 10%.

 

Effective June 15, 2015, Mark Mirken resigned as Chief Executive Officer of CannLabs, Inc. As part of his separation agreement, Mr. Mirken has agreed to forfeit 2 million shares of restricted stock which were awarded to him through his employment agreement. The Company has entered into a consulting agreement with Mr. Mirken , whereby he will be paid $5,000 per month beginning August 1, 2015 for his business development efforts and he will serve as Vice-Chairman to the Board of Directors.

 

Scott McPherson has been appointed as the Chief Executive Officer and will continue his services as Chief Financial Officer.

 

 

The Company has sold 66,700 units at $0.75 per unit, with each unit consisting of one share of common stock, one warrant with an exercise price of $0.75 with a term of three months, and one warrant with an exercise price of $1.50 with a term of three years and raised $50,025 subsequent to March 31, 2015, through a private placement.

 

Two stockholders have agreed to place 23,746,650 shares of common stock in escrow for three years.The shares are to be used for financing transactions, mergers, acquisitions, restricted stock or option grants, settlements or advisory fees. Any shares remaining following the escrow period will be returned to the stockholders.

 

Two stockholders also returned 2,929,750 shares to be used in settlement negotiations.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

Cautionary Statements Regarding Forward-Looking Statements

 

This Current Report on form 10-Q contains “forward-looking statements,” which include information relating to future events, future performance, strategies, expectations, competitive environment and regulation.  All statements other than statements of historical facts included or incorporated by reference in this quarterly report on Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans and objectives of management for future operations, are forward-looking statements.  In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative thereof or any variation thereon or similar terminology or expressions. 

 

We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees and are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:  our ability to raise additional capital, the absence of any operating history, our ability to attract and retain qualified personnel, our dependence on third party contractors who we cannot control, our ability to develop and introduce a new service to the market in a timely manner, market acceptance of our services, our limited experience in a relatively new industry, the ability to successfully develop and generate business, rapid technological change in relevant markets, unexpected network interruptions or security breaches, changes in demand for current and future intellectual property rights, legislative, regulatory and competitive developments, intense competition, general economic conditions, as well as other factors set forth under the caption “Risk Factors” in this quarterly report on Form 10-Q and in our Report on Form 10-K filed with the Securities and Exchange Commission on June 16, 2015. 

 

All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing.  Except as required by law, we assume no duty to update or revise our forward-looking statements. 

 

Overview 

 

The Company was incorporated as a Nevada corporation on January 10, 2006 for the purpose of designing and modifying motorsport racecars for its own use, providing race consulting services to other race teams and competing in organized racing events. On June 12, 2014, the Company’s wholly-owned subsidiary merged into the Company and the Company changed its name from “Speedsport Branding, Inc.” to “CannLabs, Inc.” 

 

Carbon Bond was formed as a Colorado limited liability company on October 21, 2013. Carbon Bond was converted into a Colorado corporation on May 27, 2014. 

 

CannLabs, Inc., a Colorado “S” corporation (“CannLabs Colorado”), was formed on April 19, 2010. CannLabs Colorado is a stand-alone cannabis testing laboratory. Under Colorado law, the holders of licenses for marijuana related businesses must be residents of the State of Colorado or all of the owners of an entity must be Colorado residents. Accordingly, the Marijuana Enforcement Division Laboratory License for CannLabs Colorado is held by CannLabs Colorado whose owners are our Founder and President, Genifer Murray, and our former Chief Information Officer, Steve Kilts, both of whom are Colorado residents. We believe it is the largest cannabis testing laboratory in Colorado based on our estimate of customers in the market and the number of customers for which CannLabs Colorado performs tests. CannLabs Colorado itself has no employees or equipment and provides cannabis testing as mandated by the state of Colorado, as well as other testing of cannabis as requested by its customers under the management of Carbon Bond. CannLabs Colorado controls the license to generate the revenues and Carbon Bond supplies the labor, equipment and technology utilized by CannLabs Colorado in order to provide testing services to the CannLabs Colorado customers. 

 

 

Customers of CannLabs Colorado, bring their samples of cannabis to the laboratory for testing. The Marijuana Enforcement Division (“MED”) sets the regulations for the types and amount of testing that is required for cannabis products in Colorado. If the MED relaxes or increases testing standards, CannLabs Colorado’s revenue will be adversely or positively affected, respectively. 

 

CannLabs – Connecticut, Inc. (“CannLabs Connecticut”) was incorporated on May 15, 2014, to provide testing services similar to CannLabs Colorado in Connecticut. The owners of CannLabs Connecticut are our Founder and President, Genifer Murray, and our former Chief Information Officer, Steve Kilts. CannLabs Connecticut has a laboratory license issued by the Department of Consumer Protection (“DCP”). CannLabs Connecticut itself has no employees or equipment and provides cannabis testing as mandated by the state of Connecticut, as well as other testing of cannabis as requested by its customers under the management of Carbon Bond. CannLabs Connecticut controls the license to generate the revenues and Carbon Bond supplies the labor, equipment and technology utilized by CannLabs Connecticut in order to provide testing services to the CannLabs Connecticut customers. Customers of CannLabs Connecticut, arrange to have their samples of cannabis taken to the laboratory for testing. The DCP sets the regulations for the types and amount of testing that is required for cannabis products in Connecticut. If the DCP relaxes or increases testing standards, CannLabs Connecticut’s revenue will be adversely or positively affected, respectively.

 

CannLabs – Nevada, INC. (“CannLabs Nevada”) was incorporated on May 15, 2014, to provide testing services similar to CannLabs Colorado in Nevada. The owners of CannLabs Nevada are our Founder and President, Genifer Murray, and our former Chief Information Officer, Steve Kilts. CannLabs Nevada has a provisional laboratory license issued by the State 0f Nevada, Division of Public and Behavioral Health (“DPBH”). CannLabs Nevada itself has no employees or equipment and is currently not operational. Once operational Cannlabs Nevada will provide cannabis testing as mandated by the DPBH, as well as other testing of cannabis as requested by its customers under the management of Carbon Bond. CannLabs Nevada controls the license to generate the revenues and Carbon Bond will supply the labor, equipment and technology utilized by CannLabs Nevada in order to provide testing services to the CannLabs Nevada customers.

 

Carbon Bond maintains the Software WorkFlow System and Customer Portal that is utilized by CannLabs Colorado and CannLabs Connecticut in the operation of the labs. Carbon Bond also provides certain administrative services for CannLabs Colorado and CannLabs Connecticut, including but not limited to, accounting, personnel, billing and recordkeeping through Administrative Services Agreements. While the Company is prohibited from owning CannLabs Colorado directly, it derives revenue in the form of licensing fees and administrative fees under the License Agreement and the Administrative Services Agreement, which fees are not tied to CannLabs Colorado revenues or net income.

 

While the Company is permitted to own CannLabs Connecticut, it derives revenue from CannLabs Connecticut in the form of licensing fees and administrative fees under the License Agreement and the Administrative Services Agreement. In the future, the Company may open labs in other states which it owns directly if permitted by local regulations or may operate under a similar structure to CannLabs Colorado.

 

Carbon Bond licenses certain technology to CannLabs Colorado and CannLabs Connecticut through non-exclusive licensing agreements for a monthly fee, which is currently $10,000 but is subject to adjustment pursuant to the agreements. These agreements have terms of five years and will automatically be extended for additional five year periods unless terminated in accordance with the terms of the agreements. Carbon Bond also provides administrative services to CannLabs Colorado and CannLabs Connecticut through administrative services agreements. These agreements require monthly payments of shared expenses. Shared expenses include, but are not limited to, certain human resources, client services, sales and marketing, equipment and technology, and administrative expenses. These expenses may be adjusted quarterly. The administrative services agreements have terms of five years.

 

In addition to licensing software and providing administrative services to CannLabs Colorado and CannLabs Connecticut, Carbon Bond as a separate entity Carbon Bond is conducting advanced research into the cannabis plant. Carbon Bond also provides consulting services driven by client needs and focused on cannabis education through its wholly owned subsidiary Carbon and Cook.

 

 

Carbon and Cook (“C&C”), a Nevada corporation, was incorporated on December 11, 2014, to provide consulting services in the areas of governmental relations, business licensing, regulatory compliance, finance, quality and safety and product development. In the first quarter, C&C began to obtain projects of various types, that we expect to drive revenue in the future.

 

Experentia, a Nevada corporation and wholly owned subsidiary of Carbon Bond, was incorporated in January 2015 for the purpose of performing laboratory services that the other laboratories could not perform. 

 

StrainData, a Nevada corporation and wholly owned subsidiary of Carbon Bond, was incorporated in January 2015 for the purpose of creating a web application that could be used by consumers to educate and assist those consumers in locating cannabis products that have certain cannabinoid profiles. This company will be monetized through an advertising platform as well as through a subscription based platform. 

 

It is our mission to create a safe cannabis industry by providing the leading cloud-based solution for testing, consulting and analytics. With laboratories as the core business, we expect to expand our services into consulting, web-based applications, education and other facets of the cannabis industry that we expect to evolve as this industry continues to mature. We are developing a strategic plan to create a presence in the various states as they begin to legalize marijuana for medical and/or recreational usage. We currently service CannLabs Colorado in Denver, Colorado and CannLabs Connecticut in Hartford, Connecticut and have announced plans to expand into Nevada. 

 

Strategic Outlook 

 

As the cannabis industry expands across the country, regulations regarding the testing of cannabis are also evolving. We believe that there will be a strong demand for qualified laboratories to perform the testing.  Additionally, we believe that the producers of cannabis and cannabis products will be seeking assistance to provide them with solutions in order to be able to meet expected state mandated requirements.  Consumers will want to know what products are safe and meet their requirements for dosage and other factors, in our opinion.  It is our belief that state authorities will also be seeking guidance on how to develop testing processes that will nurture the industry, while keeping it safe, in order to have a successful industry in their state.

 

We believe that we are positioned as the leading science based solutions provider with intellectual property, proprietary cloud-based analytics and scientific methods to serve the cannabis industry. This comprehensive data program, exclusive to all of our clients, offers distinct advantages to growers, dispensaries and edible makers. It not only offers fast, consistent and accurate test results but also provides comparable industry research and information which can be used to make business decisions affecting product outcomes, quality and safety. 

 

We have been at the forefront of educating the public and advising government sources. As more states legalize marijuana for various uses, we expect our position in the market to continue to grow. In addition, we facilitate quality assurance information to the public by providing a resource map on the customer’s website. This tool allows consumers to recognize and easily locate facilities that stock products both tested and certified by CannLabs Colorado.

 

Our software development team seeks to leverage technology to improve the efficiency of laboratory and scientific processes, deliver business intelligence to the cannabis retail space, and to connect consumers and patients with dispensaries that carry CannLabs’ certified products. As such we have developed StrainData.com, a web application that allows consumers and patients to search for CannLabs’ certified products that meet their needs. The web application allows consumers and patients to find products that have a desired cannabinoid profile, consumption method, or strain. The web application is geographically aware so that a consumer or patient can be connected with nearby dispensaries that carry the desired product. In addition to the web application the Company is developing a mobile application. The mobile application and website will utilize data delivered via Application Program Interfaces (“APIs”) by the CannLabs’ laboratory and analytics platform. Utilizing the data generated by the CannLabs’ laboratory and analytics platform gives us a unique ability to connect cannabis consumers and retailers.

 

 

We have developed a proprietary laboratory and analytics platform that optimizes laboratory processes through instrument integration, data validation, and the real time delivery of certified test results. The laboratory and analytics platform also provides our customers with cloud based access to their test results, detailed reporting, and analytics. Continued development on the laboratory and analytics platform will focus on providing technology to improve the efficiency of laboratory processes and to deliver new analytical tools to our customers. 

 

It is our intention to create a brand that demonstrates leadership in the industry, with science based solutions, that protects and educates the consumer and provides guidance for those that participate in the industry.

  

Results of Operations

 

Three Months Ended March 31, 2015 and 2014

 

The following discussion analyzes our results of operations for the three months ended March 31, 2015 and 2014. The following information should be considered together with our financial statements for such periods and the accompanying notes thereto. 

 

Revenue/Net Loss 

 

During the three months ended March 31, 2015, we generated revenues of $470,488, an increase of $358,215 from $112,273.  This resulted from mandated testing, which began on May 1, 2014.  We incurred a net loss of $1,264,736 for the three months ended March 31, 2015 compared to $102,107 for the three months ended March 31, 2014, an increase of $1,162,629. 

 

Cost of Revenues 

 

For the three months ended March 31, 2015, cost of revenues was $339,666 an increase of $284,133 from $55,533 for the three months ended March 31, 2014.  This was a result of additional labor, instruments and supplies needed to support the increase in revenue, additional labor retained during in anticipation of additional mandated testing being implemented in the first quarter of 2015 and labor hired to support the consulting group. 

 

General and Administrative 

 

We incurred general and administrative expenses of $449,468 for the three months ended March 31, 2015 compared to $86,786 for the three months ended March 31, 2014, an increase of $362,682.  The primary expenses were related to insurance, professional fees, and rent. 

 

Administrative Payroll 

 

For the three months ended March 31, 2015, administrative payroll expenses were $705,255 for the three months ended March 31, 2015, and increase of $667,574, from $37,681 for the three months ended March 31, 2014.  These costs relate to hiring additional staff to support the increase in revenue and non-cash deferred compensation of $524,831. 

 

Sales and Marketing 

 

We incurred sales and marketing expenses of $195,515 for the three months ended March 31, 2015, an increase of $166,135 from $29,380 for the three months ended March 31, 2014.  The majority of these costs relate to the payroll and payroll related costs as we continue to expand those departments and in an effort to increase market share and brand awareness. 

 

 

Interest expense 

 

For the three months ended March 31, 2015, interest expense was $45,320 compared to $5,000 for the three months ended March 31, 2014, an increase of  $40,320. This was a result of the loans issued by two shareholders to sustain the company’s operations as well as equipment loans to expand the laboratories. 

 

Cash Flows 

 

Cash used for operating activities during the three months ended March 31, 2015 was $469,301 an increase of $445,066 from cash used for operations of $24,235 for the three months ended March 31, 2014. This resulted from the net loss of $1,264,736 offset by increases in depreciation, deferred compensation and prepaid expenses.

 

Cash used in investing activities during the three months ended March 31, 2015 was $31,676 compared to $71,581 during the three months ended March 31, 2014, a decrease of $39,905.  During the three months ended March 31, 2014, the Company was continuing to expand its laboratory to meet the new regulatory testing requirements, whereas in 2015 most of the equipment necessary for operations had already been obtained.

 

During the three months ended March 31, 2015, cash provided by financing activities was $507,227 an increase of $363,955 from cash provided by financing activities of $143,272 for the three months ended March 31, 2014.  This resulted from the issuance of a stockholder’s line of credit to fund the Company’s ongoing operations. 

 

Liquidity and Capital Resources 

 

As of July 7, 2015, we had cash resources of approximately $92,000.  Our revenues have continued to increase, however, we have financed our operations through private offerings of debt and equity securities.  We do not currently maintain a line of credit or term loan with any commercial bank. We have predominantly leased our major equipment through capital leases.

 

Since our inception, we have focused on developing and implementing our business plan.  We do not believe that our existing cash resources will be sufficient to sustain our operations during the next twelve months.  We currently need to generate sufficient revenues to support our cost structure to enable us to pay ongoing costs and expenses as they are incurred, finance the continued development of our business, and execute the business plan.  If we cannot generate sufficient revenue to fund our business plan, we intend to raise such financing through the sale of debt and/or equity securities.  The issuance of additional equity would result in dilution to existing shareholders.  If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to us, we will be unable to execute upon the business plan or pay costs and expenses as they are incurred, which would have a material, adverse effect on our business, financial condition and results of operations. 

 

Even if we are successful in generating sufficient revenue or in raising sufficient capital in order to complete the marketing, our ability to continue in business as a viable going concern can only be achieved when our revenues reach a level that sustains our business operations. As of July 7, 2015 we have raised $550,000 through a private placement and $1,675,000 through the issuance of notes payable. There can be no assurance that we will raise sufficient proceeds, or any proceeds, for us to implement fully our proposed business plan to establish laboratories in states nationwide.  Moreover there can be no assurance that even if we achieve our goals, that we will generate revenues sufficient to fund our operations.  In either such situation, we may not be able to continue our operations and our business might fail. 

 

 

Contractual Obligations

 

At March 31, 2015, the Company was obligated under various contractual arrangements as follows: 

		Less Than				One to				Three to
		1 Year				Three Years				Five Years				Total
Maturities of Notes Payable		$	158,800			$	750,000				-			$	908,800
Line of credit			175,000				750,000				-				925,000
Capital Leases			242,525				324,977				-				567,502
Operating Leases			114,058				225,936				61,941				401,935
Purchase Obligations			-				-				-				-
		$	1,440,383			$	1,300,913			$	61,941			$	2,803,237

  

Critical Accounting Policies

 

Our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 1 of the Notes to Consolidated Financial Statements included elsewhere herein. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows and which require the application of significant judgment by management.

 

Revenue Recognition

 

In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition (Codified in FASB ASC 605), The Company will recognize revenue when (i) persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, (ii) a retailer, distributor or wholesaler receives the goods or services, (iii) the price is fixed or determinable, and (iv) collectability of the sales revenues is reasonably assured. Subject to these criteria, the Company will generally recognize revenue from laboratory tests in three ways.  For samples presented without a bulk or twelve month contract, revenue is recognized upon completion of the testing.  Customers with bulk contracts have three months to use a predetermined number of tests.  Revenue is recognized for these contracts on a pro rata basis, based on the number of tests used versus the number of tests allowed.  Twelve month contracts require prepayment monthly for the succeeding month.  Revenue is recognized based on the monthly payment required for the month in which the tests are performed.  Because tests may not be carried over to subsequent months, the monthly revenue is recognized in full in the appropriate month. 

 

The Company uses various performance measures under the percentage of completion method to recognize fixed-price contracts generated from consulting and research and development agreements. Estimating contract costs at completion and recognizing revenue appropriately involve significant management estimates. Actual costs may differ from estimated costs and affect estimated profitability and revenue recognition timing. From time to time, facts develop that require us to revise estimated total costs or expected revenue. CannLabs records the cumulative effect of revised estimates in the period when the facts requiring revised estimates become known. The Company recognizes the full amount of anticipated losses on any contract in the period a loss becomes known. For each of the periods presented, the cumulative effects of revised estimates were immaterial to the Company’s financial performance. When agreements contain more than one deliverable, the Company allocates revenue to separate elements under the agreement based on relative selling prices in accordance with FASB ASC 605-25.

 

 

Recently Issued Accounting Pronouncements

 

Recently issued accounting pronouncements are discussed in Note 1 of the Notes to Financial Statements contained elsewhere in this report. 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES. 

 

As of March 31, 2015, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2015, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 

 

We have made changes in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended March 31, 2015 that has materially changed our internal control over financial reporting.  We have hired a comptroller and additional administrative staff to segregate duties that were previously unsegregated.  The addition of the comptroller provides an additional level of review that previously did not exist.

 

PART II – OTHER INFORMATION 

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time, the Company is involved in various claims, proceedings and litigation, including the following:

 

Petition for Determination of Value Pursuant to C.R.S. §7-113-301

 

On October 27, 2014, we filed a petition for determination of value of shares in accordance with §7-113-301 of the Colorado Revised Statutes (the “CRS”). The respondent, Greg Drumm purchased an interest Carbon Bond Holdings, LLC, a predecessor entity to our subsidiary, Carbon Bond Holdings, Inc. Following our acquisition of Carbon Bond on June 12, 2014, Mr. Drumm exercised his dissenter’s rights under §7-113-209 and demanded payment for his shares based upon his calculation of their fair value. The Company subsequently determined the fair value of Mr. Drumm’s shares in accordance with §7-113-206 of the CRS and submitted payment to Mr. Drumm. Mr. Drumm subsequently informed us that he was rejecting our offer. Accordingly, we have petitioned to the court to determine the fair value of Mr. Drumm’s shares. A two day bench trial is scheduled to begin on October 13, 2015. We are confident in our calculation of the fair value of the shares; however, since the matter remains in the early stages, there can be no assurances as to the ultimate outcome of the matter.

 

 

 

Susan E. Harriman v. Steven James Kilts, Genifer Murray, Carbon Bond Holdings, LLC and CannLabs, Inc., District Court, Denver County, Colorado

 

On August 29, 2014, Susan E. Harriman filed a lawsuit against our Chief Technology Officer and Chief Information Officer, Steven Kilts, our President, Genifer Murray, Carbon Bond Holdings, LLC, a predecessor entity to our subsidiary, Carbon Bond Holdings, Inc. and us alleging, among other things, breach of contract in connection with fees that she is claiming are owed in connection with investment banking services that she purportedly provided to us. Ms. Harriman is seeking an unspecified amount of damages. We believe that the case is without merit; however, since the case remains in the early stages, there can be no assurances as to the ultimate outcome of the matter. We and our co-defendants intend to vigorously defend the matter.

 

In addition to the foregoing, we may, from time to time, be involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.            

 

ITEM1A. RISK FACTORS.

  

Not applicable. 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None. 

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not Applicable. 

 

ITEM 5. OTHER INFORMATION.

 

None.  

 

 

ITEM 6.       EXHIBITS
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of 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.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

		CANNLABS, INC.
Date:	July 8, 2015	By:	/s/ Scott A. McPherson
			Scott A. McPherson
			Chief Financial Officer